On March 28, 2022, the Tax Court issued a Memorandum Opinion in the case of Addis v. Commissioner (T.C. Memo. 2022-24). The primary issue presented in Addis v. Commissioner was whether the frivolous taxpayer’s CDP rights had been violated.
Held: Not quite, Jonah.
Mr. Addis’s 2014 Tax Reporting
On March 17, 2017, Jonah Addis filed a delinquent tax return for his 2014 tax year, reporting zero dollars of income and a refund due of approximately $3,000. In support of his return, he submitted Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for various employers (Navigant Consulting, Inc., Click Click Boom LLC, Treliant Risk Advisors, Clayton Support Services, and Francis David Corp.), on which he reported no income. Mr. Addis also submitted Form 8888, Allocation of Refund (Including Savings Bond Purchases), on which he claimed a larger refund amount ($8,000).
IRS Assessment of Penalty and Notice of Intent to Levy in Addis v. Commissioner
Despite Mr. Addis’s representations, third-party reporting received by the IRS showed that Mr. Addis received income of nearly $43,000 in 2014. The IRS thereafter sent Mr. Addis a letter stating that his 2014 return claimed one or more frivolous positions and that he would be assessed a $5,000 penalty under IRC § 6702 if he did not immediately correct it.
Not unforeseeably, Mr. Addis did not do so, and even less unforeseeably, the IRS assessed the penalty against him.
The IRS subsequently issued to Mr. Addis a Notice of Intent to Levy and Notice of Your Right to a Hearing regarding the IRC § 6702 penalty. Mr. Addis requested a CDP hearing, asserting that he was “not responsible for paying or filing a U.S. tax return.”
In August 2019, the settlement officer sent Mr. Addis a notice scheduling his CDP hearing for later that month. The settlement officer emphasized that the issues Mr. Addis raised in his hearing request included positions that the IRS had identified as “frivolous” and “utter horseshit.” The settlement officer also requested that Mr. Addis complete and submit Form 656, Offer in Compromise.
Mr. Addis responded by letter on August 16, 2019. Mr. Addis denied that his position was frivolous, arguing that
- the federal tax laws did not apply to him;
- he earned no taxable income, as he was not an officer, employee, or official of the United States;
- U.S. taxes violated his religious beliefs; and
- he is a “Moor Aboriginal Ohioan National who is domiciled in Georgia,” not a U.S. citizen.
So, if you’re keeping score at home, he argued that his position was not frivolous by showering himself in horseshit. Curious strategy, methinks…
He included with the letter a check for $25, which displayed the phrase “full satisfaction of claim for tax 2014” on the memo line.
The parties later agreed to proceed with the CDP hearing by written correspondence, rather than by telephone hearing. In February 2020, the settlement officer sent a letter, requesting information necessary to process an offer-in-compromise. He also warned Mr. Addis that the positions taken up to that time qualified as frivolous under IRS Notice 2010-33.
Mr. Addis responded by again claiming that he was not “responsible for U.S. taxes” for a variety of reasons (some old, some new). Although he submitted, inter alia, Form 656, he offered zero dollars to compromise his liability on the ground that he owed no tax. The IRS later issued to Mr. Addis a Notice of Determination sustaining the proposed levy. The settlement officer explained that he upheld the proposed levy action because of the incomplete Form 656 that Mr. Addis submitted and his repeated reliance on frivolous positions.
Standard of Review
Mr. Addis brought this suit pursuant to IRC § 6330. A taxpayer may dispute liability for a frivolous return penalty under IRC § 6702 “at a CDP hearing and on review of the CDP determination in the Tax Court, in the absence of any other opportunity to contest it.” In that instance, the IRC § 6702 penalty is the underlying liability, and the taxpayer is entitled to de novo review of the penalty so long as “he has raised a meaningful challenge to the penalty at his CDP hearing.” But if the taxpayer fails to make a meaningful challenge to the penalty, we review for abuse of discretion.
Mr. Addis utterly failed to raise a meaningful challenge. IRC § 6330(c)(4)(B) provides that an “issue may not be raised at the hearing if…the issue meets the requirement of clause (i) or (ii) of IRC § 6702(b)(2)(A).” Those clauses bar a taxpayer from raising an issue that is based on a position that the Secretary has identified as frivolous.
In the CDP proceeding Mr. Addis relied exclusively upon arguments that the IRS has identified as frivolous in IRS Notice 2010-33. The Tax Court, therefore, concluded that he did not raise a meaningful challenge. What was left was for the court to make short order of whether the settlement officer committed an abuse of discretion.
Hint: Not so much, Jonah.
Analysis in Addis v. Commissioner
To determine whether the settlement officer abused his discretion, the Tax Court asks whether he (1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues Mr. Addis raised, and (3) considered whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [Mr. Addis] that any collection action be no more intrusive than necessary.”
The Tax Court has authority to review a settlement officer’s satisfaction of the verification requirement regardless of whether the taxpayer raised the issue at the CDP hearing. The Tax Court began by noting that Mr. Addis did not assert in his petition that the settlement officer failed to satisfy this requirement and has set forth no specific facts in support of such a claim.
In any event, based on the record before the Tax Court, it concluded that the settlement officer conducted a thorough review of the materials relevant to Mr. Addis’s CDP request and verified that all applicable requirements were met.
Mr. Addis’s Liability for 2014 Taxes
During the CDP hearing, Mr. Addis raised an assortment of frivolous arguments (regarding his 2014 tax liability) as a means to contest the IRC § 6702 penalty, which itself had been imposed for making precisely such arguments on his belated 2014 tax return.
Despite being given multiple opportunities by the settlement officer to disclaim these positions, Mr. Addis did not do so. As the Tax Court has explained, these arguments are not relevant issues under IRC § 6330(c)(3), and the settlement officer accordingly did not abuse his discretion in not considering them.
Mr. Addis’s 2013 Identity Theft
At trial Mr. Addis asserted that he suffered an identity theft in 2013, which led to his 2014 tax issues. Although the Tax Court had no reason to doubt that Mr. Addis was a victim of identity theft, that issue had no bearing here. As an initial matter, Mr. Addis failed to raise this issue during his CDP proceeding or in his petition, and it is therefore not properly before the court. Even if the Tax Court could consider this issue, it “fail[ed] to see any connection between the 2013 identity theft and the IRC § 6702 penalty.”
To state the obvious, the identity theft Mr. Addis suffered in 2013 did not compel him to assert frivolous positions in a tax return he filed in 2017, which was the basis for the penalty.
Mr. Addis neither alleged in his petition nor argued at any later point that the settlement officer failed to consider “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” He has thus conceded the issue. In any case, there is no evidence in the record suggesting to the Tax Court that the settlement officer abused his discretion in finding that the balancing requirement in IRC § 6330(c)(3)(C) was met.
Penalty Under Section 6673(a)(1)
At trial the IRS requested that the Court sanction Mr. Addis under IRC § 6673 for instituting these proceedings primarily for the purpose of delaying his payment of taxes and for maintaining frivolous positions throughout this case.
IRC § 6673(a)(1) gives the Tax Court discretion to require a taxpayer to pay the Government a penalty of up to $25,000 when the taxpayer, inter alia, spews total and utter horsehair (or, as the opinion notes, “takes a frivolous or groundless position in proceedings before the Court”).
Although Mr. Addis has consistently maintained frivolous positions throughout this case, the Tax Court chose “at this time” not to impose an IRC § 6673 penalty. It did, however, sternly warn Mr. Addis that in the future it was not likely to be so lenient in this regard if he chooses to again pursue frivolous arguments before the Tax Court.
We conclude that the settlement officer did not abuse his discretion in sustaining the IRC § 6702 penalty against Mr. Addis for his 2014 tax year.
Moral of the Story
If you are appealing a frivolous position penalty, it’s best not to lead with frivolous positions…or follow…or argue them at any point.
Footnotes in Addis v. Commissioner:
- I may be editorializing a bit, but not much. ↑
- Pohl v. Commissioner, T.C. Memo. 2013-291, *7-8; Callahan v. Commissioner, 130 T.C. 44, 49 (2008). ↑
- See Sun River Fin. Tr. v. Commissioner, T.C. Memo. 2020-30, at *9-10; Callahan, 130 T.C. at 49-50 ↑
- Pohl, T.C. Memo. 2013-291, at *8. ↑
- Pohl, T.C. Memo. 2013-291, at *9; Burnett v. Commissioner, T.C. Memo. 2018-204, *9-10. ↑
- IRC § 6702(b)(2)(A); see also Burnett, T.C. Memo. 2018-204, at *9 (observing that “IRC § 6330(c) permits only ‘relevant’ issues to be raised. The term ‘relevant’ does not include frivolous or groundless issues”); Pohl, T.C. Memo. 2013-291, at *8 (holding that “[i]f the taxpayer at his CDP hearing advances no rational argument about why the penalty does not apply but instead insists on maintaining frivolous arguments that his wages are not ‘income,’ he has not made a meaningful challenge to his liability for the penalty”). ↑
- See Clark v. Commissioner, T.C. Memo. 2012-182, *3. ↑
- See id. at *4; Llanos v. Commissioner, T.C. Memo. 2021-21, *6-7 (reviewing for abuse of discretion “[b]ecause [the taxpayer] did not make meaningful challenges to the [IRC § 6702] penalties, his underlying liabilities were not raised properly, and therefore, his underlying liability is not at issue before us”). ↑
- IRC § 6330(c)(3); see, e.g., Ludlam v. Commissioner, T.C. Memo. 2019-21, at *9-10, aff’d per curiam, 810 F. App’x 845 (11th Cir. 2020). ↑
- Kidz Univ. v. Commissioner, T.C. Memo. 2021-101, *10 (citing Hoyle v. Commissioner, 131 T.C. 197, 200-03 (2008), supplemented by 136 T.C. 463 (2011)); Triola v. Commissioner, T.C. Memo. 2014-166, at *9. ↑
- See Tax Court Rule 331(b)(4) (stating that “[a]ny issue not raised in the assignments of error shall be deemed to be conceded”); Rockafellor v. Commissioner, T.C. Memo. 2019-160, *12. ↑
- See Burnett, T.C. Memo. 2018-204, at *11; Pohl, T.C. Memo. 2013-291, at *10-11; Clark, T.C. Memo. 2012-182, at *4. ↑
- See Rule 331(b)(4); Magana v. Commissioner, 118 T.C. 488, 493 (2002) (“[G]enerally it would be anomalous and improper for us to conclude that [a settlement officer] abused [his] discretion … in failing to consider arguments, issues, or other matter not raised by taxpayers or not otherwise brought to the attention of [the settlement officer].”); Pazden v. Commissioner, T.C. Memo. 2021-108, at *10 n.5. ↑
- See IRC § 6330(c)(3)(C). ↑
- See Rule 331(b)(4); see also Ansley v. Commissioner, T.C. Memo. 2019-46, at *19. ↑
- See Jaxtheimer v. Commissioner, T.C. Memo. 2019-164, at *20, aff’d, 854 F. App’x 263 (10th Cir. 2021). ↑