T.C. Memo. 2014-35
UNITED STATES TAX COURT
STEVEN T. WALTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21953-12L. Filed February 27, 2014.
Steven T. Waltner, pro se.
Michael W. Lloyd, for respondent.
BUCH, Judge: This case began as a collection proceeding in which Steven Waltner challenged the Internal Revenue Service’s efforts to collect a frivolous tax submissions penalty. That issue is no longer before us. On November 23, 2013, Mr. Waltner mailed full payment of the underlying liability plus interest to the IRS, thus rendering the issues relating to the collection of that liability moot.
[*2] While the case was pending, however, each party filed a motion asking the Court to impose sanctions against the other under section 6673.1 But for those motions, the Court could have dismissed this case as moot, and the Court informed the parties of this. Mr. Waltner unconditionally withdrew his motion, but in doing so he restated his view that respondent’s conduct merits sanctions and further noted that the Court may impose sanctions on a party sua sponte, implying that the Court should do so notwithstanding that Mr. Waltner had withdrawn his motion. In contrast, respondent was not willing to withdraw his motion. We are left to sort out whether either party should be sanctioned.
Background Mr. Waltner’s 2008 Tax Return
In August 2009 Mr. Waltner and his wife, Sarah V. Waltner, submitted a joint Form 1040, U.S. Individual Income Tax Return, for 2008 to the IRS. On the Form 1040 the Waltners reported zero wages, an IRA distribution of over $22,000, a student loan interest deduction, and a home mortgage interest deduction of over $26,000, all of which resulted in zero tax liability. The Waltners each listed their
[*3] occupation as “private-sector worker”, and they claimed a refund of over $10,000.2 Along with the Form 1040, Mr. Waltner submitted three Forms 4852, Substitute for Form W-2,3 (substitute W-2), each reporting zero wages but simultaneously reporting taxes withheld. Also, each substitute W-2 states that he determined that he received zero wages on the basis of “[p]ersonal knowledge and records provided by the company listed as ‘payer’ on line 5” and with respect to the efforts he made to obtain a corrected Form W-2, Wage and Tax Statement, he stated “none”. Mr. Waltner also submitted a “correcting” Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which he altered by inserting the word “corrected” and replacing the amount of gross proceeds of over $5,000 with zero. At the bottom of the Form 1099-B, Mr. Waltner included the following statement:
This correcting Form 1099-B is submitted to rebut a document known
to have been submitted by the party identified above as ‘Payer’ and
‘Broker’ which erroneously alleged a payment to the party identified
above as ‘Steve T. Waltner’ of ‘gross proceeds’ in connection with a
‘trade or business.’ Under penalty of perjury, I declare that I have
[*4] examined this statement and to the best of my knowledge and
belief, it is true, correct and complete. The Frivolous Tax Submissions Penalty
Three companies filed Forms W-2 for Mr. Waltner, reporting total wages of over $75,000, and those Forms W-2 also reported taxes withheld consistent with what Mr. Waltner reported on his substitute W-2s. The only substantive difference between the Forms W-2 submitted by the third parties and the substitute W-2s is that Mr. Waltner reported zero wages. In March 2010 the IRS sent the Waltners a letter informing them that the return that they had filed and on which they had reported zero wages represented a frivolous position and offering them 30 days within which to submit a corrected return; otherwise the IRS would impose a $5,000 frivolous submission penalty under section 6702. The Waltners did not submit a corrected return, and respondent assessed a $5,000 penalty and issued to Mr. Waltner a notice of penalty charge, informing him of the assessed penalty. The Collection Proceeding Before the IRS
Respondent issued a notice of intent to levy to Mr. Waltner to collect the section 6702 penalty. Mr. Waltner requested a hearing and submitted a 49-page fax to the Appeals officer who held the collection due process (CDP) hearing. The
[*5] 49-page submission included a summary of Mr. Waltner’s position that he is not liable for the section 6702 penalty and a 9-page declaration wherein he states that before January 2008 “I was very ignorant of the tax laws and assumed that all terms used by the IRS had their common meanings and that all earnings were taxable without exception. I have become increasingly more educated regarding these matters and seek to adhere to the rule of law in my affairs with the IRS”.
With respect to being liable for the income tax, he declared he was not “an officer, employee, or elected official of the United States, a State or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing”, he “was never an officer of a corporation”, “did not receive any Wages from any source”, “did not work for or receive any pay from an Employer or American Employer”, “was not engaged in Employment”, “was not an Employee”, “was not engaged in Self-Employment”, “was not engaged in a Trade or Business, i.e. I have never performed the functions of any public office”, “was not a citizen or resident of the District of Columbia or any territory or possession of the United States”, was “never incorporated in Washington, D.C. or worked for any company who incorporated in Washington, D.C.”, and “was not a governmental unit or agency or instrumentality thereof, or a United States Person”.
[*6] With respect to the information returns filed by third parties, he stated: “[N]one of the payers for whom I worked in 2008 were engaged in activities effectively connected to a Trade or Business, none was a federal agency, federal instrumentality or federal (or federally-controlled) corporation, and none paid me Wages subject to reporting” however “[s]ome of these payers retained money from my non-Wage pay and paid it over to the IRS as ‘withholding’ for federal income and employment (payroll) taxes.”
During the CDP hearing the Appeals officer informed Mr. Waltner that many of the arguments in his faxed submission were frivolous and that he would not consider them. Mr. Waltner did not provide a Form 433-A, Collection Information Statement,4 and the Appeals officer was unable to determine whether he was eligible for a collection alternative. Respondent issued a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, sustaining the proposed levy to Mr. Waltner. The Proceedings Before This Court
Among the errors assigned to respondent in the petition, Mr. Waltner alleged respondent had erroneously determined that Mr. Waltner was subject to a
[*7] section 6702 penalty despite his assertion that he “is not among the class of persons enumerated” in section 6671(b). Further, Mr. Waltner alleged that respondent had failed to verify at the CDP hearing whether Mr. Waltner was “among the limited class of people subject to tax upon which levy by distraint could be made”, which he alleged he was not. Mr. Waltner then filed an amended petition from which he omitted those frivolous arguments.
During the five months between the issuance of the notice of trial and the trial date the parties filed 24 motions, some of which were supplemented and many of which required responses, competing requests for admissions and supplemental requests for admissions and various other documents, all of which resulted in the Court’s issuing no less than 22 orders. The number of documents filed illustrates the lack of cooperation by the parties and, to some extent, also indicates acrimony between them. Respondent made repeated attempts to elicit overly broad admissions regarding facts and documents related to other years and to nonparties that have no bearing on the year in issue or the penalty at issue in this case. For his part, Mr. Waltner refused to stipulate many relevant facts and objected to being compelled to answer interrogatories and produce documents while he simultaneously requested that the Court compel respondent to answer irrelevant [*8] interrogatories and produce irrelevant documents. We address the various filings by category below.
Mr. Waltner filed a request for admissions, a supplemental request for admissions, and a motion to review respondent’s responses to each. On November 4, 2013, the Court issued a 39-page order reviewing the 44 requests for admissions and the 83 supplemental requests for admissions and respondent’s responses. The Court found many of Mr. Waltner’s requests improper because they called for legal conclusions, posed hypothetical questions, or asked for information not relevant to the frivolous tax submissions penalty for 2008. The Court also found many of respondent’s responses inadequate because respondent attempted to provide documents in lieu of admitting or denying some of the requests, respondent denied for lack of information whether certain exhibits appended to the requests were copies of those in Mr. Waltner’s administrative file when respondent presumably had the administrative file to verify those exhibits, and respondent denied for lack of knowledge or information what certain codes in Mr. Waltner’s transcript meant when respondent was the one who created those very codes. The November 4 order directed respondent to file revised responses for [*9] those the Court found inadequate. On November 22, 2013, respondent filed revised responses conforming to the Court’s order.
Respondent filed a 993-page request for admissions, including 242 separate paragraphs and appended exhibits. Mr. Waltner filed a motion for a protective order staying discovery, and respondent filed a notice of objection to Mr. Waltner’s motion. By order dated September 5, 2013, the Court granted Mr. Waltner’s motion for protective order in part, relieving Mr. Waltner of responding to some requests, and denied the motion in part, requiring him to respond to others. The Court reviewed respondent’s requests for admissions and found that some requests were irrelevant to the Court’s inquiry (regarding properties sold after the year in issue and information regarding Sarah V. Waltner not related to 2008) and that others related to matters of public record (various District Court, Court of Appeals, State superior court, and the U.S. Court of Federal Claims cases involving the Waltners and criminal court proceedings against Peter and Doreen Hendrickson). Although the Court ordered Mr. Waltner to respond to some of the requests for admissions, when he responded he renewed his objections and failed to admit or deny several requests. And as discussed below, for those requests to which Mr. Waltner responded and denied, some of those denials were not in good
Less than one month after Mr. Waltner’s requests for admissions were served, he filed a motion to compel stipulation and for an order to show cause why proposed facts and evidence should not be accepted as established under Rule 91(f). Mr. Waltner alleged that respondent was refusing to stipulate and provided his proposed stipulations. The Court granted Mr. Waltner’s motion and issued an order to show cause under Rule 91(f). Respondent filed a response alleging that Mr. Waltner’s motion should be denied because Mr. Waltner was refusing to stipulate facts such as his earnings and the CDP administrative file and that many of the proposed stipulations were already covered by Mr. Waltner’s requests for admissions. The response also included respondent’s responses to Mr. Waltner’s proposed stipulations, and so the order to show cause was discharged.
Respondent filed a motion to compel responses to interrogatories; however, respondent supplemented his motion when he received Mr. Waltner’s responses. Mr. Waltner filed an objection, and because he had in fact responded, we treated respondent’s motion to compel as a motion to review the sufficiency of Mr. Waltner’s responses. By order dated October 29, 2013, the Court granted respondent’s motion and directed Mr. Waltner to supplement his responses [*11] because Mr. Waltner’s previous responses consisted of nothing but objections--not a single interrogatory was answered. For example, Mr. Waltner repeatedly objected to interrogatories regarding his earnings from three jobs during 2008 because he stated that they were not reasonably calculated to lead to discovery of admissible evidence regarding the section 6702 penalty. Rather than answer, Mr. Waltner filed a motion for reconsideration of the Court’s October 29 order, alleging the Court had exceeded its authority in requiring responses to the interrogatories and not accepting the objections without answers. That motion for reconsideration was denied. Mr. Waltner sought an extension of time within which to answer the interrogatories, and the Court granted his motion. However, he never responded and instead paid the section 6702 penalty as discussed more fully below.
Mr. Waltner filed his own motion to compel responses to interrogatories, which he amended and to which respondent filed an objection. The Court found some of respondent’s responses sufficient; however, the Court found four responses to interrogatories regarding the summary record of assessment insufficient. Thus, the Court granted Mr. Waltner’s motion in part and ordered respondent to supplement his responses to those four interrogatories. On [*12] November 22, 2013, respondent supplemented his responses to include sufficient answers to the four interrogatories.
Respondent filed a motion to compel production of documents; however, respondent supplemented his motion when he received Mr. Waltner’s response. Mr. Waltner filed an objection; and because he had in fact responded, we treated respondent’s motion to compel as a motion to review the sufficiency of Mr. Waltner’s response to the request for production of documents. Mr. Waltner’s response consisted of nothing but objections--not a single document was produced. The Court reviewed respondent’s requests for production and found most of respondent’s requests relevant and not objectionable. However, some of respondent’s requests were overly broad. For example, respondent requested documents regarding mortgage applications “regardless of year”, and so we restricted the request to the two years before and after the year at issue because those might lead to the discovery of admissible evidence. By order dated October 31, 2013, the Court granted respondent’s motion in part and ordered Mr. Waltner to supplement his responses. Rather than answer, Mr. Waltner filed a motion for reconsideration of the Court’s October 31 order, alleging the Court had exceeded its authority in requiring responses to the requests for production of documents
and not accepting the objections without answers. The Court denied that motion
[*13] for reconsideration. Mr. Waltner sought an extension of time to respond to the request for production, and the Court granted that motion. However, Mr. Waltner never responded and, as previously mentioned, paid the section 6702 penalty. Continuance and Consolidation
Respondent filed the first motion for continuance, requesting that this case be continued so that it may be consolidated with a 2008 deficiency case involving Mr. and Mrs. Waltner’s joint return at docket No. 1729-13. Mr. Waltner filed an objection, stating that he did not wish to delay this case and that respondent’s motion should be denied because this case concerned only the 2008 penalty. By order dated October 23, 2013, the Court denied respondent’s motion to continue because the Court was disinclined to consolidate the two cases, which was the underlying reason for the motion to continue. The Court was disinclined to consolidate the cases because the parties to the two cases are not the same and the issues in the two cases were not the same; more specifically, Mrs. Waltner is not a party to this case but she is a party to the deficiency case, and at that time the underlying issue in this case was whether Mr. Waltner had made a frivolous tax submission whereas the deficiency case will require the Court to determine the Waltners’ underlying tax liability. Although it would have been within the sound [*14] discretion of the Court to consolidate the cases, the Court gave heavy weight to the fact that it was Mr. Waltner who opposed consolidation, in part because he represented that he did not want to delay this case.
Notwithstanding Mr. Waltner’s statement that he did not wish to delay this case, in early November 2013 he filed his own motion for consolidation of this case with two other cases at docket Nos. 8726-11L and 12722-13. In stark contrast to the consolidation that respondent had suggested, the cases Mr. Waltner proposed to consolidate did not even involve the same years. The Court denied Mr. Waltner’s motion to consolidate.
Less than a month before trial Mr. Waltner hired an attorney, who entered an appearance in this case and who filed a motion to change the place of trial to Jacksonville, Florida. At the time of that motion there was no connection in this case to Florida apart from Mr. Waltner’s new attorney, whose office was in Florida. The Court denied the motion to change the place of trial because it effectively requested a continuance, and hiring a new counsel is not ordinarily grounds for a continuance under Rule 133. Mr. Waltner’s then attorney also filed a motion for reconsideration of the Court’s denial of the motion to change the place of trial, which the Court also denied. The Court explained to Mr. Waltner’s
then attorney that Mr. Waltner had adamantly opposed continuing his trial as [*15] recently as October 2013. Further, the Court found the motion to change the place of trial was dilatory and appeared “to have been filed solely to accommodate Counsel, who was retained one month before the scheduled trial--a delay of Mr. Waltner’s own making.” Seven days after Mr. Waltner’s attorney filed an entry of appearance, he filed a motion to withdraw as counsel, stating that Mr. Waltner did not object to his withdrawal. Summary Judgment
Mr. Waltner filed two motions for summary judgment. Each motion stated that there were no genuine issues of material fact because respondent had not proven that Mr. Waltner was liable for the section 6702 penalty. By order dated September 3, 2013, the Court denied Mr. Waltner’s first motion for summary judgment. The Court noted that at the time of the September 3 order there was “no evidence in this case; there are only allegations of fact made by the parties * * * thus it appears both parties acknowledge that additional facts remain to be discovered.” With respect to Mr. Waltner’s assertion in his first motion for summary judgment that he was not a “person” as defined in section 6671(b), we informed him in the September 3 order that this argument has already been [*16] rejected by this Court and the Court of Appeals to which this case is appealable.5 Further, we informed Mr. Waltner in the September 3 order that his argument that he was not a person under section 6671was frivolous and warned him that the Court can impose a penalty under section 6673 if it finds that he “instituted or maintained this proceeding primarily for delay or that he took a position that is frivolous or groundless.”
Mr. Waltner filed a motion for reconsideration of the order denying his first motion for summary judgment, arguing, among other things, that the Court had misapprehended the meaning of section 6671. Further, Mr. Waltner argued he was entitled to summary judgment, despite the fact that there were disputed facts at the time of the motion. The Court denied that motion for reconsideration. On the same day he filed his motion for reconsideration, Mr. Waltner also filed a motion for certification for interlocutory appeal on the question of interpretation of section 6671(b), which the Court also denied.
Mr. Waltner’s second motion for summary judgment incorporated all of his first motion and stated that respondent would be unable to prove that the assessment of the penalty against Mr. Waltner was valid. Mr. Waltner then asked [*17] the Court to take judicial notice of a press release regarding “the discovery of evidence of forgery of the proof offered by the sitting President of the United States of his eligibility for office.” Mr. Waltner argued that the President cannot be a “competent Executive” and thus there can be no valid delegation of authority from the President to assess the frivolous return penalty at issue. By order dated October 29, 2013, the Court denied Mr. Waltner’s second motion.
Because we are a Court with nationwide jurisdiction and parties are often far from the Tax Court courthouse in the District of Columbia, the Court will often hold telephone conferences with parties to assist them in resolving issues such as discovery disputes or to discuss motions filed by one or more of the parties. The Court often reviews the case file in whole or in part in preparation for a conference call.
In preparation for such a call, a staff person called the number Mr. Waltner had provided on his petition and requested a convenient time for a conference call and a number where Mr. Waltner preferred to be contacted. During Mr. Waltner’s return phone call, he provided a number that he characterized as his work number. The Court observed on Mr. Waltner’s fee waiver application that his last “job” was in 2009; the Court then noticed that Mr. Waltner had altered the Court’s fee [*18] waiver form, substituting the word “job” where the original form stated “employment”, substituting “pay” for “salary or wages”, and substituting “company payer” for “employer”. The Court made no findings based on Mr. Waltner’s off-the-record statement, but instead by order dated September 6, the Court sought clarification by ordering Mr. Waltner to complete another application for waiver without altering the form; the Court did not direct that Mr. Waltner give updated financial information, only that he complete the form without altering it or provide the same information requested by the form in some other format. In lieu of providing an unaltered form or the requested information, Mr. Waltner paid the filing fee, thus rendering moot the question of whether he was entitled to a fee waiver. As a result, the Court vacated the September 6 order, thus ending the inquiry. Recusal
After the Court denied Mr. Waltner’s first motion for summary judgment and Mr. Waltner paid the filing fee, Mr. Waltner filed a motion for recusal of the Judge assigned to this case. As grounds, Mr. Waltner asserted that the Judge was biased against him because the Court had denied Mr. Waltner’s first motion for summary judgment without ordering a response and because the Court had ordered Mr. Waltner to resubmit his application for fee waiver without altering the [*19] questions or the wording of the form. Mr. Waltner also claimed that the Court had denied him the ability to appeal the fee waiver issue because the Court had vacated the order calling for a new fee waiver application. In an order dated October 29, 2013, the Court explained that once Mr. Waltner paid the filing fee, the Court was left with three options: (1) sanction Mr. Waltner for failing to comply with the Court’s September 6 order, which had directed him to submit a new unaltered form or the information requested in the unaltered form, (2) order Mr. Waltner to comply with the September 6 order, or (3) vacate the Court’s September 6 order and accept the filing fee. The option most favorable to Mr. Waltner was to vacate the September 6 order, which is what the Court did. Because there was no basis upon which bias could be found, the Court denied Mr. Waltner’s motion for recusal. Sanctions
Respondent filed a motion for sanctions pursuant to section 6673 in part on the basis of Mr. Waltner’s response to respondent’s request for admissions. That response was filed after the Court’s September 3 order, which warned Mr. Waltner about his potential liability for section 6673 penalty. Respondent alleged that Mr. Waltner had failed to cooperate with respondent to prepare the case for trial and was continuing to assert frivolous positions. Mr. Waltner filed a response [*20] objecting to respondent’s motion for sanctions, asserting instead that “[r]espondent offers no support (and none exists) for his contention that informing the Secretary on a tax form that one works in the private sector and received little or no reportable income is a ‘frivolous’ position meriting penalty. This contention is itself frivolous and groundless, resulting in a vexatious multiplication of these proceedings.”
Mr. Waltner filed his own motion for sanctions pursuant to section 6673. He stated that he “has no burden to prove that his non-wage earnings were not taxable, nor anything else related to the dollar amounts that were reported as income on his return”, all of which he asserted is irrelevant to the frivolous submission penalty. Mr. Waltner also asserted that it is respondent who has multiplied these proceedings by continuing to assert that Mr. Waltner has advanced frivolous arguments and that it is respondent who should be sanctioned.
Motion To Dismiss Petition Without Prejudice
Approximately two weeks before trial Mr. Waltner filed a motion to dismiss his petition without prejudice. Mr. Waltner asserted that his motion should be granted on the ground of mootness because he had fully paid the section 6702 penalty that provided the basis for the proposed collection action at issue. Mr. Waltner attached to his motion a copy of an express mail receipt for a mailing to [*21] the IRS, copies of six money orders totaling $5,400 (each with a handwritten note “2008 1040 CVPN under protest”), and a copy of a note stating “In payment of 2008, 6702 penalty plus interest. This payment is made under protest. This is for penalty assessed on Nov 7, 2011 against Steven T. Waltner. Interest paid as estimated by I.R.S. as of 11-22-13”. The Court could not grant Mr. Waltner’s motion until it determined that respondent had received the money orders and applied them as Mr. Waltner directed; moreover, the case could not be dismissed while the section 6673 motions remained unresolved. To sort all of this out, the Court set the motion to dismiss for a hearing at the trial session along with the pending section 6673 motions. At the hearing respondent’s counsel reported that Mr. Waltner’s $5,400 payment had been misapplied but that he would work to correctly apply the payment as Mr. Waltner had directed. On January 14, 2014, respondent filed a status report indicating that Mr. Waltner’s $5,400 payment had been found and was in the process of being applied as directed. December 11, 2013, Hearing
By order dated December 4, 2013, the Court had set both section 6673 motions for hearing and invited each party to appear or file a Rule 50(c) statement addressing whether that party wished to withdraw that party’s section 6673 motion in the light of Mr. Waltner’s payment of the section 6702 penalty. Each party [*22] submitted a Rule 50(c) statement; Mr. Waltner unconditionally withdrew his motion for sanctions, but respondent did not. At the hearing the Court also gave both parties an opportunity to reconsider whether they wished to withdraw their section 6673 motions. The Court offered the parties the option of conditionally withdrawing their motions (i.e., “I’ll withdraw mine if you withdraw yours.”). Mr. Waltner confirmed that he wanted to unconditionally withdraw his motion for sanctions, and respondent confirmed that he wanted the Court to decide his motion.
This case has occupied an inordinate amount of the Court’s time. The Court could have disposed of the entire matter summarily by reference to Crain v. Commissioner6 or any number of other cases that stand for the proposition that we need not address frivolous arguments.7 After all, Mr. Waltner asserted frivolous [*23] arguments, and even after the Court rejected those arguments and warned him about potential sanctions under section 6673, he continued to press those arguments. The Court has taken the time, however, to address those arguments because Mr. Waltner appears to be perpetuating frivolous positions that have been promoted and encouraged by Peter Hendrickson’s book Cracking the Code: The Fascinating Truth About Taxation in America (2007). Indeed, it appears not merely that Mr. Waltner’s positions are predicated on that book but that his returns and return information have been used to promote the frivolous arguments contained in that book. Consequently, a written opinion is warranted.
Judicial opinions are the “‘heart of the common law system’” and serve as “a critical component of what we understand to be the ‘law.’”8 Statutes and regulations provide simply an outline; judicial opinions fill in the details by providing the rule of law the court applied, the court’s rationale in applying that law, and the underlying facts.
[*24] Judicial opinions serve many purposes: they assist attorneys in advising clients and preparing cases; they provide the lower court’s rationale when the appellate court must evaluate its decision; they inform the public of the court’s analysis; and they establish clear and articulate rules for the future. It is with these purposes in mind that we address whether Mr. Waltner’s conduct merits sanctions while addressing the underlying frivolous positions upon which he relies and which he perpetuates by allowing his return information to be used.
Pursuant to section 6673(a)(1), the Court may impose a penalty of up to $25,000 against a taxpayer when it appears that he or she has instituted or maintained a case primarily for delay, that he or she took a position that is frivolous or groundless, or that he or she unreasonably failed to pursue administrative remedies.9 The purpose of section 6673, like that of section 6702 (the frivolous tax submissions penalty that underlies this case), is to encourage taxpayers to conform their positions to settled tax principles.10
[*25] One need not review the entire record to determine whether Mr. Waltner should be sanctioned; the answer can be gleaned from the discovery process. In general, a party may seek information in discovery, and the party resisting the discovery may object.11 Either party may seek the Court’s intervention by asking the Court to compel responses or by asking for a protective order.12 Once the Court rules on the appropriateness of the request or the sufficiency of the answer, however, the parties must comply with the Court’s order or risk sanctions.13
The discovery disputes are now moot because Mr. Waltner has paid the section 6702 penalty that was at issue. However, each party moved for a section 6673 penalty on the basis of the other’s actions. We focus on the record in this case to determine whether either party took a frivolous position after the Court determined it was frivolous or groundless or whether either party took actions primarily for delay.
This case presents clear examples of the proper manner for addressing discovery disputes and of a manner that evidences frivolous positions or attempts at delay. Respondent’s counsel sought discovery that went beyond the scope of [*26] this case, and the Court issued orders excusing Mr. Waltner from responding to those requests. Likewise, respondent’s counsel was evasive in answering some of Mr. Waltner’s discovery requests, and the Court ordered respondent to supplement those responses. In each instance, once the Court ruled, respondent’s counsel cured the defect, through either supplementing his responses or accepting the Court’s determinations that his requests were improper.
Mr. Waltner sought to avoid answering every discovery request.
With respect to respondent’s interrogatories, the Court found Mr. Waltner’s responses (which consisted of nothing but objections) insufficient and ordered him to supplement those responses. As previously discussed, Mr. Waltner repeatedly objected to interrogatories regarding his earnings from three jobs during 2008 because he stated that those interrogatories were not reasonably calculated to lead to the discovery of admissible evidence regarding the section 6702 penalty, an objection that is not in good faith. Rather than supplement, Mr. Waltner filed a motion for reconsideration of the order directing him to supplement, which the Court denied. Mr. Waltner then filed a motion for extension of time to supplement, which the Court granted. However, Mr. Waltner never supplemented his responses.
[*27] With respect to respondent’s requests for production of documents, the Court found Mr. Waltner’s responses (which again consisted of nothing but objections and did not include a single document) insufficient and ordered him to supplement his responses. Rather than supplement his responses, Mr. Waltner filed a separate motion for reconsideration of the order directing him to supplement his responses, which the Court denied. Mr. Waltner objected to the requests for production regarding his earnings from three jobs during 2008, because he considered that information to be irrelevant--an argument the Court had already rejected. Mr. Waltner then filed a motion for extension of time to supplement, which the Court granted. Just as he never answered the interrogatories, Mr. Waltner never supplemented his responses to the request for production of documents.
Discovery is not the only area in which Mr. Waltner failed to heed the Court’s orders. On September 3, 2013, the Court issued an order denying summary judgment and informing Mr. Waltner that he was a person under sections 6671(b) and 7701(a)(1) and thus could be liable for the section 6702 penalty. The Court identified these positions as frivolous in the September 3 order and warned Mr. Waltner that continuing to argue that he was not such a person might lead to the imposition of a section 6673 penalty. After that order, Mr. Waltner repeatedly [*28] asserted he could not be liable for the section 6702 penalty because he was not among the class of people who can be liable for that penalty: in his motion for reconsideration of the order denying summary judgment, in his motion for interlocutory appeal, in his motion for recusal, and in his second motion for summary judgment wherein he incorporated his arguments from his first motion for summary judgment. Also, Mr. Waltner repeatedly alleged that the pay he received for his work in 2008 was not taxable, an argument that was found to be frivolous many years ago.14
Mr. Waltner’s pattern of filing motions for reconsideration of orders directing him to supplement his responses and then never supplementing those responses shows that those motions were interposed for delay. Mr. Waltner’s objections in the responses he filed were rarely made in good faith. Mr. Waltner’s late attempts to obtain counsel, consolidate this case with other cases, and change the place of trial all show an attempt to delay this case.
[*29] One particularly troubling aspect of Mr. Waltner’s failure to deal with the Court in good faith relates to requests for admissions. As with the discovery requests, he objected to all requests for admissions that respondent posed. Mr. Waltner sought a protective order, which the Court granted in part and denied in part, ordering Mr. Waltner to respond to the portions of respondent’s requests for admissions that the Court found proper. Although the Court determined the remaining requests were proper, Mr. Waltner objected to almost every remaining request as “irrelevant” and “vexatious” and failed to admit or deny several requests notwithstanding the Court’s order.
Some of those requests related to the book Cracking the Code. The Court excused Mr. Waltner from admitting or denying that Peter Hendrickson wrote the book Cracking the Code and maintains the Web site http://www.losthorizons.com
, which is repeatedly referenced in the book. The Court did, however, require Mr. Waltner to respond to requests for admissions regarding certain tax materials posted on that Web site that appear to be the Waltners’ return information. Mr. Waltner was evasive in his responses and objected to every request related to the Web site on the grounds that they are not relevant to this case and that they are vexatious.
[*30] Rule 90(c)(1) generally requires a party to specifically admit, deny, or “assert that it cannot be truthfully admitted or denied and set forth in detail the reasons why this is so”. Mr. Waltner fell far short of this standard. For example, with respect to a request for admission that Mr. Waltner had submitted certain documents15 to the Web site affiliated with Cracking the Code, he objected to the request, stated he had made reasonable inquiry but he was unable to admit or deny, but that he “[d]enies ‘material * * * was contributed by petitioner’”. In other requests relating to the Web site, he simply objected and stated he had made reasonable inquiry and was unable to admit or deny. Mr. Waltner never supplemented his answers.
Those responses simply are not credible. Although redacted, even superficially the documents on the Web site appear to be those of the Waltners. The documents still appear on the Web site as of the drafting of this opinion, although after respondent’s requests for admissions were submitted they appeared in a slightly more redacted form. But after a more thorough inquiry, it is clear that they are the Waltners’ documents; they submitted those same documents in other [*31] cases pending in this Court. In short, Mr. Waltner’s statements that he was unable to admit or deny the requested admissions do not appear to have been in good faith; they appear to have been an attempt by Mr. Waltner to distance himself from the Web site and its related book.
In short, Mr. Waltner’s conduct merits sanctions. His motion to consolidate this case (after having previously objected to consolidation) and his motion to change the place of trial appear to have been interposed primarily for the purpose of delay, and thus his conduct is sanctionable under section 6673(a)(1)(A). Moreover, his assertion of positions that the Court had already rejected as frivolous is conduct sanctionable under section 6673(a)(1)(B). We will address this latter point further.
Mr. Waltner repeatedly advanced frivolous arguments. When he first advanced the argument that he was not a “person” as that term is used in the Internal Revenue Code, the Court explained in an order dated September 3, 2013, that his view has long been rejected. Yet he continued to press that point. His insistence on pressing a point that has been rejected is consistent with an admonition from Cracking the Code: It advises readers to follow its positions [*32] notwithstanding the consequences.16 Indeed, those consequences are often sanctions on the parties advocating those positions, because courts have repeatedly rejected the positions espoused in that book. Cracking the Code
We address the positions set forth in Cracking the Code not only because some of Mr. Waltner’s positions in this case mirror positions set forth in that book, but also because one of the purposes of the Court’s opinions is to guide future litigants (and in this instance, the same litigant in other proceedings before this Court).
Simply looking at the materials the Waltners submitted with their 2008 return show that they are familiar with Cracking the Code. Mr. Waltner has adopted the book’s nomenclature, declaring himself a “private-sector worker” on his 2008 return, and he followed the author’s directions in submitting substitute W-2s and 1099s including declarations, and reporting his Federal tax withholdings as including Social Security and Medicare taxes.
In his filings with this Court, Mr. Waltner has adopted the book’s frivolous approach to statutory construction, specifically as it relates to the use of the word [*33] “includes” when asserting that he cannot be among the class of people subject to a section 6702 penalty. Mr. Waltner altered his request for waiver of the filing fee to be consistent with Cracking the Code, replacing the word “employment” with “job”, replacing the words “salary or wages” with “pay”, and replacing “employer” with “company payer”. Mr. Waltner submitted a 49-page fax that he also submitted to the Appeals officer wherein his declaration closely tracks the narrow types of payments and payers that Cracking the Code declares are taxable and subject to reporting, and wherein Mr. Waltner declares under penalty of perjury that he received no such payments from any such payer. Further, Mr. Waltner states repeatedly in his filings that, although he received pay for working in 2008, the amount he received was not income because it was from a private-sector company, which Cracking the Code declares to be not taxable.
About the Author
When taxpayers consider relying on a book that purports to explain the tax laws, it is reasonable to inquire into the qualifications of the author. After all, the quality of tax research depends on the sources on which the researcher relies. Taxpayers can perform their own research or they can rely on the advice of others [*34] as a way to avoid the imposition of accuracy-related penalties.17 But whether relying on their own research or relying on others, that reliance must be reasonable.18 For example, if a case is off-topic or is no longer relevant because the law has changed, relying on that case is not reasonable.19 When a taxpayer is relying on the advice of a tax professional, the Court will consider the qualifications of the adviser.20 So it only follows that, when taking positions based on a book, it is reasonable to inquire into the expertise of the author. Some authors are well-recognized tax experts who are cited by courts; others are not.
Cracking the Code is written by Peter Eric Hendrickson. Nowhere in his book does Mr. Hendrickson set forth his credentials, other than on the back cover where he vaguely identifies himself as “researcher, analyst and scholar”. Add to that felon and serial tax evader.
[*35] Mr. Hendrickson’s first felony indictment of which the Court is aware
occurred in 1991.21 In October of that year, Mr. Hendrickson was charged with:
• Conspiracy to Place Incendiary Device in United States Mail
• Placing Injurious Article in U.S. Mail, Aiding and Abetting
• Malicious Destruction of Property Affecting Interstate Commerce by Means of Explosive
• Use of Explosive to Commit Felony Against the United States
• Failure to File Federal Income Tax Return (relating to 1988)
• Failure to File Federal Income Tax Return (relating to 1989)
Although the descriptions of the first four counts do not appear to be tax related,
the indictment provides further insights.
It was a part of the conspiracy that defendants PETER HENDRICKSON and DOREEN WRIGHT planned the placement of an incendiary device in the mail receptacle on the last day for the filing of federal income tax returns, April 16, 1990, in order to destroy such returns and to foster opposition to the payment of such income taxes.
That device was, in fact, placed in the mail.
On April 16, 1990, the last day which tax returns could be postmarked that year, a firebomb was placed in a bin at the United States Post Office in Royal Oak, Michigan. At about eight p.m., a postal worker standing near the bin and collecting mail from individuals driving in front of the post office noticed smoke coming from one of the bins. He rummaged through the bin and retrieved a smoking brown padded envelope, addressed “to the tax thieves” from “freedom loving Americans.” When the postal worker tried to extinguish whatever was causing the smoke by placing it in a puddle [*36] of water and stomping on it, the bomb detonated, injuring the postal worker and a bystander. * * * * * * * Hendrickson and Wright were charged with conspiracy to place the device at the post office. * * * Ultimately, Mr. Hendrickson pleaded guilty to a two-count superseding information: Conspiracy to Place Incendiary Device in U.S. Mail and Failure to File Federal Income Tax Return.23 Mr. Hendrickson’s second indictment occurred in 2008, when he was indicted on 10 counts of filing a false document, 4 relating to Forms 1040 and 6 relating to substitute W-2s. This indictment is notable because it post-dates the first printing of Cracking the Code, which according to the copyright page of the book occurred in July 2003. Further, it is notable because part of Mr. Hendrickson’s defense appears to have been predicated on “his interpretation of [*37] the Internal Revenue Code as expounded in his book, Cracking the Code:
[continued in follow up post]
[Edited to add link to Tax Court website]