T.C. Memo. 2018-162

UNITED STATES TAX COURT

T-STAR ENGINEERING AND TECHNICAL SERVICES, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1549-17L. Filed September 24, 2018.

Ray S. Kemerer (an officer), for petitioner.

Erin K. Neugebaur, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: This collection due process (CDP) case was brought

pursuant to sections 6320 and 6330.1

 Petitioner challenges respondent’s

1Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect at all relevant times.
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[*2] determination to sustain the filing of a notice of Federal tax lien (NFTL) for

the collection of penalties assessed under section 6702.

FINDINGS OF FACT

Petitioner timely filed Forms 941, Employer’s Quarterly Federal Tax

Return, for the taxable periods ending March 31 and June 30, 2012. Petitioner had

made total Federal tax deposits of $17,732.09 and $16,805.06 for these periods. 

On January 21, 2014, petitioner sent a letter to respondent in which it

argued, among other things, that petitioner is not subject to “employment taxes”

and Federal income tax “withholding” requirements because petitioner is a private

sector non-federally-connected company. The letter further argued that petitioner

is not an “employer” or “taxpayer” or a withholding agent as defined by the

Internal Revenue Code. Petitioner enclosed with the letter Forms 941-X, Adjusted

Employer’s Quarterly Federal Tax Return or Claim for Refund, for the taxable

periods ending March 31 and June 30, 2012. These returns were “zero returns” in

which petitioner claimed it had no employment tax liabilities for the periods at

issue and requested refunds of the Federal tax deposits previously made. On the

Forms 941-X, petitioner stated:

The amount entered into line 2 of the form 941 for the quarter was

incorrectly entered as “Wages, tips and other compensation” (as

defined in Title 26 of the USC). No federally-connected payments
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were made. T-Star Engineering & Technical Services is a privatesector company, incorporated in the union state of Pennsylvania, that

is not connected with federally-privileged activities. T-Star

Engineering & Technical Services does not have “Employees” as

defined in Title 26 of the U.S.C. Per Title 26 and related tax law,

federal taxing authority is limited to the District of Columbia,

portions of union states ceded to the federal government, and United

States possessions including the Commonwealth of Puerto Rico,

American Samoa, Guam, and the US Virgin Islands. 

In November 2014 Correspondence Examination Technician George

Johnson in respondent’s office in Ogden, Utah, reviewed petitioner’s submitted

Forms 941-X and prepared its account for the assessment of the section 6702

penalties for the frivolous adjusted returns. On November 13, 2014, Mr.

Johnson’s supervisor, Supervisory Financial Technician Krista Decaria, approved

the penalties by signing Forms 8278, Assessment and Abatement of Miscellaneous

Civil Penalties. The section 6702 penalties for the Forms 941-X for the taxable

periods ending March 31 and June 30, 2012, were assessed on December 8, 2014.

2

[*3]

2The sec. 6702 penalties were assessed on two separate dates (December 8,

2014, and March 14, 2016) for three separate returns (2012 first quarter Form 941-

X, 2012 second quarter Form 941-X, and 2012 third quarter Form 941) for a total

of $30,000. Respondent concedes four of the penalty assessments. Respondent is

defending the sec. 6702 penalties assessed on December 8, 2014, regarding

petitioner’s 2012 first quarter Form 941-X and 2012 second quarter Form 941-X,

both of which were submitted on January 24, 2014. Respondent argues that

$10,000 of the sec. 6702 penalties against petitioner should be sustained. 
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[*4] On May 3, 2016, respondent issued petitioner a Letter 3172, Notice of

Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320. On June 3,

2016, petitioner submitted a request for a CDP hearing. 

Settlement Officer (SO) Stephen J. McCarrick was assigned to petitioner’s

case. SO McCarrick obtained copies of petitioner’s adjusted returns on which the

section 6702(a) penalties had been assessed. He also obtained the Forms 8278

which showed that the penalties had the proper managerial approval. 

SO McCarrick determined that the section 6702 penalties were properly

assessed, that repondent had followed the proper procedures, that final notice and

demand for payment had been made, and a balance was due when the NFTL was

filed. Mr. McCarrick sent petitioner copies of the Forms 8278 and informed it that

the collection action would be sustained. On December 19, 2016, respondent

issued petitioner a notice of determination sustaining the NFTL.

OPINION

The conduct of the CDP hearing is governed by sections 6320(c) and 6330. 

Section 6330(c)(1) requires the SO to verify that the requirements of applicable

law and administrative procedure have been met. At the hearing the taxpayer may

raise any relevant issue relating to the unpaid tax or the filing of the NFTL. Sec.

6330(c)(2)(A). Section 6330(c)(2)(B) provides that a challenge to the existence or
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[*5] amount of the underlying tax liability may be raised only if the taxpayer did

not receive a notice of deficiency or otherwise have an opportunity to dispute the

liability.

Pursuant to section 6330(c)(3), the determination of an SO must take into

consideration: (1) the verification that the requirements of applicable law and

administrative procedure have been met, (2) issues raised by the taxpayer, and

(3) whether any proposed collection action balances the need for the efficient

collection of taxes with the legitimate concern of the person that any collection

action be no more intrusive than necessary. SO McCarrick complied with all of

these requirements.

Petitioner challenges only the underlying liabilities for the section 6702

penalties. These are assessable penalties that are not subject to deficiency

procedures. Sec. 6703(b); see Callahan v. Commissioner, 130 T.C. 44, 50 (2008). 

Petitioner did not receive (and could not have received) a notice of deficiency for

the underlying liabilities, and respondent does not contest petitioner’s right to

challenge the underlying liabilities. Accordingly, we review SO McCarrick’s

determination de novo. See Callahan v. Commissioner, 130 T.C. at 50.

Pursuant to section 6702(a), a person shall pay a penalty of $5,000 for a

frivolous tax return. In any proceeding involving the issue of whether a person is
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[*6] liable for the section 6702 penalty, “the burden of proof with respect to such

issue shall be on the Secretary.” Sec. 6703(a).

The section 6702 penalty can be assessed when three conditions are met. 

First, the taxpayer must have filed a document that purports to be a return of tax

imposed by title 26. Sec. 6702(a)(1). The penalty can also apply to amended

returns. Colton v. Gibbs, 902 F.2d 1462, 1464 (9th Cir. 1990); Crites v.

Commissioner, T.C. Memo. 2012-267, at *7. Second, the purported return must

have either not contained information on which the substantial correctness of the

self-assessment may be judged or contained information that on its face indicated

that the self-assessment was substantially incorrect. Sec. 6702(a)(1)(A) and (B). 

Third, the taxpayer’s conduct must have been based on a position which was

frivolous or reflected a desire to delay or impede the administration of Federal tax

laws. Sec. 6702(a)(2)(A) and (B).

Petitioner submitted what “purported to be a return” for its employment tax

liabilities for the taxable periods ending on March 31 and June 30, 2012. The

purported returns were submitted on the official Forms 941-X and included the

signature of petitioner’s authorized corporate representative. These returns were

filed in an effort to obtain a refund of Federal tax deposits and requested
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[*7] abatement of previously assessed tax for the taxable periods. The Forms 941-

X included assertions that were clearly erroneous and frivolous.

With respect to the third requirement, petitioner’s conduct was “based on a

position which the Secretary has identified as frivolous”. Sec. 6702(a)(2)(A). As

an explanation for the corrections, petitioner states directly on the third page of the

Forms 941-X that “federal taxing authority is limited to the District of Columbia,

portions of union states ceded to the federal government, and United States

possessions including the Commonwealth of Puerto Rico, American Samoa,

Guam, and the US Virgin Islands.” The Commissioner has determined this type of

argument to be frivolous, and that determination has been upheld by courts. 

United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990) (citing Brushaber v.

Union Pac. R.R., 240 U.S. 1, 12-19 (1916)); Wnuck v. Commissioner, 136 T.C.

498, 506 (2011); Ulloa v. Commissioner, T.C. Memo. 2010-68, 2010 WL

1330387, at *7; see also Notice 2010-33, 2010-17 I.R.B. 609, 610; Rev. Rul.

2006-18, 2006-1 C.B. 743. Petitioner’s conduct in filing these returns with

respondent clearly reflects a desire to delay or impede the administration of

Federal tax laws. 

Other arguments petitioner may have alluded to at trial or in its posttrial

memorandum are without merit. We will not painstakingly address petitioner’s
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[*8] tax-protester type arguments “with somber reasoning and copious citation of

precedent; to do so might suggest that these arguments have some colorable

merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). We sustain

respondent’s determination with respect to the section 6702 penalties assessed on

December 8, 2014, regarding the Forms 941-X for the first quarter of 2012 and the

second quarter of 2012. Respondent concedes the remaining assessments.

In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit. 

To reflect the foregoing,

An appropriate decision

will be entered.