In Uncategorized on 08/29/2019 at 16:28

The Thursday afternoon of that Obliging Jurist, Judge David Gustafson, certainly ran the gamut. First there was a 56-page designated hitter examining and exagminating the Section 45 clean coal credit. Now there’s a full-dress T. C., exploring the Section 6702 frivolous return chop, continuing the saga of Gwendolyn L. Kestin, 153 T. C. 2, filed 8/29/18.

Gwen’s been on my blog before now. See my blogpost “What More Can I Say,” 6/7/18, wherein I catalogue Gwen’s trips to Judge Gustafson’s wordprocessor.

Now the question is whether any or all of the six (count ‘em, six) photocopies of the original frivolous 1040X that Gwen unloaded on IRS was itself (or themselves) separate frivolous returns, each incurring its very own Section 6702 $5K frivolity chop.

IRS got partial summary J a year ago May on the original 1040X. It was a classic zero-income Section 3401 FICA/FUTA phony of the sort protesters routinely file. So Gwen is short-stacked going into the trial. The trial sorts out whether the remaining six copies are returns sufficient to get the chop, and whether the Boss Hoss Section 6751(b) sign-off was well and truly delivered (if indeed it needs to be).

IRS first hit Gwen with Letter 3176C, which said “If not immediately corrected, the Internal Revenue Service will assess a $5,000 penalty against you. * * * As stated above, we are proposing to assess a $5,000 penalty against you for each frivolous tax return or purported tax return that you filed. * * * If you send us corrected returns, we will disregard the previous documents that you filed and not assess the frivolous return penalty * * *.  [Emphasis added.].” 153 T. C. 2, at p. 6.

The IRS examiner sent up a Form 8278 “Assessment and Abatement of Miscellaneous Civil Penalties,” proposing to hit Gwen with the $5K chop, but her boss changed it to $10K, because Gwen in the meantime sent in a copy of her first 1040X.

Nothing daunted, Gwen fired a five-round salvo, all dated differently but all received by IRS at once. “The Commissioner cites his records to show that the third, fourth, fifth, and sixth of Mrs. Kestin’s submissions, though dated in November 2015, December 2015, March 2016, and May 2016, were all received by the IRS on the same day (August 17, 2016) and three of them in the same location (Kansas City, Missouri).  Mrs. Kestin does not dispute these assertions but rather, in her posttrial brief, “admits that the times, dates, and actions described in R’s Statement of Facts, ¶¶ 1 through 50 of his Seriatim Opening Brief * * * are generally accurate.” 153 T. C. 2, at p. 8, footnote 3.

That was just a warm-up. Gwen hit her stride, sending notices to KC, MA, TX, and DC, all with copies of said 1040X. IRS ripostes with The Magnificent Seven, a $35K chop.

Gwen tries a CDP, and can contest liability, but gets a NOD because she frivols.

Section 6702(b)(3) gives a statutory out; if the frivolite folds within thirty days, no chop. Of course IRS has burdens of production and proof, and the Section 6751(b) Boss Hoss is in play.

If a document flunks the Beard test (contains info to calculate tax due, claims to be a return, and shows good faith attempt to comply), it isn’t a return, but that goes only where the taxpayer claims what they sent was a return and IRS claims it isn’t, like last-known-address and trigger-SOL cases.

“Section 6702(a) is a very different context.  That statute imposes a penalty on a document that merely ‘purports to be a return’ (the second of the Beard criteria).  Thus, even if (or especially if) a document fails the other Beard criteria, the document may warrant the penalty as a ‘frivolous tax return’.  Mrs. Kestin’s original Form 1040X failed the Beard test because, although it ‘purports to be a return’, it lacks an ‘honest and reasonable attempt to satisfy the requirements of the tax law’; and it is therefore not a return.  However, because that Form 1040X purports to be a return but has the defects set out in section 6702(a), it is subject to the section 6702(a) penalty.” 153 T. C. 2, at p. 20.

OK, but what about the photocopies?

“But the photocopies require a different analysis.  No doubt they are photocopies of a document (the Form 1040X) that purports to be a return, but the question we must answer is whether the photocopies themselves purport to be returns.  She did not request action on the photocopy itself; rather, she asked the IRS to process and honor her original Form 1040X.  A photocopy so marked and so explained does not ‘purport to be a return’.

“The statute does not address whether copies might be subject to the penalty, and the Commissioner points us to no pertinent regulation on the subject.  The Commissioner cites no case law that addresses the question of copies labeled as such (or even of copies not labeled as such).  The Commissioner does cite Grunsted v. Commissioner, 136 T.C. 455, 456-457 (2011), in which two section 6702(a) penalties for each of two years were sustained against a taxpayer who, after being told that the IRS would not accept his first purported returns, ‘resubmitted substantially identical purported tax returns for those two years’. However, there is no suggestion in Grunsted that the later returns were mere copies or were labeled as such.  On the contrary, we found in that case that the later documents were ‘again seeking a refund’.  Id. at 457.  We explicitly held that ‘each purported to be an income tax return’ and that each was ‘filed to obtain tax refunds’.  Id. at 459.” 153 T. C. 2, at p. 21.

The IRM says that it doesn’t matter whether the purported return is original or a photocopy. But since each copy was labeled as such and sought no refund greater than the original, Gwen ducks $30K’s worth of chops.

As for the Boss Hoss, the Section 6702 chop is not “electronically calculated,” so it needs the Section 6751(b) imprimatur. But the Letter 3176C doesn’t need that.

“However, as to the first two penalties… we must determine whether the earlier Letter 3176C constituted a previous, unapproved ‘initial determination’.  We conclude that it did not.  Although it gave a stern warning about the IRS’s intention to impose a penalty, its purpose was actually to invite the taxpayer to make a correction that, if made, would have the result that the IRS ‘will * * * not assess the frivolous return penalty.’  At the time Letter 3176C was sent…one could not ‘determine’, initially or otherwise, the application of the penalty.  Rather, at that time it remained to be seen—depending on the Kestins’ actions–whether they would be liable for the penalty.

“Interpretation and application of the supervisory approval requirement in section 6751(b)(1) is made difficult by the ambiguity of the operative phrase- ‘initial determination of such assessment’–and by the fact that, no matter how it is interpreted, the statute will achieve only imperfectly the congressional purpose of ensuring ‘that penalties [w]ould only be imposed where appropriate and not as a bargaining chip.’  However, we know to look for a ‘determination’ of a penalty liability, not just an indication of a possibility that such a liability will be proposed.  Letter 3176C is not an unequivocal communication that advises the taxpayer that penalties will be proposed’; it is instead a contingent communication warning that a penalty will be assessed if the taxpayer’s frivolous filing is ‘not immediately corrected’ and assuring that the IRS ‘will * * * not assess’ the penalty if the taxpayer does correct her return.” 153 T. C. 2, at pp. 26-27. (Citations omitted, but read them.)

Gwen has all kinds of finger-fehler arguments about IRS’ paperwork, but none of them persuades Judge Gustafson.

It’s frivolites like Gwen who keep us bloggers in business.


  1. […] Mr. Taishoff also covered the final decision with From The Serious To The Frivolous. […]


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