United States Tax Court

United States Tax Court

T.C. Memo. 2025-57

MICHAEL AUSTIN FRENCH AND DAWN MICHELLE FRENCH,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 20225-23.

Filed June 4, 2025.

__________

Michael Austin French and Dawn Michelle French, pro sese.

Joseph L. Damele, Joy Nnama, Christopher S. Kippes, and Christopher

M. Menczer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GREAVES, Judge: The Internal Revenue Service (IRS or

respondent) determined a tax deficiency of $10,650 with respect to

petitioners Michael and Dawn French’s federal income tax for 2020.

Petitioners contend that wage and interest payments that Mrs. French

received are not income. We decide this issue in respondent’s favor. We

will also require petitioners to pay a penalty under section 6673(a) of

$1,000 to the United States for advancing frivolous positions and

maintaining these proceedings primarily for delay. 1

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

Rule references are to the Tax Court Rules of Practice and Procedure.

Served 06/04/25

2

[*2]

FINDINGS OF FACT

The following facts are drawn from the pleadings, trial testimony,

and documents admitted into evidence at trial, which include the

parties’ stipulation of facts along with the accompanying exhibits.

Petitioners lived in Texas when they filed the petition.

During 2020 Mrs. French worked for Fidelity Workplace

Investing, LLC (Fidelity). Fidelity paid Mrs. French $94,307 in 2020

and issued her Form W–2, Wage and Tax Statement, reporting these

wages and federal income tax withholdings of $11,476, Social Security

tax withholdings of $5,847, and Medicare tax withholdings of $1,367.

Mrs. French also received interest payments in 2020. USAA Federal

Savings Bank (USAA) paid Mrs. French $45 and $2 of interest in 2020,

and issued her two Forms 1099–INT, Interest Income, reporting these

payments with no tax withholding.

Proshares Ultrashort Euro

(Proshares) paid Mrs. French $7 of interest in 2020. Proshares reported

on its Schedule K–1, Partner’s Share of Income, Deductions, Credits,

etc., that it paid Mrs. French $7 of interest. Proshares did not withhold

any tax. Defense Finance and Accounting Service, U.S. Military Retired

Pay (USMRP), paid Mr. French $21,645 2 from a retirement pension.

USMRP issued Mr. French Form 1099–R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., reporting the pension payment and federal income tax

withholding of $1,943.

Petitioners filed a joint Form 1040, U.S. Individual Income Tax

Return, for tax year 2020. Their tax return reported adjusted gross

income consisting only of Mr. French’s retirement pension from USMRP

and $0 taxable income. Petitioners claimed a refund of $23,354, which

included all federal income tax, Social Security tax, and Medicare tax

withheld by Fidelity, as well as all federal income tax withheld by

USMRP. 3 Petitioners also prepared and attached to their tax return

Form 4852, Substitute for Form W–2, Wage and Tax Statement, or Form

1099–R, Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contracts, etc., reporting wages of zero,

2 All dollar amounts are rounded to the nearest dollar.

3 This refund amount also included the federal income tax, Social Security tax,

and Medicare tax withheld from the wages of petitioners’ two dependents, who were

employed at Panda Express, Inc., Brookshire Grocery Co., and Corner Grub House.

3

[*3] federal income tax withholdings of $11,477, 4 Social Security tax

withholdings of $5,847, and Medicare tax withholdings of $1,367. 5

Petitioners failed to report the compensation received from Fidelity and

the interest payments received from USAA and Proshares.

Respondent selected petitioners’ 2020 tax return for audit.

During the course of the audit petitioners submitted a “corrected” Form

1099–INT reporting $0 interest income from USAA. On October 18,

2023, the IRS issued petitioners a notice of deficiency for tax year 2020,

wherein respondent determined a $10,650 deficiency related to the

unreported wage and interest income. 6

Petitioners timely filed a petition with this Court for

redetermination.

Petitioners claimed respondent erred in its

determination of petitioners’ wage and interest income for tax year 2020

and further alleged that respondent did not conduct a good faith inquiry

before issuing a notice of deficiency. Respondent filed an answer and,

as is relevant here, subsequently filed a motion for summary judgment.

The Court held a hearing on October 8, 2024, on respondent’s

motion for summary judgment. Petitioners argued certain employment

activities are exempt from income tax and misconstrued several

Supreme Court and Tax Court decisions when attempting to set forth a

direct tax versus indirect tax constitutional argument. During the

hearing the Court clearly and expressly warned petitioners that their

arguments were frivolous and that if they continued to assert these

arguments the Court may, at its discretion, impose a penalty under

section 6673. The Court denied respondent’s motion and continued the

case to the February 3, 2025, trial session in Dallas, Texas, to allow

petitioners an opportunity to retain counsel. The Court called this case

for trial on February 3, 2025, where petitioners without counsel

continued to present the same frivolous arguments.

4 In the record this amount varies between $11,476 and $11,477 depending on

which exhibit or document is referenced.

5 Petitioners also attached Form 1099–R to their tax return. Petitioners did

not make any corrections to this Form. Mr. French’s retirement pension is not in

dispute.

6 The notice of deficiency included an accuracy-related penalty under section

6662(a) of $4,814. Respondent concedes this penalty in its entirety.

4

OPINION

[*4]

I.

Burden of Proof

The Commissioner’s determinations set forth in a notice of

deficiency are generally presumed correct, and the taxpayer bears the

burden of proving the determinations are in error. See Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933). This case is presumptively

appealable to the U.S. Court of Appeals for the Fifth Circuit absent a

contrary stipulation by the parties. See § 7482(b)(1)(A); Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir.

1971). For the presumption of correctness to attach to the notice of

deficiency in unreported income cases, the Commissioner must establish

some evidentiary foundation connecting the taxpayer with the incomeproducing activity or demonstrating that the taxpayer actually received

unreported income. See Sealy Power, Ltd. v. Commissioner, 46 F.3d 382,

386 (5th Cir. 1995), aff’g in part, rev’g and remanding in part T.C. Memo.

1992-168. If the Commissioner introduces some evidence that the

taxpayer received unreported income, the burden shifts to the taxpayer,

who must establish by a preponderance of the evidence that the

deficiency determination was arbitrary or erroneous. See Portillo v.

Commissioner, 932 F.2d 1128, 1133–34 (5th Cir. 1991), aff’g in part,

rev’g and remanding in part T.C. Memo. 1990-68.

The Commissioner established the requisite evidentiary

foundation to shift the burden of proof to petitioners to show that the

deficiency determination was arbitrary or erroneous. The parties

stipulated that in 2020 (1) Mrs. French worked for Fidelity; (2) Mrs.

French received the payments reported to the IRS on Form W–2 by

Fidelity; and (3) Mrs. French received the interest payments reported to

the IRS on Forms 1099–INT and Schedule K–1. These stipulations are

supported by the information returns provided by Fidelity, USAA, and

Proshares and petitioners’ Wage and Income Transcript submitted by

respondent. Petitioners’ admissions together with the information

returns sufficiently connect petitioners with the income-producing

activities and demonstrate that petitioners received earnings of $94,307,

$47, and $7 from Fidelity, USAA, and Proshares, respectively, during

2020.

II.

Unreported Income

Gross income is broadly defined as “all income from whatever

source derived.” See § 61(a); Commissioner v. Glenshaw Glass Co., 348

5

[*5] U.S. 426, 431 (1955). Gross income includes wages, salaries, and

compensation for services. § 61(a)(1). It also includes interest.

§ 61(a)(4). Petitioners received income in the form of compensation from

Fidelity and interest payments from USAA and Proshares.

Petitioners stipulated that Mrs. French worked for Fidelity

during tax year 2020 and received payments of $94,307. They further

stipulated that they received payments from USAA and Proshares of

$47 and $7, respectively. These stipulations match the amounts listed

on the information returns provided to the IRS by Fidelity, USAA, and

Proshares, respectively. These information returns are attached as

exhibits to the parties’ stipulation of facts.

Despite petitioners’ stipulation that Mrs. French received

payment in exchange for her labor, petitioners argue that it is not

taxable income. Petitioners assert a frivolous argument that a tax on

payment for labor is a direct tax which requires apportionment, while a

tax on compensation for services or wages is an indirect tax. The

Supreme Court has rejected this view. Moore v. United States, 144 S. Ct.

1680, 1687–88 (2024) (“[I]ndirect taxes are the familiar federal taxes

imposed on activities or transactions. . . . Taxes on income—including

taxes on income from property—are indirect taxes that need not be

apportioned.”); see Eisner v. Macomber, 252 U.S. 189, 207 (1920)

(referring to income as “gain derived from capital, from labor, or from

both combined” (quoting Stratton’s Indep. Ltd. v. Howbert, 231 U.S. 399,

415 (1913))).

Petitioners also argue that wage income is taxable only if it is

related to certain activities and that respondent does not have personal

knowledge of Mrs. French’s activities at work. Respondent need not

know exactly what Mrs. French did day to day. The mere fact that Mrs.

French worked for Fidelity and received payment in exchange for her

labor is enough to know that the payments are classified as income

under our tax laws. See § 61(a)(1); Eisner v. Macomber, 252 U.S. at 207.

Accordingly, we find that the $94,307 Fidelity paid Mrs. French is

includible in gross income.

Petitioners also seek redetermination on the interest income.

Petitioners stipulated that they received the interest payments from

USAA and Proshares. They dispute the classification of these payments

as income. The law on this topic is clear. The $47 and $7 interest

payments petitioners received from USAA and Proshares, respectively,

constitute gross income. See § 61(a)(4); Landers v. Commissioner, T.C.

6

[*6] Memo. 2003-300, slip op. at 3 (“As a general rule, interest received

by or credited to the taxpayer constitutes gross income and is fully

taxable.”); Treas. Reg. § 1.61-7(a).

Because petitioners stipulated that they received the payment for

labor and interest income, we sustain respondent’s determination that

those amounts are includible in gross income.

III.

Frivolous Argument Penalty

Section 6673(a)(1) authorizes this Court to impose a penalty not

in excess of $25,000 whenever it appears that (1) the taxpayer has

instituted or maintained proceedings primarily for delay; (2) the

taxpayer’s position is frivolous or groundless; or (3) the taxpayer

unreasonably failed to pursue available administrative remedies. A

taxpayer’s position is frivolous or groundless “if it is contrary to

established law and unsupported by a reasoned, colorable argument for

a change in the law.” See Takaba v. Commissioner, 119 T.C. 285, 294

(2002); Williams v. Commissioner, 114 T.C. 136, 144 (2000).

As discussed above, petitioners’ main argument put forth at trial

is frivolous. Wages, compensation for services, and salaries are income

pursuant to section 61(a). Petitioners attempted to create a false

distinction between various activities conducted within the scope of

employment that generate income. In addition to the baseless

arguments petitioners asserted at trial and during the October 2024

motion hearing, petitioners advanced an alternative theory throughout

the proceedings that the income tax is an excise tax, and they did not

receive income because they were not engaged in any activities which

could have been characterized as the enjoyment or exercise of privileges.

Income tax is not an excise tax. Moore, 144 S. Ct. at 1687 (explaining

that indirect taxes include “duties, imposts, and excise taxes, as well as

income taxes” (emphasis added)).

Given the public policy interest in deterring abuse and waste of

judicial resources, the Court is given considerable latitude in

determining whether to impose a penalty under section 6673 and in

what amount. Smith v. Commissioner, T.C. Memo. 2019-111, at *13,

aff’d, No. 20-70698, 2022 WL 576011 (9th Cir. Feb. 25, 2022); Leyshon

v. Commissioner, T.C. Memo. 2015-104, at *24, aff’d, 649 F. App’x 299

(4th Cir. 2016). As we have found, petitioners’ arguments are frivolous

and have been consistently rejected by courts. Throughout the pretrial

proceedings, petitioners repeatedly asserted these arguments in various

7

[*7] filings, motions, and hearings despite warnings that they risked a

section 6673 penalty. This Court specifically warned petitioners of the

possible imposition of a section 6673 penalty at the motion hearing in

October 2024 and at the start of the February 2025 trial session.

Respondent also put petitioners on notice and cautioned them that their

behavior could warrant a penalty imposed by this Court. Nevertheless,

they repeated the same frivolous arguments and continued to advance

them at trial, wasting the Court’s and respondent’s time and other

resources. As a result, we will require petitioners to pay a section 6673

penalty of $1,000. We warn petitioners that they risk a much more

severe penalty if they advance frivolous positions in any future

appearance before this Court.

To reflect the foregoing,

An appropriate order and decision will be entered.