Caton v. Comm'r of Internal Revenue

• Decision Date: 28 March 2012
• Docket Number: Docket No. 5071-10
• Parties: DOUGLAS R. CATON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

DOUGLAS R. CATON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5071-10

UNITED STATES TAX COURT

Filed March 28, 2012

T.C. Memo. 2012-92

Douglas R. Caton, pro se.

Michael J. Gabor and Jeffrey S. Luechtefeld, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined deficiencies in petitioner's 2004 and 2005 Federal income tax in the respective amounts of $53,635 and $50,456, plus additions to tax under sections 6651(a)(2), 6651(f), and 6654.¹ The issues fordecision are: (1) whether petitioner is liable for the deficiencies; (2) whether petitioner is liable for additions to tax under sections 6654 and 6651(f) and (a)(2);² and (3) whether the Court should impose a penalty on petitioner under section 6673(a)(1).³

FINDINGS OF FACT

The facts have been deemed stipulated under Rule 91(f) and are so found. The stipulated facts and the accompanying exhibits are incorporated herein by this reference. Petitioner resided in Fort Meyers, Florida, at the time the petition was filed.

Petitioner filed income tax returns on Forms 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents, for 2004 and 2005 (collectively, purported returns). Petitioner's purported returns were "zero" returns in that on each return he listed zero as the amount of his wages, total income, adjusted grossincome, taxable income, and total tax. Petitioner attached a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to each return. Both Forms 4852 stated that petitioner did not receive wages in 2004 and 2005.

However, during 2004 and 2005 petitioner received $194,317 and $186,213, respectively, for services performed for Mac Papers, Inc.⁴ For each year, petitioner submitted to Mac Papers, Inc., a Form W-4, Employee's Withholding Allowance Certificate, on which he claimed to be exempt from income tax withholding.⁵ Consequently, Mac Papers, Inc., did not withhold income tax from petitioner's compensation for either year.

Respondent did not treat petitioner's purported returns as valid returns. Rather, pursuant to section 6020(b), he prepared substitutes for returns (SFRs) for 2004 and 2005.⁶ On December 2, 2009, respondent issued notices of deficiencyrelating to petitioner's 2004 and 2005 tax years. Petitioner timely filed a petition with the Court.

OPINION

I. Deficiencies

The Commissioner's deficiency determinations in the notice of deficiency are presumed correct, and the taxpayer bears the burden of demonstrating otherwise.⁷ Rule 142; New Colonial Ice. Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S. 111, 112 (1933). However, pursuant to section 7491(a), the burden of proof on factual issues that affect the taxpayer's tax liability may shift to the Commissioner in certain situations. Petitioner has neither claimed nor shown that he satisfied the requirements of section 7491(a), and therefore he bears the burden of proof.

Petitioner concedes that he received the amounts of compensation set out in the notices of deficiency. However, petitioner asserts, using arguments that this Court has long deemed frivolous, that the income he received in 2004 and 2005 was not taxable income within the meaning of the law.⁸

Section 61(a) defines gross income to include "income from whatever source derived". More specifically, section 61(a)(1) includes in an individual's gross income any compensation for services, interest payments, dividend payments, and gains derived from dealings in property. Clearly, petitioner's compensation from Mac Papers, Inc., is gross income for Federal income tax purposes. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (stating that gross income includes all accessions to wealth that are clearly realized and under the control of the taxpayer); McNair v. Eggers, 788 F.2d 1509, 1510 (11th Cir. 1986) (describing the taxpayer's argument that his wages were not income as "patently frivolous"); Grimes v. Commissioner, 82 T.C. 235, 237 (1984); Reiff v. Commissioner, 77 T.C. 1169, 1173 (1981). Consequently, we uphold respondent'sdeterminations of deficiencies in petitioner's income tax for his 2004 and 2005 tax years.⁹

II. Additions to Tax

A. Section 6651(f)

We address next whether petitioner is liable for the addition to tax under section 6651(f) for fraudulently failing to file a return. Although petitioner filed what purported to be tax returns for 2004 and 2005, he filled in zeros for all lines where he should have reported income, and respondent treated those returns as invalid returns. Respondent now contends that petitioner should be liable for an addition to tax for each year for fraudulently failing to file a return.

The majority of courts, including this Court, have held that a return that contains only zeros is generally not a valid return. See United States v. Mosel, 738 F.2d 157 (6th Cir. 1984); United States v. Grabinski, 727 F.2d 681 (8th Cir. 1984); United States v. Rickman, 638 F.2d 182 (10th Cir. 1980); United States v. Moore, 627 F.2d 830 (7th Cir. 1980); United States v. Smith, 618 F.2d 280 (5th Cir. 1980); United States v. Edelson, 604 F.2d 232 (3d Cir. 1979); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003). For example, in Moore, 627 F.2d at 835, the Court of Appeals for the Seventh Circuit noted that a tax might conceivably be calculated on the basis of the zero entries; however, "it is not enough for a form to contain some income information; there must also be an honest and reasonable intent to supply the information required by the tax code." See also Mosel, 738 F.2d at 158. Accordingly, we conclude that petitioner's purported returns for 2004 and 2005 were invalid and tantamount to failing to file returns. We must therefore consider whether petitioner's failure to file returns should be considered fraudulent.

In deciding whether a failure to file is fraudulent under section 6651(f), we consider the same elements that are considered in imposing the addition to tax for fraud under former section 6653(b) and present section 6663. Clayton v. Commissioner, 102 T.C. 632, 653 (1994). Fraud is defined as an intentionalwrongdoing designed to evade tax believed to be owing. Powell v. Granquist, 252 F.2d 56 (9th Cir. 1958); Miller v. Commissioner, 94 T.C. 316, 332 (1990). The Commissioner bears the burden of demonstrating fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986), aff'g per curiam T.C. Memo. 1985-63; Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977). To carry the burden of proof on the issue of fraud, the Commissioner must show, for each year in issue, that (1) an underpayment of tax exists and (2) some portion of the underpayment is due to fraud. Petzoldt v. Commissioner, 92 T.C. 661, 698-699 (1989).

With respect to the foregoing test, the Commissioner need not prove the precise amount of the underpayment resulting from fraud, but only that some part of the underpayment of tax for each year in issue is attributable to fraud. Lee v. United States, 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), aff'g T.C. Memo. 1970-274; Petzoldt v. Commissioner, 92 T.C. at 699.

The Commissioner must show that the taxpayer intended to evade taxes known or believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Korecky v. Commissioner, 781 F.2d at1568; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Fraud is not to be imputed or presumed, but rather must be established by some independent evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C. 85, 92 (1970); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). However, fraud need not be established by direct evidence, which is rarely available, but may be proved by surveying the taxpayer's entire course of conduct and drawing reasonable inferences therefrom. Spies v. United States, 317 U.S. 492, 499 (1943); Korecky v. Commissioner, 781 F.2d at 1568; Rowlee v. Commissioner, 80 T.C. at 1123. Although fraud may not be found under "'circumstances which at most create only suspicion'", Petzoldt v. Commissioner, 92 T.C. at 700 (quoting Davis v. Commissioner, 184 F.2d 86, 87 (10th Cir. 1950), remanding a Memorandum Opinion of this Court), the intent to defraud may be inferred from any conduct the likely effect of which would be to conceal, mislead, or otherwise prevent the collection of taxes believed to be owing, Spies, 317 U.S. at 499.

Courts have relied on a number of indicia or badges of fraud in deciding whether to sustain the Commissioner's determinations with respect to the additions to tax for fraud. Although no single factor may be necessarily sufficient to establish fraud, the existence of several indicia may be persuasive circumstantial evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), aff'g percuriam T.C. Memo. 1982-603; Beaver v. Commissioner, 55 T.C. at 93. Circumstantial evidence that may give rise to a finding of fraudulent intent includes: understatement of income, inadequate records, failure to file tax returns, concealment of assets, failure to cooperate with tax authorities, filing false Forms W-4, failure to make estimated tax payments, failure to report income over an extended period, and asserting frivolous arguments and objections to the tax laws. Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff'g T.C. Memo. 1984-601; Solomon v. Commissioner, 732 F.2d at 1461-1462; DeVries v. Commissioner, T.C. Memo. 2011-185. These badges of fraud are nonexclusive. Miller v. Commissioner, 94 T.C. at 334. The taxpayer's background and the context of the events in question may be considered circumstantial...