UNITED STATES TAX COURT



              VIVIAN L. RADER, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 11409-11, 11476-11,              Filed October 29, 2014.
                  27722-11.



             Ps failed to file returns for 2003-06 and 2008 (years in issue).
      The IRS examining agent, using the bank deposits method and
      information returns issued in connection with payments to P-H or to
      both Ps, reconstructed Ps' income for the years in issue and
      determined tax deficiencies and additions to tax under I.R.C. secs.
      6651(a)(1) and (2) and 6654, which he incorporated on substitutes for
      returns (SFRs) for each P for 2003-06 and an SFR for P-H for 2008.
      The SFRs constituted the basis for the notices of deficiency issued to
      Ps. R filed amendments to answer in docket Nos. 11409-11 and
      11476-11 in which he changed the erroneous selection of "single"
      filing status on the 2003-06 SFRs for each P to "married filing
      separate", thereby increasing the tax deficiencies and additions to tax
      for each of those years, as set forth on attachments to the amendments


      1
       Cases of the following petitioner are consolidated herewith: Steven R.
Rader, docket Nos. 11476-11 and 27722-11.
                                  -2-

to answer. During the trial, the parties stipulated that any and all
deficiencies and additions to tax arising therefrom would be imposed
on P-H alone.

       Among the items of income that Ps received in 2006 were
proceeds from two sales of Colorado real property that were subjected
to 10% withholding by the escrow agent pursuant to I.R.C. sec.
1445(a), which applies to dispositions of U.S. real property interests
by foreign persons and gives rise to a credit under I.R.C. sec. 33. Ps
failed to furnish the payor with a taxpayer identification number or a
certification that Ps were not foreign persons, which would have
exempted them from I.R.C. sec. 1445(a) withholding pursuant to
I.R.C. sec. 1445(b)(2).

       Ps attack the sufficiency of the SFRs, argue that the 2006 tax
deficiency must be offset by the tax withheld under I.R.C. sec.
1445(a), raise a frivolous Fifth Amendment claim against having to
testify at trial concerning their nonfiling of returns for the years in
issue, and contest R's imposition of additions to tax under I.R.C. secs.
6651(a)(1) and (2) and 6654.

      1. Held: P-H is liable for the income tax deficiencies that R
determined for the years in issue and set forth on the SFRs, as revised
by the amendments to answer.

       2. Held, further, P-W is not entitled to a refund of any portion
of the tax withheld from the proceeds of the 2006 real property sales
because the deemed filing date of P-W's refund claim (the Feb. 11,
2011, notice of deficiency mailing date) was more than two years
after the overpayment (deemed to have occurred on the Apr. 15, 2007,
due date of P-W's 2006 return). See I.R.C. secs. 6511(b)(2)(B),
6512(b)(3)(B); Healer v. Commissioner, 

(2000).

      3. Held, further, the amounts withheld from the proceeds of Ps'
2006 sales of real property gave rise to an I.R.C. sec. 33 credit, which,
pursuant to I.R.C. sec. 6211(b)(1), may not be taken into account in
determining P-H's 2006 tax deficiency.
                                       -3-

            4. Held, further, Ps' Fifth Amendment claim is rejected.

              5. Held, further, P-H is liable for the additions to tax under
      I.R.C. secs. 6651(a)(1) and (2) and 6654 except that, because the
      attachments to the amendments to answer did not constitute amended
      SFRs, i.e., they did not set forth amounts "shown as tax on any
      return" within the meaning of I.R.C. sec. 6651(a)(2), the I.R.C. sec.
      6651(a)(2) addition to tax for the years in issue must be based upon
      the tax liabilities shown on the original SFRs, not upon the larger tax
      liabilities set forth in the amendments to answer.

           6. Held, further, P-H is subject to sanction under I.R.C. sec.
      6673(a)(1) for procedures instituted primarily for delay, etc.



      Vivian L. Rader and Steven R. Rader, pro sese.

      Thomas G. Hodel, Matthew A. Houtsma, Luke D. Ortner, and Robert A.

Varra, for respondent.



      HALPERN, Judge: These consolidated cases involve the following

determinations of deficiencies in and additions to petitioners' 2003-06 and

petitioner Steven R. Rader's 2008 Federal income tax:2




      2
        Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and Procedure. We round
all dollar amounts to the nearest dollar.
                                        -4-

                                              Additions to tax
   Year        Deficiency      Sec. 6651(a)(1)    Sec. 6651(a)(2)1    Sec. 6654(a)
   2003         $139,964           $29,804               --                --
   2004          136,414            30,693               --              $3,909
   2005          144,511            32,515               --               5,797
   2006          212,648            47,846               --              10,063
   2008             7,859             1,768            $1,061               253
      1
        With respect to the sec. 6651(a)(2) addition to tax for 2003-06, the notices
of deficiency for those years state: "The amount of the addition to tax cannot be
determined at this time, but an addition to tax of 0.5 percent will be imposed for
each month, or fraction thereof, of nonpayment, up to 25 percent, based on the
liability shown on this report." Respondent included the omitted amounts in his
pretrial memorandum, which the Court received on May 22, 2013, after the
maximum 50-month period for additions to tax under sec. 6651(a)(2) had run its
course for petitioners' 2003-06 tax years. Those amounts were $33,116 for 2003,
$34,104 for 2004, $36,128 for 2005, and $48,909 for 2006. Those same amounts
were included as sec. 6651(a)(2) additions to tax in the 2003-06 substitutes for
returns that respondent prepared pursuant to sec. 6020(b) and which constituted
the basis for the notices of deficiency pertaining to those years. Respondent does
not explain the seemingly contrary statement in the notices that those amounts
could not yet be determined.

      Respondent issued identical notices of deficiency (notices) for 2003-06 to

each petitioner on February 11, 2011, on the grounds that he was unable "to

determine which of the petitioners received the income during * * * [2003-06]"

and he did not want to be "whipsawed" (i.e., lose the case because he attributed the

income to the wrong taxpayer). At the conclusion of the trial, however,

respondent conceded that any tax deficiencies that the Court might determine and
                                          -5-

any additions to tax and penalties, "to the extent that they follow the deficiencies"

that the Court might impose, would be attributed to Mr. Rader, and no tax

deficiencies, additions to tax, or penalties would be attributed to petitioner Vivian

L. Rader. Thus, all tax deficiencies, additions to tax and penalties at issue herein

are directed to Mr. Rader (petitioner).

      In his petitions, petitioner states his intention to "contest" the notices, thus,

in effect, assigning error to respondent's determinations.

      On June 6, 2013, we issued an order granting respondent's motions (1) for

leave to file amendments to answer in docket Nos. 11409-11 and 11476-11, which

involve petitioners' 2003-06 taxable years, and (2) to consolidate for trial, briefing,

and opinion, all three cases. In his amendments to answer, respondent

acknowledged that the notices for 2003-06 erroneously determined the deficiency

amounts and additions to tax on the basis of an assumed "single" filing status for

each petitioner rather than a "married filing separate" filing status (appropriate

because petitioners were married during those years). Correcting for that error, in

his amendments to answer respondent increased his proposed deficiency amounts

and additions to tax for 2003-06 as follows:
                                        -6-

                                              Additions to tax
   Year        Deficiency      Sec. 6651(a)(1)    Sec. 6651(a)(2)    Sec. 6654(a)

   2003         $146,235           $31,215           $34,684              --
   2004          142,828            32,136               35,707         $4,093
   2005          151,072            33,991               37,768          6,060
   2006          219,412            49,368               54,853         10,383

      At the conclusion of the trial, the Court, on its own motion, invoked the

application of section 6673(a)(1), which, as pertinent, empowers the Court to

sanction a taxpayer for instituting or maintaining a proceeding primarily for delay

or for maintaining a frivolous or groundless position.

      Except for the increases in the deficiency amounts and additions to tax,

petitioners bear the burden of proof. See Rule 142(a).3




      3
        Petitioners have not invoked sec. 7491(a), which shifts the burden of proof
to the Commissioner in certain situations. In any event, sec. 7491(a) is
inapplicable herein because petitioners have failed to introduce credible evidence
that respondent's adjustments were in error, see sec. 7491(a)(1), nor have they
shown that they have satisfied the preconditions for its application, see sec.
7491(a)(2). Moreover, the revenue agent's ability to establish that petitioner was a
plumber and made substantial bank deposits during the years in issue, see
discussion infra, satisfied the requirement to establish "some reasonable
foundation" for the deficiency, see, e.g., Erickson v. Commissioner, 

, 1551 (10th Cir. 1991), aff'g T.C. Memo. 1989-552.
                                         -7-

                                FINDINGS OF FACT

      At the time the petitions were filed, petitioners resided in Colorado.

      During the years in issue, petitioner was a self-employed plumber, paid by

his customers for plumbing services he provided to them. Petitioner did not file

Federal income tax returns for the years in issue, and, therefore, he failed to report

any income from his plumbing business or any other income attributable to those

years. One of respondent's revenue agents began an examination of petitioner's

failures to file for the years in issue. After verifying that petitioner had been

issued (1) a plumbing license in 1995, which remained in active status as of

December 31, 2008, and (2) multiple plumbing permits during 2003-06, the

revenue agent acquired and analyzed petitioner's bank records for 2003-06 to

determine deposits that might have represented unreported income. For 2008, he

examined information-return documents filed by customers paying petitioner, as

reported under petitioner's Social Security number, in order to establish his

reportable gross income from his plumbing business for 2008. In reconstructing

petitioner's reportable gross income from his plumbing business for 2003-06, the

examining agent subtracted from the gross deposits listed in the bank statements

loans, transfers, and other amounts that would not constitute income. On the basis

of his bank deposits analysis for 2003-06 and the information returns for 2008,
                                          -8-

respondent concluded that petitioner's income from his plumbing business was

$351,449, $387,714, $420,818, and $577,811 for 2003-06, respectively, and at

least $34,174 for 2008. In addition, respondent determined that petitioner

received additional income in the form of a "title wire transfer" of $137,477 in

2003, a "limited international funds check" of $1,500 in 2004, and "Colorado land

title checks" totaling $66,352 representing the net proceeds from the sale of two

parcels of real property in 2006, all of which he treated as long-term capital gain.

      In connection with the two 2006 payments, the payor withheld and paid to

the IRS $25,000 from one and $2,500 from the other, which represented 10% of

the gross proceeds from the sale of each parcel. The withholdings were made and

reported by the title company as escrow agent (presumably on behalf of the

purchasers) on a Form 8288-A, Statement of Withholding on Dispositions by

Foreign Persons of U.S. Real Property Interests, a form used pursuant to

regulations under section 1445(a). See sec. 1.1445-1(c)(1), Income Tax Regs.

Although petitioners were not foreign persons subject to section 1445, it appears

that the title company felt it necessary to withhold in accordance with that section

because petitioners, as transferors, failed to furnish either a certification of non-

foreign-person status or a taxpayer identification number (TIN), as required by

section 1445(b)(2) and section 1.1445-2(b)(2)(i), Income Tax Regs., for
                                          -9-

exemption from withholding. See also the instructions for Form 8288, U.S.

Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real

Property Interests, to which the Form 8288-A must be attached.

      Petitioners have failed to furnish evidence of entitlement to any deductions

offsetting the foregoing items of income.

      On the basis of his reconstruction of petitioner's income, as aforesaid,

respondent prepared substitutes for returns (SFRs) for the years in issue,

consisting, in each case, of a Form 13496, IRC Section 6020(b) Certification,

signed by the IRS revenue agent who prepared the SFR, a Form 4549-A, Income

Tax Discrepancy Adjustments,4 and a Form 886-A, Explanations of Items. Those

SFRs incorporated the above-described adjustments to income and the tax

liabilities and additions to tax set forth in the notices. Exhibit A attached to

respondent's amendments to answer in docket Nos. 11409-11 and 11476-11, in

order to reflect petitioners' filing status as "married filing separate" (rather than

"single") consists of revised Forms 4549-A and Forms 5278, Statement--Income

Tax Changes, both of which incorporate the increased amounts resulting from that

change in filing status.


      4
        The 2008 SFR included a Form 4549, Income Tax Examination Changes,
rather than a Form 4549-A.
                                        - 10 -

                                     OPINION

I.    Tax Deficiencies

      A.     Introduction

      Petitioners do not directly dispute respondent's adjustments to petitioner's

income during the years in issue as reflected in the SFRs, and, indeed, petitioner's

admission at trial that he earned income from his plumbing business and the

evidence of his real estate sales sufficiently link him to income-producing

activities that support respondent's adjustments. Instead, petitioners attack the

sufficiency of the SFRs on technical grounds and, thus, attack indirectly the

contents thereof. They also allege that the tax deficiency for 2006 must be offset

by the taxes withheld and paid to the IRS on their real estate sales, and they raise a

Fifth Amendment (to the United States Constitution) objection.5




      5
        Petitioners also raise evidentiary objections and continue to argue that the
notice addressed to Mrs. Rader is invalid because she had no income for the years
in issue. The evidentiary objections were overruled at trial and the dispute with
respect to Mrs. Rader's liability is moot because, as 

, respondent
conceded at trial that any deficiences and additions to tax and penalties related
thereto will be attributed solely to petitioner.
                                         - 11 -

      B.     Sufficiency of the SFRs

      Essentially, petitioners argue that the SFRs are invalid because they fail "to

cite a deficiency statute and/or a tax statute from which a deficiency and penalties

could arise." They also cite the fact that the SFRs were not attached to what

petitioners refer to as a "nearly blank SFR 1040" that petitioners believe (from IRS

transcripts) "was filed, processed and posted to" petitioners' account "three years

prior to the dates on the alleged certifications."

      To constitute a section 6020(b) SFR, "the return must be subscribed, it must

contain sufficient information from which to compute the taxpayer's tax liability,

and the return form and any attachments must purport to be a 'return'." Spurlock v.

Commissioner, T.C. Memo. 2003-124, 

, at *10. The SFRs that

respondent filed on petitioners' behalf each consisted of an IRC Section 6020(b)

Certification (Form 13496), the income tax examination changes (either Form

4549-A or Form 4549), and an explanation of the changes (Form 886-A). That

combination of documents is sufficient to constitute a valid SFR under section

6020(b). See Gleason v. Commissioner, T.C. Memo. 2011-154, 

, at *12. There is no requirement that a valid SFR include a Form 1040,

U.S. Individual Income Tax Return, executed on behalf of the taxpayer. See id.;

see also Nix v. Commissioner, T.C. Memo. 2012-304, at *13-*14, aff'd, 553 Fed.
                                        - 12 -

Appx. 960 (11th Cir. 2014); Holloway v. Commissioner, T.C. Memo. 2012-137,

, at *2; sec. 301.6020-1(b)(2), Proced. & Admin. Regs.

Moreover, respondent had the right under section 6020(b) to elect married filing

separately status for petitioners rather than joint filing status. See Smalldridge v.

Commissioner, 

, 127-128 (10th Cir. 1986), aff'g T.C. Memo. 1984-

434; Conovitz v. Commissioner, T.C. Memo. 1980-22, 1980 Tax Ct. Memo

LEXIS 567, at *12.6 In these cases, respondent elected that status by way of

amendments to answer rather than in connection with the preparation of

      6
         The Court of Appeals for the Tenth Circuit in Smalldridge v.
Commissioner, 

, 127-128 (10th Cir. 1986), aff'g T.C. Memo. 1984-
434, held that the Commissioner's election of married filing separately status on an
SFR was binding where, as in that case, the married taxpayers' right to elect joint
filing status had expired pursuant to sec. 6013(b)(2)(B) (now sec. 6013(b)(2)(A)),
which prohibits married taxpayers from electing joint filing status more than three
years after the initial due date of their return. In Millsap v. Commissioner, 

(1988), however, we rejected the court's reasoning in Smalldridge, overruled
or rejected several of our precedents, two of which were cited with approval by the
court in Smalldridge, and held that the sec. 6013(b)(2) limitations on electing joint
filing status are not a bar to married taxpayers' right to elect joint filing status at
any time after the Commissioner's election of married filing separately status in
preparing an SFR for the taxpayers. See Millsap v. Commissioner, 

-
938. Petitioners have not attempted to elect joint filing status. Therefore, Millsap
is inapplicable in these cases. Moreover, even if petitioners had attempted to elect
joint filing status, we would be required to reject the attempt pursuant to Golsen v.
Commissioner, 

(1970), aff'd, 

(10th Cir. 1971), because
of the likelihood that any appeal of these cases would be to the Court of Appeals
for the Tenth Circuit, which decided Smalldridge. See Millsap v. Commissioner,

n.23 ("In accord with our holding in Golsen * * * we will follow
Smalldridge * * * in all cases appealable to the 10th Circuit.").
                                           - 13 -

petitioners' 2003-06 SFRs. The change in filing status resulted in an increase in

the tax deficiencies and additions to tax set forth in the notice for 2003-06.7

        The SFRs executed by respondent pursuant to section 6020(b) were valid

SFRs.

        C.    Petitioners' Right to an Offset

        In their brief, petitioners ask for a finding that "there exists a failure on * * *

[respondent's] part * * * to recognize receipt of a substantial payment from the

closing on the sale of a piece of property." Although it is styled as a request for a

proposed finding of fact, we interpret petitioners' request as their argument that

they are entitled to an offset for the amounts withheld from the proceeds of their

2006 real estate sales and remitted to respondent.

        Respondent acknowledges that $25,000 and $2,500 were withheld from the

proceeds of the two real estate sales, respectively, and that those amounts were

remitted to the IRS Service Center in Philadelphia. After noting the "peculiarities"

of applying a withholding regime directed at foreign sellers of U.S. real property

interests to petitioners, who were Colorado residents, respondent argues that (1)

because "the withholding credit is not a factor in determining a tax deficiency", we

        7
       As discussed infra, because the amendments to answer do not incorporate
corrected or amended SFRs for 2003-06, we must reject respondent's increases in
the sec. 6651(a)(2) addition to tax for those years.
                                       - 14 -

are without jurisdiction to consider it, citing Forrest v. Commissioner, T.C. Memo.

2011-4, 

, discussed infra, and (2) even if Mrs. Rader were entitled

to a credit for the withholding applied to her, we could not treat that withholding

as a refundable overpayment under section 6512(b)(1) because the notice mailing

date, February 11, 2011, which constitutes the deemed filing date of Mrs. Rader's

refund claim for 2006, was more than two years after the overpayment, deemed,

pursuant to section 6513(b)(1), to have occurred on April 15, 2007, the due date of

her 2006 return. See secs. 6512(b)(3)(B), 6511(b)(2)(B); see also Commissioner

v. Lundy, 

, 247-250 (1996); Healer v. Commissioner, 

,

319-323 (2000).

      We agree with respondent that we may not order a refund of the deemed

overpayment to Mrs. Rader for her share of the amount withheld from the

proceeds of the 2006 real estate sales.8 In Lundy, the Supreme Court applied the

two-year lookback (to date of payment) rule of section 6511(b)(2)(B) (rather than

the three-year lookback (to date of return filing) rule of section 6511(b)(2)(A))

under circumstances in which the taxpayer filed a return after issuance of the


      8
        We reject, however, respondent's argument that Mrs. Rader is entitled to no
credit simply because she stated that none of the sales proceeds were hers. The
record indicates that she and petitioner were coowners of the properties, and the
title company issued a Form 8288-A to each of them.
                                       - 15 -

notice of deficiency, and, in Healer, we followed Lundy and rejected the taxpayer's

argument that an SFR constituted a return filed by the taxpayer for purposes of

section 6511. Thus, the 2006 SFR that respondent executed on Mrs. Rader's

behalf on January 21, 2011, did not give her three years from that date in which to

assert a refund claim for 2006 pursuant to section 6511(b)(2)(A).

      We also agree with respondent that we may not offset petitioner's 2006 tax

deficiency by the amount of the withheld taxes, but not for the reasons stated by

respondent.

      In Forrest, the Commissioner sought to increase a taxpayer's deficiency by

the amount of Federal income taxes withheld by the State of California and

claimed as a credit by the taxpayer from a 2005 settlement payment (on account of

the termination of an employment-related lawsuit) that the parties agreed was not

includible in the taxpayer's income until 2006. Thus, the credit for the withheld

taxes claimed by the taxpayer for 2005 constituted an overstated credit. In

considering the Commissioner's claim with respect to the withheld taxes we stated:

      Under section 6211(b)(1) a deficiency is determined "without regard
      to payment on account of estimated tax, without regard to the credit
      under section 31". Section 31 generally allows the taxpayer to claim
      a credit for Federal income tax withheld from wages for that taxable
      year. The amount of an overstated credit may be summarily assessed
      and is not subject to deficiency procedures. * * * [Forrest v.
      Commissioner, 

, at *3.]
                                       - 16 -

We then concluded: "Since the [section 31] withholding credit issue is not a factor

in determining the tax deficiency, we have no jurisdiction to consider it and

therefore may not decide whether petitioner is entitled to a Federal income tax

withholding credit * * * for the 2005 tax year." 

part, section 6211(a), which provides the general definition of a

"deficiency", states:

      SEC. 6211. DEFINITION OF DEFICIENCY.

           (a) In General.--For purposes of this title in the case of income
      * * * taxes imposed by subtitle[] A * * * the term "deficiency" means
      the amount by which the tax imposed by subtitle A * * * exceeds the
      excess of--

               (1) the sum of

                  (A) the amount shown as the tax by the taxpayer upon his
             return, if a return was made by the taxpayer and an amount was
             shown as the tax by the taxpayer thereon, plus

                  (B) the amounts previously assessed (or collected without
             assessment) as a deficiency, over--

             (2) the amount of rebates, as defined in subsection (b)(2),
           made.

      In its entirety, section 6211(b)(1), upon which our decision in Forrest was

based, provides:

          SEC. 6211(b). Rules for Application of Subsection (a).--For
      purposes of this section--
                                        - 17 -

              (1) The tax imposed by subtitle A and the tax shown on
           the return shall both be determined without regard to
           payment on account of estimated tax, without regard to the
           credit under section 31, without regard to the credit under
           section 33, and without regard to any credits resulting from
           the collection of amounts assessed under section 6851 or
           6852 (relating to termination assessments).

      Thus, only the taxes, credits, etc., listed in section 6211(b)(1), i.e., estimated

tax payments, the section 31 and section 33 credits, and "credits resulting from the

collection of amounts assessed under section 6851 or 6852", are to be disregarded

in determining the amount of any deficiency under section 6211(a).

      Petitioners were subjected to income tax withholding under section 1445,

applicable to payments to foreign persons on the sale of U.S. real property

interests. Withholding under section 1445 does not give rise to a section 31 credit.

That is because it does not constitute an "amount withheld as tax under chapter 24

[sections 3401-3406]". See sec. 31(a)(1). In reaching that conclusion, we note

that the withholding from the proceeds of petitioners' 2006 real property sales,

even though prompted, in part, by petitioners' failure to supply the title company

payor with a TIN, did not constitute backup withholding under section 3406

because neither of those sales involved a "reportable payment" under section

3406(b)(1)(A) and (B) and (3). Therefore, Forrest, which involved a section 31

credit, is inapposite and not controlling.
                                         - 18 -

      We conclude, however, that, although the section 1445 withholding herein

was applied to U.S. rather than foreign persons, (i.e., nonresident alien individuals,

see sec. 1.1445-2(b)(2)(i), Income Tax Regs. (flush language)), it gave rise to a

section 33 credit. Therefore, pursuant to section 6211(b)(1), we must disregard it

in determining petitioner's 2006 deficiency.

      Section 33 provides a credit for "the amount of tax withheld at source under

subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and

on foreign corporations)." Subchapter A of chapter 3 encompasses section 1445.

Section 1445(a) generally provides that "in the case of any disposition of a United

States real property interest * * *, the transferee shall * * * withhold a tax equal to

10 percent of the amount realized on the disposition." Section 1445(b) provides a

list of exemptions from the section 1445(a) withholding requirement. Section

1445(b)(2) generally provides such an exemption "if the transferor furnishes to the

transferee an affidavit by the transferor stating, under penalty of perjury, the

transferor's United States * * * [TIN] and that the transferor is not a foreign

person." See also sec. 1.1445-2(b)(2)(i), Income Tax Regs. (to the same effect). It

is clear on the face of the Forms 8288-A issued by the title company payor that it

did not have a TIN for petitioners, and petitioners have failed to demonstrate that

they furnished to the title company either a TIN or the affidavit/certification of
                                         - 19 -

non-foreign-person status required by section 1445(b)(2) and the regulations

thereunder. Moreover, although section 1.1445-2(b)(1), Income Tax Regs., states

that section 1445 and the regulations thereunder "do not impose any obligation

upon a transferee to obtain a certification from the transferor" and that "a

transferee may instead rely upon other means to ascertain the non-foreign status of

the transferor", it appears that the title company was unwilling to pursue that

option and risk becoming liable for the nonwithheld tax pursuant to section

1.1445-1(e), Income Tax Regs., should its ascertainment of non-foreign-person

status prove to be incorrect. See sec. 1.1445-2(b)(1), Income Tax Regs. (last

sentence of first paragraph).

      Thus, rightly or wrongly, the title company payor withheld tax pursuant to

section 1445(a), thereby giving rise to petitioners' right to a section 33 credit.

Because section 6211(b)(1) specifically excludes the section 33 credit from the

deficiency computation, we agree with respondent and hold that the withheld taxes

at issue herein are not to be taken into consideration in determining petitioner's

2006 deficiency.9

      9
        Also exempt from the requirement to withhold under sec. 1445(a) are sales
of U.S. real property interests for $300,000 or less if "the property is acquired by
the transferee for use by him as a residence". See sec. 1445(b)(5); sec. 1.1445-
2(d)(1), Income Tax Regs. Petitioners' 2006 real property sales were for $250,000
                                                                          (continued...)
                                         - 20 -

      D.       Petitioners' Fifth Amendment Objection

      During the trial, petitioner was asked whether he had filed a return for 2003.

Among petitioner's grounds for initially refusing to answer that question was his

invoking of his right, under the Fifth Amendment, not to "be compelled in any

criminal case to be a witness against himself". U.S. Const. amend. V. Mrs. Rader,

who testified as to the issue, attempted to justify petitioner's assertion of a Fifth

Amendment privilege on the ground that the agent assigned to their case appeared

to be connected to the IRS Criminal Investigation Division (CID). Therefore, his

request to examine petitioners' books and records and make a "visual examination"

of petitioners' premises implied "that there was some kind of criminal

investigation going on." We concluded that petitioner had not "shown a well

founded fear of prosecution", overruled his Fifth Amendment claim, and

compelled him to answer the question, whereupon he acknowledged that he had

not filed returns for any of the years in issue.

      On brief, petitioner reiterates his claim of Fifth Amendment protection and,

impliedly, criticizes the Court for rejecting that claim at trial, in what we can only

      9
        (...continued)
and $25,000, respectively. The record is silent regarding the buyers' intended use
of the properties, and we can only assume that the title company payor did not
avail itself of the sec. 1445(b)(5) exemption either because (1) the buyers did not
intend to use the properties as a residence or (2) it was not aware of the exemption.
                                         - 21 -

assume is an effort to have his admissions of nonfiling stricken from the record.

What that would accomplish is a mystery as there is no evidence in the record on

which to base a finding that petitioner did file a return for any of the years in issue,

nor does petitioner claim that he filed a return for any of those years.

      In any event, we hereby affirm our rejection at trial of petitioner's Fifth

Amendment claim. There is no evidence that petitioner was actually under

criminal investigation for any of the years in issue. In order for an individual to

validly claim the privilege against self-incrimination, there must be a "real and

appreciable danger" from "substantial hazards of self incrimination", and the

individual must have "reasonable cause to apprehend (such) danger from a direct

answer to questions posed to him." United States v. Neff, 

, 1239

(9th Cir. 1980) (internal quotation marks and citations omitted); see also United

States v. Schmidt, 

, 1481 (10th Cir. 1987) (stating that the risk of

incrimination resulting from compelled testimony must be "substantial and real,

not merely trifling or imaginary" (internal quotation marks omitted)). Petitioner's

apprehension of criminal liability, upon the basis of an unconfirmed suspicion that

the examining agent was somehow connected with CID, even if genuine, does not,

in the context of a civil audit examination with no actual threat of a criminal

investigation, meet the foregoing standard. "The fifth amendment privilege cannot
                                        - 22 -

be used as a method of evading payment of lawful taxes." Edelson v.

Commissioner, 

, 832 (9th Cir. 1987), aff'g T.C. Memo. 1986-223.

      E.      Conclusion

      Petitioner is liable for the income tax deficiencies that respondent

determined for the years in issue.

II.   Additions to Tax

      A.      Introduction

      Respondent determined that petitioner is liable for additions to tax pursuant

to sections 6651(a)(1) and (2) and 6654. Respondent has the burden of production

with respect to those additions to tax. See sec. 7491(c). To meet that burden,

respondent must produce evidence showing that the additions to tax are

appropriate. See id.; Higbee v. Commissioner, 

, 446 (2001). Once

respondent satisfies that burden, petitioner has the burden of proof with respect to

exculpatory factors such as reasonable cause, see Higbee v. Commissioner, 

, except that respondent bears the overall burden of proof with

respect to his increases in the additions to tax, see Rule 142(a); Arnold v.

Commissioner, T.C. Memo. 2003-259, 

, at *4, i.e., respondent

must prove that there were not exculpatory factors.
                                        - 23 -

      B.      Respondent's Section 6651(a)(1) and (2) and 6654 Determinations

      Section 6651(a)(1) provides for an addition to tax in the event a taxpayer

fails to file a timely return (determined with regard to any extension of time for

filing), unless it is shown that such failure is due to reasonable cause and not due

to willful neglect. The amount of the addition is equal to 5% of the amount

required to be shown as tax on the delinquent return for each month or fraction

thereof during which the return remains delinquent, up to a maximum addition of

25% for returns more than four months delinquent.

      Section 6651(a)(2) provides for an addition to tax for failure to timely pay

"the amount shown as tax on any return specified in paragraph (1)" unless the

taxpayer establishes that the failure was due to reasonable cause and not willful

neglect. The addition is calculated as 0.5% of the amount shown as tax on the

return but not paid, with an additional 0.5% for each month or fraction thereof

during which the failure to pay continues, up to a maximum of 25%. 

of the addition to tax under section 6651(a)(2) reduces the addition to tax

under section 6651(a)(1) for any month for which both additions to tax apply. See

sec. 6651(c)(1). Pursuant to section 6651(g)(2), SFRs prepared by the

Commissioner under section 6020(b) are treated as taxpayer returns for purposes

of determining the addition to tax under section 6651(a)(2).
                                         - 24 -

      Section 6654(a) and (b) provides for an addition to tax in the event of an

underpayment of a required installment of individual estimated tax. Each required

installment of estimated tax is equal to 25% of the "required annual payment",

which, in turn, is equal to the lesser of (1) "90 percent of the tax shown on the

return for the taxable year (or, if no return is filed, 90 percent of the tax for such

year)", or (2) if the individual filed a return for the immediately preceding year,

100% of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). Except in very

limited circumstances not applicable herein, see sec. 6654(e)(3)(B), section 6654

provides no exception for reasonable cause or lack of willful neglect.

      It is undisputed that petitioner failed to (1) file returns, (2) discharge his tax

liabilities, or (3) pay any estimated tax for the years in issue. Thus, respondent has

satisfied his burden of production, under section 7491(c), with respect to his

imposition of additions to tax under sections 6651(a)(1) and (2) and 6654.

      Petitioners offer only meritless arguments against respondent's imposition

of additions to tax; e.g., in opposition to imposition of the section 6651(a)(1)

addition to tax, that nothing "he has read in his research of the law states he is

required to file a return"; that the SFRs were not valid returns "showing an amount

due and unpaid" that could constitute a basis for imposition of the section

6651(a)(2) addition to tax; and that "[n]othing on the * * * [notice] demonstrates
                                         - 25 -

the computation of an 'income' tax upon which * * * [the section 6654] penalty is

based." Petitioner's first argument ignores section 6012(a), pursuant to which he

was required to file returns for the years in issue; his second argument is belied by

the fact that the SFRs meet all of the requirements, 

, for a valid

return; and his third argument is belied by the notices themselves, which do, in

fact, compute income tax deficiencies for the years in issue. We will not

painstakingly further address petitioner's assertions "with somber reasoning and

copious citation of precedent; to do so might suggest that these arguments have

some colorable merit." Crain v. Commissioner, 

, 1417 (5th Cir.

1984); see also Wnuck v. Commissioner, 

, 501-505 (2011).

Moreover, the complete absence of evidence of exculpatory factors and

petitioner's exclusive reliance on frivolous arguments as justification for his

nonfiling of returns and nonpayment of tax supports a finding that respondent has

satisfied his burden of proof to show that no such factors exist, thereby justifying

his increases in the additions to tax.

      We will sustain respondent's imposition of additions to tax under sections

6651(a)(1) and (2) and 6654 for the years in issue. We conclude, however, that

respondent has overstated the addition to tax under section 6651(a)(2) for 2003-06
                                        - 26 -

by the amount of the increases in that addition to tax as set forth in respondent's

amendments to answer.

      As stated supra, section 6651(a)(2) imposes an addition to tax for failure to

timely pay the amount shown as tax on a return, and section 6651(g)(2), in effect,

states that SFRs are to be treated as taxpayer returns for purposes of determining

the section 6651(a)(2) addition to tax. The notice for 2003-06 properly bases the

section 6651(a)(2) additions to tax for 2003-06 on the amounts of tax shown on

the 2003-06 SFRs. Respondent's amendments to answer with respect to

petitioner's 2003-06 tax years, whereby he elects married filing separately filing

status for petitioner, increases both petitioner's tax deficiencies for those years and

the proposed additions to tax, which are based upon the increased tax deficiencies.

All of those increased amounts are computed on attachments to the amendments to

answer, which attachments consist of a new Form 4549-A, a Form 5278, and

computations of the various penalty amounts and of petitioner's self-employment

tax for 2003-06. Respondent has failed to attach to his amendments to answer a

Form 13496 for any of the years covered by the amendments to answer. The Form

13496, in pertinent part, states: "The officer of the IRS identified below,

authorized by Delegation Order 182, certifies the attached pages constitute a valid

return under section 6020(b)." The attachments to the amendments to answer
                                         - 27 -

satisfy one of the requirements of Gleason, Spurluck, and section 301.6020-

1(b)(2), Proced. & Admin. Regs., for a valid return, i.e., that it "contain[] sufficient

information from which to compute * * * [petitioner's] tax liability". However,

without their having been subscribed to or certified by an authorized Internal

Revenue Officer or employee, under those same authorities, the attachments do

not "purport[] to be", and do not constitute, a section 6020(b) return for any of the

2003-06 tax years. Therefore, we sustain the section 6651(a)(2) additions to tax

set forth in the notice for 2003-06 and reject the increases to those amounts set

forth in respondent's amendments to answer.

III.   Section 6673(a)(1) Penalty

       As 

, at the conclusion of the trial the Court, on its own motion,

invoked the application of section 6673(a)(1).

       In pertinent part, section 6673(a)(1) provides a penalty of up to $25,000 if

the taxpayer has instituted or maintained proceedings before the Tax Court

primarily for delay or the taxpayer's position in the proceeding is frivolous or

groundless. "The purpose of section 6673 is to compel taxpayers to think and to

conform their conduct to settled principles before they file returns and litigate."

Takaba v. Commissioner, 

, 295 (2002). "A taxpayer's position is

frivolous if it is contrary to established law and unsupported by a reasoned,
                                        - 28 -

colorable argument for change in the law." Goff v. Commissioner, 

,

237 (2010).

      Petitioner makes no principled defense of his failure to (1) file returns or

pay tax for the years in issue with respect to the substantial earnings from his

plumbing business or (2) report and pay tax on his capital gains from the 2006 real

property sales. Nor would he cooperate with respondent in reconstructing the

income from his plumbing business. Rather, petitioner makes groundless

arguments attacking the SFRs and the notices and makes unwarranted assertions

of Fifth Amendment rights. Petitioner's meritless arguments are frivolous within

the foregoing definition of that term. Moreover, petitioner's testimony during the

trial and arguments on brief are consistent with an intent to delay the collection of

income taxes due and owing. See Winslow v. Commissioner, 

, 276
                                        - 29 -

(2012). On that basis we hereby impose on petitioner a penalty under section

6673(a)(1) of $10,000.10


                                                       Decision will be entered

                                                 for petitioner in docket No.

                                                 11409-11, and appropriate

                                                 decisions will be entered in

                                                 docket Nos. 11476-11 and

                                                 27722-11.




      10
        We acknowledge that petitioner's claim of offset for the taxes withheld
from the proceeds of the 2006 real property sales, although unsustainable, is not
frivolous. That has no bearing upon, and does not justify, however, the frivolous
nature of petitioners' overall position in these cases. After all, the fact that a
broken clock tells the correct time twice each day does not alter the fact that it is
broken.