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Tax Court found that it could hear challenge to frivolous return penalty before rejecting summary judgment in favor of IRS
Callahan (2008), 130 TC No. 3
After determining that the taxpayers could challenge a frivolous return penalty before it, the Tax Court went on to hold that IRS wasn’t entitled to summary judgment on its imposition of the penalty. Although the taxpayers’ forms were confusing and unorthodox, the Tax Court found that it wasn’t clear that their arguments were substantially similar to positions previously held to be frivolous or displayed a desire to delay or impede the administration of federal income tax laws.
Facts. Dudley Joseph Callahan and Myrna Dupuy Callahan submitted Form 1040, U.S. Individual Income Tax Return, and Form 843, Claim for Refund and Request for Abatement, to IRS for 2003. Based on the Callahans’ 2003 Form 1040 and Form 843, IRS assessed a frivolous return penalty under then-applicable Code Sec. 6702 (before it was amended by the Tax Relief and Health Care Act of 2006). The Callahans requested a hearing under Code Sec. 6330 after receiving a final notice of intent to levy. The Callahans challenged the assessment of the penalties during their hearing, and an Appeals officer issued a notice of determination denying relief from the penalties.
Background. The Tax Relief and Health Care Act of 2006, (TRHCA, P.L. 109-432), amended Code Sec. 6702 to increase the amount of the penalty for frivolous tax returns from $500 to $5,000 and to impose a penalty of $5,000 on any person who submits a “specified frivolous submission.” Code Sec. 6702 was further amended to require IRS to prescribe a list of positions identified as frivolous. Notice 2007-30, 2007-14 IRB 883 contains the prescribed list of frivolous positions that will trigger the increased penalty amount.
Tax Court’s conclusions. The Tax Court concluded that under Code Sec. 6330(d)(1), as amended by the Pension Protection Act of 2006, it had jurisdiction to review IRS’s notice of determination when the underlying tax liability consists of frivolous return penalties.
The Court also determined that the Callahans could challenge their underlying tax liability–i.e., the frivolous return penalties–before the Tax Court. The Court noted that the Callahans did not receive a notice of deficiency with respect to the frivolous return penalties because the statutory deficiency procedures under Code Sec. 6211 through Code Sec. 6216 do not apply to frivolous return penalties under Code Sec. 6702 . The Court concluded that as the Callahans didn’t otherwise have an opportunity to dispute the imposition of the frivolous return penalties, they may contest the penalties both at their Code Sec. 6330 hearing and before the Tax Court.
The Court further held that IRS failed to show that it was entitled to summary judgment. Although the Callahans’ Form 1040 and Form 843 were confusing and unorthodox, their arguments were not substantially similar to positions previously held to be frivolous or those that display a desire to delay or impede the administration of federal income tax laws. Their Form 1040 requested a refund of levied amounts related to a previous tax year on their 2003 Form 1040, without reason why such garnishments were illegal. The Form 1040 also contained handwritten notations explaining entries, asking questions about certain items, and requesting additional credits. It included a list of nontaxable amounts received, allegations related to a civil suit against IRS, and updated depreciation schedules related to deductions that were claimed in prior years. Similarly, their Form 843 requested a refund of “every penny you collected from us plus interest,” with little explanation of the amounts collected, or why that collection was improper.
While noting that such was not binding in this case (because the taxpayers’ returns were submitted before Mar. 16, 2007), the Court found that the Callahans’ positions weren’t substantially similar to the list compiled by IRS of 40 frivolous positions in Notice 2007-30 . It appeared that the Callahans disputed IRS’s collection activities related to 2003 as well as prior years, and that they made allegations related to those disputes on their 2003 Form 1040. But the Court concluded, until the record was developed, it couldn’t say as a matter of law that the Callahans had taken a frivolous position or that they desired to delay or impede the administration of federal income tax laws.
Observation: Thus, while noting that it wasn’t governed by the current Code Sec. 6702 , the Tax Court indicated that even were it applicable, it would have reached a similar conclusion.
