T.C. Summary Opinion 2019-33
UNITED STATES TAX COURT
REED L. KLEINMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12809-18S. Filed October 31, 2019.
Reed L. Kleinman, pro se.
Michael T. Garrett and Matthew A. Houtsma, for respondent.
SUMMARY OPINION
URDA, Judge: This case was heard pursuant to the provisions of
section 7463 of the Internal Revenue Code in effect when the petition was filed.1
1 All other section references are to the Internal Revenue Code in effect for the tax year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. -2-
Under section 7463(b), the decision to be entered is not reviewable by any other
court, and this opinion shall not be treated as precedent for any other case.
The Internal Revenue Service (IRS) determined a deficiency in petitioner
Reed Kleinman’s 2015 Federal income tax of $10,518, as well as an accuracy-
related penalty under section 6662(a), (b)(2), and (d) of $2,104. Mr. Kleinman
does not challenge the third-party tax reporting upon which the IRS based its
determinations but instead presses assorted tax-defier arguments. We will sustain
the IRS’ deficiency determination subject to respondent’s concession of the
accuracy-related penalty.
Background
The parties have submitted this case for decision without trial under
Rule 122. All relevant facts have been stipulated or are otherwise included in the
record. See Rule 122(a). Mr. Kleinman resided in Arizona when he timely
petitioned this Court.
I. Mr. Kleinman’s 2015 Earnings and Tax Reporting
In 2015 Mr. Kleinman worked for A-1 Restaurant Services, LLC (A-1),
which paid him $58,712 in wages. He also received $634 in health savings
account (HSA) distributions from Optum Bank. A-1 and Optum Bank reported
these amounts on information returns filed with the IRS (respectively, a Form -3-
W-2, Wage and Tax Statement, and a Form 1099-SA, Distributions From an HSA,
Archer MSA, or Medicare Advantage MSA).
On February 1, 2016, Mr. Kleinman filed his 2015 Form 1040, U.S.
Individual Income Tax Return, on which he claimed a refund of $739. Mr.
Kleinman reported wages of $24,366, itemized deductions of $9,250, and
exemptions of $8,000. His return reflected neither the wages reported by A-1 nor
the HSA distributions reported by Optum Bank.2
II. IRS Examination and Notice of Deficiency
The discrepancies between the tax reporting of Mr. Kleinman and that of
A-1 and Optum Bank led to an IRS examination of Mr. Kleinman’s 2015 tax
return. In July 2017 the IRS sent Mr. Kleinman a notice asserting that he owed
$13,314 in tax and interest for 2015. Mr. Kleinman refused to pay, stating in a
letter dated August 18, 2017, that “[t]he language is very plain on the 4852 I sent
with my 1040 for 2015. IRC 3401(a) and 3121(a) explain it.”
On January 2, 2018, Mr. Kleinman sent another letter to the IRS, in which
he stated that he “traded * * * [his] time for a wage.” Mr. Kleinman asserted that
2 Although Mr. Kleinman attached to his 2015 tax return a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., he indicated on the form that he did not receive any wages from A-1. -4-
his wages did not constitute income because “[i]ncome is where someone gains”
and he “did not gain from * * * [his] employment.”
On April 16, 2018, the IRS issued to Mr. Kleinman a notice for his 2015 tax
year determining a deficiency of $10,518 and an accuracy-related penalty (for an
underpayment attributable to a substantial understatement of income tax) of
$2,104. In calculating the deficiency amount the notice added Mr. Kleinman’s
A-1 wages and HSA distributions to his gross income, determined a 20%
additional tax pursuant to section 223(f)(4)(A) relating to his HSA distributions,
and made corresponding computational adjustments.
Mr. Kleinman filed a timely petition for redetermination in this Court, after
which respondent conceded the accuracy-related penalty. The parties
subsequently moved to submit this case for decision without trial pursuant to
Rule 122.
Discussion
I. Unreported Income
The IRS’ determinations in a notice of deficiency are generally presumed
correct, and the taxpayer bears the burden of proving those determinations
erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);
Merkel v. Commissioner, 192 F.3d 844, 852 (9th Cir. 1999), aff’g 109 T.C. 463 -5-
(1997). In cases involving failure to report income, the Court of Appeals for the
Ninth Circuit, to which an appeal in this case would ordinarily lie, see
sec. 7482(b)(1)(A), has held that the Commissioner must establish “some
evidentiary foundation” linking the taxpayer to an alleged income-producing
activity before the presumption of correctness attaches to the deficiency
determination. Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.
1979), rev’g 67 T.C. 672 (1977). Once the Commissioner has established such a
foundation, the burden of proof shifts to the taxpayer to prove by a preponderance
of the evidence that the IRS’ determinations are arbitrary or erroneous. Hardy v.
Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff’g T.C. Memo. 1997-97.
The notice of deficiency in this case determined two adjustments involving
unreported income from A-1 and Optum Bank. The parties have stipulated that
in 2015 Mr. Kleinman received $58,712 in wages from A-1 and $634 in HSA
distributions from Optum Bank and have introduced supporting exhibits to that
effect. Both wages and HSA distributions (if not used exclusively to pay or
reimburse for qualified medical expenses as defined in section 213(d)) are sources
of taxable income. See secs. 61(a), 223(f)(2). On the basis of the evidence before
us, we are satisfied that respondent has established a reasonable foundation
connecting Mr. Kleinman with income-producing activities. The burden of proof -6-
thus shifts to Mr. Kleinman to show that the IRS’ determinations were arbitrary or
erroneous.
Mr. Kleinman has not satisfied his burden of proof. In his brief he does not
challenge the wage amount reported by A-1 or oppose the IRS’ determination that
the HSA distributions that he received were of the taxable, rather than the tax-free,
variety.3 Instead he invokes (both in his petition and in his brief) numerous
groundless arguments, including that he is “not a corporation” but “a natural born
person,” that he has never lived on Federal land, and that the income tax under the
Sixteenth Amendment does not extend to “the common man who trades their time
for a wage.”
We have repeatedly rejected these and other similar tax-defier arguments.
See, e.g., Wnuck v. Commissioner, 136 T.C. 498, 506-510 (2011); Hatfield v.
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T.C. Summary Opinion 2019-33
UNITED STATES TAX COURT
REED L. KLEINMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12809-18S. Filed October 31, 2019.
Reed L. Kleinman, pro se.
Michael T. Garrett and Matthew A. Houtsma, for respondent.
SUMMARY OPINION
URDA, Judge: This case was heard pursuant to the provisions of
section 7463 of the Internal Revenue Code in effect when the petition was filed.1
1 All other section references are to the Internal Revenue Code in effect for the tax year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. -2-
Under section 7463(b), the decision to be entered is not reviewable by any other
court, and this opinion shall not be treated as precedent for any other case.
The Internal Revenue Service (IRS) determined a deficiency in petitioner
Reed Kleinman’s 2015 Federal income tax of $10,518, as well as an accuracy-
related penalty under section 6662(a), (b)(2), and (d) of $2,104. Mr. Kleinman
does not challenge the third-party tax reporting upon which the IRS based its
determinations but instead presses assorted tax-defier arguments. We will sustain
the IRS’ deficiency determination subject to respondent’s concession of the
accuracy-related penalty.
Background
The parties have submitted this case for decision without trial under
Rule 122. All relevant facts have been stipulated or are otherwise included in the
record. See Rule 122(a). Mr. Kleinman resided in Arizona when he timely
petitioned this Court.
I. Mr. Kleinman’s 2015 Earnings and Tax Reporting
In 2015 Mr. Kleinman worked for A-1 Restaurant Services, LLC (A-1),
which paid him $58,712 in wages. He also received $634 in health savings
account (HSA) distributions from Optum Bank. A-1 and Optum Bank reported
these amounts on information returns filed with the IRS (respectively, a Form -3-
W-2, Wage and Tax Statement, and a Form 1099-SA, Distributions From an HSA,
Archer MSA, or Medicare Advantage MSA).
On February 1, 2016, Mr. Kleinman filed his 2015 Form 1040, U.S.
Individual Income Tax Return, on which he claimed a refund of $739. Mr.
Kleinman reported wages of $24,366, itemized deductions of $9,250, and
exemptions of $8,000. His return reflected neither the wages reported by A-1 nor
the HSA distributions reported by Optum Bank.2
II. IRS Examination and Notice of Deficiency
The discrepancies between the tax reporting of Mr. Kleinman and that of
A-1 and Optum Bank led to an IRS examination of Mr. Kleinman’s 2015 tax
return. In July 2017 the IRS sent Mr. Kleinman a notice asserting that he owed
$13,314 in tax and interest for 2015. Mr. Kleinman refused to pay, stating in a
letter dated August 18, 2017, that “[t]he language is very plain on the 4852 I sent
with my 1040 for 2015. IRC 3401(a) and 3121(a) explain it.”
On January 2, 2018, Mr. Kleinman sent another letter to the IRS, in which
he stated that he “traded * * * [his] time for a wage.” Mr. Kleinman asserted that
2 Although Mr. Kleinman attached to his 2015 tax return a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., he indicated on the form that he did not receive any wages from A-1. -4-
his wages did not constitute income because “[i]ncome is where someone gains”
and he “did not gain from * * * [his] employment.”
On April 16, 2018, the IRS issued to Mr. Kleinman a notice for his 2015 tax
year determining a deficiency of $10,518 and an accuracy-related penalty (for an
underpayment attributable to a substantial understatement of income tax) of
$2,104. In calculating the deficiency amount the notice added Mr. Kleinman’s
A-1 wages and HSA distributions to his gross income, determined a 20%
additional tax pursuant to section 223(f)(4)(A) relating to his HSA distributions,
and made corresponding computational adjustments.
Mr. Kleinman filed a timely petition for redetermination in this Court, after
which respondent conceded the accuracy-related penalty. The parties
subsequently moved to submit this case for decision without trial pursuant to
Rule 122.
Discussion
I. Unreported Income
The IRS’ determinations in a notice of deficiency are generally presumed
correct, and the taxpayer bears the burden of proving those determinations
erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933);
Merkel v. Commissioner, 192 F.3d 844, 852 (9th Cir. 1999), aff’g 109 T.C. 463 -5-
(1997). In cases involving failure to report income, the Court of Appeals for the
Ninth Circuit, to which an appeal in this case would ordinarily lie, see
sec. 7482(b)(1)(A), has held that the Commissioner must establish “some
evidentiary foundation” linking the taxpayer to an alleged income-producing
activity before the presumption of correctness attaches to the deficiency
determination. Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.
1979), rev’g 67 T.C. 672 (1977). Once the Commissioner has established such a
foundation, the burden of proof shifts to the taxpayer to prove by a preponderance
of the evidence that the IRS’ determinations are arbitrary or erroneous. Hardy v.
Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff’g T.C. Memo. 1997-97.
The notice of deficiency in this case determined two adjustments involving
unreported income from A-1 and Optum Bank. The parties have stipulated that
in 2015 Mr. Kleinman received $58,712 in wages from A-1 and $634 in HSA
distributions from Optum Bank and have introduced supporting exhibits to that
effect. Both wages and HSA distributions (if not used exclusively to pay or
reimburse for qualified medical expenses as defined in section 213(d)) are sources
of taxable income. See secs. 61(a), 223(f)(2). On the basis of the evidence before
us, we are satisfied that respondent has established a reasonable foundation
connecting Mr. Kleinman with income-producing activities. The burden of proof -6-
thus shifts to Mr. Kleinman to show that the IRS’ determinations were arbitrary or
erroneous.
Mr. Kleinman has not satisfied his burden of proof. In his brief he does not
challenge the wage amount reported by A-1 or oppose the IRS’ determination that
the HSA distributions that he received were of the taxable, rather than the tax-free,
variety.3 Instead he invokes (both in his petition and in his brief) numerous
groundless arguments, including that he is “not a corporation” but “a natural born
person,” that he has never lived on Federal land, and that the income tax under the
Sixteenth Amendment does not extend to “the common man who trades their time
for a wage.”
We have repeatedly rejected these and other similar tax-defier arguments.
See, e.g., Wnuck v. Commissioner, 136 T.C. 498, 506-510 (2011); Hatfield v.
Commissioner, 68 T.C. 895, 897 (1977); Klir v. Commissioner, T.C.
Memo. 1979-259, 38 T.C.M. (CCH) 1028, 1030 (1979). We will not dignify them
with further discussion. See, e.g., Crain v. Commissioner, 737 F.2d 1417, 1417
(5th Cir. 1984) (“We perceive no need to refute these arguments with somber
3 Sec. 223(f) requires the inclusion in income of (and imposes a 20% additional tax upon) HSA distributions not used for qualified medical expenses or fitting one of the exceptions outlined in sec. 223(f)(4). Mr. Kleinman does not contend in this Court that these distributions were so used or that his circumstances in 2015 fit any of the statutory exceptions. -7-
reasoning and copious citation of precedent; to do so might suggest that these
arguments have some colorable merit.”); Wnuck v. Commissioner, 136 T.C.
at 510-512 (explaining that addressing frivolous arguments wastes time and
resources and delays the assessment of tax).
In conclusion, the parties’ stipulation that Mr. Kleinman received
unreported wages and unreported HSA distributions in 2015 satisfies respondent’s
burden to establish an evidentiary foundation linking Mr. Kleinman to the asserted
income-producing activities. For his part, Mr. Kleinman has chosen to repeat
meritless arguments rather than attempt to show the IRS’ determinations were
arbitrary or erroneous. We sustain the IRS’ deficiency determinations.
II. Section 6673 Penalty
Pursuant to section 6673(a)(1), we have the authority to impose a penalty of
up to $25,000 on a taxpayer who, among other things, institutes or maintains
before this Court a proceeding primarily for delay or pursues in this Court a
position which is frivolous or groundless. We choose not to impose this penalty
here because Mr. Kleinman has no previous history of making frivolous
arguments. Mr. Kleinman should be aware, however, that if he advances
groundless tax-defier arguments in the future, he risks expensive consequences. -8-
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and for
petitioner as to the penalty.