Monday, October 23, 2017
Lesson From The Tax Court: Tax Protesting Is A Hobby That Eats
Everyone needs a hobby. Psychology Today explained why here. But some hobbies grow and grow until they become all-consuming. As Benjamin Franklin reportedly put it: beware the hobby that eats. Protesting your taxes for stupid reasons is one of those hobbies that eat.
Bob Wood once wrote a great blog post about stupid tax protest arguments. The legal term for “stupid” is, of course, “frivolous.” Bob rightly says it’s one of the worst names you can be called in the tax world. I really love his line: “In IRS lingo, it’s about as bad as you can get, just shy of the other “f” word, fraudulent.”
The case of Henry M. Jagos and Kathy A. Jagos v. Commissioner, T.C. Memo. 2017-202 (Oct. 16, 2017), teaches such a lesson. It appears from the opinion that the Jagoses are among those lucky taxpayers who do not have to work for their money because their money works for them. Of their total taxable income in 2012 of $544,000, $520,000 seems to have come from investments. At least it came from payments they received from Fidelity Investments and Fidelity withheld about $98,000 in taxes.
With that kind of income, one has plenty of time for hobbies. It appears from this case the Jagoses decided that tax protesting would be a good hobby to have. In 2012 they filed a return to get back the $98,000 in withheld taxes. They reported zero income, claiming the payments they received were not taxable income because they “are private-sector citizens (non-federal employee) employed by a private-sector company (non-federal entity) as defined in 3401(c)(d).”
In old-fashioned texting parlance my reaction to that statement vacillates between OMG, LOL and WTF. For the more measured IRS and Tax Court reaction, see below the fold.
The IRS reaction to the Jagoses return was to hold the refund, open an exam, and propose a tax deficiency along with penalties, including a §6702 frivolous return penalty. Notably, the IRS did not assert the fraud penalty. It concluded the Jagoses were merely stupid (frivolous) and not bad (fraudulent).
The Jagoses continued riding their hobby horse into Tax Court. They raised multiple stupid tax protestor arguments in their petition and asserted them at trial. Judge Buch’s response was quite calm and measured. It’s why he’s a judge and I’m not. Following trial, Judge Buch granted the taxpayers’ request to submit post-trial briefs. He made them promise to read Wnuck v. Commissioner, 136 T.C. 498 (2011) and Waltner v. Commissioner, T.C. Memo. 2014-35, aff’d, 659 F. App’x 440 (9th Cir. 2016). He also made them promise to limit their brief to 15 pages. I suppose Judge Buch’s hope was that they would come to reason and see the error of their ways.
Judge Buch badly underestimated the hold their hobby had on them. The Jagoses, consumed by their hobby, apparently did not read the cases and submitted a beastly 70-page document that the Court said “failed to abandon the well-worn tax-protester arguments that this Court has rejected time and again.”
Section 6673 permits the Tax Court to impose a penalty of up to $25,000 “whenever it appears to the Tax Court that...(C) the taxpayer’s position in such proceeding is frivolous or groundless...” Here, while the Tax Court did impose a §6673 penalty, it limited the penalty to $1,000.
I can only speculate as to why the Tax Court, after graciously giving the Jagoses a huge “Warning, Warning, Warning!” continued acting with such restraint in limiting the penalty amount to $1,000. This is a couple, after all, whose investments returned them over $500,000 in 2012. A $1,000 penalty is chump change to them. It’s the cost of one night in a Deluxe room at Trump International Hotel in Washington, D.C. These are folks who have the ability to hire competent counsel. Their choice not to do so is because of their passion over their hobby.
But their hobby is not only costly to them, it’s costly to tax administration. When I was at attorney in Office of Chief Counsel, I would encounter these kind of hobbyists. It always amazed me why some very smart people could behave so stupidly, even to the point of ensnarling their children into their tax mess by creating family limited partnerships, trusts, and other types of legal entities to evade tax and evade collection of tax. All for the hobby.
And look how much this hobby consumes. One can readily presume that they had similar returns in other years. After all, if they were behaving this way in 2013 when they submitted their 2012 returns, and if they were behaving this way when they were attacking the deficiency in 2016, they probably have other tax years where they are in the same mess.
All because their tax protesting is a hobby that eats.