TAX COURT OPINION

Case: Byron Keith
Docket Number: 1836-15L
Judge: Gustafson
Opinion Type: bench
Filed: 06/20/2016
Pages: 26

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 BYRON KEITH, Petitioner, v. ) ) ) ) Docket No. 1836-15 L. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152, and to give effect to the opinion of the Court as set forth in the transcript of the proceeding at Detroit, Michigan, on June 8, 2016, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before the undersigned judge at Detroit, Michigan, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. (Signed) David Gustafson Judge Dated: Washington, D.C. June 20, 2016 SERVED Jun 20 2016 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Bench Opinion by Judge David Gustafson June 8, 2016 Byron Keith v. Commissioner Docket No. 1836-15L The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of Practice and Procedure, and it shall not be relied on as precedent in any other case. This "collection due process" ("CDP") case is an appeal by petitioner pursuant to 26 U.S.C. section 6330(d), asking this Court to review the determination by the Office of Appeals of the Internal Revenue Service to sustain a notice of Federal tax lien to collect petitioner's unpaid income tax for the years 2006, 2008, 2009, and 2010 and eight penalties under section 6702(a) for 2008, 2009, and 2010. On the notice of determination and on the petition, petitioner is named Byron Keith. 22 Petitioner asserts that his name has been legally 23 changed, identifies himself by the name Nearyah Malak 24 Yisrael, and has signed some of the papers in this 25 case with that name. However, he has made no showing 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 of a legal name change and has not moved to have the caption of the case changed. The case was tried in Detroit, Michigan, on June 6, 2014. Petitioner represented himself, and John D. Davis represented the Commissioner. We uphold petitioner's challenge as to liability for seven of the eight penalties under section 6702(a), but we hold that otherwise IRS Appeals did not abuse its discretion and we sustain the filing of the notice of lien to that extent. FINDINGS OF FACT 12 Petitioner's latest Form 1040 13 14 15 16 17 18 19 20 21 22 23 24 25 In the year 2006 petitioner earned a total of $12,336.68 in wages reported on certain information returns filed by several payors, from which $1,213.46 was withheld as Federal income tax. (See Ex. 33-J.) For the year 2006 petitioner filed a Form 1040 individual income tax return, for which he did not fully pay the reported tax liability. (Ex. 25-J, Attachment, fifth page.) Rather, as of March 2011, $680.52 of his self-reported 2006 income tax liability remained unpaid. (Ex. 33-J, last page.) Apparently 2006 was the last year for which petitioner has filed a Federal income tax return. He alleges that sometime soon thereafter his "status 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 changed" when he created a trust (although he elsewhere indicated that the trust was created in 1976; see Ex. 46-P, line D on each Form 1041). We assume that at some point he did create a trust (but we hold that it did not change his "status" for tax purposes). Petitioner's Forms 1041 Petitioner thereafter filed for the year 2006 a Form 1041, "U.S. Income Tax Return for Estates and Trusts" (Ex. 46-P), on which the "Name of Estate or Trust" was stated to be "Private, Social Security, Simple Trust, titled: BYRON KEITH", and the name of the fiduciary was given as "Byron Keith". On that Form 1041 for 2006 he reported the same income that had been reported as compensation paid to him. However, he reported various deductions, the largest of which was an "Income distribution deduction" of $10,406, yielding "Taxable income" of negative $300 on line 22 and "Total tax" of zero on line 23. He claimed on line 24e the same $1,214 of "Federal income tax withheld" that had been taken from his compensation, and requested a refund of that amount. The IRS evidently processed the Form 1041 and paid the requested refund in December 2008. (See Ex. 33-J, "12 16 08" refund check.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 For 2007 (not at issue here) petitioner filed a similar Form 1041 that claimed a refund of $2,874 that the IRS paid on "05 27 08" (see Ex. 46-P). In 2008 petitioner earned $31,301.07 from Aramark, from which Aramark withheld $329.15 as Federal income tax. On or about February 16, 2009, petitioner filed for 2008 a Form 1041 similar to the 2006 form, reported on the 2008 form his Aramark earnings and $329 of Federal income tax withholding, and claimed a refund of $329, which the IRS paid on "06 07 11" (see Ex. 46-P). For 2009 petitioner filed a similar Form 1041 in or about February 2010, and for 2010 petitioner filed a similar Form 1041 in or about February 2011. Each return reported income (which we infer to have been 16 petitioner's own earnings), deductions including an 17 18 19 20 21 22 "Income distribution deduction", "Taxable income" of negative $300, zero withholding, and zero tax liability, and each claimed no refund. Each of the returns for 2006 through 2010 claimed an "Income distribution deduction" sufficient to reduce taxable income to negative $300. However, 23 all but one of the Forms 1041 that appear in our 24 25 record are incomplete and do not include the Schedule K-1 that is the part of the form that shows the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 income distribution. Only the Form 1041 for 2010 that is attached to Exhibit 34-J includes a Schedule K-1, and it indicates that the entire amount of the income distribution was to "Regina Alexander-Keith". We infer from her last name and from her address that this individual is a spouse or relative of petitioner. There is no evidence in the record to show that petitioner (either in his own name or for the trust) made any payments to Regina Alexander- 10 Keith, or that Regina Alexander-Keith reported any 11 12 13 14 15 income distributions as income on her own Federal income tax returns. (Petitioner testified that he filed a Form 1041 for each of the years 2006 through 2013, and we find that he did so.) 16 Notices of deficiency 17 18 19 20 Petitioner did not file individual income tax returns for 2008, 2009, or 2010, though, as we have noted, he did earn and receive compensation in those years. His payors reported that compensation to the 21 Government, and the IRS prepared substitutes for 22 23 24 25 returns ("SFRs") calculating petitioner's income tax liability, and issued notices of deficiency for 2008 in June 2011 (Ex. 14-J), for 2009 in December 2012 (Ex. 15-J), and for 2010 in April 2013 (Ex. 16-J). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Petitioner received the notices but did not file 2 3 4 5 6 7 8 9 10 11 12 13 petitions in the Tax Court to challenge them. The IRS thereafter assessed the deficiencies it had determined. Frivolous return penalties From November 2011 through December 2012, the IRS assessed against petitioner eight $5,000 penalties under section 6702(a) for filing frivolous returns. The IRS's notice of tax lien pertaining to those penalties (Ex. 1-J) identifies them as pertaining to the three tax years ending 12/31/2006, 12/31/2008, and 12/31/2010. (Ex. 1-J.) The "Notice of Federal Tax Lien Filing and Your Right to a 14 Hearing under IRC 6320" (Ex. 2-J) does not shed 15 16 17 18 19 further light. Our record shows what only three of these $5,000 penalties were asserted for: The IRS asserted a section 6702 penalty for the year "200612"--i.e., the year ending 12/31/2006--for a "Form 1041" (Ex. 31-J). The copy of the first page 20 of the return that is attached to a levy notice in 21 Exhibit 33-J is stamped "Frivolous Tax Penalty 22 23 24 25 Assessed". We can therefore conclude that one $5,000 penalty was assessed for the 2006 Form 1041. The IRS asserted a section 6702 penalty for the year "200812"--i.e., the year ending 12/31/2008--for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 a "1041" (Ex. 26-J). We can therefore conclude that one $5,000 penalty was assessed for the 2008 Form 1041. The IRS asserted a section 6702 penalty for the year "201012"--i.e., the year ending 12/31/2010--for a "Form 1041" (Ex. 30-J). One of the copies of the Form 1041 for 2010 that appears in our record appears as an attachment to an IRS letter proposing the frivolous return penalty (Ex. 34-J). The basis for the other five $5,000 penalties is unexplained on our record. Levy notice On March 7, 2011, the IRS sent to petitioner a "Final Notice of Intent to Levy and Notice of Your 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Right to a Hearing", pertaining to petitioner's 16 17 18 19 20 21 22 23 unpaid 2006 income tax balance and the $5,000 frivolous return penalty for the 2008 Form 1041. (Ex. 33-J.) Petitioner did not request a CDP hearing in response to that levy notice (nor file a follow-up Tax Court petition), and he thereby passed up an opportunity to challenge those liabilities. In this case we do not have jurisdiction to review that levy notice. 24 Notice of lien filing 25 When petitioner failed to pay the liabilities 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 after notice and demand, the IRS sent to petitioner a "Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320" (Ex. 2-J) on July 3, 2014. On July 18, 2014, petitioner timely submitted to the IRS a Form 12153, "Request For a Collection Due Process or Equivalent Hearing" before the IRS Office of Appeals. The Form 12153 includes a block for stating the "reason for the dispute", and in that block petitioner wrote "See Attachment". His attachment was a two-page letter consisting of frivolous contentions--including that "1040's are for people that work as government agents/officials"; that petitioner earned not income but "pecuniary wages for services rendered"; that withholding taxes are "gifts to the U.S. government, not taxes that may not be enforced"; that "the Legal and Lawful me, Nearyah 18 Malak Yisrael [is] the fiduciary of the paper entity 19 20 21 22 23 24 25 'BYRON KEITH'"; and that the lien notice "is not a valid lien because it is not signed by a judge". His request for a CDP hearing did not request an installment agreement or an offer in compromise. It did not assert that his income tax liabilities had been incorrectly computed, or that he was entitled to deductions or credits not allowed. Rather, its 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 contention was the blanket assertion that he owed none of the liabilities that the IRS had assessed. IRS Appeals sent petitioner a letter dated August 27, 2014 (Ex. 9-J), that, among other things, suggested he could request a face-to-face hearing. In response, petitioner sent a letter (Ex. 45-J) that requested a face-to-face hearing. However, before receiving that response, on September 3, 2014, IRS Appeals sent him another letter (Ex. 11-J) that scheduled a telephone hearing, stated that Appeals had determined that one or more of the issues in his request for a hearing was frivolous, and explained that he could get a face-to-face hearing only if he disclaimed his frivolous issues and raised legitimate issues. The letter stated, "We may also consider 16 whether you owe the amount due, but only if you did 17 18 19 20 21 22 23 24 25 not receive a statutory notice of deficiency or have not otherwise had an opportunity to dispute your liability with Appeals." (Thus, as to a prior "opportunity", the letter made no distinction between the income tax liabilities subject to deficiency procedures and the section 6702(a) penalties that had been assessed without deficiency procedures.) On September 13, 2014, petitioner sent a letter (Ex. 12-J) to the Acting Commissioner of the IRS and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 sent a copy to IRS Appeals. The letter stated that "I authorize you to contact me only by mail". IRS Appeals construed this as a demand for a hearing by correspondence. Petitioner's letter included an attachment entitled "Plain Statement of Facts" replete with additional frivolous arguments. On October 1, 2014, IRS Appeals sent another letter (Ex. 17-J). This letter repeated IRS Appeals' 9 warning that petitioner's positions were frivolous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and stated that, "If you do not amend or withdraw your hearing request [to remove frivolous issues], your case will be returned to Collection." Similar to the prior letter, this letter also discussed the "prior opportunity" to dispute "the underlying liability" and "the balance owed", not distinguishing between the income tax liabilities and the penalty liabilities. The letter stated, "If you do not participate in a conference or respond to this letter, the determination or decision letter that we issue will be based on your hearing request...." On November 3, 2014, petitioner filed a petition in this Court under Docket No. 26340-14L, in which he attempted to challenge the IRS's notice of lien filing dated July 3, 2014 (Ex. 2-J). On January 8, 2015, the IRS moved to dismiss the petition on the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 grounds that it was premature in the absence of a final notice of determination having been issued by IRS Appeals. Ironically, on the same day IRS Appeals issued its final notice of determination (Ex. 25-J). The Court granted the motion to dismiss. Notice of determination and petition IRS Appeals' final notice of determination upheld the filing of the notice of lien (Ex. 25-J) . In describing Appeals's "verification" of compliance 10 with the requirements of applicable law and 11 12 13 14 15 regulations, the attachment to the notice stated, "An assessment was properly made for each tax and period listed on the CDP notice." It concluded that, because petitioner received notices of deficiency for 2008, 2009, and 2010 but did not petition the Tax 16 Court to challenge those determinations, petitioner 17 18 19 was "precluded from challenging the underlying liabilities". The notice did not discuss or refer to verification as to the penalties in particular; it 20, did not explain the basis for the eight $5,000 21 22 23 24 25 penalties; it did not describe whether or how petitioner had a prior opportunity to dispute the penalties. Rather, it stated as follows: "The CDP notice was [sic] Civil Penalties liabilities for tax years 2006, 2008 and 2010. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 The tax [sic] liabilities for tax years 2006, 2008, and 2009 incurred resulted [sic] from the assessment of a Civil Penalty. "Section 6702 allows imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous submission other than returns, if the purported returns or specified submissions are either based upon a position identified as frivolous by the Service in a published list or reflect a desire to delay or impede tax administration." On January 20, 2015, petitioner timely filed his 1 2 3 4 5 6 7 8 9 10 11 12 13 petition in this suit, challenging that notice. 14 15 16 17 18 19 20 21 22 23 24 25 I. Collection Due Process principles OPINION When a taxpayer fails to pay any Federal income tax liability after demand, section 6321 imposes a lien in favor of the United States on all the property of the delinquent taxpayer, and section 6323 authorizes the IRS to file notice of that lien. However, the IRS must provide written notice of a tax lien filing to the taxpayer within five business days. After receiving such a notice, the taxpayer may request an administrative hearing before Appeals. Sec. 6320(a)(3) (B), (b) (1). Administrative review 1s 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 carried out by way of a hearing before IRS Appeals pursuant to section 6330(b) and (c); and, if the taxpayer is dissatisfied with the outcome there, he can appeal that determination to the Tax Court under section 6330(d), as petitioner has done. For the agency-level CDP hearing before IRS Appeals, the pertinent procedures are set forth in section 6330(c). Those procedures require IRS Appeals to consider four sets of issues: First, the appeals officer must obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. Sec. 6330(c)(1). The basic requirements, see sec. 6320, for which Appeals was to obtain verification are: a timely assessment of the liability, secs. 6201(a)(1), 6501(a); notice and demand for payment of the liability, sec. 6303; and notice of the filing of the lien notice and of the taxpayer's right to a CDP hearing, sec. 6320(a) and (b). We discuss verification below in part II. Second, a taxpayer may contest the existence and amount of the underlying tax liability if he did not have a prior opportunity to dispute the tax liability. Sec. 6330(c) (2) (B). We discuss underlying liability below in part III. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 Third, the taxpayer may "raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy," including challenges to the appropriateness of the collection action and offers of collection alternatives. Sec. 6330(c) (2) (A). 6 Petitioner proposed no "collection alternative", and 7 8 9 10 11 12 13 14. 15 we need not address this issue. Fourth, at the CDP hearing Appeals is to consider "whether any proposed collection action [here, the filing of the NFTL] 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." Sec. 6330(c)(3)(C). The filing of a notice of lien is often the least intrusive means of collection. 16 Petitioner has alleged no failure of such balancing, 17 18 19 20 and none is apparent, so we do not address this issue. When Appeals issues its determination, the taxpayer may "appeal such determination to the Tax 21 Court", pursuant to section 6330(d) (1). 22 23 24 25 II. Verification IRS Appeals has the affirmative duty, without any prompting by the taxpayer, to verify the procedural predicate for the liabilities. See Hoyle 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 v. Commissioner, 131 T.C. No. 13 (2008). As to the income tax liabilities, the notice of determination sets forth Appeals' compliance with the "verification" requirements as to the liabilities at issue. Petitioner's only contention in the nature of an allegation of a failure of "verification" as to the income tax liabilities is his argument that, before collection could proceed, the IRS was obliged to demonstrate that Form 23C had been properly signed 10 in connection with their assessment. Petitioner is 11 mistaken. As we have often held, IRS Appeals may 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rely on agency transcripts to verify the procedural predicates for a liability. There is no evidence that petitioner requested a Form 23C during the CDP hearing; but even if he had, the IRS was not obliged to provide it, see Best v. Commissioner, T.C. Memo. 2014-72 at *16-*19. IRS Appeals is not obliged to retrieve Form 23C for every CDP verification. As to penalty, however, the defects we discuss below in the Commissioner's position constitute defects of verification. Our record does not show that IRS Appeals verified the procedural predicate for all eight penalty liabilities. The discussion of verification in the notice of determination appears directed solely to the income tax liabilities; of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 eight $5,000 penalties, the basis for only three (i.e., one each for the Forms 1041 for 2006, 2008, and 2010) can be inferred; and the discussion of the section 6702(a) penalty appears almost garbled. 5 Consequently, IRS Appeals abused its discretion in 6 7 8 9 failing to properly verify as to the five other penalty liabilities. In this instance, however, the verification defects as to the five other penalties also bear on 10 petitioner's liability for those penalties. Because 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we hold that petitioner is entitled to challenge the underlying liability for the penalties, we decline to remand the case to IRS Appeals for verification as to those five. Where we can address such verification- related issues in our de novo consideration of underlying liability, it would be inappropriate to remand the case to Appeals, to give it a second bite at the apple. It would also be inefficient, since we properly have the liability issue before us here and can address it now and resolve the case. III. Challenge to underlying liability A. Review principles In considering IRS Appeals' consideration of collection issues, the Court reviews the administrative determination for an abuse of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 discretion, see Sego v. Commissioner, 114 T.C. 604, 610 (2000); but in addressing challenges to underlying liability, we consider the issues de novo. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). As we noted above, a taxpayer is allowed to challenge underlying liability in a CDP case only where he has not had a prior opportunity to make such a challenge. In making such a challenge, the petitioner normally bears the burden of proof, see Rule 142(a)(1); but Section 7491(c) imposes on the IRS "the burden of production in any court proceeding with respect to the liability of any individual for any penalty". B. Income tax liabilties Petitioner advances numerous frivolous arguments, and only frivolous arguments, to dispute his income tax liability for the years at issue. If we needed to decide his income tax liability for those years, we would do so without addressing his arguments at length, since frivolous arguments are not entitled to refutation in a court opinion. See 21 Wnuck v. Commissioner, 136 T.C. 498, 501-513 (2011). 22 23 24 25 However, we need and may not address his income tax liabilities at all: Petitioner had the opportunity to challenge his self-reported income tax liability for 2006 when the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 IRS issued to him a levy notice for that year, for 2 which he could have requested a CDP hearing, from 3 4 5 6 7 8 9 which he could have appealed to the Tax Court. Likewise, he had a prior opportunity to challenge the IRS's determination of his income tax liability for 2008, 2009, and 2010 when the IRS isued to him notices of deficiency, which gave him the right to petition the Tax Court for a redetermination of his liabilities. Though he did not take advantage of 10 those opportunities, he had those opportunities. 11 Consequently, he is barred by section 6330(c)(2)(B) 12 13 14 15 16 17 18 19 from challenging his income tax liability for any of the four years at issue. C. Penalty liabilities 1. Prior opportunity As far as our record shows, petitioner had a prior opportunity to challenge only one of the eight penalties imposed under section 6702(a)--i.e., the penalty for filing the Form 1041 for the year 2008, 20 which was the subject of the levy notice that he 21 22 23 24 25 could have appealed to the Tax Court. (Ex. 33-J.) For that one penalty, petitioner's challenge is barred. For the other seven, section 6330(c) (2) (B) did not bar a challenge. However,.the IRS's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 correspondence implied to petitioner that he was thus barred. This implication may have discouraged petitioner from attempting such a challenge, and we therefore construe his pleadings broadly and find that he should be deemed to have put the penalty liability at issue. We attribute no bad motive to this mistaken or imprecise commentary in the IRS's letters. Most commonly, the penalties under discussion with income tax liabilities are the accuracy-related penalties under section 6662 that are subject to deficiency procedures; and the right to challenge such a penalty liability typically rises or falls with the right to challenge the income tax liability. The assessable penalty under section 6702(a), however, is independent of the income tax liability, and is not the subject of a notice of deficiency. Consequently, a taxpayer who has received a notice of deficiency for 2010 is not thereby barred from later challenging his liability for a section 6702(a) penalty for that year--and should not be told that he is barred. 2. Burden of production We therefore turn to the merits of the section 6702(a) penalties. In so doing, we follow the counsel of section 7491(c), quoted above, that the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 IRS bears the burden of production. The Commissioner 2 must first show the applicability of the penalty; 22 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 only after he does so will the taxpayer have the burden to prove that the penalty does not apply. 3. The statute Section 6702 (a) (entitled "Civil penalty for frivolous tax returns") provides: "A person shall pay a penalty of $5,000 if-- "(1) such person files what purports to be a return of a tax imposed by this title but which-- "(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or "(B) contains information that on its face indicates that the self-assessment is substantially incorrect, and " (2) . the conduct referred to in paragraph (1)-- "(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or "(B) reflects a desire to delay or impede the administration of Federal tax laws." Thus, by its basic terms, the penalty is imposed only when a taxpayer "files what purports to be a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 return of a tax". Moreover, although the caption of subsection (a) includes the word "frivolous", the nature of the return that is to be penalized is described--without the use of that word--by characteristics set out in the subordinate text of (a) (1). The statute has two requirements--the presence or absence of information (in sec. 6702(a)(1)) and the culpable conduct of the reporting (in sec. 6702(a)(2)). 3. The five unexplained penalties For five of the $5,000 penalties, the record does not show the basis for the penalties. Eight $5,000 penalties are assessed, and they are stated as arising from three years--2006, 2008, and 2010. We 15 must conclude that three of the eight penalties 16 17 18 19 20 21 22 23 24 25 relate to the Forms 1041 filed for those three years. The other five remain a mystery. We do not know--and respondent's counsel could not even speculate as to-- the returns for which these penalties were asserted. That being the case, we cannot say that the Commissioner has carried his burden of production. Therefore, we must sustain petitioner's challenge as to those five penalty liabilities. 4. The penalties based on Forms 1041 For three of the $5,000 penalties, we have 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 24 1 2 3 4 5 6 7 8 9 shown that the IRS imposed them because of the filing of the Forms 1041 for 2006, 2008, and 2010. The challenge as to 2008 is barred (see part II.C.1, supra), so we need consider only 2006 and 2010. The question is whether the Forms 1041 fall within the description in section 6702(a). The culpable conduct requirement of (a)(2) includes tax return reporting that is based on an identified "frivolous" position (see (a) (2) (A) ), and petitioner' s trust-based 10 position has indeed been so identified. See Rev. 11 Rul. 2006-19. We therefore conclude that (a)(2) is 12 13 14 15 16 17 18 19 20 21 22 23 24 25 satisfied in connection with petitioner's Forms 1041, and we look to determine whether the Forms 1041 are described in (a) (1). In so determining, it is important to resist any urge to hypothesize undemonstrated facts. One might be tempted to assume that Regina Alexander-Keith did not report and pay tax on the supposed "Income distribution" that the trust deducted, so that the Form 1041 was probably a fraudulent component of a tax evasion scheme--but we assume nothing, especially where the Commissioner has the burden of production. He put on no evidence of Regina's reporting or not reporting. It is useful to note what we do not address 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 25 1 2 3 4 5 6 7 8 9 under (a)(1). We do not decide the frivolousness of petitioner's position that his creation of a trust somehow assigned to it his income and withholdings. His position is indeed frivolous, and that conclusion is relevant to (a)(2); but the position itself is not a return, and we must decide whether the return is described in (a)(1). Nor do we answer here the hypothetical question whether a Form 1040 that inaccurately omits one's income on the basis of 10 petitioner's trust theory would incur a penalty, 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 since no such return is at issue here. All we have are the Forms 1041 that inaccurately report income. Nor do we simply decide whether the Forms 1041 are inaccurate (though they certainly are). By other means the Internal Revenue Code punishes inaccuracy-- viz., by the accuracy-related penalty of section 6672(a). Similarly, the issue is not whether the Forms 1041 were fraudulent, since fraud is addressed by the fraud penalty of section 6663. Rather, we must determine whether the errors are of the sort described in section 6702(a)(1). The particular target of that provision is not a reporting position that looks kosher but turns out to be inaccurate. The target is instead the return that has patent errors--wholesale omissions that render 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 tax computation impossible (sec. 6072(a) (1) (A)), or "information that on its face indicates that the self-assessment is substantially incorrect" (sec. 6702(a) (1) (B)). For example, the "zero return" is no return at all; it is frivolous because it purports to be a return but it manifestly reports nothing. We understand section 6702(a) to penalize the facially frivolous return, not the return that simply turns out to have been erroneous. The IRS was able to process petitioner's (false) Forms 1041 and even paid the refunds claimed thereon. It is not impossible for a trust to have income in the amounts petitioner (falsely) reported and to have deductions for income distribution, yielding zero tax liability. 15 Petitioners' Forms 1041 were certainly false, but we 16 17 18 cannot say they were frivolous. We therefore sustain petitioner's liability challenge as to seven of the $5,000 penalties. 19 Otherwise, we find no error or abuse of discretion in 20 the IRS Appeals' sustaining the filing of the NFTL; 21 22 23 24 25 and we overrule petitioner's challenge as to one penalty (i.e., the 2008 penalty for the Form 1041), and we overrule altogether petitioner's challenge as to his income tax liability for 2006, 2008, 2009, and 2010. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company . This concludes the Court's oral Findings of Fact 27 and Opinion in this case. (Whereupon, at 11:25 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com