Docket No. 6979-89 | Tax Ct. | Dec 31, 1990
1990 Tax Ct. Memo LEXIS 733">*733
*2207 MEMORANDUM OPINION
This matter is before the Court on respondent's motion for summary judgment, filed November 8, 1990, pursuant to Rule 121. 1 The issue that respondent seeks to have adjudicated in his favor is whether petitioners, as a matter of law, should be found liable for the tax deficiencies and additions to tax as determined by respondent in the deficiency notices. Petitioners have failed to file any objection to respondent's1990 Tax Ct. Memo LEXIS 733">*734 summary judgment motion.
By separate statutory notices of deficiency, both of which are dated March 17, 1989, respondent determined deficiencies in, and additions to, petitioners' Federal income tax as follows:
| JAMES M. BOYCE | |||||
| Section | Section | Section | |||
| Year | Deficiency | 6653(b) | 6661(a) | 6654(a) | |
| 1979 | $ 3,947 | $ 1,974 | -0- | -0- | |
| 1980 | 4,887 | 2,444 | -0- | $ 311 | |
| 1981 | 12,705 | 6,353 | -0- | 973 | |
| Section | Section | Section | Section | ||
| Year | Deficiency | 6653(b)(1) | 6653(b)(2) | 6661(a) | 6654(a) |
| 1982 | $ 15,471 | $ 7,736 | * | $ 3,868 | $ 1,506 |
| 1983 | 14,854 | 7,427 | **1990 Tax Ct. Memo LEXIS 733">*735 | 3,714 | 908 |
| 1984 | 14,491 | 7,246 | *** | 3,623 | 912 |
| SHELLEY A. BOYCE | |||||
| Section | Section | ||||
| Year | Deficiency | 6653(b) | 6661(a) | 6654(a) | |
| 1979 | $ 2,052 | $ 1,046 | -0- | -0- | |
| 1980 | 2,785 | 1,395 | -0- | $ 178 | |
| 1981 | 9,943 | 4,972 | -0- | 762 | |
| Section | Section | Section | Section | ||
| Year | Deficiency | 6653(b)(1) | 6653(b)(2) | 6661(a) | 6654(a) |
| 1982 | $ 12,442 | $ 6,221 | * | $ 3,111 | $ 1,211 |
| 1983 | 11,516 | 5,728 | ** | 2,879 | 705 |
| 1984 | 10,220 | 5,110 | *** | 2,555 | 643 |
Petitioners were residing in San Luis Rey, California, when they timely filed the consolidated petition in this case.
We assume the following facts based on the parties' pleadings, supporting memoranda, and in particular on respondent's first request for *2208 admissions sent to petitioners by certified1990 Tax Ct. Memo LEXIS 733">*736 mail on August 14, 1990. In his request for admissions, respondent sets forth sufficient facts to sustain his determinations of petitioners' tax deficiencies and additions to tax, including the additions to tax for fraud. Because petitioners have failed to respond to respondent's request for admissions, each matter set forth in that document is deemed admitted as fact, pursuant to Rule 90(c), and is incorporated herein by this reference.
At all relevant times, petitioners were married and residing in Southern California where they earned a living shoeing horses and doing business as "Sharp Horseshoe Enterprises" or "Sharp Horses." On their 1978 Federal income tax return, petitioners employed the cash receipts and disbursements method of accounting and maintained the calendar year as their taxable year. Petitioners are self-proclaimed "nontaxpayers" who have, in effect, failed to file Federal income tax returns for the years 1979 through 1984. Specifically, petitioners mailed standard IRS Forms 1040 to the Internal Revenue Service Center in Fresno, California, for each of the years 1979, 1980, and 1981. On the forms, petitioners claimed that Mr. Boyce was "self-employed" and1990 Tax Ct. Memo LEXIS 733">*737 Mrs. Boyce was a "homemaker." However, petitioners failed to disclose any financial information on the returns for those years and filled in all the appropriate lines of each return with the words "none" or "object." For the years 1982, 1983, and 1984, petitioners failed to file any Federal income tax return forms.
In December 1984, respondent contacted petitioners by letter, requesting that they file completed Federal income tax returns for the years 1979 through 1983. Petitioners admit they never filed the completed returns, including one for 1984, and attempted to hinder the collection of their Federal income tax by transferring and concealing their assets in the following manner.
On January 23, 1985, Mrs. Boyce transferred her interest in petitioners' family residence, located at 577 Sleeping Indian Road, San Luis Rey, California (hereinafter "the residence"), to Mr. Boyce by quitclaim deed, making Mr. Boyce the sole owner of the residence. On March 29, 1985, without consideration, Mr. Boyce executed a grant deed transferring the residence to the Jacob Family Preservation Trust, an entity created and controlled by petitioners for purposes of avoiding income tax. On September 20, 1985, petitioners1990 Tax Ct. Memo LEXIS 733">*738 caused the Jacob Family Preservation Trust to transfer the residence by grant deed to the White Rail Company, which is owned and controlled by petitioners. The White Rail Company, at the time of this transfer, had an offshore address used by Nassau Life Insurance Company, Ltd., another entity which assists taxpayers in avoiding the payment and collection of their Federal income taxes. In an attempt to insulate their residence from levy, petitioners, on December 17, 1987, caused the White Rail Company to record a deed of trust and assignment of rents in the amount of $ 350,000 in favor of Northern Plains Services. The deed of trust and assignment of rents are not supported by consideration, and neither the White Rail Company nor petitioners have made any payments on the trust deed. Regardless of legal title, petitioners have continued to live in, and exercise dominion and control over, their residence.
In an effort to insulate their truck from a tax levy, petitioners transferred the truck's title to Westcoast Leasing but never gave up possession and control over it. The address of Westcoast Leasing is P.O. Box 25, Aztec, New Mexico, the same address used by Northern Plains Services. 1990 Tax Ct. Memo LEXIS 733">*739 In 1986, petitioners began using nominee bank accounts to conduct their horseshoeing business so as to protect their accounts from a tax levy.
Respondent scheduled a meeting with petitioners on December 6, 1988, for purposes of either receiving petitioners' delinquent returns or soliciting the necessary information to prepare them. Although Mr. Boyce appeared for the scheduled conference, he failed to produce any books or records and refused to answer respondent's questions. Respondent, therefore, reconstructed petitioners' taxable income for each year in issue using the bank deposits method and by obtaining documents showing that petitioners received fees for their horseshoeing services.
Petitioners admit that they have no books or records to substantiate their income and expenses for any of the years at issue and that respondent's reconstruction of their taxable income for those years, using the bank deposits method, is correct. Respondent determined that petitioners deposited the following amounts into their checking accounts, numbered XXXXX-X3125, XXXXX-X4356, and XXXX-XX095-A, at Bank of America in Oceanside, California:
| Year | Amount Deposited |
| 1979 | $ 63,598 |
| 1980 | 74,828 |
| 1981 | 157,151 |
| 1982 | 191,145 |
| 1983 | 194,906 |
| 1984 | 186,372 |
1990 Tax Ct. Memo LEXIS 733">*740 The facts deemed admitted in respondent's first request for admissions establish that no portion of petitioners' bank deposits in 1979 through 1984 was nontaxable income, namely, gifts, inheritances, or loans.
Petitioners were paid the following fees for their horseshoeing services during 1983 and 1984. Each payer gave petitioners an IRS Form *2209 1099 for purposes of claiming the fees as income, which petitioners failed to do.
| Year | Payer | Amount |
| 1983 | Hoyt S. Pardee | $ 1,900 |
| 1984 | Hoyt S. Pardee | 1,886 |
| Doug Lilly Quarter Horses | 10,987 | |
| Oak Haven Farms | 1,390 | |
| Buckeye Ranch Inc. | 1,239 | |
| Mik-Mar Co. | 617 |
In addition, petitioners received interest income of $ 10 in 1979, $ 128 in 1981, and $ 384 in 1982.
Although petitioners have no documents to substantiate any of their ordinary and necessary business expenses, they admit that their expenses did not exceed 60 percent of their gross receipts, the amount that respondent allowed as deductible expenses in computing petitioners' tax deficiencies.
The facts deemed admitted in respondent's first request for admissions establish that petitioners failed to report the following amounts1990 Tax Ct. Memo LEXIS 733">*741 of taxable income for the years 1979 through 1984:
| James M. Boyce, Jr. | |
| Year | Taxable Income |
| 1979 | $ 12,729 |
| 1980 | 13,966 |
| 1981 | 30,404 |
| 1982 | 37,344 |
| 1983 | 37,982 |
| 1984 | 36,275 |
| Shelley A. Boyce | |
| Year | Taxable Income |
| 1979 | $ 12,729 |
| 1980 | 13,966 |
| 1981 | 30,404 |
| 1982 | 37,344 |
| 1983 | 37,982 |
| 1984 | 36,275 |
In their consolidated petition, petitioners do not address the determinations made by respondent in the deficiency notice; rather, their so-called "assignments of error" contain only erroneous Constitutional arguments and conclusory allegations of "error" frequently used by tax protestors, namely, (a) petitioners are exempt from a direct unapportioned tax; (b) the statutory notices of deficiency were issued without due process at the administrative level; and (c) petitioners have been deprived of certain procedural safeguards guaranteed to them by the U.S. Constitution. Petitioners' assignments of error were purportedly based on their "statement of facts," which also contains numerous and erroneous statements of law. Petitioners do not dispute respondent's method of computing petitioners' tax deficiencies and additions to tax and challenge only the validity1990 Tax Ct. Memo LEXIS 733">*742 of the deficiency notices on the basis of the Constitutional arguments set forth in the petition.
On July 30, 1990, respondent filed a motion for partial summary judgment seeking to dispose of the Constitutional arguments petitioners raised in the petition. On October 24, 1990, we granted respondent's motion for partial summary judgment, reserving for trial the merits of respondent's determinations regarding petitioners' tax deficiencies and additions to tax.
Petitioners have continuously refused to comply with Tax Court discovery procedures. On June 14, 1990, respondent served petitioners his first request for interrogatories and production of documents, pursuant to Rules 71 and 72, respectively. The requested information addressed issues presently before this Court. Petitioners ignored the discovery requests. On August 6, 1990, respondent filed a motion to compel petitioners to respond to his interrogatories and comply with his request for the production of documents, or to impose sanctions under Rule 104. Despite a Court order to respond by October 1, 1990, petitioners failed to respond to the discovery requests. Accordingly, the Court issued an order prohibiting petitioners1990 Tax Ct. Memo LEXIS 733">*743 from introducing anything into evidence pertaining to the matters in respondent's requested interrogatories and documents.
Respondent filed the summary judgment motion presently before us on November 8, 1990. The Court ordered petitioners to file a response to respondent's motion no later than November 23, 1990. However, petitioners have failed to file any such response.
A decision shall be rendered on a motion for summary judgment if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b). The moving party bears the burden of proving there is no genuine issue of material fact.
As a preliminary matter, we find that respondent was justified in using the bank deposits method of determining petitioners' income and deductions for each year in issue since petitioners failed to produce any books or records of their financial activities and failed to answer respondent's inquiries in his letters and in the auditing1990 Tax Ct. Memo LEXIS 733">*745 sessions. Under these circumstances, we have long held that the bank deposits method of determining taxable income is reasonable.
Section 61(a) provides that gross income includes all income from whatever source derived, including (but not limited to) compensation for services rendered, gross income derived from business, and interest. Although taxpayers engaged in a trade or business are allowed to deduct all the ordinary and necessary business expenses paid or incurred in carrying on a trade or business, they are required to substantiate the amount of their claimed business expenses by maintaining adequate records. Secs. 162(a); 6001;
The next question before this Court is whether there is any genuine issue of material fact precluding us from deciding that the additions to tax respondent determined pursuant to sections 6661(a) and 6654(a) are correct as a matter of law. Section 6661(a) imposes an addition to tax when there is a "substantial understatement of income tax for any taxable year." Section 6654(a) imposes1990 Tax Ct. Memo LEXIS 733">*747 an addition to tax in the case of a failure of an individual to pay estimated income tax. As to the additions to tax determined by respondent under sections 6661(a) and 6654(a), petitioners have the burden of proof. Rule 142(a). They have given us no reason to believe that respondent has erroneously determined these additions to tax, and, therefore, we find them correct as a matter of law.
Respondent determined additions to petitioners' income tax for fraud under section 6653(b) for the years 1979, 1980, and 1981, and under section 6653(b)(1) and (2) for the years 1982, 1983, and 1984. Section 6653(b) and amended section 6653(b)(1) provide that if any part of an underpayment of tax is due to fraud, the taxpayer will be subject to an addition to tax equal to 50 percent of the underpayment. In addition, subsection 6653(b)(2) imposes an amount based on the portion of the underpayment attributable to fraud. Fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing.
Finally, a review of the record herein shows that an award of damages on the Court's own motion, pursuant to section 6673, is clearly justified. 1990 Tax Ct. Memo LEXIS 733">*751 Section 6673(a)(1) provides that whenever it appears to the Tax Court that (a) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (b) the taxpayer's position in such proceeding is frivolous or groundless, or (c) the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay a penalty to the United States not in excess of $ 25,000. Section 6673 makes no attempt to infringe upon the right of any citizen who, acting seriously and in good faith, wishes to petition this Court for redress of grievances which he has against respondent. However, petitioners' tax protestor arguments have uniformly been held by this Court to be entirely without merit, and by now, the continued assertion of such frivolous and meritless claims can no longer be considered to be serious efforts by bona fide taxpayers to vindicate a legitimate position. Such arguments are, in short, frivolous. See
For the foregoing reasons, we find there are no genuine issues of material fact to be tried. Accordingly, we sustain respondent's determinations contained in the notices of deficiency, *753 including the additions to tax for fraud, and find that respondent is entitled to a summary adjudication on the merits of this case as a matter of law.
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 of 1954 as amended and in effect for the years in issue.↩
*. 50% of the interest due on $ 15,471.↩
**. 50% of the interest due on $ 14,854. ↩
***. 50% of the interest due on $ 14,491.↩
*. 50% of the interest due on $ 12,442.↩
**. 50% if the interest due on $ 11,516.↩
***. 50% of the interest due on $ 10,220.↩
2. See also
Michalowski v. Commissioner , T.C. Memo. 1976-192↩3. See also
Morris v. Commissioner , T.C. Memo. 1990-580↩4. In their continuing effort to avoid, hinder, and delay respondent's assessment and collection of their tax deficiencies, petitioners filed a motion on Nov. 27, 1990, demanding that the trial judge disqualify himself from the case due to his alleged personal bias or prejudice against petitioners. In the affidavit attached to their motion, petitioners failed to produce any evidence of bias or impartiality on the part of the fact finder; rather, they merely recited the overly familiar and erroneous Constitutional arguments that this Court, and others, have consistently rejected as tiresome tax protestor rhetoric. Accordingly, we denied petitioners' motion to disqualify the judge on Dec. 3, 1990.↩
5. See for example
Cauvel v. Commissioner , T.C. Memo. 1989-547↩