Frivolous taxpayers are amongst my absolute favorites.  The opinions that they spawn are just wonderful breaks in an otherwise monotonous string of upheld determinations…especially when they involve crazy German nationals, as no less than three did in 2020.  In this article, we examine the frivolous return penalty (IRC § 6702) and the frivolous petition penalty (IRC § 6673(a)(1)).  In doing so, we include a discussion of some of the taxpayers that made 2020 so much fun for the Tax Court.

The Penalties for Frivolity (and Generally Pissing off the Tax Court)

Under IRC § 6207, the IRS may impose a $5,000 penalty on any individual who files what purports to be a return of tax imposed by the Code but which (a)  does not contain information on which the substantial correctness of the self-assessment of such tax may be judged, or contains information that on its face indicates the self-assessment is substantially incorrect, and (b)  is based on a frivolous position (as identified by the IRS in published guidance) or reflects a desire to delay or impede the administration of the federal tax laws.[1]

Also, a person who submits a request for a CDP hearing under IRC § 6320 or IRC § 6330, or an application for an installment agreement under IRC § 6159, an offer in compromise under IRC § 7122, or a taxpayer assistance order under IRC § 7811; and such submission is based on a frivolous position (as identified by the IRS in published guidance) or reflects a desire to delay or impede the administration of federal tax laws, is subject to a $5,000 penalty.[2]

Beyond the minor frivolity penalty, the Tax Court may impose a $25,000 penalty whenever you piss it off in two specific respects: (1) a lot; and (2) often. More precisely, the Tax Court may impose the penalty pursuant to IRC § 6673(a)(1) whenever it appears that the taxpayer has instituted or maintained a proceeding primarily for delay or has adopted (and zealously advocated) a position that is frivolous or groundless.[3]

With respect to petitioning the Tax Court, it is elementary that the Tax Court may entertain a petition only if it has jurisdiction, which jurisdiction any party can question at any time.[4] The Tax Court has jurisdiction to review the IRS’s determination to proceed with a collection action, including review of the IRS’s determinations to collect an IRC § 6702 frivolous return penalty.[5] The Tax Court’s jurisdiction even includes a review of the underlying liability for an IRS § 6702 frivolous return penalty, if otherwise appropriate.[6]

The Frivolous Return Penalty of IRC § 6702

The penalty under IRC § 6702 applies if a position that the taxpayer has proponed on the purported return is frivolous.[7] Although the Code does not define “frivolous,” the legislative history and case law provide some examples. According to the legislative history, a position is frivolous only if it is “patently improper.”[8]

The Seventh Circuit defined a frivolous position as one which is “contrary to established law and is not supported by a reasoned, colorable argument to change the law.”[9] Basically, you can argue that the law should be changed, but you can’t argue that the IRS and its agents were in league with present-day Nazis, as the petitioner implied in Friedel v. Commissioner.[10]

Frivolous Positions

A petition to the Tax Court is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.^[11] Groundless is similarly defined as being without a basis in law or fact.^[12] The penalty may be imposed if the taxpayer knew or should have known that the argument is groundless.^[13]

“Should have known is an objective test.” The taxpayer’s belief in a frivolous position, no matter how sincere, does not prevent the imposition of the penalty.^[14] Nonetheless, the Tax Court understands that there is a difference between a frivolous position and one that is ultimately found to be without merit.^[15]

Only the former position is subject to sanctions. The Tax Court notes that it “intends to remain open to all who invoke the protection of the law in good faith,”^[16] which is the court’s polite way of saying that they will be as lenient as possible if the petitioner isn’t certifiably, batshit crazy.

Statutory Framework for Levying Unpaid Frivolousness Penalty

The Code imposes a lien in favor of the United States on all property and rights to property of a taxpayer liable for tax when a demand for payment of the tax has been made and the taxpayer fails to pay the tax. IRC § 6321. The IRS must furnish the taxpayer with a notice of the filing of an NFTL within five business days after the NFTL is filed.[17]

Having done so, the IRS is permitted to levy upon property and property rights of any person liable for tax if such person fails to pay the tax within 10 days after notice and demand for payment is made.[18] For purposes of IRC § 6331(a)’s levy authority over a tax, which the taxpayer has failed to pay after notice and demand, the term “tax” includes the liability for the IRC § 6702 penalty.[19]

CDP Rights Extend Even to Frivolous Taxpayers

No levy may be made until and unless the IRS has notified the taxpayer in writing of the right to a hearing before the levy is made. When a taxpayer requests a hearing in response to the notice of filing of an NFTL (IRC § 6320) or a notice of levy (IRC § 6330), the IRS must conduct a hearing.[20] At the hearing the taxpayer may raise any relevant and decidedly non-frivolous issue such as the appropriateness of the collection action, but not the literacy of the IRS or the “reliability” of its computers.[21]

The IRC § 6702 frivolous return penalty, as an assessable penalty, is not subject to the deficiency procedures outlined in IRC §§ 6211-6216.[22] Because a taxpayer will not have received a notice of deficiency before assessment of this penalty, such taxpayer may dispute his liability for the penalty at a CDP hearing, as well as on the Tax Court’s review of the CDP determination (in the absence of any other opportunity to contest the underlying liability).[23]

When, however, a taxpayer fails to raise its underlying liability for the whack-a-doodle penalty under IRC § 6702 in the underlying CDP hearing, the Tax Court’s hands are tied, and the Tax Court lacks jurisdiction to entertain the argument, no matter how persuasive or sane the argument might (or, in this case, might not) be.[24]

With respect to IRC § 6702 penalties, a taxpayer properly raises the issue if he makes a meaningful (read: nonfrivolous) challenge to the penalty itself.[25] Demanding proof of “reliability” of penalties, similarly, is not the same as “meaningfully challenging” penalties.

Examples of Frivolity from Tax Court Opinions in 2020

Lloyd – When the Door Hit’s the Prophet’s Ass on the Way Out

James Lloyd, the petitioner Lloyd v. Commissioner,[26] is a self-proclaimed “prophet.” That’s all you really need to know about him, but that’s not all I am going to tell you. The petitioner, a lonely man without employees or staff to assist him, operated several Bible-focused websites and internet-based radio stations, which he dubbed the “Christian Media Network.” At trial, the petitioner even proclaimed that “in effect” he is “Christian Media Network.”

Pride goeth before the fall, and what a beautiful fall it will turn out to be.

The petitioner offered materials to his “flock” (he was a shepherd, too, after all) for a small donation to the cause. This “donation” however, was a fixed amount (plus shipping and handling), and the materials could not be obtained without the donation. If not for the religious smokescreen, these “donations” had all of the earmarks of a “sale” of goods that produced “income.” The Tax Court thought so as well. The petitioner also interspersed advertisements for rain filters, satellite dishes, and organic seeds among the Good Words.

No real relevance, just real hypocrisy.

The petitioner’s principal argument was that he has no “income” subject to tax because the income tax law is “null and void,” because the concept of “income” cannot be defined by the Code, because the legislature is prohibited from “defining terms used within the United States Constitution as to do so would in reality amend the Constitution in a way outside their authority to do so.” Well then, that settles it. Time for this tax attorney to pack it up and go home. But just for shits and giggles, let’s read on…

The Prophet, being a reasonable man, understands that the Tax Court is a slave to the “law,” and mercifully offers the Tax Court an alternative avenue of relief, so as to save face and to save the “Code” that the Tax Court is so very fond of. “In publicly functioning as a church, James Lloyd and the Christian Media ministry which he directs, are immune from Income Tax liability by the First Amendment of the United States Constitution.”

Phew. I thought he might start talking crazy again.

The court in Lloyd, did not take much time to “consider” the Prophet’s “argument” before “rejecting it summarily.” The Tax Court did so with a flourish, however, in quoting the Fifth Circuit Court of Appeals, which observed as to frivolous tax arguments “We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.”[27]

The Four Horsemen of Crazy Deutschelanders

Schwager v. Commissioner

Fritz Schwager was angefressen (pissed-off) at the IRS for finding fault with his failure to file his returns from 2009 through 2012, and he responded to the notice with a letter that “questioned the validity” of the levy notice. As the Tax Court notes, in support of his validity argument, Fritz “referenced a panoply of statutes and cases addressing issues including the Paperwork Reduction Act, the proper recording of tax assessments, the IRS’ supposed burden of proof, fraud, the ultra vires doctrine, and delegation of authority.” Judge Urda then simply states in the next breath that “the IRS treated this [batshit craziness] as a timely request for a CDP appeal.”

In beautiful preterition,^[28] the Tax Court declares in Schwager v. Commissioner, (T.C. Memo. 2020-83), that it “will not painstakingly document every groundless argument” advanced by Fritz, nor will the Tax Court “dignify them with reasoned analysis.” Why, not, you may ask? Because, according to the Tax Court, “doing so might be misinterpreted as suggesting that they have some colorable merit. They do not.”^[29]

Alber v. Commissioner

The petitioner in Alber v. Commissioner,[30] was playing a game of Marco Polo with reality, which by all metrics, he was winning handily. Herr Alber was a non-U.S. citizen residing in Germany. He submitted a Form 211 (Application for Award for Original Information) to the Whistleblower office of the IRS (WBO) that alleged, and I quote: the “fake Federal Republic of Germany banana republic has been treating [the petitioner] badly and in illegal, unconstitutional ways including stealing [his] monies and assets in [the] form of taxes and tax fraud based on invalid tax laws from 1954.” To be clear, this is a case against the whistleblower arm of the IRS, and the WBO, heretofore, has been a chiefly American department to complain about. The petitioner is a German citizen with a beef against the German government over German taxes (and other various and sundry issues).*

*Author’s Note: How the bloody hell does this apply to the U.S. (in general) or the WBO (specifically), you may ask. It turns out that one of the voices in the petitioner’s head was William Henry Marks, a U.S. expatriate, who immigrated to petitioner’s subconscious when he was just a young boy in the suburbs of Berlin. Although jurisdiction based upon the citizenship of a psychosis had never before been attempted (and you can bet your ass I researched this), the petitioner, among other things, was an innovator. Sadly, Judge Gustafson was a tad myopic, focusing instead on “facts” and “objective reality.” If this case proves nothing else (and, honestly, it doesn’t), it demonstrates that even the most measured jurist can be influenced by bias. In the present matter, Judge Gustafson was prejudiced by the fact that Mr. Marks did not present direct testimony, and apparently there is no hearsay exception for testifying as the truth of the matter asserted for a statement made by a figment of one’s imagination.

Friedel v. Commissioner

The primary issue before the court in Friedel v. Commissioner,[31] was whether the IRS Whistleblower Office abused its discretion in rejecting a German national’s whistleblower claim against six targets, all of whom were officials within the German government on the basis that they had committed (inter alia) fiduciary fraud, breach of trust, bond fraud, identity theft, torture, abuse of power, corruption, and human trafficking and because they are “criminal Nazi judges and prosecutors.” There must be something in the water in der hinterland, because combined with Alber, this is the second case this year brought by a crazy German against other German nationals, accusing them of all sorts of crimes against humanity (but failing to allege that any such crimes, in any way, violated U.S. Federal revenue laws)…and let’s not also forget Herr Schwager.

Damiani v. Commissioner

Not to be done by Herr Schwager, Herr Alber and Herr Friedel, in Damiani v. Commissioner, (T.C. Memo. 2020-132), yet another foreign national residing in Germany, filed a whistleblower claim in May 2019, identifying two targets (1) German insurance company, and (2) the insurance company’s director. She alleged that the targets had committed fiduciary fraud, bond fraud, securities fraud, and identity theft, asserting that they had forged her name on insurance contracts and repeatedly demanded payments for insurance premiums that allegedly “disappear[ed].” She made allegations of money laundering and tax fraud, asking whether “IRS Form 1099-OID…was required, and ha[d] Form 1040 already been submitted?”

As with Herr Friedel, Frau Damiani supplied little information to support her claims. What she did provide was a memorandum setting forth his allegations, an identity theft affidavit, and letters that “several documents, written entirely in German, that appear to be invoices.” Similarly, she made no discernible allegations regarding the U.S. tax liability of any person. The claims were assigned the same poor classifier as in the Friedel case, who discovered quickly that neither party was a U.S. person or entity. He concluded that, because the allegations pertained to “events between and among non-USA persons/entities,” petitioner did not identify a Federal tax issue. He accordingly recommended that the WBO reject petitioner’s claims.  The WBO rejected the claims, and the petitioner cried foul in epic fashion.

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Footnotes:

[1] IRC § 6207(a).

[2] IRC § 6207(b).

[3] See Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986); Bruhwiler v. Commissioner, T.C. Memo. 2016-18, at *10.

[4] Romann v. Commissioner, 111 T.C. 273, 280 (1998).

[5] See IRC § 6330(d)(1); Callahan v. Commissioner, 130 T.C. 44, 48-49 (2008).

[6] See Callahan, 130 T.C. at 49.

[7] Kestin v. Commissioner, 153 T.C. No. 2 (2019) (distinguishing a purported tax return from a mere copy of a tax return — inclusion of copies of 1040X as attachments to letters or notices did not constitute “fil[ing] what purports to be a return” for purposes of IRC § 6702(a)(1)); Callahan, 130 T.C. at 49 (documents requesting refunds are purported returns); Kelly v. United States, 789 F.2d 94 (1st Cir. 1986) (correspondence is purported return where taxpayer included sufficient documentation for refund request); Olson v. United States, 760 F.2d 1003 (9th Cir. 1985) (unsigned return with no listed wages is purported return); Lovell v. United States, 755 F.2d 517 (7th Cir. 1984) (tax returns signed “not a tax return” is still a purported return when filed for refund).

[8] 1982 Act Senate Report at 277.

[9] Coleman, 791 F.2d at 71. Cf. Reg. §1.6662-3(b)(3); 31 C.F.R. §10.34(d)(2) (which defines frivolous as patently improper with respect to standards of conduct for rendering advice regarding tax return position or for signing return); Fed. R. Civ. P. 11 (which uses same standard for sanctions in civil litigation); 28 U.S.C. §1927 (awards of fees); Fed. R. Civ. P. 38 (awards of damages).

[10] T.C. Memo. 2020-131.

[11] Coleman, 791 F.2d at 71.

[12] Horn v. Commissioner, 90 T.C. 908 (1988).

[13] Id.; May v. Commissioner, 752 F.2d 1301 (8th Cir. 1985).

[14] Coleman, 791 F.2d at 71.

[15] See, e.g., Johnson v. Commissioner, T.C. Memo 1986-488; Bowen v. Commissioner, T.C. Memo 2001-47; Booker v. Commissioner, T.C. Memo 1996-261.

[16] Id.

[17] IRC § 6320(a).

[18] IRC § 6331(a).

[19] See IRC § 6671(a); Blaga v. Commissioner, T.C. Memo. 2010-170, *11.

[20] IRC § 6320(b)(1); IRC § 6320(b)(3).

[21] IRC § 6330(c)(2)(A).

[22] See IRC § 6703(b).

[23] See Callahan, 130 T.C. at 49-50; see also Giamelli v. Commissioner, 129 T.C. 107, 114-116 (2007); Treas. Reg. § 301.6320-1(f)(2), Q&A-F3.

[24] See Treas. Reg. § 301.6320-1(f)(2), Q&A-F3; see also Giamelli, 129 T.C. at 115-16; McRae v. Commissioner, T.C. Memo. 2015-132, *8-*9 (taxpayer failed explicitly to contest or provide evidence regarding underlying liability during CDP hearing; therefore, Tax Court lacked jurisdiction); Zook v. Commissioner, T.C. Memo. 2013-128, *6-*7 (taxpayer failed to raise or provide evidence regarding underlying liabilities; assertion of frivolous arguments not considered “raising issue” regarding liabilities).

[25] See IRC § 6702(a)(1)(A); IRC § 6702(a)(2)(A); see also Pohl v. Commissioner, T.C. Memo. 2013-291, *8; Buckardt v. Commissioner, T.C. Memo. 2012-170, *12, aff’d, 584 F. App’x 612 (9th Cir. 2014).

[26] T.C. Memo. 2020-92.

[27] Williams v. Commissioner, 801 F. App’x 328, 329 (5th Cir. 2020) (quoting Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)); see also Wnuck v. Commissioner, 136 T.C. 498, 501 (2011); Wells v. Commissioner, T.C. Memo. 2019-134, at *5.

[28] The rhetorical device of preterition (also known as paralipsis, cataphasis, antihrasis, and parasiopesis) is a personal favorite of mine, and it is displayed in the Tax Court’s rather passive aggressive language here. “If I weren’t more of a gentleman, I would call you a lying, two-faced, wolf-whelped, son-of-a-whore, but I won’t, because, as I said, I am a gentleman.” That’s right, dear readers, there are fancy Latin and Greek words for being passive aggressive. Learn them. Use them. Enjoy them. 

[29] See Wnuck v. Commissioner, 136 T.C. 498, 510-513 (2011) (explaining that addressing frivolous arguments wastes time and resources and delays the assessment of tax); Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); Grunsted v. Commissioner, 136 T.C. 455, 460 (2011).

[30] T.C. Memo. 2020-20.

[31] T.C. Memo. 2020-131.

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