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Frivolous Tax Return Penalties Survive Taxpayer's Death.
(Parker Tax Publishing June 17, 2014)

Frivolous tax return penalties assessed under Code Sec. 6702 as a result of the nonpayment of employment tax liabilities survived the taxpayer's death. U.S. v. Molen, 2014 PTC 243 (E.D. Calif. 5/21/14).

Sandra Molen and her husband, James operated a florist business that had several employees. The workers were paid at first by check and later by money order. The Molens filed false Form 941s, inaccurately reporting that they paid no wages subject to social security or Medicare taxes. The Molens did not file their required IRS Forms 940 and 941 by the required deadlines, nor did they make timely Form 941 tax deposits. They provided their employees false IRS Form W-2s and failed to report social security and Medicare wages and taxes. The Molens justified their refusal to meet these legal obligations by arguing that the compensation they paid employees did not constitute wages and that the federal courts could not enforce federal tax laws outside of the District of Columbia. As a result, the Molens accrued Form 941 and Form 940 employment tax liabilities, including interest and penalties, of approximately $30,000 for periods ending March 31, 2000, through June 30, 2006.

The IRS filed a civil action to reduce to judgment the outstanding federal tax assessments and to foreclose on real property owned by James and Sandra. In February, Sandra died, and the question arose as to whether the civil action against her survived her death. The IRS's claims against Sandra were for frivolous tax return penalties and were assessed under Code Sec. 6702. Thus, the district court in which the IRS filed its civil action against the Molens was tasked with determining whether a penalty assessed under Code Sec. 6702 survives a taxpayer's death.

The IRS cited Reiserer v. U.S., 479 F.3d 1160 (9th Cir. 2007), in support of its assertion that an action pursuant to Code Sec. 6702 is civil in nature and therefore survives the death of a defendant. In Reiserer, the Ninth Circuit Court addressed the issue of whether an action for civil tax shelter promoter penalties under Code Sec. 6700 and Code Sec. 6701 survived the death of the defendant and held that the penalties under these statutes were sufficiently civil in nature that the action survived the defendant's death. In reaching its conclusion, the court reasoned that the fact that the statutes are found in Internal Revenue Code Chapter 68, titled Additions to the Tax, Additional Amounts, and Assessable Penalties, rather than Chapter 75, titled Crimes, Other Offenses, and Forfeitures, was a clear indication that the legislature intended the penalties in question to be civil. Code Sec. 6702, the IRS noted, also appears in Chapter 68 of the Internal Revenue Code, thus indicating that the legislature intended for the frivolous return penalties to be civil in nature.

The IRS also cited Estate of Rau v. Comm'r, 301 F.2d 51 (9th Cir. 1962), for the proposition that the penalty assessed under Code Sec. 6702 is not so onerous as to raise it to the level of a criminal sanction. In Rau, the Ninth Circuit Court held that a 50 percent addition to tax for fraud did not abate at the taxpayer's death.

Noting that there was no case law on this issue and thus the issue was one of first impression, a district court held that the Code Sec. 6702 penalties assessed against Sandra survived her death. According to the court, the question of whether the IRS's claims survived Sandra death is a question of federal law and, to determine whether a federal cause of action survives the death of a defendant, the court said, a determination must be made as to whether the claim is civil or penal in nature, since penal actions do not survive the death of a party. While some statutes expressly state that an action survives upon the death of a party, many statutes, such as Code Sec. 6702, are silent. In the latter case, the court said, courts must determine whether the statute in question is civil or penal in nature by resorting to the two-part test articulated in Hudson v. U.S., 552 U.S. 93 (1997). The test requires an inquiry into whether the legislature has indicated an intention to establish a civil penalty. Second, the court must determine whether the statutory scheme is so punitive either in purpose or effect, as to transform what was clearly intended as a civil remedy into a criminal penalty.

The court agreed with the IRS assertion that the frivolous return penalty assessed against Sandra under Code Sec. 6702, which was $500 for each violation, was far less onerous than the penalty assessing a 50-percent addition to tax for fraud that was held to be civil in nature in Rau, or the tax shelter promoter penalty that was held to survive the death of the taxpayer in Reiserer. Accordingly, the court found that the frivolous return penalties assessed against Sandra survived her death.

For a discussion of penalties relating to frivolous tax returns, see Parker Tax ¶262,145. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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