TAX COURT OPINION

Case: Barbara A. Kupersmit
Docket Number: 13428-14L
Judge: Gustafson
Opinion Type: bench
Filed: 07/01/2015
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 MN BARBARA A. KUPERSMIT, Petitioner, v. ) ) ) ) Docket No. 13428-14 L. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Philadelphia, Pennsylvania, on June 16, 2015, 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 Philadelphia, Pennsylvania, 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, decision will be entered for petitioner. (Signed) David Gustafson Judge Dated: Washington, D.C. July 1, 2015 SERVED Jul 01 2015 Capital Reporting Company 3 1 2 3 4 5 6 Bench Opinion of Judge David Gustafson June 16, 2015 Barbra A. Kupersmit v. Commissioner Docket No. 13428-14L The Court has decided to render in this case the following as its oral Findings of Fact and 7 Opinion, which shall not be relied on as precedent in 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Rule 152 of the Tax Court Rules of Practice and Procedure. This "collection due process" ("CDP") case is an appeal by petitioner Barbara A. Kupersmit pursuant to 26 U.S.C. section 6330(d), asking this Court to review the notice of determination issued May 13, 2014, by the Office of Appeals of the Internal Revenue Service ("IRS") to sustain a notice of proposed levy to collect a penalty assessed against Ms. Kupersmit pursuant to section 6702(a) for the year 2007. Respondent (the Commissioner) admitted that IRS Appeals abused its discretion in issuing the notice of determination and moved for a remand and a continuance, but Ms. Kupersmit objected. 24 When the case was called from the calendar in 25 Philadelphia on June 15, 2015, we denied the 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 1 2 Commissioner's motions and proceeded to trial. Ms. Kupersmit represented herself at the hearing, and 3 Daniel C. Munce represented the Commissioner. We will 4 4 5 hold in favor of Ms. Kupersmit. FINDINGS OF FACT 6 Petitioner's return 7 8 9 In May 2012 the IRS received an untimely return for 2007 (Ex. 1-J) submitted by Ms. Kupersmit and her husband (Stip. 2). Her husband had prepared 10 the return, and she signed it. The return had 11 multiple irregularities: 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The Kupersmits' return reported taxable interest on line 8a as "Est 1,400". On line 13 ("Capital gain or (loss)"), it reported "LOSS 201,387", but no Schedule D was attached. On Line 14 ("Other gains or (losses)"), it reported "RACE TRACK GAMBLING LOSS 0". On line 40 ("Itemized deductions") it reported "EST 12,500". In the payments section it included two figures--3408 and 9125.76--that it appears to identify as "PRIOR YEAR UNCLAIMED REFUND", and that are apparently added to yield the amount of 12,525.76, which as written straddles the line between line 73 (the amount overpaid) and line 74a (the amount to be refunded). That computation of the overpayment ignores the entries on line 64 ("Federal 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 5 income tax withheld") and line 65 ("2007 estimated tax payments") that presumably should have increased the claimed overpayment. To the return were attached (1) a blank Form 1040 for the year 2011, and (2) five pages of copies of filings in a lawsuit brought against the Kupersmits by Citizens Bank of Pennsylvania, some of which appear to assert that the IRS should be enjoined from taking action against the Kupersmits. Assessment of the penalty The IRS determined that the return was "frivolous" (see respondent's 6/1/2015 pretrial 1 2 3 4 5 6 7 8 9 10 11 12 13 memorandum at 2) and assessed against Ms. Kupersmit the penalty under section 6702(a). When she did not pay it, the IRS issued to her a notice of proposed levy. She then requested a CDP hearing before IRS Appeals. CDP hearing and petition The Commissioner admits that, in the course of the CDP hearing, IRS Appeals abused its discretion in two respects: First, Appeals denied Ms. Kupersmit the opportunity to challenge her liability for the penalty, which denial was improper since she had had no prior opportunity for such a dispute. 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 6 1 Cf. sec. 6330(c)(2)(B). Second, Appeals failed to 2 3 4 5 6 7 8 9 10 11 obtain the IRS's file for the determination and assessment of the liability at issue (thereby impeding court review of its determination, among other things). Nonetheless, on May 13, 2014, Appeals issued a notice of determination (attached to the petition) sustaining the notice of proposed levy. On June 9, 2014, Ms. Kupersmit timely filed her petition in this case. At that time, she resided in Pennsylvania. (Stip. 1.) 12 Pretrial proceedings 13 14 15 16 17 18 19 20 21 22 23 24 25 When the Commissioner discerned the defects in the CDP hearing, he filed a motion to remand this case to IRS Appeals so that those defects could be cured. Ms. Kupersmit objected. When the case was called from the calendar on June 15, 2015, Ms. Kupersmit confirmed that the only issue to be decided was her liability for the section 6702(a) penalty, which she wished to challenge, and which Appeals had not permitted her to challenge. She repeated her objection to any remand and argued that Appeals "should not be given two bites at the apple." The Court denied the Commissioner's motions and proceeded to trial. 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 7 I. Collection due process principles OPINION If a taxpayer fails to pay any Federal income tax liability after notice and demand, section 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer's property. However, the IRS must first issue a final notice of intent to levy, and notify the taxpayer of the right to an administrative hearing before the Office of Appeals. Sec. 6320(a), 6330(a) and (b) (1). After receiving such a notice, the taxpayer may request an administrative hearing before IRS Appeals, Sec. 6330(a)(3)(B), (b)(1). At the CDP hearing, the appeals officer must make a determination whether the proposed collection action may proceed. In so doing, the appeals officer is required to do several things, only one of which is at issue here: Pursuant to section 6330(c)(2)(B), IRS Appeals must consider a taxpayer's challenge to her underlying tax liability, if she "did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." A section 6702(a) penalty is not subject to notice of deficiency procedures, and the Commissioner now acknowledges 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 twww.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 that Ms. Kupersmit did not have any "prior opportunity" for such a challenge. II. Standard of review and burden of production When we review an IRS Appeals determination of underlying liability, we review it de novo (as we 6 would in a deficiency case) and not simply for an abuse of discretion (as when reviewing collection issues). See Goza v. Commissioner, 114 T.C. 176, 181- 182 (2000). Moreover, the underlying liability here is a penalty. Section 7491(c) provides that "the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty". Consequently, at trial the Commissioner had the burden of production with respect to Ms. Kupersmit's liability for the section 6702(a) penalty. Only if the Commissioner met that burden did the burden then shift to Ms. Kupersmit to convince us otherwise. Because the penalty liability was the only issue in the case, the Court instructed the Commissioner to proceed first at trial, in order to attempt to carry his burden of production to show that the return was subject to penalty under section 6702(a). The only evidence he put on was the tax return (which the parties had stipulated) and 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 9 testimony of Mr. and Mrs. Kupersmit. As we will explain, this evidence did not carry the day. III. Section 6702(a) penalty Section 6702(a) provides as follows: (a) Civil penalty for frivolous tax returns.-- 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. That provision does not penalize merely incorrect returns. The Code does have an accuracy-related penalty, but it is found in section 6662, not section 6702. A return does not become "a frivolous tax return" simply because it has an erroneous item (or 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 twww.CapitalReportingCompany.com Capital Reporting Company 1 multiple erroneous items). Moreover, it must be 10 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 noted that the Commissioner did not offer any evidence (such as information returns filed by third parties, or the absence of such information returns) to contradict the individual entries on the return or otherwise prove them erroneous. The individual entries are not facially erroneous, and the Commissioner has offered nothing more. It should be noted that the Kupersmits' return is not a "zero return". Cf. Oman v. Commissioner, T.C. Memo. 2010-276. Nor is the return facially "frivolous", as we usually use that term. See Leyshon v. Commissioner, T.C. Memo 2015-104 at *20-*22. Met with this observation during closing argument, the Commissioner stated that he does not contend that the Kupersmits' return reflects "a position which the Secretary has identified as frivolous" under subsection (a) (2)(A), but rather that it "reflects a desire to delay or impede the administration of Federal tax laws" under subsection (a)(2)(B). However, this was a contention first made after both parties had rested. The Commissioner's 23 pretrial memorandum simply asserts (at 2) that 24 25 "respondent determined" that the return "was frivolous", and the memorandum nowhere makes any 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 contention as to delaying or impeding tax administration. At trial the Commissioner did not put on any evidence as to delay or impediment that 4 might result from the Kupersmits' return, and the 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 closing argument only speculated as to difficulties that the return might pose for the IRS personnel processing it. Without evidence on the point, we cannot say that counsel's arguments satisfied the Commissioner' s burden of going forward. Counsel seemed to suggest that the most confounding irregularity on the Kupersmits' return was its omission of Schedule D to itemize the capital loss reported on line 13. That is indeed a serious irregularity; but such an omission is explicitly characterized by the Code not as a frivolous position but as a "mathematical or clerical error", sec. 6213(g)(2)(D), for which the Code gives the Commissioner a decisive solution, see sec. 6213 (b) (1) . Against the Commissioner' s argument that the return "reflects a desire to delay or impede the administration of Federal tax laws", a contrary argument that is more persuasive to us, particularly after observing the Kupersmits' testimony and demeanor, is that the return simply reflects a lack 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 12 of competence. We do not think that the penalty of section 6702(a) was intended to penalize that defect. CONCLUSION We do not sustain the determination of IRS Appeals to proceed with collection of the section 6702(a) penalty by levy, but rather upon entertaining Ms. Kupersmit's challenge to that liability, we determine that Ms. Kupersmit should not be held liable for it. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:47 p.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 2 4 25 866.488.DEPO twww.CapitalReportingCompany.com