Gianninis v Commissioner, T.C. Memo. 2022-65 | June 23, 2022 | Urda, J.| Dkt. No. 20132-19.


Short Summary: This case involves the disputed liability for (1) frivolous arguments, (2) the imposition of accuracy-related penalties on underpayments, and (3) penalties for untimely filing tax returns. Louis U. Giannini and Dawn M. Giannini untimely filed their federal income tax return for 2017. On their tax return, Gianninis only reported the wage income Mr. Giannini received. The Gianninis did not report (1) any compensation regarding Mrs. Giannini's job, (2) the state income tax refund she received from Wisconsin, or (3) interest income paid by their Bank. The IRS informed them their failure to report such income. The Gianninis acknowledged their failure to report the refund and the interest, but they argued the income received by Mrs. Giannini was not taxable as she was a private sector employee. The IRS issued a notice of deficiency (IRS CP3219A Notice) regarding her unreported wage income, and their failure to timely submit their tax return in 2017. And, the IRS assessed an accuracy-related penalty under Section 6662(a) of $5,795. The Tax Court determined Gianninis' arguments regarding the nature of the income earned by private-sector employees as not taxable and not timely filing their tax return based on such arguments as groundless and frivolous. The Tax Court sustained the IRS deficiency determination. However, based on the Gianninis' changed position, the Tax Court determined not to assess a penalty to them for pursuing frivolous or groundless under section 6673(a)(1) at this time.

Key Issues:

Primary Holdings:

  • Gianninis failed to provide enough arguments to support that Dawn's wages income was not taxable income, as they only argued she was a "private sector worker". Additionally, they failed to support a reasonable cause for not filing on time their tax return, based on the same frivolous arguments.
  • The Tax Court decided not to assess an additional penalty for pursuing a frivolous or groundless position to Gianninis as they did not previously make such arguments.

Key Points of Law:

  • The IRS determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving by a preponderance of the evidence that the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • Taxpayers failing to report income are obliged to prove the IRS deficiency assessments "lacks rational foundation or is arbitrary and excessive". See Cole v. Commissioner. 637 F.3d at 773
  • The Tax Court has found as frivolous the argument that "Congress has no constitutional [taxing] authority over citizens of the states of the United States, as opposed to residents either of the District of Columbia or of U.S. territories and possessions". See Harrell v. United States, 13 F.3d 232, 235 (7th Cir. 1993)
  • Section 26 U.S.C. § 6651(a)(1) imposes an addition to tax for the failure to timely file a required return to the taxpayer unless the failure was due to "reasonable cause and not due to willful neglect".
  • The addition to tax is of 5% of the tax not reported on the tax return for each month or fraction thereof for which there is a failure to file the return, not to exceed 25% in total. See Section 26 U.S.C. 6751(a)(1). Additionally, it is not subject to any supervisory approval requirement. See § 6751(b)(2)(A).
  • IRS bears the initial burden of production to provide evidence supporting the tax return was untimely filed. See Section 26 U.S.C. § 7491(c). If the IRS satisfies it, the burden to prove the addition to tax the addition to tax should not apply is for the taxpayer. See Mileham v. Commissioner, T.C.
  • The Tax Court has the authority to assess a penalty not in excess of $25,000 to "a taxpayer who pursues a position that is frivolous or groundless" pursuant to Section 26 U.S.C. §6673(a).

Insights: This case is another example of failing to demonstrate IRS erred in its determination based on frivolous arguments, such as considering private sector employees wages are not taxable income. Additionally, this case helps to warn the taxpayers not pursuing a frivolous position, as this may considerably augment their tax liability and assessment of penalties. For additional information, see Freeman Law:

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