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Notes to File:
Issues: Federal “Frivolous
If IRC 6703 requires burden of proof for liability
for penalties under IRC 6700, IRC 6701, and IRC 6702 to be on the
Secretary, how does a taxpayer get to a proceeding to compel the
Secretary to meet its burden of proof for liability for a penalty
charge under 6702? Either 6700 or 6701 can apply to a person(s)
activities or documents, respectively, but both penalties cannot
apply concurrently to the same person(s). However, both penalties
must be displayed on a return of tax for IRC 6702 to be assessable.
Therefore, assuming 6700, 6702, and 6703 are intrinsically linked
and also assuming 6701, 6702, and 6703 are intrinsically linked,
the following analysis is presented:
SUMMARY AND ANALYSIS
OF RELEVANT INTERNAL REVENUE CODES
IRC 6700. - Promoting abusive
tax shelters, etc.
6700 charges a penalty of $1000 or 100% of
the gross income derived from each activity for an overstatement
of deductions, credits, etc. to any person who organizes an entity
or assists in the sale of any interest in an entity and makes or
furnishes or causes another person to furnish a statement who knows
is false or fraudulent as to any material matter.
6700 deals with an overstatement of deductions, a filer of such
a return of tax (statement) would not necessarily be cognizant of
the value of certain deductions and would rely on the person furnishing
information. Therefore, 6700 would apply only to the person(s) who
knows an overstatement of deduct
ions is false or fraudulent
but could also apply to the individual who files a return of tax
who also knows an overstatement of deductions is false or fraudulent.
A penalty under 6700 could apply to one or more persons, to include
the filer of such a return of tax.
IRC 6701. - Penalties
for aiding and abetting understatement of tax liability.
charges a general penalty of $1000 to any person who aids or assists
in, procures, or advises the preparation, or presentation of any
return, affidavit, claim, or other document that would result in
an understatement of the liability for tax of another person. 6701
charges a corporation penalty of $10,000 for the same conduct.
The person authorized or required to present the return of tax
does not have knowledge or consent to the understatement then 6702
would not apply to the filer of the return of tax. If the person
authorized or required to present the return of tax does have knowledge
of the understatement purported on the return of tax then 6701 and
6702 would apply to the individual who files the return of tax.
The individual filing a return of tax where a person who is
authorized or required to present the same return is assessed a
penalty under 6701 would have access to a proceeding through the
provisions for a proceeding provided for in 6703 addressing the
rules for 6701. Then, the Sec. would have the burden of proof to
establish the individual filing the return of tax had knowledge
or consented to the understatement of tax shown on the return and
would therefore be liable for a penalty under 6701 and 6702.
Either 6700 applies and/or 6701 applies to an abusive tax shelter
return. If 6700 applies to the organizer, then 6702 cannot apply
to a filer due to dependence on the information supplied by the
organizer unless the filer had knowledge or consented to the overstatement
then 6702 would apply.
If 6701 applies to a return due to
an understatement of tax then 6702 could only apply to a filer of
the return of tax if the filer had knowledge of or consented to
the understatement of tax.
IRC 6703 - Rules Applicable to
penalties under sections 6700, 6701, and 6702.
Burden of proof
is on the Sec. for liability of person/individual. With respect
to 6700 and 6701, if within 30 days after Notice and Demand, a person
pays 15% and files a claim for a refund with the Sec. No levy or
proceeding in court for collection until liability is determined
by the court. Court, in a proceeding, can enjoin any levy or proceeding.
30 days after claim for refund of bond (15% of penalty) under
6700 and 6701, a proceeding in court is allowed to determine liability
for penalty. 6702 liability would follow for an individual who filed
a return of tax where a person or persons assessed a penalty under
6700 or 6701 were to be found liable. A filer of such a return or
some other individual who filed such a return is not a taxpayer
but is a pseudo tax return preparer, in other words, a nontaxpayer.
If 6700 and 6701 is charged, then 6702 can also
be charged. However, a claim for refund must be filed by a person
charged a penalty under 6700 or 6701 within 30 days of Notice and
Demand and if denied such a person must file in proper court within
30 days of denial. If no liability is found for penalty charged
under 6700 or 6701 then no penalty charged under 6702 could lie
unless the filer had knowledge or consented to the overstatement
of deductions or understatement of tax.
If 6702 is charged
without assessment of a penalty on a person liable for a penalty
under 6700 or 6701 then the person charged with 6702 could not proceed
to claim a refund and would not be able to file for a proceeding
to determine liability within 30 days of denial of any claim for
It follows then, if a person is not charge with
a penalty under 6701 then a penalty could not lie for an individual
under 6702 because the individual charged a penalty under 6702 would
not have an opportunity, in a proceeding, to allow the Sec. to meet
its burden of proof of filer liability. In other words, the access
to a proceeding where an individual charged a penalty under 6702
depends on the liability of the person charged a penalty under 6701
and whether the person pursues the refund process as provided for
under 6703. The assessment of a penalty under 6702 on a taxpayer
or nontaxpayer without an accompanying penalty under 6700 and 6701
would be a clear attempt to deny due process and would be intentional
and fraudulent collection by the IRS of a penalty not due.
On the other hand, a individual assessed a penalty under 6702
could be held to not be connected to the liability of a person charged
a penalty under 6701 if the individual filer of the return attempted
to correct the gross value overstatement or tax understatement when
filing ato establish no intent to evade tax liability for the tax
shelter or other persons depending on the correctness of statements
or returns required of the tax shelter. This could be accomplished
by attaching a statement to the return of tax explaining any discrepancy
purported on the return. But the only opportunity for an individual
filer to establish a lack of liability, in a proceeding, is if the
person assessed a penalty under 6700 or 6701 timely filed for a
refund, and if denied, sought a proceeding to determine liability.
So it stands, an individual charged a penalty under 6702 does
not have access to due process unless the individual is the person
charged a penalty under 6700 and 6701. IRC 6702 cannot be charged
as a stand alone penalty assessed against a taxpayer or nontaxpayer
due to lack of due process to determine liability as outlined in
Black’s Law Dictionary,
5th Ed., West Pub.
A real being; existence. An organization
or being that possesses separate existence for tax purposes. Examples
would be corporations, partnerships, estates and trusts. The accounting
entity for which accounting statements are prepared may not be the
same as the entity defined by law. A sole proprietorship is not
an entity for tax purposes.
Black’s Law Dictionary,
5th Ed., West Pub.
Of little weight or importance. A pleading
is “frivolous” when it is clearly insufficient on its face, and
does not controvert the material points of the opposite pleading
and is presumably interposed for mere purposes of delay or to embarrass
It is very important to get
the issue of “taxpayer” vs “nontaxpayer” settled. The importance
of this issue has been addressed by an Appeals Court, in 1972, who
“The revenue laws are a code or system in regulation
of tax assessments and collection. They relate to taxpayers, and
not to nontaxpayers. The latter are without their scope No procedure
is prescribed for nontaxpayers, and no attempt is made to annul
any of their rights and remedies in due course of law. With them
Congress does not assume to deal, and they are neither the subject
nor the object of the revenue laws....”
(Economy Heating v.
United States, 470 F.2d 585 (1972); Long v. Rasmussen, 2181 F236;
Gerth v. United States, 132 F. Supp. 894 (1955)).
Title 26, Subtitle F, Chapter 79, §7701 Definitions.
When used in this title, where not otherwise distinctly expressed
or manifestly incompatible with the intent thereof—
The term “person” shall be construed to mean and include an individual,
a trust, estate, partnership, association, company or corporation;
. . .
Title 26, Subtitle F, Chapter 68, Subchapter B, Part
Rules for application of assessable penalties
Penalty assessed as tax. . .
(b) Person defined. The term “person”,
as used in this subchapter, includes an [individual] officer or
[individual] employee of a corporation, or a [individual] member
or [individual] employee of a partnership, who as such officer,
employee, or member is under a duty to perform the act in respect
of which the violation occurs. [emphasis added by author].
Black’s Law Dictionary, 5th Ed., West Pub.
In a general sense, the form and manner of conducting juridical
business before a court or judicial officer. Regular and orderly
progress in form of law, including all possible steps in an action
from its commencement to the execution of judgment. Term also refers
to administrative proceedings before agencies, tribunals, bureaus,
or the like. [with respect to 6703, term refers to a Federal district
Secretary of the Treasury and Secretary
26, Subtitle F, Chapter 79, §7701 Definitions.
(a) When used
in this title, where not otherwise distinctly expressed or manifestly
incompatible with the intent thereof—
. . .
of the Treasury and Secretary
(A) Secretary of the Treasury The
term “Secretary of the Treasury” means the Secretary of the Treasury,
personally, and shall not include any delegate of his.
The term “Secretary” means the Secretary of the Treasury or his
(A) In general The term “or his delegate”—
(i) when used with reference to the Secretary of the Treasury, means
any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary of the Treasury directly, or indirectly
by one or more redelegations of authority, to perform the function
mentioned or described in the context; and
(ii) when used with
reference to any other official of the United States, shall be similarly
[ The Internal Revenue Service is the “Secretary”
with respect to Internal Revenue Code.]
Black’s Law Dictionary, 5th Ed., West Pub.
A form of business
in which one person owns all the assets of the business in contrast
to a partnership and corporation. The sole proprietor is solely
liable for all the debts [and taxes] of the business. [emphasis
added by author].
Miller v. U.S.
from a judgment under Rule 60(b) is limited to the following reasons:
mistake, inadvertence, excusable neglect, newly discovered evidence,
fraud, and "any other reason justifying relief from the operation
of the judgment." Fed.R.Civ.P. 60(b). Miller made no
to any of these grounds in his motion to reconsider an adverse decision
from a lower court. [Miller was corrected in his assumption IRC
Section 6701 was wrongly assessed by the IRS. He or his attorney
failed to bring the correct argument that IRC 6702 does not apply
References Concerning Internal Revenue Code.
• IRC 6700, 6701, 6702, and 6703 were added by Pub. L. 97-248, title
III, § 320(a), § 324(a), § 326(a), §322(a), Sept. 3, 1982 and by
96 Stat. 611, 615, 617, 612, respectively . IRC 6700 was amended
in 1984 and 1989. IRC 6701 and 6703 were also amended in 1989. IRC
6702 has not been amended since 1982.
• It must be noted 6700,
6701, 6702, and 6703 are found in United States Code (USC), Title
26, Subtitle F, Chapter 68, Subchapter B, Part I. It must also be
noted all sections of code in Subchapter B are applicable only to
nontaxpayers with respect to their filing status of statements,
memos, information returns, returns of tax, etc.
of code refer to persons who file documents that will be used by
taxpayers to voluntarily make themselves subject to Internal Revenue
tax and these documents are required to be available or filed with
the IRS directly or included with the Form 1040 Individual Income
Tax Return of a taxpayer. In other words, persons referred to in
Title 26, Subtitle F, Chapter 68, Subchapter B are not taxpayers
within the meaning of 7701 and are, therefore, nontaxpayers due
to a person’s filing status. For assessable taxpayer penalties see:
Title 26, Subtitle F, Chapter 68, Subchapter A.
reserved: Tengoku dojo, 2007.
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