IRC 6702(a)

The Tax Court ruled in Srbislav B. Stanojevich, 160 T.C. No. 7, filed April 10, 2023 that the Petitioner, in his capacity as trustee of a grantor-type trust, filed frivolous income tax returns for four tax periods.  As such, he was held liable for penalties because the law provides at IRC 6702(a) that a penalty is imposed on a “person [who] files what purports to be a return of the tax imposed by this title,” and Petitioner’s filing of the frivolous returns on behalf of the trust falls within the meaning of that provision.  The IRS assessed a $5,000 per return penalty in this case.  In January of 2013, Petitioner submitted a request to the IRS for an employer tax identification number for the Source Financial Trust (SFT) and represented that the trust was a grantor-type trust and that he was the trustee. Petitioner later filed a Form 1041, U.S. Income Tax Return for Estates and Trusts for each relevant year. The total taxable income on each return was from interest income. Each return also reported that SFT had federal income tax withheld in an amount equal to the amount of interest/total taxable income reported on the return.  The total tax on each return was then put at zero and an overpayment equal to the amount of tax withheld was claimed.  Forms 1099 were attached reflecting income paid to SFT. Some of the 1099s reflected tax withholdings.  The IRS determined the 1099s were false. The IRS deemed the returns to be frivolous and assessed the Petitioner with the penalty referenced above.  The Petitioner argued that he should not be assessed the penalty because these were not his personal returns. This was the issue the Court decided – could a taxpayer be assessed a section 6702(a) penalty for filing a frivolous return that is not his personal return?  The Court indicated that it was appropriate for the IRS to make this assessment.  The Court saw nothing in the statute that prevented its application in this instance and cited IRC section 6102(b)(4) as further support because it has a mandate that the return of a trust “shall be made by the fiduciary thereof.”  So, its trustee. The Court explained that the fact that Congress placed on the trustee the duties and responsibilities associated with the filing of the trust’s income tax return supports its conclusion that Congress considered it appropriate to impose section 6702(a) liability on a trustee who files a frivolous income tax return on behalf of a trust.