Tax Court in Brief | Ashford v. Comm’r | Unreported Income, Additions to Tax, Frivolous Arguments, Taxable Income

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The Tax Court in Brief – September 26th – September 30th, 2022

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Tax Litigation:  The Week of September 26th, 2022, through September 30th, 2022

Ashford v. Comm’r, T.C. Memo. 2022-101| September 29, 2022 | Vasquez, Judge | Dkt. No. 17590-18, 2492-19 (Consolidated)

Summary:  During taxable years 2013 and 2014 petitioner performed services for Aviation Managed Solutions, Inc. (AMS), and served in the Air National Guard. AMS paid petitioner $89,977 and $98,565 in 2013 and 2014, respectively, and reported those amounts on Forms 1099– MISC. Petitioner also received wages of $5,924 and $6,380 in 2013 and 2014 from the Department of the Air Force. The Air Force reported those amounts on Forms W–2. In 2013 petitioner received $4,300 from an individual retirement account, which reported the distribution on Form 1099–R. Petitioner was under the age of 59-1/2 in 2013. Although he filed an income tax return for 2012, petitioner did not do so for 2013 or 2014. So, the IRS prepared substitutes for returns (SFRs) on the basis of third-party reporting. See 26 U.S.C. § 6020(b). The IRS issued notices of deficiency for 2013 and 2014, determining that petitioner had taxable income, scheduled in the opinion. The notices of deficiency also include determinations that petitioner is liable for self-employment tax on the nonemployee compensation he received for the years in issue. And, with respect to petitioner’s 2013 retirement distribution, the IRS determined a 10% additional tax under section 72(t). Petitioner timely petitioned the Tax Court. The matters were consolidated for trial, briefing, and opinion. Before trial petitioner filed a Pretrial Memorandum, in which he advanced frivolous arguments. He also stipulated receiving the wages, nonemployee compensation, and retirement distribution determined by the IRS. The IRS’s briefing requested that the Tax Court penalize petitioner pursuant to section 6673(a)(1).

Key Issues and Primary Holdings:

(1) Whether Ashford had unreported income as set forth in the notices of deficiency. Yes.

(2) Whether Ashford is liable for the section 72(t) additional tax relating to a distribution he received in 2013. Yes.

(3) Whether Ashford is liable for additions to tax under section 6651(a)(1). Yes.

(4) Whether Ashford is liable for additions to tax under section 6651(a)(2). Yes.

(5) Whether Ashford is liable for additions to tax under section 6654(a). Yes.

(6) Whether Ashford is liable for a frivolous position penalty under section 6673(a)(1). No, but Ashford is heavily cautioned…

Key Points of Law:

Burden on Unreported Income. The IRS’s determinations in a notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving them erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); see Williams v. Commissioner, 999 F.2d 760, 763–64 (4th Cir. 1993), aff’g T.C. Memo. 1992-153. Where a return is not filed by a taxpayer, the IRS may determine income on the basis of third-party information returns. See Robbins v. Commissioner, T.C. Memo. 2017-247, at *6–7. The burden then shifts to the taxpayer to prove by a preponderance of the evidence that the IRS’s determinations are arbitrary or erroneous. See Helvering v. Taylor, 293 U.S. 507, 515 (1935); Tokarski v. Commissioner, 87 T.C. 74, 76–77 (1986).

Taxable Income. Section 1 imposes an income tax on taxable income, and section 63 defines taxable income as gross income minus deductions. Section 61(a) defines gross income to include “income from whatever source derived.” Section 61(a)(1) includes in an individual’s gross income any compensation for services. Amounts distributed from an IRA are also includible in a taxpayer’s gross income as provided in section 72 subject to certain exceptions. 26 U.S.C. § 408(d)(1). Wages, nonemployee compensation, and retirement distributions received by a taxpayer constitute gross income for federal income tax purposes. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955); McNair v. Eggers, 788 F.2d 1509, 1510 (11th Cir. 1986) (per curiam); Grimes v. Commissioner, 82 T.C. 235, 237 (1984); Reiff v. Commissioner, 77 T.C. 1169, 1173 n.7 (1981).

Stipulations with the IRS. Per Rule 91(e), “A stipulation shall be treated, to the extent of its terms, as a conclusive admission by the parties to the stipulation, unless otherwise permitted by the Court or agreed upon by those parties.”

Frivolous Argument. The contention that the IRS must file an SFR under section 6020(b) before determining a deficiency is frivolous. Stewart v. Commissioner, T.C. Memo. 2005-212, 2005 Tax Ct. Memo LEXIS 212, at *5 (citing Schiff v. United States, 919 F.2d 830, 832–33 (2d Cir. 1990)). The IRC need not prepare an SFR under section 6020(b) in order to determine a deficiency for a taxpayer who has not filed a return for that year. Hartman v. Commissioner, 65 T.C. 542, 545 (1975); Stewart, 2005 Tax Ct. Memo LEXIS 212, at *5. Where a taxpayer files no return, the IRS may determine the deficiency as if a return had been filed on which the taxpayer reported the amount of tax due was zero; the deficiency is the amount of tax due. Laing v. United States, 423 U.S. 161, 174 (1976); Schiff, 919 F.2d at 832–33; Stewart, 2005 Tax Ct. Memo LEXIS 212, at *5.

Additions to Tax, 72(t). Section 72(t)(1) imposes a 10% additional tax on the taxable amount of an early distribution from a qualified retirement plan (as defined in section 4974(c)). A distribution is early if it is made before the recipient attains the age of 59-1/2. 26 U.S.C. § 72(t)(2)(A)(i). The 10% additional tax does not apply to certain distributions, such as those attributable to the taxpayer’s disability or made for the payment of certain medical expenses. See id. at § 72(t)(2)(A) and (B).

Additions to Tax, 6651. Section 6651(a)(1) provides for an addition to tax for failure to timely file a return unless the taxpayer proves that the failure was due to reasonable cause and not due to willful neglect. Section 6651(a)(2) provides for an addition to tax for failure to timely pay the amount shown as tax on a return unless the taxpayer proves that the failure was due to reasonable cause and not due to willful neglect. Section 6654(a) imposes an addition to tax on a taxpayer who fails to make required payments of estimated tax. Section 7491(c) ordinarily imposes the burden of production on the Commissioner. Higbee, 116 T.C. at 446–47. But, where the taxpayer makes no assignments of error as to the additions to tax that were determined in the notices of deficiency, the taxpayer is deemed to have conceded those items. See Rule 34(b)(4).

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

Insights: When a taxpayer fails to file a return and then alleges that the IRS’s substitutes for return are “Dummy Returns” is not a good angle to take with the Tax Court. Asserting frivolous arguments before the Tax Court is a $25,000 play; fortunately for Ashford, he caught the Tax Court in a favorable mood. The Tax Court cautioned, as it often does (thankfully, for many taxpayers), “Nevertheless, we caution petitioner that he risks penalties under section 6673(a)(1) if he presses similar arguments in the future.”