The Tax Court in Brief – January 2nd – January 6th, 2023
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Tax Litigation: The Week of January 2nd, 2022, through January 6th, 2023
- XC Foundation v. Comm’r, T.C. Memo. 2023-3| January 5, 2023 | Lauber, J. | Dkt. No. 9189-21X
- Henry v. Comm’r, T.C. Memo. 2023-2| January 5, 2023| Ashford, J. | Dkt. No. 18832-18
Mining v. Comm’r, T.C. Memo. 2023-1| January 4, 2023 | Marshall, J. | Dkt. No. 4989-20
Summary: During 2016, Ryan Mining (Mining) was employed by Tasco, Inc. (Tasco), and it issued him Form W–2, Wage and Tax Statement, reporting wages of $116,000, no federal income tax withheld, Social Security tax withheld of $7,192, and Medicare tax withheld of $1,682 for the 2016 tax year. Mining sent to the IRS a signed Form 1040, U.S. Individual Income Tax Return, for the 2016 tax year. Mining reported zero income and federal income tax withheld of $8,797, and claimed a refund of that amount. Mining included a Form 4852, Substitute for Form W–2, Wage and Tax Statement, or Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. In a notice of deficiency, the IRS determined a deficiency of $23,075 and a section 6662(a) accuracy-related penalty. Mining petitioned the Tax Court to review the matter.
In the Tax Court, Mining asserted arguments, such as (1) the notice of deficiency is invalid because the signer of the notice lacked proper delegated authority to sign and issue it; (2) the IRS has no proof that Mining received wages and reliance on a Form W–2 is hearsay; and (3) the wages listed on the Form W–2 issued by Tasco did not meet the definition of wages under the Code. Mining asserted similar arguments in a separate Tax Court proceeding in 2014. In the present matter, Mining was warned not to make further frivolous arguments. At trial, the IRS made an oral motion requesting that the Court impose a section 6673 penalty against Mining for making frivolous arguments.
Key Issues: Whether Mining (1) underreported income for the 2016 tax year, (2) is liable for a section 6662(a) accuracy-related penalty, and (3) is liable for a section 6673 penalty for frivolous arguments?
Primary Holdings: (1) Yes, Mining did not raise a reasonable dispute concerning the accuracy of the Tasco Form W–2, and thus it constitutes a reasonable foundation and that the presumption of correctness attaches to the IRS’s income adjustment. (2) Yes, Mining reported zero tax due on his return, but his correct tax was $23,075. That amount was “substantial,” and, the IRS proved it complied with all penalty procedural and approval matters. (3) No, but Mining was warned to not assert frivolous positions in any future appearance before the Court.
Key Points of Law:
Burden of Proof. In general, the IRS’s determination of a deficiency is presumed correct, and the taxpayer has the burden of proving otherwise. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In unreported income cases, however, the Tenth Circuit requires the IRS to establish “[s]ome reasonable foundation for the assessment” in order to preserve the presumption of correctness. Erickson v. Commissioner, 937 F.2d 1548, 1551 (10th Cir. 1991), aff’g T.C. Memo. 1989-552. Once the IRS introduces substantive evidence linking the taxpayer with the income, the presumption of correctness applies and the burden shifts to the taxpayer to produce substantial evidence overcoming it. United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991).
Reporting of Income. Section 61(a)(1) defines gross income as “all income from whatever source derived,” including “[c]ompensation for services.” Wages and salaries are compensation for services that are includible in gross income. See Treas. Reg. § 1.61-2(a).
Frivolous Argument. The argument that wages listed on Form W–2 issued by an employer are not taxable because they do not meet the definition of wages under sections 3121 and 3401 of the Code is a frivolous argument. See, e.g., Wnuck v. Commissioner, 136 T.C. 498, 499 (2011).
Section 6662(a) Accuracy-Related Penalty. Section 6662(a) and (b)(2) imposes a 20% penalty on the portion of an underpayment of tax that is attributable to a “substantial understatement of income tax.” Section 6662(d)(2) generally defines an “understatement” as the excess of the tax required to be shown on the return over the amount shown on the return as filed. An understatement of income tax is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. 26 U.S.C. § 6662(d)(1)(A). The IRS generally bears the burden of production with respect to the liability of an individual for any penalty. Id. at § 7491(c). This includes showing compliance with section 6751(b) regarding supervisory approval of the penalty.
Section 6673 Penalty. Under section 6673(a)(1)(B), the Tax Court may impose a penalty not to exceed $25,000 if the taxpayer’s position is “frivolous or groundless.” “A taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.” Rader v. Commissioner, 143 T.C. 376, 392 (2014). “The purpose of section 6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate.” Takaba v. Commissioner, 119 T.C. 285, 295 (2002). The Tax Court is given considerable latitude in determining whether to impose a penalty and in what amount.
Insights: Mining is, quite frankly, fortunate that the Tax Court did not sustain the Commissioner’s request to assess penalties for making frivolous arguments. Mining asserted similar frivolous arguments in a prior proceeding. That Mining happened to cease making the arguments during the trial (even though he did not formally withdraw them) saved him from an additional $25,000 in penalties.