Smells Like Crack

[LPC]

Another Tax Court memorandum opinion that looks like a response to another of Hendrickson's Heroes.

James Robert Morse et ux. v. Commissioner, T.C. Memo. 2010-40, Nos. 17809-08, 26521-08

JAMES ROBERT AND KATHY MORSE,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

JAMES ROBERT AND KATHY S. MORSE,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

Filed February 25, 2010

James Robert and Kathy S. Morse, pro sese.

Rollin G. Thorley, for respondent.

MEMORANDUM OPINION

GERBER, Judge: These consolidated cases were submitted fully stipulated pursuant to Rule 122.1 For petitioners' 2005 and 2006 tax years respondent determined the following income tax deficiencies and an accuracy-related penalty:

Accuracy-Related
Year Deficiency Penalty Sec. 6662
____ __________ _________________

2005 $3,511 $702.20
2006 1,761 -0-

The deficiencies are attributable to petitioners' failure to report income. The questions for our consideration are whether petitioners' income from wages is taxable for both years and whether they are liable for an accuracy-related penalty for 2005.

BACKGROUND

Petitioners James Robert Morse (petitioner) and Kathy S. Morse (Mrs. Morse) were residents of Arizona at the time their petitions were filed. Mrs. Morse died on December 18, 2008, after the filing of the petitions.2

For 2005 petitioners timely filed a joint Form 1040, U.S. Individual Income Tax Return, reflecting zero gross and zero adjusted gross income and claiming a $3.02 overpayment of withholding tax. Respondent applied the $3.02 overpayment to petitioners' outstanding 2002 income tax liability. On their 2005 income tax return, petitioners reported $29,500.59 and $14,833.05 as wages solely for purposes of Social Security and Medicare along with an explanation as to why said wages were not taxable as income.

For 2006 petitioners timely filed a joint Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, reporting $4,225 of adjusted gross income from unemployment compensation and claiming a $2,287.39 overpayment of withholding tax. Respondent applied $2,148.86 of the $2,287.39 to petitioners' outstanding income tax liability for 2003 and the remaining $138.53 to petitioners' outstanding income tax liability for 2004. On their 2006 return petitioners reported wages solely for Social Security and Medicare purposes but not as gross income.

Subsequently, respondent, on January 25, 2008, sent petitioners letters advising that their 2005 and 2006 income tax returns contained reporting positions that are considered to be "Frivolous Tax Submissions" and that they might be subject to a penalty under section 6702. Those same letters provided petitioners with an opportunity to correct their 2005 and 2006 returns. In responses dated February 27, 2008, petitioner advised respondent that his returns were correct and that his position was fully explained therein. In addition, petitioner posed numerous questions as to why respondent considered his tax reporting position to be "frivolous". Subsequently, respondent assessed a $500 penalty against petitioner and against Mrs. Morse under section 6702. Petitioners did not pay the $500 penalties, and respondent proceeded to pursue collection activity.

Thereafter respondent verified the existence of petitioners' wages and advised petitioners of the intention to determine income tax deficiencies. Petitioners retorted that respondent had no right to change their 2005 and 2006 returns. Respondent issued notices of deficiency for the tax years 2005 and 2006 on September 17 and May 5, 2008, respectively, from which petitioners petitioned this Court.

DISCUSSION

Petitioner admits that petitioners received "wages" during 2005 and 2006 but argues that those wages are not taxable.3 Petitioner's argument is familiar to this and other courts and has been soundly rejected on numerous occasions. Petitioner, in an attempt to construct an argument, begins with definitions of the terms "includes" and "including" and some general principles of statutory construction. He then defines certain terms, such as "United States", "employee", and related terms. Finally, he refers the Court to section 3401(c), which concerns withholding of tax from wages. By citing, out of context, selected text from the withholding tax provisions, petitioner concludes that only residents of the District of Columbia and Federal employees are subject to the Federal income tax on their wages. Petitioner's position is without substance and has been rejected on numerous occasions by this and other courts.

By selectively analyzing statutes out of context, petitioner has reached the conclusion that petitioners' wages received for 2005 and 2006 do not constitute taxable income. Petitioner has followed in the footsteps of numerous others who have unsuccessfully attempted to find a way to avoid paying Federal income tax. We find petitioner's arguments to be wholly without merit and not worthy of further analysis. For example, it has been explained that "Compensation for labor or services, paid in the form of wages or salary, has been universally, held by the courts of this republic to be income, subject to the income tax laws currently applicable." United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981); see Funk v. Commissioner, 687 F.2d 264 (8th Cir. 1982), affg. per curiam T.C. Memo. 1981-506; Broughton v. United States, 632 F.2d 706, 707 (8th Cir. 1980); Hayward v. Day, 619 F.2d 716, 717 (8th Cir. 1980); Rowlee v. Commissioner, 80 T.C. 1111, 1120 (1983). Moreover, we are not obligated to exhaustively review and/or rebut petitioner's misguided contentions. Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).

We accordingly hold that petitioners' wage income is subject to the income tax and that respondent did not err in determining income tax deficiencies against petitioners.

Finally, we consider whether petitioners are liable for an accuracy-related penalty under section 6662. Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty of 20 percent on the portion of an underpayment attributable to negligence or disregard of rules or regulations, or to a substantial understatement of income tax. An understatement is substantial if it exceeds the greater of: (1) 10 percent of the tax required to be shown on the return for the taxable year, or (2) $5,000. Sec. 6662(d)(1)(A).

Petitioners did not have a substantial understatement as their underpayment fell short of the statutory threshold. Accordingly, we consider whether petitioners are subject to an accuracy-related penalty attributable to negligence. Respondent has carried the burden of production by showing that petitioners failed to report income and that their reason for doing so was frivolous.

An underpayment is not subject to an accuracy-related penalty to the extent that the taxpayer shows that the underpayment is due to reasonable cause and good faith. Sec. 6664(c); Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd. 299 F.3d 221 (3d Cir. 2002); see also secs. 1.6662-3(a), 1.6664-4(a), Income Tax Regs.

Petitioners' position reflected on their income tax returns and the position presented to this Court are without substance and have no support in case precedent. It is of no consequence that petitioners presented a detailed explanation of their statutory analysis, because it has been rejected by numerous courts and because it is nothing more than sophistry. Accordingly, we hold that petitioners were negligent and are subject to the accuracy-related penalty for the 2005 tax underpayment.

To reflect the foregoing,

Appropriate orders and decisions will be entered.

FOOTNOTES

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

2 Respondent has moved, with respect to both cases, to dismiss Mrs. Morse for failure to prosecute as no representative of her estate has come forward to pursue this proceeding. Respondent's motions to dismiss will be granted.

3 Petitioner also made arguments concerning the sec. 6702 penalties that had been assessed, but this Court is without jurisdiction to address the merits of that assessment.

END OF FOOTNOTES

[LPC]

Another Tax Court memorandum opinion that looks like a response to another of Hendrickson's Heroes.

Sure enough, the 2006 "victory" of James and Kathy Morse can be found at http://www.losthorizons.com/tax/MoreVictories16.htm

[LPC]

the 2006 "victory" of James and Kathy Morse can be found at http://www.losthorizons.com/tax/MoreVictories16.htm

You know, it's extremely courteous of Hendrickson to post both the image of the refund checks (or notice of credit) with an html label with the name of the taxpayer, because it allows us to find the refunds by taxpayer name with a simple Google search. If we had to look at each image on his web page, it would be a lot more difficult to match the refunds with the Tax Court losses.

And in matching the refund with the Tax Court opinion, I noticed that the numbers are different. Morse received a refund (really an overpayment credit) of $2,287.39 for the year 2006, but the IRS eventually assessed (and the Tax Court affirmed) a deficiency of only $1,787. Hendrickson posted their tax returns also, and according to the Forms 4852, there was no federal income tax withheld, only Social Security and Medicare. But the deficiency affirmed by the Tax Court was for federal income tax, and I don't think that FICA taxes can be assessed through a deficiency procedure, so how does the IRS recover the FICA taxes that were credited to the previous year's returns? Just reverse the credits and begin collection actions for the previous years?

[Nikki]

You know, it's extremely courteous of Hendrickson to post both the image of the refund checks (or notice of credit) with an html label with the name of the taxpayer, because it allows us to find the refunds by taxpayer name with a simple Google search. If we had to look at each image on his web page, it would be a lot more difficult to match the refunds with the Tax Court losses.

You're not the only one to appreciate Pete's generosity.

[Quixote]

And in matching the refund with the Tax Court opinion, I noticed that the numbers are different. Morse received a refund (really an overpayment credit) of $2,287.39 for the year 2006, but the IRS eventually assessed (and the Tax Court affirmed) a deficiency of only $1,787. Hendrickson posted their tax returns also, and according to the Forms 4852, there was no federal income tax withheld, only Social Security and Medicare. But the deficiency affirmed by the Tax Court was for federal income tax, and I don't think that FICA taxes can be assessed through a deficiency procedure, so how does the IRS recover the FICA taxes that were credited to the previous year's returns? Just reverse the credits and begin collection actions for the previous years?

No FICA taxes were credited to the previous year's return. The Morse's claimed $2,287.39 on line 7, federal income tax withheld. That credit was not supported by the Forms 4852, but was apparently allowed on initial processing of the return. As it turns out, they overstated the amount of that credit. IRC 6201(a)(3) authorizes the Secretary to assess such an overstatement without a notice of deficiency. The IRS thinks it can reverse the credit any time within the 10 year collection limitation period. The existence of IRC 6201(a)(3) suggests that such a reversal must be made within the assessment limitation period.

[jg]

The IRS thinks it can reverse the credit any time within the 10 year collection limitation period. The existence of IRC 6201(a)(3) suggests that such a reversal must be made within the assessment limitation period

Do you know if that issue has been adjudicated?

[Famspear]

The IRS thinks it can reverse the credit any time within the 10 year collection limitation period. The existence of IRC 6201(a)(3) suggests that such a reversal must be made within the assessment limitation period

Do you know if that issue has been adjudicated?

I see what you're driving at: Section 6201(a)(3) implies that the debit to the taxpayer's Form 1040 account should be treated as a statutory assessment for purposes of the assessment limitation period. The wording of 6201(a)(3) is interesting because, in the absence of that wording, I would have tended to want to argue that the debit to the account is not an "assessment."

I don't know whether there is any case law on this issue.

In the case of Cracking the Code returns and other fraudulent returns, of course, the issue (3 year assessment statutory period versus 10 year collection statutory period, or whatever) would seem to be less critical, as there is no assessment limitation time period for a tax in connection with a fraudulent return or a return for a tax which the taxpayer has willfully attempted to evade.

[Tax Man]

I was thinking of a different kind of crack when I saw the thread title.

[Quixote]

The IRS thinks it can reverse the credit any time within the 10 year collection limitation period. The existence of IRC 6201(a)(3) suggests that such a reversal must be made within the assessment limitation period

Do you know if that issue has been adjudicated?

I doubt it. I am not aware of any case on the issue.