Taxpayer Advocate Annual Report - 6673

[jcolvin2]

The Taxpayer Advocate issued its annual report today at

http://www.irs.gov/advocate/article/0,, ... 16,00.html
http://www.irs.gov/newsroom/article/0,, ... 84,00.html

Most Litigated Issue No. 9 was the frivolous issue penalty under section 6673. The text is as follows:

MLI
#9
Frivolous Issues Penalty Under Internal Revenue Code Section 6673
and Related Appellate-Level Sanctions

SUMMARY

From June 1, 2010, through May 31, 2011, the federal courts issued decisions in at least 43
cases involving the Internal Revenue Code (IRC) § 6673 “frivolous issues” penalty, and at
least one case involving an analogous penalty at the appellate level. These penalties are
imposed against taxpayers for maintaining a case primarily for delay, raising frivolous
arguments, unreasonably failing to pursue administrative remedies, or filing a frivolous
appeal.1 In many of the cases we reviewed, taxpayers escaped liability for the penalty but
were warned they could face sanctions for similar conduct in the future.2 Nonetheless, we
included these cases in our analysis to illustrate what conduct will and will not be tolerated
by the courts.

PRESENT LAW

The U.S. Tax Court is authorized to impose a penalty against a taxpayer if the taxpayer
institutes or maintains a proceeding primarily for delay, takes a frivolous position in a proceeding, or unreasonably fails to pursue available administrative remedies.3 The maximum
penalty is $25,000.4 In some cases, the IRS requests that the Tax Court impose the penalty;5
in other cases, the Tax Court exercises its discretion, sua sponte,6 to do so.
Taxpayers who institute an action pursuant to IRC § 74337 in a United States District Court
for damages against the United States could be subject to a maximum penalty of $10,000 if
the court determines the taxpayer‘s position in the proceedings is frivolous or groundless.8

In addition, IRC § 7482(c)(4),9 §§ 1912 and 1927 of Title 28 of the U.S. Code,10 and Rule 38
of the Federal Rules of Appellate Procedure11 (among other laws and rules of procedure)
authorize federal courts to impose penalties against taxpayers or attorneys for raising frivolous
arguments or using litigation tactics primarily to delay the collection process. Because
the sources of authority for imposing appellate-level sanctions are numerous and some
of these sanctions may be imposed in non-tax cases, this report focuses primarily on the
IRC § 6673 penalty. However, Table 9 in Appendix III lists one tax case in which a Court of
Appeals imposed sanctions under other authorities.12

ANALYSIS OF LITIGATED CASES

We analyzed 43 opinions issued between June 1, 2010, and May 31, 2011, that addressed
the IRC § 6673 penalty. Thirty-six of these opinions were issued by the Tax Court and
seven were issued by U.S. Courts of Appeals in cases brought by taxpayers who sought review
of the Tax Court’s imposition of the penalty. Notably, the Courts of Appeals sustained
the Tax Court’s position in all seven cases.

In 18 cases, the Court imposed penalties under IRC § 6673, with the amounts ranging from
$500 to the maximum of $25,000. We reviewed seven cases where taxpayers prevailed
when the IRS asked the court to impose a penalty. In five of these cases the court warned
the taxpayers not to bring similar arguments in the future.13 In the remaining two cases
where the taxpayer prevailed when the IRS sought imposition of the penalty, the court
found that the taxpayers’ behaviors did not rise to the level of asserting frivolous issues or
being solely for the purpose of delaying proceedings.14 Two taxpayers were represented by
attorneys; all 41 others appeared pro se (represented themselves). The taxpayers in these
cases presented a wide variety of arguments that the courts have generally rejected on numerous occasions. Upon encountering these arguments, the courts almost invariably cited
the language set forth in Crain v. Commissioner:

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. The constitutionality of our income tax system—including the role played within that system by the Internal Revenue Service and the Tax Court—has long been
established.15

In the cases we reviewed, taxpayers raised the following issues that the Tax Court deemed
frivolous. Consequently, the taxpayers were subject to a penalty under IRC § 6673(a)(1)
(or, in some cases, the court warned that such arguments were frivolous and could lead to a
penalty in the future if the taxpayers maintained the same positions):
■■ Citizens of certain states are not subject to income taxes: At least four taxpayers
argued that as residents of a “sovereign,” “compact,” or “independent” state, they are not
subject to income taxes imposed by the United States government.16 The Tax Court
imposed penalties of $1,00017 to $5,00018 in these cases.
■■ IRS forms and notices violate the Paperwork Reduction Act because they do not
display a valid Office of Management and Budget (OMB) Control Number: In at
least two cases, taxpayers argued that IRS forms and notices violated the Paperwork
Reduction Act (PRA), and therefore the taxpayers had no duty to file tax returns.19
Under the PRA, OMB is given authority to review an agency “collection of information”
and to assign a control number to each “collection of information” it approves.20
If a “collection of information” does not display a current control number or fails to
state that the request for information is not subject to the PRA, the PRA provides that
a person cannot be subject to a penalty for the failure to maintain or provide information.
21 These taxpayers argued that because certain IRS forms and notices do not
contain OMB control numbers, the PRA protects them from any penalties for failure to
comply with the IRS’s request for information. The courts have consistently rejected
such arguments.22
■■ Only income earned from the United States government or entities associated with
the United States government is taxable: Taxpayers in at least three cases presented
arguments that only federal government employees, public servants, those who earn
income from the United States government, or those who earn income from federally
licensed corporations are subject to the income tax.23

CONCLUSION
Taxpayers in the cases analyzed this year presented the same arguments raised and repeated
year after year, which the courts routinely and universally reject.24 Taxpayers avoided
the IRC § 6673 penalty in only seven cases where the IRS requested it, demonstrating the
willingness of the courts to penalize taxpayers when they offer frivolous arguments or institute
a case merely for delay. Where the IRS has not requested the penalty, the court may
nonetheless raise the issue sua sponte, and in many cases imposes the penalty or cautions
the taxpayer that similar future behavior will result in a penalty.25 Finally, the U.S. Courts
of Appeals have shown their willingness to uphold the penalties imposed by the Tax Court
without fail in the cases analyzed for the period between June 1, 2010, and May 31, 2011.


1 The Tax Court generally imposes the penalty under IRC § 6673(a)(1). Other courts may impose the penalty under IRC § 6673(b)(1). U.S. Courts of
Appeals generally impose sanctions under IRC § 7482(c)(4), 28 U.S.C. § 1927, or Rule 38 of the Federal Rules of Appellate Procedure, although some
appellate-level penalties may be imposed under other authorities.
2 See, e.g., Forrest v. Comm’r, T.C. Memo. 2010-263.
3 IRC §§ 6673(a)(1)(A), (B), and (C).
4 IRC § 6673(a)(1).
5 The standards for the IRS’s decision to seek sanctions under IRC § 6673(a)(1) are found in the Chief Counsel Directives Manual (CCDM). See CCDM
35.10.2 (Aug. 11, 2004). For sanctions of opposing parties, under IRC § 6673(a)(2), all requests for sanctions are reviewed by the designated agency
sanctions officer under Executive Order 12988 on Civil Justice Reform. This review ensures uniformity on a national basis. See, e.g., CCDM 35.10.2.2.3
(Aug. 11, 2004).
6 “Sua sponte” means without prompting or suggestion; on its own motion. Black’s Law Dictionary (9th ed. 2009). Thus, for conduct that it finds particularly
offensive, the Tax Court can choose to impose a penalty under IRC § 6673 even if the IRS has not requested the penalty. See, e.g., Hyde v. Comm’r, T.C.
Memo. 2011-104.
7 IRC § 7433(a) allows taxpayers a civil cause of action against the United States if an IRS employee intentionally or recklessly disregards any IRC provision
or regulation promulgated under the IRC.
8 IRC § 6673(b)(1).
9 IRC § 7482(c)(4) provides that the United States Courts of Appeals and the Supreme Court have the authority to impose a penalty in any case where the
Tax Court’s decision is affirmed and the appeal was instituted or maintained primarily for delay or the taxpayer’s position in the appeal was frivolous or
groundless.
10 28 U.S.C. § 1912 provides that when the Supreme Court or a United States Court of Appeals affirms a judgment, the court has the discretion to award to
the prevailing party just damages for the delay, and single or double costs. 28 U.S.C. § 1927 authorizes federal courts to sanction an attorney or any other
person admitted to practice before any court of the United States or any territory thereof for unreasonably and vexatiously multiplying proceedings.
11 Federal Rule of Appellate Procedure 38 provides that if a United States Court of Appeals determines an appeal is frivolous, the court may award damages
and single or double costs to the appellee.
12 See Walbaum v. Comm’r, 387 Fed. Appx. 668 (8th Cir. 2010), cert. denied, 131 S. Ct. 1056 (2011) (imposing $5,000 in damages pursuant to 28 U.S.C.
§ 1912 for the frivolous appeal).
13 See, e.g., Cook v. Comm’r, T.C. Memo. 2010-137.
14 See Anyika v. Comm’r, T.C. Memo. 2011-69 and Pace v. Comm’r, T.C. Memo. 2010-272.
15 Crain v. Comm’r, 737 F.2d 1417, 1417-18 (5th Cir. 1984).
16 See, e.g., Callahan v. Comm’r, T.C. Memo. 2010-201 and Mooney v. Comm’r, T.C. Memo. 2011-35.
17 See McLaurine v. Comm’r, T.C. Memo. 2010-236.
18 See Burchfield v. Comm’r, T.C. Memo. 2011-30.
19 See Hyde v. Comm’r, T.C. Memo. 2011-104 and Antolick v. Comm’r, 107 A.F.T.R.2d (RIA) 1768 (11th Cir. 2011), aff’g Tax Ct. No. 21635-08L.
20 44 U.S.C. §§ 3502, 3504, 3507(a).
21 44 U.S.C. § 3512.
22 See U.S. v. Dawes, 951 F.2d 1189, 1191-93 (10th Cir. 1991) (citations omitted); Pitts v. Comm’r, T.C. Memo. 2010-101.
23 See, e.g., Burchfield v. Comm’r, T.C. Memo. 2011-30.