UNITED STATES TAX COURT

T.C. Memo. 2002-112

UNITED STATES TAX COURT

NEIL T. NORDBROCK, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

EVELYN R. NORDBROCK, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 12755-00, 12756-00.

Filed May 3, 2002.

Neil T. Nordbrock and Evelyn R. Nordbrock, pro sese.

Vicki L. Miller, and Robert M. Fowler, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge:

Respondent determined deficiencies and

additions to tax as follows:

- 2 Docket No. 12755-00--Neil T. Nordbrock

Year

Deficiency

1995

1996

1997

$8,497

8,727

1,581

Additions to Tax/Penalties, I.R.C.

Sec. 6651(a)(1)

Sec. 6654

$1,903

2,182

395

$453

465

85

Docket No. 12756-00--Evelyn R. Nordbrock

Year

Deficiency

1995

1996

1997

$7,860

8,569

1,691

Additions to Tax/Penalties, I.R.C.

Sec. 6651(a)(1)

Sec. 6654

$1,744

2,142

423

$418

456

90

The issues for decision are whether petitioners failed to

report taxable income, whether they are entitled to joint filing

status, and whether they are entitled to deduct business expenses

in excess of those conceded by respondent.

Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect for the years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been deemed stipulated pursuant to

Rule 91(f).

Petitioners resided in Arizona during the years in

issue and at the time that they filed their petitions in these

cases.

Petitioners were married to each other during the years

in issue.

During 1995 and for part of 1996, Evelyn R. Nordbrock

(Ms. Nordbrock) was employed by Alpha Tax Service as a tax return

- 3 preparer.

In 1996, she started a tax preparation business in

which she prepared tax returns for third parties during 1996 and

1997.

During the years in issue, Neil T. Nordbrock

(Mr. Nordbrock) was a self-employed accountant.

During the years in issue, petitioners received the

following items of income:

Source

Wages

(Alpha Tax Service)

1995

$12,694.41

$

1996

1997

778.89

--

Interest income

1,313.00

5,638.00

$5,554.00

Dividend income

15,013.00

–

59.00

Capital gain

10,758.00

–

--

Rental income

6,063.00

370.00

--

Cancellation of

indebtedness

--

1,748.00

--

Pension distribution

--

--

12,376.00

Nonemployee compensation

864.00

908.00

1,583.00

E. Nordbrock tax

preparation

17,911.00

27,728.00

--

N. Nordbrock accounting

21,179.00

14,236.00

9,917.00

Swan business receipts

10,835.28

--

--

Danmarkin Investments/

-Charles Schwab dividend income

6,824.00

--

Olde Discount–dividend

income

3,398.00

--

--

Under Arizona community property laws, one-half of each of the

foregoing items is allocable to each petitioner.

- 4 Beginning long before the years in issue, petitioners were

involved in continuing disputes with the Internal Revenue Service

(IRS).

Petitioners were associated with an organization known as

the American Law Association, which conducted seminars promoting

the creation of foreign trusts for the purpose of decreasing or

avoiding taxes.

In 1978, petitioners established three foreign

business trusts in the Turks and Caicos Islands.

Mr. Nordbrock

was convicted of violating section 7206(1) for filing false

income tax returns for 1981 and 1982.

Mr. and Ms. Nordbrock were

convicted of violating section 7206(1) for filing a false amended

income tax return for 1981.

These convictions were affirmed on

appeal by the Court of Appeals for the Ninth Circuit in United

States v. Nordbrock, 952 F.2d 408 (9th Cir. 1992) (unpublished

opinion).

In 1992, the District Court for the District of

Arizona imposed a lifetime injunction prohibiting Mr. Nordbrock

from preparing tax returns for others.

The lifetime injunction

was affirmed on appeal by the Court of Appeals for the Ninth

Circuit in United States v. Nordbrock, 38 F.3d 440 (9th Cir.

1994).

In October 1992, respondent seized property located on Swan

Road in Tucson, Arizona.

The IRS sent a notice of seizure to

Swan Business Organization as nominee of Mr. Nordbrock on

October 9, 1992.

- 5 In 1994, Mr. Nordbrock commenced a proceeding in bankruptcy.

In that proceeding, his attorney was John J. Standifer, Jr.

(Standifer).

During 1995, checks totaling $3,060.48 were written

to Standifer.

Other checks were written to Standifer and to the

bankruptcy trustee in multiples of $36.50 per month as “payments

to be applied to Mr. Nordbrock’s Chapter 13 Plan”.

On April 25, 1996, the IRS sold the Swan property in order

to enforce a judgment against Mr. Nordbrock for preparer

penalties.

Petitioners commenced litigation challenging the sale

and seeking to set it aside.

That litigation was still pending

at the time of trial in these cases.

For each of the years in issue, petitioners submitted to the

IRS a joint Form 1040, U.S. Individual Income Tax Return.

Next

to their signatures on the form, however, was a reference to

“Note 1”.

Note 1 to each return was a statement as follows:

NOTE 1

This return is not voluntarily submitted, nor is it

signed under penalties of perjury.

It is signed and submitted under duress, coercion, and

the threat of criminal prosecution.

See 319 US 624-1943 WEST VIRGINIA STATE BOARD OF

EDUCATION et al. v. BARNETTE et al.

In the notices of deficiency, respondent determined that

petitioners were taxable on the items of income set forth above,

less certain of the deductions claimed on the Forms 1040

submitted by them.

Respondent disallowed deductions for legal

- 6 expenses, travel expenses, education expenses, meals and

entertainment, and similar unsubstantiated items.

Respondent

also determined that petitioners had other items of income that

respondent has since conceded.

Respondent determined that

petitioners’ Forms 1040 were not valid income tax returns.

Thus

respondent determined the additions to tax in issue and

calculated the deficiencies using rates for married persons

filing separate returns.

In each of the petitions in these cases, filed December 12,

2000, petitioners attached approximately 150 pages of exhibits

purportedly supporting their claims that the notices of

deficiency were a continuation of “harassment, lies, and criminal

fraud” committed by various Federal employees.

Summarizing their

allegations, they claim “in excess of 500 criminal violations

perpetrated against * * * [them] by more than 150 different

federal co-conspirators during the past 17 1/2 years.”

OPINION

Respondent moved to strike from the petition and to dismiss

for lack of jurisdiction the allegations constituting accusations

of criminal conduct.

A hearing on respondent’s motion was held

in Phoenix, Arizona, on March 19, 2001.

granted.

Respondent’s motion was

At that time, Mr. Nordbrock requested that any trial be

postponed for “at least 90 days”.

Petitioners were advised that

- 7 the hearing was only for the purposes of the motion and the trial

had not been set.

By notice served August 24, 2001, the case was set for trial

in Phoenix on January 28, 2002.

Attached to the Notice Setting

Case for Trial was a Standing Pre-Trial Order including, among

other things, the following paragraphs:

Continuances will be granted only in exceptional

circumstances. See Rule 133 (formerly Rule 134), Tax

Court Rules of Practice and Procedure. Even joint

motions for continuance will not routinely be granted.

*

*

*

*

*

*

*

ORDERED that all facts shall be stipulated to the

maximum extent possible. All documentary and written

evidence shall be marked and stipulated in accordance

with Rule 91(b), unless the evidence is to be used to

impeach the credibility of a witness. Objections may

be preserved in the stipulation. If a complete

stipulation of facts is not ready for submission at

trial, 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. Any documents or

materials which a party expects to utilize in the event

of trial (except for impeachment), but which are not

stipulated, shall be identified in writing and

exchanged by the parties at least 15 days before the

first day of the trial session. The Court may refuse

to receive in evidence any document or material not so

stipulated or exchanged, unless otherwise agreed by the

parties or allowed by the Court for good cause shown.

* * *

On December 14, 2001, respondent filed a Motion to Show

Cause Why Proposed Facts in Evidence Should Not Be Accepted as

Established, recounting petitioners’ failure to address

respondent’s proposed stipulation or to respond to respondent’s

- 8 informal and formal discovery.

The motion to show cause also

referred to petitioners’ attempt to secure by formal discovery

the “oaths of office” of respondent’s counsel and of the Chief

Judge and of the judicial officers to whom these cases had been

assigned for hearing on respondent’s motion to dismiss and for

the trial scheduled for January 28, 2002.

On December 17, 2001,

respondent’s Motion to Compel Responses to Respondent’s

Interrogatories and Motion to Compel Production of Documents were

filed.

On December 17, 2001, an Order to Show Cause was issued.

On December 18, 2001, respondent’s discovery motions were

granted.

On December 31, 2001, Respondent’s Status Report was filed.

Respondent’s status report attached a copy of a request for a

90-day continuance served by petitioners but not as of then

received by the Court.

Respondent objected to continuance,

recounting the history of the cases and pointing out that

petitioners’ grounds for continuance were not well taken.

Respondent also referred to petitioners’ continuing failure to

respond to the outstanding discovery.

On January 9, 2002, the Court instituted a conference

telephone call among the parties and the Court to advise

petitioners that their request for a continuance would not be

granted.

The parties also discussed the outstanding discovery

Orders and response to the Order to Show Cause.

The Court

- 9 advised petitioners of the necessity of presenting documentation

that would substantiate the deductions to which they might be

entitled for the 3 years in issue.

Thereafter, the Court

received from petitioners documents demanding production of

copies of subscribed oaths of office; their demands were

untimely, were not relevant to the subject matter involved in the

pending cases, and were not likely to lead to the discovery of

admissible evidence.

On January 14, 2002, petitioners filed a

Motion to Dismiss claiming that neither respondent nor the Court

had “proven jurisdiction” in these cases.

denied.

That motion was

The Court has jurisdiction in these cases as a result of

timely filed petitions from valid notices of deficiency.

6212, 6213, and 6214.

Secs.

After invoking our jurisdiction in a

deficiency case, petitioners may not just change their minds and

decide they do not want to be here.

Stevens v. Commissioner, 709

F.2d 12 (5th Cir. 1983), affg. T.C. Memo. 1982-352; Dorl v.

Commissioner, 57 T.C. 720 (1972), affd. per curium 507 F.2d 406

(2d Cir. 1974); see also sec. 7459(d); Estate of Ming v.

Commissioner, 62 T.C. 519 (1974) (a deficiency case commenced by

a taxpayer cannot be voluntarily dismissed without entry of a

decision on the merits).

On January 16, 2002, Respondent’s Motion in Limine to

Exclude Untimely Identified Witnesses and Untimely Exchanged

Documents was filed.

That motion recounted petitioners’

- 10 continuing failure to provide documents concerning their claimed

deductions other than a few documents that related to expenses

for 1995.

The motion also pointed out petitioners’ failure to

submit a trial memorandum identifying witnesses as required by

the Court’s Standing Pre-Trial Order.

Respondent’s motion was

set for hearing on January 28, 2002.

When the cases were called

for trial on January 28, petitioners filed a Renewal of Motion to

Dismiss, repeating and expanding on scurrilous accusations

against respondent’s counsel and the Court and claiming that the

Court lacked jurisdiction because neither respondent’s counsel

nor the Court would provide copies of their oaths of office to

petitioners.

Petitioners’ motion was denied.

Respondent’s

motion in limine was granted.

The cases proceeded to trial on January 28.

Petitioners

presented neither evidence nor argument that respondent’s

determination of specific items of income was erroneous.

The

facts that were deemed stipulated connected petitioners to items

of income either by specific receipts or by bank deposits into

accounts under the control of petitioners.

See Delaney v.

Commissioner, 743 F.2d 670 (9th Cir. 1984), affg. T.C. Memo.

1982-666; Tokarski v. Commissioner, 87 T.C. 74 (1986).

The

testimony of Mr. Nordbrock and the documents presented for 1995

related to legal and other expenses of filing his personal

bankruptcy, repairs or improvements to petitioners’ home, travel

- 11 expenses, and expenses of attending seminars.

Petitioners bear

the burden of proving that they are entitled to deductions.

See,

e.g., Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975),

affg. T.C. Memo. 1972-133.

It is apparent from the record in this case that petitioners

are not entitled to the benefits of the burden of proof

provisions of section 7491(a).

They have failed to respond to

reasonable requests for information, documents, meetings, and

interviews, and they have failed to comply with Court orders that

they produce documents and answer questions.

They have not

presented any substantiation with respect to deductions for 1996

and 1997.

They have not produced credible evidence on disputed

issues of fact.

In view of their history as tax return

preparers, they should have been familiar with the types of

records required and the legal requirements for deductions.

Instead of substantiating their deductions, they have made

unwarranted accusations against those charged with determining

their tax liability.

Mr. Nordbrock testified only after the Court told him that

he would have to explain the documents that had been produced for

1995 before any deductions could be allowed.

His testimony was

vague and conclusory and marked by failure to remember specific

details on cross-examination.

Ms. Nordbrock declined to testify.

Petitioners contend that the bankruptcy proceedings were

- 12 commenced in an attempt by petitioners to save business property

from seizure by the IRS.

Mr. Nordbrock testified that the only

creditor in the bankruptcy was the IRS, and the debt to the IRS

resulted from $75,000 in preparer penalties.

v. Nordbrock, 38 F.3d 440 (9th Cir. 1994).

See United States

Respondent argues

that these expenses are personal expenses and not deductible

business expenses.

Petitioners have not persuaded us that the

bankruptcy-related expenses were ordinary and necessary business

expenses and have not provided us with a basis for allocating the

fees between personal services and business services.

Petitioners presented copies of checks that were payable to the

attorney who filed the bankruptcy proceeding.

They did not,

however, present any invoices that explained the services

provided by the attorney.

See In re Collins, 26 F.3d 116 (11th

Cir. 1994); Dowd v. Commissioner, 68 T.C. 294, 303-304 (1977).

Some of the payments claimed as deductible were made to the

trustee in bankruptcy.

Those payments relate to the preparer

penalties, inasmuch as petitioner testified that the only

creditor in the bankruptcy was the IRS and that the seizure of

property that he was trying to defeat was for $75,000 in unpaid

preparer penalties that were assessed against him.

the payments is not clear.

The nature of

If the payments were for monthly

fees, as petitioner testified, they suffer from the same

infirmity as the legal fees.

If they were payments on account of

- 13 the penalties and any interest related thereto, they are not

deductible.

(1995).

See Tippin v. Commissioner, 104 T.C. 518, 528-529

In any event, petitioners have failed to prove that the

payments are deductible.

Mr. Nordbrock testified that some of the seminar expenses

and travel expenses were for an investment seminar related to

Ms. Nordbrock’s investments.

Respondent’s theory is that the

seminars attended by petitioners, including travel to those

seminars, related to petitioners’ tax protest activities.

of the exhibits support respondent’s argument.

Some

A payment of $480

claimed as legal and professional fees was, according to

Mr. Nordbrock’s testimony, for authoring a letter to the IRS that

challenged the “true identity and legal affiliation of the entity

known as the Internal Revenue Service”.

In any event,

Mr. Nordbrock was enjoined during the years in issue from

preparing tax returns on behalf of clients.

Ms. Nordbrock did

not testify, although most of the checks received in evidence

were signed by her.

We are not persuaded that the checks

represent payments for deductible business expenses.

Those

expenses relating to investments, to personal taxes, or to

Ms. Nordbrock’s expenses as an employee of Alpha Tax Services

would be deductible, if at all, under section 212 and only to the

extent that the total exceeded 2 percent of petitioners’ adjusted

gross income.

See sec. 67(a).

The amounts identified by

- 14 petitioners for seminars totaled less than $500 and do not meet

that threshold.

The travel expenses claimed by petitioners were

not substantiated as required by section 274(d).

No

contemporaneous documents or other reliable evidence corroborated

the alleged business purpose of the travel.

Petitioners contend that the repairs and maintenance expense

related to an office in their home.

The only evidence on this

issue is Mr. Nordbrock’s uncorroborated and conclusory testimony.

The documentation that was presented consisted of checks without

invoices and credit card charges, and the documentation showed no

allocation between an alleged office in the home and the personal

residential quarters of petitioners.

Petitioners failed to

present reliable or persuasive evidence that would satisfy the

conditions of section 280A(c).

After examination of the documents submitted by petitioners

and petitioners’ testimony, we conclude that any additional

expenses beyond those conceded by respondent are not adequately

substantiated.

There is no excuse for petitioners’ failure to present

substantiating materials during the administrative stages and for

more than a year while these cases were pending.

They

disregarded the Court’s order that they produce documents for

1996 and 1997.

They are familiar with the consequences of

failing to produce documents when required by law or Court order

- 15 to do so.

See United States v. Nordbrock, supra.

They refused

to answer interrogatories asking for identification of items of

disputed income and claimed deductions, notwithstanding a Court

order that they answer the interrogatories.

When their efforts

to delay trial failed, they sought dismissal of the cases.

On

the entire record in these cases, we infer that evidence that

petitioners refused to produce would have been unfavorable to

their claims of error in respondent’s determinations.

See

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946), affd. 162 F.2d 513 (10th Cir. 1947).

The Forms 1040 submitted by petitioners for the years in

issue were not valid tax returns.

114 T.C. 136 (2000).

See Williams v. Commissioner,

to joint return rates.

As a result, petitioners are not entitled

See sec. 6013(b); Thompson v.

Commissioner, 78 T.C. 558, 561-562 (1982).

Based on the

Forms 1040 they submitted, the additions under section 6651(a)(1)

are appropriate.

Williams v. Commissioner, supra.

The section

6654 addition to tax applies absent exceptions not shown to exist

in these cases.

(1980).

Grosshandler v. Commissioner, 75 T.C. 1, 20-21

The tax returns and the transcripts of petitioners’

accounts received in evidence satisfy respondent’s burden of

production with respect to the additions to tax.

- 16 To take account of respondent’s concessions,

Decisions will be entered

under Rule 155.