George J. Smith & Sheila Ann Smith v. Commissioner
2019 T.C. Memo. 111
| Tax Ct. | 2019Background
- George and Sheila Smith filed joint 2013 and 2014 Forms 1040 that omitted most reported compensation and bank interest (about $66.7k in 2013 and $63.7k in 2014).
- George received wages from Staples; Sheila received pay from Fife, Microsoft, Met Homes, and 2014 unemployment; both received nominal bank interest.
- Respondent assessed deficiencies for 2013 and 2014, and in March 2016 assessed §6702 frivolous-return penalties (not subject to Tax Court deficiency review here).
- Petitioners argued respondent was required under I.R.C. §6020(b) to prepare substitute returns before contesting their filed returns, contended their receipts were not "wages" or "employment" income, and claimed the income tax is an excise tax.
- The Court rejected those defenses, sustained the income inclusions and a §6651(a)(1) late-filing addition for 2013, denied relief on the §6702 challenge, and imposed a $2,500 sanction under §6673(a)(1).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §6020(b) requires the Commissioner to prepare substitute returns before determining deficiencies when taxpayer filed frivolous/false returns | Smiths: §6020(b) obligates IRS to create and sign substitute returns before treating filed returns as incorrect | IRS: §6020(b) grants authority but imposes no mandatory duty; prior cases reject mandatory substitute-return requirement | Court: No mandatory duty; IRS need not prepare substitute returns before determining deficiencies |
| Whether compensation and interest are excluded from gross income because petitioners were not "employees" or their pay not "wages" under chapters 21/24 | Smiths: Payments were not "wages" and they were not "employees," so amounts not taxable as income | IRS: Gross income under §61(a) includes compensation and interest regardless of chapters 21/24 definitions | Court: Amounts received for services and interest are includible in gross income; chapter 21/24 definitions irrelevant to §61 |
| Whether the Federal income tax is an excise tax not applicable to petitioners' activities | Smiths: Income tax is an excise tax and does not apply to their receipts (except unemployment) | IRS: Income tax is properly imposed under Subtitle A and §61 covers receipts like wages and interest | Court: Excise-tax argument is meritless and rejected |
| Whether additions/penalties (§6651, §6673) are appropriate | Smiths: (argued generally lack of liability / procedural defenses) | IRS: §6651(a)(1) for late filing (2013) applies; §6673 sanctions for frivolous litigation appropriate | Court: Sustained §6651(a)(1) for 2013; imposed $2,500 §6673(a)(1) penalty for frivolous positions |
Key Cases Cited
- Schiff v. United States, 919 F.2d 830 (2d Cir. 1990) (rejecting a mandatory-duty reading of §6020(b))
- Roat v. Commissioner, 847 F.2d 1379 (9th Cir. 1988) (same)
- Gattuso v. Pecorella, 733 F.2d 709 (9th Cir. 1984) (wages-not-income arguments are frivolous)
- Martin v. Commissioner, 756 F.2d 38 (6th Cir. 1985) (excise-tax theory rejected)
- Parker v. Commissioner, 724 F.2d 469 (5th Cir. 1984) (tax-protester theories meritless)
- Lively v. Commissioner, 705 F.2d 1017 (8th Cir. 1983) (similar rejection of frivolous tax arguments)
- Higbee v. Commissioner, 116 T.C. 438 (Tax Court 2001) (burden of production for penalties)
- Graev v. Commissioner, 149 T.C. 485 (Tax Court 2017) (section 6751(b) supervisory-approval discussion)