Schlabach v. United States
101 Fed. Cl. 678
Fed. Cl.2011Background
- Schlabach filed a 2007 Form 1040EZ claiming a $1,313.54 refund but reported $0 income and failed to attach W-2s, instead using Form 4852 with a statement denying income as defined by statutes.
- IRS designated Schlabach’s return as frivolous under IRC § 6702(c); Ogden center opened a frivolous-return control affecting all future submissions.
- Fresno office issued a $5,000 penalty for the frivolous return; Schlabach sent a corrected 2007 return and a challenge to the penalty, which the IRS destroyed or misclassified.
- Subsequently, Schlabach submitted a CDP hearing request; variety of inter-office communications and stall letters followed from several IRS offices.
- Schlabach paid the first $5,000 penalty (plus interest) in September 2009 and later sought a refund; a second $5,000 penalty was assessed for the CDP hearing request.
- The court held the first penalty justified but found insufficient proof for the second penalty; Schlabach is entitled to a refund of $5,027.86 plus interest.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was the 6702(a) penalty proper for the frivolous return? | Schlabach argues the return was not frivolous or properly assessed. | IRS contends the return contained positions identified as frivolous under § 6702(c). | Yes; penalty sustained for frivolous 2007 return. |
| Is the CDP hearing penalty valid as a specified frivolous submission? | CDP request was not frivolous; procedural irregularities tainted the penalty. | CDP request was frivolous under § 6702(b) and subject to a second penalty. | No; government failed to prove frivolousness given irregularities; second penalty invalid. |
| Did the appeal amendment affect the second penalty? | Amendment withdrew frivolous arguments and would negate the second penalty. | Amendment was not properly considered and did not resurrect frivolous claims. | Yes; amendment undermines basis for second penalty. |
| Do procedural irregularities undermine the government's burden on the second penalty? | Destruction/misclassification of documents undermines the government’s case. | Irregularities do not void the penalty if it was warranted on the record. | Undercuts the second penalty; refund warranted. |
Key Cases Cited
- Waltner v. United States, 98 Fed.Cl. 737 (2011) (frivolous-return penalties; similar standards applied)
- Jenkins v. United States, 101 Fed.Cl. 122 (2011) (loss or mishandling of IRS administrative files affects penalties)
- Yuen v. United States, 290 F.Supp.2d 1220 (2003) (definitive opportunity to dispute penalties; procedures differ from typical tax-refund actions)
- Thomberry v. Commissioner, 136 T.C. 356 (2011) (requires explanation when a determination reflects delay or impediment to tax administration)
- Callahan v. Commissioner, 130 T.C. 44 (2008) (signature-based challenges; relevance to § 6751(b) approval requirement)