TP Purposely Misundertands IRS "Error"

[The Observer]

KENTON R. FLEMING,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

Filed June 20, 2017

Kenton R. Fleming, pro se.

Christopher D. Bradley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PUGH, Judge: Respondent determined deficiencies and additions to tax as follows:

Additions to tax

Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)
2010 $ 7,463 $ 689 $ 582
2011 7,844 1,092 631


FINDINGS OF FACT

Some of the facts have been deemed stipulated under Rule 91(f). Petitioner lived in Georgia at the time he filed the petition. During 2010 and 2011 petitioner was an employee of Southern Polytechnic State University (SPSU) in Marietta, Georgia. In 2010 petitioner earned $ 56,078 in wages from SPSU, and in 2011 he earned $ 56,364. Those wages were reflected on Forms W-2, Wage and Tax Statement, and reported to respondent. Petitioner neither filed tax returns nor made payments aside from withholdings for either tax year.

Respondent filed substitutes for returns for petitioner pursuant to section 6020(b) reflecting a filing status of single and claiming standard deductions for both 2010 and 2011. Respondent then issued notices of deficiency to petitioner based on those substitutes for returns. On November 4, 2014, petitioner timely petitioned the Court for redetermination of his tax liabilities. As shown on *3 respondent's transcripts for petitioner's accounts, on December 15, 2014, respondent erroneously assessed the amounts determined in the notices of deficiency for 2010 and 2011. On March 10, 2015, respondent entered a litigation freeze (Code 520) on petitioner's accounts. On June 1, 2015, respondent reversed the erroneous assessments and sent petitioner two corresponding Notices CP21E, one for each year, reflecting a "zero balance" for each year.

OPINION

I. Petitioner's Tax Liabilities

Under section 61(a), gross income includes all income from whatever source derived, including wages. The Commissioner may reconstruct a taxpayer's wages from third-party payer reports such as Forms W-2. Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997); Andrews v. Commissioner, T.C. Memo. 1998-316; White v. Commissioner, T.C. Memo. 1997-459. Items of gross income are includible in gross income for the taxable year in which the cash-basis taxpayer received them. Sec. 451.

Petitioner testified that he received the wages from SPSU but offered no evidence regarding deductions or credits, even after we explained that the purpose of the trial was to redetermine his income and deductions. His sole challenge to respondent's notices of deficiency was that respondent issued him Notices CP21E *4 on June 1, 2015, that each showed a zero balance, and his account transcripts showed a zero balance. He argues that those documents should be presumed correct and that they establish that he owes no tax. We agree that these documents are correct but they do not prove he has no liability for 2010 or 2011. They show only that no liability has been assessed.

Under section 6212, if the IRS determines that there is a deficiency in Federal income tax (defined in section 6211(a) as the amount by which taxes owed exceeds taxes paid), then the IRS must issue a notice of deficiency to the taxpayer, as was done here. The IRS must wait 90 days to assess the tax determined to be owed in that deficiency notice (or 150 days for notices mailed to foreign addresses). Additionally, under section 6213(a) the IRS is barred from assessing a taxpayer's outstanding tax liability if the taxpayer files a petition for redetermination within that 90-day period; and the IRS will remain barred from assessing the liability while the taxpayer's case is pending before us. That is what happened here. As we explained to petitioner, the trial was to establish petitioner's liabilities. Once we determine his liabilities and enter our decision, respondent must assess those amounts. See sec. 6215(a). Assessment then will be made by recording the liabilities for the tax owed on petitioner's account transcript. See sec. 6203. On the basis of evidence offered at trial we hold that *5 petitioner's liabilities are as respondent determined in the notice of deficiency.

II. Additions to Tax

Respondent determined that petitioner is liable for additions to tax for 2010 and 2011 under section 6651(a)(1), for failure timely to file a valid return; and section 6651(a)(2), for failure timely to pay tax shown on a return.

Section 6651(a)(1) authorizes the imposition of an addition to tax for failure timely to file a return unless it is shown that such failure is due to reasonable cause and not willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985). A failure timely to file a Federal income tax return is due to reasonable cause if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return within the prescribed time, typically for reasons outside the taxpayer's control. See McMahan v. Commissioner, 114 F.3d 366, 369 (2d Cir. 1997), aff'g T.C. Memo. 1995-547; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Section 6651(a)(2) imposes an addition to tax for failure timely to pay the amount shown as tax on a return unless the failure was due to reasonable cause and not willful neglect. A substitute for return constitutes "the return filed by the taxpayer" for purposes of determining the amount of an addition to tax under *6 section 6651(a)(2). See sec. 6651(g)(1); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008); Cabirac v. Commissioner, 120 T.C. 163, 170 (2003), aff'd without published opinion, 94 A.F.T.R. 2d 2004-5490 (3d Cir. 2004).

The Commissioner bears the burden of production with respect to a taxpayer's liability for additions to tax. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner carries the burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect or that the taxpayer had an affirmative defense, such as reasonable cause and good faith. See Higbee v. Commissioner, 116 T.C. at 446-447.

We hold that respondent satisfied his burden of establishing that petitioner was required to file returns for 2010 and 2011 but failed to do so. See sec. 6012(a)(1)(A) (providing that taxpayers must file returns unless their gross income does not exceed the sum of the personal exemption and the standard deduction for those years). We also hold that petitioner failed to pay tax shown as due on valid substitutes for returns for 2010 and 2011 prepared by respondent under section 6020(b). See Wheeler v. Commissioner, 127 T.C. at 210 (2006). Petitioner failed to offer any evidence of reasonable cause or raise any other challenge to these *7 additions to tax beyond his argument that the IRS records showed he had a "zero balance". Accordingly, petitioner is liable for the additions to tax under section 6651(a)(1) and (2).III. Section 6673

Section 6673(a)(1) authorizes the Court to require a taxpayer to pay a penalty to the United States in an amount not to exceed $ 25,000 whenever it appears to the Court that the taxpayer instituted or maintained the proceeding primarily for delay or that the taxpayer's position in the proceeding is frivolous or groundless.

Petitioner was warned about maintaining frivolous positions and should be familiar with the consequences as we have imposed this penalty on him in the past. 2 In several prior cases he conceded his liability rather than going to trial. We believe that he knew that the arguments in this case were frivolous. And the record before us shows that this case was delayed unnecessarily by his vexatious tactics, including his refusal to provide a working telephone number; his refusal to stipulate certain issues, requiring respondent to move for an order to show cause *8 why certain proposed facts and evidence should not be established pursuant to Rule 91(f); and his repeated protestations at trial that no one had explained the erroneous assessment to him, even though it was explained in connection with respondent's motion for summary judgment. Nonetheless, petitioner did respond to these motions, and on the basis of those responses we denied respondent's motions in part. We therefore are constrained not to impose a penalty at this time but again warn him that his arguments and tactics - including tactics that seem intended primarily to delay - may result in further and greater penalties in the future should he persist in making them.

To reflect the foregoing,

Decision will be entered for respondent.

FOOTNOTES:

/1/ Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.

/2/ In Fleming v. Commissioner, docket No. 14357-10L, by Order and Decision entered March 16, 2012, this Court granted respondent's Motion for Summary Judgment and to Impose a Penalty Under Sec. 6673 and imposed a penalty of $ 1,500 against petitioner.

[Famspear]

Respondent filed substitutes for returns for petitioner pursuant to section 6020(b) reflecting a filing status of single and claiming standard deductions for both 2010 and 2011. Respondent then issued notices of deficiency to petitioner based on those substitutes for returns. On November 4, 2014, petitioner timely petitioned the Court for redetermination of his tax liabilities. As shown on *3 respondent's transcripts for petitioner's accounts, on December 15, 2014, respondent erroneously assessed the amounts determined in the notices of deficiency for 2010 and 2011. On March 10, 2015, respondent entered a litigation freeze (Code 520) on petitioner's accounts. On June 1, 2015, respondent reversed the erroneous assessments and sent petitioner two corresponding Notices CP21E, one for each year, reflecting a "zero balance" for each year....

Background for readers who are not Federal tax law geeks:

The Court noted that the Internal Revenue Service had erroneously assessed the tax, discovered its error, and removed the assessment. The reason the act of assessment was an error was that the IRS generally is not allowed to assess a deficiency in Federal income tax during the 90 days immediately after the date of issuance of a statutory notice and during the time in which a Tax Court case is pending, and for a period of time even after the Tax Court decision becomes final. Clearly, because the taxpayer had timely filed his Tax Court petition in November 2014, the December 2014 assessment was improper.

The statutory provision is found in subsection (a) of Section 6213 of the Internal Revenue Code, which provides in part:

(a) Time for filing petition and restriction on assessment

Within 90 days [ . . .] after the notice of deficiency authorized in section 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final......

An assessment is reflected on the account transcript for a taxpayer for the kind of tax and tax period by a debit to the account for the amount of the assessment. Normally, the IRS does not make the mistake of assessing the tax (that is, of debiting the account) while a Tax Court case is pending.

Mr. Fleming, the doofus tax protester in this case, falsely assumed that because the tax had been zeroed out (with a credit equal to the amount of the improper debit assessment), this must have somehow meant that the IRS was saying that the tax amount was zero. Of course that was completely incorrect.

The whole point of this law is to prevent the IRS from assessing the tax (that is, to prevent the IRS from officially recording the tax as a debit in the applicable IRS account for the taxpayer) until the taxpayer has had (1) the opportunity to enjoy the benefit of a 90 day period to decide whether to litigate in Tax Court and, (2) the opportunity to actually litigate the validity vel non of the IRS deficiency determination and to have the Tax Court render a redetermination decision. Mr. Fleming's goofy theory -- that the fact that account showed no tax liability somehow meant that the IRS was asserting that no tax was due -- is completely stupid.

The fact that the account showed no tax liability simply meant that the IRS was trying to follow the rule imposed on the IRS by Congress in section 6213(a).

[Burnaby49]

We do things differently up here in Canada. Taxes are always assessed and owing regardless of whether or not an appeal has been filed. However, if an appeal is filed, collection is put in abeyance until the appeal is concluded or abandoned. During this period interest accrues (at market rates or higher) so that in the event of a long appeal period (some have lasted over ten years) interest can exceed the amount of tax originally assessed. Because of this tax lawyers often tell their clients to pay the tax immediately. If they win on appeal they get it back along with accrued interest that the government now owes them.

[Dr. Caligari]

We do things differently up here in Canada. Taxes are always assessed and owing regardless of whether or not an appeal has been filed. However, if an appeal is filed, collection is put in abeyance until the appeal is concluded or abandoned. During this period interest accrues (at market rates or higher) so that in the event of a long appeal period (some have lasted over ten years) interest can exceed the amount of tax originally assessed. Because of this tax lawyers often tell their clients to pay the tax immediately. If they win on appeal they get it back along with accrued interest that the government now owes them.

Interest is running here in the U.S. as well; it's just that for 90 days, the IRS has only a "proposed assessment" and not an actual "assessment." If the taxpayer files in Tax Court, the IRS the cannot formally "assess" until the Tax Court rules.

[Burnaby49]

We do things differently up here in Canada. Taxes are always assessed and owing regardless of whether or not an appeal has been filed. However, if an appeal is filed, collection is put in abeyance until the appeal is concluded or abandoned. During this period interest accrues (at market rates or higher) so that in the event of a long appeal period (some have lasted over ten years) interest can exceed the amount of tax originally assessed. Because of this tax lawyers often tell their clients to pay the tax immediately. If they win on appeal they get it back along with accrued interest that the government now owes them.

Interest is running here in the U.S. as well; it's just that for 90 days, the IRS has only a "proposed assessment" and not an actual "assessment." If the taxpayer files in Tax Court, the IRS the cannot formally "assess" until the Tax Court rules.

In Canada you can't appeal an assessment until it is actually issued. Until then nothing has legally happened.

As I understand your comment the IRS issues a "proposed assessment" which is a preview of what the IRS actually plans to assess in ninety days. This give the taxpayer time to appeal the pending assessment without being assessed. If the taxpayer wins at court he is never assessed. Canada does not have an equivalent to that. The CRA and the taxpayer often negotiate the issues behind an assessment and might, or might not, come to an agreement on the amount of the assessment, but nothing official happens until the assessment is issued. At that point the taxpayer has 90 days to appeal.

[Famspear]

As I understand your comment the IRS issues a "proposed assessment" which is a preview of what the IRS actually plans to assess in ninety days. This give the taxpayer time to appeal the pending assessment without being assessed. If the taxpayer wins at court he is never assessed....

Yes, that's essentially how the U.S. system works.

[Famspear]

Not understanding the legal terms used in the Internal Revenue Code can cause confusion.

When a taxpayer files a U.S. Federal income tax return showing an amount of tax, the taxpayer is said to have "self-assessed" the tax. (As explained below, that is not the same as an "assessment".)

When the IRS receives and processes the return, the IRS generally "assesses" (that is, officially records, on the books of the U.S. Department of the Treasury) the amount of tax that was "self-assessed" by the taxpayer as shown on the return.

If the Internal Revenue Service later examines the return and concludes that the correct tax is some amount higher than the tax that was "self-assessed" by the taxpayer, the IRS is said to have made a "determination" of a "deficiency."

As used here, the term "deficiency" does not mean "unpaid tax" (although the amount of the deficiency may in fact be equal to the amount of unpaid tax).

Here, the term "deficiency" means simply the excess of (A) what the IRS believes the correct tax amount to be, over (B) the amount that was self-assessed by the taxpayer as shown on the taxpayer's return -- with BOTH amounts generally determined WITHOUT REGARD to how much has actually been paid (through withholding or other means). On at least one occasion, I have even seen a Federal judge get confused about this point.

It is this "deficiency" that the IRS generally cannot legally "assess" (cannot legally, officially record on the books) until the following process is completed.

First, the IRS must issue the statutory notice of deficiency (the "90 day letter"). If the taxpayer does not file a Tax Court petition within the 90 day period, the IRS can then "assess" the tax.

If the taxpayer does file a timely Tax Court petition, that petition is a request that the Tax Court make a "redetermination" of the deficiency. If the Tax Court renders a decision on the correct amount of the deficiency, the Tax Court is said to have made the "redetermination".

Barring appeal of the Tax Court decision, the IRS then "assesses" the amount of deficiency that was "redetermined" by the Tax Court.

After the tax is assessed, the IRS issues a written "notice and demand" to the taxpayer. If the taxpayer does not pay the tax demanded (generally, within about 10 days, I believe), then

AUTOMATICALLY....
.........BY OPERATION OF LAW......
...................WITHOUT ANYTHING ELSE HAPPENING.......

....a Federal tax lien arises, effective retro-actively to the time that the IRS assessed the deficiency, without the need to issue any notice of Federal tax lien. The tax lien covers all "property and rights to property" of the taxpayer as the time of the assessment (and generally to all after-acquired property) until the lien is satisfied or becomes unenforceable by reason of lapse of time (i.e., the lapse of the time period provided in the statute of limitations).

The IRS may also establish the priority of the Federal tax lien as against various third parties by issuing -- and recording in the proper place -- a "notice of Federal tax lien" (NFTL). The general rule here is "first in time, first in right." Generally, an encumbrance in favor of some third party (such as a secured lender) that was perfected before the NFTL was filed will take priority over the Federal tax lien. Even some encumbrances that are perfected after the NFTL was filed may take priority over the Federal tax lien.

But, I digress.......

[Dr. Caligari]

Famspear is, as usual, correct. I was just giving a short version to contrast the US procedure with the Canadian procedure explained by Burnaby.