Tax Court Win

In the recent Swanson v. Comm’r (TC Memo 2024-105) US Tax Court case, the Tax Court slapped a tax protestor with a $25,000 frivolous submission penalty.  The Tax Court Opinion was very clear that the law disapproved of the Tax Protestor and his frivolous arguments, but nevertheless the Tax Court may have given conspiracy theorists potential fuel. But did a tax protester really win at tax court?

In this age of disinformation, charlatans are able to peddle their nonsensical ideas to a wide audience over social media.  In the Tax World, tax protestor arguments are the equivalent of flat earth theories.  A few examples of frivolous tax protestor arguments can be found on the IRS website.  These frivolous arguments include:  the income tax law is unconstitutional, the income tax system is voluntary, and the income tax law does not apply to so-called sovereign citizens. 

In the Swanson case, the IRS assessed the taxpayer a $16,690 tax deficiency and a $3,338 (20%) accuracy penalty.  The taxpayer in Swanson under-reported his income on his return claiming, among other things, that as a schoolteacher he did not have to pay income taxes.  The taxpayer in Swanson also had a history of making frivolous arguments in prior court cases. 

The Tax Court slammed the taxpayer in Swanson and his arguments as frivolous.  The Tax Court sustained the IRS’ assessment.  But the Tax Court was not done slapping the taxpayer around.

The Tax Court then went on to address the $3,338 (20%) accuracy penalty.  The Tax Court reasoned that an accuracy penalty only applies when a Taxpayer files a return.  Under the Beard Test , a tax return must meet four requirements, namely (1) it must have sufficient data to calculate the tax liability, (2) it must purport to be a tax return, (3) it must be an honest and reasonable attempt to satisfy the requirements of the tax law and (4) it must be signed under penalty of perjury.  The taxpayer in Swanson did not file a legal tax return because his frivolous positions were not an honest and reasonable attempt to satisfy the requirements of the law.  The Taxpayer in Swanson avoided the $3,338 or 20% accuracy penalty thus obtaining a small “victory”, but the Tax Court was not done thrashing the Taxpayer.

Just as in a Tom and Jerry Cartoon where Tom (the cat) sidesteps a small trap Jerry (the mouse) set for him, only to get smacked over the head with a huge anvil, the Taxpayer in Swanson got hit with a bigger penalty than the $3,338 accuracy penalty.  The Tax Court hit the Taxpayer with a $25,000 anvil in the form of a frivolous submission penalty.  Tax Court determined the taxpayer in Swanson did not file a valid tax return. And, as such, should also be assessed a 25% failure to file penalty, which is much larger than the 20% accuracy penalty the Tax Court allowed him to sidestep. 

Unfortunately, the Swanson case may make its rounds on the internet.  While, the opinion does not condone frivolous tax arguments, nevertheless, internet conspiracy theorists may talk about the Taxpayer avoiding the accuracy penalty while leaving out the larger penalty assessed by the Tax Court.  This is like saying Tom is the “winner” of the Tom and Jerry episode by only viewing the 2 seconds of the cartoon where Tom sidesteps the trap and ignores the remaining 8 minutes of the cartoon where Jerry hits Tom with the more serious consequences of the anvil.   

At RJS LAW, we help our clients solve tax problems.  We are real, experienced attorneys who provide legal advice grounded in the law.  If you have any tax problem with any of the state or federal taxing authorities, please contact us on the web at RJS LAW or call our office at 619-595-1655 for a free consultation.  We will provide you with real, sober, and practical advice for your tax problems. 

Written by Joseph Cole, Esq., LL.M.