United States of America v. Nichols et al

Filing 40

ORDER GRANTING IN PART THE UNITED STATES MOTION FOR PARTIAL SUMMARY JUDGMENT. The United States Motion for Partial Summary Judgment ECF No. 31 is GRANTED in part. Signed by Judge Thomas O. Rice. (LLH, Courtroom Deputy)

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

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UNITED STATES OF AMERICA,
NO: 13-CV-0167-TOR
Plaintiff,

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v.

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ORDER GRANTING IN PART THE
UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT

DON O. NICHOLS, et al.,

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Defendants.

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BEFORE THE COURT is the United States’ Motion for Partial Summary

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Judgment (ECF No. 31). This matter was submitted without oral argument. The

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United States is represented by Dylan C. Cerling and Adam D. Strait. Defendants

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Don O. Nichols and Terry A. Nichols are represented by Charles H. Hammer.

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Defendant Last Day Trust has not appeared in this case and an order of default has

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been entered against it. ECF No. 28. The Court has reviewed the record and files

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herein, and is fully informed.

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//

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ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 1

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BACKGROUND
On May 29, 2013, the United States filed its first amended complaint

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seeking: (1) judgment against Defendants Don and Terry Nichols (collectively

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“the Nichols”) for unpaid federal income taxes and civil penalties for the years

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1999, 2001–2009; (2) a determination that real property purchased by the Nichols

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in Reardon, Washington (the “subject property”), had been fraudulently transferred

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to Defendant Last Day Trust; (3) in the alternative, a determination that Last Day

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Trust holds title to the subject property as the nominee or alter ego for the Nichols;

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(4) a determination that the United States has valid tax liens against the Nichols’

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property; and (5) an order foreclosing on the subject property to satisfy the tax

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liens. ECF No. 3.

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The United States has alleged in its complaint that the Nichols filed

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frivolous federal income tax returns for the tax years 1999, 2001–2008. Id. at ¶13–

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17. The Secretary of Treasury has made assessments of federal income taxes,

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penalties, interest, and other statutory additions against the Nichols who have

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neglected or refused to make the requested payments. Id. at ¶ 15–17, 19. The

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Internal Revenue Service (“IRS”) has recorded statutory liens against all property

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and rights to property owned by the Nichols pursuant to 26 U.S.C. § 6321. Id. at

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¶ 19–22.

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ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
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The United States has also alleged that the Nichols purchased the subject

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property on August 17, 1984. Id. at ¶ 33. On December 10, 1998, a Real Estate

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Tax Affidavit was filed with the Spokane County Auditor changing the name on

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the property to “Don Nichols, Trustee of the Last Day Trust.” Id. at ¶ 34. This

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document noted that the change was “a mere change in identity.” Id. On

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December 31, 1998, the Nichols signed a statutory warranty deed purporting to

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convey the subject property to Don Nichols as trustee for the Last Day Trust in

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exchange for consideration in the amount of “zero dollars and no/110ths [sic].” Id.

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at ¶ 35. The United States further alleges that “[d]espite the purported transfers of

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the Subject Property, Defendants Don O. Nichols and Terry A. Nichols continue to

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occupy, possess, exercise dominion and control over, and have use and enjoyment

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of the subject property.” Id. at ¶ 37.

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In response to interrogatories by the United States, the Nichols submitted

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draft 1040X returns and Schedule A forms setting forth the deductions to which the

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Nichols believed they were entitled in the years at issue. ECF No. 32 ¶ 39; 33-42

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at 8; 33-43 at 7. The United States now moves the Court for an order of partial

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summary judgment based upon undisputed facts established in those submissions

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and certified IRS records. ECF No. 31.

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//

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ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
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DISCUSSION
Summary judgment may be granted to a moving party who demonstrates

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“that there is no genuine dispute as to any material fact and that the movant is

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entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The moving party

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bears the initial burden of demonstrating the absence of any genuine issues of

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material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then

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shifts to the non-moving party to identify specific genuine issues of material fact

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which must be decided by a fact-finder. See Anderson v. Liberty Lobby, Inc., 477

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U.S. 242, 256 (1986). “The mere existence of a scintilla of evidence in support of

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the plaintiff’s position will be insufficient; there must be evidence on which the

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jury could reasonably find for the plaintiff.” Id. at 252.

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For purposes of summary judgment, a fact is “material” if it might affect the

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outcome of the suit under the governing law. Id. at 248. A dispute concerning any

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such fact is “genuine” only where the evidence is such that a reasonable jury could

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find in favor of the non-moving party. Id. In ruling upon a summary judgment

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motion, a court must construe the facts, as well as all rational inferences therefrom,

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in the light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372,

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378 (2007). Only evidence which would be admissible at trial may be considered.

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Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002).

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The United States requests the following findings by the Court: (1) the

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Nichols are not entitled to certain deductions, (2) the Nichols are subject to certain

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penalties as well as interest, and (3) Last Day Trust acts wholly as a nominee or

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alter ego for the Nichols. ECF No. 31. The Nichols “do not deny that Last Day

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Trust was operating as a nominee entity,” nor do they object to any of the United

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States’ statements of undisputed fact. No. 38 at 2–4.

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While the Nichols raise no factual objections, they do object to the United

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States motion on grounds that it is premature and maintain that a final tally of the

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Nichols’ tax liability will be established through negotiations. Id. at 2, 3. The

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United States has not requested the Court to determine a final amount of the

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Nichols’ tax liability in the current motion. This motion is not premature because

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the United States is entitled to narrow the field of issues for trial through a motion

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for partial summary judgment. See,e.g., Sebastian Int’l, Inc. v. Russolillo, 151 F.

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Supp. 2d 1215, 1217 (C.D. Cal. 2001) (“A court may grant summary adjudication

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on specific issues without granting summary judgment as to the entire cause of

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action so as to narrow the issues for trial.”); Continental Airlines, Inc. v. Goodyear

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Tire & Rubber Co., 819 F.2d 1519, 1525 (9th Cir. 1987) (approving partial

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summary judgments that narrowed the issues, shortened any subsequent trial by

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months, and efficiently separated the legal from the factual questions). The Court

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therefore considers whether, based upon the undisputed material facts, the United

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States is entitled to summary adjudication on each of the issues identified.

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A. Deductions
Income tax deductions are “a matter of legislative grace and . . . the burden

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of clearly showing the right to the claimed deduction is on the taxpayer.”

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Sparkman v. C.I.R., 509 F.3d 1149, 1159 (9th Cir. 2007) (quoting New Colonial

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Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)); see also Talley Indus. Inc. v.

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C.I.R., 116 F.3d 382, 387 (9th Cir. 1997) (“The taxpayer has the burden to

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demonstrate entitlement to a particular deduction.” (internal quotation marks

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omitted)). “Taxpayers are required to keep sufficient records to substantiate

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deductions.” Sparkman, 509 F.3d at 1159 (citing 26 U.S.C. § 6001; 26 C.F.R.

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§ 1.6001-1(a)). “If evidence to establish a deduction is lacking, the taxpayer, not

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the government, suffers the consequence” and the deduction is not allowed. Talley

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Indus. Inc., 116 F.3d at 387–88.

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1. Charitable Deductions

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In their draft 1040X and Schedule A forms submitted to the United States,

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the Nichols claim certain charitable deductions. The United States contends that

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“the Nichols have not provided sufficient evidence to substantiate the purported

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charitable deductions” and requests the Court to “find the Nichols are not entitled

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to charitable deductions . . . in an amount greater than the receipts they have

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provided” for the years 1999, 2001–2004, and 2007. ECF No. 31 at 9–10. The

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Nichols have not denied the United States’ factual allegations regarding the

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numbers represented on these draft forms nor that the Nichols lack appropriate

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receipts for some of the claimed contributions. See ECF No. 38.

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In general, a taxpayer is allowed to deduct any contributions or gifts made

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to qualifying organizations for their use. See 26 U.S.C. § 170(a). 26 C.F.R.

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§ 1.170A–13(a)(1) requires that charitable contribution deductions, whether made

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by cash or otherwise, be substantiated by at least one of the following:

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(i) A canceled check.
(ii) A receipt from the donee charitable organization showing the name of

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the donee, the date of the contribution, and the amount of the contribution. A letter

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or other communication from the donee charitable organization acknowledging

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receipt of a contribution and showing the date and amount of the contribution

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constitutes a receipt . . . .

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(iii) In the absence of a canceled check or receipt from the donee charitable

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organization, other reliable written records showing the name of the donee, the

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date of contribution, and the amount of the contribution.

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If the donation is a small amount, any written or other evidence from the

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donee charitable organization acknowledging receipt is generally sufficient (e.g.,

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emblem, button, or other token). The reliability of the records is determined on the

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basis of all relevant facts and circumstances. See 26 C.F.R. § 1.170A–13(a)(2)(C).

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To claim a charitable contribution deduction of $250 or more, the taxpayer must

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substantiate the contribution with a contemporaneous written acknowledgment

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from the donee organization. 26 U.S.C. § 170(f)(8); 26 C.F.R. § 1.170A–13(f)(8).

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However, “[s]eparate contributions of less than $250 are not subject to the

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requirements of section 170(f)(8), regardless of whether the sum of the

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contributions made by a taxpayer to a donee organization during a taxable year

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equals $250 or more.” 26 C.F.R. § 1.170A–13(f)(8).

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After reviewing the Nichols’ draft forms and substantiating evidence, the
Court makes the following findings of undisputed fact:
(1) The Nichols’ 1999 draft 1040X return claims deductions for
$710.00 in charitable gifts of cash or check and $245.00 in other
charitable gifts. ECF No. 33-23 at 9. The Nichols have not
provided any evidence substantiating these amounts.

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(2) The 2001 draft 1040X claims deductions for $2,515.00 in gifts of
cash or check and $240.00 in other gifts. ECF No. 33-25 at 11.
The Nichols have substantiated $2,515.00 in gifts of cash or check
to the Lincoln City SDA Church, id. at 8, but have not
substantiated the $240.00 in other charitable gifts.

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(3) The 2002 draft 1040X claims deductions for $2,463.00 in gifts of
cash or check and $235.00 in other gifts. ECF No. 33-27 at 14.
The Nichols have substantiated $1,343.00 in gifts of cash or check
to the Lincoln City SDA Church. Id. at 11. The Nichols have not
substantiated the remaining $1,120.00 in gifts of cash or check nor
the $235.00 in other charitable gifts.
(4) The 2003 draft 1040X claims deductions for $9,159.00 in gifts of
cash or check and $245.00 in other gifts. ECF No. 33-29 at 19.
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The Nichols have substantiated $8,109.00 in gifts of cash or check
to the Spokane Countryside SDA Church. Id. at 7. The Nichols
have not substantiated the remaining $1,050.00 in gifts of cash or
check nor the $245.00 in other gifts.

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(5) The 2004 draft 1040X claims deductions for $5,612.50 in gifts of
cash or check and $248.00 in other gifts. ECF No. 33-31 at 22.
The Nichols have substantiated gifts of cash or check in the
amounts of $123.00 to the Spokane Central SDA Church and
$5,489.50 to the Spokane Countryside SDA Church. Id. at 7–8.
The Nichols have not substantiated the $248.00 in other gifts.

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(6) The 2007 draft 1040X claims deductions for $12,005.00 in gifts of
cash or check and $245.00 in other gifts. ECF No. 33-37 at 20.
The Nichols have substantiated gifts of cash or checks in the
amount of $695.00 to the Gospel Heritage Foundation, $3,539.00
to the Spokane Countryside SDA Church, and $420.00 to the
Linwood Seventh-day Adventist Church. Id. at 11–15. The
Nichols have not substantiated the remaining $7,351.00 in gifts of
cash or check nor the $245 in other gifts.

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Based on the foregoing, the Court concludes, absent additional evidence

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substantiating the claimed deductions, that: (1) the Nichols may not claim any

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deduction for charitable gifts in 1999, (2) the Nichols may claim only $2,515.00 in

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charitable gifts in 2001, (3) the Nichols may claim only $1,343.00 in charitable

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gifts in 2002, (4) the Nichols may claim only $8,109.00 for charitable gifts in

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2003, (5) the Nichols may claim only $5,612.50 for charitable gifts in 2004, and

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(6) the Nichols may claim only $4,654.00 for charitable gifts in 2007. The United

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States is entitled to adjudication on these points as a matter of law.

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2. Real Estate Tax Deductions
The Nichols stated during their depositions that they might be entitled to

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certain real estate tax deductions. ECF Nos. 31 at 10; 33-2 at 16 (discussing how

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long it would take to verify a real estate deduction claim). None of the submitted

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draft 1040X returns or Schedule A forms make claims for deduction of state real

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estate taxes. See ECF Nos. 33-23 at 9; 33-27 at 14; 33-29 at 19; 33-31 at 22; 33-33

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(does not include a Schedule A form listing itemized deductions); 33-35 (does not

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include a Schedule A form); 33-37 at 20. The Nichols have not submitted

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evidence that would substantiate any real estate deductions, nor do they dispute the

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United States’ assertion that “the Nichols do not have evidence of such

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deductions.” ECF No. 38. As such, the Nichols have not carried their burden to

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identify specific genuine issues of material fact on this matter. See Anderson, 477

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U.S. at 256. The United States is entitled to adjudication that the Nichols may not

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claim state real estate tax deductions for the years at issue.

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3. Commuting Expense Deductions
For the years 2003–2007, the Nichols’ submitted Schedule C and Schedule

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C-EZ forms claiming business expense deductions for commuting costs,

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accompanied by handwritten notations detailing commuting mileages. ECF No.

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33-29 at 4, 21 ($6,523.20 deduction claimed in 2003); 33-31 at 9, 19 ($8,411.25

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deduction claimed in 2004); 33-33 at 14, 16 ($3,264.30 deduction claimed in

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2005); 33-35 at 15 ($2,302.74 deduction claimed in 2006); 33-37 at 4–5, 18

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($4,121.88 deduction claimed in 2007). “A taxpayer’s costs of commuting or

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driving to work is not a deductible business expense . . . , but rather is a non-

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deductible personal expense[.]” Sanders v. C.I.R., 439 F.2d 296, 297 (9th Cir.

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1971) (citations omitted). The United States is entitled to adjudication that the

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Nichols may not claim commuting expenses as a business deduction.

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B. Penalties and Interest

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The United States asserts that the Nichols are liable for certain penalties,

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additions, and interest on their tax liabilities. ECF No. 31 at 13–18. Specifically,

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the United States asserts the Nichols are liable for (1) an accuracy-related penalty

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for understating the amount of taxes owing, (2) an addition for failing to make

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estimated payments, (3) an addition for failing to pay taxes assessed, (4) a penalty

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for frivolous returns, and (5) interest on the amounts due. Id. at 13–14.1 The

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Nichols have not responded to these assertions. See ECF No. 38. Nevertheless,

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the burden rests upon the United States to produce evidence with respect to the

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The United States requests the Court to make findings that the Nichols have such

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additional liabilities, but clarifies that a determination of the actual amounts due

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may only be calculated following a final determination of the Nichols’ tax

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liabilities. Id. at 14.

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Nichols’ liability for any penalty, addition to tax, or other additional amount

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imposed by the tax code. 26 U.S.C. § 7491(c).

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1. Accuracy-Related Penalties

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The United States contends that the Nichols are liable for accuracy-related

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penalties for 1999 and 2004. ECF No. 31 at 14. The Nichols have not responded

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to this contention. See ECF No. 38.

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A penalty is assessed upon “[a]ny substantial understatement of income tax.”

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26 U.S.C. § 6662(a), (b)(2). An “understatement” is “the amount of tax required to

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be shown on the return,” minus the actual amount of tax shown on the return.

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§ 6662(d)(2)(A). An understatement is “substantial” if “the amount of the

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understatement for the taxable year exceeds the greater of . . . 10 percent of the tax

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required to be shown on the return . . . or $5,000.” § 6662(d)(1)(A).

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In 1999, the Nichols filed a 1040 return stating that they had zero income,

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accompanied by a letter stating that they “did not earn ‘wages’ or ‘gross income’

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as such terms are defined in the United States tax law.” ECF No. 33-22 at 2–3, 5.

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As such, the Nichols 1040 return indicated they owed no income tax. Id. at 3. The

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draft 1040X amended return submitted by the Nichols shows an adjusted gross

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income for 1999 in the amount of $47,530.62 with an estimated tax liability of

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$2,510.47. ECF No. 33-23 at 7. The IRS has calculated the amount of tax due as

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$5,501.00. ECF No. 33-3 at 3. Under the IRS’s calculation, the Nichols’ 1999

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return understated their tax by more than $5,000 and the Nichols would be liable

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for the penalty. Under the Nichols’ own calculations in the draft 1040X, the return

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filed in 1999 understated their tax liability by $2,510.47 which is more than 10%

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of the tax required to be shown—that is, the $0.00 of tax liability shown on the

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filed return is a 100% understatement of the $2,510.47 tax liability the Nichols

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now contend was owed. Under either calculation, the Nichols are liable for a

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§ 6662 accuracy-related penalty for understating their tax liability in 1999.

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In 2004, the Nichols again filed a 1040 return stating they had zero income,

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accompanied by a similar letter asserting they did not earn wages as defined by the

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U.S. Tax Code. ECF No. 33-30. The Nichols again asserted they owed no income

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tax. Id. at 3. The Nichols’ draft 1040X amended return indicates that they had an

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adjusted gross income of $50,438.87 in 2004 and owed an estimated $10,792.40 in

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tax. ECF No. 33-31 at 17. The IRS has calculated the Nichols’ tax liability as

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$11,622.00. ECF No. 33-7 at 3. Under either calculation, the amount of tax

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indicated in the 2004 return was understated by more than $5,000 or 10% of the

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tax liability required to be shown. The Nichols are subject to an accuracy-related

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penalty under § 6662 for understating their tax liability in 2004.

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Because the Nichols would be liable for an accuracy-related penalty in 1999

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and 2004 based upon the amount of tax liability established by either the Nichols

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or the IRS, the exact amount due is not material for purposes of determining

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whether the penalty applies. The United States is entitled to adjudication that the

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Nichols are liable for § 6662 accuracy-related penalties for substantial

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understatement of income tax in 1999 and 2004. The amount of those penalties

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(20% of the portion of underpayment) will be calculated upon a final determination

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of the Nichols’ actual tax liabilities in those years.

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2. Section 6654 Addition to Tax

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The United States contends that the Nichols are liable for penalties for

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failing to make estimated tax payments in the years 2001–2003, 2005–2007. ECF

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No. 31 at 15–16. The Nichols have not responded to this contention. ECF No. 38.

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The tax code imposes an addition to tax for underpayment of taxes. 26

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U.S.C. § 6654(a); see also Harris v. C.I.R., 104 T.C.M. (CCH) 554 (2012). The

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addition is calculated with respect to four quarterly installment payments on the

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taxpayer’s estimated tax liability. § 6654(a), (c). Each installment is equal to one-

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quarter of the taxpayer’s “required annual payment.” § 6654(d)(1)(A). The

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required annual payment is equal to the lesser of “(i) 90 percent of the income tax

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shown on the return for the taxable year (or, if no return is filed 90 percent of the

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tax for such year), or (ii) 100 percent of the tax shown on the return for the

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preceding taxable year.” § 6654(d). This addition to tax “is mandatory unless the

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taxpayer proves an exception applies.” Harris, 104 T.C.M. (CCH) 554 at *6; see

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also 26 U.S.C. § 6654(e) (exceptions). Federal income tax withholdings from

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wages are generally deemed payments on the estimated tax liability. See 26 U.S.C.

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§ 6654(g).

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The burden rests on the United States to prove the Nichols are liable for an

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addition. 26 U.S.C. § 7491(c). The United States has submitted certified Form

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4340 Certificates of Assessments, Payments, and Other Specified Matters (“Form

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4340”), covering the Nichols’ individual income tax accounts for each of the

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relevant years. These forms are admissible as public records. Hansen v. United

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States, 7 F.3d 137, 138 (9th Cir. 1993) (per curiam). They are also entitled to a

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presumption of correctness, absent evidence to the contrary, and are sufficient to

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establish the United States’ prima facie case that an addition applies. See Hughes

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v. United States, 953 F2d 531, 535 (9th Cir. 1992); United States v. Stonehill, 702

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F.2d 1288, 1293 (9th Cir. 1983) (“The government can usually carry its initial

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burden, however, merely by introducing its assessment of tax due. Normally, a

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presumption of correctness attaches to the assessment, and its introduction

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establishes a prima facie case.”). Following the government’s prima facie

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showing, the burden shifts to the taxpayer to present evidence rebutting the

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correctness of the Form 4340s and establishing that genuine issues of material fact

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exist which warrant denial of a motion for summary judgment. See Hansen, 7 F.3d

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at 138; Stonehill, 702 F.2d at 1294. The Nichols have not disputed the accuracy of

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the Form 4340s nor have they presented contradictory evidence.

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Based upon a review of the certified Form 4340s and the Nichols’ filed
returns, the Court makes the following findings of undisputed fact:
(1) In 2001, the Nichols filed a 1040 return estimating that they had no
tax liability. ECF No. 33-24. That year, the IRS calculated Terry
Nichols’ taxable income as $28,590.00 and assessed an income tax
liability of $4,177.00. ECF Nos. 3 at ¶ 16; 33-4. The Form 4340
indicates no payments or withholding credits for the year. ECF No.
33-4.

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(2) In 2002, the Nichols filed a 1040 form estimating that they had no
taxable income. ECF No. 33-26. The IRS calculated Terry Nichols’
taxable income as $26,537.00 and assessed an income tax liability of
$4,060.00. ECF Nos. 3 at ¶ 16; 33-5. The Form 4340 reflects a
withholding credit of $15.00, but no additional withholdings or
payments. ECF No. 33-5.
(3) In 2003, the Nichols filed a 1040 form estimating that they had no tax
liability. ECF No. 33-28. The IRS calculated Don Nichols’ taxable
income as $49,669.00 and assessed an income tax liability of
$13,839.00. ECF Nos. 3 at ¶ 15; 33-6. The assessment records
indicate no payments or withholding credit for the year. ECF No. 336.

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(4) In 2004, the Nichols filed a 1040 form estimating that they had no tax
liability. ECF No. 33-30. The IRS calculated the Nichols joint
taxable income as $37,151.00 and assessed a tax liability of
$11,622.00. ECF Nos. 3 at ¶ 17; 33-7. The assessment records reflect
a withholding credit of $20.37 but no additional withholdings or
payments. ECF No. 33-7.
(5) In 2005, the Nichols filed a 1040 form estimating that they had no tax
liability. ECF No. 33-32. That year, the IRS calculated Terry
Nichols’ taxable income as $25,639.00 and assessed upon her a tax
liability of $3,479.00. ECF Nos. 3 at ¶ 16; 33-8. The IRS also
calculated Don Nichols’ taxable income as $50,742.00 and assessed a
tax liability upon him of $15,011.00. ECF Nos. 3 at ¶ 15; 33-10. The
assessment records show no withholding credits or payments for the
year for either Terry or Don Nichols. ECF Nos. 33-8; 33-10.
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PARTIAL SUMMARY JUDGMENT ~ 16

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(6) In 2006, the Nichols filed a 1040 form estimating they had no tax
liability. ECF No. 33-34. The IRS calculated Terry Nichols’ taxable
income as $24,738.00 and assessed a tax liability of $5,768.00. ECF
No. 3 at ¶ 16; 33-12. The IRS calculated Don Nichols’ taxable
income as $43,108.00 and assessed a tax liability of $7,339.00. ECF
Nos. 3 at ¶ 15; 33-14. The assessment records show no withholding
credits or payments for Terry Nichols. ECF No. 33-12. The records
show a federal income tax withholding credit in the amount of
$2,972.00 for Don Nichols, but no additional withholding credits or
payments. ECF No. 33-14.
(7) In 2007, the Nichols filed a 1040 form estimating that they had no tax
liability. ECF No. 33-36. The IRS calculated Terry Nichols’ taxable
income as $20,309.00 and assessed a tax liability of $7,076.00. ECF
Nos. 3 at ¶ 16; 33-16. The IRS calculated Don Nichols’ taxable
income as $79,302.00 and assessed a tax liability of $16,707.00. ECF
Nos. 3 at ¶ 15; 33-18. The assessment records show no withholding
credits or payments for Terry Nichols. ECF No. 33-16. The records
show a federal income tax withholding credit in the amount of
$7,188.00 for Don Nichols, but no additional withholding credits or
payments. ECF No. 33-18.

12
13

Based upon the foregoing, the Court concludes that in each of the relevant

14

years the Nichols filed returns showing that they had no estimated tax liabilities.

15

The Nichols did not make any payments on their estimated tax liabilities in these

16

years other than some negligible federal income tax withholdings on wages. The

17

United States argues that the Nichols are liable for an addition on tax because they

18

underpaid the amount of taxes the IRS later assessed. However, the amount that

19

the IRS assessed is irrelevant for the application of an addition under § 6654. The

20

statute requires a taxpayer to pay 90% of the estimated tax shown on the filed

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 17

1

return for that year or 100% of the estimated tax shown on the filed return for the

2

preceding year. 26 U.S.C. § 6654(d)(1)(B). 2
The Nichols are not liable for a § 6654 tax addition because they paid the

3
4

required portion of the estimated tax liability shown on their returns. As the

5

Nichols filed “zero returns” their required annual payment on estimated taxes for

6

each of the relevant years is $0.00, based upon the lesser of either 90% of the $0.00

7

liability shown on that year’s return or 100% of the $0.00 liability shown on the

8

previous year’s return. See Linmar Prop. Mgmt. Trust v. C.I.R., 96 T.C.M. (CCH)

9

176 at *12 (2008). For example, in 2002, the Nichols’ required annual payment

10

under § 6654(d)(1)(B) was the lesser of 90% of the $0.00 tax liability shown on

11

their 2002 return or 100% of the $0.00 tax liability shown on their 2001 return.

12

ECF Nos. 33-24; 33-26. The Nichols cannot underpay on the estimated null tax

13

liabilities shown on each return filed. They are therefore not subject to an addition

14
15
2

16

Only where a taxpayer has failed to file a return does the addition apply to the

17

failure to pay 90% of the assessed tax for a given year. See 26 U.S.C.

18

§ 6654(d)(1)(B) (. . .or, if no return is filed, 90 percent of the tax for such

19

year . . . .”). The Nichols did not fail to file returns in the relevant years. Thus,

20

this provision does not apply.

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 18

1

under § 6654. The United States is not entitled to summary adjudication on this

2

issue.

3

3. Section 6651 Additions to Tax

4

The United States contends that the Nichols are liable for additions to their

5

tax for failing to “promptly pay their tax liabilities for any of the following tax

6

years: 1999, 2001–2007.” ECF No. 31 at 16. The Nichols have not responded to

7

this contention. See ECF No. 38.

8

The tax code imposes an addition to tax for failure “to pay the amount

9

shown as tax on any return” or “to pay any amount in respect to any tax required to

10

be shown on a return . . . which is not so shown (including an assessment made . . .

11

within 21 calendar days from the date of notice and demand therefor) . . . .” 26

12

U.S.C. § 6651(a)(2), (3).3 The initial burden rests on the United States to produce

13

evidence indicating that the taxpayer failed to make the required payments. 26

14

U.S.C. § 7491(c); Wheeler v. C.I.R., 127 T.C. 200, 207–08 (2006). The burden

15

then shifts to the taxpayer to produce evidence that the failure was due to

16
3

17

The addition to tax for such a failure to pay is “0.5 percent of the amount of such

18

tax if the failure is for not more than 1 month, with an additional 0.5 percent for

19

each additional month or fraction thereof during which such failure continues, not

20

exceeding 25 percent in the aggregate.” § 6651(a)(2), (3).

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 19

1

reasonable cause and not due to willful neglect. 26 U.S.C. § 6651(a)(2), (3);

2

Wheeler, 127 T.C. at 208.

3

In addition to the findings of undisputed fact described in the preceding

4

section, the Court finds undisputed that in 1999 the Nichols filed a 1040 return

5

estimating that they had no tax liability. ECF No. 33-22. The IRS calculated the

6

Nichols’ taxable income as $36,667.00 and assessed an income tax liability of

7

$5,501.00. ECF Nos. 3 at ¶ 17; 33-3. The assessment reflects a withholding credit

8

of $515.53, but no additional withholdings or payments. ECF No. 33-3.

9

The Court further finds undisputed that the IRS provided the Nichols with

10

notice and demand of the assessed tax liability for each of the relevant years.

11

“[W]hen a deficiency exists, the Commissioner must issue a notice of deficiency

12

and wait 90 days before assessing the tax.” Jordan v. C.I.R., 102 T.C.M. (CCH)

13

386 at *2 (2011); see also 26 U.S.C. §§ 6212(a), 6213(a). Absent evidence to the

14

contrary, the United States may rely upon Form 4340 records to verify that notice

15

and demand were provided. See Jordan, 102 T.C.M. (CCH) 386 at *3 (“If the

16

taxpayer does not offer any evidence to show an irregularity, the IRS may rely on

17

computerized records, including the Form 4340, to verify that the notice of

18

deficiency was sent and the tax properly assessed.”). An entry on each of the

19

Nichols’ yearly assessment record reflects that the additional tax was assessed only

20

after default on the statutory 90 day demand letter. ECF Nos. 33-3 at 3 (1999); 33-

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 20

1

4 at 3 (2001); 33-5 at 3 (2002); 33-6 at 3 (2003); 33-7 at 6 (2004); 4 33-8 at 3 (2005

2

for Terry Nichols); 33-10 at 3 (2005 for Don Nichols); 33-12 (2006 for Terry

3

Nichols); 33-14 at 4 (2006 for Don Nichols); 33-16 at 3 (2007 for Terry Nichols);

4

33-18 at 3 (2007 for Don Nichols). These entries are sufficient to establish that the

5

Nichols were provided with notice of their deficiencies and demand for payment.

6

See Jordan, 102 T.C.M. (CCH) 386 at *3. Moreover, the Nichols do not dispute

7

that they were provided with notice and demand to pay the liabilities assessed by

8

the IRS. See ECF No. 38.

9

Finally, the Court finds, based upon the review of the Form 4340s, that the

10

Nichols did not make any payments on the tax liabilities assessed by the IRS

11

following the notice and demand thereof for any of the relevant years. See ECF

12

Nos. 33-3; 33-4; 33-5; 33-6; 33-7; 33-8; 33-10; 33-12; 33-14; 33-16; 33-18. The

13

Nichols have not disputed or presented evidencing contradicting this failure to

14

make payments. As such, the Court concludes that the United States is entitled to

15

adjudication that the Nichols are liable for additions to taxes in the years 1999,

16
17
4

18

The 2004 Form 4340 does not contain the same entry as the other records, but it

19

does indicate that the “Statutory Notice of Balance Due” was provided. ECF No.

20

33-7 at 6.

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 21

1

2001–2007 for failing to pay the amount required by the IRS assessments after

2

notice and demand thereof, pursuant to 26 U.S.C. § 6651(a)(3).5
4. Frivolous Return Penalties

3
4

The United States contends that the Nichols are liable for penalties

5

associated with submitting frivolous returns in the years 2005–2008. ECF No. 31

6

at 17. The Nichols have not responded to this contention. See ECF No. 38.

7

The tax code imposes a civil penalty of $5,000 upon any person who (1)

8

“files what purports to be a return of a tax imposed by this title but which” (2)

9

contains insufficient information on which the substantial correctness of a return

10

can be assessed or information that is on its face “substantially incorrect,” and (3)

11

the filing “is based on a position which the Secretary has identified as frivolous” or

12

“reflects a desire to delay or impede the administration of Federal tax laws.” 26

13

U.S.C. § 6702(a); see also O’Brien v. C.I.R., 104 T.C.M. (CCH) 620 at *4 (2012).

14

The statute grants the Secretary authority to prescribe a list of positions identified

15

as frivolous. § 6702(c).

16
5

17

The Court does not conclude that the Nichols are liable for additions pursuant to

18

26 U.S.C. § 6651(a)(2). The Nichols’ filed returns showed no tax liability and the

19

Nichols could not therefore fail to pay the liability shown on their returns, i.e. zero.

20

Cf. Linmar Prop. Mgmt. Trust, 96 T.C.M. (CCH) 176 at *12.

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 22

1
2
3

The Court makes the following findings of undisputed fact:
(1) The Nichols filed documents annually from 2005–2008 purporting to
be tax returns and asserting that the Nichols had received taxable
income as defined by the United States tax code. ECF Nos. 33-32
(2005); 33-34 (2006); 33-36 (2007); 33-38 (2008).

4
5
6
7
8
9
10

(2) In 2005, the Nichols reported no income. ECF No. 33-32.
Documents filed with the IRS by third-parties indicate that Don
Nichols received $27,300.00 in nonemployee compensation from
Bethlehem Construction, Inc., and that Terry Nichols received
$33,839.63 in wages from North Central Care Center. ECF No. 33-33
at 7–8.
(3) In 2006, the Nichols reported no income. ECF No. 33-34.
Documents filed with the IRS by third-parties indicate that Don
Nichols received $51,558.16 in wages from Executive Flight, Inc.,
and that Terry Nichols received $17,158.99 in wages and $17,249.00
in nonemployee compensation from North Central Care Center. ECF
No. 33-35 7–9.

11
12
13

(4) In 2007, the Nichols reported no income. ECF No. 33-36. Documents
filed with the IRS by third-parties indicate Don Nichols received
$88,052.61 in wages from Executive Flight, Inc., and that Terry
Nichols received $31,268.71 in nonemployee compensation from
North Central Care Center. ECF No. 33-37 at 9–10.

14
15
16
17
18

(5) In 2008, the Nichols reported no income. ECF No. 33-38.
Documents filed with the IRS by third-parties indicate that Don
Nichols received $109,873.11 in wages from Executive Flight, Inc.,
and that Terry Nichols received $7,931.95 in nonemployee
compensation from North Central Care Center. ECF No. 33-39 at 8–
9.
These undisputed facts establish that the Nichols’ returns from 2004–2008

19

lacked information on which the substantial correctness of the return could be

20

judged and, in fact, contained information that was substantially incorrect. See

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 23

1

O’Brien, 104 T.C.M. (CCH) 620 at *5 (“RPS reported on the original Form W–2

2

that it was petitioner's employer and that it had withheld certain taxes on her

3

wages. On her Form 1040X petitioner claimed that she received no wages while

4

admitting that income tax was withheld from the amounts paid to her by RPS. By

5

reason of the above, petitioner's Form 1040X was substantially incorrect on its

6

face. Furthermore, the Form 1040X did not contain information on which the

7

substantial correctness of petitioner's reported tax liability could be evaluated.”).

8

Further, the IRS “has identified as frivolous a position that wages or other

9

compensation received are not taxable income.” Id.; see also Notice 2008-14,

10

2008-1 C.B. 310 (January 28, 2008); Notice 2007-30, 2007-1 C.B. 883 (April 2,

11

2007); Rev. Rul. 2004-34 (March 22, 2004). “A return that reports taxable income

12

and tax of zero is frivolous in circumstances where a third-party payor has reported

13

on an information return that the taxpayer had income and that income tax was

14

withheld on that income.” O’Brien, 104 T.C.M. (CCH) 620 at *5. The Nichols

15

attached to each return a document indicating they had not received wages as

16

defined by the tax code, but third-party payor documents indicated that the Nichols

17

did, in fact, receive wages or compensation each year. The Nichols’ position in

18

each tax year was frivolous.

19
20

The Court concludes that (1) the Nichols filed what purported to be a tax
return each year from 2004–2008, (2) the Nichols’ returns contained insufficient

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 24

1

information and information that was on its face substantially incorrect, and (3) the

2

Nichols’ position in filing these “zero returns” had been identified as frivolous by

3

the IRS at the time of each filing. The United States is entitled to adjudication that

4

the Nichols are liable for a $5,000 penalty pursuant to 26 U.S.C. § 6702(a) for the

5

years 2004–2008.

6
7

5. Interest
Finally, the United States requests the Court to rule that “the Nichols are

8

liable for statutory interest upon all of their liabilities for assessed taxes and

9

penalties.” ECF No. 31 at 18. The Nichols have not responded to this contention.

10
11

See ECF No. 38.
The tax code imposes interest upon any amount of tax not paid on or before

12

the last date prescribed for payment. 26 U.S.C. § 6601(a). The tax code also

13

imposes interest upon “any assessable penalty, additional amount, or addition to

14

the tax” if that amount is not paid within twenty-one days of notice and demand

15

thereof and running from the date of notice and demand. § 6601(e)(2)(A). Interest

16

under § 6601(e)(2)(A) is mandatory. Purcell v. United States, 1 F.3d 932, 943 (9th

17

Cir. 1993). The United States is entitled to adjudication that interest applies to the

18

Nichols’ tax liabilities, including penalties and additions. However, the United

19

States must establish the dates of notice and demand, and the proper accounting of

20

interest, before the Court can grant judgment on the matter. See id. (concluding

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 25

1

that the date of notice and demand is a factual matter that must be determined by

2

the trier of fact).

3

C. Status of Last Day Trust

4

The United States contends that Last Day Trust was a nominee entity for the

5

Nichols. ECF No. 31 at 20. The Nichols have conceded this point. ECF No. 38 at

6

2. Accordingly, the United States is entitled to adjudication that Last Day Trust is

7

a nominee entity for the Nichols.

8

ACCORDINGLY, IT IS HEREBY ORDERED:

9

1. The United States’ Motion for Partial Summary Judgment (ECF No. 31) is

10

GRANTED in part as discussed herein.

11

The District Court Executive is hereby directed to enter this Order, provide

12

copies to counsel, and mail a copy to the address of record for Defendant Last Day

13

Trust.

14

DATED May 28, 2015.

15
16

THOMAS O. RICE
United States District Judge

17
18
19
20

ORDER GRANTING IN PART THE UNITED STATES’ MOTION FOR
PARTIAL SUMMARY JUDGMENT ~ 26