On March 10, 2021, the Tax Court issued a Memorandum Opinion in the case of Smith v. Commissioner (T.C. Memo. 2021-29). The primary issues presented in Smith v. Commissioner were whether a photocopy of an original purported return, for which the IRS has no record and on which the petitioner expects the IRS to act in making a refund, purports to be a return of income tax, and whether the petitioner was liable for the IRC § 6702(a) frivolous return penalty.
The Purported Return Gambit in Smith v. Commissioner
The IRS had no record of the petitioner’s husband’s tax return for 2008 and notified him of such in 2012. The petitioner and her husband sent a letter to the IRS asserting that they had sent the return to the Fresno Service Center, and “as [the IRS] has lost or misplaced my return, please find enclosed copies of the original filing of my 2008 1040 Return and filed supporting documents.” This purported return reports $5,614 of federal income tax withheld with no corresponding income or tax due. The petitioner and her husband, shortly thereafter, demanded “a full and complete refund within 30 days.”
To make matters even weirder, the petitioner and her husband enclose corrected W-2s and 1099s allegedly “supporting” the fact that they earned no taxable income…although tax was withheld.
But wait, there’s more…
For each corrected Form 1099, the petitioner added the following statement:
The above form is not intended to represent a corrected 1099-MISC filed by the party identified above as the “PAYER”. The correcting 1099-MISC above is submitted to “REBUT” a document known to have been submitted by the party identified above as “PAYER” which erroneously alleges a payment or payments to the party identified as “RECIPIENT” of “gains, profits or income” made in the course of a “trade or business”.
Neither the “PAYER” nor the “RECIPIENT” engaged in any transaction(s) with each other that were made in the course of a “trade or business” as those terms are defined. This correcting form ends any such presumption. Under the penalty of perjury, I declare that I have examined this statement and to the best of my knowledge and belief, it is true, correct, and complete.
Well, in that case…let’s just pack up our papers and go home.
IRS Tries to Plays Nice
In September 2012, the IRS sent the petitioner a letter informing her that her returns claimed a frivolous position (were 24k horseshit, more appropriately). What’s more, the IRS gave the petitioner an opportunity to correct the submission before it went full Lou Ferrigno-qua-Hulk on her. In response, the petitioner sent the IRS a letter disagreeing with the alleged frivolousness of her submission and once again demanding a full refund. At once. Just as if Dr. Bruce Banner stubbed his toe, the IRS went into Hulk-mode and assessed the IRC § 6702(a) (Frivolous Return) penalty against the petitioner.
The “Private Sector Citizen” Argument
In further response to the IRS’s claims that the petitioner had taxable wages (she did), the IRS had the gall to claim that she owed taxes on said wages. The petitioner would have none of this and replied:
I am rebutting [her employer’s] claim [that they paid her wages], stating that I am a private-sector citizen (non-federal employee employed by a private-sector company (non-federal entity) as defined in IRC § 3401(c)(d). I am not employed in a “trade or business” nor am I an “officer of a corporation.”
The Tax Court, not sympathetic to her argument notes, rather callously, that the petitioner’s husband worked for the employer and received money in exchange for his services rendered. Rude.
In a rather predictable fashion, the IRS filed a Notice of Federal Tax Lien against the petitioner. In response, the petitioner timely filed a Form 12153 (Request for a Collection Due Process or Equivalent Hearing) explaining once more that she should not be subject to a collection action because she is not an officer, employee, or elected official of the United States or the District of Columbia. Furthermore, there was no tax liability to be collected because, for every year “questioned by the IRS,” she was expecting a full refund of the “alleged” taxes. Appeals disagreed and sustained the Notice of Federal Tax Lien
The Petitioner’s Position
Among other things, the petition filed with the Tax Court relies on the claim that “any Federal tax on the right to engage in economic activity and enjoy the benefits therefrom is a direct tax that must be apportioned, she argues that “only economic activities (or the gains therefrom) within a certain, limited class [excluding income from labor] are taxable by the feds as income.”
I just want to put it out there that calling the IRS “the feds” does not do much to support the authority of her position, but damn the Man and full speed ahead, I suppose.
The Frivolous Return Penalty, a Primer
IRC § 6702(a) imposes a civil penalty of $5,000 upon a person who files a frivolous tax return. The penalty applies if three conditions are met. First, the filer must have filed a document that “purports to be a return of a tax imposed by the Internal Revenue Code. Second, the purported return must be a document that either “does not contain information on which the substantial correctness of the self-assessment may be judged” or “contains information that on its face indicates that the self-assessment is substantially incorrect” or is just batshit crazy (paraphrasing). IRC § 6702(a)(1). Third, the filer’s conduct must either be “based on a position which the Secretary has identified as frivolous” or must “reflect a desire to delay or impede the administration of Federal tax laws.” IRC § 6702(a)(2).
If a person files multiple frivolous returns for a single year, the Commissioner may assess multiple frivolous return penalties. See Grunsted v. Commissioner, 136 T.C. 455, 456-457, 460 (2011). The frivolous return penalty can be assessed against each filer of a joint return. See, e.g., O’Brien v. Commissioner, T.C. Memo. 2012-326, *4, n. 5.
Needless to say, the Tax Court quickly found that the petitioner’s submissions satisfied the three tests rather easily, finding that the petitioner’s argument that the Federal income tax, when applied to income from labor, is a direct tax that must be apportioned is frivolous. See, e.g., United States v. Gerads, 999 F.2d 1255, 1256-1257 (8th Cir. 1993) (per curiam) (stating “we have rejected, on numerous occasions, the tax-protestor argument that the federal income tax is an unconstitutional direct tax that must be apportioned” and granting Government’s motion for sanctions for frivolous appeal).
Two Out of Three Ain’t Bad
The Tax Court doesn’t go so far as to actually quote Meatloaf, but the Tax Court does find that with respect to prior supervisory approval under IRC § 6751(b)(1), the IRS satisfied its burden with respect to two out of the three frivolous return penalties.
The IRC § 6673 Sanction
IRC § 6673(a)(1) provides a penalty of up to $25,000 if (1) the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or (2) the taxpayer’s position in the proceeding is frivolous or groundless. “A taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.” Rader v. Commissioner, 143 T.C. 376, 392 (2014) (quoting Goff v. Commissioner, 135 T.C. 231, 237 (2010)), aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015). Furthermore, the purpose of IRC § 6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate.” Takaba v. Commissioner, 119 T.C. 285, 295 (2002).
Given the public policy interest in deterring the abuse and waste of judicial resources, the authority of the Tax Court to impose this penalty and decide in what amount is broad. See Leyshon v. Commissioner, T.C. Memo. 2015-104, at *24, aff’d, 649 F. App’x 299 (4th Cir. 2016). The Tax Court may impose the penalty even where taxpayers have raised some issues that were neither frivolous nor groundless, along with issues that were frivolous or groundless. See, e.g., Powers v. Commissioner, T.C. Memo. 2009-229, *16.
Not unsurprisingly, the petitioner was a prime candidate for this sanction. In so finding, the Tax Court notes the breadth of the petitioner’s dedication to her crazy.
Having read petitioner’s 46-page brief, which repeats the arguments she made in the 29-page petition, and with which we have dealt supra, we believe that petitioner is deserving of a penalty because of the frivolous arguments she has made. We will impose on her an IRC § 6673(a)(1) penalty of $2,500.
Swing and a miss, Crazy Lady.
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