1 5 1 T.C. No . 1

UNITED STATES TAX COURT

BENTON W ILLIAM S, J R., Pet i t io n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 3 0 4 87 -1 5
. Fi l edJ u l y 3 , 2 0 1 8.

P d idn o tfi le a Fed eral i n co m e t ax retu rn fo r 2 0 12 . R p rep ared a s ub s t i tu t e fo r retu rn an dd et erm i n eda d efi ci en cy i nP’ s Fed eral i n co m e t ax , an ad di t i o n al t ax u n d er I.R.C. s ec. 7 2 (t ), an d ad d i t io n s t o t ax u n d er I.R.C. s ec. 6 6 51 (a)(1 ) an d(2 ). P fi l eda p et i t i o nco n t ai n i n g fri v o l o u s arg u m en t s an dth en fi l eda s eri es o f fri v o l o u s p ret ri al m o t i o n s an d m ad e fri v o l o u s p o s tt ri al arg u m en ts
. I.R.C. s ec. 6 6 7 3 (a)(1 ) au th o ri zes th e Tax Co u rtt o i m p o s e a p en al ty o f up t o $ 25 ,0 00 o na t ax pay er wh en ev er i t ap p ears thatth e p ro ceed i n g was i n s ti tu t edp ri m ari l y fo r d el ay o r t hatth e t ax p ay er’ s p o s i t i o n i s fri v o l o u s o r g ro u n d l es s . I.R.C. s ec. 6 7 5 1 (b )(1 ) requ i res th atn o p en al ty

u n d er t h e I.R.C. s h al l b e as s es s edu n l es s th e i n it i al d et erm i nat i o n o f t h e p en al ty i s p ers o n al l y ap pro v edb y th e i m m ed i at e s up erv i s o r o f t h e i n d iv i du al m ak i n g the d et erm in at i o n . See Graev v . Co m m is s i o n er, 1 4 9 T.C. (Dec. 2 0 , 2 0 1 7 ), s upp l em en t i n g an d o v erru l in g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6).- 2

- Hel d : P i s l i ab l e fo r t h e d efi ci en cy , ad d it i on al t ax , an d ad d i ti o n s t o t ax . Hel d , fu rt h er, t h e au th o ri ty o f t h e Tax Co urtt o i m

po s e a p en al ty u n d er I.R.C. s ec. 6 6 7 3(a)(1 ) i s n o ts ub jectt o t h e ap pro v al req u irem en t o f I.R.C. s ec. 6 7 5 1(b )(1 ). Hel d , fu rt h er, P i s l i ab le fo r a $ 2 ,0 0 0 p en al ty u n d er I.R.C. s ec. 6 6 7 3 (a)(1 ).

Ben t o n W i l l iam s, J r., p ro s e. Ev an K. Li k e, fo r res p o n d en t
.

RUW E , J ud g e: Th e Co m m is s i o n er d et erm i n eda d efi ci en cy i np et i t i o n er’ s 2 0 1 2 Fed eral i n co m e t ax o f $ 9 ,0 0 0 an dad d it i o n s t o t ax u n d er s ect i o n6 6 51 (a)(1 )
an d (2 ) 1 o f $ 1 3 5 an d $ 3 9.7 5 , res p ect i v el y . Th e i s su es fo r d eci s i o nare: (1 ) wh et h er $ 4 3 , 3 9 6 of u n rep o rt edwag es th atp et i t i on er recei v edi n 2 0 1 2 i s i n cl u d i b l e i n t ax ab l e i n co m e; (2 ) wh et her $ 7 ,2 0 0 o f un em p l o ym en tco m

p en s at io n th at p et i t i o n er recei v edi n 2 0 1 2 i s i n cl u d i bl e i nt ax ab le i n co m e; (3 ) wh et her a $ 7 ,8 9 0 d i s tri b u t i o n th at p et i ti o n er recei v edfro m h i s ret i rem en tacco u n ti n2 0 12 i s i n cl u d i b l e i n t ax ab le i n co m e; (4 ) wh et h er p et i t io n er i s l i ab l e fo r t h e 1 0 %

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect atal l rel ev an t t im es .- 3

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ad d it i o n al t ax u n d er s ect i o n 7 2 (t ); an d(5 ) wh et her p et i t i o n er i s l i ab l e fo r t h e ad d it i o n s t o t ax u n d er s ect i on 6 6 5 1 (a)(1 ) an d(2 ). Th e Co u rtwi l l al s o co n si d er wh et h er i ts h o u l d i m

p os e a p en al ty

o np et i t i o n er p urs u an t t o s ect i o n6 6 7 3 (a)(1 ). FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed h erei nb y th i s referen ce. Pet i t i o ner res i dedi n Oh i o wh en h e fi l ed h i s p et i t i o n. In 2 0 1 2 p et i t i o n er recei v ed : (1 ) $ 4 3 ,3 9 6 o f wag es fro m Ap p l et on Pap ers , In c.; (2 ) un em

p l oym en t co m

p en s at i o no f $ 7,2 0 0 fro m th e Oh i o Dep art m en to f J o b & Fam il y Serv i ces ; an d(3 ) a $ 7 ,8 9 0 d i st ri bu t i o nfro m Pri n ci p al Li fe In s u ran ce Co
. 2 Pet i t i o n er d i dn o t fi l e a Fed eral i n co m e t ax retu rn fo r 2 0 1 2 . As a res u l t , th e Co m m i s s i o n er p rep areda s ub s t i tu t e fo r retu rn (SFR) t hatco n s is tedo f a Fo rm 1 3 4 9 6 , IRC Sect i o n 6 0 2 0 (b ) Cert i fi cat io n ; a Fo rm 4 54 9 , In co m e Tax Ex am i n at i o n Ch an g es ; an d a Fo rm

8 8 6 -A, Ex p l an at i o n o f It em s . OnAu g u s t3 1 , 2 0 15 , th e Co m m i s s i o n er i ss u edp et i t i on er a n o t i ce o f d efi ci en cy fo r 2 0 12 . Pet i ti o n er t i m el y fi led a p et i ti o n wi th th is Co u rt
.

2 Th e Co m

m i ss i o n er d et erm i n edth atth e d i s tri b u t i o n fro m Pri n ci pal Li fe In s u ran ce Co . was a d is tri b u ti o n fro m a qual i fi edret i rem en tp l an .- 4

-

In h i s p et i t i o n, p et i t i o ner rai sedfri v o l o u s arg u m en ts . He th enfi l eds ev eral p ret ri al m o t i o n s i n wh i ch h e rai s edth e s am e t y p e o f arg u m en t s. On M arch 2 8 , 2 0 1 6 , res p on den t ’ s co u n s el s en tp et i t io n er a l et t er i n fo rm i ng h i m th atth e arg u m en t s h e rai s edi n a m o t i o n fo r s umm ary ju d g m en twere fri v ol o u s an dth at
res p o n d en t wo u l d m o v e fo r t h e Co u rtt o i m p o s e a p en al ty

u n d er s ect i o n 6 67 3 (a)(1 ) i f h e p ers i s t ed . OnM arch 1 4 , 2 0 1 7 , res p o nd en t ’ s co u n s el s en tp et i t i o ner an o th er l et t er, i n wh i ch h e rem i nd edp et i t i o n er o f t he Tax Co urt ’ s au th o ri ty t o i m p o s e a p en al ty u n d er s ect i o n 6 6 7 3 (a)(1 ). Attri al res po n d en t fi leda m o t io nas k in g th e Co u rtt o i m p o s e a s ect i o n 6 6 7 3 (a)(1 ) p en al ty o n p et i t i o n er. Pet it i o n er s t at ed t o t h e Co urtattri al : [T] h e Co u rtju std en i edm y m o t i on s * * * fo r l acko f s ub j ectm at t er juri s di ct i o n , p ers o n al t erri t o ri al juri s d i ct i o nt o fo rce a d i recti n co m e t ax , an d , o f co u rs e, I was s tru ckd own o n t h at . So t o m e i t ap p ears th ath ere i n th e [C] o u rt , th e Co u rtwi l l n o treco g n i ze t h atty p e o f arg u m en t* * * Th e Co u rtl at er warn edp et it i o n er t h atth e t y p e o f arg u m en t s h e was p urs u i n g was
o f t h e s o rtth at h av e g en erat edp en al t i es . Ho wev er, o nb ri ef p et i t i o ner co n t i n u ed rai s in g fri v o l o us arg u m en t s . 3

3 Th e fo l l o wi n g ex cerp t i s an ex am p l e o f t h e t y

p e o f arg u m en t s p et i t i o n er rai s edi n h is b ri ef: Pet i t i o ner i s n o t i n an y

co n tract wi th th e i rs an di s n o td o m ici l edi n (co n ti n u ed ...)- 5
- OPINION I. Defi ci en cy A. Un rep o rt edIn co m e Sect io n 6 1 (a) d efi n es g ro s s i n co m e as al l i n co m e fro m wh at ev er s o u rce d eri v ed . Pet i t i o n er s t i pu l at edt o recei v i n g th e am ou n t s s etfo rt h i n t h e n o t i ce o f d efi ci en cy . Attri al p et i t i o n er n ei th er t es t i fi edn o r p res en t edan y wi tn es s es . Ho wev er, h e as s ert s , u si n g t ax -p ro t es t er t y p e arg u m en t s, th atth e i n co m e h e recei v edi n 2 0 1 2 i s n o t t ax ab l e u n d er t h e Co d e. Hi s arg um en t s are s h o p wo rn t ax p ro t es t er arg u m en t s th ath av e b een u n i v ers al l y reject edb y

th i s Co u rt
. See, e.g ., Wn u ck v. Co m

m i s s i on er, 1 36 T.C. 4 9 8 (2 0 1 1); Wh eel er v . Co m m is s io n er, 1 2 7 T.C. 2 0 0 (2 0 0 6 ), aff’ d , 5 2 1 F.3 d1 2 8 9 (1 0 th Ci r. 2 0 0 8 ); Bl ai r v . Co m m is s io n er, T.C. M em o . 2 01 6 -2 1 5 , at* 5 -* 6 ; Orr v . Co m m i s s i o n er, T.C. M em o . 1 98 1 -1 1 1 , 1 9 8 1 Tax Ct . M em o LEXIS 6 3 7 . W e wi l l n o tp ai ns t ak i n gl y ad dres s p et i ti o n er’ s arg u m en t s “ wi th s o m

b er reas o ni n g an dco p i o u s ci t at io n o f p reced en t ; t o d o s o
m i g h ts u gg es tth atth es e arg u m en t s h av e s o m e co l o rab l e m eri t .” Crai nv . Co m m i s s i o n er, 7 3 7 F.2 d1 4 1 7 , 1 4 1 7 (5 th Ci r. 1 9 8 4 ); s ee al s o Kan o fs ky v .

3 (...co n t in u ed ) th e “ Un i t edSt at es ” fed eral zo n e. (Art i cl e 4 Sec 3 Cl 2 ) Iti s i l l eg al t o k i dn ap the Pet i t io n er’ s i d en t i ty as a Co n s t i tut i o n al Ci t i zen b y b i rt h an dm o v e i tt o t h e Di s tri cto f Co l u m bi a wi th o u tth e Pet i t io n er’ s co n s en t . (1 8 U.S.C. 1 2 0 1 )[.]- 6

-

Co m m i s s i o n er, T.C. M em o . 2 0 1 5 -7 0 , at* 2 . Acco rd in g l y , we h o l dthatth e Co m m i s s i o n er’ s d et erm in at i o n s o f u n rep o rt edi n co m e as s etfo rt h i nth e n o t i ce o f d efi ci en cy

are co rrect , an d t h o s e d et erm i n at i o ns are s u s t ai n ed

. B. Sect i o n 7 2 (t ) Ad d i t i o n al Tax Sect io n 7 2 (t )(1 ) i m

p o s es , wi th cert ai nex cep t i o ns , an ad d it i on al t ax o nan earl y d i s tri b u t i o n fro m

a qu al i fi edret i rem en t p l an equ al t o 1 0 % o f t h e p o rt i o no f th e am o un tth ati s i n cl ud i b l e i n g ro s s i n co m e. Becau se s ect i o n 7 2 (t ) i m p o ses a

“ t ax ” rat h er t h an a p en al ty o r an ad di t io nt o t ax wi thi nth e m ean i ng o f s ect i o n 7 4 9 1 (c), p et i ti o n er h as th e b u rd en o f p ro du ct i o no n thi s i s s u e. See El v . Co m m i s s i o n er, 1 4 4 T.C. 1 4 0 , 1 4 5 -1 4 9 (2 0 1 5). Pet i t i o ner h as n otd i s p u tedth atth e d i s tri bu t io nfro m Pri nci p al Li fe In s u ran ce Co . was a d is tri b u ti o n fro m a qual i fi edret i rem en tp l an . He h as al l eg ed

n o fact s an d p ro du cedn o ev i d en ce s h o wi n g th ath e h adat tai n edth e ag e o f 5 9 -1 / 2 wh en h e recei v ed th e d i s tri b u t i o n o r t h atan y o th er s t atu t ory

ex cep t i o nap p l i es . W e wi l l acco rd in gl y

s u st ai n th e Co m

m is s io n er’ s d et erm i n at i o n t h atp et i t i o n er i s l i ab l e fo r t he 1 0 % ad d it i o n al t ax u n d er s ect i o n7 2 (t ). C. Ad di t i o n s t o Tax Th e Co m m is s i o n er d et erm i n edth at p et i t i o n er i s l i ab l e fo r ad d i t i o n s t o t ax
u n d er s ect i o n 6 6 5 1 (a)(1 ) an d(2 ). Res p o n d en th as th e b u rd en o f p ro du ct i o nwi th- 7
-

res p ectt o t h es e ad di ti o n s t o t ax . See s ec. 7 4 91 (c). On ce res p o n d en ts at is fi es th i s b u rd en , p et i t i o n er h as th e b u rd en o f p ro o f wi th res p ectt o ex cu l pat o ry fact o rs s u ch
as reas o n ab l e cau s e. See Hi g b ee v . Co m m i s s io n er, 1 1 6 T.C. 4 38 , 4 46 -4 4 7 (2 0 01 ). 1
. Sect i o n 6 6 5 1 (a)(1 ) Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io nt o t ax wh en a t ax p ay er fai l s t o t i m el y fi l e a ret u rn u n l es s th e t ax p ay er es t ab l i s h es thatth e fai l u re was du e t o
reas on ab l e cau s e an dn o tdu e t o wi l l fu l n eg l ect
. Pet i t i o ner was req u i red to fi l e a ret u rn fo r 2 0 1 2 p u rs u an t t o s ect i o n 6 0 1 2 , an d h e s t i p u l at edth ath e d i dn o td o s o . Thu s , res p o n d en th as m eth i s b u rd en , an d th e b u rd en s h i ft s t o p et i t i o n er. Al th ou g h p et i t i o n er arg u es th at h e i s n o t req u i red t o fi l e a ret u rn , h e recei v edg ro ss i n co m e g reat er t h an th e ex em p t i o nam o u n t . See s ec. 6 0 1 2 (a)(1 )(A). He d i d n o t p res en t an y

ev i d en ce t h ath i s fai l ure t o fi l e was du e t o reas o n ab l e cau s e
an d n o twi ll fu l n eg l ect . Acco rd i n g l y , p et i t io n er i s l i ab l e fo r t h e ad d i t i o nt o t ax
u n d er s ect i o n 6 6 5 1 (a)(1 ).

2
. Sect i o n 6 6 5 1 (a)(2 ) Sect io n 6 6 5 1 (a)(2 ) i m

p o s es an ad d i t io nt o t ax fo r fai lu re t o t i m el y p ay th e
am ou n to f t ax s h o wno n a retu rn u n l es s th e t ax p ay er s h o ws th atth e fai l u re was du e t o reas on ab l e cau se an dn o tdue t o wi l l fu l n eg lect . AnSFR p rep aredb y th e- 8

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Secret ary p u rs u an tt o s ect i o n 6 0 2 0 (b ) i s treat edas “ th e ret u rn fi l edb y th e t ax p ay er fo r p u rp o s es o f d et erm in i n g th e am o u n to f t h e ad d i t i o n” u n d er s ect io n 6 65 1 (a)(2 ). Sec. 6 6 51 (g )(2 ). Pet i t i o ner d o es n o tco n t en dth ath e p ai d th e am o u n t s ho wno nth e SFR. Th e SFR t hat res p o n d en tp rep aredco n s i s t s o f a Fo rm 1 3 49 6 , a Fo rm

8 8 6 -A, an da Fo rm 4 5 4 9 . Th at co m

b in at i o n o f d o cu m en t s i s s u ffi ci en tt o co n s t itu t e a v al i dSFR

u n d er s ect i o n 6 0 2 0 (b ). Rad er v . Co m m i s s i o ner, 1 4 3 T.C. 3 7 6 , 3 8 2 (2 0 1 4 ), aff’ d, 6 1 6 F. Ap p ’ x 3 9 1 (1 0 th Ci r. 2 0 1 5 ); s ee al s o Gl eas o nv . Co m m is s i o n er, T.C. M em o. 2 0 1 1 -1 5 4 , 2 0 11 Tax Ct . M em o LEXIS 1 5 1, at* 39 -* 4 0 . Thu s, th e SFR i s
a v al i ds ect i o n 6 0 2 0 (b ) retu rn d eem edt o h av e b een fi l edb y p et i t i o ner fo r th e p u rp os es o f s ect io n 6 6 5 1 (a)(2 ). Th erefo re, res p o nd en th as m et h i s b u rd en . Pet i t io n er d i dn o to ffer ev id en ce t h ath is fai l u re t o p ay was du e t o reas o n ab l e
cau s e an d n o t du e t o wi l l fu l n eg l ect . Acco rd i n g ly , we h ol dth atp et i t i o n er i s l i ab l e fo r t h e ad d it i on t o t ax u n d er s ect i o n6 65 1 (a)(2 ). II. Sect io n 6 6 7 3 (a)(1 ) Pen al ty Attri al res po n d en t fi leda m o t io nas k in g th e Co u rtt o i m p o s e a p en al ty

o n p et i t i o n er p u rs u an tt o s ect i o n 6 6 7 3 (a)(1 ). Ti t l e 2 6 , s ect i o n 6 6 7 3 (a)(1 ) au tho ri zes th e Tax Co u rt t o req ui re a t ax p ay er t o p ay t o th e Un i t edSt at es a p en al ty n o ti n
ex ces s o f $ 2 5 , 00 0 wh en ev er i t ap p ears th atp ro ceed i n g s i n th e Tax Co u rth av e- 9

-

b een in s t i tu t edo r m ai n t ai n edb y th e t ax p ay er p ri m ari ly

fo r d el ay , o r t h at th e t ax p ay er’ s p o s i t io n i n s u ch p ro ceed i n gs i s fri v o l o u s o r g ro u n dl es s . 4 A. Sect i o n 6 7 51 (b )(1 ) an dIt s Im p acto nSect i o n6 6 7 3 (a)(1 ) Ti t l e 2 6 , s ect i o n 6 7 51 (b )(1 ) req u i res th at “ [n ] o p en al ty u n d er t h i s t i t l e s h al l b e as s es s edu n l es s th e i n i t i al d et erm i n at i on o f s u ch as s es s m en ti s p ers o n al ly ap p ro v ed(i n wri t i n g) b y

th e i m m ed i at e s uperv i s o r o f th e i n d i v i dual m ak i n g s u ch d et erm i n at i o n o r s u ch h i g h er l ev el o ffi ci al as th e Secret ary m ay d es i g n at e.” 5 In Graev v . Co m

m i s si o ner (Graev III), 1 4 9 T.C. (Dec. 2 0 , 2 0 1 7 ), s up p l em en t i n g
an d o v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ), wh i ch was d eci d edaft er tri al an dth e

4 Sec. 6 6 7 3(a)(1 ) p ro v i d es , i np ert i n en tp art : SEC. 6 6 73 (a). Tax Co u rtPro ceed i n gs .-- (1 ) Pro cedures i ns t i tu tedp ri m ari l y fo r d el ay , et c.-- Wh en ev er i tap p ears t o th e Tax Co u rtth at
--

(A) p ro ceed i n g s b efo re i th av e b een i n s t i tu t edo r m ai n tai n ed b y

th e t ax p ay er p ri m ari l y

fo r d el ay , [o r] (B) t h e t ax p ay er’ s p o s i t i o ni ns u ch p ro ceed i n g i s fri v o l o u s o r g ro u n d les s , * * *

* * * * * * * th e Tax Co urt , i n i t s d eci si o n , m ay req u i re t h e t ax p ay er t o p ay t o th e Un i t edSt at es a p en al ty n o ti n ex ces s o f $ 2 5 ,0 0 0
. 5 Sec. 6 7 5 1(b )(1 ) d o es n o tap p l y t o th e s ec. 6 6 5 1 , 6 6 54 , an d 6 6 5 5 ad di t i o n s t o t ax o r t o o th er p en al t i es cal cu l at edth ro u g h el ect ro n ic m ean s . Sec. 6 7 5 1 (b )(2 ).- 1 0 -

s ub m i s si o n o f b ri efs i n t h e i n s tan tcas e, we ag reedwi th th e h o l d i n g o f t h e Co u rto f Ap p eal s fo r t h e Seco n dCi rcu i ti n Ch ai v . Co m m i s s i o ner (Ch ai ), 8 5 1 F.3 d1 9 0 (2 d Ci r. 2 0 17 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 2 0 1 5 -4 2 , th atth e Co m m i s s i o n er’ s co m

p l i an ce wi th s ect i o n 6 7 5 1 (b )(1 ) i s ap p ro pri at el y co n s i d eredi n a d efi ci en cy

p ro ceed i n g . Ch ai , 8 5 1 F.3 dat2 2 1. Th is m ean s th atres p o nd en tm u s t
o ffer ev i den ce i n th i s Co u rto f wri t t en s up erv i s ory ap p ro v al fo r p en al t i es co v ered b y s ect i o n 6 7 5 1 (b )(1 ) i n o rd er t o m eetth e b u rd en o f p ro du ct i o n u n d er s ect i o n 7 4 9 1 (c). See Graev III, 1 4 9 T.C. at(s li p o p . at1 4 ). Th e p en al ty

ati ss u e i n Graev III was a s ect i on 6 6 6 2(a) p en al ty , wh ich i s a p en al ty d et erm i n ed b y th e Co m m i s s i o n er i na n o ti ce o f d efi ci en cy o r b y Ch i ef Co u n s el fo r t h e In t ern al Rev en u e Serv i ce (IRS) i nth e an swer o r am en d edan s wer fi led on b eh al f o f t h e Co m m i s si o n er i nthi s Co u rt . Wh at Graev III m ad e cl ear i s th atan i ni t i al d et erm i n at i o n b y th e IRS t o as s erta p en al ty req u i res wri t t en ap p ro v al b y

an IRS s up erv i s o r an d t h atan i n i t i al d et erm in at i o nb y a Ch i ef Co u n s el at t o rn ey t o affi rm at i v el y

p l ead s u ch a p en al ty

o nb eh al f o f t h e IRS req ui res wri t t en
s up erv i s o ry

ap p ro v al b y

the at to rn ey ’ s s uperv i so r. See Graev III, 1 4 9 T.C. at, (s l ip o p . at5 , 1 4 ). Ho wev er, Graev III l eftm an y qu es t i o n s u n an s wered . See Graev III, 1 4 9 T.C. at, (s l i p o p . at4 5 -5 0 , 6 2 -6 3 ) (Ho l m es , J ., co n cu rri n g ).- 1 1 -

As rel ev an tt o th i s cas e, t h e ap p l i cat i on o f s ect i o n6 7 5 1 (b )(1 ) t o s ect i o n 6 6 7 3 (a)(1 ) i s arg uab l y

u n cl ear. See Graev III, 1 4 9 T.C. at(s l i p o p . 6 2-6 3 ) (Ho lm es , J ., co n cu rri n g). Th e s ect i o n6 6 7 3(a)(1 ) p en al ty can b e i m

p o s ed o n l y

at th e d i s cret i o n o f t h e Co u rtfo r m i s b eh av i o r b efo re t h e Co urt . It i s n o ta p en al ty d et erm i n edb y

the Co m m is s i o n er. Un d er s ect i on 6 6 7 3(a)(1 ), th e Tax Co u rt“ m ay ” i m p o s e t h e p en al ty

reg ard l es s o f wh et h er t h e Co m m i s s i o n er m ov es fo r i t s i m p o s i t i o n . B. St atu t o ry

Co n s tru ct i o n A l o n g -es t ab l i s h edcan o n o f s t atut o ry co n s tru ct i o ni s th at“ [w] h ere t here i s
n o cl ear i n ten ti o n o th erwi s e, a s p eci fi c s t atu t e wi l l n o tb e co n tro l l edo r n u l l i fi edb y a g en eral o n e, reg ard l es s o f t h e p ri o ri ty o f en act m en t .” Rad zan o w er v . To uch e Ro s s & Co ., 4 2 6 U.S. 1 4 8 , 1 5 3 (1 9 7 6 ) (qu o t i n g M o rt o nv . M an cari , 4 17 U.S. 5 3 5 , 5 5 0 -5 5 1 (1 9 7 4 )). Fu rt her, i t i s a card i n al ru l e o f s t atu t o ry co n s tru ct i o nth atrep eal s b y i m p li cat i o n are d is fav o red . Un i t edSt at es v . Un i t edCo n t ’ l Tu n a Co rp ., 4 2 5 U.S. 1 6 4 , 1 6 8 (1 9 7 6 ); M o rt o n , 4 1 7 U.S. at5 4 9 . Th i s p ri n ci p le i s g i v en “ s p eci al wei g h t ” wh en d eci d i n g whet h er a s p eci fi c s t atu t e h as b een rep eal edb y a g en eral
s t atu te. Un i ted Co n t’ l Tu na Co rp ., 4 2 5 U.S. at1 69 . Nev ert hel es s , an i m p l i ed rep eal m ay

b e fo u ndi n cert ai n l i m i t edci rcu m s t an ces :- 1 2 -

“ (1 ) Wh ere p ro v i s i on s i n th e t wo act s are i n i rreco nci l ab l e co n fl i ct , th e l at er act t o th e ex t en t o f t h e co n fl ictco n s t i tu t es an i m p l i edrep eal o f t h e earl i er o n e; an d(2 ) i f t h e l at er actco v ers th e wh ol e s ub j ecto f th e earl i er o n e an di s cl earl y i n t en dedas a s ub s t i tu t e, i t wi l l o p erat e s i m i l arl y as a rep eal o f the earl i er act . Bu t , i nei th er cas e, th e i n t en t i o n o f t h e l eg i s l ature t o rep eal m u s tb e cl ear an dm an i fes t* * * ” Hah n v . Co m

m is s io n er, 1 1 0 T.C. 1 4 0 , 1 4 9 (1 9 98 ) (qu o t i n g Rad zan o wer, 4 2 6 U.S. at1 5 4 ). Sect io n s 6 6 7 3 (a)(1 ) an d6 7 5 1 (b )(1 ) are n o ti ni rreco n ci lab l e co n fl i ct , s ect i o n 6 7 5 1 (b )(1 ) i s n o t a s ub s t i tu te fo r s ect i o n6 6 7 3 (a)(1 ), an dCo n g res s d i dn o tex p res s
a m an i fes t i n t en tt o rep eal s ect i o n 6 6 7 3 (a)(1 ) o r t o m od i fy th e l o n gs t an di n g p ro cedural ru l es th atg o vern th e p ro ces s i n g o f cas es i nth e Tax Co urt
. Ani rreco nci l ab le co nfl ictex i st s wh en “ th ere i s a p o si ti v e rep u g nan cy b et ween * * * [t h e s t atu tes ] o r * * * th ey can n o t m u tu al l y co ex i s t .” Rad zan o wer, 4 2 6 U.S. at1 55 . If th e t w o s tatu t es can co ex is t, i ti s th e du ty o f t h e co u rt s t o g i v e effect t o b o th . M o rt o n , 4 17 U.S. at5 5 1
. Here t h e p u rp o s es o f s ect i o n s 6 7 5 1 (b )(1 ) an d6 6 7 3 (a)(1 ) can b o th b e s erv ed wh i le g i v i n g effect t o b o th p ro v i s i o n s . Sect i o n6 7 5 1 was en act edas p arto f t h e IRS Res tru cturi ng an d Refo rm Acto f 1 9 9 8 , Pub . L. No . 1 0 5 -2 06 , s ec. 3 3 0 6 , 1 1 2 St at . at 7 44 . Co n g res s ex p res s edi t s i n t en t wi th res p ect t o s ect i on 6 7 5 1 (b ) i nth e- 1 3 -

l eg i s lat i v e h i s to ry . 6 Th e Sen at e Fi n an ce Co m m i t t ee b el i ev ed“ th at p en al t i es
s h o u ldo n l y

b e i m p o s edwh ere ap p ro pri at e an dn o tas a b arg ai n i n g ch i p .” S. Rep t
. No . 1 0 5 -1 7 4 , at6 5 (1 9 9 8 ), 1 99 8 -3 C.B. 5 3 7 , 6 0 1
. Th e co m m i t t ee fu rt her
ex p lai n edth at s ect i o n 6 7 5 1 (b )(1 ) “ req u i res th e s p eci fi c ap p ro val o f IRS

m an ag em en tt o as s es s al l n on -co m p u t er g en erat ed p en al t i es u n l es s ex cep t ed .” Id

. (em p h as i s ad ded ). Th i s i s b o l s t eredb y th e t erm s o f s ect i o n6 7 5 1 (b )(1 ), wh i ch al l o w o n l y

two i nd i v i du al s t o ap p ro v e a p en al ty : (1 ) “ th e i m m ed iat e s up erv i s o r o f th e i n d i v i du al m ak i n g th e d et erm i n at i on ”; o r (2 ) “ s u ch h i g her l ev el o ffi ci al as th e Secret ary m ay d es i g n at e.” Th e co m

m i t t ee’ s i nt en twas k ey

t o th e h ol d i n g i nCh ai

. In Ch ai , 8 5 1 F.3 dat2 19 , th e co u rt s tat ed : W e m u s tth erefo re “ co n su l tl eg i s l at i ve h i s t o ry an do th er t o o l s o f s t atu t o ry co n s tru ct i o n t o d i s cern Co ng res s ’ s m ean i ng .” Iti s p art i cu l arl y

u s efu l t o “ co n s i d er rel i ab le l eg i s l at i ve h i s t o ry ” i ncas es l i ke t h i s wh ere “ th e s tatu t e i s s u s cep ti b l e t o d i v erg en tu n ders t an d i n g s an d , equ al l y

i m p o rt an t , wh ere t h ere ex is t s au th o ri tat i v e l eg i s l at i ve h i s t o ry th atas si s t s i n d i s cern i n g wh atCo n g res s actu al ly m ean t .”
“ Th e m o s ten l i g ht en i n g s o u rce o f l eg i s l at i v e h i st o ry i s g en eral l y a co m m i t t ee rep ort , p art i cu l arl y a co n feren ce co m

m i t t ee rep o rt , wh i ch

6 If a s t atu te i s am

bi gu o u s , as i ti s i n t h i s cas e, s ee Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 (2 d Ci r. 2 0 17 ), aff’ g i np art , rev ’ g i np artT.C. M em o . 2 01 5 -4 2 ; Graev v . Co m

m i s si o ner, 1 4 9 T.C. , (s l i p o p. at 3 1) (Dec. 2 0 , 2 0 1 7 ) (Ho lm es , J ., co n cu rri n g), s up p l em en t i n g an do v erru l i n g i np art1 4 7 T.C. 4 6 0 (2 0 1 6), t h en we p ro p erl y

co n su l tth e l eg i s l at i v e h i s t o ry t o d i s cern th e s tatu te’ s p u rp os e, s ee Cal t ex Oi l Ven ture v . Co m m i s s i o ner, 1 3 8 T.C. 1 8 , 3 4 (2 0 1 2 ) (ci t i n g Bu rl i n g t o n N. R.R. Co . v . Ok l a. Tax Co m m ’ n , 4 8 1 U.S. 4 54 , 4 6 1 (1 9 8 7 )).- 1 4 -

we h av e i d en t ifi edas am o n g ‘ the m o stau th ori t at i v e an drel i ab le m at eri al s o f l eg i s l at i ve h i s t o ry .’ ” Th e rep o rtfro m

the Sen at e Fi nan ce Co m m i t t ee o n§ 6 7 5 1 (b ) s t at es cl earl y

the p u rp os e o f t h e p ro v i s i o nan dth us Co n g res s’ s i n t en t : “ Th e Co m

m i t t ee b el iev es th atp en al t ies s h o ul do nl y b e i m p o sed wh ere ap p ro p ri at e an dn o tas a b arg ai n i ng ch i p .” Th e s t atu t e was m ean tt o p rev en tIRS ag en t s fro m th reat en i n g u n

ju s t i fi edp en al t i es t o en co u rag e t ax p ay ers t o s et t l e. (“ [T] h e IRS wi l l o ft ens ay , i f y oud o n ’ t s et t l e, we are g o i n g t o as s ertp en al t i es .”). * * * [Ci tat i on s o m i tt ed .] Th e l eg i s lat i v e h i s t ory o f s ect i o n6 6 7 3 (a)(1 ) s h o w s th atCo n g res s h ad d i fferen t p ri ori t i es i n g ran t in g t h e Tax Co u rtth e p o wer t o i m p o s e s ect i o n 6 6 7 3 (a)(1 ) p en al t i es . Sect io n 6 6 7 3 (a)(1 ) was l as t am en d edb y th e Om n i b u s Bu d g etReco n ci l i at i o n Acto f 1 9 8 9 (OBRA), Pu b . L. No . 1 0 1 -2 3 9 , s ec. 7 7 3 1 , 1 0 3 St at . at 2 40 0 . Th e OBRA ch an g edth e awardal l o wab l e un d er s ect i o n 6 6 7 3 (a)(1 ) fro m “ d am ag es ” t o “ p en al t i es ” an di n creas edth e am o u n tal l o wab le fro m a
m ax i m u m o f $ 5 , 0 0 0 t o a m ax i m

u m o f $ 2 5 ,0 0 0 . Th e l eg i s l at i v e h i s t o ry ex p l ai n s : [T] h e $ 5 ,0 0 0 m ax i m

u m [award ] p ro vi d edu n d er p res en t l aw ap pears t o b e i n effect i v e i n d et erri n g t ax p ay ers fro m t ak i n g fri v o lo u s p o s i t i o n s . Th e co m m i tt ee h as ex p l i ci tl y

ch os en t o cal l th es e award s “p en al t i es ”, rat h er t han “ d am ag es ” (as u n der p res en tl aw), s o th at i ti s cl ear t h at s peci fi c d am ag es i n cu rredb y th e Un i t ed St at es n eedn o t b e p ro v edb efo re th e co urtm ay i m p o s e th i s p en al ty . Th e co m m it t ee b el i ev es th atd eal i n g wi th thes e fri v o l ou s l aws u i t s was t es s carce ju d i ci al res ou rces an dd el ay s th e res o l u ti o n o f l eg it i m at e d i s p u t es . Th e co m m i tt ee ex p ect s t h ati t s m o d i fi cat i o n s t o th i s p ro v i si o n wi l l fu rt h er d ecreas e fri v ol ou s l aws u i t s. * * *- 1 5 -

H.R. Rep t . No . 1 0 1 -2 4 7 , at1 3 9 9 -1 4 0 0 (1 9 8 9 ), 1 98 9 U.S.C.C.A.N. 1 9 0 6 , 2 8 6 9

- 2 8 7 0
. Sect io n s 6 6 7 3 (a)(1 ) an d6 7 5 1 (b )(1 ) are n o ti ni rreco n ci lab l e co n fl i ctan dcan
co ex is t . Sect i o n 6 6 7 3 (a)(1 ) ap p l i es b y i t s t erm s o nl y t o p en al t i es i m p o s edb y th e Tax Co u rtfo r fri v o lo u s an d g ro u n d l es s cl ai m s th atwas t e t h e t i m e an dres o u rces o f th e Co u rt . Co n g res s d es i g n ed s ect i o n 6 6 7 3 (a)(1 ) as a t oo l fo r t h e Tax Co u rtt o
co m b atfri vo l o u s l i ti g at i o n an dredu ce i t s co n g es tedd o ck et
. Sect i o n6 6 73 (a)(1 ) i s a p o s it i v e g ran to f p o wer. Onth e co n trary , s ect io n 6 7 5 1 (b )(1 ) was i n t en d edt o ap p l y o n l y t o IRS d et erm i n at i o n s. Co n g res s d es ig n eds ect i o n6 7 51 (b )(1 ) t o cl am p d o wno na p ercei v edIRS p ract i ce. Sect io n 6 6 7 3 (a)(1 ) h as an en t i rel y d ifferen t p u rp o s e. Th ere i s n o p o s i t i v e rep u g n an cy b et ween the s ect i o n s, an d t h ey can p o si t iv el y
co ex is t
. Th e l eg i s lat i v e h i s t ory m ak es cl ear t h ats ect i o n 6 7 5 1 (b )(1 ) i s i nt en d edt o p rev en t th e IRS fro m

i m p ro p erl y u s i n g p en al t i es th atare wi th in i ts p o wer t o d et erm i n e i n o rd er t o co erce s et t l em en t s . Th e l eg i sl at iv e h i s t o ry s t at es th at Co n g res s i n ten d edfo r t h i s t o b e acco m p l i s h edb y

req u i ri n g thatIRS m an ag em en t ap p ro v e p en al t i es thati t h as th e au th o ri ty t o d et erm i n e. Co n s equ en t l y , th e

“ i n di v i du al m ak in g * * * [a p en al ty ] d et erm i n at i o n” as d es cri b edi n s ect i o n- 1 6 -

6 7 5 1 (b )(1 ) i s an IRS em

p l o y ee. S. Rep t . No . 1 0 5 -1 7 4 , s up ra at6 5 , 1 9 9 8 -3 C.B. at 6 0 1 . Th e Tax Co u rti s n o tm en t i o n edi ns ect i o n 6 7 5 1 o r i t s l eg i s l at i v e h i st o ry . Sect i o n 6 6 7 3(a)(1 ) i s d es i g nedt o d et er b adb eh av i or i n l i t i g at i o n b efo re t h e Tax Co u rtan dco n s erv e ju di ci al res o u rces . Sect i o n6 7 5 1 (b )(1 ) i s cl earl y n o ti n t en d ed
as a m ech an is m t o res trai n th e Tax Co u rt
. Ti t l e 2 6 , s ect i o n 7 4 82 (c)(4 ) i s s i m i l ar t o s ect io n 6 67 3 (a)(1 ). It g ran t s th e Sup rem e Co u rto f t he Un it edSt at es an dth e U.S. Ci rcu i tCo u rt s o f Ap p eal s th e p o wer t o i m

po se p en al ti es i n cas es wh ere t h e d eci s i o no f t h e Tax Co u rti s affi rm ed
an d th e co u rtd eci d es “ th at th e ap p eal was i n s ti tu t edo r m ai n t ai n ed p ri m ari l y fo r d el ay o r t h atth e t ax p ay er’ s p o s i t i o ni n th e ap p eal i s fri v o l o u s o r g ro u n d l es s .” Sect i o n 6 6 7 3(b )(1 ) au th o ri zes th e Di s tri ctCo u rt s t o i m p o s e a p en al ty

n o ti nex ces s
o f $ 1 0,0 0 0 i f a t ax pay er m ai nt ai n s a “ fri vo l ou s o r g ro u n d l es s ” p os i t i o ni na s ect i o n 7 4 3 3 p ro ceed i n g . Sect i o n 6 7 5 1 (b )(1 ) was n o ti n ten d ed as a b ro adres trai n t
m ech an i s m

o n th e Fed eral ju d i ci ary . Itwas n o ti nt en d edt o co v er t h e i m p os i t i o n
o f p en al t i es thatCo n g res s i n t en d edco u ldb e i m p o sedb y co u rt s b ecau s e o f

m i s b eh av i o r b y

a l i ti g an tdu ri n g th e co u rs e o f a ju d i ci al p ro ceed i n g . Acco rd i n g l y , we h o l dth ats ect i on 6 75 1 (b )(1 ) d o es n otap p l y t o th e Tax Co u rtwh en i t i m p o s es p en al t i es u n d er s ect i o n 6 6 7 3 (a)(1 ).- 1 7 -

C. Pet it i o n er’ s Li ab i l i ty fo r t h e Sect i o n 6 6 7 3 (a)(1 ) Pen al ty Befo re t ri al , res p on d en t’ s co u n s el warn ed p et i t io n er t h atth e arg u m en t s h e
was ad v an ci ng were fri v o l o u s . Attri al p et i t io n er s eem edt o ackno wl ed g e t h ath i s arg u m en t s wo u l db e v iewedas fri v o l o u s . W e ev enwarn edp et i t i o ner t h atth e arg u m en t s h e was ad v an ci n g ap p eared t o b e fri v o l o us . Yet h i s b ri ef co n s i s t ed
s o l el y o f fri v o l o u s arg u m en t s . Sect io n 6 6 7 3 (a)(1 ) was d es i g n edt o d et er t h i s ty p e o f b eh av i o r. Acco rd in g ly , we i m

p os e a p en al ty

o f $ 2 ,0 0 0 p u rs u an tt o s ect i o n6 6 7 3 (a)(1 ). In reach i n g o u r d eci s i o n , we h av e co n s id eredal l arg u m en t s m ad e b y th e p art i es , an dt o th e ex ten tn o tm en t i o n edo r ad dres s ed , th ey are i rrel ev an to r wi th o u tm eri t
. To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er an d d eci s i o nwi l l b e en t ered

.