143 T.C. No. 19
Tax Ct.2014Background
- Petitioners Vivian L. Rader and Steven R. Rader, married and residing in Colorado, did not file returns for 2003-2006 and 2008, with income reconstructed by the IRS for those years.
- The IRS used bank deposits and information returns to recreate petitioners’ reported income and issued substitutes for returns (SFRs) forming the basis of the notices of deficiency.
- Respondent amended answers to change petitioners’ filing status from single to married filing separately for 2003-06, increasing deficiencies and additions to tax; the amendments were ultimately used as the basis for the notices.
- Two 2006 Colorado real property sales by petitioners triggered 10% withholding under IRC 1445(a) (withholding credit under IRC 33) due to lack of Taxpayer Identification Numbers or non-foreign status certifications.
- During trial, it was stipulated that any deficiencies and related additions would be attributed to Mr. Rader (P-H) alone, with Mrs. Rader’s liability being moot; respondent conceded this at trial.
- The court ultimately held that the SFRs were valid, petitioners’ Fifth Amendment claim was rejected, and penalties under 6651 and 6654 were sustained, with certain adjustments to 2003-06 penalties and a section 6673(a)(1) sanction for delay.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of the SFRs under section 6020(b) | Rader contends SFRs are invalid for lack of proper deficiency statutory basis. | Respondent argues SFRs, with Form 13496, Form 4549-A/886-A, satisfy 6020(b) requirements. | SFRs valid; they sufficiently identify tax liability and are proper returns for deficiency purposes. |
| Effect of MFJ vs MFSeparate status on 2003-06 deficiencies | Petitioners argue filing status invalidly altered by amendments. | Respondent’s amendments to answer set MFSeparate, affecting amounts; however, amendments do not constitute amended SFRs for 6651(a)(2). | Tax deficiencies and 6651(a)(2) additions for 2003-06 must be based on the original SFRs’ tax liabilities, not the amended amounts. |
| Offset/credit for withholding under IRC 1445 | Petitioners seek offset/credit for 2006 withholding against deficiencies. | Withholding under 1445 yields a 33 credit but is not a 31 credit and is disregarded under 6211(b)(1) when computing deficiency. | Withheld amounts are not used to reduce the 2006 deficiency; 33 credit is disregarded for deficiency purposes. |
| Petitioners’ Fifth Amendment objection | Petitioner asserts Fifth Amendment privilege against self-incrimination. | Court previously rejected the claim as not showing real danger of criminal prosecution. | Fifth Amendment claim rejected; testimony compelled and admissions proper. |
| Section 6673(a)(1) penalty | Petitioner argues the position is reasonable and not frivolous. | Petitioner’s position is frivolous and instituted primarily to delay collection. | Court imposed $10,000 penalty under 6673(a)(1) for frivolous/Delay-based conduct. |
Key Cases Cited
- Golsen v. Commissioner, 54 T.C. 742 (1970) (controls appellate outcome; follow circuit law in 10th Circuit cases)
- Smalldridge v. Commissioner, 804 F.2d 125 (10th Cir. 1986) (binding election of MFSeparate on SFR when joint filing rights limited)
- Millsap v. Commissioner, 91 T.C. 926 (1988) (limits on late elections to joint filing after MFSeparate election; complex preclusion considerations)
- Gleason v. Commissioner, 2011 WL 2600917 (N/A) (validity of SFRs under 6020(b) without a signed Form 1040)
- Spur(l)ock v. Commissioner, T.C. Memo. 2003-124 (2003) (SFRs can be valid without a traditional 1040 if information suffices to compute liability)
- Edelson v. Commissioner, 829 F.2d 828 (9th Cir. 1987) ( Fifth Amendment rights in tax proceedings can be limited in civil audits)