Taxpayer’s frivolous argument is once again denied

The Tax Court held that amounts a taxpayer received for wages and rent were included in gross income and imposed the maximum $25,000 frivolous-position penalty under Sec. 6673(a)(1)(B).

Facts: In 2018, Brian Dean Swanson was employed as a high school teacher in Georgia. In addition to his teaching wages of $79,186, Swanson received $6,510 in rent from the Chamber of Commerce of Greater Augusta, Ga., Inc. His wages and federal income tax withholding were reported on Form W-2, Wage and Tax Statement, and the rental income was reported on Form 1099-MISC, Miscellaneous Information.

In January 2019, Swanson filed his 2018 Form 1040, U.S. Individual Income Tax Return. Swanson’s return reported a pension of $32,123, taxable interest of $15, and federal income tax withheld of $7,611 and claimed a refund for the full amount he reported as withheld. Swanson did not report his wages. Instead, he included 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., reporting zero dollars of wages but the same amount of withholding reported on his Form W-2. Swanson explained on the Form 4852 that:

This job is my source of capital. This capital does not qualify as “wages” as defined in 26 USC and the withholding payments made by this employer were erroneously withheld from money that is capital, not income. The [Form W-2] from this employer was issued in error.

Similarly, Swanson did not report the rental income. Instead, he sent a letter to the IRS that included a “corrected” Form 1099-MISC reporting zero dollars of rent, stating:

This notice is submitted with a corrected 1099-MISC. The original sent to your agency incorrectly identified money paid to me as “rent.” However, this payment merely represents the restoration of capital for tax purposes and should not be reported on a 1099-MISC.

In February 2022, the IRS issued a notice of deficiency that adjusted Swanson’s income to include the wages and rental income that he received in 2018 and imposed a Sec. 6662(a) accuracy-related penalty. In response, Swanson timely petitioned the Tax Court.

Issues: The issues before the court were the taxability of Swanson’s unreported wages and rent, whether he was liable for an accuracy-related penalty, and whether the court should grant the IRS’s motion to impose a Sec. 6673 frivolous-position penalty.

Both parties stipulated that Swanson received the unreported wages and rent during the 2018 tax year. As a result, the IRS had established the necessary evidentiary foundation connecting the taxpayer with the alleged income-producing activity for the presumption of correctness to attach to the notice of deficiency. Therefore, the burden of proving the IRS’s determinations erroneous shifted to Swanson.

Secs. 61(a)(1) and (5) specifically state that gross income includes all income from whatever source derived, including compensation for services (wages) and rents, respectively (see also Regs. Secs. 1.61-2(a)(1) and 1.61-8(a)). Consequently, the court noted that Swanson’s unreported wages and rent were plainly required to be included in his gross income. Swanson argued, as he had unsuccessfully in numerous past cases, that his wages and rent should be excluded on the basis “that the Code does not impose tax on public school teachers, that he did not receive any amounts in excess of the fair market value of his services, and that taxation of the amounts he did receive would violate the Uniformity Clause of the U.S. Constitution.” Given Swanson’s record of pursuing “similar frivolous arguments” before the Tax Court, the U.S. District Court for the Southern District of Georgia, and the Eleventh Circuit, the court held that Swanson’s arguments required no further discussion and sustained the IRS’s determinations with respect to the deficiency in tax.

Next the court examined whether Swanson was liable for an accuracy-related penalty under Sec. 6662(a). Citing Williams, 114 T.C. 136 (2000), the court evaluated whether Swanson had filed a valid return for 2018, which is required for the penalty to apply. Beard, 82 T.C. 766 (1984), articulates a four-part test to determine for purposes of the Sec. 6662(a) accuracy-related penalty if a return is valid: (1) There must be sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury.

The court found that Swanson’s Form 1040 did not satisfy the first and third elements of a valid return. His Form 1040 did not include all the sources of the reported withholding; therefore, it did not contain sufficient data to calculate his tax liability, failing the first element of the Beard test. Similarly, by relying on frivolous legal positions as the basis to exclude his wages and rent, Swanson had not made an honest and reasonable attempt to satisfy the requirements of the tax law, failing the third element of the Beard test. Having found that Swanson’s 2018 Form 1040 was not a valid return, the court held that he was not liable for the Sec. 6662(a) accuracy-related penalty.

Finally, the court considered the IRS’s request that it impose a Sec. 6673 frivolous-position penalty of up to $25,000. Swanson had a long history of taking frivolous positions, and the court took judicial notice of the fact that the “Eleventh Circuit has sanctioned petitioner in the amount of $8,000 at least three separate times for taking such positions and that the Southern District of Georgia has also sanctioned him by permanently enjoining him from filing refund suits in federal court for any tax year in which he has failed to report his wages as income.” Furthermore, the Tax Court had previously sanctioned Swanson $15,000 for making frivolous arguments. Finding that these past sanctions had not deterred Swanson, the court imposed the maximum penalty of $25,000 “in the hopes that [Swanson] will in fact think and conform his conduct to settled principles going forward.”

Holding: The Tax Court held that Swanson was liable for the deficiency in tax related to his unreported wages and rent and a $25,000 Sec. 6673 frivolous-position penalty. However, it further held that the Sec. 6662(a) accuracy-related penalty did not apply because he had not filed a valid return.

■ Swanson, T.C. Memo. 2024-105

— Matthew Geiszler, Ph.D., is a lecturer in accounting in the Brooks School of Public Policy, and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, both at Cornell University. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.