In Uncategorized on 11/19/2012 at 17:08

But If It’s Not a Return, It Doesn’t Count

There is much in the saga of Karl Gregg Weatherly and Jinny H.S. Weatherly, 2012 T. C. Memo. 320, filed 11/19/12, and Judge Morrison deals with it all, but I’ll confine my comment to the single point: if a filed document isn’t a return, it can’t be a frivolous return.

Instead of the usual Form 1040 with schedules for Karl’s photography endeavors, Karl filed a document styled “Notice of Affidavit Statement in Rebuttal to Internal Revenue Code Section 6011 For Year Period Ending December 31, 2003” (“Notice of Affidavit”), 2012 T. C. Memo. 320, at p. 2, footnote 2. Eventually Karl filed a Form 1040 for the year at issue. IRS issued a SNOD that appears untimely, but Karl never raises SOL, and so Judge Morrison deems it waived. Practice tip–unless patently erroneous, raise SOL every time.

“The Notice of Affidavit could qualify as a valid tax return, thereby relieving Karl Weatherly of liability for the addition to tax, only if it meets all four requirements of the test set forth in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). See Oman v. Commissioner, T.C. Memo. 2010-276, slip op. at 16-24 (explaining why the Beard test determines whether a return was filed for the purpose of the addition to tax under section 6651(a)(1) in cases appealable to the Court of Appeals for the Ninth Circuit). The four requirements are that the document must (1) contain sufficient data to calculate the correct liability; (2) purport to be a return; (3) be an honest and reasonable attempt to follow the tax laws, and (4) be executed under penalty of perjury. Beard v. Commissioner, 82 T.C. at 777. The Notice of Affidavit is a 40-page list of spurious pseudolegal arguments. It does not contain sufficient data to calculate Karl Weatherly’s correct tax liability for 2003. It does not purport to be a return. And it is not an honest and reasonable attempt to follow the tax laws. Therefore, the Notice of Affidavit fails the first, second, and third Beard requirements. It is not a valid return.” 2012 T. C. Memo. 320, at pp. 17-18. (Footnote omitted, but read it. Karl tries to save the day by claiming his screed is a “notice”, but that doesn’t fly.)

See Section 6702(a)(1). That section imposes a penalty for filing a frivolous return. Karl’s return wasn’t a return. Because he eventually filed a proper return (late), he gets the late-filing and late-paying additions to tax.

But Karl escapes the Section 6673 frivolous proceedings penalty, as he makes a last-gasp repentance. “The Weatherlys’ arguments that they are entitled to deductions for legal expenses (for 2003 and 2004), a theft-loss deduction (for 2003), and a net operating-loss-carryforward deduction (for 2004) were advanced by Karl Weatherly’s testimony. We did not reach the question whether his testimony was sufficient to secure the deductions because the Weatherlys abandoned their claims on brief. Nonetheless, their initial claims were not frivolous. We do not want to discourage taxpayers from litigating colorable claims. Moreover, we note that while the arguments Karl Weatherly made in his Notice of Affidavit were frivolous, the Weatherlys did not pursue any of those arguments in their briefs or testimony to this Court. Thus, we decline to impose a penalty.

“However, we emphasize to the Weatherlys that they should expect to be penalized if they make frivolous and groundless arguments in the future.” 2012 T. C. Memo. 320, at pp. 21-22.

So beware, Weatherlys. You engage in frivolity at your peril.

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