Tax attorney - 6673 frivolous penalty

Stanley C. Wolcott v. Commissioner. Dkt. Nos. 4371-06 , 4372-06 , TC Memo. 2007-315, October 18, 2007.[Code Secs. 6651, 6654 and 6673]

Late filing penalty: Late payment penalty: Failure to pay estimated tax penalty: Sanctions for frivolous or groundless position. --
An individual who stipulated to failing to file tax returns for two years and owing deficiencies for those years, was liable for additions to tax under Code Secs. 6651(a)(1), and 6651(a)(2). In addition, the taxpayer did not fall within any exception to the obligation to make estimated tax payments during those two years and, therefore, was liable for additions to tax under Code Sec. 6654(a). Finally, although he advanced tax-protestor arguments during his tax court trial, including an argument that Form 1040 did not comply with the Paperwork Reduction Act of 1995, sanctions under Code Sec. 6673(a)(1) were not imposed because he may not have understood the state of the law with respect to such arguments. The individual was warned, however, that if he advanced similar arguments in future proceedings the sanction would be imposed.
P failed to file Federal income tax returns for 2000 and 2001 until after he was issued a notice of deficiency for those taxable years. R determined deficiencies and additions to tax pursuant to secs. 6651(a)(1) and (2) and 6654(a), I.R.C. P conceded the deficiencies.

Held: P is liable for the additions to tax pursuant to secs. 6651(a)(1) and (2) and 6654(a), I.R.C.
MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: These consolidated cases are before the Court on petitions for judicial review of statutory notices of deficiency dated November 28, 2005. After concessions,1 the issues for decision are:

(1) Whether petitioner is liable for additions to tax under sections 6651(a)(1) and (2) and 6654(a) for the two taxable years at issue;2 and

(2) whether the Court should impose a penalty under section 6673(a)(1).
FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts and accompanying exhibits are hereby incorporated by reference. At the time he filed his petitions, petitioner resided in Loudon, Tennessee.

Petitioner failed to file Federal income tax returns for the 2000 and 2001 taxable years until February 23, 2007.3 Petitioner did not have any Federal income tax withheld and did not make any estimated tax payments for the 2000 and 2001 taxable years.

On November 28, 2005, respondent issued the aforementioned notices of deficiency in which, for petitioner's 2000 taxable year, respondent determined a Federal income tax deficiency in the amount of $2,014.20 and additions to tax pursuant to sections 6651(a)(1) and (2) and 6654(a) in the amounts of $453.20, $503.55, and $107.60, respectively. For petitioner's 2001 taxable year, respondent determined a Federal income tax deficiency in the amount of $2,851 and additions to tax pursuant to sections 6651(a)(1) and (2) and 6654(a) in the amounts of $641.48, $598.71,4 and $113.94, respectively.

Petitioner then filed timely petitions with this Court. On February 23, 2007, shortly before trial, petitioner submitted to respondent's counsel Forms 1040, U.S. Individual Income Tax Return, for the 2000 and 2001 taxable years. Those joint returns included the income of petitioner's spouse. Respondent agreed with the filing status and income reported in those returns. Respondent then filed motions for leave to file amended answers to amended petitions out of time. Petitioner did not oppose either the motions or the amended answers. The Court then granted respondent's motions for leave, and the amended answers were filed reflecting recalculated and increased deficiencies and additions to tax for the 2000 and 2001 taxable years. The recalculated and increased deficiencies and additions to tax were as follows: For petitioner's 2000 taxable year, a Federal income tax deficiency in the amount of $4,444 and additions to tax pursuant to sections 6651(a)(1) and (2) and 6654(a) in the amounts of $999.90, $1,111, and $239, respectively. For petitioner's 2001 taxable year, a Federal income tax deficiency in the amount of $5,389 and additions to tax pursuant to sections 6651(a)(1) and (2) and 6654(a) in the amounts of $1,212.53, $1,131.69,5 and $195, respectively.

Before trial, respondent filed a motion to consolidate these cases, which the Court granted on March 2, 2007. A trial was held on March 5, 2007, in Knoxville, Tennessee.
OPINION
I. Respondent's Burden of Production
Under section 7491(c), respondent bears the burden of production with respect to a taxpayer's liability for penalties or additions to tax. This means that respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438, 446 (2001). In instances where an exception to the penalty or addition to tax is afforded upon, for example, a showing of reasonable cause or substantial authority, the taxpayer bears the burden of "[coming] forward with evidence sufficient to persuade a Court that the Commissioner's determination is incorrect." Id. at 447.
II. Additions to Tax
Section 6651(a)(1) imposes an addition to tax of 5 percent per month or a fraction thereof up to a maximum of 25 percent for failure to file a timely return unless it is shown that such failure is due to reasonable cause and not to willful neglect. Section 6651(a)(2) imposes an addition to tax of 0.5 percent per month up to a maximum of 25 percent for failure to pay the amount of tax shown on a return. The two penalties combined, however, may not exceed 5 percent per month. See sec. 6651(c). Section 6654(a) imposes an addition to tax for underpayment of estimated income tax by an individual taxpayer. That addition to tax is computed by reference to four required installment payments of the taxpayer's estimated tax liability, each constituting 25 percent of the "required annual payment". Sec. 6654(c)(1), (d)(1)(A). For taxpayers whose adjusted gross income for the preceding year was $150,000 or less, the "required annual payment" is equal to the lesser of (1) 90 percent of the tax shown on the individual's return for the year or, if no return is filed, 90 percent of his or her tax for such year, or (2) if the individual filed a return for the immediately preceding taxable year, 100 percent of the tax shown on that return. Sec. 6654(d)(1)(A) and (B)(i) and (ii).

Respondent has satisfied his burden of production with respect to all three additions to tax. With respect to the section 6651(a)(1) addition to tax, respondent has satisfied his burden of production because, as the parties have stipulated, petitioner failed to file tax returns for the 2000 and 2001 taxable years until February 23, 2007.

Respondent has satisfied his burden of production with respect to the section 6651(a)(2) addition to tax because petitioner failed to pay his entire 2000 and 2001 tax liabilities as shown on the late returns that petitioner filed on February 23, 2007.6

Finally, respondent has satisfied his burden of production with respect to the section 6654(a) addition to tax because petitioner failed to file 2000 and 2001 Federal income tax returns until February 23, 2007, and made no estimated tax payments for the 2000 or 2001 taxable year. Because petitioner did not file a Federal income tax return for the preceding taxable years, 1999 and 2000, respondent has met his burden of producing evidence that petitioner had a required annual payment of estimated tax for 2000 and 2001. The Court also notes that petitioner does not fit within any of the exceptions listed in section 6654(e).7

At trial and in his briefs, petitioner challenges the additions to tax on the basis that Form 1040 does not comply with the Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. secs. 3501-3520 (2000). This meritless argument and others like it have been rejected repeatedly by this Court and Federal Courts of Appeals. See Wheeler v. Commissioner, 127 T.C. 200, 208 (2006) ("The Paperwork Reduction Act is not a defense to the addition to tax under section 6651(a)(1), nor does it create a loophole in the Code."); Dodge v. Commissioner, T.C. Memo. 2007-236 (finding that petitioner was "incorrect" insofar as he argued that respondent could not impose additions to tax pursuant to sections 6651(a)(1) and 6654(a) because Form 1040 does not comply with the PRA); see also Salberg v. United States, 969 F.2d 379, 384 (7th Cir. 1992) ("Statutes are not subject to the PRA and, as the government points out in its brief, every court that has considered the argument that the regulations and the instruction books promulgated by the IRS are within the scope of the PRA has rejected it."); United States v. Dawes, 951 F.2d 1189, 1193 (10th Cir. 1991) ("Congress enacted the PRA to keep agencies, including the IRS, from deluging the public with needless paperwork. It did not do so to create a loophole in the tax code."); United States v. Hicks, 947 F.2d 1356, 1359 (9th Cir. 1991) ("But even assuming without deciding that the IRS failed to comply with the PRA here, its failure does not prevent Hicks from being penalized.").8

Accordingly, the Court concludes that petitioner is liable for the section 6651(a)(1) and (2) and section 6654(a) additions to tax for his 2000 and 2001 taxable years.
III. Section 6673(a)(1) Penalty
Respondent, in his pretrial memorandum and on brief, has asked the Court to impose a penalty under section 6673(a)(1). Section 6673(a)(1) authorizes the Tax Court to impose a penalty not in excess of $25,000 on a taxpayer for proceedings instituted primarily for delay or in which the taxpayer's position is frivolous or groundless. "A position maintained by the taxpayer is `frivolous' where it is `contrary to established law and unsupported by a reasoned, colorable argument for change in the law.'" Williams v. Commissioner, 114 T.C. 136, 144 (2000) (quoting Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986)).

Because the Court has already classified arguments regarding the PRA as frivolous and as tax-protester arguments, petitioner should have known of the frivolous nature of his position in this case. See, e.g., Andreas v. Commissioner, T.C. Memo. 1993-551 (characterizing as frivolous an argument that Commissioner's alleged failure to comply with the PRA may bar the assessment and collection of Federal income tax); Aldrich v. Commissioner, T.C. Memo. 1993-290; McDougall v. Commissioner, T.C. Memo. 1992-683, affd. without published opinion 15 F.3d 1087 (9th Cir. 1993). Nevertheless, in light of the newness at the time of trial in this case of the Tenth Circuit's decision in Pond v. Commissioner, 211 Fed. Appx. 749 (10th Cir. 2007), affg. T.C. Memo. 2005-255, which petitioner appears to have misunderstood, we shall exercise great restraint and shall not this time impose a penalty under section 6673(a)(1). Petitioner is warned, however, that we shall not be so inclined should he again advance before the Court arguments, incorrectly relying on Pond v. Commissioner, supra, as frivolous as those advanced in these cases.

The Court has considered all of petitioner's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Appropriate decisions will be entered.
1 Petitioner has conceded the deficiencies, as increased in accordance with the computations of respondent's counsel, infra at 4, and at trial sought to discuss only his liability for the additions to tax and the sec. 6673(a)(1) penalty that respondent has asked the Court to impose.2 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the years in issue;3 Petitioner also never filed a Federal income tax return for 1999, which is relevant to his liability for an addition to tax under sec. 6654(a) for the 2000 taxable year.4 Respondent notes that the addition to tax under sec. 6651(a)(2) was only applied at 0.5 percent for the first 42 months after the return was due and that the addition to tax will continue to apply, not to exceed 25 percent in the aggregate.5 See supra note 4.6 Mendes v. Commissioner, 121 T.C. 308, 324-325 (2003), which suggests that petitioner's late return is not considered a "return" for purposes of the addition to tax, is distinguishable because respondent filed amended answers to the amended petitions and because petitioner then stipulated the recalculated and increased tax deficiencies.7 Sec. 6654(e) provides two exceptions to the sec. 6654(a) addition to tax. First, the addition is not applicable if the tax shown on the taxpayer's return for the year in question (or, if no return is filed, the taxpayer's tax for that year), reduced for these purposes by any allowable credit for wage withholding, is less than $1,000. Sec. 6654(e)(1). Second, the addition is not applicable if the taxpayer's tax for the full 12-month preceding taxable year was zero and the taxpayer was a citizen or resident of the United States. Sec. 6654(e)(2). In light of our earlier conclusion regarding petitioner's 2000 and 2001 deficiencies, petitioner is liable for deficiencies for 2000 and 2001 that net of withholding exceed $1,000. Furthermore, in light of our earlier conclusion regarding petitioner's liability for a deficiency for 2000, it has not been shown that petitioner had no tax liability in 2000. Because petitioner never filed a Federal income tax return for 1999, it has not been shown that he had no tax liability for that year.8 Petitioner relies heavily on the Court of Appeals for the Tenth Circuit's unpublished decision in Pond v. Commissioner,> 211 Fed. Appx. 749 (10th Cir. 2007), affg. T.C. Memo. 2005-255, in support of his argument regarding the PRA. An appeal in this case would normally lie in the Court of Appeals for the Sixth Circuit, absent a stipulation to the contrary. The Court of Appeals for the Tenth Circuit, in Pond, never reached the merits of the taxpayer's argument because the taxpayer did not include any of the Form 1040 in the record for the Court of Appeals for the Tenth Circuit to review. See id. at 752 n.2. Moreover, the Court of Appeals for the Tenth Circuit noted that "while the [Form] 1040 is an information request, it might be excepted from the provisions of * * * [the PRA, 44 U.S.C. sec. 3512] under the statutory origin theory discussed but neither adopted nor rejected in United States v. Dawes, 951 F.2d 1189, 1191-92 (10th Cir. 1991)." Id. Finally, we have already rejected reliance on Pond for the proposition that 1995 amendments to 44 U.S.C. sec. 3512 should alter the manner in which we view arguments based on the PRA. See Pate v. Commissioner, T.C. Memo. 2007-132.



Steven W. Pond, Petitioner-Appellant v. Commissioner of Internal Revenue, Respondent-Appellee. U.S. Court of Appeals, 10th Circuit; 06-9002, January 4, 2007, 211 FedAppx 749.Affirming Dec. 56,184(M); TC Memo. 2005-255; 90 TCM 468 .[ Code Sec. 151]Personal exemption: Exemption amount. --
Penalties against an individual for his failure to file returns and to pay estimated tax for the years at issue were proper. The individual's argument that he was not required to file tax returns because the Internal Revenue Code did not specify an exemption amount was rejected. The Code's provision of a specific number and a statutory formula for adjusting that number defied the individual's contention that the inadequately defined amount prevented him from being penalized for noncompliance.
[ Code Sec. 6012]Paperwork Reduction Act: Self-help provision: Evidence. --
The Tax Court properly upheld the IRS's assessment of penalties against an individual for his failure to file returns and to pay estimated tax for the years at issue. The individual's contention that he was protected by the self-help provision of the Paperwork Reduction Act of 1995 because the Form 1040 issued by the IRS failed to comply with the statute was rejected. He failed to present, as evidence, copies of the form to support his argument..
Before: Hartz, Ebel and Tymkovich, Circuit Judges. *
ORDER AND JUDGMENT **
T YMKOVICH, Circuit Judge: Steven W. Pond failed to file federal income tax returns or pay estimated taxes from 1995 to 2001. The Commissioner of Internal Revenue assessed Pond for his deficiencies in each of those years and charged him additional penalties pursuant to 26 U.S.C. §§6654 and 6651(a)(1). The Tax Court upheld those assessments. Pond, proceeding pro se, disputes the penalties. He argues 1) the 1040 Form (1040) issued by the Internal Revenue Service (IRS) fails to comply with the Paperwork Reduction Act of 1995, and 2) without a numerical value for the "exemption amount" provided by 26 U.S.C. §6012(a)(1)(A), there is no requirement to file an income tax return.Our jurisdiction to answer these questions arises under 26 U.S.C. §7482(a)(1). As copies of 1040s from the relevant years were not included in the record for our review, Pond provides insufficient support for his first contention; it is therefore denied. Moreover, we reject his second contention, and AFFIRM the Tax Court.
I. Background
Steven Pond has operated a helicopter repair and maintenance company since 1980. From 1995 to 2001, he failed to file any federal income tax returns and did not pay any estimated taxes despite grossing in excess of $65,000 each year. On April 8, 2003, the IRS issued three notices of deficiency for the periods running 1995 to 1997, 1998 to 2000, and 2001. In its three notices, the IRS determined that Pond had failed to report any income from 1995 to 2001 and was liable for penalties under 26 U.S.C. §6651(f), or alternatively §§6651(a)(1), and 6654.On July 8, 2003, Pond petitioned the Tax Court for relief. The Tax Court rejected the penalties assessed by the Commissioner for Pond's fraudulent failure to pay estimated tax, per 26 U.S.C. §6654, because it determined Pond never intended to defraud the government. That finding is not challenged on appeal. The Tax Court upheld the Commissioner's assessment of penalties under §§6651(a)(1) and 6654 for Pond's failure to file returns and failure to pay estimated tax.Pond challenges the U.S. Tax Court ruling on two bases. First, he asserts the 1040 issued by the IRS does not comply with the Paperwork Reduction Act of 1995, and therefore he cannot be assessed penalties because he is protected by the Act's self-help provision found at 44 U.S.C. §3512. Second, he insists that §6012(a)(1) only requires the filing of a federal tax return when gross income equals or exceeds the "exemption amount" and he therefore does not have to file because allegedly no specific "exemption amount" was defined by the Internal Revenue Code.
II. Discussion
We review the Tax Court's conclusions of law de novo and its factual findings for clear error. Jackson v. Commissioner [ 89-1 USTC ¶9123], 864 F.2d 1521 (10th Cir. 1989).A. Paperwork Reduction Act of 1995 and the 1040 FormThe Paperwork Reduction Act was passed in 1980 with the hope of rendering federal requirements on small businesses less burdensome. To aid small businesses in responding to governmental requests for information, the 1995 amended version of the Act includes a self-help provision:
(a) Notwithstanding any other provision of law, no person shall be subject to any penalty for failing to comply with a collection of information that is subject to this subchapter if --

(1) the collection of information does not display a valid control number assigned by the Director in accordance with this subchapter; 1 or

(2) the agency fails to inform the person who is to respond to the collection of information that such person is not required to respond to the collection of information unless it displays a valid control number.

(b) The protection provided by this section may be raised in the form of a complete defense, bar, or otherwise at any time during the agency administrative process or judicial action applicable thereto.
44 U.S.C. §3512.Pond suggests that he cannot be penalized for failing to file the 1040, because the 1040 is a collection of information covered by the Paperwork Reduction Act. He contends the 1040 bears neither of the items required by the Act: 1) a valid control number assigned by the Office of Management and Budget (OMB), or 2) proper notice that a person is not required to respond unless a valid control number is displayed. The Tax Court found Pond's arguments frivolous, addressed neither argument, and threatened him with future sanctions for bringing similarly frivolous arguments in subsequent proceedings.The Supreme Court, however, has made clear that tax forms such as the 1040 are information collection requests within the meaning of the Act. Dole v. United Steelworkers of America, 494 U.S. 26, 33 (1990) ("Typical information collection requests include tax forms, medicare forms, financial loan applications, job applications, questionnaires, compliance reports, and tax or business records. These information requests share at least one characteristic: The information requested is provided to a federal agency, either directly or indirectly.") (internal citations omitted); see United States v. Collins [ 91-2 USTC ¶50,554], 920 F.2d 619, 630 n.12 (10th Cir. 1990). Therefore, we need to ask whether the 1040 is excepted from the two requirements set out above in 44 U.S.C. §3512 2 and, if not, whether the 1040 complies with those requirements.But Pond did not include any of the 1040 that he challenges in the record for us to review, so we cannot address his arguments. With no support in the record for his petition of relief, we must deny his claim.B. Specific Exemption AmountEvery individual with gross income equaling or exceeding the "exemption amount" is required to file a federal income tax return. 26 U.S.C. §6012(a)(1). The relevant exemption amount is defined by 26 U.S.C. §151(d). 26 U.S.C. §6012(a)(1)(D)(ii). Pond argues the lack of a specific amount designated by §151(d) prevents penalizing him for non-compliance as it is unclear whether his income exceeds the necessary threshold for mandatory filing.Pond is mistaken: the Internal Revenue Code provides a specific amount. The exemption amount is generally defined as $2,000. 26 U.S.C. §151(d). This general exemption amount is then modified by a cost-of-living adjustment as provided for by the Code's reference to the Consumer Price Index at 26 U.S.C. §1(f)(3)-(6). The Code's provision of a specific number and statutory formula for adjusting that number defies Pond's contention that the exemption amount is inadequately defined for him to be penalized for noncompliance. We reject his argument.
III. Conclusion
For the foregoing reasons, we AFFIRM the Tax Court and order Pond to pay the taxes and additions assessed against him.* After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1(G). The cause is therefore ordered submitted without oral argument.** This order and judgment is not binding precedent except under the doctrines of law of the case, res judicata and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 (eff. Dec. 1, 2006) and 10th Cir. R. 32.1 (eff. Jan. 1, 2007).1 The Director in question is the Director of the Office of Management and Budget.2 For instance, while the 1040 is an information request, it might be excepted from the provisions of §3512 under the statutory origin theory discussed but neither adopted nor rejected in United States v. Dawes [ 92-2 USTC ¶50,493], 951 F.2d 1189, 1191-92 (10th Cir. 1991).


Alvin S. Brown
Tax Attorney
www.irstaxattorney.com
703 425-1400

www.irsforum.org to upload your IRS experiences