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Sun River Financial Trust v. Commissioner (T.C. Memo. 2020-30)

On March 5, 2020, the Tax Court issued a Memorandum Opinion in the case of Sun River Financial Trust v. Commissioner (T.C. Memo. 2020-30). The single issue presented in Sun River Financial Trust was whether the IRS abused its discretion in sustaining a proposed levy and the filing of a notice of Federal tax lien (NFTL) with respect to petitioner’s unpaid IRC § 6702 (frivolous return) penalties for 2010 and 2011.

Background

Any case that contains a long footnote in which the Tax Court summarizes the petitioner’s frivolous arguments promises to be interesting, and Sun River Financial does not disappoint.

The petitioner filed delinquent returns for 2010 and 2011. Not an auspicious start. Though the petitioner reported $42,000 and $54,000 in taxable income for these years, it also reported zero tax due and claimed a full refund of the amount of tax withheld for each year. But wait, there’s more.

Attached to petitioner’s returns were Forms 1099-A (Acquisition or Abandonment of Secured Property), Forms 1099-B (Proceeds from Broker and Barter Exchange Transactions), and Forms 1099-OID (Original Issue Discount). The IRS dutifully examined the filings and attached forms, all of which the IRS found to be without a scintilla of merit.

The IRS notified the petitioner of its determination that the petitioner’s 2010 and 2011 were frivolous, warned the petitioner that there were penalties for taking frivolous return positions, and gave petitioner an opportunity to withdraw its “returns” and file nonfrivolous returns within 30 days. The petitioner, however, did not file amended returns. Instead, the petitioner submitted “various correspondence” raising some rather novel arguments, which the IRS likewise considered to be frivolous and meritless.

Chief among the petitioner’s “arguments” was that IRS agents lack the capacity to determine whether a return is frivolous because they are “not lawyers and do not regularly read legal texts.” See Sun River Financial at *3, fn. 3. Though IRS agents are not lawyers, and may or may not “read,” the petitioner’s argument fails for one reason that became painfully clear to the petitioner very soon thereafter, when the very same illiterate IRS agent assessed IRC § 6702 penalties for each frivolous return and mailed notice and demand for payment to the petitioner.

Whether or not the petitioner refused to acknowledge the IRS’s agent’s authority to do so remains unseen; however, the petitioner failed to pay the assessed penalties, and the IRS issued a Letter 1058 (Final Notice of Intent to Levy and Notice of Right to Hearing), which Letter 1058 was followed by a Notice of Federal Tax Lien Filing (NFTL) and Right to Hearing under IRC § 6320.

Petitioner timely requested a CDP hearing by filing a Form 12153, in which he alleged that the IRS’s computers were “unreliable, inaccurate, untrustworthy and lack proper security.” Contending that the IRS’ computers were “unable to produce a believable result,” petitioner stated that it was “reluctant” to pay the penalties assessed against it without “proof that the mathematical calculations were correct.” The IRS let out an institutional guffaw and noted that the game was afoot.

Although the settlement officer attempted to schedule a telephone conference, the petitioner requested that the CDP hearing be conducted via correspondence only. What issues the petitioner had with “telephones” is not noted in the Tax Court opinion, which is a shame, because that one promised to be a doozie.

Petitioner failed to produce any “evidence” or “facts” to substantiate his reasserted contention that the IRS’s assessments were “unreliable,” which Appeals notes in the two notices of determination mailed to the petitioner shortly thereafter, does not have any bearing on whether (a) it could read, or (b) the underlying frivolousness of the petitioner’s return positions. Not content to be a fly in the IRS’s ointment, the petitioner filed a timely Tax Court petition, and here we are.

How to Handle a Petitioner who Challenges the Court’s Jurisdiction that Petitioner Invoked by Filing Petition, a Case Study

The petitioner, or the varied voices in his head, decided, after the trial had not gone the way he/they planned, to file a motion to dismiss, arguing that the Tax Court lacked jurisdiction to hear the case. I want you to reread that sentence once – no more, or your head will explode. The petitioner, who, of his own volition, filed a Tax Court petition, thereby invoking the Tax Court’s jurisdiction, thereafter, filed a motion to dismiss arguing that the Tax Court lacked the very jurisdiction he claimed it possessed.

To be honest, the Tax Court wasn’t really sure what to do with the motion to dismiss. It was more than happy to be rid of the petitioner, but it had already started drafting its opinion, so it went ahead and issued the opinion, if for no other reason than to serve as a warning to the next lunatic who thought that “lack of institutional reliability” would be suitable grounds for ignoring a demand for payment by the IRS.

The Tax Court may entertain a petition only if it has jurisdiction, which jurisdiction any party can question at any time. Romann v. Commissioner, 111 T.C. 273, 280 (1998). Because the Tax Court has limited jurisdiction, it may exercise jurisdiction only as explicitly authorized by statute. See Naftel v. Commissioner, 85 T.C. 527, 529 (1985). 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. See IRC § 6330(d)(1); Callahan v. Commissioner, 130 T.C. 44, 48-49 (2008). The Tax Court’s jurisdiction even includes a review of the underlying liability for an IRS § 6702 frivolous return penalty, if otherwise appropriate. See Callahan, 130 T.C. at 49.

The Tax Court notes that the petitioner “does not dispute that…petitioner timely filed a petition for review” of the IRS’s notice of determination.

You can be sure that the Tax Court took a long, deep breath, before it jerked the steering wheel of justice and took a hard turn onto Crazy Street when the Tax Court has to confirm that the petitioner does not dispute that it timely petitioned the Tax Court for review of the IRS’s determination. Indeed, instead of disputing that the IRS’s notice of deficiency was valid, the petitioner uses frivolous legal arguments to support his case that his “allegedly” frivolous arguments weren’t frivolous. I am not sure how many wrongs make a right, but if frivolous arguments were cardinal directions, the petitioner’s invocation of tripartite frivolity would return him to facing due north towards Crazytown, his home and native land, apparently.

The Tax Court managed to not let its seething anger overcome it. Judge Vasquez clearly learned remarkably good coping mechanisms growing up. The Tax Court observed only that “[b]ecause petitioner properly invoked our jurisdiction, we will deny its motion to dismiss.” I am certain that on some alternate plane of existence this made perfect sense when Judge Vasquez (or his equally deferential clerk) wrote that last sentence, but to me, it sounds like the petitioner accomplished what it set out to do, which is to divest this proceeding of any shred of dignity and/or relevance (other than to affirm that the petitioner is bat-shit crazy and deserving of IRC § 6702 penalties as few petitioners have been before it).

Somehow, Judge Vasquez manages to keep his cool long enough to politely “warn” the petitioner “to refrain from advancing frivolous arguments in the future” or else the boom of IRC § 6673(a)(1) would be lowered upon the petitioner to the tune of a $25,000 penalty for wasting the Tax Court’s resources and patience.

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, IRC § 6320(a).

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. IRC § 6331(a). 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. See IRC § 6671(a); Blaga v. Commissioner, T.C. Memo. 2010-170, *11.

CDP Rights Extend Even to the Nuttiest of 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. IRC § 6320(b)(1); IRC § 6320(b)(3). 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. IRC § 6330(c)(2)(A).

The IRC § 6702 frivolous return penalty, as an assessable penalty, is not subject to the deficiency procedures outlined in IRC §§ 6211-6216. See IRC § 6703(b). 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). 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.

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. 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).

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

Failing to contend that the returns determined frivolous by the IRS contained “sufficient” or “actual” information, or at the very least arguing that the returns were not frivolous, is a failure to challenge the underlying liabilities. The Tax Court gave the petitioner the widest of latitude, but, in the end, the Tax Court cannot fix crazy if crazy does not want to be fixed. Having not challenged the issue of frivolousness in its returns (whether in its petition or in its “arguments” before the Tax Court), the petitioner was deemed to have conceded the issue of whether it is liable for the IRC § 6702 penalties. See Tax Court Rules 34(b)(4), 331(b)(4).

Original opinion: (T.C. Memo. 2020-30) Sun River Financial Trust v. Commissioner

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