There have been many schemes to keep away from paying taxes. The IRS has, for years, included these schemes and the associated frivolous arguments as a part of its Soiled Dozen listing, reminding taxpayers “that again and again, these arguments have been thrown out of court docket.” The U.S. Tax Courtroom lately heard one more case specializing in such an argument—and dominated in opposition to it.

Background

Petitioner was self-employed as a gold and silver dealer, printed month-to-month newsletters concerning the gold and silver market, and offered brokerage providers for purchasers. He carried out his enterprise by two sole proprietorships, Moneychanger and Franklin Sanders, SP. In line with court docket paperwork, the petitioner began his companies in Arkansas however “fled the state” after an antagonistic state gross sales tax resolution. He now lives in Tennessee.

In 1998 petitioner offered each entities to Little Mountain Corp, or LMC. After the sale, he offered consulting providers to LMC by one other sole proprietorship, At all times Frank Consulting, or AFC. In line with court docket paperwork, from 2009 and 2016, the petitioner submitted invoices, most of which have been valued at over $10,000. Petitioner instructed LMC—which paid the invoices in checks made out to “money”—to separate the funds into installments of lower than $10,000. Petitioner additionally acquired bonuses.

Examination

Petitioner didn’t file earnings tax returns for tax years 2008 by 2018, nor did he make estimated tax funds. After the IRS notified the petitioner that he was underneath examination, the IRS claims he failed to speak with the income agent and didn’t attend the preliminary assembly. He additionally didn’t adjust to doc requests for his enterprise information, allegedly as a result of he had no information.

Finally, the IRS established that the petitioner acquired $3,492,526 within the years at problem. The IRS ready substitutes for returns and issued a discover of deficiency. The petitioner responded by submitting in Tax Courtroom.

Arguments

At Courtroom, the petitioner argued that the funds he acquired from LMC will not be taxable as a result of he isn’t an “particular person” topic to tax. Particularly, based on court docket paperwork, the petitioner claimed that he’s a “citizen,” not an “particular person.”

Petitioner relied on part 7701(a)(1) for this argument, which, amongst different issues, defines an individual “to imply and embrace a person, a belief, property, partnership, affiliation, firm or company” and references the time period “citizen” all through.

This, argued petitioner, is critical. Since “citizen” and “particular person” are listed collectively in numerous code sections, he claimed, the 2 are mutually unique as “citizen” and “particular person.” That, he reasoned, signifies that he does not should pay taxes.

The Courtroom famous that the petitioner’s idea that residents don’t have to pay federal earnings tax has been persistently rejected as frivolous. Moreover, the Courtroom pointed to the Laws at 1-1(a), which outline a person topic to tax as any “particular person who’s a citizen or resident of the US.” A citizen is outlined as “[e]very particular person born or naturalized in the US and topic to its jurisdiction.”

Along with the assessed tax, the IRS added penalties for failure to file, fraudulent failure to file, failure to pay, and failure to pay estimated tax.

Fraud

The burden falls to the IRS to show fraud by clear and convincing proof at any time when there are fraud allegations. They have to present “the taxpayer meant to evade taxes identified to be owing by conduct meant to hide, mislead or in any other case forestall the gathering of taxes.”

The Courtroom checked out lots of what they name badges of fraud to find out fraudulent intent:

1. Failure to file tax returns.
2. Failure to report earnings over an prolonged interval.
3. Failure to furnish the Commissioner with entry to information or to cooperate with taxing authorities.
4. Failure to maintain ample books and information.
5. Expertise and information, particularly information of tax legal guidelines.
6. Concealment of financial institution accounts or property from IRS brokers.
7. Willingness to defraud one other in a enterprise transaction.
8. Implausible or inconsistent explanations of conduct.
9. Failure to make estimated tax funds.
10. A sample of conduct that signifies an intent to mislead.

After an intensive overview of the document, the Courtroom concluded that at the very least eight badges of fraud show that the petitioner acted with fraudulent intent.

The petitioner raised a number of defenses to the opposite allegations, together with that the Division of the Treasury failed to explain the place the general public can “make submittals.” The Courtroom rejected every of these defenses.

Frivolous Argument

The petitioner did get a win: Part 6673(a)(1) authorizes a penalty of as much as $25,000 at any time when the taxpayer’s place seems frivolous or groundless. A taxpayer’s place is frivolous or groundless “whether it is opposite to established legislation and unsupported by a reasoned, colorable argument for a change within the legislation.” The Courtroom did discover the petitioner’s arguments to be frivolous—and he repeatedly asserted these arguments within the pretrial interval. Nevertheless, for the reason that petitioner didn’t pursue these arguments at trial, the Courtroom didn’t impose a piece 6673 penalty.

The case is Claude Franklins Sanders v. Commissioner of Inside Income, T.C. Memo. 2023-71.

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