T .C . Memo . 2010-14 9

UNITED STATES TAX COUR T

HAROLD X . .O'BOYLE, Petitioner v . COMMISSIONER

OF INTERNAL REVENUE, Responden t

SALLY R .`O'BOYLE, Petitioner v . COMMISSIONER

OF INTERNAL REVENUE, Responden t

Docket Nos . 30214-07, 30215-07 .' . Filed July 13, 2010 . Harold X . O'Boyle and Sally R . O'Boyle, pro sese . Vivian Rodriguez , for respondent .

MEMORANDUM OPINIO N

WELLS, Judge : Respondent . determined deficiencies i n petitioners .' Federal income tax and additions to tax pursuant t o 'These cases were consolidated , byorder of this Court and are hereinafter referred to collectively as the instant case . SERVED JUL 13 2010 2 -sections 6651(a)(1) and (2) . and 6654(a)2 for their 2000, 2001, and 2002 tax years in the following amounts :

Harold X . O'Boyl e

Additions to tax under sec .

Year Deficiency 6651(a)(1) 6651(a)(2) 665 4

2000 $23,688 $5,329 .80 $5,922 .00 $1,265 .2 8 2001 67,726 15,238 .35 16,931 .50 2,706 .5 4 2002 77,558 17,450 .55, 19,389 .50 2,591 .7 7 Sally R . O'Boyl e Additions to tax under sec .

Year Deficiency 6651 (a) (1) 6651(a)(2) 665 4

2000 $76,162 $17,136 .45 $19,040 .50 $4,068 .2 0 2001 92,034 20,707 .65 23,008 .50 3,678 .0 1 2002 254,419 57,244 .28 63,604 .75 8,501 .9 6 The issues . we must decide are : (1) Whether petitioner s received and failed to report taxable income for their 2000 , 2001, and 2002 tax years ; (2) whether petitioners are liable for self-employment tax for the tax years in issue ; (3) whether petitioner Sally R . O'Boyle (Ms . O'Boyle) is liable for a 10percent additional tax pursuant . to section 72,(t) for an early distribution from a qualified retirement plan ; (4) whether petitioners are entitled to a filing status of married filing jointly ; and (5) whether petitioners are liable for the addition s 2A11 section references are to the Internal Revenue Code in effect for . the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure .

to tax respondent determined pursuant to sections 6651(a)(1) and (2) and 6654(a) for the tax years in issue .

Background

Some of the facts and certain exhibits have been stipulated . The . parties' stipulations of .fact are incorporated in this opinion by reference and are found as facts in the instant case . At the time of filing their petitions, petitioners resided in Costa Rica .

Petitioners received the following income for the tax years in issue :

Harold X . O'Boyl e

Type of income 2000 2001 200 2

Interest $369 $280 $3 2

Dividends 8 454 1,57 2

Short-term capital gain -- -- 13,57 7

Long-term capital gain -- -- 122,58 9

Compensation for services 69,894 182,243 48,195

Sally R . O'Boyl e

Type of income 2000 2001 200 2

Interest -- $43 - -Dividends -- $60 1 Short-term capital gain -- -- 25 0 Long-term capital gain -- 121,34 0 Distributive share o f partnership income $295 . 94 3 4 Qualified retiremen t account distribution 6,27 7 Compensation for services 200, .223 234,259 165,64 9 During tax years 20 .00, 2001, and 200 .2 petitioners wer e .engaged in a real estate business .

During the years inissue .petitioner Harold X . O'Boyle (Mr . O'Boyle) . received compensation from third parties for managing rental properties He deposited that compensation . into his various business bank accounts . ' Ms . O'Boyle received compensation from third,parties for her activities as a real estate broker during 2000, 2001, and 2002 . She deposited . that compensation into the bank accounts of Sall y 5 -O'Boyle Realty, LC, -4 an unincorporated entity having Ms . O'Boyle as its sole member .

Ms . O'Boyle received nonemployee compensation from Red Barn

Actors studio during 2001 and 2002 .

Neither petitioner was employed by any third party during

2000, 2001, or 2002 .

Petitioners did not file a timely .tax return for the 2000, 2001, or 2002 tax years .

Mr . O'Boyle paid $10,000 toward his potential Federal income tax liability for the 2000 tax year . At the time of . trial, neither petitioner had made any additional payment toward his or her Federal income tax liabilities for tax years 2000, 2001, or 2002 .

At some point between May 2006?and March 2008 petitioners sent to respondent a Form 1040, U .S . Individual Income Tax Return, electing joint filing status for . each of the tax years in . issue .' The only taxable income shown on petitioners' 2000 Form 1040 was $8 in ordinary dividends . The only taxable income show n 6 -on petitioners' 2001 Form 1040 was $16 in interest and $454 in ordinary dividends . The only taxable income shown on petitioners' 2002 Form 1040- .was $601 in ordinary dividends and a capital gain of $250 .

During July 2007, respondent prepared substitutes for returns pursuant to section 6020(b) for petitioners' 2000, 2001 , .and 2002 tax years using the joint filing status .

On,October 3, 2007, respondent sent petitioners notices of deficiency for their°2000, 2001, and .2002 tax . years . Petitioners timely petitioned this Court for redetermination of the deficiencies set forth in the notices of deficiency . On February .18, 2009,' petitioners filed a motion to,dismiss for lack of jurisdiction .

Petitioners' motion to dismiss for lack of jurisdiction was denied by this Court on February .18, 2009 .

. Discussion 6 I . Burden of Proo f Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, Welch v . Helvering , 290 U .S . 111, 115 (1933), and Rule 142(a) places-the burden of proving an error on the taxpayer . However, under section 7491(a)(1), if a taxpayer introduces credible evidence with respect to any factual issue relevant to the liability for tax,-the burden of proof may shift to the Commissioner . Additionally, section 7491(c) places the burden of production regarding additions to tax on the Commissioner . If the Commissioner satisfies the burden of production, the taxpayer bears the ultimate burden of persuasion regarding the additions to tax . See Higbee v . Commissioner , 116 T .C . 438, 446 (2001 )

8 -Petitioners assert that their_ 2000, 2001 , and 2002 Forms 1040 along with their testimony at trial constitute credible evidence of the nature and amount-of their income for the year s .in issue and argue that the burden shou .ld .be, .shifted to respondent pursuant to section 7491(a)(1) on those issues . order for the burden to shift under section 7491(a)(1), i n addition to introducing credible evidence on a disputed issue of fact , a taxpayer must comply with the substantiation and recordkeeping requirements of the Internal Revenue Code and cooperate with reasonable requests by the . Commissioner for " witnesses , information , documents meetings , and interviews" . Sec . 7491 (a) (2) .

We first consider whether petitioners-, have introduced credible evidence with respect to a disputed fact relevant t their liability for tax . We conclude that both the Forms 104 .07 and petitioners' . testimony are nothing more than . .a continuatio n petitioners' frivolous legal arguments and conclusions . Neither the Forms 1040 nor petitioners' testimony offers any probative evidence of their liability for tax . Accordingly, w e conclude that petitioners have not introduced credible evidenc e for purposes of section 7491(a), and the burden of proo f therefore remains-with petitioners .

'Seethe discussion infra concerning the validity of petitioners' 2000, . 2001, ;and 2002 Federal income tax returns .

- .10 -Petitioners . concede that Mr . O'Boyle received a long-term capital gain distribution of $1,249 during 2002-and that Ms . O'Boyle received a short-term capital gain distribution of $250 during 2002 .

During tax year 200 .2, petitioners received gross proceeds of $510,000 for the sale of real property located at 2107 Flagler Avenue, Key West, Florida . Respondent determined that petitioners' basis in that property was $267,320 . Petitioners have not produced any evidence that their basis in the property was greater than the amount respondent determined .

While petitioners concede that they received the amounts set forth above, they contend .that those amounts are not taxable .income within the meaning of the Internal Revenue Code .8 T o support their . contention, petitioners offer only frivolous arguments . Petitioners offered altered Forms 1099-B, Proceeds . From Broker and Banker Exchange Transaction and 1099-S, -Proceed s From Real Estate Transactions, they prepared themselves, but th e altered Forms 1099-B and 1099-S are based on tax-protester type arguments and therefore are not credible . Petitioners' testimony at trial was nothing more than mistaken, frivolous conclusions that the-income in issue is not taxable . We do not addres s 'In the . notice of deficiency issued to Ms . O'Boyle for her 2002 tax year, respondent also determined that Ms . O'Boyle had a taxable gain of $377,359 from the sale of securities . Respondent now concedes that Ms . O'Boyle's sale of securities in 2002 did .not result in a taxable gain .

11 -petitioner's frivolous and groundless arguments with "sombe r reasoning-and copious citation of precedent " as to do so "might suggest that these arguments have some colorable merit : ." See Crain v . . Commissioner , 737 F .2d 1417 ., .1417 ( 5th Cir . - 1984) . Accordingly , we uphold respondent ' s determination that Mr . O'Boyle had-taxable income- . of $13,57 . 7 for ° 2002 from the sale of . securities . . We conclude that petitioners, capital gain distributions were taxable income in the year received . We further conclude that petitioners realized a taxable capital gait of $242 , 680 . for 2002 from the sale of real property . ' Compensation for Service s Compensation for services rendered constitutes taxable income, and a-taxpayer has no basis in his labor . Sec . 61 ( a)(1) ; Abrams v . Commissioner ,, 82 T, .C .,403 ; .407 .(1984) . Mr . O'Boyle testified that during the years in .issue he received compensation from third parties- .for his management of rental properties an d .from a real estate business-in which he engaged with Ms . O'Boyle . He further testified that he deposited that . . compensation into his various business bank accounts . Ms . O'Boyle testified . that during the years in issue she was a licensed real estate broke r 91n the notices of deficiency respondent . determined that each petitioner was liable for the entire gain from the sale . of the real property . Respondent .now concedes that only one- .half of the gain should be included in the taxable income of each petitioner . Since petitioners had owned the property for more than a year, the gain qualifies for long-term capital gain treatment pursuant to sec . 1222(3)

12 -and received commissions and fees for her activities as a real estate broker . She further testified that she .deposited those commissions and fees into her various business accounts . Bank deposits are prima facie evidence of income . Clayton v . Commissioner , 102+T .C . 632 (1994) . The bank deposits method of reconstruction assumes that all money .deposit .ed in a~ taxpayer's bank account constitutes taxable income . DiLeo v . Commissioner , 96 T .C . 858, 868 (1991), affd . 959 F .2d 16 (2d Cir . 1992)

. Taxpayers bear the burden of proving that the Commissioner's determination of income computed using the ban k deposits method of reconstructing income is incorrect . Id . 871 .

Using a bank deposits analysis, respondent treated . all of the deposits into petitioners' business bank accounts during the years in issue .as taxable income . Respondent determined that Mr . O'Boyle had taxable income arising from his property management and real estate activities of $6 .8,894, .$182,243, and $48,195 for his 2000, 2001, and 2 .002 tax years, respectively . Respondent . determined that Ms . O' .Boyle had taxable income from her activities .as :a real estate broker of-$200,223, $233,249, and $164,849 for her .2000, 2001, and 2002 tax years, . respectively . Respondent further determined, on the basis of a third-part y information return, that Ms . O'Boyle received nonemployee compensation from - Red Barn Actors Studio of $1,010 in tax year 2001 . and $800 in tax year 2002 .

Petitioners do not challenge respondent ' s computation of their receipts from their property management'and real estate activities . To the contrary , they concede that the ban k statements respondent used accurately . reflect their deposits for the years in-issue . Petitioners also- do .not challenge Ms . O'Boyle's receipt of compensation from Red Barn Actors Studio . However, petitioners- - argue that the amounts they'received from their property management and real estate activities and'as-Ms . O'Boyle ' s nonemployee compensation during the years in issue are not taxable income . To support this assertion , petitioners offe r only frivolous arguments and an_altered .Form'1099-MISC . . Miscellaneous Income, which they prepared themselves . The altered Form'1099-MISC petitioners offered is based on taxprotester arguments,-and we do not find, it credible . Petitioners' testimony at trial wasrnothing more than mistaken, .

°frivolous conclusions that the income in issue is not taxable .

As discussed above, we do not address petitioner's frivolous and .groundless'arguments . Because petitioners have not-shown thatrespondent's bank deposits analysis' ; was incorrect, we uphold respondent's determinations that petitioners' compensation for property management and real estate activities and Ms . .O'Boyle's - 14„-nonemployee compensation from . Red Barn Actors Studio-were taxable income in the years received .

III . Self-Employment Ta x

Section 1401 imposes a tax on the self-employment income of every individual . Self-employment income . is the gross income derived,by an individual from any trade or business carried on by such individual, less allowable deductions . Sec . 1402 . Petitioners have conceded that they .were engaged in business, activities during the years in issue and that . they received compensation for their business, activities . Petitioners have conceded that they were not employed by, any third party during the years in issue, and they do not assert that any of the other exceptions in section 1402(c) applies to exclude their business income from . the definition of self-employment income . Instead, petitioners offer frivolous assertions that their businesses d o not meet the statutory definition of a tr ade or business . ; uphold respondent .'s determination that petitioners are subject to self-employment tax . .on their compensation for business activities for the 2000, 2001,,and,2002 tax years . Under section 164(f ) petitioners are entitled to a deduction for income tax purposes . of one-half of their self-employment, taxes .- ._ , IV . Additional Tax for Early Distribution From Qualified Retirement Pla n Section 72(t)(1) imposes a 10-percent additional tax o n early distributions from qualified retirement plans unless the 17 -petitioners did not file valid .Federal income tax-returns for the 2000, 2001,jand 2002 . tax years . Since petitioners did not elect the . joint filing-status,on valid returns for the years in issue, we uphold respondent's-use of the filing status "Married Filing . Separately" in determining petitioners' deficiencies- .for th e 2000, 2001, and 2002 tax years .

VI . Additions to Ta x

A . Failure To Fil e

Section 6012 generally requires the filing of an income tax return by all individuals_receivinggross income in excess of .

certain-minimum amounts . . Because petitioners had . gross income .for-each of they years'in issue as determined by-respondent in the notices of deficiency and upheld by!this Court above in excess of the section 6012 minimum .amount, petitioners were required t o file Federal income tax'returns .for'their 2000, 2001, and 2002 tax years . Section 6651(a) .(1) imposes an addition to .tax for failure to file an income tax return by the due date . A taxpaye r may be relieved of the addition , however, if he can demonstrate that the "failure is due to reasonable cause and not due to willful neglect " . Id .' Respondent bears the burden of production under section 7491( c), and petitioners bear the burden of proof . See Higbee v . Commissioner , 116 T .C . at 446 . As d-iscussed above , io( . .continued )

not .consider whether or'when petitioners did in fact file those returns .

petitioners did not file valid income tax returns for their 2000 , 2001, and 2002 tax years . Nor did petitioners make a showing that their failure to file was due to reasonable cause . Accordingly, we uphold,respondent's .determination of additions to tax pursuant to section .6651(a)(1 )

Failure To Pa y

Section 6651(a)(2) provides for an addition to tax for failure to pay taxes shown .on a return on or before the payment due date . . In instances where the taxpayer fails to file a return, a return prepared by the . Commissioner pursuant to section . 6020(b .) shall :be'treated as the return filed by the taxpayer for . the purpose of calculating the addition to tax pursuant to section 6651(a)(2) . Sec . 6651(g)(2) . For a return prepared by the Commissioner to constitute a section 6020(b) return, . it must be subscribed, it must contain sufficient information from which to compute the taxpayer's tax liability, and the return form an d . .any attachments must purport to be a return . Spurlock V . .

Commissioner , T .C . Memo . 2003-124 . Respondent bears the burden of .producti .on under section 7491(c), and petitioners bear the 'burden of proof . See Higbee .v . .Commi .ssioner , supra at 446 . The record contains a substitute for return for eac h .petitioner for each of the 2000, 2001,_and 2002 tax years . Eac h substitute for return is subscribed and includes a section 6020(b) certification ; Form 4549-A, Income Tax Discrepancy 1 . 9 Adjustments ; Form 5278, . Statement .- Income Tax Changes ; and Form 886-A, Explanation of Items . Those forms are sufficient for respondent to compute petitioners' tax liabilities for tax years .2000, 2001, and 2002, and respondent has certified .that they will be treated as returns . 'Petitioners have conceded that, with the exception of $10,000 paid-by Mr . O'Boyle 'for his 2000 tax year,,, petitioners did not pay any taxes and did not have any amounts withheld for their 2000,2001, or' 2002 tax year . Accordingly, we uphold respondent's determination of additions to tax pursuant to section 6651(a)(2) .

C . Failure To Make Estimated'Tax Payment s

Section 6654(a) imposes an addition to tax for failure to

.pay estimated income tax . Section 6654(a) applies where prepayments of tax, through either withholdings or estimated quarterly payments, do not equal -the lesser of 90 percent of th e tax shown for the current tax year or 100 percent of .the tax shown for the"previous tax year . Sec . 6654(d)(1)(B) . Where the taxpayer did not file a return for the preceding tax year, the estimated tax payments must equal 90 percent of the tax shown for the current tax year . Id . Respondent bears the . burden of production to show that petitioners had .an estimated tax payment obligation, which includes-showing whether a return .was filed fo r v . . Commissioner , the preceding year . See sec . 7491(c) ; Wheeler, 127 T .C . 200, 211-212 (2006)", affd .-521 F .3d 1289 (10th Cir .

20 -2008) . Petitioners bear the burden of proof ., See Higbee v . Commissioner , supra at 446 .

The record .shows .that petitioners filed a return for tax year 1999 showing tax due of $11,262 . . Ninety percent of the tax for 2000 was greater than $11,262 ; therefore, for the .2000 .tax year, petitioners were required to make . .,estimated payments equal to $11,262 . The record shows that petitioners did not file valid tax returns-for the 2000 and 2001 tax-years . Accordingly , ~ .petitioners-were required to make estimated tax payments-equal to 90 percent of the tax for the 2001 and .2002 tax years . Respondent has satisfied the . burden of production by showing that petitioners had estimated . .tax payment obligations for the 2000, 2001, and 2002 tax years . The record shows that petitioners failed :tomake the required estimated tax . . payments . for the 2000, 2001, and .2002 tax years . Moreover, there is no evidence o r argument that an,exception applies . . Consequently, petitioners, . have failed .to meet their burden of proof, and we uphold respondent's determination of additions to tax pursuant to ,section 6654 (a )

VII . Section 6673 Penalt y

Section 6673(a)(1),provides that this Court may, require the taxpayer to pay a penalty not in excess of $25,000 whenever it appears to this Court that : (a) The proceedings were instituted or,maintained by the taxpayer primarily for-delay ; '(b) the 2 1 taxpayer's position is frivolous or groundless ; or (c) th e taxpayer unreasonably failed to pursue available administrative remedies .

.Respondent has moved for a section 6673 penalty .

Petitioners were warned by respondent that their arguments were frivolous . Petitioners referred to the penalty in their petitions ." During the trial, this Court gave petitioners yet another warning of the potential consequences for continuing to raise frivolous arguments . Petitioners clearly are aware of section 6673, yet raised frivolous . arguments during the administrative process, in their petitions to this Court, and in their posttrial briefs . Furthermore, petitioners continued t o raise groundless arguments regarding the jurisdiction of this Court even after the Court ruled on those arguments-by denying petitioners' motion to dismiss for lack of . jurisdiction .

Accordingly, we shall impose a $15,000 penalty in each docket in the instant case pursuant to section 6673 .

We have considered all of the contentions and arguments of the parties that are not discussed herein, and we conclude that they are without merit, irrelevant, or moot .

"Para . 6 of the petition filed by each petitioner admits :

"According to Section 6673, this court may penalize Petitioner up to $25,000 for failure to complete the administrative process before petitioning this court ."

To reflect the foregoing, Decisions will be entere d under Rule 155 .