T.C. Memo. 2021-16
UNITED STATES TAX COURT
DON KRAMER AND LELA ARABULI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
DON KRAMER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 15224-17, 15368-17. Filed February 16, 2021.
Don Kramer and Lela Arabuli, pro sese.
Mark J. Tober, Sean P. Deneault, and William T. Maule, for respondent.
MEMORANDUM OPINION
GALE, Judge: Respondent has moved in these consolidated cases for entry
of default and decision (motion). The motion was set for a hearing at which
Served 02/16/21 -2-
[*2] petitioners failed to appear.1 Because petitioners neither cooperated in
preparing these cases for trial nor appeared for trial, we will grant respondent’s
motion and enter decisions in his favor.
I. Procedural History
The petitions in these cases seek redetermination of adjustments in two
notices of deficiency.2 One of the notices, in the case at docket No. 15224-17, was
addressed to both petitioner Don Kramer and petitioner Lela Arabuli. In that
notice of deficiency, respondent determined the following deficiencies, as well as
section 66513 failure-to-file additions to tax, a section 6662 accuracy-related
penalty, and section 6663 fraud penalties:4
1 As a consequence, petitioners forfeited their opportunity to dispute the allegations in respondent’s motion. 2 At the time the petitions were filed in these cases, petitioners resided in Michigan. 3 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. 4 Respondent determined the sec. 6663 fraud penalties only against Mr. Kramer. For the years for which respondent determined fraud penalties against Mr. Kramer, he determined in the alternative that both petitioners are liable for sec. 6662 accuracy-related penalties. Because we sustain the fraud penalties, we do not further address the accuracy-related penalties for 2006, 2007, and 2008 as only one of the penalties may be imposed with respect to the same underpayment. See sec. 6662(b) (flush language); Le v. Commissioner, T.C. (continued...) -3-
[*3] Penalties Addition to tax Year Deficiency sec. 6651 Sec. 6662 Sec. 6663 2006 $49,559 $12,349.00 --- $37,169 2007 30,735 9,306.75 --- 23,051 2008 16,467 4,116.75 --- 12,350 2010 4,424 971.50 $777.20 ---
Respondent determined that Mr. Kramer, but not Ms. Arabuli, is liable for section
6663 fraud penalties. Petitioners timely petitioned for redetermination with respect
to this notice of deficiency. In his answer, respondent affirmatively pleaded
numerous allegations in support of his fraud penalty determinations against
Mr. Kramer for 2006, 2007, and 2008.
In the other notice of deficiency, in the case at docket No. 15368-17,
addressed only to Mr. Kramer, respondent determined a section 6651 failure-to-file
addition to tax and section 6663 fraud penalties5 as follows:
4 (...continued) Memo. 2020-27, at *38-*39; Zaban v. Commissioner, T.C. Memo. 1997-479, 1997 WL 651480, at *12. 5 Respondent again determined sec. 6662 accuracy-related penalties as an alternative to the sec. 6663 fraud penalties. In this case as well, we sustain the fraud penalties for both years and therefore do not address the accuracy-related penalties. -4-
[*4] Penalties Addition to tax Year Deficiency sec. 6651 Sec. 6662 Sec. 6663 2004 --- --- --- $17,295.00 2005 --- $2,039 --- 8,724.75
Mr. Kramer timely petitioned for redetermination with respect to the adjustments
in this notice of deficiency.6 In his answer, respondent affirmatively pleaded
numerous allegations in support of his fraud penalty determinations against
Mr. Kramer for 2004 and 2005.
First set for trial in November 2018, these cases were continued and
consolidated at the parties’ joint request. They were rescheduled for trial as
described below.
A notice setting the cases for trial (trial notice), setting the trial date in each
of these cases for November 18, 2019, was mailed on June 18, 2019, to petitioners
at the address they provided in their petitions. The trial notice warned: “Your
6 The notice of deficiency for 2004 and 2005 did not determine a deficiency for either year, as Mr. Kramer had consented to the assessment of deficiencies of $23,060 and $11,633, respectively, for those years. Nonetheless, we have jurisdiction to redetermine the sec. 6651 addition to tax and the sec. 6663 fraud penalties for those years even in the absence of determinations of deficiencies in tax. See Eck v. Commissioner, 16 T.C. 511, 515 (1951), aff’d per curiam, 202 F.2d 750 (2d Cir. 1953). -5-
[*5] failure to appear may result in dismissal of the case and entry of decision
against you.” This mailing was not returned.
A standing pretrial order was attached to the trial notice. The standing
pretrial order directed petitioners, among other things: (1) to communicate and
cooperate with respondent’s counsel regarding settlement or, if the case could not
be settled, the preparation of a stipulation of facts; (2) to identify in writing and
exchange with respondent’s counsel, no later than November 4, 2019, any
documents or materials that petitioners expected to offer at trial; (3) to serve on
respondent’s counsel and file with the Court a pretrial memorandum no later than
November 4, 2019; and (4) to be present on the trial date and prepared to try the
case. The standing pretrial order warned: “The Court may impose appropriate
sanctions, including dismissal, for any unexcused failure to comply with this
Order.”
A second notice (reminder notice), mailed on October 4, 2019, to petitioners
at the address they provided in their petitions, reminded them that their cases had
been set for trial on November 18, 2019, and warned that failure to appear could
result in dismissal of their cases. This mailing was not returned.
Petitioners did not file a pretrial memorandum in either of these cases.
Additionally, respondent’s counsel sent petitioners several letters seeking their -6-
[*6] cooperation in preparing these cases for trial. Respondent’s counsel also
attempted to contact petitioners by telephone on several occasions. Although these
efforts did yield some communications between the parties, they made little
progress in preparing these cases for trial. Indeed, there was no successful
communication between the parties for roughly an entire year after the Court
continued these cases from their initial trial setting.7
When respondent’s efforts to pursue informal discovery proved
unsuccessful, he turned to formal discovery. Respondent’s formal discovery
efforts began with a request for admissions under Rule 90, which was filed with
the Court and served on petitioners on August 30, 2019. While his request for
admissions was pending, respondent sent petitioners a proposed stipulation of
facts. Although respondent’s counsel took steps to ensure that petitioners were
aware of the procedures set forth in Rule 90(c) for serving and filing a proper
response to the request for admissions, petitioners did not do so.8 Respondent
7 Respondent’s specific allegations concerning petitioners’ failure to cooperate are detailed in his motion, which petitioners could have disputed had they appeared at the trial session. Given petitioners’ failure to dispute respondent’s allegations, and the absence of any evidence to the contrary, we treat them as established for purposes of the motion. 8 Petitioners did, however, serve on respondent a notice of objection to respondent’s request for admissions, wherein they sought to review originals of documents attached to the request for admissions and alleged that respondent and (continued...) -7-
[*7] thereafter incorporated the matters addressed in the request for admissions in a
proposed first supplemental stipulation of facts.
On October 1, 2019, respondent’s counsel sent a copy of the first
supplemental stipulation of facts to petitioners, accompanied by a letter that
explained the parties’ joint obligation under Rule 91 to reach, to the fullest extent
possible, comprehensive stipulations regarding matters relevant to the pending
cases. The letter also informed petitioners that respondent planned to seek an order
compelling stipulation under Rule 91(f).
On October 4, 2019, respondent filed a motion for an order to show cause
why proposed facts and evidence should not be accepted as established pursuant to
Rule 91(f), which included as exhibits the proposed stipulation of facts and the
proposed first supplemental stipulation of facts. The Court then issued an order to
show cause directing petitioners to show cause by October 28, 2019, why the
matters set forth in the proposed stipulation of facts and first supplemental
stipulation of facts should not be treated as established.
8 (...continued) his counsel had violated their civil rights and the Fair Debt Collection Practices Act. This notice of objection did not comply with Rule 90(c), which requires, as to each matter raised in a request for admissions, a written answer that either specifically admits or denies the matter or states a detailed objection thereto. -8-
[*8] In response, Mr. Kramer filed a document on November 1, 2019, entitled
“Tax Statement Affidavit”. Instead of addressing respondent’s proposed
stipulations, the Tax Statement Affidavit set forth hundreds of pages of tax-
protester rhetoric. Ms. Arabuli did not file any response to the order to show
cause. Accordingly, the Court deemed stipulated all matters set forth in the
proposed stipulation of facts and the first supplemental stipulation of facts.
II. Default Judgment Under Rule 123
Rule 123(a) provides that the Court may hold a party in default and enter a
decision against that party if he or she has “failed to plead or otherwise proceed as
provided by these Rules or as required by the Court”. Rule 123(b) allows the
Court broad discretion to dismiss a case “[f]or failure of a petitioner properly to
prosecute or to comply with these Rules or any order of the Court or for other
cause which the Court deems sufficient”. In general, entry of default under Rule
123(a) is appropriate as to issues where the Commissioner bears the burden of
proof, while dismissal under Rule 123(b) is appropriate where the taxpayer bears
the burden of proof. See Smith v. Commissioner, 926 F.2d 1470, 1476 (6th Cir.
1991), aff’g 91 T.C. 1049 (1988); Putnam v. Commissioner, T.C. Memo. 2015-
160, at *12-*13. -9-
[*9] We have interpreted Rule 123 “liberally to permit entry of a judgment of
default or dismissal consistently with our sound discretion and the interests of
justice.” Hill v. Commissioner, T.C. Memo. 2015-172, at *10 (citing Stringer v.
Commissioner, 84 T.C. 693, 706 (1985), aff’d without published opinion, 789 F.2d
917 (4th Cir. 1986)). Accordingly,
[w]e have entered judgments of default or dismissal where a taxpayer (among other things): (1) unreasonably refused to stipulate facts or the authenticity of documents, Long v. Commissioner, 742 F.2d 1141 (8th Cir. 1984); (2) failed to comply with Court-ordered discovery, Rechtzigel v. Commissioner, 79 T.C. 132 (1982), aff’d per curiam, 703 F.2d 1063 (8th Cir. 1983); or (3) failed to appear at trial, Ritchie v. Commissioner, 72 T.C. 126 (1979).
Id. at *10-*11. We have also pointed out that in cases where “a taxpayer does not
think well enough of his case to defend it where the government has the burden of
proof, this Court should default him.” Bosurgi v. Commissioner, 87 T.C. 1403,
1408 (1986).
Petitioners’ conduct in these cases establishes that they have failed to
proceed both as provided by the Court’s Rules and as we have otherwise directed
by order. Although the Court’s Rules required petitioners to cooperate with
respondent’s counsel to prepare stipulations of facts, they failed to do so.
Additionally, petitioners did not appear for trial, despite being warned by the trial
notice, standing pretrial order, and reminder notice that failure to appear could - 10 -
[*10] result in dismissal of these cases and entry of decisions against them.
Finally, petitioners have failed to cooperate with respondent’s counsel to prepare
for trial or otherwise resolve these cases as directed in the standing pretrial order.
Petitioners have not advanced any justification for their failures. Consequently, we
conclude that petitioners are in default under Rule 123(a).
Although petitioners are in default, respondent bears certain burdens of
production or proof with respect to the deficiencies, additions to tax, and penalties
at issue in these cases. Accordingly, we must also determine whether respondent
has carried his various burdens in order to decide whether it is appropriate to enter
decisions in his favor on all issues determined in the notices of deficiency. See
Hill v. Commissioner, at *11. Where, as here, we have found petitioners in
default, all well-pleaded allegations in respondent’s answers are deemed admitted.
See Bosurgi v. Commissioner, 87 T.C. at 1409; Rechtzigel v. Commissioner, 79
T.C. 132, 141-142 (1982), aff’d per curiam, 703 F.2d 1063 (8th Cir. 1983).
Respondent may also rely on deemed admissions and deemed stipulations to
satisfy his burdens of production and proof. See, e.g., Smith v. Commissioner, 91
T.C. at 1052-1053; Console v. Commissioner, T.C. Memo. 2001-232, 2001 WL
1020126, at *4, aff’d, 85 F. App’x 869 (3d Cir. 2003). - 11 -
[*11] III. Deficiencies
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct. See Rule 142(a). Here, all of the material allegations set forth
in the petitions in support of the assignments of error have been denied in
respondent’s answers. Petitioners have not claimed or shown entitlement to any
shift in the burden of proof under section 7491(a). See sec. 7491(a)(2)(B).
Accordingly, the burden of proof generally rests with petitioners concerning any
error in the deficiency determinations.
As we have noted, Mr. Kramer agreed to the deficiencies determined for
2004 and 2005. See supra note 6. In addition, the income adjustments underlying
respondent’s deficiency determinations for the other years at issue are largely
established by deemed stipulations. For 2006, 2007, and 2008 Mr. Kramer is
deemed to have stipulated that he received significant amounts of unreported
income, consisting of taxable interest income, qualified dividend income, and
passive foreign investment company income; for 2010, deemed stipulations
establish that Mr. Kramer failed to report his receipt of various amounts of taxable
interest income and a qualified dividend.
However, the deemed admissions and deemed stipulations in these cases do
not directly establish petitioners’ receipt of two items of unreported income: $99 - 12 -
[*12] from taxable refunds of State and local taxes for 2007 and $16,410 from
pensions and annuities for 2010.9 Where, as here, a taxpayer disputes a deficiency
determination that is based on unreported income, the presumption of correctness
does not apply unless the Commissioner can establish at least a “minimal” factual
predicate or evidentiary foundation connecting the taxpayer to an income-
generating activity or to the receipt of funds. See United States v. Walton, 909
F.2d 915, 918-919 (6th Cir. 1990) (citing Weimerskirch v. Commissioner, 596
F.2d 358, 361-362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977)); Richardson v.
Commissioner, T.C. Memo. 2006-69, 2006 WL 931912, at *14, aff’d, 509 F.3d
736 (6th Cir. 2007). “Once the Commissioner makes the required threshold
showing, the burden shifts to the taxpayer to prove by a preponderance of the
evidence that the Commissioner’s determinations are arbitrary or erroneous.”
9 Respondent contends that these two income adjustments (which appear in the notice of deficiency on line “e” of section 7, titled “Adjustments to income”, in Forms 5278, Statement - Income Tax Changes) are not in dispute because the petition in docket No. 15224-17 did not properly assign error to them. It is true that, despite assigning error to other adjustments for 2007 and 2010 by identifying specific lettered items listed in section 7 of the Forms 5278, the petition did not specifically assign error to the line 7(e) adjustments. But the petition nevertheless alleged that respondent’s written explanations with respect to “Taxable Refunds of State and Local Income Taxes” and “Pensions and Annuities” were “baseless and arbitrary”. Those written explanations (which appear in the notice of deficiency in Form 886-A, Explanation of Items) list the specific amounts of the relevant income adjustments. Under these circumstances, we conclude that the petition adequately assigned error to both adjustments. See Gray v. Commissioner, 138 T.C. 295, 298 (2012) (noting that a pro se litigant’s petition should be liberally construed). - 13 -
[*13] Walquist v. Commissioner, 152 T.C. 61, 67-68 (2019) (citing Helvering v.
Taylor, 293 U.S. 507, 515 (1935)).
Respondent contends in his motion, and petitioners have not disputed, that
he has satisfied any burden to produce predicate evidence connecting petitioners to
income that he determined was unreported. We agree. In particular, petitioners are
deemed to have stipulated the authenticity of copies of their joint Federal income
tax returns for 2006, 2007, 2008, and 2010. As explained below, those returns
establish a sufficient factual predicate to connect petitioners to both the State and
local tax refund income and the pension and annuity income that remain in dispute.
Respondent’s determinations with respect to those items are therefore entitled to
the presumption of correctness, and petitioners bear the burden to prove them
arbitrary or erroneous.
With respect to the $99 State and local tax refund for 2007, petitioners’
returns for 2006, 2007, and 2010 all claimed deductions on Schedule A, Itemized
Deductions, for State and local tax payments. Their 2006 and 2008 returns also
reported income from taxable refunds of State and local taxes of $550 and $2,356,
respectively. This pattern of claiming deductions for State and local tax payments,
combined with petitioners’ self-reported receipt of taxable refunds of such
payments in their 2006 and 2008 returns, establishes a sufficient factual predicate - 14 -
[*14] to support the inference that petitioners likely also received a taxable refund
that should have been reported in their 2007 return, as determined in the notice of
deficiency.
A similar analysis supports respondent’s determination regarding pension
and annuity income for 2010. In their returns for 2006 and 2007, petitioners
reported taxable pension and annuity income of $82,580 and $81,903, respectively.
Petitioners also reported an additional tax of $8,258 for 2006 and $8,190 for 2007,
equivalent to 10% of the pension and annuity income that they reported for each of
those years. See sec. 72(t)(1) (imposing an additional 10% tax on certain
distributions from qualified retirement plans). Respondent’s determination that
petitioners failed to report $16,410 of pension and annuity income for 2010 (which
was accompanied by a further adjustment in the notice of deficiency reflecting an
additional tax of $1,641, equivalent to 10% of the unreported amount) thus finds
factual support in petitioners’ self-reported history of receiving similar large
pension and annuity distributions, subject to an additional 10% tax, in previous
years.
Accordingly, all of respondent’s deficiency determinations either have been
conclusively established through deemed stipulations or are entitled to the
presumption of correctness. Because petitioners adduced no evidence in support of - 15 -
[*15] the assignments of error, they have failed to satisfy their burden of proof.
We therefore sustain respondent’s deficiency determinations in full.
IV. Additions to Tax and Penalties
In the notices of deficiency, respondent also determined additions to tax and
penalties (collectively, penalties) against one or both petitioners for each of the
taxable years at issue. These included failure-to-file additions to tax under section
6651, an accuracy-related penalty under section 6662, and fraud penalties under
section 6663, each requiring respondent to carry a particular burden of production
or proof.
The Commissioner generally bears the burden of production with respect to
a penalty where the taxpayer has contested it in a petition. See sec. 7491(c); Funk
v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118
T.C. 358, 363-365 (2002). The Commissioner’s burden of production includes
showing compliance with the supervisory approval requirement of section 6751(b).
See Graev v. Commissioner, 149 T.C. 485, 492-493 (2017), supplementing and
overruling in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d
190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42. The
Commissioner also must offer sufficient evidence to indicate that it is appropriate
to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). If the - 16 -
[*16] Commissioner satisfies his burden of production, the taxpayer bears the
burden of proving it is inappropriate to impose the penalty because of reasonable
cause, substantial authority, or a similar provision. Id. at 446-447; see also secs.
6651(a)(1), 6664(c); Wheeler v. Commissioner, 127 T.C. 200, 206 (2006), aff’d,
521 F.3d 1289 (10th Cir. 2008).
A. Supervisory Approval
Respondent has met his burden of production with respect to supervisory
approval of the section 6662 accuracy-related penalty and the section 6663 fraud
penalties.10 To do so, respondent submitted with his motion excerpts of two “30-
day letter” packages addressed to petitioners. The excerpts were accompanied by a
declaration of Revenue Agent Jeffrey M. Wiese (RA Wiese), in which RA Wiese
avers that the excerpts are copies of records made and maintained by the Internal
Revenue Service in the ordinary course of business, made at or near the time of
occurrence of the relevant events by a person (or from information transmitted by a
person) with knowledge thereof. RA Wiese’s declaration is sufficient to
10 The failure-to-file additions to tax under sec. 6651 are not subject to the supervisory approval requirement. See sec. 6751(b)(2)(A); Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 231 (2018). - 17 -
[*17] authenticate the excerpts from the 30-day letter packages as admissible
business records.11 See Fed. R. Evid. 803(6), 902(11).
One of the 30-day letter packages was addressed to Mr. Kramer and
contained the results of an examination of his 2004 and 2005 Federal tax returns,
while the other was addressed to both Mr. Kramer and Ms. Arabuli and contained
the results of an examination of their 2006, 2007, 2008, 2009, and 2010 Federal tax
returns. Each package included a cover letter (Letter 950) and a Form 4549,
Income Tax Examination Changes. The Letters 950 are dated June 18, 2013, and
bear the signature of Paul Brusseau (whom petitioners are deemed to have
stipulated was RA Wiese’s immediate supervisor) above the title “Group Manager,
Examination Area (Central)”. The Forms 4549 are also dated June 18, 2013, and
they bear RA Wiese’s typed signature. For each taxable year, the Forms 4549 list
the proposed adjustments to petitioners’ income tax liabilities, including the
section 6662 penalty for 2010 and section 6663 penalties for 2004 through 2008.
In addition, petitioners are deemed to have stipulated the authenticity of a
more complete copy of the 30-day letter package relating to their 2006 through
11 Assertions in the declaration are inadmissible hearsay except to the extent that they authenticate the excerpts from the 30-day letter packages as business records, and we therefore do not consider those assertions for any other purpose. See, e.g., Shuman v. Commissioner, T.C. Memo. 2018-135, at *24-*28, aff’d, 774 F. App’x 813 (4th Cir. 2019). - 18 -
[*18] 2010 taxable years,12 which includes a more detailed explanation of the
section 6662 accuracy-related penalty proposed for 2010. That copy of the 30-day
letter package includes a calculation worksheet for 2010 titled “Accuracy-Related
Penalties under IRC 6662” which states that petitioners’ underpayment of tax for
that year “is attributable to one or more of” several grounds on which a section
6662 penalty could be imposed, including “negligence or disregard of rules or
regulations”. It also includes two copies of Form 870, Waiver of Restrictions on
Assessment and Collection of Deficiency in Tax and Acceptance of
Overassessment, stating the amount of the proposed penalty for 2010 with the
notation “IRC 6662(c)” (referring to the provision that defines the terms
“negligence” and “disregard” for purposes of section 6662).
Under section 6751(b)(1), the “initial determination” of a penalty must be
“personally approved (in writing) by the immediate supervisor of the individual
making such determination” or by a designated higher ranking official. See Chai
v. Commissioner, 851 F.3d at 220-221; Graev v. Commissioner, 149 T.C. at 487.
We recently explained that the initial determination of a penalty “is embodied in
12 The relevant stipulation states that a “Letter 950 along with attachments” with respect to petitioners’ 2006, 2007, 2008, and 2009 taxable years was attached to the first supplemental stipulation of facts. However, the referenced letter and attachments also address 2010. We are not bound by a stipulation that clearly misstates the contents of a document it describes. See, e.g., Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195-196 (1989). - 19 -
[*19] the document by which the Examination Division formally notifies the
taxpayer, in writing, that it has completed its work and made an unequivocal
decision to assert penalties.” Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15
(2020). For purposes of this requirement, a revenue agent’s report containing
proposed penalties that is transmitted to a taxpayer as part of a 30-day letter
package constitutes an initial determination that requires supervisory approval.
See Clay v. Commissioner, 152 T.C. 223, 249 (2019); Flume v. Commissioner,
T.C. Memo. 2020-80, at *34.
The written supervisory approval of an initial penalty determination is not
required to take any specific form. See Palmolive Bldg. Inv’rs, LLC v.
Commissioner, 152 T.C. 75, 85-86 (2019). For example, a supervisor’s signature
on a cover letter sent to a taxpayer along with an examination report is sufficient.
See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 213 (5th Cir. 2018);
Flume v. Commissioner, at *34. Additionally, section 6662 provides for several
distinct penalties, and each specific penalty determined thereunder must be
approved by a supervisor. See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152
T.C. at 87.
Where the Commissioner’s determination of a section 6662 accuracy-related
penalty is communicated to a taxpayer through “boilerplate text” indicating that the - 20 -
[*20] penalty is “‘attributable to one or more of’ specified grounds,” the
communication is “interpreted to assert all of the specified grounds as alternative
bases for the penalty, unless other portions of the communication explicitly limit
the penalty determination to a subset of those grounds.” See Oropeza v.
Commissioner, 155 T.C. ___, ___ (slip op. at 15-16) (Oct. 13, 2020). In such
instances, our analysis focuses on which penalties the taxpayer would have
understood the communication to assert, since the purpose of the supervisory
approval requirement is “to prevent the unapproved threat of a penalty from being
used ‘as a bargaining chip’” against the taxpayer. See id. at ___ (slip op. at 16-17)
(quoting Chai v. Commissioner, 851 F.3d at 219).
Because no specific form of approval is required, the supervisor’s signatures
on the Letters 950 are sufficient to demonstrate that RA Wiese obtained written
supervisory approval to assert each of the penalties identified in the 30-day letter
packages before the determination of those penalties was formally communicated
to petitioners. With respect to 2010, this approval extends to the assertion of a
negligence penalty under section 6662(a), (b)(1), and (c), as the boilerplate in the
relevant 30-day letter package, combined with the reference therein to section
6662(c), was sufficient to alert petitioners that respondent intended to pursue a
penalty on at least that basis. - 21 -
[*21] Once the Commissioner produces sufficient evidence to demonstrate timely
supervisory approval, the burden shifts to the taxpayer to produce evidence of any
earlier formal communication of a penalty. See Frost v. Commissioner, 154 T.C.
23, 35-36 (2020). Petitioners have not produced evidence of any formal
communication concerning the penalties at issue before the date RA Wiese’s
supervisor signed the Letters 950. We therefore conclude that the 30-day letter
packages constituted the first formal communication of the proposed penalties to
petitioners and that respondent has satisfied his burden of production as to the
supervisory approval requirement.
B. Section 6651 Additions to Tax
The matters that we have deemed stipulated under Rule 91(f) are sufficient
to establish that respondent has carried his burden of production as to the section
6651(a)(1) additions to tax determined against Mr. Kramer for 2005 and against
both petitioners for 2006, 2007, 2008, and 2010. Section 6651(a)(1) imposes an
addition to tax for any failure to file a return by its due date. The addition is equal
to 5% of the amount required to be shown as tax on the return for each month or
portion thereof that the return is late, up to a maximum of 25%. See id. The
addition is imposed on the net amount due, calculated by reducing the amount
required to be shown as tax on the return by any part of the tax which is paid on or - 22 -
[*22] before its due date. See sec. 6651(b)(1). To carry his burden of production
with respect to the section 6651(a)(1) addition to tax, respondent must introduce
evidence (such as a stipulation) showing that a return was filed after the due date.
See Wheeler v. Commissioner, 127 T.C. at 207-208 (introduction of evidence
showing return was filed after due date satisfied burden of production); Higbee v.
Commissioner, 116 T.C. at 447 (stipulation as to return filing date satisfied burden
of production).
Mr. Kramer is deemed to have stipulated that he filed his 2005 income tax
return on or about June 21, 2007. Mr. Kramer’s 2005 return would have been due
in April 2006, and any extension for filing that return would have expired in
October 2006. See secs. 6072(a), 6081(a). Accordingly, the deemed stipulation
establishes that Mr. Kramer’s return was filed after the due date, and respondent’s
burden of production is satisfied. Respondent’s burden is similarly satisfied by
deemed stipulations that Mr. Kramer and Ms. Arabuli filed joint income tax returns
on or about the following dates: November 24, 2009, for the 2006 taxable year;
March 5, 2010, for the 2007 taxable year; June 23, 2010, for the 2008 taxable year;
and March 1, 2012, for the 2010 taxable year. All of these filing dates are later
than the due dates of the returns for those years, plus any extensions, and the - 23 -
[*23] stipulations thus satisfy respondent’s burden of production as to section
6651(a)(1) additions to tax for those years.
C. Section 6662 Penalty
Respondent has also satisfied his burden of production with respect to the
section 6662 penalty he determined against both petitioners for 2010. Section
6662 imposes a penalty equal to 20% of any underpayment of tax attributable to,
inter alia, negligence or disregard of rules or regulations. See sec. 6662(a) and
(b)(1). Negligence “includes any failure to make a reasonable attempt to comply
with the provisions of the internal revenue laws or to exercise ordinary and
reasonable care in the preparation of a tax return.” Sec. 1.6662-3(b)(1), Income
Tax Regs.; see also sec. 6662(c).
We have previously found that the Commissioner “provided sufficient
evidence that it is appropriate to impose the negligence penalty” with respect to the
portion of an underpayment attributable to unreported income consisting of $3,620
from unemployment compensation and $1,659 from cancellation of debt where the
taxpayer “offered no explanation for his failure to report the income.” Oglesby v.
Commissioner, T.C. Memo. 2011-93, 2011 WL 1598728, at *7-*8. We have also
found that negligence penalties were appropriate where the taxpayers did not
adequately challenge the Commissioner’s determination that they failed to report - 24 -
[*24] receipt of two State tax refunds in the amounts of $675 and $63. Le v.
Commissioner, T.C. Memo. 2020-27, at *25, *39-*40.
Here, we have found that, for 2010, deemed stipulations establish that
petitioners received and failed to report income from taxable interest and a
qualified dividend and that respondent produced sufficient evidence to indicate that
petitioners received and failed to report distributions from pensions and annuities
subject to the additional 10% tax under section 72(t)(1). See supra pp. 11, 14. In
the notice of deficiency, respondent determined that the total amount of income
petitioners failed to report was $18,548 (consisting of $2,137 from taxable interest,
$1 from a qualified dividend, and $16,410 from pensions and annuities). Thus,
petitioners’ 2010 return, which reported total income of $72,338, actually should
have reported total income of $90,886. Accordingly, the $18,548 that petitioners
failed to report represents approximately 20% of their total income for 2010.
Petitioners’ failure to report such significant amounts of income from
interest and from pensions and annuities--amounts similar to or greater than
amounts of unreported income that we have previously found sufficient to support
negligence penalties--in conjunction with their failure to provide any explanation
for omitting that income from their return, suggests that they neither made a
reasonable attempt to comply with the internal revenue laws nor exercised - 25 -
[*25] reasonable care in the preparation of their return.13 In particular, we do not
think that a reasonable taxpayer would be unaware of, or fail to report, such a large
percentage of his or her total income for a taxable year. This conclusion is
particularly compelling here, where income from pensions and annuities
constitutes the bulk of the unreported income and petitioners reported significant
amounts of income from pensions and annuities for years not long preceding the
year at issue. See supra p. 14. Furthermore, the matters we have deemed
stipulated establish that Mr. Kramer reported some, but not all, of his taxable
interest and qualified dividend income for 2010. From these stipulations we can
infer that petitioners did not take reasonable care to ensure that the correct amounts
were reported on their return. We accordingly find that respondent has satisfied
his burden of production with respect to the appropriateness of the negligence
penalty for 2010.
13 We note that petitioners’ 2010 return is signed by a return preparer. Although reliance on a return preparer can in some circumstances relieve a taxpayer of liability for a negligence penalty, “[g]enerally, the duty of filing accurate returns cannot be avoided by placing the responsibility on a return preparer.” See Rosser v. Commissioner, T.C. Memo. 2010-6, 2010 WL 26295, at *11-*12. Even if a taxpayer establishes that the return preparer is responsible for an error--which petitioners have not done--“the taxpayer still has a duty to read and review the return and make sure that all income items are included.” See id. at *12. - 26 -
[*26] We have sustained a deficiency in tax for 2010 of $4,424. Generally, the
deficiency, understatement of income tax, and underpayment of tax are all
computed in the same manner. See secs. 6211(a), 6662(d)(2), 6664(a). In this
case, however, a withholding adjustment reduces the underpayment to $3,886.
Accordingly, petitioners are liable for a penalty of 20% of the $3,886
underpayment, or $777.20.
D. Section 6663 Penalties
Respondent bears the burden of proof with respect to the section 6663 fraud
penalties determined against Mr. Kramer and must prove by clear and convincing
evidence that for each year (1) an underpayment of tax exists and (2) at least some
portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b); DiLeo
v. Commissioner, 96 T.C. 858, 873 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).
“Clear and convincing evidence is that measure or degree of proof which will
produce in the mind of the trier of facts a firm belief or conviction as to the
allegations sought to be established. It is intermediate, being more than a mere
preponderance, but not to the extent of such certainty as is required beyond a
reasonable doubt as in criminal cases. It does not mean clear and unequivocal.”
Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990) (quoting Cross v.
Ledford, 120 N.E.2d 118, 123 (Ohio 1954)). - 27 -
[*27] Here, respondent has clearly and convincingly established the existence of
underpayments of tax for 2004, 2005, 2006, 2007, and 2008 through the
affirmative allegations in the answers, which are deemed admitted, as well as
through matters we have deemed stipulated pursuant to Rule 91(f). Mr. Kramer is
deemed to have stipulated that he executed a Form 870 in which he agreed that
there were deficiencies in his income tax of $23,060 for 2004 and $11,633 for
2005. This stipulation establishes by clear and convincing evidence that Mr.
Kramer underpaid his tax for those years. Mr. Kramer is also deemed to have
stipulated that he failed to report substantial amounts of income for the taxable
years 2006, 2007, and 2008, and he is deemed to have admitted respondent’s
allegation that he had “underpayments of tax for the taxable years 2006, 2007, and
2008”. Respondent has therefore established clearly and convincingly that Mr.
Kramer underpaid his tax for 2006, 2007, and 2008.
Respondent must also prove clearly and convincingly that Mr. Kramer had
the requisite fraudulent intent to underpay his tax. Respondent satisfies this burden
by showing that Mr. Kramer “intended to evade taxes known to be owing by
conduct intended to conceal, mislead or otherwise prevent the collection of taxes.”
See DiLeo v. Commissioner, 96 T.C. at 874; see also Rowlee v. Commissioner, 80
T.C. 1111, 1123 (1983). Fraud “does not include negligence, carelessness, - 28 -
[*28] misunderstanding or unintentional understatement of income.” United States
v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956).
The existence of fraud is a question of fact to be resolved upon consideration
of the entire record. See DiLeo v. Commissioner, 96 T.C. at 874; Gajewski v.
Commissioner, 67 T.C. 181, 199 (1976), aff’d without published opinion, 578 F.2d
1383 (8th Cir. 1978). Fraud can rarely be established by direct proof of the
taxpayer’s intention. Accordingly, fraud may be, and typically is, proved by
circumstantial evidence. Courts usually rely on certain indicia (or badges) of fraud
in deciding whether a taxpayer had the requisite fraudulent intent. The badges of
fraud include: (1) understated income; (2) maintaining inadequate records;
(3) failing to file tax returns; (4) implausible or inconsistent explanations of
behavior; (5) concealing income or assets; (6) failing to cooperate with tax
authorities; (7) engaging in illegal activities; (8) dealing in cash; (9) failing to make
estimated tax payments; and (10) filing false documents. See Estate of Trompeter
v. Commissioner, 279 F.3d 767, 773 (9th Cir. 2002), vacating and remanding 111
T.C. 57 (1998); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),
aff’g T.C. Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910 (1988);
see also Spies v. United States, 317 U.S. 492, 499-500 (1943). These badges of - 29 -
[*29] fraud are nonexclusive. See Niedringhaus v. Commissioner, 99 T.C. 202,
211 (1992).
Mr. Kramer is deemed to have admitted the allegation in the answer in
docket No. 15368-17 that at least parts of his “underpayments of tax for the taxable
years 2004 and 2005 are due to fraud with the intent to evade tax” and the
allegation in the answer in docket No. 15224-17 that at least parts of his
“underpayments of tax for the taxable years 2006, 2007, and 2008 are due to fraud
with the intent to evade tax.” Moreover, the matters deemed stipulated pursuant to
Rule 91(f) in these cases clearly and convincingly establish several badges of
fraud. As one example, the first supplemental stipulation of facts sets forth matters
detailing how Mr. Kramer concealed income and assets by falsely stating on his
2004, 2005, 2006, 2007, and 2008 returns that he did not have an interest in or
signatory authority over a financial account in a foreign country, even though he
had an interest in accounts held with a foreign financial institution beginning in
2003 and continuing beyond 2008. The first supplemental stipulation of facts also
establishes that Mr. Kramer failed to inform his tax return preparer about his
foreign accounts, failed to maintain records relating to some of those accounts,
failed to file (or was delinquent in filing) so-called FBAR reports relating to his
foreign accounts, failed to file several tax returns on time, and failed to report - 30 -
[*30] income from various sources. These deemed stipulations, and other matters
established in the record, persuade us that respondent has established the existence
of Mr. Kramer’s fraud for 2004 through 2008 by clear and convincing evidence.
E. Exculpatory Factors
Petitioners bear the burden of proof with respect to any exculpatory factors
for penalties. See Wheeler v. Commissioner, 127 T.C. at 206; Higbee v.
Commissioner, 116 T.C. at 446-447. As petitioners have adduced no evidence in
support of any exculpatory factors, we sustain respondent’s penalty determinations.
V. Statute of Limitations
Petitioners have pleaded as an affirmative defense that the periods of
limitations on assessments have expired for the years at issue. However, the
Commissioner may make an assessment at any time “[i]n the case of a false or
fraudulent return with the intent to evade tax”. Sec. 6501(c)(1). Our finding fraud
with respect to the 2004 through 2008 taxable years therefore lifts the periods of
limitations for those years. See id.; Richardson v. Commissioner, 509 F.3d at 745.
For 2010 petitioners are deemed to have admitted that the notice of deficiency was
issued before the expiration of the limitations period (which was extended by
agreement), as alleged in respondent’s answer. Accordingly, respondent is not - 31 -
[*31] barred from assessing any of the deficiencies, additions to tax, or penalties at
issue in these cases.
VI. Conclusion
The record before us establishes that petitioners are in default under
Rule 123(a). The record further establishes that, to the extent he bears them,
respondent has carried his burdens of production and proof as to all deficiencies,
additions to tax, and penalties determined in the notices of deficiency. We will
therefore grant respondent’s motion.
To reflect the foregoing,
Appropriate orders will be
issued, and decisions will be entered
for respondent.