Tax Court Fined Independent Contractor $1,000 For Frivolous Argument

Posted by Kim Chen on July 7th, 2019

Staples, TC Memo 2019-75
The Tax Court imposed a $1,000 frivolous argument penalty under Code Sec. 6673 on an independent contractor who argued that his independent contractor commissions were not taxable income, but loans. The Tax Court warned the taxpayer several times that the argument was frivolous and a penalty might be imposed if he continued to advance it, but he continued to advance the argument anyway.
Background. Code Sec. 61 provides that gross income includes income from all sources, including compensation for services, including fees, commissions, fringe benefits, and similar items. Self-employment income includes any income derived by an individual from any trade or business the individual carries on. (Code Sec. 1402) Loans are generally not taxable income unless the debt is reduced or canceled. (Code Sec. 61(a)(12))
Under Code Sec. 6673, an individual who:
1. Institutes or maintains a proceeding in the Tax Court primarily for delay; or
2. Takes a frivolous or groundless position during Tax Court litigation may be subject to a penalty.
The maximum penalty is $25,000. (Code Sec. 6673(a)(1))
Under Code Sec. 6020(b), the IRS is authorized to prepare a return for any taxpayer who fails to file a return. A return prepared by the IRS pursuant to Code Sec. 6020(b) is prima facie good and sufficient for all legal purposes. (Code Sec. 6020(b)(2))
Facts. The taxpayer, Mr. Staples, was an independent contractor with TVC Marketing Associates, Inc. (TVC). Mr. Staples provided services to TVC customers and was paid a commission by TVC for these services.
Each commission was recorded as an advance payment that was offset by a “debit” that TVC tracked. As the customer associated with the advance commission and offsetting debit continued as a TVC customer and made payments to TVC, each debit was gradually reduced.
Conversely, if a customer did not pay TVC, any remaining debit for that customer reduced future commissions that TVC paid to Staples for services to other customers. Staples was not obligated to repay to TVC any commissions that he received from TVC, and he never repaid TVC for any commissions that he received.
For 2012, Mr. Staples failed to file his Federal income tax return or pay the tax due.
Pursuant to Code Sec. 6020(b), the IRS prepared a substitute for return for Mr. Staples’s 2012 tax year using a Form 1099-MISC, Miscellaneous Income, issued by TVC to calculate Staples’s unreported income. The Form 1099-MISC filed by TVC reported that Staples had $18,954 of nonemployee compensation in 2012. The IRS determined that Staples’s taxable income for 2012 was $7,865.
Taxpayer’s argument. Staples conceded that he received payments from TVC, but he disputed the legal characterization of the payments as taxable income. He argued that the payments were loans and, thus, were not taxable income.
Payments for services were not loans. The payments Staples received from TVC were not loans because Staples was not obligated to repay TVC for any payments that he received from TVC, nor did he ever actually repay any amounts he received from TVC. Therefore, the $18,954 he received from TVC in 2012 for services he performed as an independent contractor were properly included in his gross income for that year.
Frivolous argument penalty imposed. Further, the Tax Court imposed a $1,000 penalty under Code Sec. 6673. The Tax Court warned Staples several times during the proceedings that he might be subject to a penalty if he continued to advance his frivolous argument that the payments he received from TVC were loans and not compensation. Notwithstanding the Tax Court’s warnings, throughout the proceedings Staples repeated that same frivolous argument.
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