Roye v. Commissioner

• Decision Date: 27 August 2012
• Docket Number: T.C. Memo. 2012-246,Docket No. 9913-10
• Parties: JEFFREY A. ROYE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

JEFFREY A. ROYE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2012-246
Docket No. 9913-10

UNITED STATES TAX COURT

Filed August 27, 2012

P failed to file tax returns for 2003 and 2004. R prepared substitutes for returns under I.R.C. sec. 6020(b) for those years and issued a notice of deficiency determining deficiencies in income tax and additions to tax under I.R.C. secs. 6651(f) and (a)(2) and 6654. In his answer to amended petition, R asserted, as an alternative to additions to tax under I.R.C. sec. 6651(f), additions to tax under I.R.C. sec. 6651(a)(1).

Held: P is liable for the deficiencies in income tax and additions to tax under I.R.C. secs. 6651(f) and (a)(2) and 6654 for 2003 and 2004.

Held, further, P is liable for an I.R.C. sec. 6673(a)(1) penalty of $15,000.

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Jeffrey A. Roye, pro se.

Duy P. Traru, Kathryn F. Patterson, and George Edward Gasper, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: By notice of deficiency (notice), respondent determined deficiencies in, and additions to tax with respect to, petitioner's Federal income tax as follows:¹

+---------------------------------------------------------------------------------+
                ¦Year ¦Deficiency ¦Sec. 6651(f) ¦Additions to tax Sec. 6651(a)(2) ¦Sec. 6654 ¦
                +------+------------+--------------+----------------------------------+-----------¦
                ¦2003 ¦$14,595 ¦$10,581 ¦$3,649 ¦$377 ¦
                +------+------------+--------------+----------------------------------+-----------¦
                ¦2004 ¦21,342 ¦15,473 ¦5,336 ¦612 ¦
                +---------------------------------------------------------------------------------+
                

By answer to amended petition, respondent supported by specific averments his determination of additions to tax under section 6651(f) and, as an alternative to those additions to tax, claimed additions to tax pursuant to section 6651(a)(1).

The issues for decision for 2003 and 2004 (years in issue) are whether petitioner: (1) underreported his income, (2) is liable for additions to tax for

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failures to (A) pay tax timely and (B) pay estimated income tax, and (3) is liable for an addition to tax for fraudulent failure to file or, alternatively, for nonfraudulent failure to file.² We must also decide whether to make absolute this Court's order dated June 14, 2011, directing petitioner to show cause why a penalty should not be imposed upon him under section 6673(a)(1) (sanctioning taxpayers who, among other things, bring proceedings for the purpose of delay or advance a frivolous or groundless position).

FINDINGS OF FACT

Background

At the time he filed the petition and amended petition, petitioner lived in Texas.

From at least 1999 to 2009, petitioner operated a pool-cleaning business. He did not file Federal income tax returns for taxable years 1999-2004.³ He filed Federal income tax returns for taxable years 2005-08, engaging a tax return preparer to prepare those returns.

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Internal Revenue Service (IRS) Examination

Respondent assigned Revenue Agent Mark Tae to examine petitioner's liability for the years in issue. By letter dated March 7, 2008, Revenue Agent Tae informed petitioner that the IRS had not received his tax returns for the years in issue and that he had scheduled a March 17, 2008, meeting to discuss the matter. In response, petitioner sent a letter, dated March 11, 2008, stating that he would not attend that meeting and denying that he is (1) liable for the "so-called income tax or any other internal revenue tax" and (2) a taxpayer under the Internal Revenue Code. He also stated that he had "filed returns in past years out of total ignorance of the tax laws." Petitioner subsequently sent to Revenue Agent Tae a document claiming sovereign immunity from, among other things, "any administrative action, civil or criminal" brought by the IRS.

Petitioner did not provide to Revenue Agent Tae records or other information concerning his taxable income for the years in issue. Therefore, to determine petitioner's income for those years, Revenue Agent Tae inquired of a credit bureau and, on the basis of the received information, he had summonses served on five financial institutions. One of those summoned financial institutions, JPMorgan Chase & Co. (JPMorgan Chase), informed him that, in the years in issue, petitioner had not maintained an account in his name, but he may

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have had signature authority with respect to the bank account of "Freedom Church of Revelation Restoration Ministries" (bank account). Revenue Agent Tae had summonses served on JPMorgan Chase requesting information concerning that account.

Upon receiving the requested records, Revenue Agent Tae examined the deposits made to the bank account, over which petitioner, indeed, held sole signature authority, and copies of canceled checks. Noticing that memo lines of several deposited checks referenced "pool services", he sent 21 third-party contact letters to issuers of those checks requesting additional information. He received several responses, all of which confirmed that petitioner had serviced their swimming pools during the years in issue and either that they remitted to him checks made out to "FCR" or petitioner's company name was "FCR".

Revenue Agent Tae then reconstructed petitioner's income for the years in issue under the so-called bank deposits method. To reconstruct petitioner's income for each year in issue, he prepared a schedule of the net deposit and individual item amount of "checks that was [sic] received by [petitioner] and deposited to a bank account under the name of Freedom Church of Revelation", the source of each deposit (i.e., interest payment, name of issuer of check), the check number, and the memo text (i.e., Revenue Agent Tae's notation of an

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interest payment, memo line of deposited checks). To the sum of those deposits he added undeposited items from third parties (customers),⁴ and he subtracted interest credited to the account and identifiable nontaxable deposits. He believed that, for each year in issue, the resulting sum represented the year's unreported gross income from petitioner's pool-cleaning business.

2003 Adjustment

Revenue Agent Tae determined that, during 2003, total deposits of $49,974 were made to the bank account, from which he subtracted $378, representing interest, the difference being unreported net deposits from pool cleaning. He further concluded that petitioner also received from customers $2,983 for pool cleaning services rendered, none of which was deposited into the bank account. He determined the net deposits plus undeposited items from customers, totaling $52,579, to be petitioner's 2003 unreported gross income from his pool-cleaning business.

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2004 Adjustment

Revenue Agent Tae determined that, during 2004, total deposits of $69,889 were made to the bank account, from which he subtracted $495 and $500, representing interest and gifts, respectively, the difference being unreported net deposits from pool cleaning. He further concluded that petitioner also received from customers $1,961 for pool cleaning services rendered, none of which was deposited into the bank account. He determined the net deposits plus undeposited items from customers, totaling $70,855, to be petitioner's 2004 unreported gross income from his pool-cleaning business.

All Years

Revenue Agent Tae could not identify, for either year in issue, any business expenses paid from the bank account.

Substitutes for Returns Under Section 6020(b)

Respondent prepared substitutes for returns under section 6020(b) for petitioner's years in issue (section 6020(b) returns). The 2003 section 6020(b) return showed $378 and $52,579 of interest income and Schedule C gross receipts, respectively, totaling $52,957. The 2004 section 6020(b) return showed $495 and $70,855 of interest income and Schedule C gross receipts, respectively, totaling $71,350. The interest amounts and Schedule C gross receipts are the same as

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those determined in Revenue Agent Tae's bank deposits analysis. The section 6020(b) returns showed resulting deficiencies of $14,595 and $21,342 for the years in issue. In response to a Letter 950 (i.e., a 30-day letter), proposing changes to petitioner's tax for those years, petitioner (1) disagreed with the proposed changes, (2) reiterated his denial of "taxpayer" status under the Internal Revenue Code, and (3) stated that he "did not file tax returns for tax years ending 200312 & 200412* * * [and] there is no Code Section in the Internal Revenue Code that authorizes the IRS to 'change' returns, even if [he] had filed a return." Petitioner did not make any income tax payments or any estimated tax payments for 2003 or 2004.

Notice

Respondent issued the notice on January 27, 2010, from his Small Business and Self-Employed Office, Dallas, Texas. It was signed on his behalf by Janet A. Miller, "Technical Services, Gulf States Area". In an attachment to the notice, respondent explained that, for each year in issue, his determination of a deficiency in tax was principally due to his adjustments increasing petitioner's gross receipts from his pool-cleaning business plus unreported interest income. Respondent also explained his determination of...