PENALTIES FOR PURSUING FRIVOLOUS TAX ARGUMENTS

Those who act on frivolous positions risk a variety of civil and criminal penalties.  Those who adopt these positions may face harsher consequences than those who merely promote them.  As the Seventh Circuit Court of Appeals noted in United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991), “Like moths to a flame, some people find themselves irresistibly drawn to the tax protester movement’s illusory claim that there is no legal requirement to pay federal income tax.  And, like moths, these people sometimes get burned.”

Taxpayers filing returns with frivolous positions may be subject to the accuracy-related penalty under section 6662 (twenty percent of the underpayment attributable to negligence or disregard of rules or regulations) or the civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud) or the erroneous claim for refund penalty under section 6676 (twenty percent of the excessive amount).  Additionally, late filed returns setting forth frivolous positions may be subject to an addition to tax under section 6651(f) for fraudulent failure to timely file an income tax return (triple the amount of the standard failure to file addition to tax under section 6651(a)(1)).  See Mason v. Commissioner, T.C. Memo. 2004-247, 88 T.C.M. (CCH) 398 (2004) (frivolous arguments may be indicative of fraud if made in conjunction with affirmative acts designed to evade paying federal income tax).

The Tax Relief Health Care Act of 2006 amended section 6702 to allow imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous submissions other than returns, if the purported returns or specified submissions are either based upon a position identified as frivolous by the IRS in a published list or reflect a desire to delay or impede tax administration.  Pub.L. 109-432, 120 Stat. 2922 (2006).  The term specified submission means:  a request for a hearing under section 6320 (relating to notice and opportunity for hearing on filing of a notice of lien), a request for hearing under section 6330 (relating to notice and opportunity for hearing before levy), an application under section 6159 (relating to agreements for payment of tax liability in installments), an application under section 7122 (relating to compromises), or an application under section 7811 (relating to taxpayer assistance orders).  This amendment is effective for frivolous returns or specified frivolous submissions made after March 15, 2007, the publication date of Notice 2007-30, 2007-14 I.R.B. 1, identifying the list of frivolous positions. 

In the 1980s, Congress showed its concern about taxpayers misusing the courts and obstructing the appeal rights of others when it enacted tougher sanctions for bringing frivolous cases before the courts.  Section 6673 allows the courts to impose a penalty of up to $25,000 when they come to any of three conclusions:

-   a taxpayer instituted a proceeding primarily for delay,

-   a position is frivolous or groundless, or

-   a taxpayer unreasonably failed to pursue administrative remedies.

An appeals court explained the rationale for the sanctions in Coleman v. Commissioner, 791 F.2d 68, 72 (7th Cir. 1986):  “The purpose of § 6673 . . . is to induce litigants to conform their behavior to the governing rules regardless of their subjective beliefs.  Groundless litigation diverts the time and energies of judges from more serious claims; it imposes needless costs on other litigants.  Once the legal system has resolved a claim, judges and lawyers must move on to other things.  They cannot endlessly rehear stale arguments . . . . [T]here is no constitutional right to bring frivolous suits . . . . People who wish to express displeasure with taxes must choose other forums, and there are many available.”

Taxpayers who rely on frivolous arguments may also face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206(1), a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.

Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on such arguments may also face various penalties such as:  (1) a $250 penalty under section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting an understatement of tax; and (3) criminal felony prosecution under section 7206(2) for which the penalty is up to $250,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

Further, promoters who fail to comply with court orders run the risk of incarceration for contempt of court.  A tax scam promoter named James A. Mattatall was arrested for failing to provide list of the names, addresses, phone numbers, and Social Security numbers of his customers to the Justice Department per the court’s order.  See http://www.usdoj.gov/tax/txdv04699.htm.  Also, a taxpayer named Charles D. Saunders was held in civil contempt, incarcerated and fined $250 a day until he complied with the court’s order directing him to fully comply with a summons from the IRS. See 2006 TNT 164-16 (August 18, 2006).

Relevant Case Law:

Jones v. Commissioner, 688 F.2d 17 (6th Cir. 1982) – the court found the taxpayer’s claim that his wages were paid in “depreciated bank notes” as clearly without merit and affirmed the Tax Court’s imposition of an addition to tax for negligence or intentional disregard of rules and regulations.

Baskin v. United States, 738 F.2d 975 (8th Cir. 1984) – the court found that the IRS’s assessment of a frivolous return penalty without a judicial hearing was not a denial of due process, since there was an adequate opportunity for a later judicial determination of legal rights.

Holker v. United States, 737 F.2d 751, 752-53 (8th Cir. 1984) – the court upheld the frivolous return penalty even though the taxpayer claimed the documents he filed to claim a refund did not constitute a tax return.  Noting that “[t]axpayers may not obtain refunds without first filing returns,” the court then found that A[h]is unexplained designation of his W-2 forms as ‘INCORRECT’ and his attempt to deduct his wages as the cost of labor on Schedule C also establish the frivolousness and incorrectness of his position.”

Rowe v. United States, 583 F. Supp. 1516, 1520 (D. Del. 1984) – the court upheld the viability of section 6702 against various objections, including that it was unconstitutionally vague because it does not define a “frivolous” return.  AFrivolous is commonly understood to mean having no basis in law or fact,” the court stated.

Szopa v. United States, 460 F.3d 884 (7th Cir. 2006) – the court found that a frivolous tax appeal warrants a presumptive sanction of $4,000, but that the court would impose an $8,000 sanction against taxpayers who make repeated frivolous appeals as Szopa did.

Gass v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,220 (10th Cir. 2001) – the court imposed an $8,000 penalty for contending that taxes on income from real property are unconstitutional.  The court had earlier penalized the taxpayers $2,000 for advancing the same arguments in another case.

Brashier v. Commissioner, 2001-1 U.S.T.C. (CCH) ¶ 50,356 (10th Cir. 2001) – the court imposed $1,000 penalties on taxpayers who argued that filing sworn income tax returns violated their Fifth Amendment privilege against self-incrimination, after the Tax Court had warned them that their argument – rejected consistently for more than seventy years – was frivolous.

McAfee v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,433 (N.D. Ga. 2001) – after losing the argument that his wages were not income and receiving a $500 penalty, the taxpayer returned to court to try to stop the government from collecting that penalty by garnishing his wages.  The court stated that “bringing this ill-considered, nonsensical litigation before this court for yet a second time is nothing but contumacious foolishness which wastes the time and energy of the court system,” and imposed a $1,000 penalty.

United States v. Rempel, 87 A.F.T.R.2d (RIA) 1810 (D. Ark. 2001) – the court warned the taxpayers of sanctions and stated: “It is apparent to the court from some of the papers filed by the Rempels that they have at least had access to some of the publications of tax protester organizations.  The publications of these organizations have a bad habit of giving lots of advice without explaining the consequences which can flow from the assertion of totally discredited legal positions and/or meritless factual positions.”

Sanctions Imposed Generally in Tax Court Cases:

Hanloh v. Commissioner, T.C. Memo. 2006-194, 92 T.C.M. (CCH) 266 (2006) - the court imposed sanctions of $25,000 where the taxpayer continued to advance frivolous and groundless arguments after having been warned that making those arguments would result in sanctions.

Stallard v. Commissioner, T.C. Memo. 2006-42, 91 T.C.M. (CCH) 881 (2006) - the court imposed sanctions of $25,000 where the taxpayer raised only frivolous and groundless arguments noting that the taxpayer had been warned in the current proceeding, and sanctioned in a prior proceeding, for raising frivolous arguments.

Silver v. Commissioner, T.C. Memo. 2005-281, 90 T.C.M. (CCH) 559 (2005) – the court imposed sanctions of $25,000 against the taxpayer for filing a frivolous suit challenging his tax liability and making only groundless arguments.

Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823 (2005 aff’d, 436 F.3d 533 (5th Cir. 2006) – the court imposed sanctions totaling $25,000 against the taxpayer for advancing arguments characteristic of tax-protester rhetoric that has been universally rejected by the courts, including arguments regarding the Sixteenth Amendment.  In affirming the Tax Court’s holding, the Fifth Circuit granted the government’s request for further sanctions of $6,000 against the taxpayer for maintaining frivolous arguments on appeal, and the Fifth Circuit imposed an additional $6,000 sanctions on its own, for total additional sanctions of $12,000.

Howard v. Commissioner, T.C. Memo. 2005-144, 89 T.C.M. (CCH) 1449 (2005) – the court imposed a $12,500 penalty against the taxpayer, who had been sanctioned previously, for making frivolous arguments and instituting the court proceedings primarily for delay.

Brenner v. Commissioner, T.C. Memo. 2004-202, 88 T.C.M. (CCH) 212 (2004) – the court imposed sanctions of $15,000 against the taxpayer where he continued making frivolous arguments despite being specifically warned by the court against doing so.

Chase v. Commissioner, T.C. Memo 2004-142, 87 T.C.M. (CCH) 1414 (2004) – the court imposed sanctions of $20,000 against the taxpayer for continuing to make frivolous arguments even though the court warned him that he would likely be penalized if he persisted.

Trowbridge v. Commissioner, T.C. Memo. 2003-164, 85 T.C.M. (CCH) 1450 (2003) – the court imposed sanctions against former husband and wife, $25,000 for Mr. Trowbridge and $15,000 for Ms. Martin, where the taxpayers failed to raise a single plausible argument.

Hill v. Commissioner, T.C. Memo. 2003-144, 85 T.C.M. (CCH) 1328, 1331 (2003) – the court imposed a $15,000 penalty against the taxpayer because he disregarded warnings from the court that his position was without merit.  Furthermore, the taxpayer had been previously sanctioned by the court in another proceeding for raising frivolous arguments.

Nunn v. Commissioner, T.C. Memo. 2002-250, 84 T.C.M. (CCH) 403, 410 (2002) – the court, on its own motion, imposed sanctions against the taxpayers in the amount of $7,500 after warning taxpayers repeatedly that their frivolous arguments could subject them to a penalty, stating “[w]here pro se litigants are warned that their claims are frivolous . . . and where they are aware of the ample legal authority holding squarely against them, a penalty is appropriate.”

Sawukaytis v. Commissioner, T.C. Memo. 2002-156, 83 T.C.M. (CCH) 1886, 1888 (2002) – the court imposed a $12,500 penalty against the taxpayer for arguing the income tax is an excise tax and that he did not engage in excise taxable activities.  The court found the taxpayer’s “position, based on stale and meritless contentions, is manifestly frivolous and groundless.”

Ward v. Commissioner, T.C. Memo. 2002-147, 83 T.C.M. (CCH) 1820, 1824 (2002) – the court imposed sanctions against the Wards in the amount of $25,000 stating that “[t]heir insistence on making frivolous protester type arguments indicates an unwillingness to respect the tax laws of the United States.”

Gill v. Commissioner, T.C. Memo. 2002-146, 83 T.C.M. (CCH) 1816, 1819 (2002) – the court imposed a $7,500 penalty against the taxpayer stating the taxpayer’s “insistence on making frivolous protester type arguments indicates an unwillingness to respect the tax laws of the United States.”

Monaghan v. Commissioner, T.C. Memo. 2002-16, 83 T.C.M. (CCH) 1102, 1104 (2002) – the court rejected the taxpayer’s frivolous arguments and imposed sanctions in the amount of $1,500, stating that “[h]e has caused this Court to waste its limited resources on his erroneous views of the tax law which he should have known are completely without merit.”

Hart v. Commissioner, T.C. Memo. 2001-306, 82 T.C.M. (CCH) 934 (2001) – the court imposed sanctions in the amount of $15,000 against the taxpayer, because his delaying actions caused the Service and the court to needlessly spend time preparing for the trial and writing the opinion.

Sigerseth v. Commissioner, T.C. Memo.2001-148, 81 T.C.M. (CCH) 1792, 1794 (2001) – pointing out that this case involving the use of trusts to avoid taxes was “a waste of limited judicial and administrative resources that could have been devoted to resolving bona fide claims of other taxpayers,” the court imposed a $15,000 penalty.

MatrixInfoSys Trust v. Commissioner, T.C. Memo. 2001-133, 81 T.C.M. (CCH) 1726, 1729 (2001) – in claiming that his income belonged to his trust, the court stated that the taxpayer had made “shopworn arguments characteristic of the tax-protester rhetoric that has been universally rejected by this and other courts,” and imposed a $12,500 penalty.

Madge v. Commissioner, T.C. Memo. 2000-370, 80 T.C.M. (CCH) 804 (2000) – after having warned the taxpayer that continuing with his frivolous arguments – that he was not a taxpayer, that his income was not taxable, and that only foreign income was taxable – would likely result in a penalty, the court imposed the maximum $25,000 penalty.

Haines v. Commissioner, T.C. Memo. 2000-126, 79 T.C.M. (CCH) 1844, 1846 (2000) – stating, “[p]etitioner knew or should have known that his position was groundless and frivolous, yet he persisted in maintaining this proceeding primarily to impede the proper workings of our judicial system and to delay the payment of his Federal income tax liabilities,” the court imposed a $25,000 penalty.

Sanctions Imposed in Collection Due Process Cases:

Hassell v. Commissioner, T.C. Memo. 2006-196, 92 T.C.M. (CCH) 273 (2006) – the court imposed sanctions against the taxpayer in the amount of $10,000 for continuing to assert frivolous arguments.

Forbes v. Commissioner, T.C. Memo. 2006-10, 91 T.C.M. (CCH) 672 (2006) - the court imposed a $20,000 sanction against the taxpayer holding the he failed to assert any coherent claims and only raised frivolous arguments

Burke v. Commissioner, 124 T.C. 189 (2005) – the court imposed a $2,500 penalty against Burke for wasting judicial resources with his frivolous arguments even though Burke abandoned several frivolous arguments at trial.

Carrillo v. Commissioner, T.C. Memo. 2005-290, 90 T.C.M. (CCH) 608 (2005) – the court imposed a $5,000 sanction against the taxpayers for making frivolous arguments despite being alerted to the potential use of sanctions against them.

Wetzel v. Commissioner, T.C. Memo. 2005-211, 90 T.C.M. (CCH) 266 (2005) – the court imposed a $15,000 penalty against Wetzel, a professional tax return preparer, for making frivolous arguments because he knew or should have known the arguments were frivolous.

Hamzik v. Commissioner, T.C. Memo. 2004-223, 88 T.C.M. (CCH) 316 (2004) – the court imposed sanctions of $15,000 against the taxpayer for his insistence in making frivolous arguments subsequent to the court warning him of the likelihood of penalties being imposed.

Aston v. Commissioner, T.C. Memo. 2003-128, 85 T.C.M. (CCH) 1260 – the court imposed a $25,000 penalty against the taxpayer for continuing to maintain frivolous arguments, despite having been warned in a previous proceeding before the court that those arguments were without merit.

Fink v. Commissioner, T.C. Memo. 2003-61, 85 T.C.M. (CCH) 976, 980 – the court imposed a $2,000 penalty against the taxpayer for raising “primarily for delay, frivolous arguments and/or groundless contentions, arguments, and requests, thereby causing the Court to waste its limited resources.”

Eiselstein v. Commissioner, T.C. Memo. 2003-22, 85 T.C.M. (CCH) 794, 796 (2002) – the court imposed a penalty of $5,000 against the taxpayer for raising “frivolous tax-protester arguments” and referred to the “unequivocal warning” issued by the court in Pierson v. Commissioner concerning the imposition of sanctions against taxpayers abusing the protections provided for in sections 6320 and 6330.

Haines v. Commissioner, T.C. Memo. 2003-16, 85 T.C.M. (CCH) 771, 773 (2003) – the court imposed a penalty of $2,000 against the taxpayers for making “protester arguments which have, on numerous occasions, been rejected by the courts.”

Gunselman v. Commissioner, T.C. Memo. 2003-11, 85 T.C.M. (CCH) 756, 759 (2003) – the court imposed a penalty of $1,000 against the taxpayer who argued “that there is no Internal Revenue Code section that makes him liable for taxes.”  The court characterized the taxpayer’s argument as a “frivolous, tax-protester argument.”

Young v. Commissioner, T.C. Memo. 2003-6, 85 T.C.M. (CCH) 739, 742 (2003) – the court imposed a penalty of $500 against the taxpayer for “raising the same arguments that [the court has] previously and consistently rejected as frivolous and groundless.”

Roberts v. Commissioner, 118 T.C. 365, 372-73 (2002) - the court imposed a $10,000 penalty against Roberts for making frivolous arguments stating “[i]n Pierson v. Commissioner . . . we issued an unequivocal warning to taxpayers concerning the imposition of a penalty under section 6673(a) on those taxpayers who abuse the protections afforded by sections 6320 and 6330 by instituting or maintaining actions under those sections primarily for delay or by taking frivolous or groundless positions in such actions.”

Rennie v. Commissioner, T.C. Memo. 2002-296, 84 T.C.M. (CCH) 611, 614 (2002) – the court imposed a $1,500 penalty against the taxpayer for making frivolous arguments and choosing “to ignore and/or not follow case precedent and interpretation of the statutory law.”

Tornichio v. Commissioner, T.C. Memo. 2002-291, 84 T.C.M. (CCH) 578, 582 (2002) – the court imposed a $12,500 penalty against the taxpayer for making frivolous arguments, stating “[f]ederal courts have unequivocally rejected his protester arguments and sanctioned him for raising them.”

Davich v. Commissioner, T.C. Memo. 2002-255, 84 T.C.M. (CCH) 429, 435 (2002) – the court imposed a $5,000 penalty against the taxpayer case, stating “it is clear that [the taxpayer] regards this proceeding as nothing but a vehicle to protest the tax laws of this country and to espouse his own misguided views, which we regard as frivolous and groundless.”

Davidson v. Commissioner, T.C. Memo. 2002-194, 84 T.C.M. (CCH) 156, 160-61 (2002) – the court imposed a $4,000 penalty for raising groundless arguments noting that “[d]uring the administrative hearing, petitioner was provided with a copy of the Court’s opinion in Pierson v. Commissioner [115 T.C. 576, 581 (2000)]. . . and was warned that his arguments were frivolous.”

Davis v. Commissioner, T.C. Memo. 2001-87, 81 T.C.M. (CCH) 1503 (2001) –  after warning that the taxpayer could be penalized for presenting frivolous and groundless arguments, the court imposed a $4,000 penalty.

Pierson v. Commissioner, 115 T.C. 576, 581 (2000) - the court considered imposing sanctions against the taxpayer, but decided against doing so, stating, “we regard this case as fair warning to those taxpayers who, in the future, institute or maintain a lien or levy action primarily for delay or whose position in such a proceeding is frivolous or groundless.”

Sanctions Imposed Against Taxpayer’s Counsel:

Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected the taxpayer’s argument that income received from sources within the United States is not taxable income stating that “[t]he 861 argument is contrary to established law and, for that reason, frivolous.”  The court imposed sanctions against the taxpayer in the amount of $15,000, as well as sanctions against the taxpayer’s attorney in the amount of $10,500, for making such groundless arguments.

The Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) – concluding that the petitioners chose “to pursue a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments,” the court imposed a $25,000 penalty against them, and also imposed sanctions of more than $10,600 against their attorney for arguing frivolous positions in bad faith.

Edwards v. Commissioner, T.C. Memo. 2002-169, 84 T.C.M. (CCH) 24, 42 (2002) – the court found that sanctions were appropriate against both the taxpayer and the taxpayer’s attorney for making groundless arguments.  The court stated that “[a]n attorney cannot advance frivolous arguments to this Court with impunity, even if those arguments were initially developed by the client.”  In a supplemental opinion, the court imposed sanctions against the taxpayer in the amount of $24,000 and against the taxpayer’s attorney in the amount of $13,050.  Edwards v. Commissioner, T.C. Memo. 2003-149, 85 T.C.M. (CCH) 1357.