S corporation's TMP personally responsible for sec. 6673 penalty.
The IRS moved to impose a Sec. 6673 penalty on F; he did not respond to this motion. The Tax Court (opinion Beghe, J.) holds that the penalty should be imposed on F, as TMP, rather than on R or on all R's shareholders.
Sec. 6673(a) authorizes the court to impose a penalty against "the taxpayer," not in excess of $25,000, when the court believes the proceedings were instituted or maintained primarily for delay, petitioner's position was frivolous or groundless, or petitioner unreasonably failed to pursue available administrative remedies.
F has displayed a complete lack of interest in presenting his case and has repeatedly ignored the IRS's requests for substantiation of the claimed deduction. We therefore conclude that R initiated this proceeding primarily for delay and has unreasonably failed to pursue available administrative remedies. Under these circumstances, it is appropriate to impose a penalty pursuant to Sec. 6673.
We have never imposed a penalty pursuant to Sec. 6673 on a TMP challenging a final S corporation administrative adjustment. The question is whether a penalty can be imposed in such a proceeding and, if so, whether the S corporation, the TMP or each of the shareholders is liable. Sec. 6673(a) provides that "the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000." A "taxpayer," as defined by Sec. 7701(a)(14), is "any person subject to any internal revenue tax."
In this case, R, an S corporation, is a passthrough entity not subject to tax. Thus, R is not a "taxpayer" within the meaning of Sec. 7701(a)(14). However, each of R's shareholders is a "taxpayer" within the meaning of Sec. 7701(a)(14) because corporate-level adjustments determined by this proceeding cannot be litigated in a personal income tax case, and the Service may determine the additional tax liability of the shareholders with respect to these adjustments by computational adjustment.
F is a shareholder in R, since the tax matters person of an S corporation is a shareholder designated by the other shareholders or the Secretary pursuant to Sec. 6231(a)(7) and Temp. Regs. Sec. 301.6231(a)(7)-1T. F is also the only R shareholder who has actually participated in the conduct of this proceeding on R's behalf.
Although R's shareholders are parties to this proceeding pursuant to Secs. 6226(c) and 6228(a)(4)(A), as made applicable to S corporations by Sec. 6244, we find it inappropriate to impose a penalty on any shareholder who has not actually participated in this proceeding. We conclude that F, as TMP, is the "taxpayer" who instituted this proceeding primarily for delay and unreasonably failed to pursue available administrative remedies, and we therefore require him to pay a penalty pursuant to Sec. 6673.