The Tax Court in Brief – June 20th – June 24th, 2022

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Tax Litigation: The Week of June 20th, 2022, through June 24th, 2022

Gilmartin v. Comm'r, T.C. Memo. 2022-64 | June 23, 2022 | Vasquez, J. | Dkt. No. 21604-18

Opinion

Short Summary: During the relevant tax periods, David Gilmartin ("Petitioner"), who has a doctorate in economics, worked as an economist for various employers and clients. Petitioner's clients issued him Forms 1099-MISC, and Petitioner's employers issued him Forms W-2. Petitioner also received other information reports, such as: Forms 1099-INT, Form 1099-B, and Forms 1099-R. Petitioner failed to file federal income tax returns for tax years 1989 through 2010.

On June 25, 2012, a grand jury returned an indictment, charging Petitioner with, among other charges, tax evasion under I.R.C. § 7201. Petitioner was ultimately found to be guilty, and the U.S. District Court (S.D. New York) imposed a prison sentence of 4 years, supervised release of 3 years, and restitution of $1,672,399.62. After Petitioner appealed, the U.S. Court of Appeals for the Second Circuit affirmed the conviction on May 10, 2017.

The IRS prepared substitutes for returns (SFRs) on the basis of third-party reporting. The IRS issued a Notice of Deficiency, determining Petitioner was liable for income taxes, self-employment taxes, and additions to tax under I.R.C. §§ 6651(a)(2) and (f) and 6654. Petitioner timely petitioned the U.S. Tax Court and was set for trial. Petitioner made frivolous arguments at trial (that he was not liable for income tax on his wages and compensation). The Commissioner made an oral motion to impose a penalty against Petitioner, pursuant to I.R.C. § 6673(a)(1). Petitioner then filed a 147-page "Simultaneous Opening Brief" that expounded on his frivolous arguments made at trial.

Key Issues:

(1) Whether Petitioner failed to report taxable income for the years at issue;

(2) Whether Petitioner is liable for self-employment tax on nonemployee compensation received during certain tax years;

(3) Whether Petitioner is liable for additions to tax under Section 6651(a)(2) for the years at issue;

(4) Whether Petitioner is liable for additions to tax under Section 6654 for certain tax years; and

(5) Whether the Court should impose a penalty on Petitioner under Section 6673(a)(1).

Primary Holdings:

(1) Petitioner failed to report taxable income for the years at issue;

(2) Petitioner is liable for self-employment tax on nonemployee compensation received during certain tax years;

(3) Petitioner is liable for additions to tax under Section 6651(a)(2) for the years at issue;

(4) Petitioner is liable for additions to tax under Section 6654 for certain tax years; and

(5) Petitioner is liable for a penalty under Section 6673(a)(1).

Key Points of Law:

  • The Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of providing that the Commissioner's determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • A taxpayer's arguments that payments made to him or her for his/her services are not taxable are frivolous and characteristic of rhetoric that has been universally rejected by the U.S. Tax Court and other courts. See Wilcox v. Comm'r, 848 F.2d 1007 (9th Cir. 1988), aff'g C. Memo. 1987-225; Samples v. Comm'r, T.C. Memo. 2009-167.
  • Self-employment income generally consists of the gross income derived by an individual from any trade or business carried on by such individual, less the allowable deductions attributable to such trade or business, during any taxable year. See R.C. § 1402(a), (b).Income received as an independent contractor falls within the definition of "self-employment income." See, e.g., Delgado v. Comm'r, T.C. Memo. 2021-84, at *5.
  • A return prepared by the Commissioner in accordance with Section 6020(b) is treated as the return filed by the taxpayer for the purpose of determining the amount of the addition under Section 6651(a)(2). See R.C. § 6651(g)(2); Wheeler v. Comm'r, 127 T.C. 200, 208–09 (2006).
  • Once the Commissioner has met his burden of production, a taxpayer must prove that his/her failure to timely pay federal income tax was due to reasonable cause and was not due to willful neglect. See R.C. § 6651(a)(2).
  • An addition to tax, pursuant to Section 6654, is calculated with reference to four required installment payments of the taxpayer's estimated tax liability. SeeR.C. § 6654(c), (d).
  • Where a taxpayer filed no return for the current tax year or the immediately preceding tax year, the "required annual payment" is equal to 90% of the tax due for the current year. SeeR.C. § 6654(d)(1)(B).
  • Section 6673(a)(1) authorizes the Tax Court to require a taxpayer to pay a penalty to the United States in an amount not to exceed $25,000 whenever it appears to the Tax Court that the taxpayer instituted or maintained the proceeding primarily for delay or that the taxpayer's position in the proceeding is frivolous or groundless. SeeR.C. § 6673(a)(1).

Insight: Gilmartin is a sobering reminder that a taxpayer's failure to file federal income tax returns can have both criminal and civil consequences. Taxpayers should be wary that asserting certain "tax protester" arguments (e.g., the United States does not have the authority to impose federal income taxes on its citizens) do not ultimately win the day. Such arguments have been made for decades and determined to be frivolous by the Tax Court and other courts. And, though a taxpayer may expound on such protester arguments in a 147-page brief, the Tax Court may, in fact, sanction the taxpayer.

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