Kestin, (2019) 153 TC No. 2
The Tax Court has held that the IRS could not assess frivolous return penalties on photocopies of a previously submitted return. The taxpayer submitted a frivolous tax return, and, when the IRS prompted her to file a corrected return, she submitted a photocopy of the original amended return six times. The IRS assessed her seven frivolous return penalties, but the Tax Court said only one penalty could be assessed.
Background. The IRS can assess a $5,000 penalty if, in general, a person “files what purports to be a tax return” but the return is frivolous. (Code Sec. 6702(a))
The Internal Revenue Manual (IRM) instructs IRS employees that penalties are assessed under Code Sec. 6702(a) without regard to whether the claim is a copy or an original, whether the signature on the claim is a copy or an original or whether there has been a Code Sec. 6702 penalty previously assessed for the same tax period. (IRM 220.127.116.11(4) (Aug. 13, 2015))
The Tax Court has held that if a taxpayer files multiple frivolous returns for a single year, the IRS can assess multiple frivolous return penalties. (Whitaker, TC Memo 2017-192)
Facts. Ms. Kestin timely filed a Form 1040 for the 2014 tax year showing $155,000 of income and paid the tax due.
Later in 2015, she filed an amended Form 1040X, showing no income and requesting a refund of the taxes she had previously paid. She attached a letter to the amended return to explain why she was owed a refund. The letter stated, “I am not employed in a ‘trade’ or ‘business’ nor am I an ‘officer of a corporation,’ nor do I hold a public office. Therefore, I did not receive privileged, taxable ‘wages’.”
In 2016, the IRS sent the Ms. Kestin a letter advising that the position reflected on the her amended return was frivolous, warning that the IRS intended to assert a $5,000 penalty under Code Sec. 6702 for “Frivolous Tax Positions,” and giving her the opportunity to avoid that penalty by correcting her frivolous filing.
She did not correct the filing. Instead, she sent a photocopy of the amended return, again demanding a refund. Over the course of 2016, she sent five more photocopies of her amended return, for a total of six copies. Each copy was clearly labeled as a copy.
In a previous Tax Court order, the Court had held that Kestin’s original amended return— asserting that her wages are not subject to income tax—was frivolous.
The IRS assessed seven $5,000 frivolous return penalties against Kestin for the original Form 1040X and the six photocopies. Kestin petitioned the Tax Court to review the assessment. She conceded that the original amended return was frivolous and that one $5,000 penalty should apply to that return.
Decision. The Tax Court dismissed the six penalties applied to the copies of the amended returns since those copies did not purport to be returns for purposes of Code Sec. 6702(a).
The Tax Court found that Ms. Kestin’s September 2015 amended return on Form 1040X purported to be a tax return, was intended by her as a tax return, sought a refund, and was understood by the IRS to be a tax return. However, each of the photocopies of that Form 1040X that Ms. Kestin included in her subsequent letters was expressly stated to be a “copy” of that original Form 1040X. Each was manifestly intended by her to be perceived as a photocopy of the Form 1040X, and the IRS perceived each as a copy of an original. Mrs. Kestin sought only one refund of the income tax she had reported on her original (non-frivolous) Form 1040 return, not seven refunds of that amount.
The IRS cited Whitaker for assessing the multiple penalties. But in Whitaker the penalties for the year at issue were sustained only as to a “Form 1040 [that] bore original signatures”, and “what purported to be a correct Federal income tax return” that “was signed by” the taxpayer.
But the Court found that no penalty was sustained against a mere copy in Whitaker. The second penalized document was not labeled a copy, was not in fact a copy, was instead a signed original, and sought a refund. The Court concluded that Kestin’s circumstance was plainly different from Whitaker.
In addition, the Court said that IRM 18.104.22.168(4), which does not have the force of law, is incorrect because it fails to distinguish a purported tax return from a mere copy of a purported tax return.