The Tax Court held that the IRS could not assess frivolous-return penalties on multiple photocopies of a previously submitted return.
Facts: The taxpayer, Gwendolyn Kestin, timely filed a Form 1040, U.S. Individual Income Tax Return, for tax year 2014 showing $155,702 of income and paid the appropriate tax due. Later in 2015, Kestin filed a Form 1040X, Amended U.S. Individual Income Tax Return, for the same tax year that showed no income and requested a refund of the taxes previously paid. Kestin attached a letter to the amended return that stated, in part, "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.' "
The IRS sent Kestin a letter advising that the position reflected on the amended return was frivolous and warned that it would assert a $5,000 penalty under Sec. 6702 for a frivolous tax position. The letter allowed her to avoid that penalty by correcting the frivolous filing. Rather than doing so, Kestin sent the IRS a letter arguing against its position, along with a photocopy of the amended return, stamped "photocopy — do not process." Over the course of the next year, she sent five more photocopies of the amended return. Each copy was clearly designated as such in accompanying correspondence.
The IRS assessed seven $5,000 penalties against Kestin under Sec. 6702, for the original Form 1040X and the six photocopies. Following an appeal, the IRS issued Kestin a notice of determination to sustain the penalties and a Notice of Federal Tax Lien.
Kestin petitioned the Tax Court. In an earlier order, the court granted the IRS's motion for summary judgment in part, based on the undisputed fact that the amended 2014 return was frivolous. However, the court ordered trial on the question of how many more, if any, frivolous returns Kestin had filed.
Issues: Sec. 6702(a) provides a $5,000 civil penalty if a person files what purports to be a tax return under the Code but does not contain information by which its substantial correctness can be discerned or that on its face contains information indicating that it is substantially incorrect. In addition, the filing must be based on a position the IRS has listed as frivolous under Sec. 6702(c) or that reflects a desire to delay or impede the administration of federal tax laws. Kestin acknowledged in a post-trial brief that the original Form 1040X was frivolous but disputed the penalty with respect to it on procedural grounds and with respect to the photocopies because she did not purport them to be returns.
The IRS cited Whitaker, T.C. Memo. 2017-192, and Grunsted, 136 T.C. 455 (2011), both of which upheld Sec. 6702 penalties for each of two substantially similar Forms 1040 submitted for the same tax year or years. The IRS also pointed to Internal Revenue Manual (IRM) Section 22.214.171.124(4), which advises that Sec. 6702(a) penalties may be assessed regardless of whether a claim for refund and the signature on it are original or copies.
Holding: The Tax Court noted that the photocopies of the Form 1040X were all explicitly marked "copy" and were in fact copies of the original Form 1040X; thus, they did not purport to be returns for the purposes of Sec. 6702(a). Kestin sought only one refund of the income tax previously reported on the original (nonfrivolous) Form 1040 return, not seven refunds of that amount.
The court also distinguished these facts from those in Whitaker and Grunsted, in each of which the returns were signed and purported to be returns. As for the IRM, besides lacking the force of law, IRM Section 126.96.36.199(5) further advises that IRS personnel should not assess the penalty if they are unable to determine whether a filing is an additional claim for refund or a response to the IRS's request for a copy of a previous filing, the court noted.
The Tax Court accordingly held that penalties did not apply to the six copies of the amended return, leaving only one $5,000 frivolous-return penalty for the original amended return, finding its assessment and enforcement procedurally valid.
- Kestin, 153 T.C. No. 2 (2019)
— By Mark A. McCoon, CPA, Ph.D., associate professor, University of Wisconsin—Superior.