In conjunction with the University of San Diego School of Law, RJS Law is also hosting the 8th Annual USD School of Law-RJS Law Tax Controversy Institute at the University of San Diego School of Law Campus in San Diego, California on July 28, 2023. You may find out more about the institute here.
Today’s guest blogger is Joseph Cole, LL.M. He is an Senior Associate Attorney at RJS Law in San Diego, California. His practice includes federal and state tax controversy. He discusses frivolous position penalties that Tax Court may impose under IRC 6673. We have had a number of posts discussing the 6673 penalty including many of our designated order posts. Joseph talks about the warnings issued by the Court prior to the imposition of this penalty. Multiple warnings have long been part of this landscape even though not dictated by the IRC. A few years ago, I looked at the frequency of the imposition of the 6673 penalty and you can find that article here. Keith
The Tax Court may impose penalties under IRC §6673 of up to $25,000 for positions that are “frivolous and groundless.” IRS Notice 2010-33 lists many of the positions that the Tax Court deems frivolous. These positions include arguments such as the Tax Code being unconstitutional or participation in the tax system being voluntary. Anybody who regularly reads Tax Court cases will notice when frivolous position issues come across the Tax Court (and these issues are surprisingly common). In the opinions I have read, the Tax Court gives the taxpayer a warning before issuing a §6673 penalty. This blog post will address why the Tax Court issues a warning in these cases and whether a warning is a substantive legal right.
The frivolous position penalty statute gives the Tax Court discretion as to whether it will impose a §6673 penalty. The statute reads the Tax Court “may require the taxpayer to pay to the United States a penalty.” (Emphasis added.) The statute gives Tax Court judges a cudgel they may use to impose order and decorum in their court room and to discourage litigants from wasting the court’s time. Other penalty statutes in the Internal Revenue Code have mandatory language. For example, the late filing penalty statute (IRC §6651(a)(1)) states penalties “shall be added” (emphasis added) when a taxpayer violates the statutory provisions. The frivolous tax return penalty statute (IRC §6702) states a taxpayer “shall pay a penalty”(emphasis added) if a taxpayer files a frivolous tax return.
As a matter of practice, the Tax Court gives petitioners a warning before issuing a §6673 penalty. A couple recent Tax Court cases illustrate this practice. In Luniw v. Comm’r, TC Memo 2023-49, the Taxpayer is let off with a warning when the court discusses §6673 penalties because the Taxpayer had not made similar frivolous claims in previous cases. In Luniw, the Service assessed §6702 frivolous return penalties against the taxpayer. The Tax Court does not discuss whether the petitioner received a warning regarding §6702 frivolous return penalties; however, the lack of a discussion regarding the §6702 frivolous return penalties makes sense because the Court did not have jurisdiction over those assessable penalties. (For a recent example of a taxpayer that did not heed the Tax Court’s warnings regarding the 6673 penalty, see Golditch v. Comm’r, TC Memo. 2022-26.)
In Englert v. Comm’r, TC Memo 2023-38 the taxpayer had a deficiency in income taxes but also faced §6702 frivolous return penalties assessed prior to the deficiency proceeding. He made frivolous arguments before the Tax Court in addition to the frivolous positions he had taken before the IRS. The Tax Court did not address the §6702 frivolous argument penalties because it lacked deficiency jurisdiction over these assessable penalties. The Englert court then imposed a $1,000 penalty under §6673 for post-trial submissions containing frivolous arguments. The Tax Court did not address the §6702 frivolous return penalties because it lacked deficiency jurisdiction. Therefore, the Court does not address whether the IRS gave a warning to the taxpayer before the §6702 frivolous return assessment.
IRM §25.25.10.11 provides that Taxpayers should be issued a warning letter before a §6702 assessment giving the taxpayers 30 days to correct the submission. The statute does not require this warning which the IRS has imposed upon itself. No cases have addressed whether the failure to issue this warning would provide a basis for setting aside this penalty.
Similarly, the question arises as to whether there is a substantive right to a judicial warning before a §6673 frivolous position assessment. While the Tax Court has no equivalent to the IRM, Tax Court judges have issued warnings in numerous cases making the use of the warning something akin to the IRS administrative requirement in the penalty it can impose for similar taxpayer behavior. It is not clear whether these warnings are a mere courtesy, a prophylactic measure, or whether the number and consistency of the opinions issuing warnings prior to the imposition of the frivolous position penalty have amounted to Stare Decisis. While a warning from the bench may not be a substantive right for taxpayer, a warning does make a §6673 assessment virtually bullet-proof.
Appeals courts review the Tax Court’s §6673 penalty determination for abuse of discretion. In Wolf v. Comm’r, 4 F.3d. 709 (9th Cir. 1993) the Ninth Circuit determined that the Tax Court did not abuse its discretion when it put the taxpayer on notice that the taxpayer may face sanctions and the taxpayer proceeds with frivolous despite the court’s warning. The Wolf opinion demonstrates the benefit of issuing a warning. Even without a warning from the bench, if a taxpayer asserts frivolous arguments that in the past have resulted in §6673 penalties on other taxpayers, it would be difficult for a taxpayer that made patently frivolous arguments to argue that the Tax Court abused its discretion by issuing §6673 penalties.
Frivolous positions at the Tax Court and the frivolous position penalty may unfortunately become more of an issue in the years to come. People are being exposed to more disinformation and charlatanism through social media. Flat earth theories (both literal and figurative) are receiving a surprising level of popular acceptance today. As a recent Procedurally Taxing post pointed out, many taxpayers are relying on social media for tax advice. The Tax Law equivalents of flat earth theories are finding increasing levels of popularity The frivolous position jurisprudence and statutes will hopefully evolve to rise to the challenge of this new age of disinformation.