United States Tax Court building in Washington DC
The IRS doesn't like frivolity when it comes to returns. And they can count on Albert Lauber, my favorite Tax Court judge, to back them up when they are right. Eric D. Clarkson was challenging frivolity penalties - Code Section 6702 - fourteen of them at five grand a pop. Here is the story according to Lauber's opinion.
The Returns
Mr. Clarkson failed to file timely Federal income tax returns for every year from 2003 to 2016. The IRS prepared substitute returns for each year and issued notices of deficiency. As of June 2020 the tab was over a quarter million. When reading a Tax Court decision, one of the lines that can hint that things are not going to go well for the taxpayer is "Petitioner is no stranger to this Court". There have already been two bouts of litigation over actually paying the taxes in some of the years.
IRS has been sending Mr. Clarkson letters asking among other things that he submit returns for 2013-2015. He finally responded by filing returns for 2003-2015. Only there was a problem with those returns. He attached Form 4852 in order to correct his W-2s to show zero wages. He also attached 1099s that " corrected" 1099s that he had received to zero.
The IRS warned him that the returns were frivolous and subject to a $5,000 penalty and gave him a chance to withdraw them, but it was no dice.
He asserted that he had received no “wages as defined in section 3401(a)” and that his “corrected” Forms 1099-MISC were intended to “rebut allegations made by others” that he had been paid taxable compensation. He expressed disagreement with the IRS's characterization of his Forms 1040 as “submissions,” insisting that they were proper “returns” that the IRS must accept and process. He asserted that these “returns” could not legally be “withdraw[n] and replace[d]” even if he had wished to do so.
The Penalty
Following the steps required, including supervisory approval, the IRS assessed 14 penalties at $5,000 each. Shockingly, Mr. Clarkson did not pay the penalties. IRS issued a Notice of Intent to Levy on November 25, 2019. Mr. Clarkson requested a collection due process hearing.
As the basis for his challenge, he asserted that he did not owe the penalties because he “did not submit any frivolous returns.” He demanded that the IRS “release the hold on [his] returns” and “process them.” He repeated his earlier arguments that he had no Federal tax liabilities because he was not a “federal employee or one engaged in any government privileged activity that would give rise to any federal tax liability.” He did not request a collection alternative.
There was a lot of back and forth with the Settlement Officer (SO), In the end the SO approved the penalties and the levy. As noted, Mr. Clarkson is no stranger to the Tax Court. He filed a petition on May 17, 2021. On February 10, 2022, IRS (the respondent) filed a motion for summary judgment, which Mr. Clarkson (the petitioner) opposed. That is what Judge Lauber had to deal with,
The Opinion
There are three requirements for the Section 6702 - Frivolous income tax return - penalty to be upheld. There has to be a document that "purports" to be a return.(By the way, whenever you see some form of the word purport in a Tax Court decision, you can be pretty sure things will not go well for the taxpayer). The purported return has to contain information on its face that indicates that the self-assessment was substantially incorrect. Finally the petitioner’s conduct was based on a position that the Secretary has identified as frivolous.
Petitioner's “zero returns” were based on his assertions that wages are not income and that the Federal Government has no authority to tax private sector income. Similar statements often accompany “zero returns” filed by tax protesters.
Judge Lauber cites a number of recent cases to illustrate the point including one that I covered - Hendrickson v. Commissioner, T.C. Memo. 2019-10.
Judge Lauber closes with a warning to Mr. Clarkson that reminds me of a story I heard many times from those older than me. The story was that if they were spanked at school, they would keep quiet about it, because if their parents heard about it, they would be spanked again. The Tax Court can also impose a penalty on people who bring frivolous arguments - Section 6673(a). It can be as much as $25,000. Judge Lauber exhibited the quality of mercy.
Because we have not yet had occasion to warn petitioner about the risk he runs under section 6673(a)(1), we will not impose a penalty at this time. But he is advised that he is likely to be penalized if he continues to raise frivolous arguments, either in this proceeding or in any future proceeding in this Court.
A Response
To get the other side of the story, such as it is, I reached out to Peter Hendrickson for his thoughts, particularly as the W-2 technique reminded me of his recommendations. Mr. Hendrickson's response was too long for this piece, so I published it here. Mr. Hendrickson is the author of Cracking The Code - The Fascinating Truth About Taxation In America (CtC). He refers to people who follow his methods as "CtC educated". The overall import of his comment was that it appeared that Mr. Clarkson was not doing it right.
No CtC-educated filer simply "enters all zeros" on anything. Certainly, it often happens that -0- is the correct entry here and there in a filing, however much the tax agencies dislike that number on the "income" portions of the forms. But such entries are not made by anyone knowledgeable about the law simply as a matter of policy— they are made as a matter of accuracy, each being individually determined by the proper application of all relevant provisions of law.
The legal analysis is available on his Lost Horizons website - THE INCOME TAX IS AN EXCISE TAX ARISING ONLY UPON THE HAPPENING OF DISTINGUISHED TAXABLE EVENTS. I remain unconvinced. The most troubling argument that he makes is this one.
Further, of course, the more than 250,000 concrete admissions by the IRS and state tax agencies made over the years since the foregoing information about the tax was first compiled and published in 2003 emphasize even more strongly the invalidity of applying the tax to unprivileged earnings. As pointed out in detail in this 2017 analysis, such “admissions against interest” reveal in the most compelling way possible that the government that posts and cites to falsifications about the Brushaber ruling in hopes of perpetuating a desired revenue-stream knows better itself, and will admit it when the demand is properly made.
I find it disturbing that if you follow Mr. Hendrickson's instructions and ask for all your withholdings back, there is a good chance that you will receive them. In the event that you are one of the unlucky ones that get challenged by the IRS, don't use the arguments in Tax Court. It may cost extra.
Other Coverage
Freeman Law covered the case in Tax Litigation: The Week of September 5th, 2022, through September 9th, 2022. It is a good summary,
Lew Taishoff has BE CAREFUL WHAT YOU ASK FOR – REDIVIVUS.
