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Dacey v. C.I.R. T.C. Memo. 1992-187 Tax Court, 1992. 1992 WL 60902
(U.S.Tax Ct.), 63 T.C.M. (CCH) 2584, Unempl.Ins.Rep. (CCH) P 16539A, T.C.M. (RIA) 92,187, 1992 RIA
TC Memo 92,187 DATE: Filed March 30, 1992.
COUNSEL: Norman
F. Dacey, pro se. John
Aletta and Robert E. Marum, for respondent. MEMORANDUM
OPINION CLAPP,
JUDGE: This
case has been submitted to the Court with the facts fully stipulated pursuant to Rule 122. All
section references are to the
Internal Revenue Code for the years in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. Respondent
determined the following deficiencies in and additions to petitioner’s Federal income
taxes:
Additions to Tax
Sec.
Sec.
Sec. Sec. Year Deficiency 6653(a)(1) 6653(a)(2)
6654 6661
1981 $44,455.06 $2,222.75 ---
$3,406.34 --- 1982
7,468.88 373.44
1
727.14 $ 1,867.22 1983
9,462.72 473.14 1
579.05
2,365.68 1984
61,200.79
3,060.04 1
3,847.77
15,300.20 1985
50,016.36
2,500.82 1
2,866.15
12,504.09 After
a concession with respect to section 6661 by respondent, the issues for
decision are: (1)
When petitioner ceased to be a citizen of the United States. We hold that
petitioner renounced his United States citizenship on April 27, 1988. (2)
Whether petitioner is subject to United States income taxes on royalty income
received by him from 1981 through 1985. We hold that he is. (3)
Whether petitioner is subject to self-employment income taxes on royalty income
received by him from 1981 through 1985. We hold that he is. (4)
Whether petitioner is subject to income taxes on one-half of the social
security benefits of $8,839 and $9,150 he received in 1984 and 1985,
respectively, under section 86. We hold that he is. (5)
Whether petitioner is liable for additions to tax under sections 6653(a)(1) and
6654 for tax years 1981 through 1985 and section 6653(a)(2) for tax years 1982
through 1985. We hold that he is. We
incorporate by reference the stipulation of facts and attached exhibits.
Petitioner resided in Ireland at the time he filed his petition. Petitioner
is an author. His book, “How to Avoid Probate!”, originally
published in 1966 with updated versions published in 1980 and 1983, was a best
seller and has sold over 2-1/2 million copies. Petitioner made numerous radio
and television appearances in the United States promoting the book. Petitioner
received royalty income during the tax years 1981, 1982, 1983, 1984, and 1985
of $84,389.32, $22,886.38, $28,082.52, $130,085.32, and $106,510.42,
respectively, on sales of this book. Payments were made by
petitioner’s New York publisher, Crown Publishers, Inc., either to
petitioner at a Connecticut address or to his Connecticut bank account.
Petitioner did not file any Forms 1040 or Forms 1040NR with the Internal
Revenue Service for the tax years 1981 through 1985. Petitioner
was a United States citizen by birth. On May 17, 1980, petitioner applied for a
United States passport, declaring in the application that he was a United
States citizen and the purpose of the trip was a “holiday”. The
application also noted that the trip would last for 2 months, and the countries
to be visited were Ireland, England, and Italy. On the basis of that
application, United States passport number A1 746685 was issued to petitioner
on June 2, 1980. Petitioner left the United States on or about August 15, 1980,
and apparently moved to Ireland. Petitioner
took up residence in Portacarron, Oughterard, in County Galway, Ireland, and
lived there from 1980 until about 1990 when he moved to Bath, Avon, England. He
registered and voted in elections and referenda in Ireland from September 1980
until at least May 1989. Petitioner also registered his car in County Galway,
Ireland, in December 1980, renewing it annually through 1987. On
January 21, 1985, petitioner again applied for a United States passport, this
time through the United States Consulate in Dublin, Ireland. The passport
application again required petitioner to declare that he was a United States
citizen, as well as attest to certain other facts. The additional
representations included that petitioner had not: been naturalized as a citizen of a
foreign state; taken an oath, or made an affirmation or other formal
declaration of allegiance to a foreign state * * * made a formal renunciation
of nationality either in the United States or before a diplomatic or consular
officer of the United States in a foreign state * * * The
application required petitioner to declare that statements made in the
application were “true and complete”. Petitioner signed and
submitted the application on January 21, 1985. Upon that application,
petitioner was issued United States passport number Z5173919 on January 29,
1985. Petitioner’s
passport applications of May 17, 1980 and January, 21, 1985, listed his occupation
as “author” and “writer”, respectively, and
both contained above-quoted representations regarding petitioner’s
United States citizenship status. Petitioner subsequently was issued a passport
by the Republic of Ireland on August 29, 1986. Petitioner
formally renounced his United States citizenship on April 27, 1988. Petitioner
appeared personally before Michael S. Owen, Vice Consul of the United States at
the United States Embassy in Dublin, Ireland, and signed both an Oath of Renunciation
of the Nationality of the United States and a Statement of Understanding. Before
reaching the merits of the case, we first address petitioner’s Motion
for Recusal, filed September 18, 1991. Petitioner alleges that the Judge to
whom this case was assigned acted in a prejudicial manner towards petitioner.
Specifically, petitioner claims that he has been prejudiced by the
Court’s order dated November 7, 1990, setting for hearing
petitioner’s motion to compel certain discovery, and by the
Court’s order dated January 24, 1991, directing the parties to proceed
with the stipulation process with the objective of submitting the case to the
Court under Rule 122. On
September 21, 1988, petitioner timely filed a petition with this Court
requesting a redetermination of the tax determined to be owing by respondent
for tax years 1981 through 1985. The case was set for trial in Hartford,
Connecticut, on March 19, 1990. Petitioner, who was in Ireland at the time,
moved the Court for a continuance for health reasons. The Court granted that
motion, and the case was subsequently recalendared for trial in Hartford,
Connecticut, on November 26, 1990. Petitioner filed five separate motions
before that trial date. Petitioner
moved the Court to compel respondent to agree to certain stipulations and to
grant summary judgment for petitioner; these motions were denied after due
consideration on the merits. Petitioner also moved the Court to continue the
case again, this time citing dissatisfaction with respondent’s answers
to his interrogatories. The Court denied petitioner’s motion to
continue the case because petitioner failed to put forth specific reasons as
required by Rule 91(f). Petitioner then moved the Court to compel respondent to
answer the above-mentioned interrogatories. The Court set this matter for
hearing at the trial session in Hartford, Connecticut, on November 26, 1990.
Finally, petitioner moved the Court to reconsider continuing the case because
health concerns prohibited petitioner from traveling to the United States. The
Court’s order dated November 14, 1990, granted a continuance and
directed each party to propose how the matter could best be brought to
resolution: ORDER Based
on petitioner’s motion filed November 13, 1990, to reconsider denial
of motion for continuance filed October 19, 1990, and the attached certificates
of two different doctors setting forth petitioner’s various health
problems, in which both doctors advise against petitioner’s traveling
at this time, it is ORDERED
that petitioner’s above-referenced motion is granted in that this
Court’s order dated October 29, 1990, denying petitioner’s
motion for continuance is vacated and set aside. It is further ORDERED
that this case is continued from the Court’s November 25, 1990,
Hartford, Connecticut trial session. It is further ORDERED
that jurisdiction of this case is retained by the undersigned. It
is further ORDERED
that petitioner shall file, on or before December 7, 1990, a report with
respect to how he proposes to proceed with this case given the state of his
health, his physical presence outside the United States, and his pro se status
before the Court, bearing in mind that somehow, at some time, this matter must
be concluded. It is further ORDERED
that respondent shall file, on or before December 7, 1990, a report on the
status of his communications with petitioner and any suggestions that
respondent might have as to how this case can proceed to a conclusion. Respondent
indicated that the case was susceptible to submission under Rule 122, while
petitioner requested a separate hearing on the discovery matter in Hartford,
Connecticut, in May 1991. After due consideration of the proposals, the Court
concluded that the case was susceptible to submission under Rule 122 and that,
because of the unusual logistical circumstances, this was the best way to
proceed. The Court’s order dated January 24, 1990, directed the
parties to continue the stipulation process to that end: ORDER Pursuant
to the Court’s order dated November 14, 1990, each of the parties
herein has filed a report with suggestions as to how this case may proceed to a
conclusion. The Court has considered both reports and finds that
petitioner’s suggestions are inadequate in that petitioner merely
suggests that a hearing in this matter be rescheduled at a time and place
convenient to the Court on or about May 1, 1991, which the Court considers to
be an unrealistic suggestion in light of the prior continuances granted to
petitioner for health reasons. The Court considers the suggestions contained in
respondent’s letter to petitioner dated November 30, 1990, to be a
reasonable and rational outline of a course of action which would bring this
matter to a conclusion. It appears to the Court that, given the state of
petitioner’s health, his presence outside the United States, and his
continuing inability to travel to the United States for trial, the only way
this case can be concluded is to have it submitted to the Court as a fully
stipulated case under Rule 122 of the Tax Court Rules of Practice and
Procedure. It appears that the case is susceptible of submission in this
matter. After due consideration, it is ORDERED
that petitioner proceed immediately to respond to respondent’s
proposed stipulation of facts with the ultimate objective of submitting this
case to the Court under Rule 122. It is further ORDERED
that each of the parties shall file, on or before March 22, 1991, a report with
respect to the foregoing. If a complete stipulation of facts is not ready for
submission on or before March 22, 1991, and if the Court determines that this
is the result of either party’s failure to fully cooperate in the
preparation thereof, the Court may order sanctions against the uncooperative
party. The
Court did not force petitioner to adopt or accede to any particular course of
action regarding his case. The Court was simply trying, as it must, to move the
case along and bring the matter to conclusion. No bias or preconceptions about
petitioner or the merits of the case were involved in the Court’s
rulings or handling of the case. The Judge to whom the case was assigned was
not, and is not, biased against petitioner. After consideration,
petitioner’s Motion for Recusal, filed September 18, 1991, is denied. Petitioner
also questioned the propriety of respondent’s notice of deficiency on
several grounds. Petitioner claimed that numerous improperly motivated audits
of his tax returns were performed by respondent, including this one at the
behest of the United States Department of State because of its displeasure with
petitioner’s political views. Petitioner further asserts that
respondent s agents pursued this case as an “act of private
revenge”, disregarded the regulations as well as this Court’s
Rules, and “prepared [the] claim in a careless inaccurate and
inefficient manner.”Generally, this Court will not look behind the statutory
notice of deficiency to examine the propriety of respondent’s motives
or the evidence used or procedures involved in making her determinations. Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). A trial before this Court is a
proceeding de novo to determine a taxpayer’s correct tax liability.
Our findings and holding are based on the merits of the case and not on any
previous record developed at the administrative level. This Court has
recognized a narrow, limited exception to the general rule where there is
substantial evidence of unconstitutional conduct by respondent, and the
integrity of our judicial process would be impugned. Greenberg’s
Express, Inc. v. Commissioner, supra at 327-328. After a review of the
record, we do not find any credible evidence of unconstitutional conduct by
respondent in this case. We also have considered petitioner’s
arguments for review of respondent’s procedures prior to issuing the
notice of deficiency in this case and find them without merit. 1.
LOSS OF UNITED STATES CITIZENSHIP Turning
to the merits of the case, we first address the question of when petitioner
lost his United States citizenship. Loss of United States citizenship is
governed by the Immigration and Nationality Act of 1952, ch. 477, sec.
349(a)(1), (2), and (5), as amended, 8 U.S.C. sec. 1481(a)(1), (2), and (5)
(1988). See sec. 1.1-1(c), Income Tax Regs. Title 8 U.S.C. section 1481(a)
provides that a United States citizen shall lose his or her nationality if he
or she voluntarily performs a statutorily designated expatriating act with the
requisite intention of relinquishing United States citizenship. Vance v.
Terrazas,
444 U.S. 252, 261 (1980). Title 8 U.S.C. section 1481(b) assigns the burden of
proof to the party claiming that the loss has occurred. Of the seven enumerated
acts in 8 U.S.C. section 1481(a), only three have possible application in this
case: (1)
obtaining naturalization in a foreign state upon his own application, or * * * (2)
taking an oath or making affirmation or other formal declaration of allegiance
to a foreign state or * * * *
* * * * * * (5)
making a formal renunciation of nationality before a diplomatic or consular
officer of the United States in a foreign state, in such form as may be
prescribed by the Secretary of State * * * Petitioner,
a United States citizen by birth, asserts that he lost his United States
citizenship under either paragraphs (2) or (5). Although not expressly,
petitioner also seems to make an argument for expatriation under paragraph (1). Petitioner
initially claims that he lost his United States citizenship upon entry into
Ireland in 1980. Petitioner maintains Irish authorities told him he already was
a citizen of Ireland by descent. According to petitioner, both his grandfathers
were born in Ireland; therefore, his parents were Irish citizens and, thus, so
is he. Petitioner asserts that his name was entered into a “Registry
of Foreign Births” at this time but fails to provide any evidence to
this effect. Petitioner
also claims that he lost his United States citizenship by virtue of a letter
dated January 1, 1981, and mailed from Galway, Ireland, on that date to the
United States Department of State. In the letter, petitioner primarily cites
his dissatisfaction with certain aspects of United States foreign policy as the
reason for his “ultimate protest — the renunciation of my
United States citizenship”, which he claims the letter performs. The
State Department has no record of the letter. As
the party claiming loss of United States citizenship, petitioner bears the
burden of proving such loss, 8 U.S.C. section 1481(b), as well as the burden of
proving that respondent’s deficiency determination was incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933). Petitioner has failed to show that
he lost his United States citizenship at any time during the years at issue. No
evidence exists in the record establishing that petitioner obtained
naturalization in Ireland upon his own application or that of an authorized
agent as required by 8 U.S.C. section 1481(a)(1). Nor is there evidence that
petitioner took an oath, made an affirmation, or any other type of formal
declaration of allegiance to Ireland as required by 8 U.S.C. section
1481(a)(2). We need not decide whether petitioner was an Irish citizen by
descent because the expatriating statute requires more than an acknowledgment
of dual citizenship to effectuate loss of United States citizenship. United
States v. Matheson, 532 F.2d 809 (2d Cir. 1976); Jalbuena v. Dulles, 254 F.2d 379 (3d Cir.
1958). Petitioner
presents only an Irish passport issued to him on August 29, 1986, County Galway
automobile registration documents from 1980 through 1987, and a certification
stating that petitioner voted in Irish elections from 1980 through 1989. None
of this evidence establishes that petitioner satisfied the statutory
expatriation requirements. Both the passport, which was issued after the time
period at issue, and the Irish automobile registration are irrelevant to loss
of United States citizenship. In addition, the Supreme Court held in Afroyim v.
Husk, 387 U.S. 253 (1967), that participation in foreign elections is not an
act of expatriation. Thus, petitioner’s arguments under 8 U.S.C.
section 1481(a)(1) and (2) must fail. The
State Department has certified its complete records on petitioner’s
citizenship status, and review of them fails to disclose the letter petitioner
claims to have mailed in 1981. However, even if we were to accept that the letter
was mailed by petitioner from Ireland as petitioner claims and was received by
the State Department in 1981, it would fail to effectuate a loss of
citizenship. The letter is legally insufficient under 8 U.S.C. sec. 1481(a)(5)
(1988), which requires formal renunciation to be “in such form as may
be prescribed by the Secretary of State * * *.” The Secretary did
prescribe forms required to be used by persons renouncing United States
citizenship under paragraph (a)(5), and the letter was not on any such form.
The State Department’s regulations in effect in 1981 required that the
renuncient sign forms containing specific expatriating language and describing
the repercussions of the act. Such forms are the very ones used by petitioner
when he successfully renounced his United States citizenship at the American
Embassy in Dublin, Ireland, in 1988. See 22 C.F.R. sec. 50.50 (1991). This was
not a nominal requirement; expatriation is a serious act that should be
undertaken with a full understanding of the consequences. Moreover, paragraph
(a)(5) requires that when a renunciation occurs in a foreign state, it shall be
made “before a diplomatic or consular officer of the United States * *
* ”. Petitioner simply did not comply with these requirements until
April 27, 1988. Moreover,
when petitioner applied for and received another United States passport in
1985, he expressly represented that he was still a United States citizen and
had not taken actions to renounce that citizenship or obtain nationalization in
a foreign state. Petitioner cannot gain some governmental benefits on the basis
of certain representations and then take a precisely contrary position in order
to avoid tax liability; he is estopped from taking the contrary position. United
States v. Matheson, supra at 819; Rexach v. United States, 390 F.2d 631, 632
(1st Cir. 1968). Therefore, petitioners claim of loss of United States
citizenship prior to 1988 under 8 U.S.C. section 1481(a)(5) also must fail. On
April 27, 1988, petitioner personally appeared at the American Embassy in
Dublin, Ireland. The American consular officer, Michael S. Owen, explained the
seriousness and consequences of renunciation of United States citizenship.
Petitioner was required to and did read the Statement of Understanding in
connection with his desire to expatriate. Petitioner then signed the Statement
of Understanding and the Oath of Renunciation of the Nationality of the United
States, and by doing so, fulfilled the requirements of 8 U.S.C. section 1481(a)(5)
in the manner and form prescribed by the Secretary of State. See 22 C.F.R. sec.
50.50 (1991). We
hold that petitioner lost his United States citizenship on April 27, 1988. He was a United States citizen
until that date. 2.
ROYALTY INCOME As
a citizen of the United States during the years at issue, petitioner is subject to United States Federal
income tax on his worldwide income. Sec. 1; Cook v. Tait, 265 U.S. 47 (1924);
sec 1.1- 1(a)(1) and (c), Income Tax Regs. It is unnecessary to determine
whether that income was from sources within or without the United States since
petitioner is not a nonresident alien. See sec. 861. Petitioner’s
residency status is likewise irrelevant. Petitioner points out that the United
States-Irish Tax Convention exempts from United States taxation certain royalty
income of Irish residents. United States-Ireland Income Tax Treaty, Sept. 13,
1949, art. VIII, par.(1), 2 U.S.T. (Vol. 2) 2303, 2311. The convention,
however, expressly excludes United States citizens from the definition of a
resident of Ireland. Id. at art. II, par. (1)(g), 2 U.S.T. (Vol. 2) 2307. Petitioner’s
royalty income received during the years at issue is includable in his gross
income as a United States citizen. Sec. 61(a)(6). Since no related deductions
were claimed relating to production of that income, those amounts represent
petitioner’s taxable income for those years. Sec. 63(a). Thus, we hold
that petitioner is fully taxable on the royalty income he received during 1981,
1982, 1983, 1984, and 1985 in the amounts of $84,389.32, $22,886.38,
$28,082.52, $130,085.32 and $106,510.42, respectively. 3.
SELF-EMPLOYMENT TAXES We
also must decide whether petitioner is liable for self- employment tax on his
royalty income under sections 1401 and 1402. Petitioner bears the burden of
proof on this issue as he does with all of the remaining issues. With
certain exceptions not relevant here, self-employment income is
definedgenerally as net income from a “trade or business” as
that term is defined in section 62. Sec. 1402(a), (c), and (d); sec.
1.1402(a)-1, Income Tax Regs. It is undisputed that the royalty income
petitioner received arose from writing and updating his book, “How to
Avoid Probate!”. Petitioner’s authorship, updating efforts,
and radio and television appearances were undertaken with a profit objective.
He expended significant personal time and effort in this pursuit. We hold that
petitioner engaged in a trade or business as an author and promoter of his
writings. See Hittleman v. Commissioner, T.C. Memo 1990- 325; Allen v.
Commissioner, T.C. Memo. 1982-93. Payment in the form of royalties in
subsequent years does not alter the trade or business nature of the activity,
nor defeat the fact that the royalties were derived from petitioner’s
self-employment. See Oates v. Commissioner, 18 T.C. 570, 585 (1952), affd.
207 F.2d 711 (7th Cir. 1953). Moreover, the record indicates that an updated
version of petitioner’s book was published during one of the years at
issue. Petitioner
argues that, as a nonresident alien, he is exempt from the tax pursuant to the
parenthetical language of section 1402(b). We have held, however, that
petitioner was a United States citizen for all of the years at issue.
Petitioner also claims that royalty income cannot be self-employment income.
This Court has held to the contrary. Hittleman v. Commissioner, supra; Allen
v. Commissioner, supra. Petitioner
puts forth no other argument, and the record is devoid of any additional
evidence relating to this issue. We hold that petitioner has failed to satisfy
his burden of proof on this issue and is liable for self-employment tax for
1981 through 1985. 4.
TAX ON SOCIAL SECURITY BENEFITS Petitioner
also received social security benefits during 1984 and 1985 of $8,839 and
$9,150, respectively. Section 86 provides that one-half of the social security
benefits received by taxpayers with incomes in excess of certain limits are
subject to income tax. Petitioner’s income for 1984 and 1985 as determined
above exceeds the limits for all filing categories. See sec. 86(c). Petitioner’s
sole argument on this issue is that he believes the social security benefits he
received during 1984 and 1985 were the tax-free “return of premiums he
paid over a 47-year period”. The statute, however, provides for no
such basis accounting. Rather, the law requires inclusion of social security
benefits in gross income where the taxpayer’s income exceeds limits
that are exceeded in this case. Thus, we hold that petitioner is liable for
income taxes on $4,419.50 and $4,575 for 1984 and 1985, respectively. 5.
ADDITIONS TO TAX Last,
we must decide whether petitioner is liable for additions to tax under sections
6653(a)(1) for 1981 through 1985 and section 6653(a)(2) for tax years 1982
through 1985. Negligence has been defined as the lack of due care or failure to
do what a reasonable and ordinarily prudent person would do under the
circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). Liability
for section 6653(a) additions to tax results from a holding that the
underpayment of tax was due to negligence or intentional disregard of the rules
or regulations. Petitioner bears the burden of proof. Bixby v. Commissioner, 58 T.C. 757, 791-792
(1972). Petitioner
wrote a book on the subject of probate in the United States, including
discussion of the related taxes. In addition, he made many radio and television
appearances regarding his book. Authorship in a complex area such as this
implies at least some level of awareness and sophistication of the existence
and importance of tax statutes and regulations governing United States citizens
and their transactions. We believe petitioner was cognizant of the requirement
to attend to tax matters and was capable of acquiring the relevant information
or assistance to properly comply with his tax obligations. Thus, we hold that
petitioner is liable for the additions to tax under section 6653(a). Liability
for section 6654 additions to tax turns on whether a sufficient estimated tax
is paid for each year in issue. This addition is imposed unless petitioner can
show he comes within one of the exceptions set forth in section 6654(e). See
Pring v. Commissioner, T.C. Memo. 1989-340. Since petitioner did not file any returns
or make any payments for the years at issue, and we have held that petitioner
received substantial taxable income during those years, and petitioner has not
shown that any of the exceptions of section 6654(e) apply, we hold that
petitioner is liable for the additions to tax under section 6654. Decision
will be entered under Rule 155. |