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 1155,702 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...