Non-taxpayer laws

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March 22, 2007

Notes to File:

Issues: Federal “Frivolous Return” Fraud

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:

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.

Because 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.
6701 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 a refund.

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 6703.


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 the opponent.

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 stated:
“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.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
(1) Person
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 I, §6671.
Rules for application of assessable penalties
(a) 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 court].

Secretary of the Treasury and Secretary
Title 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—
. . .
(11) Secretary 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.
(B) Secretary The term “Secretary” means the Secretary of the Treasury or his delegate.
(12) Delegate
(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 construed.
[ The Internal Revenue Service is the “Secretary” with respect to Internal Revenue Code.]

Sole proprietorship
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.
Relief 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
reference 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 to taxpayers.]

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.
These sections 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.

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