The Nis Family Trust v. Commissioner
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Opinion
115 T.C. No. 37
UNITED STATES TAX COURT
THE NIS FAMILY TRUST, FRANK NI, TRUSTEE, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9820-99, 9821-99, Filed December 4, 2000. 9822-99.
The cases are before the Court on R’s motions for judgment on the pleadings and partial summary judgment and on the Court’s orders to show cause why it should not (1) impose penalties on Ps for instituting or maintaining proceedings primarily for delay or for advancing frivolous or groundless positions, and (2) require Ps’ attorney, S, to pay excess costs, expenses, and fees for her bad faith course of conduct by which she unreasonably and vexatiously multiplied these proceedings. In the petitions, Ps fail to address any of the adjustments made in the notices of deficiency, raising
1 Cases of the following petitioners are consolidated herewith: Nis Venture Trust, Frank [Hae-Rong] Ni, Trustee, docket No. 9821-99, and Hae-Rong and Lucy B. Ni, docket No. 9822- 99. - 2 -
only meritless tax-protester arguments. Ps, therefore, have conceded those adjustments and, with respect to the deficiencies in tax determined by R, entry of judgment on the pleadings is appropriate. Sec. 7491, I.R.C., does not add to the burden of respondent as the movant for judgment on the pleadings in these cases. R has shown that partial summary judgment is appropriate for the accuracy-related penalties determined by R. Ps have abandoned their return positions, relying, instead, on a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax- protester arguments. S, Ps’ attorney, has, in bad faith, aided Ps in that strategy by making additional meritless tax-protester arguments, making meritless motions and responses to motions, and abusing the Court’s subpoena power. Neither Ps or S have shown that the orders to show cause should not be made absolute. 1. Held: With respect to the deficiencies in tax determined by respondent, judgment will be entered on the pleadings. Rule 120(a), Tax Court Rules of Practice and Procedure. 2. Held, further, sec. 7491, I.R.C., does not add to movant’s burden for judgment on the pleadings with respect to such deficiencies in tax. 3. Held, further, with respect to the sec. 6662, I.R.C., accuracy-related penalties, partial summary judgment will be granted for R. Rule 121(a), Tax Court Rules of Practice and Procedure. 4. Held, further, in each case, P (or Ps) will be required to pay penalties ($25,000 in docket No. 9822- 99; $500 in docket No. 9820-99 and $5,000 in docket No. 9821-99) on account of instituting and maintaining these proceedings primarily for delay and taking frivolous and groundless positions. Sec. 6673(a)(1), I.R.C. 5. Held, further, S will be required to pay personally $10,643.75 for R’s excess attorney’s fees reasonably incurred by R on account of S’s bad faith course of conduct in which she unreasonably and vexatiously multiplied the proceedings. Sec. 6673(a)(2), I.R.C. - 3 -
Crystal D. Sluyter, for petitioners.
Dale A. Zusi, Paul K. Webb, and Debra K. Moe, for
respondent.
OPINION
HALPERN, Judge: These cases have been consolidated for
trial, briefing, and opinion (the consolidated cases or these
cases). Respondent has determined deficiencies in income tax and
accuracy-related penalties under section 6662 as follows:
Taxable Petitioner[s] Year Deficiency Penalty
The Nis Family Trust, Frank Ni, Trustee 1995 $83 $17
Nis Venture Trust, Frank Ni, Trustee 1995 172,702 34,540
Hae-Rong and Lucy B. Ni 1995 186,988 37,398
These cases are before the Court on (1) respondent’s motions for
(A) judgment on the pleadings and (B) partial summary judgment
and (2) the Court’s orders to show cause why it should not impose
(A) penalties on petitioners pursuant to section 6673(a)(1) and
(B) require counsel for petitioners, Crystal D. Sluyter, to pay
costs, expenses, and fees (without distinction, costs) pursuant
to section 6673(a)(2).
Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for the year in issue, and - 4 -
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
Residence
At the time the petitions were filed, all petitioners
resided in San Jose, California.
Notices of Deficiency
By separate notices of deficiency, each dated February 19,
1999 (collectively, the notices of deficiency or notices),
respondent determined the deficiencies in tax and penalties set
forth above.2 Respondent’s determinations were based on the
following adjustments:
Nis Family Trust
Respondent disallowed petitioner’s deduction for fiduciary
and attorney’s fees in the amount of $600 because of petitioner’s
failure to establish the amount, if any, of such fees paid during
the taxable year for ordinary and necessary expenses incurred in
connection with trust administration or the management of trust
assets. Respondent disallowed petitioner’s deduction for a
charitable contribution in the amount of $1,800 because of
2 Copies of those notices of deficiency are attached as Exhibits A through C to respondent’s requests for admissions. As set forth below, petitioners failed timely to deny respondent’s requests for admissions, and, therefore, such requests are deemed admitted. See Rule 90. Petitioners are also deemed to admit that petitioner Hae-Rong Ni is also known as Frank Ni. - 5 -
petitioner’s failure to substantiate (1) the existence and amount
of any contribution, (2) that a contribution was made to a
charitable organization, and (3) that the claimed contribution
was not a prohibited transaction resulting in personal benefit or
inurement. Respondent disallowed petitioner’s claimed exemption
deduction in the amount of $100 because of petitioner’s failure
to show entitlement to such deduction under either section 651 or
652.
Nis Venture Trust
Respondent disallowed petitioner’s cost of goods sold in the
amount of $404,420 and a deduction for Schedule C, Profit or Loss
From Business, expenses in the amount of $9,737 because of
petitioner’s failure to substantiate such expenditures and to
show that such expenses were incurred in a trade or business.
Respondent disallowed an S corporation loss in the amount of
$20,131 because of petitioner’s failure to substantiate such loss
and show that the loss was a business loss. On various grounds,
respondent disallowed an income distribution deduction in the
amount of $1,500, a deduction for attorney’s fees of $1,500, a
deduction for an exemption of $100, and a Schedule E,
Supplemental Income and Loss, expense for rent in the amount of
$1,021. - 6 -
Hae-Rong and Lucy B. Ni
Respondent increased petitioners’ gross income by $439,230
based on the alternative grounds that (1) the Nis Family Trust
and the Nis Venture Trust (together, the Trusts) are shams with
no economic substance, (2) the Trusts are grantor trusts, (3)
under the assignment of income doctrine, petitioners are taxable
on the income and deductions of the Trusts, or (4) if the Trusts
are recognized for tax purposes, sections 652 or 662 function to
increase the gross income of petitioners. Respondent also made
certain resultant adjustments and other adjustments that are not
fully explained.
Pleadings
A separate petition in each of the consolidated cases was
filed on May 21, 1999. None of the petitions fully complied with
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115 T.C. No. 37
UNITED STATES TAX COURT
THE NIS FAMILY TRUST, FRANK NI, TRUSTEE, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9820-99, 9821-99, Filed December 4, 2000. 9822-99.
The cases are before the Court on R’s motions for judgment on the pleadings and partial summary judgment and on the Court’s orders to show cause why it should not (1) impose penalties on Ps for instituting or maintaining proceedings primarily for delay or for advancing frivolous or groundless positions, and (2) require Ps’ attorney, S, to pay excess costs, expenses, and fees for her bad faith course of conduct by which she unreasonably and vexatiously multiplied these proceedings. In the petitions, Ps fail to address any of the adjustments made in the notices of deficiency, raising
1 Cases of the following petitioners are consolidated herewith: Nis Venture Trust, Frank [Hae-Rong] Ni, Trustee, docket No. 9821-99, and Hae-Rong and Lucy B. Ni, docket No. 9822- 99. - 2 -
only meritless tax-protester arguments. Ps, therefore, have conceded those adjustments and, with respect to the deficiencies in tax determined by R, entry of judgment on the pleadings is appropriate. Sec. 7491, I.R.C., does not add to the burden of respondent as the movant for judgment on the pleadings in these cases. R has shown that partial summary judgment is appropriate for the accuracy-related penalties determined by R. Ps have abandoned their return positions, relying, instead, on a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax- protester arguments. S, Ps’ attorney, has, in bad faith, aided Ps in that strategy by making additional meritless tax-protester arguments, making meritless motions and responses to motions, and abusing the Court’s subpoena power. Neither Ps or S have shown that the orders to show cause should not be made absolute. 1. Held: With respect to the deficiencies in tax determined by respondent, judgment will be entered on the pleadings. Rule 120(a), Tax Court Rules of Practice and Procedure. 2. Held, further, sec. 7491, I.R.C., does not add to movant’s burden for judgment on the pleadings with respect to such deficiencies in tax. 3. Held, further, with respect to the sec. 6662, I.R.C., accuracy-related penalties, partial summary judgment will be granted for R. Rule 121(a), Tax Court Rules of Practice and Procedure. 4. Held, further, in each case, P (or Ps) will be required to pay penalties ($25,000 in docket No. 9822- 99; $500 in docket No. 9820-99 and $5,000 in docket No. 9821-99) on account of instituting and maintaining these proceedings primarily for delay and taking frivolous and groundless positions. Sec. 6673(a)(1), I.R.C. 5. Held, further, S will be required to pay personally $10,643.75 for R’s excess attorney’s fees reasonably incurred by R on account of S’s bad faith course of conduct in which she unreasonably and vexatiously multiplied the proceedings. Sec. 6673(a)(2), I.R.C. - 3 -
Crystal D. Sluyter, for petitioners.
Dale A. Zusi, Paul K. Webb, and Debra K. Moe, for
respondent.
OPINION
HALPERN, Judge: These cases have been consolidated for
trial, briefing, and opinion (the consolidated cases or these
cases). Respondent has determined deficiencies in income tax and
accuracy-related penalties under section 6662 as follows:
Taxable Petitioner[s] Year Deficiency Penalty
The Nis Family Trust, Frank Ni, Trustee 1995 $83 $17
Nis Venture Trust, Frank Ni, Trustee 1995 172,702 34,540
Hae-Rong and Lucy B. Ni 1995 186,988 37,398
These cases are before the Court on (1) respondent’s motions for
(A) judgment on the pleadings and (B) partial summary judgment
and (2) the Court’s orders to show cause why it should not impose
(A) penalties on petitioners pursuant to section 6673(a)(1) and
(B) require counsel for petitioners, Crystal D. Sluyter, to pay
costs, expenses, and fees (without distinction, costs) pursuant
to section 6673(a)(2).
Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for the year in issue, and - 4 -
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
Residence
At the time the petitions were filed, all petitioners
resided in San Jose, California.
Notices of Deficiency
By separate notices of deficiency, each dated February 19,
1999 (collectively, the notices of deficiency or notices),
respondent determined the deficiencies in tax and penalties set
forth above.2 Respondent’s determinations were based on the
following adjustments:
Nis Family Trust
Respondent disallowed petitioner’s deduction for fiduciary
and attorney’s fees in the amount of $600 because of petitioner’s
failure to establish the amount, if any, of such fees paid during
the taxable year for ordinary and necessary expenses incurred in
connection with trust administration or the management of trust
assets. Respondent disallowed petitioner’s deduction for a
charitable contribution in the amount of $1,800 because of
2 Copies of those notices of deficiency are attached as Exhibits A through C to respondent’s requests for admissions. As set forth below, petitioners failed timely to deny respondent’s requests for admissions, and, therefore, such requests are deemed admitted. See Rule 90. Petitioners are also deemed to admit that petitioner Hae-Rong Ni is also known as Frank Ni. - 5 -
petitioner’s failure to substantiate (1) the existence and amount
of any contribution, (2) that a contribution was made to a
charitable organization, and (3) that the claimed contribution
was not a prohibited transaction resulting in personal benefit or
inurement. Respondent disallowed petitioner’s claimed exemption
deduction in the amount of $100 because of petitioner’s failure
to show entitlement to such deduction under either section 651 or
652.
Nis Venture Trust
Respondent disallowed petitioner’s cost of goods sold in the
amount of $404,420 and a deduction for Schedule C, Profit or Loss
From Business, expenses in the amount of $9,737 because of
petitioner’s failure to substantiate such expenditures and to
show that such expenses were incurred in a trade or business.
Respondent disallowed an S corporation loss in the amount of
$20,131 because of petitioner’s failure to substantiate such loss
and show that the loss was a business loss. On various grounds,
respondent disallowed an income distribution deduction in the
amount of $1,500, a deduction for attorney’s fees of $1,500, a
deduction for an exemption of $100, and a Schedule E,
Supplemental Income and Loss, expense for rent in the amount of
$1,021. - 6 -
Hae-Rong and Lucy B. Ni
Respondent increased petitioners’ gross income by $439,230
based on the alternative grounds that (1) the Nis Family Trust
and the Nis Venture Trust (together, the Trusts) are shams with
no economic substance, (2) the Trusts are grantor trusts, (3)
under the assignment of income doctrine, petitioners are taxable
on the income and deductions of the Trusts, or (4) if the Trusts
are recognized for tax purposes, sections 652 or 662 function to
increase the gross income of petitioners. Respondent also made
certain resultant adjustments and other adjustments that are not
fully explained.
Pleadings
A separate petition in each of the consolidated cases was
filed on May 21, 1999. None of the petitions fully complied with
our Rules, and, in each case, petitioner (petitioners in the case
of Hae-Rong and Lucy B. Ni) was ordered by the Court to file an
amended petition. In each case, petitioner (or petitioners)
filed an amended petition (together, the amended petitions)
stating the following disagreement, and reasons therefor, with
the adjustments set forth above (and accompanying penalty):
I disagree with all the adjustments and changes the Commissioner has made. I do not believe that there was any underlying liability due to a lack of consideration. I have previously submitted facts with the Internal Revenue Service “IRS” in support of my position in an effort to resolve the matter administratively. The IRS failed or refused to consider those facts or my good faith effort to resolve - 7 -
the matter. The following facts were submitted to the IRS in April of 1999:
1. “It does not appear that the United States and the State of California (each a body politic with their respective governments) are under any legal obligation to protect our property and ourselves; 2. That although I may have accepted some commercial benefits, it does not appear that the tax in question bears a fiscal relation to those benefits; 3. In addition, regardless of the fact that some commercial benefits may have been accepted, it does not appear that any obligation to pay any particular tax in return was ever disclosed.”
Factually, this case is distinguished from cases such as United States v. Sloan, 939 F.2d 499 and similar cases because the presumption of Cook v. Tait, 265 U.S. 47 has been overcome due in part to statutes such as 50 U.S.C. § 1520 as enacted in 1976.
The IRS has not disputed these facts. Therefore, petitioner brings only an issue of law before the court.
The legal conclusion drawn from the above facts is that no liability could have been incurred regardless if income was earned or not because of a lack of consideration, see also State of Wisconsin, et al. v. J.C. Penney Company, 311 U.S. 435, and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274.
Respondent filed answers to the amended petitions on
September 24, 1999. In each answer, respondent denied making
errors in his adjustments.
Consolidation
By motion filed November 23, 1999, respondent moved to
consolidate these cases for trial, briefing, and opinion (the
motion to consolidate). We ordered petitioners to make any - 8 -
objection to the motion to consolidate by December 13, 1999. No
objection was made, and we granted the motion to consolidate on
December 21, 1999.
Cases Set for Trial
By notice dated December 29, 1999, these cases were set for
trial at the trial session of the Court commencing on June 5,
2000, in San Francisco, California (the trial session).
Admissions
On March 16, 2000, respondent served Respondent’s Requests
for Admissions (the requests for admissions) on all petitioners
herein. See Rule 90. None of the petitioners responded to the
requests for admissions. Therefore, each matter as to which
respondent requested admission is deemed admitted (the deemed
admissions). See Rule 90(c). We will set forth some of the
deemed admissions in the discussion that follows.
Appearance of Crystal D. Sluyter
On April 10, 2000, Crystal D. Sluyter, attorney, entered her
appearance in each of these cases, on behalf of the respective
petitioner (or petitioners).
Motions for Protective Order
On April 10, 2000, petitioners, “by and through”
Ms. Sluyter, separately moved in each case for a protective order
“in regards to discovery and production of documents” (motions
for protective order or the motions). The motions all state: - 9 -
“This motion should be granted because the respondent is not
entitled to receive any private and confidential books and
records from petitioners.” No affidavits accompany the motions.
The motions are accompanied, however, by documents entitled
“Memorandum of Points and Authorities” (the memoranda). The
memoranda state as follows: “The gravamen of Petitioners’ case
is that respondent has no legitimate authority over their lives
and property.” The memoranda continue:
The petitioners entered evidence that the Internal Revenue Code (IRC) was not applicable to them. * * *
* * * * * * *
As the Petitioners maintain that Respondent lacks legitimate authority over their lives and property, it would be imprudent to allow Respondent to have Petitioners’ books and records before evidence is provided to the contrary.
The motions are all signed by Ms. Sluyter.
On April 11, 2000, the Court ordered respondent to respond
to the motions. On April 24, 2000, respondent filed an 11-page
response.
On April 25, 2000, the Court denied the motions.
Motions for Judgment on the Pleadings
On April 12, 2000, respondent, by a separate motion in each
case, moved for judgment on the pleadings (the motions for
judgment on the pleadings or the motions). On April 13, 2000,
the Court ordered petitioners to respond to the motions for
judgment on the pleadings. On April 19, 2000, in response to the - 10 -
motions, all of the petitioners filed similar documents,
captioned “Petitioners’ Objections to Respondent’s Motion for
Judgment on the Pleadings and Supporting Memorandum” (sometimes,
petitioners’ objections). The memorandum portion of each of
petitioners’ objections states that, although, in the petition,
petitioner (petitioners, in the case of Hae-Rong and Lucy B. Ni)
did state that there were no issues of fact in dispute, such is
no longer the case. Each such memorandum portion claims:
There is no evidence to suggest that there is a bona fide political relationship between the petitioners and the “UNITED STATES” and the “STATE OF CALIFORNIA.” There is no evidence that the petitioners are subject to the written will of individuals called “CONGRESSMEN." * * *
Each of petitioners’ objections includes an affidavit of
Ms. Sluyter wherein, among other things, she claims, without
further detail: “There is a factual dispute as to the
Petitioners relationship to the United States and the State of
California.” Ms. Sluyter signed the petitioners’ responses.
Court’s Order Dated April 24, 2000
By order dated April 24, 2000 (the April 24 order), the
Court (1) calendared the motions for judgment on the pleadings
for hearing at the trial session and (2) ordered that, at the
trial session (A) petitioners show cause why the Court should not
impose a penalty pursuant to section 6673(a)(1) (which provides
for a penalty if, among other things, a proceeding is instituted
or maintained primarily for delay or the taxpayer’s position is - 11 -
frivolous or groundless), and (B) Ms. Sluyter show cause why she
should not be required to pay costs pursuant to section
6673(a)(2) (which provides that costs may be imposed on counsel
who has multiplied the proceedings in any case unreasonably and
vexatiously).
Motions to Compel
On April 24, 2000, by one consolidated motion, made in each
of these cases, respondent moved to compel (1) production of
documents and (2) answers to interrogatories (the motions to
compel). In support of the motions to compel, respondent set
forth a history of unfulfilled requests for both informal and
formal discovery. In support of the motion to compel answers to
interrogatories, respondent set forth the following description
of an April 4, 2000, meeting among respondent’s counsel,
Ms. Sluyter, and an individual named Mark MacDonald:
On April 4, 2000, respondent’s counsel met with attorney Sluyter and Mark MacDonald, a representative of petitioners, regarding respondent’s informal and formal discovery requests and about the legal theories presented in these consolidated cases. Attorney Sluyter and Mr. MacDonald set forth a variety of arguments on petitioners’ behalf, including: (1) that what the United States government calls the “federal law” is not applicable to petitioners Frank [Hae-Rong] and Lucy Ni, (2) that Frank [Hae-Rong] and Lucy Ni have no affiliation to the “so-called United States,” (3) that the Internal Revenue Service has no jurisdiction to audit the income tax returns of Frank [Hae-Rong] and Lucy Ni, and (4) that Frank [Hae-Rong] and Lucy Ni can have no tax liability because no consideration exists between the Ni’s and the United States government. Further, Attorney Sluyter stated that petitioners would not be providing respondent’s - 12 -
counsel with responses to the aforementioned interrogatories and would not be providing respondent’s counsel with any of the requested documents. Finally, attorney Sluyter stated that she would be filing a protective order with this Court regarding respondent’s counsel’s discovery requests.
Respondent asked that petitioners be ordered to produce documents
pursuant to 100 separately numbered requests in Respondent’s
First Request for Production of Documents (the document request)
and answer 59 separately numbered interrogatories propounded in
Respondent’s First Set of Interrogatories (the interrogatories).
Respondent asked for sanctions if petitioners failed to comply
with any such order.
By order dated April 25, 2000 (the April 25 order), the
Court ordered petitioners, on or before May 8, 2000, to produce
the documents asked for in the document request and answer the
interrogatories. The Court set the sanctions portion of the
motions to compel for hearing at the trial session.
On May 26, 2000, the Court filed as a status report
Respondent’s Supplements to Respondent’s Motions To Compel
Production of Documents and To Compel Responses to
Interrogatories (the status report). Attached to the status
report are copies of petitioners’ responses to the document
request and interrogatories (petitioners’ responses). In
response to the document request, petitioners provided two
documents: “Declaration of Trust of the NIS Venture Trust” and a
purported trust indenture relating to “The Nis Family Trust”. In - 13 -
response to 83 of 100 requests for documents, petitioners
responded: “There are no documents responsive to this request.”
Such requests included respondent’s requests for documents
supporting the various deductions claimed by petitioners in their
returns. In response to an interrogatory asking petitioners to
state their legal theory, a portion of petitioners’ response is
as follows:
Petitioners will prevail because none of the witnesses are able to prove that the petitioners are subject to the will of any individuals, including individuals referred to as “CONGRESSMEN.” As such, any demands or claims to petitioners’ property are void. The tax system is voluntary not mandatory and the IRS Commissioner has not [sic] oath of office to the United States.
In addition, petitioners can show that the individuals of the IRS have no legitimate authority over the lives and property of the petitioners. The only “authority” these individuals have is enforcing their arbitrary will at gun-point. * * *
Ms. Sluyter signed petitioners’ responses.
Motions To Quash
On May 25, 2000, by five consolidated motions, made in each
of these cases (motions to quash), respondent moved to quash
subpoenas (the subpoenas) served on Charles Rossotti, Peggy Rule,
Kevin Johnson, Andrew Bricker, and James Ledbetter. The
subpoenas are signed by Ms. Sluyter, and seek to compel
attendance of the individuals subpoenaed to testify at the trial
session on behalf of petitioners. Mr. Rossotti is the
Commissioner of Internal Revenue; Ms. Rule is the Internal - 14 -
Revenue Service (IRS) District Director, Central California
District; Mr. Johnson is a Revenue Agent of the IRS; Mr. Bricker
is a Special Agent in the Criminal Investigation Branch of the
IRS; and Mr. Ledbetter is an Appeals Officer of the IRS.
Respondent made various arguments as to why the subpoenas ought
to be quashed. Principally, respondent argued that none of the
individuals can give testimony that is required or relevant for
the Court to redetermine the deficiencies determined in these
cases.
By order dated May 26, 2000, the Court ordered petitioners,
on or before June 1, 2000, to file a response to the motions to
quash, suspended compliance with the subpoenas, and set the
motions to quash subpoenas for hearing at the trial session.
On June 5, 2000, petitioners lodged with the Court
“Petitioners’ Response to Respondent’s Motion to Quash Subpoenas
with Supporting Memorandum of Points and Authorities” (the
response to the motion to quash or the response). Because the
response was late, the Court gave petitioners leave to file it.
In pertinent part, the response contains the following argument:
The issue before the COURT is whether or not the individuals of the so-called INTERNAL REVENUE SERVICE (IRS) and the UNITED STATES GOVERNMENT have legitimate authority over the lives and property of the petitioners. * * *
Each witness has initiated force against the petitioners. They have each * * * made the wild claim that the individuals of the so-called UNITED STATES GOVERNMENT2 have not only a right to control - 15 -
petitioners’ life and property, but also a right to a portion of that property.
Petitioners have the right to collaterally attack all so-called “evidence” against them. * * * that includes all so-called “facts” frivolous legal conclusions; conclusions such as the absurd claim that petitioners are subject to so-called “FEDERAL LAW” with no further requirements. ___________ 2 There is no “entity” commonly called “GOVERNMENT.” What is referred to as “GOVERNMENT” is nothing more than individuals. These individuals use various “titles” appended to their names as if that gives them legitimate authority over the lives and property of other people.
In the response, petitioners also claim, with respect to
respondent’s counsel, Paul Webb, that he is a liar. They state:
In his [Webb’s] last pleading he outright lied1 about the Zimmerman case in Fresno.[3] * * * ___________
3 Apparently, petitioners are referring to respondent’s response to petitioners’ motions for protective order, in which respondent states, among other things:
Petitioners’ counsel has already argued these same frivolous legal positions before the United States District Court in an unrelated summons enforcement case. The District Court, in an unpublished opinion, summarily rejected these arguments. See Zimmerman, et al. v. United States, 85 AFTR 2d 2000-1091; 2000-1 USTC par. 50,295 (E.D. Cal. 2000) (Zimmermans argued that they are not subject to federal taxation because "they are neither citizens or residents" of the United States, they have no political relationship to the United States and owe no allegiance to the United States and the United States is under no duty to protect the Zimmermans; the responsibility to pay tax is based on a reciprocal agreement for the United States to protect the Zimmermans).
We see no inaccuracy in respondent’s statements about the Zimmerman case, which we further discuss infra in sec. III.B.3. - 16 - 1 WEBB should be sanctioned for his outrageous lie.
The response is signed by Ms. Sluyter.
Motions for Reconsideration
On June 5, 2000, by one consolidated motion, made in each of
these cases, petitioners moved for reconsideration of (1) our
denial of the motions for protective order and (2) the April 25
order (motions for reconsideration). Among the arguments
advanced by petitioners in the motions for reconsideration is
that the existence of the Internal Revenue Code is not evidence
that the Code is binding on petitioners. Petitioners explain
that respondent’s counsel:
still refuses to provide any evidence that the petitioners are subject to the so-called “CONGRESS.” That is all so-called “FEDERAL LAW” is. It’s the written will of individuals referred to as “CONGRESSMEN.” It demands no reverence, no allegiance and no compliance. * * *
Until there is evidence that Petitioners are subject to the will of these individuals, then what the so-called “IRC” says is wholly irrelevant because there is no evidence that it is binding first. What is frivolous2 is maintaining that the petitioners are subject to so-called “FEDERAL LAW” while refusing to produce evidence that Petitioners are subject to the written will of individuals referred to as “CONGRESSMEN.”
The filing of a so-called “RETURN” is no evidence that Petitioners are subject to the will of individuals referred to as “CONGRESSMEN.” * * *
Just because the petitioners filed so-called “RETURNS” out of fear is no evidence that a legitimate obligation to do so exists. * * * - 17 -
_______ 2 One must also [take] into consideration that most of those individuals referred to as “CONGRESSMEN,” that [sic] if they can be identified at all by the respondent, are more then likely DEAD or not referred to as “CONGRESSMEN” and [sic] longer. Are petitioners subject to the written will of individuals who are dead?
Ms. Sluyter signed the motions for reconsideration. We denied
them.
Trial Session
These cases came on for hearing (the hearing), pursuant to
notice, at the trial session. At the hearing, respondent moved
to amend the motions for judgment on the pleadings to limit them
to the deficiencies in each case (and exclude the penalties).
Counsel for petitioners stated that she had no objection to those
motions, and the Court granted them. The Court took the motions
for judgment on the pleadings, as amended (still, motions for
judgment on the pleadings), under advisement. Respondent also
informed the Court that he would be making a motion for partial
summary judgment with respect to the penalties determined by him
in each case. The Court gave respondent leave until July 5,
2000, to make such motion and allowed petitioners until August 4,
2000, to respond.
The Court did not conduct proceedings on those portions of
the April 24 order ordering (1) petitioners to show cause why
they should not be subject to a penalty under section 6673(a)(1)
and (2) Ms. Sluyter to show cause why she should not be required - 18 -
to pay costs pursuant to section 6673(a)(2). Rather, the Court
ordered that compliance with such orders (the orders to show
cause) be extended to August 25, 2000, at which time, petitioners
and Ms. Sluyter were to show cause, in writing, why the orders to
show cause should not be made absolute.
The Court denied the motions to quash on the grounds that no
trial was held and the subpoenas were no longer in force. The
Court denied the sanctions portion of the motions to compel.
The Court continued the consolidated cases and retained
jurisdiction.
Subsequent Actions by Parties
On June 7, 2000, respondent, by separate motion in each
case, moved for partial summary judgment as to the section
6662(a) penalty (the motions for partial summary judgment or
motions). No petitioner responded to any of the motions for
partial summary judgment.
Neither petitioners nor Ms. Sluyter has filed any response
to the orders to show cause.
Respondent has filed various memoranda of points and
authorities in support of the motions for judgment on the
pleadings and partial summary judgment and the orders to show
cause, as well as the affidavit of Paul K. Webb, one of
respondent’s attorneys, in connection with the order to show
cause as to Ms. Sluyter. - 19 -
Petitioners have attempted to file a document styled
“Emergency Motions for Continuance and Request for Sanctions”,
accompanied by Ms. Sluyter’s declaration in support of that
document. We returned those documents to Ms. Sluyter accompanied
by a letter dated August 9, 2000, explaining, among other things,
that, since the cases are neither calendared for trial nor set
for hearing, no continuance could be granted. By that letter, we
advised Ms. Sluyter how to ask for more time to respond to the
Court’s orders. By letter dated August 31, 2000, we returned to
Ms. Sluyter a document styled “Emergency Motion for Extension”,
since such document lacked Ms. Sluyter’s original signature and,
thus, was not a proper document. See Rule 23(a)(3). We again
advised Ms. Sluyter how to ask for more time to respond.
Discussion
I. Motions for Judgment on the Pleadings
A. Introduction
1. Rule 120(a)
In pertinent part, Rule 120(a) provides: “After the
pleadings are closed but within such time as not to delay the
trial, any party may move for judgment on the pleadings.” The
pleadings in these cases consist of the petitions, amended
petitions, and answers, since no other pleadings were required or
permitted. See Rule 30. The answers were all made before - 20 -
April 12, 2000, which is the date on which respondent made the
motions for judgment on the pleadings. The motions for judgment
on the pleadings were made sufficiently in advance of the date of
the trial session, June 5, 2000, so as not to delay trial of
these cases. The procedural requirements of Rule 120(a) were,
thus, satisfied. As amended, the motions ask that the Court find
that there is due from the various petitioners the deficiencies
in tax set forth above. Petitioners object.
2. Rule 34(b)
Rule 34 deals with petitions. In pertinent part, Rule 34,
provides:
(b) Content of Petition in Deficiency or Liability Actions: The petition in a deficiency or liability action shall contain * * *
(4) Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignments of error shall be deemed to be conceded. Each assignment of error shall be separately lettered.
(5) Clear and concise lettered statements of the facts on which petitioner bases the assignments of error, except with respect to those assignments of error as to which the burden of proof is on the Commissioner. - 21 -
3. Respondent’s Arguments
Respondent’s argument is the same in each of the motions.
In docket No. 9820-99, respondent states:
Petitioner’s amended petition fails to meet these requirements [Rule 34(b)] and in fact states that “petitioner brings only an issue of law before the court.” * * * Tax Court Rule 34(b)(4) states that “Any issue not raised in the assignments of error shall be deemed to be conceded."
Respondent then summarizes the amended petition and states that
petitioner has failed to comply with Rule 34(b) by, in effect,
failing to assign any error to respondent’s determinations of
deficiencies. For that reason, respondent argues, the motion
should be granted:
[The amended petition] * * * merely sets forth frivolous legal positions which are contrary to established law and unsupported by a reasoned, colorable argument for change in the law. Petitioner’s amended petition fails to present any specific allegations of error, any meritorious reasons for disagreeing with the notice of deficiency, nor any facts in support of any such disagreement. * * *
Because petitioner’s amended petition merely sets forth frivolous arguments and as such does not allege any justiciable error with respect to the notice of deficiency, respondent should be granted judgment in his favor based upon the pleadings. [Citations omitted.]
4. Burden of Proof
A judgment on the pleadings is a judgment based solely on
the allegations and information contained in the pleadings and
not on any outside matters. See Rule 120(a) and (b); see also - 22 -
Fed. R. Civ. P. 12(c); Black’s Law Dictionary 848 (7th ed. 1999).
The movant has the burden of showing entitlement to judgment on
the pleadings. See Abrams v. Commissioner, 82 T.C. 403, 408
(1984). He must show that the pleadings do not raise a genuine
issue of material fact and that he is entitled to a judgment as a
matter of law. See id.; see also 2 Moore, Moore’s Federal
Practice, sec. 12.38, at 12-102.1 (3d ed. 2000) (“Judgment on the
pleadings should be granted if the movant ‘is entitled to
judgment as a matter of law’”, quoting Burns Intl. Sec. Servs. v.
International Union United Plant Guard Workers, Local 537, 47
F.3d 14, 16 (2d Cir. 1995)). At the hearing, we asked respondent
to address whether the provisions of recently enacted section
7491 add to his burden as movant in these cases. Respondent
believes that they do not. We agree.
Section 7491 was enacted by section 3001(a) of the Internal
Revenue Service Restructuring & Reform Act of 1998 (RRA 1998),
Pub. L. 105-206, 112 Stat. 685, 726-727. As so added, section
7491 is effective with respect to court proceedings arising in
connection with examinations by respondent commencing after July
22, 1998, the date of the enactment of RRA 1998. See RRA 1998
sec. 3001(c). Respondent concedes that section 7491 is effective
with respect to these Court proceedings. Provisions of section - 23 -
7491 pertinent to this case are set forth in the margin.4 Among
other things, section 7491 provides that, in any court
proceeding, the burden of proof as to any factual issue is on the
Secretary where the taxpayer, who has satisfied certain other
4 SEC. 7491. BURDEN OF PROOF
(a) Burden Shifts Where Taxpayer Produces Credible Evidence.--
(1) General rule. If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.
(2) Limitations. Paragraph (1) shall apply with respect to an issue only if--
(A) the taxpayer has complied with the requirements under this title to substantiate any item;
(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and
(C) in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430(c)(4)(A)(ii).
(c) Penalties.
Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title. - 24 -
requirements, produces credible evidence with respect to that
issue. See sec. 7491(a).
Section 7491 does not add to respondent’s burden as the
movant for judgment on the pleadings in these cases because, in
part, the burden on the movant is to show that there are no
material facts in dispute. See, e.g., Abrams v. Commissioner,
supra; see also Enron Oil Trading & Transp. v. Walbrook Ins. Co.,
132 F.3d 526, 529 (9th Cir. 1997) (with respect to Fed. R. Civ.
P. 12(c), which is similar to our Rule 120(a), judgment on
pleadings for defendants reversed when they failed clearly to
establish that, on the face of pleadings, no material issues of
fact remained to be resolved and they were entitled to judgment
as a matter of law). Once the movant shows that there are no
material facts in dispute, as he has here, see infra section
I.B., then there remain only legal issues for the Court to
decide. Since there remain only legal issues, burden of proof,
and, therefore, section 7491, are irrelevant.
B. Discussion
Respondent has determined deficiencies in tax against each
of the petitioners, and the petitioners have filed petitions. We
have jurisdiction to redetermine the correct amount of such
deficiencies. See sec. 6214(a). As set forth supra in section
I.A.2., the petition in a deficiency case must set forth each and
every error that the petitioner alleges to have been committed by - 25 -
the Commissioner and clear and concise statements of facts upon
which the petitioner bases the assignments of error.
Furthermore, any issue not raised in the assignments of error is
deemed conceded. See id. A petition that makes only frivolous
and groundless arguments makes no justiciable claim, and it is
properly subject to a motion for judgment on the pleadings. See
Abrams v. Commissioner, 82 T.C. 403 (1984); see also Rodriguez v.
Commissioner, T.C. Memo. 1995-67 (judgment on the pleadings
granted where petitions merely set forth frivolous “protester
arguments that have been heard by this Court on many occasions
and rejected”); Wright v. Commissioner, T.C. Memo. 1990-232
(frivolous argument in petition that petitioner was exempt from
Federal taxation justified granting respondent’s motion to
dismiss for failure to state a claim); Brayton v. Commissioner,
T.C. Memo. 1989-664 (taxpayer made meritless “tax-protester”
arguments; quoting Abrams, the Court stated: “A judgment on the
pleadings is appropriate where a petition raises no justiciable
issues.”). We may grant a motion for judgment on the pleadings
as to less than all the issues in a case. See Brock v.
Commissioner, 92 T.C. 1127, 1133 (1989); Caplette v.
Commissioner, T.C. Memo. 1993-46 (partial judgment on the
pleadings, except as to fraud penalty, where petition merely
contained “tax protester arguments that have been heard and
rejected by this Court on many occasions”). - 26 -
The amended petitions all contain the same arguments:
(1) The petitioners have no tax liability “due to a lack of
consideration”, (2) "[i]t does not appear that the United States
and the State of California (each a body politic with their
respective governments) are under any legal obligation to protect
our property and ourselves", (3) although petitioners may have
accepted some commercial benefits, “it does not appear that the
tax in question bears a fiscal relation to those benefits”, and
(4) “regardless of the fact that some commercial benefits may
have been accepted, it does not appear that any obligation to pay
any particular tax in return was ever disclosed”.
Those are all frivolous arguments. On numerous occasions,
courts have rejected similar arguments. See, e.g., McLaughlin v.
Commissioner, 832 F.2d 986, 987 (7th Cir. 1987) ("The notion that
the federal income tax is contractual or otherwise consensual in
nature is not only utterly without foundation but * * * has been
repeatedly rejected by the courts."); United States v. Drefke,
707 F.2d 978, 981 (8th Cir. 1983) (taxpayer unsuccessfully argued
that taxes are debts only incurred when individuals contract with
the Government for services). The cases cited in the amended
petitions are not relevant to the adjustments made in the notices
of deficiency. None of those cases relates to the validity of
the trusts involved or to the substantiation of expenses, which
are the issues set forth in the notices. Furthermore, the - 27 -
statute cited in the amended petitions, 50 U.S.C. section 1520
(1982), has long since been repealed. When it was effective, the
statute related to the testing of chemical and biological agents
on humans. Clearly such a statute is not relevant to our
redetermination of any deficiency in petitioners’ Federal income
taxes.
In the amended petitions, petitioners state that
“[petitioners bring] only an issue of law before the court.” In
petitioners’ responses (to the motions for judgment on the
pleadings), petitioners claim that that no longer is the case.
Nevertheless, petitioners have not moved to amend the amended
petitions to aver any facts in support of their assignments of
error. See Rules 34(b), 41(a). Indeed, in petitioners’
responses to the motions, petitioners’ claim: “[t]here is no
evidence” (1) “to suggest that there is a bona fide political
relationship between the petitioners and the ‘UNITED STATES’ and
the ‘STATE OF CALIFORNIA’” and (2) “that the petitioners are
subject to the written will of individuals called ‘CONGRESSMEN’”.
Those claims do not raise any factual issue relevant to our
redetermination of the deficiencies determined by respondent.
Those are frivolous claims of no merit. Petitioners have raised
no factual issues for decision by us.
None of the petitions or amended petitions assign any error
that we consider justiciable: Petitioners rely on meritless tax- - 28 -
protester arguments that demand no respect from the courts.
Petitioners have failed to make any legitimate challenge to the
deficiencies determined by respondent. They have not assigned
any error that could possibly influence us to redetermine the
deficiencies determined by respondent.
C. Conclusion
In the petitions, petitioners have failed to address any of
the adjustments made in the notices of deficiency. We,
therefore, consider petitioners to have conceded those
adjustments. See Rule 34(b)(4). They have made no other
argument of which we take cognizance. We shall grant the motions
for judgment on the pleadings.5
II. Motions For Partial Summary Judgment
1. Background
The motions for partial summary judgment ask for partial
summary adjudications as to the section 6662(a) penalties. Those
motions were made following respondent’s amendments to the
5 Under various of the theories underlying respondent’s adjustments with respect to petitioners Hae-Rong and Lucy B. Ni (e.g., the income of the Trusts is taxed to Hae-Rong and Lucy B. Ni because the Trusts are shams with no economic substance), the Trusts would owe no income tax and there could be no deficiency in tax. Respondent has, nevertheless, with respect to the Trusts, determined deficiencies in tax. We recognize that respondent may issue inconsistent notices in order to protect his interests. We will delay entering decisions in these cases until the parties have had the opportunity to advise us how we should deal with any inconsistencies. - 29 -
motions for judgment on the pleadings to remove the penalties
from the scope of those motions and, thus, to limit them to the
deficiencies in each case. Respondent explained his action in
amending the motions for judgment on the pleadings as resulting
from his concern that the pleadings alone did not satisfy the
burden of production that section 7491 imposes on him with
respect to petitioners’ liabilities for the section 6662
penalties.6 See sec. 7491(c). Apparently, respondent was
concerned that, because of section 7491(c), we would refuse to
enter judgment on the pleadings with respect to the section 6662
penalties.
2. Section 6662 Accuracy-Related Penalties
Section 6662(a) provides for an accuracy-related penalty in
the amount of 20 percent of the portion of any underpayment of
tax attributable to, among other things (1) negligence or
disregard of rules or regulations (hereafter, simply, negligence)
or (2) any substantial understatement of tax. Negligence has
6 Because of respondent’s amendments to the motions for judgment on the pleadings, we do not determine the adequacy of petitioners’ pleadings with respect to the sec. 6662 penalties. Rule 34(b)(4) provides that the petition shall contain: “Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. * * * Any issue not raised in the assignments of error shall be deemed to be conceded.” We need not determine whether, in fact, petitioners failed to assign error to respondent’s determinations of the sec. 6662 penalties and, thus, are deemed to concede their liabilities for such penalties, thereby allowing for judgment on the pleadings with respect to such liabilities. - 30 -
been defined as the failure to exercise the due care of a
reasonable and ordinarily prudent person under like
circumstances. See Neely v. Commissioner, 85 T.C. 934, 947
(1985). A substantial understatement exists for any taxable year
if the amount of the understatement for the taxable year exceeds
the greater of 10 percent of the tax required to be shown on the
return for the year or $5,000. See sec. 6662(d)(1)(A).
3. Summary Judgment
A summary judgment is appropriate "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). "A
partial summary adjudication may be made which does not dispose
of all the issues in the case." Id. The party moving for
summary judgment has the burden of showing the absence of a
genuine issue as to any material fact. See, e.g., Espinoza v.
Commissioner, 78 T.C. 412, 416 (1982).
As noted in our background discussion, petitioners are
deemed to have admitted certain facts. The deemed admissions
were made pursuant to Rule 90(c). By the deemed admissions, the
petitioners have each admitted negligence in the preparation and
filing of his (their) income tax return for 1995. The admissions - 31 -
referred to in Rule 121(b), include those deemed admitted under
Rule 90(c). See, e.g., Marshall v. Commissioner, 85 T.C. 267,
272 (1985). Respondent can rely on a deemed admission of
negligence to show that there is no genuine issue as to any
material fact and that the taxpayer was negligent as a matter of
law. See, e.g., Battikhi v. Commissioner, T.C. Memo. 1998-208;
McIlvane v. Commissioner, T.C. Memo. 1994-104. We have here,
however, more than conclusory deemed admissions of negligence.
By the deemed admissions, petitioners are also deemed to admit
numerous additional facts that, when taken together, establish
that each failed to exercise the due care of a reasonable and
ordinarily prudent person under like circumstances. For example,
each petitioner is deemed to admit that the Trusts are shams,
created primarily for income tax purposes. Petitioners assigned
no error to respondent’s determination of a penalty or set forth
any facts contradicting respondent’s grounds. We are satisfied
that all of the underpayments of tax here in question are
attributable to negligence, and so find.
Moreover, by the deemed admissions, petitioners are deemed
to admit to copies of their 1995 income tax returns. We have
examined those copies and, based on the deficiencies in tax
determined by respondent, which we will sustain, we find that all
of the underpayments of tax here in question are attributable to
substantial understatements of tax. - 32 -
Based either on the negligence of petitioners or their
substantial understatements of income tax, the motions for
partial summary judgment shall be granted. Petitioners are
liable for the section 6662 penalties determined by respondent.
III. Orders To Show Cause
A. Penalty Pursuant to Section 6673(a)(1)
1. Introduction
Petitioners in each of these cases have been ordered to show
cause why the Court should not impose a penalty pursuant to
section 6673(a)(1) (the order to show cause or the order). No
petitioner has obeyed the order. Respondent has filed his
memorandum of points and authorities in support of the order
(respondent’s memorandum). For the reasons that follow, we shall
make the order to show cause absolute.
2. Section 6673(a)(1)
Section 6673 provides for the imposition of penalties and
the awarding of costs. Section 6673(a) applies to proceedings
before the Tax Court; in pertinent part, it provides:
(1) Procedures instituted primarily for delay, etc.
Whenever it appears to the Tax Court that--
(A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, - 33 -
(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 to the United States a penalty not in excess of $25,000.
3. Discussion
A taxpayer’s position is frivolous “if it is contrary to
established law and unsupported by a reasoned, colorable argument
for change in the law. * * * The inquiry is objective. If a
person should have known that his position is groundless, a court
may and should impose sanctions.” Coleman v. Commissioner, 791
F.2d 68, 71 (7th Cir. 1986); see also Hansen v. Commissioner, 820
F.2d 1464, 1470 (9th Cir. 1987) (trial court’s finding that
taxpayer should have known that claim was frivolous allows for
section 6673 penalty); Booker v. Commissioner, T.C. Memo.
1996-261.
We have already concluded that the petitions make nothing
but frivolous arguments. See supra sec. I.B. Hae-Rong Ni is
both petitioner in his own right and, as trustee, petitioner for
the trusts. He was not represented by counsel when he filed the
petitions in these cases. Attached to respondent’s memorandum is
a copy of a diploma issued by Oregon State University in 1984,
conferring on one Hae-Rong Ni the degree of Doctor of Philosophy.
In respondent’s memorandum, he states that Hae-Rong Ni is highly - 34 -
educated and, thus, should have been aware that the arguments
that he was making on his own behalf and on behalf of the trusts
are frivolous. Respondent argues that, had Hae-Rong Ni conducted
any research at all, he would have found that courts have
rejected similar arguments. Petitioners have failed to respond
to respondent’s memorandum, and we accept as true respondent’s
representation as to Hae-Rong Ni’s education. We also agree that
he should have known that his positions were frivolous.
Consequently, we find that petitioners’ positions in each of
these cases are frivolous.
Moreover, we believe that petitioners both instituted and
maintained these proceedings primarily for delay. All of the
petitioners filed returns and reported items of income and
deduction. Petitioners Hae-Rong and Lucy B. Ni reported total
taxes due of $2,516. None of those returns claim that
petitioners are not subject to the Federal income tax, as
petitioners claim in the petitions. The notices of deficiency
are based on the positions taken by petitioners in their returns.
Respondent’s principal adjustment questions the independent tax
existence of the trusts. Other adjustments disallow deductions
and other amounts for lack of substantiation. Petitioners have
made no attempt to meet respondent’s adjustments head on. By the
deemed admissions, petitioners admit the following: Neither
petitioners Hae-Rong or Lucy B. Ni, in their own right, nor - 35 -
petitioner Hae-Rong, as trustee of the Trusts, appeared before
respondent for the scheduled audit of their (his) return.
Neither petitioners Hae-Rong or Lucy B. Ni, nor any
representative on their behalf, appeared before respondent to
comply with summonses issued to such petitioners even though
ordered to do so by the U.S. District Court for the Northern
District of California. None of the petitioners have provided
records to respondent to substantiate the deductions, losses, and
other items claimed by them on their returns, nor do they have
such records. Moreover, by the April 25 order, we ordered
petitioners to produce documents to respondent and answer his
interrogatories. We have reviewed petitioners’ responses to the
April 25 order, copies of which are attached to the status report
(filed by respondent). Those responses are inadequate and, we
believe, not made in good faith. It appears to us that
petitioners abandoned their return positions before they filed
the petitions in these cases. We assume that they concluded that
their return positions lacked merit. See, e.g., Johnston v.
Commissioner, T.C. Memo. 2000-315 (reviewing “long line of
authority” prohibiting assignment to a trust of income earned
from rendering personal services). Rather than press positions
in which they appear to have lost confidence, petitioners chose,
instead, to pursue a strategy of noncooperation and delay, - 36 -
undertaken behind a smokescreen of frivolous tax-protester
arguments.
Clearly, the taxpayers in these cases deserve penalties
under section 6673(a)(1). In determining the amounts of those
penalties, we take account of the repeated incidents of
petitioners’ noncooperation and nonresponsiveness, both during
respondent’s examinations of their returns, see Cary v.
Commissioner, T.C. Memo. 1988-128, affd. without published
opinion, 900 F.2d 262 (9th Cir. 1990), and during the pendency of
this case. We also take account of the fact that, as these
proceedings progressed, and counsel appeared for petitioners,
petitioners’ frivolous arguments multiplied. See infra sec. III.
B.3. Finally, we are aware that petitioner Hae-Rong Ni (also
known as Frank Ni) is here both in an individual capacity and as
trustee for the trusts. By the deemed admissions, petitioners
admit that (1) during the taxable year in question, the trusts
were the alter egos of petitioners Hae-Rong and Lucy B. Ni and
(2) the trusts were shams, created primarily for income tax
purposes. Petitioners abandoned their return positions before
they filed the petitions in these cases. Since petitioners
abandoned their return positions before they filed the petitions
in these cases, we assume that petitioners recognize the truth of
the deemed admissions, and have brought the Trust cases only to
ensure that respondent does not assess the same deficiency - 37 -
against both the Nis, as individuals, and the Trusts. See supra
note 5. However, petitioner Hae-Rong Ni, as trustee, has not
limited himself to filing protective petitions in the Trust
cases. He has raised the same frivolous arguments with respect
to the Trust that he has raised in his individual capacity. Such
duplication has served to burden respondent and the Court and
delay disposition of these cases. We will, therefore, impose
penalties not only on Hae-Rong (and Lucy B.) Ni but also on the
Trusts. Taking into account the actions of petitioner Hae-Rong
Ni in the Trust cases and petitioners Hae-Rong and Lucy B. Ni in
their case, the amounts in dispute in each case, respondent’s
efforts to dissuade petitioners from their groundless arguments,
and the time and effort of the Court required to dispose of these
cases, we believe that the maximum penalty, in the amount of
$25,000, is appropriate with respect to petitioners Hae-Rong and
Lucy B. Ni, and smaller penalties, in the amount of $500 in the
case at docket No. 9820-99, and $5,000 in the case at docket No.
9821-99, are appropriate with respect to each of the Trusts.
4. Conclusion
The order to show cause shall be made absolute, and
petitioner (petitioners) in each case shall pay to the United
States a penalty pursuant to section 6673(a)(1) in the amount of
$25,000 in docket No. 9822-99, $500 in docket No. 9820-99, and
$5,000 in docket No. 9821-99. - 38 -
B. Costs Pursuant to Section 6673(a)(2)
Ms. Sluyter has been ordered to show cause why she should
not be required to pay costs pursuant to section 6673(a)(2) (the
order to show cause or the order). She has not obeyed the order.
Respondent has filed his memorandum of points and authorities in
support of the order (respondent’s memorandum), along with the
declaration of Paul K. Webb, Esq. (the Webb declaration). For
the reasons that follow, we shall make the order to show cause
absolute.
2. Section 6673(a)(2)
Section 6673(a)(2) provides for counsel’s liability for
excessive costs. In pertinent part, section 6673(a)(2) provides:
Counsel’s liability for excessive costs. Whenever it appears to the Tax Court that any attorney or other person admitted to practice before the Tax Court has multiplied the proceedings in any case unreasonably and vexatiously, the Tax Court may require--
(A) that such attorney or other person pay personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct * * * - 39 -
a. Bad Faith
Section 6673(a)(2) is a relatively new provision,7 and, in
Harper v. Commissioner, 99 T.C. 533 (1992), we discussed fully
the standards for imposing costs under it. While there may be
some question as to whether, before we impose costs, we must find
that the attorney or other person admitted to practice before the
Tax Court (without distinction, attorney) acted in bad faith, see
Harper v. Commissioner, supra at 545, we have no trouble in
finding that, in these cases, Ms. Sluyter did act in bad faith.
The standard of bad faith that we believe is here satisfied is
the standard described by us in Harper v. Commissioner, viz.,
that the challenged actions are entirely without colorable
pretext or basis and are taken for reasons of harassment or delay
or for other improper purposes. Harper v. Commissioner, supra at
546. For purposes of determining bad faith, a claim is colorable
if it has some legal and factual support, considered in light of
the reasonable beliefs of the individual making the claims. See
Nemeroff v. Abelson, 620 F.2d 339, 348 (2d Cir. 1980) (citing
“ABA Model Rules of Professional Conduct" sec. 3.3, Comment
(Discussion Draft 1980)); see also Golden Eagle Distrib. Corp. v.
7 Sec. 6673(a)(2) was added to the Code by sec. 7731(a) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2400, and applies to positions taken after Dec. 31, 1989, in proceedings pending on or commenced after such date. - 40 -
Burroughs, 801 F.2d 1531, 1537 (9th Cir. 1986) (similar
standards for imposing sanctions pursuant to Rule 11, Fed. R.
Civ. P.). Bad faith may be found not only in the actions that
led to the litigation but also in the conduct of the litigation.
See Harper v. Commissioner, supra.
Ms. Sluyter entered her appearances in the consolidated
cases on April 10, 2000, after the petitions had been filed. It
is clear that, on that date, Ms. Sluyter was aware of the
meritless tax-protester arguments made in the petitions. On
April 4, 2000, a week before her appearances, Ms. Sluyter met
with respondent’s counsel (the April 4 meeting), and she both
repeated and added to the specious arguments made in the
petition. Respondent has provided us with a letter from
respondent’s counsel to Ms. Sluyter, dated April 11, 2000 (the
April 11 letter), analyzing various cases and statutory
provisions, and showing the lack of merit in Ms. Sluyter’s
arguments made at the April 4 meeting. We have examined the
April 11 letter. It put Ms. Sluyter on clear notice that her
arguments were meritless. Nevertheless, Ms. Sluyter has
persisted in those and similar arguments. She has signed
documents submitted to respondent and the Court that contain
meritless and, in some instances, inflammatory, statements:
e.g.: - 41 -
[P]etitioners can show that the individuals of the IRS have no legitimate authority over the lives and property of petitioners. The only “authority” these individuals have is enforcing their arbitrary will at gun point. * * *
-------------------
There is no “entity” commonly called “GOVERNMENT.” What is referred to as “GOVERNMENT” is nothing more than individuals. These individuals use various “titles” appended to their names as if that gives them legitimate authority over the lives and property of other people.
One must also [take] into consideration that most of those individuals referred to as “CONGRESSMEN,” that if they can be identified at all by the respondent, are more then likely DEAD or not referred to as “CONGRESSMEN” and [sic] longer. Are petitioners subject to the written will of individuals who are dead?
Just because the petitioners filed so-called “RETURNS” out of fear is no evidence that a legitimate obligation to do so exists. * * *
We believe that, by those statements, Ms. Sluyter intended to
make legal claims, and those claims are entirely without color.
No attorney could reasonably believe that Ms. Sluyter’s “dead
congressmen” claim is more than meritless or the Federal
Government lacks authority to collect income taxes.
Moreover, we believe that Ms. Sluyter made those claims for
delay or other improper purposes. As stated supra in section
III.A.3, it appears to us that petitioners abandoned their return
positions in favor of a strategy, undertaken behind a smokescreen - 42 -
of frivolous and tax-protester arguments, of noncooperation and
delay. Ms. Sluyter abetted that strategy by reiterating and
multiplying those frivolous and tax-protester arguments (see the
discussion infra in sec. III.B.3.b). We believe that there is
ample evidence that Ms. Sluyter conducted this litigation in bad
faith.8
b. Unreasonable and Vexatious Multiplication of Proceedings
In sum, the following actions, among others, lead us to
believe that Ms. Sluyter unreasonably and vexatiously multiplied
the proceedings before the Court:9
Petitioners’ motions for protective order were made on
April 10, 2000, the day Ms. Sluyter entered her appearances. The
motions were signed by Ms. Sluyter. Those motions were made in
response to respondent’s discovery requests. We ordered
respondent to respond and, after considering that response,
denied the motions. In essence, the memoranda that accompany the
motions state that, until respondent proves that he has
8 Rule 201 (a) provides: “Practitioners before the Court shall carry on their practice in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association.” (Model Rules.) Our finding that Ms. Sluyter conducted this litigation in bad faith brings into question her conduct under the Model Rules. See, e.g., Model Rules 3.1, 3.2, and 3.3. 9 In relevant part, the term “vexatious” means to cause or create, or intended to cause or create, vexation or annoyance. The American Heritage Dictionary 1915 (4th ed. 2000). - 43 -
legitimate authority over petitioners’ lives and property, they
should not be required to comply with respondent’s requests for
discovery. We again point out that petitioners filed returns
reporting items of income and deduction. Section 7602(a)(1)
establishes the Secretary’s authority to examine a taxpayer’s
books and records to determine the correctness of any return.
Clearly, Ms. Sluyter knew that when she signed the motion. We
say that because respondent has brought to our attention another
proceeding in which Ms. Sluyter represented tax-protesters
challenging the Commissioner’s summons enforcement action. That
proceeding, Zimmerman v. United States, 85 AFTR 2d 2000-1091;
2000-1 USTC par. 50,295 (E.D. Cal. 2000), involves findings and
recommendations submitted by U.S. Magistrate Judge O’Neill to the
Hon. Anthony W. Ishii, Judge, U.S. District Court for the Eastern
District of California. In his findings and recommendations (all
of which are adverse to the Zimmermans), Magistrate Judge O’Neill
states that, under section 7602(a)(1), to ascertain the
correctness of any return, the “Secretary is authorized to
examine ‘any books, papers, records, or other data which may be
relevant or material’ for IRS inquiry”.10 Id. Moreover,
10 In Zimmerman v. United States, 86 AFTR 2d 2000-7027, 2000-2 USTC par. ___ (E.D. Cal. 2000), Judge Ishii imposed sanctions against Ms. Sluyter under Fed. R. Civ. P. 11 for tax- protester type arguments that she had advanced in the proceeding discussed in the text and in a related, subsequent proceeding. - 44 -
respondent’s right to obtain discovery is established by our
Rules. See Rule 70(a). The motions were groundless, and
Ms. Sluyter had reason to know that; the motions served no
purpose other than to delay these proceedings and annoy the Court
and respondent.
Ms. Sluyter also signed Petitioners’ Objections to
Respondent’s Motion for Judgment on the Pleadings and Supporting
Memorandum. That document makes the unsupported statement that
petitioners have no bona fide political relationship to the
United States and the frivolous argument that there is no
evidence that petitioners “are subject to the written will of
individuals called CONGRESSMEN”. It accompanied Ms. Sluyter’s
affidavit stating: “There is a factual dispute as to the
Petitioners relationship to the United States and the State of
California.” No legitimate factual dispute is raised in the
pleadings or was otherwise before the Court. The response was
unreasonable and contributed to the delay in concluding these
proceedings.
We have detailed the subpoenas signed by Ms. Sluyter.
Respondent moved to quash the subpoenas, and petitioners filed
the response to the motions to quash. Among those subpoenaed was
Charles Rossotti, Commissioner of Internal Revenue. At the trial
session, we denied the motions to quash on the grounds that no
trial was held and the subpoenas were no longer in force. We - 45 -
agree, however, with the principal argument made by respondent in
the motions to quash: viz., the testimony of the subpoenaed
witnesses is irrelevant to the Court’s redetermination of the
deficiencies determined by respondent. The statement in the
response to the motions to quash that the issue before the Court
is whether the IRS and the U.S. Government “have legitimate
authority over the lives and property of the petitioners” is, as
we have discussed, groundless, and served only to unreasonably
protract these proceedings. Moreover, the response contains the
unsupported (and unsupportable) charge that respondent’s counsel
lied about Zimmerman v. United States, supra. The response also
claims, without support: “Each witness has initiated force
against the petitioners.” Such charges can only have been made
to vex or distress respondent, his counsel, and this Court.
From the time Ms. Sluyter entered her appearances in these
cases to the present, she has acted to multiply these proceedings
by actions that are both unreasonable and vexatious. There
remains only the question of the amount of costs we shall require
her to pay.
4. Costs
“Attorney’s fees awarded under section 6673(a)(2) are to be
computed by multiplying the number of excess hours reasonably
expended on the litigation by a reasonable hourly rate. The
product is known as the ‘lodestar’ amount.” Harper v. - 46 -
Commissioner, 99 T.C. at 549. Respondent has submitted
respondent’s memorandum in support of the order to show cause.
In support of respondent’s memorandum, respondent has submitted
the Webb declaration (declaration of Paul K. Webb, respondent’s
counsel). Attached to the Webb declaration are copies of
respondent’s internal time keeping records, reflecting the total
time expended on the consolidated cases by, among others,
attorneys Paul K. Webb, Dale A. Zusi, and Debra K. Moe. Their
total time spent working on the cases is set forth, as well as
their time spent working on the cases since the appearance of Ms.
Sluyter. Since the appearance of Ms. Sluyter, the hours spent
working on the cases by Mr. Webb, Ms. Zusi, and Ms. Moe are
202.75, 17.25, and 13.5, respectively. Respondent asks
reimbursement only for those hours spent by his attorneys on
tasks that would not have been required in the absence of
Ms. Sluyter’s “vexatious actions multiplying these proceedings”
(excess hours).
Respondent asks reimbursement for 56.75 hours of Mr. Webb’s
time, at a rate of $125 an hour. Mr. Webb is the attorney with
day-to-day responsibility for the cases. He is an attorney
employed in respondent’s San Jose, California, District Counsel’s
office. He has been a member of the California State Bar since
1987. He has detailed the time he spent on the cases, which
involved time spent on research, drafting, review of submissions - 47 -
to the Court, and appearances. Based in part on the costs of
living and attorney wages in San Jose, California, respondent
asks reimbursement at a rate of $125 an hour for Mr. Webb’s time.
The hourly rate properly charged for the time of a Government
attorney is the "amount to which attorneys of like skill in the
area would typically be entitled for a given type of work on the
basis of an hourly rate of compensation." Harper v.
Commissioner, 99 T.C. at 551. Petitioners and Ms. Sluyter have
made no response to the order to show cause. We have no reason
to believe that $125 an hour is not a reasonable hourly charge
for Mr. Webb’s time or that 56.75 is not the number of excess
hours Mr. Webb expended on this litigation. We are familiar with
the procedural and factual history of this case and believe that
56.75 hours was reasonably necessary for Mr. Webb to do the work
he described. See United States v. $12,248 U.S. Currency, 957
F.2d 1513, 1520 (9th Cir. 1992). We find that $125 is a
reasonable hourly charge for Mr. Webb’s time and 56.75 is the
number of excess hours he reasonably expended on this litigation.
The lodestar amount for Mr. Webb’s time is $7,093.75.
Respondent asks reimbursement for 10.25 hours of Ms. Zusi’s
time, at a rate of $200 an hour. Ms. Zusi is the abusive trust
coordinating attorney for the Central California District of the
IRS. She has practiced law for more than 15 years, both with
District Counsel and as a trial attorney and Assistant U.S. - 48 -
Attorney with the Department of Justice. Ms. Zusi’s hours were
spent on research, advice, review of submissions in these cases,
and appearances. Also based on local rates of compensation for
attorneys, respondent asks reimbursement at a rate of $200 an
hour for Ms. Zusi’s time. For similar reasons as with respect to
Mr. Webb, we find that $200 is a reasonable hourly charge for Ms.
Zusi’s time and 10.25 is the number of excess hours she
reasonably expended on this litigation. The lodestar amount for
Ms. Zusi’s time is $2,050.
Respondent asks reimbursement for 7.5 hours of Ms. Moe’s
time, at a rate of $200 an hour. Ms. Moe is Mr. Webb’s
supervisor. She is an Assistant District Counsel in respondent’s
San Jose, California, District Counsel’s office. Ms. Moe has
been practicing law since 1982. Also based on local rates of
compensation for attorneys, respondent asks reimbursement at a
rate of $200 an hour for Ms. Moe’s time. For similar reasons as
with respect to Mr. Webb, we find that $200 is a reasonable
hourly charge for Ms. Moe’s time and 7.5 is the number of excess
hours she reasonably expended on this litigation The lodestar
amount for Ms. Moe’s time is $1,500.
The total lodestar amount for the time of Mr. Webb,
Ms. Zusi, and Ms. Moe is $10,643.75. Respondent has not itemized
costs for travel expense, photocopying, or supplies used in
preparing the cases. Respondent limits his request for costs to - 49 -
the total lodestar amount. We shall require Ms. Sluyter to pay
costs in that amount.
We find that $10,643.75 is a reasonable amount for
respondent’s excess attorney’s fees incurred by reason of
Ms. Sluyter’s unreasonable and vexatious multiplication of these
proceedings. Therefore, we shall make the order to show cause
absolute and order Ms. Sluyter personally to pay respondent
$10,643.75 pursuant to section 6673(a)(2), that she make payment
by means of a certified check, cashier’s check, or money order in
favor of the IRS, that such payment be delivered to respondent’s
counsel at the Office of District Counsel in San Jose,
California, not later than 30 days from the date the order is
served, and that respondent report to the Court if such payment
is not timely received.
IV. Conclusion
To reflect the foregoing,
An appropriate order imposing a sanction on Crystal D. Sluyter shall be issued, and other appropriate orders shall be issued.
Related
Cite This Page — Counsel Stack
115 T.C. No. 37, Counsel Stack Legal Research, https://law.counselstack.com/opinion/the-nis-family-trust-v-commissioner-tax-2000.