Grunsted v. Commissioner

SCOTT GRUNSTED, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 12954–09L. Filed May 11, 2011.

P filed late purported income tax returns for 2002, 2003 and

2004 showing zero income and seeking refunds for taxes with-

held. R notified P that two of the purported returns would not

be accepted for lack of sufficient information and that they

were based on frivolous positions. P resubmitted substantially

identical purported tax returns for those two years. R

assessed five frivolous return penalties under sec. 6702,

I.R.C., against P for those years. P failed to pay the penalties.

R then commenced collection action against P. P argues that

R may not proceed with the proposed collection action as the

penalties were invalid assessments. P maintains that the pen-

alties were not properly assessed because no district director

exists. District directors were eliminated after the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub.

L. 105–206, 112 Stat. 685. R moves for summary judgment.

1. Held: P is liable for the five frivolous return penalties

under sec. 6702, I.R.C., which were validly assessed because

the district director responsibilities were reassigned under the

savings provision of the Internal Revenue Service Restruc-

turing and Reform Act of 1998, Pub. L. 105–206, sec. 1001,

112 Stat. 689, and IRS Deleg. Order 1–23 (formerly IRS

Deleg. Order 193, Rev. 6), Internal Revenue Manual pt.

1.2.40.22 (Nov. 8, 2000).

455

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456 136 UNITED STATES TAX COURT REPORTS (455)

2. Held, further, R may proceed with collection.

3. Held, further, P is not subject to a penalty under sec.

6673, I.R.C., but is warned that continued frivolous argu-

ments may subject him to the sec. 6673, I.R.C., penalty in the

future.

Scott Grunsted, pro se.

Lisa M. Oshiro and Melanie Senick, for respondent.

OPINION

KROUPA, Judge: This collection review matter is before the

Court on respondent’s motion for summary judgment under

Rule 121. 1 The first issue for decision is whether petitioner

is liable for the five frivolous return penalties assessed for

the 2002, 2003 and 2004 tax years (the years at issue). We

find that he is liable. The second issue for decision is

whether respondent’s determination to proceed with the pro-

posed collection action is an abuse of discretion. We hold it

is not.

Background

Petitioner resided in Hayden, Idaho at the time he filed

the collection review petition. Petitioner is a husband, a

father and a college graduate.

Petitioner filed late purported income tax returns on Form

1040EZ for each of the years at issue. His purported returns

showed zero income. Petitioner attached letters to the pur-

ported returns supporting his zero income filings by claiming

that private sector payments for labor are not taxable. He

attached a Form 4852, Substitute for Form W–2, Wage and

Tax Statement, to each purported tax return. Petitioner

reported that his employer, Agency Software, Inc., had with-

held Federal income tax, State tax, local tax, Social Security

tax and Medicare tax. Petitioner sought refunds for all Fed-

eral taxes withheld and also requested refunds for Social

Security and Medicare taxes in his letters.

Respondent notified petitioner in a letter that the pur-

ported returns for 2002 and 2003 would not be accepted

because they lacked sufficient information and were based on

frivolous positions. Petitioner resubmitted substantially iden-

1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and

Procedure, and all section references are to the Internal Revenue Code.

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(455) GRUNSTED v. COMMISSIONER 457

tical purported tax returns for those two years, again

showing zero income and again seeking a refund of certain

amounts withheld from his wages. Respondent assessed

frivolous return penalties against petitioner for the three

years at issue. Respondent assessed a penalty for each of the

five purported returns filed in those years, in the amounts of

$500 and $500 for 2002, $500 and $5,000 for 2003 and $5,000

for 2004. 2

Petitioner failed to pay the penalties. Respondent issued a

Final Notice of Intent to Levy and Notice of Your Right to

a Hearing with respect to the five frivolous return penalties.

Respondent also filed two notices of Federal tax lien with the

relevant county recorder. One lien dealt with the two pen-

alties for 2002 and the one penalty for 2004. The other lien

dealt with the two penalties for 2003. Respondent notified

petitioner of the Federal tax liens, detailing the liens and

petitioner’s right to a collection due process (CDP) hearing.

Petitioner responded to the levy and lien notices, asserting

that no lawful assessments had been made and threatening

criminal complaints and civil action. Petitioner argued that

the penalties were invalid assessments because no district

director exists. Per petitioner, the Secretary is required

under regulations to appoint a district director for assess-

ment purposes, and no tax may be assessed without a dis-

trict director.

Respondent’s Appeals Office scheduled a CDP hearing and

requested petitioner to provide outstanding tax returns and

certain financial information. Petitioner failed to provide any

returns or financial information so that collection alter-

natives could be considered. Petitioner did, however, send a

long letter arguing that respondent had failed to follow

assessment procedures because the Secretary had not

appointed a district director in his geographical area. Peti-

tioner concluded that, because there was no district director,

there were also no assessment officers and therefore the pen-

alties could not be assessed against him. Petitioner also

asserted other arguments that his wages were zero and that

he was not subject to any frivolous return penalty.

2 The amount of the frivolous submission penalty was increased from $500 to $5,000 in De-

cember 2006. See Tax Relief and Health Care Act of 2006, Pub. L. 109–432, div. A, sec. 407,

120 Stat. 2960.

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458 136 UNITED STATES TAX COURT REPORTS (455)

Respondent’s Appeals Office again asked petitioner to pro-

vide tax returns and other information and notified peti-

tioner that his arguments were frivolous. After sending yet

another letter with substantially similar arguments, peti-

tioner had a telephone CDP hearing. Petitioner raised

substantially similar arguments at his hearing, and he failed

to provide the requested documents or propose collection

alternatives.

Respondent’s Appeals Office upheld respondent’s collection

action, including a proposed levy, and sent a determination

letter to petitioner. Petitioner timely filed a petition with this

Court. Petitioner’s only argument in his two-sentence peti-

tion is that he does not owe the frivolous return penalties

because proper assessment cannot be made in the absence of

a district director.

Respondent filed a motion for summary judgment, and

petitioner filed a response. This is the first time this Court

has addressed in a published Opinion the question of

whether the absence of a district director causes an assess-

ment to be invalid. 3

Discussion

Petitioner has followed in the footsteps of numerous others

who have unsuccessfully attempted to avoid paying Federal

income taxes. Petitioner wants only to contest his liability for

the frivolous return penalties in this collection review

matter.

We begin by noting that we have jurisdiction to review a

determination notice issued under section 6330 where the

underlying tax liability consists of frivolous return penalties.

See Callahan v. Commissioner, 130 T.C. 44, 47–49 (2008).

We also note that petitioner may contest the frivolous return

penalties before this Court. 4 See id. at 49–50. We next

review general rules that apply to summary judgment.

3 A Federal District Court has rejected the district director argument. United States v. Booth,

106 AFTR 2d 2010–6409, 2010–2 USTC par. 50,626 (E.D. Cal. 2010). We are not, however,

bound by the decision of the District Court for the Eastern District of California.

4 Petitioner did not receive a deficiency notice with respect to the frivolous return penalties

because the statutory deficiency procedures do not apply to frivolous return penalties. See sec.

6703(b); Yuen v. United States, 290 F. Supp. 2d 1220, 1224 (D. Nev. 2003). Petitioner also has

not disputed the penalties during a prior conference with respondent’s Appeals Office. See Lewis

v. Commissioner, 128 T.C. 48 (2007). As a result, petitioner may contest the penalties both at

a CDP hearing and before this Court.

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(455) GRUNSTED v. COMMISSIONER 459

The purpose of summary judgment is to expedite litigation

and avoid costly, time-consuming and unnecessary trials.

Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).

Summary judgment may be granted if the pleadings and

other acceptable materials, together with the affidavits, if

any, show that there is no genuine issue as to any material

fact and that a decision may be rendered as a matter of law.

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).

We next consider the standard of review under which we

evaluate respondent’s summary judgment motion. Where the

validity of the underlying tax liability is properly at issue, as

the case is here, we will review the matter de novo. See

Callahan v. Commissioner, supra at 50; Sego v. Commis-

sioner, 114 T.C. 604, 610 (2000). Where the validity of the

underlying tax liability is not properly at issue, we will

review the Commissioner’s determination for abuse of discre-

tion. See Callahan v. Commissioner, supra at 50–51; Sego v.

Commissioner, supra at 610.

We now review the frivolous return penalties in light of the

dual purpose of our review. A civil penalty for filing frivolous

returns may be assessed against a taxpayer if three require-

ments are met. First, the taxpayer must file a document that

purports to be an income tax return. Sec. 6702(a)(1). Second,

the purported return must lack the information needed to

gauge the substantial correctness of the self-assessment or

contain information indicating the self-assessment is

substantially incorrect. Id. Third, the taxpayer’s position

must be frivolous or demonstrate a desire to delay or impede

the administration of Federal income tax laws. Sec.

6702(a)(2). We generally look to the face of the documents to

determine whether a taxpayer is liable for a frivolous return

penalty as a matter of law. See Yuen v. United States, 290

F. Supp. 2d 1220, 1224 (D. Nev. 2003).

Respondent satisfied the first element by showing that

petitioner filed five documents for the years at issue that

each purported to be an income tax return. The five Forms

1040EZ purported to be income tax returns filed to obtain

tax refunds. See Callahan v. Commissioner, supra at 53.

Petitioner attached a Form 4852 to each purported return,

reporting amounts that petitioner’s employer had withheld

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460 136 UNITED STATES TAX COURT REPORTS (455)

for tax. Petitioner thus filed five purported tax returns for

the years at issue.

Respondent satisfied the second element as well. Petitioner

claimed on his purported returns and on the attached Forms

4852 that he received no wages. The same Forms 4852, how-

ever, indicated that Agency Software, Inc. had withheld cer-

tain taxes on wages to petitioner. Petitioner attached expla-

nations to his initial purported returns, clarifying that the

payments he received were for labor. These attached letters

made patently erroneous assertions, including that the Fed-

eral Government could tax only income ‘‘federally connected’’

and not the payments petitioner received from the private

sector. By the same token, none of the purported returns

petitioner submitted contained information on which the

substantial correctness of the self-assessment might be deter-

mined.

Finally, respondent satisfied the third element by showing

that the purported returns reflect frivolous positions. This

Court and others have repeatedly characterized returns

reflecting zero income and zero tax as frivolous. See Blaga v.

Commissioner, T.C. Memo. 2010–170; Ulloa v. Commissioner,

T.C. Memo. 2010–68; Hill v. Commissioner, T.C. Memo.

2003–144; Rayner v. Commissioner, T.C. Memo. 2002–30,

affd. 70 Fed. Appx. 739 (5th Cir. 2003). Petitioner advanced

meritless tax-protester arguments to report zero wages on

his purported returns. We do not address petitioner’s ground-

less arguments with somber reasoning and copious citations

of precedent, as to do so might suggest that these arguments

possess some degree of colorable merit. See Crain v. Commis-

sioner, 737 F.2d 1417, 1417 (5th Cir. 1984). We therefore find

that petitioner is liable for the frivolous return penalties

under section 6702 because all of the elements have been

met.

Petitioner argued to respondent’s Appeals Office and in his

petition that respondent cannot assess frivolous return pen-

alties against him, even if section 6702 would otherwise

apply, because the assessments for the penalties are invalid.

We disagree.

An assessment is made by recording the liability of a tax-

payer in the office of the Secretary in accordance with rules

or regulations prescribed by the Secretary. Sec. 6203. Assess-

ments are made by assessment officers who are appointed by

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(455) GRUNSTED v. COMMISSIONER 461

the district director and the director of the regional service

center. Sec. 301.6203–1, Proced. & Admin. Regs. Petitioner

argues that there is no district director; therefore no assess-

ment officers have been properly appointed and so there can

be no valid assessment of frivolous return penalties against

him. Petitioner is correct in arguing that there are no longer

any district directors. He errs, however, in concluding that

there were no valid assessments because of the absence of

district directors.

The IRS has been reorganized several times in recent his-

tory. The district director position and responsibilities were

assigned to others after the Internal Revenue Service

Restructuring and Reform Act of 1998 (RRA), Pub. L. 105–

206, 112 Stat. 685, required the Commissioner to eliminate

or substantially modify the IRS’ national, regional and district

structure. Id. sec. 1001, 112 Stat. 689. To ensure continuity

of operations, the RRA specifically included a savings provi-

sion. Id. sec. 1001(b). The savings provision applies to keep

in effect regulations that refer to officers whose positions no

longer exist. Id. It also provides that nothing in the reorga-

nization plan would be considered to impair any right or

remedy to recover any penalty claimed to have been collected

without authority. Id.

Furthermore, IRS Deleg. Order 1–23 (formerly IRS Deleg.

Order 193, Rev. 6), Internal Revenue Manual pt. 1.2.40.22

(Nov. 8, 2000), allows directors, submission processing field,

compliance services field and accounts management field to

appoint assessment officers. This order further implemented

Congress’ intent that the IRS’ normal duties, including that

of assessment, not be obstructed by the reorganization. 5 In

short, petitioner’s frivolous return penalties were properly

assessed and his argument, albeit novel, is without merit.

Petitioner has not advanced arguments or presented evi-

dence allowing us to conclude that the determination to sus-

tain the proposed collection action was arbitrary, capricious,

or without sound basis in fact or otherwise an abuse of

discretion. See, e.g., Giamelli v. Commissioner, 129 T.C. 107,

5 See H. Conf. Rept. 105–599, at 194 (1998), 1998–3 C.B. 747, 948 (‘‘The IRS Commissioner

is directed to restructure the IRS by eliminating or substantially modifying the present-law

three-tier geographic structure and replacing it with an organizational structure that features

operating units serving particular groups of taxpayers with similar needs. * * * The legality

of IRS actions will not be affected pending further appropriate statutory changes relating to

such a reorganization (e.g., eliminating statutory references to obsolete positions).’’).

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462 136 UNITED STATES TAX COURT REPORTS (455)

112, 115 (2007). Petitioner did not provide any collection

alternatives or present any other defenses. The record

indicates that the only issues petitioner raised throughout

the administrative process, in his petition and at the sum-

mary judgment hearing were frivolous tax-protester argu-

ments and groundless arguments about assessment

authority. We therefore conclude that respondent’s deter-

mination to proceed with the proposed collection action is not

an abuse of discretion. It is appropriate for us to grant

respondent’s summary judgment motion.

We now address whether it is appropriate for us to impose

a penalty against petitioner on our own motion under section

6673. This section authorizes the Tax Court to require a tax-

payer to pay to the United States a penalty of up to $25,000

whenever it appears that proceedings have been instituted or

maintained primarily for delay or that the taxpayer’s position

in such proceedings is frivolous or groundless. See sec. 6673;

Scruggs v. Commissioner, T.C. Memo. 1995–355, affd. with-

out published opinion 117 F.3d 1433 (11th Cir. 1997); Zyglis

v. Commissioner, T.C. Memo. 1993–341, affd. without pub-

lished opinion 29 F.3d 620 (2d Cir. 1994). The purpose of sec-

tion 6673, like that of section 6702, is to compel taxpayers

to think and to conform their conduct to settled tax prin-

ciples. See Coleman v. Commissioner, 791 F.2d 68, 71 (7th

Cir. 1986).

We note that the type of argument petitioner raised, espe-

cially that his wages are not taxable, is the type of argument

that has been deemed by this Court to be frivolous and/or

sanctionable under section 6673. It is apparent from the

record that petitioner instituted this proceeding in continu-

ation of his refusal to acknowledge and satisfy his tax obliga-

tions. Such proceedings waste the Court’s and respondent’s

limited resources, taking time away from taxpayers with

legitimate disputes. We take this opportunity to admonish

petitioner that the Court will consider imposing a substantial

penalty if petitioner returns to the Court and advances

similar arguments in the future.

We have considered all remaining arguments the parties

made and, to the extent not addressed, we conclude they are

irrelevant, moot or meritless.

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(455) GRUNSTED v. COMMISSIONER 463

To reflect the foregoing,

An appropriate order and decision for

respondent will be entered.

f

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