Hatfield v. Comm’r, T.C. Memo. 2022-59 | June 13, 2022 | Lauber, J. | Dkt. Nos. 7327-20, 1500-21
Short Summary: Petitioners were a married couple filing joint federal income tax returns for tax years 2013 and 2014. Husband was employed as a radiologist. Petitioners failed to report husband’s wages as gross income on their federal income tax returns for 2013 and 2014.
The Internal Revenue Service (IRS) examined petitioners’ 2013 and 2014 returns and assessed federal income tax based on the wages reported on the Forms W-2, Wage and Tax Statement, that husband’s employer had filed with the IRS for each of those years. In addition, the IRS found that petitioners were liable for additional tax for early withdrawals from an individual retirement account in 2013 and 2014 and that petitioners had failed to report taxable interest in 2014. The IRS also imposed accuracy-related penalties for both years and an addition to tax for petitioners’ failure to timely file their 2014 return.
The IRS issued timely notices of deficiency for 2013 and 2014, and petitioners timely petitioned the Tax Court for redetermination. Petitioners’ sole argument was that husbands’ wages were not taxable income because “the United States Code [does not] actually make the ‘wages’ of American citizens subject to the Subtitle A federal personal income tax.”
The IRS filed a motion for summary judgment for 2013 and a motion for partial summary judgment for 2014, conceding the accuracy-related penalty for this latter year. Petitioners responded to the motion for 2013 but did not respond to the motion for 2014.
- Was there no genuine dispute of material fact and could decision be rendered for the IRS as a matter of law (except as conceded by the IRS)?
- Were husband’s wages includible in petitioners’ gross income for 2013 and 2014?
- Was the 2013 accuracy-related penalty properly imposed?
- Was the 2014 late-filing addition to tax properly imposed?
- Would the frivolous position penalty be imposed upon petitioners?
- Yes, there was no genuine dispute of material fact and decision could be rendered for the IRS as a matter of law (except as conceded by the IRS).
- Yes, husband’s wages were includible in petitioners’ gross income for 2013 and 2014. Petitioners did not assert a “reasonable dispute” regarding the accuracy of the Forms W-2 that husband’s employer filed with the IRS for 2013 and 2014, and they did not dispute that husband provided services as a radiologist for his employer during those years. Moreover, petitioners’ argument that wages received by U.S. citizens from employment in the United States were not subject to federal income tax was a “time-worn tax-protester argument” and therefore frivolous. As such, petitioners did not meet their burden of showing that the IRS acted erroneously or arbitrarily by including husband’s wages in their gross income for 2013 and 2014.
- Yes, the IRS showed that petitioners were liable for the 2013 accuracy-related penalty and that it had complied with all procedural requirements in asserting the penalty. Additionally, petitioners did not show that any portion of their underpayment of tax for that year was due to reasonable cause or that they acted in good faith with respect to that underpayment.
- Yes, the IRS met its burden of showing that petitioners’ 2014 return was not timely filed. Additionally, petitioners offered no explanation for their late filing other than frivolous arguments and did not show that their failure to timely file their 2014 return was due to reasonable cause and not due to willful neglect.
- No, the Tax Court chose not to impose frivolous position penalty upon petitioners. While petitioners’ position was frivolous and it was clear that they instituted and maintained these cases before the Tax Court for delay, petitioners had refrained from advancing frivolous arguments after the Tax Court warned them that they risked a frivolous position penalty.
Key Points of Law
- The purpose of summary judgment is to expedite litigation and avoid unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).
- The Tax Court may grant summary judgment when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Tax Court Rule 121(b); Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
- Issues that petitioners do not raise in a petition’s assignment of error are deemed conceded. Tax Court Rule 34(b)(4).
- Gross income means all income from whatever source derived, including compensation for services. IR.C. § 61(a)(1).
- In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the IRS by a third party and the taxpayer has fully cooperated with the IRS, the IRS shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return. I.R.C. § 6201(d).
- All wages are included in gross income for purposes of determining federal income tax liability, and any argument otherwise is frivolous. Rev. Rul. 2006-18; see also IRS, The Truth About Frivolous Tax Arguments 9, 13 (2022), https://www.irs.gov/pub/irs-utl/2022-the-truth-about-frivolous-tax-arguments.pdf.
- Frivolous arguments need not be refuted with “somber reasoning and copious citation of precedent.” See Crain v. Comm’r, 737 F.2d 1417, 1417 (5th Cir. 1984); Wnuck v. Comm’r, 136 T.C. 498, 501–13 (2011).
- A 20% penalty is imposed upon the portion of any underpayment of income tax that is attributable to a substantial understatement of income tax. IR.C. § 6662(a), (b)(2).
- An “understatement” means the excess of the tax required to be shown on the return over the amount shown on the return as filed. I.R.C. § 6662(d)(2).
- An understatement is “substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. I.R.C. § 6662(d)(1)(A).
- The IRS bears the burden of production with respect to the liability of an individual for any penalty. See IR.C. § 7491(c); Higbee v. Comm’r, 116 T.C. 438, 446 (2001).
- The IRS must show that it complied with procedural requirements of section 6751(b)(1). See IR.C. § 7491(c); Graev v. Comm’r, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).
- Section 6751(b)(1) prohibits a penalty from being assessed unless the initial determination of the assessment was personally approved in writing by the immediate supervisor of the individual making such determination.
- No penalty is imposed under section 6662 with respect to any portion of an underpayment if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to it. IR.C. § 6664(c)(1).
- There is an addition of tax of 5% of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file the return, not to exceed 25% in total. IR.C. § 6651(a)(1).
- Additions to tax under section 6651(a)(1) are not subject to any supervisory approval requirement. See I.R.C. § 6751(b)(2)(A).
- The Tax Court is authorized to require a taxpayer to pay a penalty of up to $25,000 when it appears to the Tax Court that proceedings have been instituted or maintained primarily for delay or the taxpayer’s position in such proceedings is frivolous or groundless. IR.C. § 6673(a)(1).
- Section 6673 is intended to compel taxpayers’ conduct to settled tax principles and to deter the waste of judicial and IRS resources. Coleman v. Comm’r, 791 F.2d 68, 71–72 (7th Cir. 1986); Salzer v. Comm’r, T.C. Memo. 2014-188, 108 T.C.M. (CCH) 284, 287.
- “Frivolous and groundless claims divert the Court’s time, energy, and resources away from more serious claims and increase the needless cost imposed on other litigants . . . .” Kernan v. Comm’r, T.C. Memo. 2014-228, 108 T.C.M. (CCH) 503, 512, aff’d, 670 F. App’x 944 (9th Cir. 2016).
Insights: This case highlights the danger of raising frivolous arguments before the Tax Court and the importance of heeding the Tax Court’s warnings if a taxpayer has already started down that path.
Have a question? Contact Jason Freeman, Freeman Law.
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