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Tax Court flexes its muscles - imposes sanctions and issues a warning.

Recently, the Tax Court issued several opinions that reflect its intolerance of taxpayers' and practitioners' (both private and governmental) actions that the court determined to be dilatory or improper. To clearly communicate its message, the court drew on Sec. 6673, a rather infrequently used (but very potent) Code provision that permits the Tax Court, in its discretion, to impose monetary sanctions or penalties if it determines that (1) proceedings have been instituted or maintained by a taxpayer primarily for delay, (2) the taxpayer's position is frivolous or groundless or (3) the taxpayer unreasonably failed to pursue available administrative remedies. In addition, if the court determines that a practitioner has multiplied the proceedings unreasonably or vexatiously, it may require the payment of excess costs (including attorneys' fees) reasonably incurred because of such conduct.

In Nis Family Trust, 115 TC No. 37 (2000), the court imposed monetary sanctions (the maximum $25,000 in one docket) against the taxpayers and also required their attorney to pay $10,600 to the IRS, representing excess attorneys' fees that the Service incurred on account of the attorney's conduct in unreasonably delaying the proceedings. The case involved three separate dockets. In each petition filed in response to the statutory deficiency notices, the taxpayers (appearing pro se) failed to address any of the adjustments that the IRS proposed; rather, the petitions contained nothing but frivolous, tax-protester-like positions. The court entered judgment against the taxpayers based on the pleadings, imposed accuracy-related penalties and further found that the taxpayers both instituted and maintained the proceedings primarily for delay. This latter finding was based on the taxpayers' noncooperation and nonresponsiveness throughout the audit and during the court proceedings, including the discovery process. Sometime during the pendency of the proceeding (as often occurs), the taxpayers retained an attorney who entered an appearance on their behalf. The attorney continued to raise the same type of arguments that the taxpayers had previously advanced. Based on the record, the court held that the taxpayers were subject to penalties under Sec. 6673(a)(1), and their attorney was required to pay costs under Sec. 6673(a)(2). The court found that both the taxpayers and their attorney attempted to unreasonably and unduly multiply the proceedings and that the attorney's actions were undertaken in bad faith.

Shortly thereafter, the Tax Court issued its opinion in Pierson, 115 TC No. 39 (2000), involving a taxpayer's appeal under the newly enacted "collection due-process procedures" of Secs. 6320 and 6330. Once again, rather than addressing the merits of the matters in issue, the taxpayer's petition raised only frivolous tax-protester arguments. The court concluded that the taxpayer instituted the proceeding primarily for delay and, therefore, imposed a penalty under Sec. 6673(a)(1). However, noting that its jurisdiction over the collection due-process procedure is relatively new, the court opted not to impose a penalty in this case. However, it did make its intentions clear for future similar cases, by unequivocally stating that it regarded "this case as fair warning to those taxpayers who, in the future, institute or maintain a lien or levy action primarily for delay or whose position in such a proceeding is frivolous or groundless."

Lest one is led to believe that Sec. 6673 is applicable only to taxpayers and their representatives, consider Dixon, TC Memo 2000-116. In this case, the Tax Court imposed sanctions and costs under Sec. 6673(a)(2)(B) against the Service due to the misconduct of IRS district counsel during a court proceeding. The court noted that this case represented the first time it had the occasion to apply Sec. 6673 to misconduct of a government attorney. The court examined its relatively few opinions when it had imposed sanctions or costs or both on taxpayers' representatives and concluded that a finding of bad faith was a prerequisite. In this case, although the Service had brought the misconduct to the court's attention, after considering all the facts and circumstances, the court held that the attorneys intentionally misled the court before, during and after the trial, and these actions were deliberate attempts by government attorneys to manipulate and abuse the trial process and thus were undertaken and carried out in bad faith.

Perhaps a more instructive reflection of the Tax Court's intensity regarding its "zero tolerance" approach to curbing abuses of the court's (and the IRS's) time and resources can be gleaned from its opinion in Universal Trust 06-15-90, TC Memo 2000-390. This case involved whether an individual who filed a petition on behalf of a trust in fact possessed the legal capacity to do so. The Service moved to dismiss the case for lack of jurisdiction. The individual had also been involved in other cases before the Tax Court in which similar arguments had been made. The court concluded that the individual did not possess the requisite capacity to institute the proceeding, and therefore dismissed the case. However, the court did not stop at that. After noting that the IRS did not seek Sec. 6673 sanctions against the individual, the court gratuitously suggested that perhaps the Service should consider imposing other penalties and/or sanctions (i.e., Secs. 6700-6701 (tax shelter promoter)) or that a criminal investigation should be initiated against the individual: "the expenditures of time and resources of the Court and the Commissioner in this and other cases in which [the individual] has acted ... have been so substantial as to raise the question whether some other sanction might be appropriate."

The issuance of these opinions within a relatively short period is indicative of what the Tax Court may perceive as an increasing problem. While zealous advocacy of a client's (be it a taxpayer or the IRS) position should never be discouraged, practitioners must conduct thoughtful and careful analyses to properly evaluate whether the permissible line has been (or is about to be) crossed. This is especially true when the practitioner has not been an active participant from the inception. Obviously, when this happens, the practitioner should make every effort to ascertain and evaluate all prior activity, and whether some damage control is necessary before proceeding with the representation. As noted, each case is fact-intensive; whether the court concludes that sanctions are appropriate depends on its particular facts and circumstances. Certainly, the Tax Court has spoken loud and clear on bad faith, and will not hesitate to use the ammunition provided by Sec. 6673 in the future.

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Article Details
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Title Annotation:penalties for dilatory or improper actions by taxpayers or practitioners
Author:Elly, Mark H.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Apr 1, 2001
Previous Article:Offers in compromise: "doubt as to collectibility".
Next Article:Withholdings on aliens by educational institutions.

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