On June 29, 2021, the Tax Court issued a Memorandum Opinion in the case of Muhammad v. Commissioner (T.C. Memo. 2021-77). The primary issue presented in Muhammad v. Commissioner was whether the petitioner’s arguments were completely frivolous, or just a little frivolous, so as to support the frivolous argument penalty under IRC § 6673(a)(1)(B).

Held: Petitioner was completely full of shit; penalties ensued.

Overview of Muhammad v. Commissioner

The question presented in this case is whether the petitioner is taxable on wages of $48,535 received from her employer during 2016. The petitioner contends that her wages were not subject to Federal income tax because she was not engaging in the “exercise of Federal privileges.” Finding her argument to be frivolous, the Tax Court sustained the deficiency of $5,326 determined by the IRS and imposed a penalty of $250 under IRC § 6673(a)(1)(B).

Income in a Nutshell

IRC § 61(a) provides that “gross income means all income from whatever source derived,” including “[c]ompensation for services.” IRC § 61(a)(1). In cases of unreported income, the IRS must establish an evidentiary foundation connecting the taxpayer to the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev’g 67 T.C. 672 (1977), or demonstrate that the taxpayer actually received income, Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982). Form W-2 information supplied to the IRS by the taxpayer’s employer is sufficient to meet this burden. See Hardy v. Commissioner, 181 F.3d 1002, 1004-1005 (9th Cir. 1999), aff’g T.C. Memo. 1997-97. Once the IRS has met its threshold burden, the burden shifts to the taxpayer to show that the IRS determination of income was arbitrary or erroneous. Id.

The IRS may not rely solely on a third-party report of income, such as a Form W-2, if the taxpayer raises a reasonable dispute concerning the accuracy of the report. See IRC § 6201(d). The petitioner failed to do so. The petitioner thus bears the burden of proving that the IRS erred in determining that she received unreported income of $48,535.

The Frivolous Argument

In contending that she did not receive taxable “wages,” petitioner relies on a provision of chapter 24, subchapter A, which governs withholding of income tax from wages. IRC § 3401(a) defines “wages” to mean “all remuneration for services performed by an employee for his employer.” IRC § 3401(a) specifies 23 narrow exceptions to that rule, but petitioner does not rely on any of those. Rather, she relies on IRC § 3401(c), which provides that, “[f]or purposes of this chapter, the term ‘employee’ includes an officer, employee, or elected official of the United States” or agency thereof. Because petitioner was not “exercising a Federal privilege” when performing services for the University, she asserts that she was not an “employee” and thus earned no “wages” as defined by IRC § 3401(a).  Clearly…but just for giggles, let’s see what the law actually says…

The Tax Court was less than impressed, stating that “this is a time-worn tax-protestor argument that no court has ever accepted.”  Swing and a helluva crazy miss.

IRC § 3401(c) provides that the term “employee” “includes” Federal officers and employees; it does not say that the term “employee” “consists exclusively” of Federal officers and employees. See IRC § 7701(c) (“The terms ‘include’ and ‘including’ when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”); Sims v. United States, 359 U.S. 108, 112 (1959); Wnuck v. Commissioner, 136 T.C. 498, 506 (2011) (“Anyone fluent in English knows that the word ‘includes’ cannot be assumed to mean ‘includes only.’”). By providing that wages “means all remuneration for services performed by an employee,” subject only to enumerated exceptions, IRC § 3401(a) makes it obvious that “employees” are not limited to Government employees. In any event IRC § 3401(c) applies only “[f]or purposes of this chapter,” viz., for purposes of chapter 24, which governs collection of income tax at the source on wages. IRC § 3401(c) has no application to chapter 1, subchapter B, which governs the computation of taxable income.

and others), the courts have repeatedly rejected the argument that petitioner advances here” (emphasis in original). See Taliaferro v. Freeman, 595 F. App’x 961, 962-963 (11th Cir. 2014) (calling the argument “frivolous” and “meritless”); Montero v. Commissioner, 354 F. App’x 173, 175 (5th Cir. 2009) (per curiam) (calling it “frivolous” and a “tax-protester argument”); Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) (per curiam) (calling it “meritless”); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (calling it a “preposterous reading of the statute”). The Tax Court accordingly sustained the adjustment of $48,535 to petitioner’s 2016 gross income.

Frivolous Position Penalty

The Tax Court in no uncertain terms states that “for these reasons (IRC § 6673(a)(1) authorizes the Tax Court to require a taxpayer to pay to the United States a penalty, not in excess of $25,000, whenever it appears to the Tax Court that (A) proceedings before it have been instituted or maintained primarily for delay, or (B) the taxpayer’s position in such proceeding is frivolous or groundless.

The purpose of IRC § 6673 is to compel taxpayers to conform their conduct to settled tax principles and to deter the waste of judicial and IRS resources. Coleman v. Commissioner, 791 F.2d 68, 71-72 (7th Cir. 1986); Salzer v. Commissioner, T.C. Memo. 2014-188. Frivolous and groundless claims divert the Court’s time, energy, and resources away from more serious claims and increase the needless cost imposed on other litigants. Kernan v. Commissioner, T.C. Memo. 2014-228, aff’d, 670 F. App’x 944 (9th Cir. 2016); see Kile v. Commissioner, 739 F.2d 265, 269-270 (7th Cir. 1984) (“[W]e can no longer tolerate abuse of the judicial review process by irresponsible taxpayers who press stale and frivolous arguments.”), aff’g Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), and Basic Bible Church of Am., Auxiliary Chapter 11004 v. Commissioner, T.C. Memo. 1983-287.

Petitioner’s argument that wages are not taxable unless received by a Federal employee is a frivolous argument. See, e.g., Briggs v. Commissioner, T.C. Memo. 2016-86 (imposing a $3,000 penalty on a taxpayer who made the same argument); Waltner v. Commissioner, T.C. Memo. 2014-35 (imposing a $2,500 penalty), aff’d, 659 F. App’x 440 (9th Cir. 2016). The IRS publishes and occasionally updates “The Truth About Frivolous Tax Arguments,” a compendium of frivolous positions and the case law refuting them. Petitioner’s argument is included in that compendium.[1] Although petitioner has no legal training, had she made even a modest inquiry using an internet search engine she would have found the copious authorities refuting her stance. See Wnuck, 136 T.C. at 504 (“Anyone with the inclination to do legal research will confront such authorities.”).

The best/worst part of this case is that the Tax Court continuously warned petitioner during the calendar call that she risked a penalty if she advanced frivolous arguments and that “wages are not income” is a frivolous argument. “Despite this warning, petitioner persisted throughout the trial on the path on which she had embarked.” Counsel for respondent urged that an IRC § 6673 penalty was appropriate, representing that she had repeatedly advised petitioner in pretrial communications that she was advancing a frivolous position.

Judge Lauber is a Softie

Ultimately, and without much controversy, the Tax Court concluded that a penalty is appropriate. When the Tax Court advised petitioner at trial that we would consider imposing such a penalty, she stated that she was now unemployed and that a penalty would cause her financial hardship. Taking her at her word, Judge Lauber decided to impose only a modest penalty of $250. However he “warn[ed] petitioner that she will risk a much more severe penalty if she advances frivolous positions in any future appearance before this Court.”

(T.C. Memo. 2021-77) Muhammad v. Commissioner

Footnotes

[1] The Truth About Frivolous Tax Arguments, Internal Revenue Service (March 2018), https://www.irs.gov/pub/taxpros/frivolous_truth_march_2018.pdf; see Rev. Rul. 2006-18, 2006-1 C.B. 743, 743 (emphasizing to taxpayers and preparers that the argument advanced by petitioner here “has no merit and is frivolous”).

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