Paul L. Caron

Monday, August 21, 2023

Lesson From The Tax Court: Tax Protesting—A Hobby That Eats

Camp (2021)Everyone should have a hobby.  Generally, hobbies are good for you, as this Utah State University Mental Health Education post explains.  But some hobbies become cancerous, becoming all-consuming.  Those hobbies are not good for you.  As Benjamin Franklin reportedly put it: beware the hobby that eats.

Protesting your taxes is a hobby that eats.  Bob Wood once wrote this 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.”

That is why I call tax protestors “hobbyists.”  They simply advance stupid reasons for not paying taxes, to the point where their hobby consumes them and others, at great cost.  That’s the lesson we learn in  Lawrence James Saccato v. Commissioner, T.C. Memo. 2023-96 (July 25, 2023) (Judge Lauber), where the taxpayer failed to file returns for some 14 years.  When caught, he persisted in protesting that he was exempt from income tax because, among other stupid reasons, he was “ a citizen of the State of Oregon” and not a “federal citizen.”  The Court’s reaction was to impose a §6673 penalty on top of a deficiency topping $200k.  His hobby was eating him up.

The sad details are below the fold.  

Law: Section 6673
Section 6673 dates back to at least 1954, but has been modified several times since.  The most important modification came in 1989’s Omnibus Budget Reconciliation Act, P.L. 101-239, §7731(a), where Congress raised the potential sanction from $5,000 to $25,000 and renamed the sanction a “penalty” rather than “damages.”

Currently, §6673 provides:

“Whenever it appears to the Tax Court that—(A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (B) the taxpayer’s position in such proceeding is frivolous or groundless, or (C) the taxpayer unreasonably failed to pursue available administrative remedies, the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000.”

Even though §6673 is a penalty that the IRS can ask for in Court, it is also one that the Tax Court can impose just on its own.  We call that “sua sponte.”  Either way, there is no need to comply with the supervisory approval provisions in §6751(b).

As to the Court imposing the penalty sua sponte, it’s difficult to say that any one of the Tax Court judges even has a supervisor!  Further, as the Tax Court explained in Williams v. Commissioner, 151 T.C.1 (2018), the two statutes have different purposes.  Section 6751(b)(1) is generally believed to be aimed by preventing lower-level IRS employees from using penalties as a bargaining chip.  But the point of §6673(a)(1) was to let the Tax Court impose penalties for claims and petitions that “waste the time and resources of the Court.” 151 T.C. at 8–10.

The IRS can also ask the Court to impose §6673 penalties.  It takes the position that doing so does not trigger the §6751 supervisory approval requirements because it’s the Tax Court that has the discretion to impose or not impose the sanction, not the IRS.  See Proposed Regulations, 88 FR 21564 (Apr. 4, 2023).

The IRS has the ability to impose its own penalties for frivolous positions asserted in tax return filings.  See §6702.  Those penalties must comply with the supervisory approval requirements.  See Jaxtheimer v. Commissioner, T.C. Memo. 2019-164.  However, when a taxpayer is simply a non-filer, there is no return to declare frivolous, even if the reasons for not filing are frivolous.  So §6673 fills a gap there.  As we see in today’s case.

Let’s take a look.

The years at issue are 2013-2016.  During those years Judge Lauber finds that Mr. Saccato had the following income.  First, he ran a business in Roseburg, Oregon, ironically named “Hide Away Storage”.  Its income “came from the rental of storage sheds, U-Haul vehicles, space for the storage of cars and RVs, and land on which a cell tower stood.” Op. at 3.  He ran the business through as series of sham entities, designed to hide his income, detailed by Judge Lauber in the opinion.  Thus, the irony of the business name.  Second, he sold some real property in 2014 that he had had purchased in 2002.  Again, however, he did so through a series of transactions to try and hide his ownership and, presumably, avoid having the title company issue a Form 1099 in his name.  Again, Judge Lauber gives the details.  Third, in 2013 Mr. Saccato was discharged from a substantial number of debts, including one debt from a bank he had sued (pro se) for unlawful debt collection practices.  See Saccato v. United States Bank Nat'l Ass'n, 10-6244-HO (D. Or. 2012).  While he lost the court case, he apparently was able to shake that creditor off his back.  The bank issued a 1099-C for some $22,000 in DOI the following year.

Despite receiving all this income, Mr. Saccato filed no federal tax returns for the years at issue (and apparently some 10 other years dating at least back to 2005.  Op. at 17).  The IRS selected those years to investigate and found it necessary to prepare a Substitute For Return (SFR) using a bank deposits analysis.  That resulted in a Notice of Deficiency (NOD) for the four years, asserting some $200,000 in unreported tax liabilities, plus various penalties for failure to file and failure to pay.  Curiously, the NOD did not propose any fraud penalty.  I guess the RA concluded that Mr. Saccato was just stupid (frivolous) and not bad.  He had drunk the Kool-aide, not made it.  Or maybe there was some goof-up in the penalty approval process.

Mr. Saccato continued riding his hobby horse into Tax Court.  He raised multiple tax protestor arguments, despite repeated warnings from Judge Lauber.  For example, Mr. Saccato kept asserting that the NOD was “invalid because ‘it was not signed under penalties of perjury by [a] duly authorized assessment officer.’ And he urged that he is exempt from Federal income tax because he is ‘a citizen of the State of Oregon’ and “not a federal citizen.’” Op. at 7.

Worse, Mr. Saccato kept attacking the Tax Court’s legitimacy. “Four months after filing his Petition, petitioner moved to have this case dismissed for lack of jurisdiction, setting forth a plethora of arguments pulled off tax-protester websites.”  Op. at 16.

Worst of all, Mr. Saccato did all of this in the face of not one, not two, but three warnings from Judge Lauber to stop the nonsense.  He even continued it after trial!  His post-trial brief was filled with “gibberish commonly embraced by tax protestors—e.g., that he never knowingly elected to be treated as a ‘taxpayer,’ that he was protected through the doctrine of estoppel, and that the notice of deficiency lacked the required jurat signed under the penalties of perjury.” Op. at 17 (internal quote marks omitted).

Lesson:  Tax Protesting Is A Hobby That Eats
The IRS has this very good webpage (although somewhat hidden) on frivolous positions.  Could be useful if you ever need to counsel a client about that.  Today’s lesson shows how the hobby of Tax Protesting is costly both to the taxpayer and to tax administration.

First, Mr. Saccato’s hobby was costly to him and his loved ones.  He’s no spring chicken.  Part of his income in 2013 was from Social Security payments (which Judge Lauber did not characterize as disability payments).  That meant he was at least in his early/mid 60’s at that time.  That would put him in his early/mid 70’s now.  And now faces a large judgement.  Is this really how he wants to spend his retirement?  Is this how he wants to die?

Notice, however, this is just a judgment.  Further, the §6673 penalty of $10k looks pretty dinky when compared to the deficiency of over $200k.  So maybe the game is worth the candle?  And I am sure some alert reader will point out that if Mr. Saccato had taken all that money he should have paid in tax in 2013-, 2014, 2015 and 2016, and had prudently invested it, he might actually come out ahead, and he could just pay the judgment and move on with his life.  That’s possible.  But I doubt it.

It’s more likely the IRS must now engage in a long and arduous collection process.  It’s more likely Mr. Saccato will expand his hobby into dodging collection, utilizing Collection Delay Process (CDP) and creating more sham trusts and entities.  He might duck and weave for the rest of his life.  And maybe all this hobbying will bring him joy and contentment.  That’s what real hobbies are supposed to do.

Nah.  What kind of life is that for him or his loved ones?  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 roping their children into their tax protest hobby 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 then they die and what do their loved ones inherit?  A big bag of nothing but trouble.

Second, even if it's all hunky-dory to Mr. S., his hobby is costly to tax administration and the rest of us.  It eats up the time of IRS employees and Tax Court judges.  Here, for example, Mr. Saccato “refused to cooperate with the revenue agent (RA),” Op. at 7.  So the RA had to investigate all the sham entities and do a bank deposit accounts to come up with the information needed.  That takes time and effort.  And then think of the time and effort wasted by the Tax Court and the IRS Office of Chief Counsel.  That sucks...resources that could otherwise be used to enforce the tax laws more broadly so that the rest of us aren't suckers for doing our best to comply the the mess Congress creates.

Truly, tax protesting is a hobby that eats.

Comment: The Wet Noodle of §6673
The Tax Court is understandably quite reluctant to impose §6673 penalties.  When it does, the penalty imposed is almost always far less than the $25,000 max.  It’s mostly a symbolic move, and a puny one at that.  It’s never the dog.  Not even the tail.  More like just a hair on the tail of the dog.  In today’s case, for example, the $10k penalty is a high one, but still is less than 5% of the total judgment.  It’s like 40 lashes with a wet noodle.  Congress last addressed that in 1989 when it raised the maximum penalty from $1,000 to $25,000.  But $25k of 1989 dollars are worth about $61k in 2023 dollars.  Thus the §6673 sanction is becoming limper and limper over time. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each Monday (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.

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@ Bruce: LOL. Great observation!

Posted by: bryan | Aug 21, 2023 2:02:31 PM

I wonder if this upstanding citizen of Oregon filed Oregon income tax returns.

Posted by: Bruce Wolk | Aug 21, 2023 1:02:07 PM

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