T.C. Memo. 2021-29
UNITED STATES TAX COURT
SHEILA ANN SMITH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1312-16L. Filed March 10, 2021.
P submitted purported income tax returns and copies thereof, each of which reported zero gross income, zero taxable income, and zero tax. The submissions also claimed refunds for amounts withheld by employers for Social Security tax, Medicare tax, and Federal income tax. R assessed an I.R.C. sec. 6702(a) frivolous return penalty for each submission. P failed to pay the penalties, and R filed a notice of Federal tax lien (NFTL) to assist collection of the penalties. P requested a collection due process hearing in which she challenged her liability for the penalties, arguing, among other things, that wages are not taxable.
Held: A photocopy of an original purported return for which R has no record and on which P expects R to act in making a refund purports to be a return of income tax.
Held, further, a photocopy of a purported prior return on which no action is requested does not purport to be a return of income tax.
Served 03/10/21 -2-
[*2] Held, further, R has met his burden of proving that four purported returns were frivolous tax returns.
Held, further, R properly assessed I.R.C. sec. 6702(a) frivolous return penalties with respect to three of those returns.
Held, further, R's NFTL filing is sustained with respect to the three purported returns.
Held, further, P is liable for an I.R.C. sec. 6673 penalty for maintaining her frivolous positions in this proceeding.
Sheila Ann Smith, pro se.
William D. Richard, Lisa M. Oshiro, and Alicia H. Eyler, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: This case is before us to review a determination by the
Internal Revenue Service (IRS) Independent Office of Appeals (Appeals)1
sustaining respondent's filing of a notice of Federal tax lien (NFTL) in an effort to
collect six unpaid penalties assessed against petitioner for filing frivolous tax
1 On July 1, 2019, the IRS Appeals Office was renamed the Internal Revenue Service Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). Some of the events in this case predate that renaming. We use the term "Appeals" without distinction to refer to the office both before and after the name change. -3-
[*3] returns for her tax years 2008 through 2011. We will sustain the
determination in part, with respect to three of the six assessed penalties. We will
also impose on petitioner an additional penalty for advancing frivolous positions
in this proceeding.
All section references are to the Internal Revenue Code of 1986, as
amended. All dollar amounts are rounded to the nearest dollar.
FINDINGS OF FACT
The parties have stipulated certain facts and the authenticity of certain
documents. The facts stipulated are so found, and documents stipulated are
accepted as authentic. Petitioner lived in Washington State when she filed the
petition.
Purported Tax Returns and Penalties Assessed
-- 2008 Tax Year
In June 2012, respondent notified petitioner's husband, George J. Smith, that
respondent had no record of receiving his 2008 tax return. In response, on June
26, 2012, petitioner and her husband (Smiths) sent to respondent a letter (June 26
letter) claiming that they had sent "an original 2008 return with proper forms and
statements * * * to the Fresno Service Center". They added: "As you have lost or
misplaced my return, please find enclosed copies of the original filing of my 2008 -4-
[*4] 1040 Return and filed supporting documents". That copy (2008 Form 1040
copy No. 1) reproduces a 2008 Form 1040, U.S. Individual Income Tax Return,
dated April 14, 2009, claiming joint filing status and signed by both Smiths under
penalty of perjury (2008 Form 1040). The 2008 Form 1040 copy No. 1 reports an
overpayment of 2008 income tax, as follows:
Total income -0- Adjusted gross income -0- Total tax -0- Federal income tax withheld $5,614 Overpayment and refund requested 5,614
By the June 26 letter, the Smiths demanded "a full and complete refund
within 30 days" of the overpayment evidenced by the 2008 Form 1040 copy No. 1.
Besides the 2008 Form 1040 copy No. 1, the Smiths enclosed with the June 26
letter copies of three Forms 4852, Substitute for Form W-2, Wage and Tax
Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and two corrected Forms
1099-MISC, Miscellaneous Income. One Form 4852 is for Mr. Smith, naming the
employer or payer as Corporate Express Office Products, Inc. (Corporate Express).
It shows: -5-
[*5] Wages, tips, and other compensation -0- Social Security wages -0- Medicare wages and tips -0- Social Security tips -0- Federal income tax withheld $1,309 State income tax withheld -0- Local income tax withheld -0- Social Security tax withheld 3,096 Medicare tax withheld 724
A second Form 4852 is for petitioner, naming the employer or payer as
Gregory Wong--New York Life Insurance (N.Y. Life). The third Form 4852 is for
petitioner, naming the employer or payer as Alan McGaw & Associates. Those
two forms are similar to the first Form 4852 in that they show zero for the first
four items and the sixth and seventh items. They show various taxes withheld.
The two corrected Forms 1099-MISC are for petitioner, one showing the
payer as Microsoft Corp. (Microsoft) and reporting "Other income" as zero and the
second showing the payer as World Ventures Holdings, LLC, and reporting
"Nonemployee compensation" of zero. Petitioner added on the page displaying
each corrected Form 1099-MISC the following statement. -6-
[*6] This Statement includes the above representation of a Form 1099- MISC. 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.
During 2008, Mr. Smith worked for Corporate Express and received money
in exchange for his services. Petitioner worked for Alan McGaw, N.Y. Life,
Microsoft, and World Ventures Holdings, LLC, and, from each, received money in
exchange for her services.
On September 11, 2012, respondent sent petitioner a Letter 3176C
informing her that the 2008 Form 1040 copy No. 1 claimed a frivolous position
and giving her the opportunity to correct the submission. The letter warned her
that, if no correction was made, a penalty under section 6702, Frivolous Tax
Submissions, would be assessed. In response, on September 28, 2012, the Smiths -7-
[*7] sent respondent a letter disagreeing that their 2008 return position was
frivolous and again demanding a refund of their claimed 2008 tax overpayment.
The letter enclosed another copy of the 2008 Form 1040 (2008 Form 1040 copy
No. 2). The two copies of the 2008 Form 1040 are identical. Petitioner did not
submit a corrected 2008 return to respondent.
The record contains a Form 8278, Assessment and Abatement of
Miscellaneous Civil Penalties, dated December 10, 2012, proposing the
assessment of a $5,000 section 6702(a) penalty against petitioner with respect to
the 2008 Form 1040 copy No. 1. The form contains blocks for the "Originator",
"Manager", and "Supervisor". The Originator block is signed "Tara C. Durrant",
the Manager block contains the printed name "Sherri Holcomb", and the Reviewer
block is signed "Sherri Holcomb". On December 10, 2012, respondent assessed
the penalty.2
The record contains a Form 8278 dated October 3, 2012, proposing the
assessment of a $5,000 section 6702(a) penalty against petitioner with respect to
the 2008 Form 1040 copy No. 2. The Originator block is signed "Tara C.
2 Notwithstanding that petitioner and Mr. Smith made joint returns for the five years at issue, we address only sec. 6702(a) penalties assessed against petitioner. We have no information whether respondent assessed sec. 6702(a) penalties against Mr. Smith. -8-
[*8] Durrant", the Manager block contains the printed name "Sherri Holcomb",
and the signature in the Reviewer block is "Darrell Owen". On February 11, 2013,
respondent assessed the penalty.
-- 2009 Tax Year
On or about November 7, 2012, respondent received from the Smiths an
original Form 1040X, Amended U.S. Individual Income Tax Return (2009 Form
1040X). On that form, signed by both Smiths under penalty of perjury, they report
the following:
Correct amount of adjusted gross income -0- Correct amount of tax -0- Correct amount of withholding $5,719 Original return overpayment 2,035 Total refund requested 3,684
The Smiths attached to the 2009 Form 1040X two Forms 4852, both for
Mr. Smith: one for Staples Contract & Commercial (Staples) and the second for
Corporate Express. The entries on those Forms 4852 are similar to the entries on
the Forms 4852 accompanying the copies of the 2008 Form 1040 (showing no
items of income and various withholdings). -9-
[*9] A letter from the Smiths accompanying the 2009 Form 1040X explains that
the Forms 4852 are necessary because
the companies provided W-2 which erroneously alleged payments of Internal Revenue Code * * * sections 2121 [sic section 3121, perhaps] & 3401 wages that are hereby disputed.
They have listed payments as "wages" as defined in the Internal Revenue Code * * * sections 3401(a) and 3121(a). I am rebutting their claim, stating that I am a private-sector citizen (non-federal employee_ employed by a private-sector company (non-federal entity) as defined in 3401(c)(d). I am not employed in a "trade or business" nor am I an "officer of a corporation". * * *
During 2009, Mr. Smith worked for both Corporate Express and Staples and
received money in exchange for his services rendered.
On or about March 21, 2013, respondent sent petitioner Letter 3176C
informing her that the 2009 Form 1040X claimed a frivolous position and giving
her the opportunity to correct the submission. Petitioner did not submit a
corrected 2009 Form 1040X.
The record contains a Form 8278 dated July 22, 2013, proposing the
assessment of a $5,000 section 6702(a) penalty against petitioner with respect to
the 2009 Form 1040X. The Originator block is signed "Tara Durrant", the
Manager block contains the printed name "Joan Evans", and the Reviewer block is
signed "Joan Evans". On July 22, 2013, respondent assessed the penalty. -10-
[*10] -- 2010 and 2011 Tax Years
Stipulated exhibits demonstrate that the pattern for 2010 and 2011 was
similar to the pattern for 2008. For 2010, respondent received from the Smiths a
Form 1040 (2010 Form 1040) dated April 17, 2012, and signed by both of them
under penalty of perjury. On August 8, 2012, respondent sent the Smiths a Letter
3176C with respect to the 2010 Form 1040. The Smiths did not submit a corrected
2010 Form 1040, but, instead, in September 2012, they sent respondent a
photocopy of the 2010 Form 1040 (2010 Form 1040 copy). For 2011, respondent
received from the Smiths a Form 1040 (2011 Form 1040) dated April 14, 2012,
and signed by both of them under penalty of perjury. On March 13, 2013,
respondent sent the Smiths a Letter 3176C with respect to the 2011 Form 1040.
He received no response.
Both the 2010 and 2011 Forms 1040 and the 2010 Form 1040 copy report
no items of income but do report withheld taxes and request refunds of the
withheld amounts. All are accompanied by Forms 4852 with zero or no amount
shown in all income categories and a letter explaining how payers had
mischaracterized as wages amounts paid to one or the other of them that were not
wages. -11-
[*11] During 2010, Mr. Smith worked for Staples and petitioner worked for
Voters for Dick Muri, and both received money in exchange for their services.
During 2011, Mr. Smith worked for Staples and received money in exchange for
his services. Petitioner provided services to Microsoft and received payment from
it.
The record contains three Forms 8278, dated March 13, 2014, each
proposing the assessment of a $5,000 section 6702(a) penalty against petitioner,
one with respect to the 2010 Form 1040, the second with respect to the 2010 Form
1040 copy, and the third with respect to the 2011 Form 1040. All contain the
printed name "Mrs. McNeeley" in the Originator block, and each contains the
printed name "Rochelle Nichols" in the Manager block and the signature
"Rochelle Nichols" in the Reviewer block. On April 7, 2014, respondent assessed
the three $5,000 penalties.
The Determination
In February 2015, respondent filed the NFTL and sent petitioner notice of
the filing and of her right to a so-called collection due process (CDP) hearing
pursuant to section 6320. In response, petitioner timely filed with respondent a
Form 12153, Request for a Collection Due Process or Equivalent Hearing.
Petitioner explained in a letter attached to the form that she should not be subject -12-
[*12] to collection action because she is not an officer, employee, or elected
official of the United States or the District of Columbia. Moreover, she continued,
there was no tax liability to be collected because, for every year questioned by
respondent, she had filed a Form 1040 and was expecting a refund.
Petitioner's Form 12153 was assigned to Appeals Settlement Officer (SO)
Poonam Sharma. By a series of letters, SO Sharma scheduled a telephone
conference with petitioner for September 24, 2015. Petitioner responded, asking
that a new hearing date be set at least 60 days thereafter and that the hearing be
conducted by correspondence. SO Sharma answered that she would resolve
petitioner's case on the basis of petitioner's written submission, and she invited
petitioner to provide her with a proposal or some resolution for the assessed
penalties or with any other information that petitioner wanted to provide. She
warned petitioner that, if she did not receive petitioner's submission by October
12, 2015, she would make her determination using the information already in the
file.
On October 11, 2015, petitioner sent a letter to SO Sharma stating that the
IRS had not answered her requests for clarification as to the frivolous nature of her
returns. She did not propose any collection alternative. She did, however,
disagree with and challenge her liability for any section 6702 penalty. She argued, -13-
[*13] among other things, that the returns she submitted did contain information
on which the substantial correctness of her self-assessment could be judged and
did not contain information that, on its face, indicated that her self-assessment was
substantially incorrect. Those claims, if true, would defeat application of the
frivolous return penalty imposed by section 6702(a). See infra sec. II.B.
Shortly thereafter, SO Sharma determined that Appeals should sustain the
filing of the NFTL, on the basis of her review of the case file, case history, and
various transcripts of account. Her case activity record states that she verified
from computer transcripts that (1) assessments were properly made for the
penalties and years in question, (2) notice and demand for payment were properly
mailed to petitioner's last known address, and (3) there was a balance due when
the NFTL was requested. By letter dated December 11, 2015, an Appeals team
manager informed petitioner that the filing of the NFTL was sustained.
The Petition
Petitioner timely petitioned for us to review the determination. She asks to
have the NFTL withdrawn and the assessed section 6702 penalties abated. As best
we understand petitioner's grounds, they are that her (i.e., the Smiths') returns are
accurate and take no frivolous position. She also recites a variety of arguments
that respondent cannot challenge her returns or that compensation for services -14-
[*14] cannot be taxed. Relying 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'." Moreover, she claims that, before respondent can
assess a section 6702 penalty, he is "required" by section 6020(b) and the aug-
menting regulations "to prepare and sign a substitute return", which he did not do.
Trial and Briefing
Trial in this case was held in Seattle, Washington, in May 2017. Briefing
was completed in November 2017. In December 2017, the Court issued a report in
Graev v. Commissioner, 149 T.C. 485 (2017), supplementing and overruling in
part 147 T.C. 460 (2016). In Graev v. Commissioner, 149 T.C. at 493, we held
that, in cases in which the Commissioner bears the burden of production with
respect to penalties under section 7491(c), that burden includes evidence of
written supervisory approval of penalties as required by section 6751(b)(1). And
that section requires the approval be by the "immediate supervisor" of the
individual making the "initial determination" of the penalty.3
3 The section continues "or such higher level official as the Secretary may designate." Sec. 6751(b)(1). The Secretary has made no such designation. -15-
[*15] Subsequently, petitioner moved that the Court compel respondent to provide
evidence of proper approval of the section 6702(a) penalties, "showing that an
Immediate Supervisor approved them in writing prior to the penalties being
asserted upon petitioner." As a consequence, we offered both parties the
opportunity to file supplemental briefs addressing whether respondent had met his
burden of production. Petitioner filed a supplemental brief, arguing that the
evidence in the record (i.e., the various Forms 8278) was inadequate to carry
respondent's burden.
Remand
In July 2020, we remanded this case to Appeals for a supplemental hearing
to comply with the verification requirements of section 6330(c)(1). Section
6330(c)(1) requires the settlement officer at a CDP hearing to obtain from the
Secretary verification that the requirements of any applicable law or administrative
procedure have been met. SO Sharma's case activity record evidences that she had
verified from computer transcripts (1) an assessment of the penalties, (2) notice
and demand for payment, and (3) that there was a balance due. It is silent with
respect to section 6751(b)(1) compliance. Also, the Forms 8278 in evidence
(Forms 8278) were not among the documents stipulated to constitute the
administrative record in this case. Because our abuse-of-discretion review is -16-
[*16] limited to the administrative record, we could not take them into account in
determining whether SO Sharma verified section 6751(b)(1) compliance. Finally,
nothing on any of the forms identifies the individual signing the form as the
"immediate supervisor" of the originator of the form, whom we presumed to be the
individual making the initial determination of assessment of the penalty.
Appeals accorded petitioner a supplemental hearing and Appeals Team
Manager Brian J. Hefty sent petitioner a Supplemental Notice of Determination
Concerning IRS Collection Actions under Internal Revenue Code Sections 6320
or 6330 (supplemental determination). The principal holding of the supplemental
determination is that Appeals would sustain the NFTL but abate the penalty
assessed with respect to the 2008 Form 1040 copy No. 2. That determination
followed the recommendation of SO Steve Lerner to whom the remand had been
assigned. To comply with the remand instruction to verify compliance with the
section 6751(b)(1) written supervisory approval requirements, SO Lerner emailed
copies of the Forms 8278 to Mss. Holcomb, Evans, and Nichols, asking whether,
when they signed the forms, they were directly managing the originator of the
form. Someone forwarded SO Lerner's email to Andrea Ipson, IRS Frivolous
Return Program Coordinator. SO Lerner received replies form Mss. Evans and -17-
[*17] Ipson. The following chart shows relevant information regarding the Forms
8278 (the signatures underscored).
Letter Form Purported 3176C 8278 Penalty return sent signed Originator Manager Reviewer assessed 2008 9/11/12 12/10/12 Tara C. Sherri Sherri 12/10/12 Form Durrant Holcomb Holcomb 1040 copy No. 1 2008 1/19/13 Tara C. Sherri Darrel 2/11/13 Form Durrant Holcomb Owen 1040 copy No. 2 2009 3/21/13 7/22/13 Tara C. Joan Joan 7/22/13 Form Durrant Evans Evans 1040X 2010 8/8/12 3/13/14 Mrs. Rochelle Rochelle 4/7/14 Form McNeeley Nichols Nichols 1040 2010 3/13/14 Mrs. Rochelle Rochelle 4/7/14 Form McNeeley Nichols Nichols 1040 copy 2011 3/13/13 3/13/14 Mrs. Rochelle Rochelle 4/7/14 Form McNeeley Nichols Nichols 1040
Ms. Ipson replied to SO Lerner's email as follows:
I have reviewed the F8278's as you requested. Tara Durrant was the initiating employee for 2008 and 2009. Sherri Holcomb, Joan Evans and Darrell Owen were the department managers and direct -18-
[*18] supervisors of Tara Durrant at the time of each signature. Rochelle Nichols was the direct supervisor of Mrs. McNeeley at the time of signature for the 2010 and 2011 penalty forms.
Ms. Evans replied that, when, on July 22, 2013, she signed the Form 8278
with respect to petitioner's 2009 Form 1040X, she was Ms. Durrant's direct
manager.
With respect to the 2008 Form 1040 Copies Nos. 1 and 2, SO Lerner
concluded:
I am taking the position that the originating employee can only have one immediate manager/direct supervisor, and that therefore the first 2008 $5K penalty [with respect to the 2008 Form 1040 copy No. 1] is valid because the Form 8278 was signed by the originator's immediate supervisor, but that the second 2008 $5K penalty [with respect to the 2008 Form 1040 copy No. 2] is not valid because the Form 8278 was not signed by the originator's immediate supervisor.
With respect to the 2009 Form 1040X, SO Lerner concluded: "I have
verified compliance with section 6751(b)(1)[;] * * * Joan Evans, the employee
who approved the penalty, was the direct supervisor (manager) of Tara Durrant,
the employee who proposed the penalty."
With respect to the 2010 Form 1040 and the 2010 Form 1040 copy SO
Lerner concluded: "Based on FRP Coordinator Andrea Ipson's * * * email both
2010 Forms 8278 are valid because they were signed by [Rochelle Nichols,] the -19-
[*19] originator's immediate supervisor. SO Lerner concluded accordingly with
respect to the 2011 Form 1040.
Appeals Team Manager Hefty concluded the supplemental determination as
follows.
Legal and Procedural Requirements SO Lerner verified that the requirements of any applicable law or administrative procedure were met and that IRS records confirmed the proper issuance of the notice and demand, NFTL filing, and notice of a right to a CDP hearing.
SO Lerner verified that penalty assessment was properly made for three of the four periods listed [on] the CDP notice and that notice and demand for payment was mailed to Ms. Smith's last known address. SO Lerner verified that there was a balance due when the NFTL was filed.
SO Lerner had no prior involvement with respect to the specific penalty periods either in Appeals or Compliance.
SO Lerner reviewed the Collection file, IRS records and information provided by Ms. Smith. SO Lerner's review confirmed that for three of the four penalty periods the IRS followed all legal and procedural requirements, and that the actions taken or proposed were appropriate under the circumstances.
Issues on Unpaid Liability Addressed above.
Balancing Efficient Tax Collection with Concern Regarding Intrusiveness SO Lerner balanced the need for efficient tax collection with Ms. Smith's concern that the action taken be no more intrusive than necessary. SO Lerner recommended abatement of $5,000 of the -20-
[*20] $30,000 penalty assessments subject to the NFTL. Since $25,000 of the $30,000 penalty assessments remained, and since Ms. Smith proposed no collection alternatives, SO Lerner sustained the NFTL filing.
OPINION
I. Introduction
A. Preliminary Matters
We review Appeals' determination to sustain the filing of an NFTL pursuant
to sections 6320(c) and 6330(d)(1). Where the existence or amount of the
underlying tax liability is properly at issue, we review the determination regarding
the underlying tax liability de novo. Goza v. Commissioner, 114 T.C. 176,
181-182 (2000). We review all other determinations for abuse of discretion. Id. at
182; Patrick's Payroll Servs., Inc. v. Commissioner, T.C. Memo. 2020-47, at *10,
aff'd, ___ F. App'x ___, 2021 WL 811497 (6th Cir. Mar. 3, 2021).4 The phrase
4 In Robinette v. Commissioner, 123 T.C. 85, 95 (2004), rev'd, 439 F.3d 455 (8th Cir. 2006), we held that "when reviewing for abuse of discretion under section 6330(d), we are not limited by the Administrative Procedure Act * * * and our review is not limited to the administrative record." The Court of Appeals for the Ninth Circuit, however, has concluded that, when in a sec. 6330 case we review for abuse of discretion, the record rule applies. See Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff'g in part T.C. Memo. 2006-166, and aff'g in part, rev'g in part decisions in related cases. Under sec. 7482(b)(1)(G), appeal in this case would evidently lie in the Court of Appeals for the Ninth Circuit, and in this case we therefore follow that court's opinion. See (continued...) -21-
[*21] "underlying tax liability" includes the tax deficiency, any additions to tax or
penalties, and statutory interest. Katz v. Commissioner, 115 T.C. 329, 339 (2000);
Patrick's Payroll Servs., Inc. v. Commissioner, at *10-*11. In reviewing for abuse
of discretion, we must uphold Appeals' determination unless it is arbitrary,
capricious, or without sound basis in fact or law. See, e.g., Murphy v.
Commissioner, 125 T.C. 301, 308, 320 (2005), aff'd, 469 F.3d 27 (1st Cir. 2006).
When this Court remands a case to Appeals and it comes back to us after a
supplemental determination is issued, we review the supplemental determination.
See Hoyle v. Commissioner, 136 T.C. 463, 468 (2011), supplementing 131 T.C.
197 (2008); Kelby v. Commissioner, 130 T.C. 79, 86 (2008).
B. Issues for Decision
Petitioner assigns error to the determination on the grounds that, because
she is not liable for the frivolous return penalties that respondent assessed, he filed
the NFTL in error. She does not argue that she was entitled to a collection
alternative, see sec. 6330(c)(2)(A)(iii), nor, with one exception, does she argue
that Appeals failed to verify compliance with all applicable laws or administrative
procedures, see sec. 6330(c)(1), (3)(A). She does claim, however, that respondent
4 (...continued) Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). -22-
[*22] cannot collect any of the assessed penalties because he failed to comply with
the written supervisory approval requirement found in section 6751(b)(1) before
he assessed the penalties. We limit our review of Appeals' determination to issues
raised by the taxpayer. See Lunsford v. Commissioner, 117 T.C. 183, 188 (2001).
Because petitioner had no opportunity to challenge her liability for the
penalties before she requested a CDP hearing, respondent accepts that she was
within her rights to challenge them during her CDP hearing and that, because she
did challenge them (albeit unsuccessfully), she may challenge them in this
proceeding. We agree. See sec. 6330(c)(2)(B); Gluck Irrevocable Tr. v.
Commissioner, 154 T.C. 259, 269 (2020); sec. 301.6320-1(f)(2), Q&A-F3, Proced.
& Admin. Regs. Respondent concedes the penalty assessed with respect to the
2008 Form 1040 copy No. 2. We accept that concession. Otherwise respondent
denies that he erred in assessing the remaining five penalties or in issuing the
NFTL. He denies that he failed to obtain the required written supervisory
approval before assessing those five penalties.
The parties present us two issues for decision: first, whether the five
remaining purported returns were frivolous so as to merit respondent's assessments
of five section 6702(a) penalties for filing frivolous returns, and second, whether
respondent unlawfully made those assessments because, before making them, he -23-
[*23] failed to obtain the written supervisory approval required by section
6751(b)(1). The first issue is a challenge to the existence of petitioner's
underlying liability for the penalties, which we review de novo. See sec.
6330(c)(2)(B); Kestin v. Commissioner, 153 T.C. 14, 24 (2019). Respondent
bears the burden of proving that the conditions of the penalty are satisfied. See
sec. 6703(a); Kestin v. Commissioner, 153 T.C. at 22. The second issue does not
go to the merits of the penalties but rather raises the question of whether the NFTL
was improperly issued because respondent failed to take a necessary
administrative step before he assessed the penalties to which the NFTL related.
See secs. 6303, 6320-6323, 6751(b)(1). In exercising our jurisdiction under
section 6330(d)(1) to review an Appeals determination to sustain a collection
action, we have said that "compliance with section 6751(b)(1) is an issue of
'verification' under section 6330(c)(1)". Laidlaw's Harley Davidson Sales, Inc. v.
Commissioner, 154 T.C. 68, 76 n.8 (2020); see also Kestin v. Commissioner, 153
T.C. at 23. We have also said: "We review the verification requirement for abuse
of discretion." Blackburn v. Commissioner, 150 T.C. 218, 223 (2018); see also
Shepherd v. Commissioner, T.C. Memo. 2020-45, at *13.5
5 In Kestin v. Commissioner, 143 T.C. 14, 28 (2019), a CDP case in which the standard of review for the verification requirement was abuse of discretion but (continued...) -24-
[*24] II. Section 6702 Frivolous Return Penalty
A. Introduction
Section 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". Sec. 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." Sec. 6702(a)(2). Congress directed the
5 (...continued) the scope of review may not have been the administrative record, see Robinette v. Commissioner, 123 T.C. at 95, we relied on the evidence at trial to conclude that the Commissioner had carried his burden of production under sec. 7491(c) to show compliance with sec. 6751(b)(1). In Kapp v. Commissioner, T.C. Memo. 2019-84, at *95-*96, we concluded on the basis of the administrative record that the Commissioner had satisfied the verification requirements because he had "met his burden of production under section 6751(b)(1)." It is not clear that "burden of production"--i.e., the Commissioner's obligation to produce evidence making out a prima facie case, see, e.g., Ball v. Commissioner, T.C. Memo. 2020-152, at *12-- plays any role if the scope of review is not de novo. -25-
[*25] Secretary to prescribe and periodically revise "a list of positions which * * *
[he] has identified as being frivolous". Sec. 6702(c).
Unlike the companion penalty for specified frivolous submissions provided
for in section 6702(b), Congress did not in specifying a penalty for frivolous tax
returns provide the return filer the opportunity to withdraw the frivolous return
and, by such withdrawal, avoid the penalty. See sec. 6702(b)(3); Kestin v.
Commissioner, 153 T.C. at 30. Nevertheless, by administrative action, the
Commissioner has accorded filers of frivolous returns a similar opportunity.6 That
was the opportunity accorded petitioner by respondent's Letters 3176C.
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) (sustaining two penalties for
2002 and two penalties for 2003 on account of two "substantially identical"
purported tax returns for each year); Whitaker v. Commissioner, T.C. Memo.
2017-192, at *6, *11-*12 (sustaining two penalties for identical returns with
different attachments but accepting Commissioner's concession with respect to
6 See, e.g., Internal Revenue Manual pt. 4.10.12.5.1(5) (Sept. 5, 2014) ("Note: IRC 6702 does not require notification to a taxpayer that the position claimed on a return is frivolous, but notification should be provided as a matter of policy."). -26-
[*26] third return submitted in response to Commissioner's erroneous claim that he
had not received first return). Nevertheless, a photocopy of a return marked as a
copy and on which a taxpayer does not request action "does not 'purport to be a
return'." Kestin v. Commissioner, 153 T.C. at 26 (upholding assessment of section
6702 penalty on account of taxpayer's original frivolous amended return but not on
six "reference" copies received by Commissioner). 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, at *4 n.5.
B. The Three Conditions Satisfied
1. First Condition
We first inquire whether the remaining five submissions for which
respondent assessed penalties (i.e., other than the 2008 Form 1040 copy No. 2, for
which respondent concedes the penalty) purport to be income tax returns. See sec.
6702(a)(1). Petitioner subscribed the 2009 Form 1040X, the 2010 Form 1040, and
the 2011 Form 1040, each of which reported zero gross income, zero taxable
income, and zero tax. By those forms, petitioner (and her husband) sought refunds
of amounts withheld by employers for Social Security and Medicare taxes in
addition to amounts withheld for the payment of Federal income tax. And while
the 2009 Form 1040X is not petitioner's first attempt at filing a 2009 return, it is -27-
[*27] clear that the section 6702 frivolous return penalty can attach to an amended
return. See Kestin v. Commissioner, 153 T.C. 14; Crites v. Commissioner, T.C.
Memo. 2012-267, at *7. The facts are sufficient for us to find, and we do find,
that the 2009 Form 1040X, the 2010 Form 1040, and the 2011 Form 1040 purport
to be income tax returns. See, e.g., Callahan v. Commissioner, 130 T.C. 44, 53
(2008) ("[D]ocuments that are filed to obtain a refund of tax have consistently
been held to be purported returns."); O'Brien v. Commissioner, at *13-*14.
We also find that the 2008 Form 1040 copy No. 1 purported to be an income
tax return. The Smiths sent respondent that copy when Mr. Smith learned that
respondent had no record of the 2008 Form 1040. The June 26 letter (1) states
petitioner's assumption that the 2008 Form 1040 had been lost or misplaced,
(2) represents the 2008 Form 1040 copy No. 1 to be a copy of the 2008 Form
1040, and (3) asks for "a full and complete refund within 30 days" of the
overpayment evidenced by that copy. Undoubtedly, petitioner understood that
respondent would make no refund of any overpaid 2008 tax without a 2008 tax
return, and we assume that she sent him the 2008 Form 1040 copy No. 1 to obtain
such a refund. Because the copy was presented to respondent in order to induce
him to make a refund of tax, it purported to be a return of tax. See, e.g., Callahan
v. Commissioner, 130 T.C. at 53. But see Seaview Trading, LLC v. -28-
[*28] Commissioner, T.C. Memo. 2019-122, at *11 (holding that a partnership,
whose agents sent copies of a return to the IRS to evidence that it had previously
filed the return, did not intend its sending of the copies to constitute the filing of a
return). Kestin v. Commissioner, 153 T.C. 14, is distinguishable because the 2008
Form 1040 copy No. 1 was not merely a reference copy of a prior return, marked
as such and on which petitioner expected no action. See id. at 26, 28. While it is
true that the 2008 Form 1040 copy No. 1 lacked original signatures (being merely
a copy of the 2008 Form 1040), that is not a fatal omission in the context of the
section 6702(a) penalty because the statute imposes a penalty on a document that
merely "purports to be a return" of tax. See id. at 25-26.
The 2010 Form 1040 copy was identical to the 2010 Form 1040. With
respect to the 2010 Form 1040 copy, we rely on our Opinion in Kestin v.
Commissioner, 153 T.C. 14. In Kestin, in addition to an original Form 1040X, the
taxpayer included photocopies of that return, marked as copies, with letters that
she sent the Commissioner. In those letters, she identified the photocopies as
copies, and she did not request action on the photocopies themselves but asked the
IRS to honor and process the original Form 1040X. Id. at 19. The Commissioner
assessed penalties not only with respect to the original Form 1040X but also with
respect to the copies. We concluded: "A photocopy so marked and so explained -29-
[*29] does not 'purport to be a return'." Id. at 26. In the present case, although the
2010 Form 1040 copy was not marked as a copy, the accompanying letter makes
clear that it was a copy and was intended to reinforce petitioner's initial purported
return, claiming a refund, rather than intended to initiate a new action for refund.
As in Kestin, we find that the copy, i.e., the 2010 Form 1040 copy, did not purport
to be an income tax return and is not subject to a penalty under section 6702(a).
See also Seaview Trading, LLC v. Commissioner, T.C. Memo. 2019-122.
2. Second Condition
The second condition respondent must demonstrate to have been satisfied is
that the purported return either (1) lacks sufficient information to judge the
substantial correctness of the self-assessment or (2) contains information that, on
its face, indicates a substantially incorrect self-assessment. See sec. 6702(a)(1).
As we have found, the documents petitioner submitted as tax returns reported zero
adjusted gross income, zero taxable income, and zero tax and sought refunds of
withheld amounts. But the Forms 4852 petitioner submitted name employers for
both petitioner and Mr. Smith, and petitioner concedes that the Smiths received
from those employers moneys in exchange for their services. Petitioner also
submitted Forms 1099-MISC to rebut Forms 1099-MISC submitted by what she
describes as "PAYER[S] erroneously alleg[ing] * * * payments of 'gains, profits or -30-
[*30] income'". Petitioner explained that the payers had mischaracterized as
wages amounts paid to one or the other of the Smiths that were not wages because
each Smith was a "private-sector citizen (non-federal employee_employed by a
private-sector company (non-federal entity)". Petitioner's assertions that she and
her husband received no wages because they were not Federal employees are
patently erroneous. Considered as a whole (with attachments) the returns
indicated that the self-assessments were substantially incorrect. See, e.g., Blaga v.
Commissioner, T.C. Memo. 2010-170, 2010 WL 3023961, at *6.
3. Third Condition
The third and final condition respondent must prove is that petitioner's
conduct satisfying the second condition was based on a position that the Secretary
had identified as frivolous or that reflects a desire to delay or impede the
administration of Federal tax laws. See sec. 6702(a)(2).
Section 6702(c) directs the Secretary to prescribe and periodically revise a
list of positions that he has identified as frivolous. Notice 2010-33, 2010-17
I.R.B. 609, lists positions the Secretary has identified as frivolous.7 Section 1 of
the notice provides that positions that are the same as or similar to the positions
7 The notice is effective for submissions made and issues raised after April 7, 2010. Notice 2010-33, sec. IV, 2010-17 I.R.B. 609, 612. -31-
[*31] listed in the notice are identified as frivolous for purposes of the section
6702(a) frivolous return penalty. Section III(1)(e) of the notice identifies as
frivolous the position that "[a] taxpayer has an option under the law to * * * elect
to file a tax return reporting zero taxable income and zero tax liability even if the
taxpayer received taxable income during the taxable period for which the return is
filed, or similar arguments described as frivolous in Rev. Rul. 2004-34, 2004-1
C.B. 619."
Rev. Rul. 2004-34, supra, describes as a frivolous position a "zero return
position" taken by some taxpayers. The claim is that a taxpayer may avoid tax
(and perhaps obtain a refund of taxes withheld) by filing a return showing no
income and no tax liability even though the taxpayer has wages, salary, or other
income. Id. Such taxpayers, the notice continues, "typically rely on one or more
frivolous arguments to support the position that wage or other income is not
subject to tax." Id.
That description fits petitioner perfectly. During each year from 2008
through 2011, petitioner and her husband were employed and received
compensation for their services, yet they failed to report that compensation as
income on the purported returns on the grounds that wages are not income.
Section 61(a) broadly includes as an item of gross income "[c]ompensation for -32-
[*32] services, including fees, commissions, fringe benefits, and similar items".
Petitioner's claim that wages are not income is patently frivolous. See, e.g., Olson
v. Commissioner, 760 F.2d 1003, 1005 (9th Cir. 1985) (per curiam); Smith v.
Commissioner, T.C. Memo. 2019-111, at *9-*11; Briggs v. Commissioner, T.C.
Memo. 2016-86, at *10.
Likewise 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).
Finally, petitioner is mistaken, and her argument is frivolous, that, before
respondent can assess a section 6702 penalty, he is required to prepare and sign a
substitute for return. Numerous cases are to the contrary. See, e.g., Schiff v.
United States, 919 F.2d 830, 832-833 (2d Cir. 1990) (per curiam) (citing Roat v.
Commissioner, 847 F.2d 1379, 1381-1382 (9th Cir. 1988)); Hartman v.
Commissioner, 65 T.C. 542, 545 (1975); Smith v. Commissioner, at *7-*10. -33-
[*33] C. Conclusion
Except with respect to the 2010 Form 1040 copy, respondent has shown the
elements specified in section 6702(a) necessary for him to impose on petitioner the
remaining four section 6702(a) penalties in issue.8 We next consider whether,
before assessing the penalties, respondent obtained the required written
supervisory approval.
III. Written Supervisory Approval of the Penalties
Section 6751(b)(1) provides: "No penalty under this title shall be assessed
unless the initial determination of such assessment is personally approved (in
writing) by the immediate supervisor of the individual making such determination
or such higher level official as the Secretary may designate." Written supervisory
approval must be obtained before a section 6702(a) penalty is assessed, Kestin v.
Commissioner, 153 T.C. at 29, but it need not be obtained before the
Commissioner sends the taxpayer a Letter 3176C giving her the option to recant
and avoid the penalty, id. at 30.
8 Necessarily, with respect to the elements of those penalties, respondent has carried "the burden of production" imposed on him by sec. 7491(c) "in any court proceeding with respect to the liability of any individual for any penalty * * * imposed by this title." -34-
[*34] B. Parties' Arguments
Respondent relies on the Forms 8278 to show that, before he communicated
to petitioner the section 6702 penalties in issue, the immediate supervisors of the
individuals initially determining the penalties approved the determinations in
writing, thus satisfying his burden to produce evidence of compliance with section
6751(b)(1).9
Petitioner argues that the Forms 8278 are insufficient evidence of
compliance because "[t]he purported signatures that appear on the Form 8278
appear to be 'facsimile signatures'" of the "Originator", "Supervisor", or
"Manager", and, while the forms show the signature of someone described as
"Manager", none are signed by an "Immediate Supervisor".
C. Discussion
1. Signatures
Petitioner's argument that the Forms 8278 show only facsimile signatures is
without merit. "Section 6751 requires only personal approval in writing, not any
9 Because respondent concedes the penalty with respect to the 2008 Form 1040 copy No. 2 and we sustain no penalty with respect to the 2010 Form 1040 copy, we need not concern ourselves with the attendant Forms 8278, and any subsequent reference to the Forms 8278 refers only to the forms attendant to the 2008 Form 1040 copy No. 1, 2009 Form 1040X, the 2010 Form 1040, and the 2011 Form 1040. -35-
[*35] particular form of signature or even any signature at all." Deyo v. United
States, 296 F. App'x 157, 159 (2d Cir. 2008); see also Palmolive Bldg. Inv'rs, LLC
v. Commissioner, 152 T.C. 75, 86 (2019) (citing Deyo and quoting that sentence).
2. Written Supervisory Approval Requirement
In July 2020, we remanded this case to Appeals to give it the opportunity to
verify compliance with the written supervisory approval requirements of section
6751(b)(1) for the section 6702 penalties. In particular, we questioned whether
the individual signing each of the Forms 8278 was the immediate supervisor of the
individual making the initial determination to assess the penalty (i.e., the
originator of the form). We have reviewed the supplemental determination and
conclude from the administrative record that respondent satisfied the written
supervisory approval requirement with respect to three of the four penalties
remaining in issue, i.e., the penalties with respect to the 2009 Form 1040X, the
2010 Form 1040, and the 2011 Form 1040. The record does not support a similar
showing for the penalty with respect to the 2008 Form 1040 copy No. 1.
SO Lerner reports that Ms. Evans communicated to him that, when on July
22, 2013, she signed the Form 8278 with respect to the 2009 Form 1040X, she was
the direct manager of the originator of the Form 8278, i.e., Ms. Durrant.
Ms. Ipson, Frivolous Return Program Coordinator, communicated to SO Lerner -36-
[*36] that Rochelle Nichols was the direct supervisor of Ms. McNeeley, originator
of the Forms 8278 with respect to the 2010 Form 1040 and the 2011 Form 1040, at
the time she (Ms. Nichols) signed those Forms 8278. Those communications to
SO Lerner, together with the corresponding Forms 8278, are evidence in the
record from which he could conclude that the three Forms 8278 were signed, and
the penalties approved, by the immediate supervisor of each individual making the
initial determination to assess a penalty before the date of assessment shown on
the form. Petitioner offers nothing in rebuttal. SO Lerner did not abuse his
discretion in concluding that respondent's employees had obtained the necessary
section 6751(b)(1) approvals of section 6702(a) penalties with respect to the 2009
Form 1040X, the 2010 Form 1040, and the 2011 Form 1040 before assessing
those penalties.
With respect to the 2008 Form 1040 copy No. 1, Ms. Ipson informed SO
Lerner that three individuals (Mss. Holcomb, Evans, and Mr. Owen) "were the
department managers and direct supervisors of Ms. Durrant" when Ms. Durrant
signed the attendant Form 8278. SO Lerner reasoned that the originator of the
form "can only have one immediate manager/direct supervisor, and that therefore
the * * * penalty * * * [was] valid because the Form 8278 was signed by the
originator's immediate supervisor". Sheri Holcomb was the individual who signed -37-
[*37] the Form 8278 approving the penalty with respect to the 2008 Form 1040
copy No. 1. But she was one of three individuals that Ms. Ipson described as Ms.
Durrant's "immediate manager/supervisor" when Ms. Holcomb signed the form.
We accept at face value SO Lerner's premise that an originating employee has only
one immediate supervisor. Perhaps Ms. Ipson did not understand the question,
but, on the basis of her answer, we think that the best one can conclude is that
there was a one in three chance that Ms. Holcomb was Ms. Durrant's immediate
supervisor when Ms. Holcomb signed the form. SO Lerner abused his discretion--
i.e., he did not have a sound basis in fact--in concluding that Ms. Holcomb was
Ms. Durrant's immediate supervisor. Respondent failed to obtain the necessary
section 6751(b)(1) approval of a section 6702(a) penalty with respect to the 2008
Form 1040 copy No. 1.
IV. The Supplemental Determination
By the supplemental determination, Appeals Team Manager Hefty
determined to sustain the NFTL but to abate the penalty assessed with respect to
the 2008 Form 1040 copy No. 2. As discussed supra, we have determined that
respondent must also abate the penalties assessed with respect to the 2008 Form
1040 copy No. 1 and the 2010 Form 1040 copy. With respect to the remaining
penalties--i.e., with respect to the 2009 Form 1040X, the 2010 Form 1040, and the -38-
[*38] 2011 Form 1040--respondent has carried his burden of proving petitioner
liable for the penalties.
Moreover, with respect to those three penalties, we are satisfied that, from
the same evidence (part of the administrative record), SO Lerner verified that,
before assessing the penalties, respondent's employees obtained the required
written supervisory approval. He recommended sustaining the NFTL. Reviewing
his actions for abuse of discretion, we see no abuse. The lien may stand in so far
as it relates to the penalties attendant to the 2009 Form 1040X, the 2010 Form
1040, and the 2011 Form 1040.
V. Section 6673 Sanction
In pertinent part, section 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, "[t]he purpose of section 6673 is to compel
taxpayers to think and to conform their conduct to settled principles before they -39-
[*39] 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 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). We 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, 2009 WL 3171768, at *16.
We sanction petitioner under section 6673(a)(1) not for her conduct in filing
frivolous returns but for raising her frivolous arguments before us. Some of the
arguments petitioner raises--for instance, that the amounts she and her husband
received from employer's and others for their services are not income--are
arguments that we have found sanctionable under section 6673(a)(1)(B). E.g.,
Keown v. Commissioner, T.C. Memo. 2003-69; Fox v. Commissioner, T.C.
Memo. 1993-277, aff'd, 69 F.3d 543 (9th Cir. 1995). 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 -40-
[*40] because of the frivolous arguments she has made. We will impose on her a
section 6673(a)(1) penalty of $2,500.
An appropriate order and decision
will be entered.