Edwards v. Comm'r

T.C. Memo. 2003-149

UNITED STATES TAX COURT

DAVID J. EDWARDS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket No. 7010-00. Filed May 22, 2003.

Noel W. Spaid, for petitioner.

Dale A. Zusi, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

BEGHE, Judge: This case has remained before the Court to

consider the amount of the penalty under section 6673(a)(1)1

*
This Supplemental Memorandum Opinion supplements Edwards
v. Commissioner, T.C. Memo. 2002-169.
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 2 -

that petitioner must pay respondent and the amount of

respondent’s costs under section 6673(a)(2) that petitioner’s

counsel, Noel W. Spaid, must pay respondent.

Background

This case was tried in 2001 over 2 days separated by more

than 5 months. In Edwards v. Commissioner, T.C. Memo. 2002-169,

we held petitioner had failed to report income in 1996, was not

entitled to various deductions claimed for 1996 and 1997, and was

liable for accuracy-related penalties under section 6662(a). We

also found petitioner had unreasonably failed to pursue

administrative remedies and had taken frivolous and groundless

positions and would be liable for a penalty under section

6673(a)(1) in an amount to be determined; we also found Ms. Spaid

had recklessly and knowingly made frivolous arguments on

petitioner’s behalf and that she would be required to pay, under

section 6673(a)(2), respondent’s excess costs, expenses, and

attorney’s fees. We deferred setting the penalty under section

6673(a)(1) and Ms. Spaid’s liability under section 6673(a)(2)

until the parties responded to our inquiries into respondent’s

excess costs attributable to the misconduct of petitioner and Ms.

Spaid. We ordered respondent to submit an affidavit of costs,

expenses, and attorney’s fees that could appropriately be taken

into account in determining the penalty on petitioner under

section 6673(a)(1) and Ms. Spaid’s liability to respondent under
 - 3 -

section 6673(a)(2). We also permitted petitioner and his counsel

to file objections to respondent’s affidavit.

As an aid to understanding our findings and discussion, we

briefly recap the relevant findings in Edwards v. Commissioner,

supra.

Petitioner is a medical doctor who has been practicing

preventive medicine since 1961. Petitioner also acts as a

registered medical examiner for the Federal Aviation

Administration.

In 1995, on the advice of Estate Preservation Services

(EPS), operated by Robert L. Henkell,2 petitioner transferred

ownership of his medical practice, his movie and sound equipment,

his airplane and other vehicles, his residence, and other assets

to seven separate trusts. Petitioner’s revocable trust held

complete ownership of the “focus trust”, which held complete

ownership of the remaining trusts. Petitioner retained direct or

indirect beneficial ownership of all trust assets and continued

to exercise control over the trust assets after the transfers.

Although petitioner did not report any gain when he

transferred his assets to the trusts, the trusts claimed

2
In October 1998, at the Commissioner’s behest, the U.S.
District Court for the Eastern District of California issued a
preliminary injunction enjoining EPS and Henkell from rendering
tax shelter advice. See United States v. Estate Pres. Servs., 38
F. Supp. 2d 846 (E.D. Cal. 1998), affd. 202 F.3d 1093 (9th Cir.
2000).
 - 4 -

depreciation deductions on the transferred assets on the basis of

their alleged fair market values at the time of transfer to the

trusts, rather than on original cost or depreciated basis in

petitioner’s hands.

Petitioner filed a Form 1040, U.S. Individual Income Tax

Return, reporting $10,613 in taxable income for 1996 and $13,380

in taxable income for 1997. These returns reported Federal

income tax liabilities of $2,465 for 1996 and $4,497 for 1997.

Each of the trusts filed Forms 1041, U.S. Income Tax Return for

Estates and Trusts, for tax years 1996 and 1997 reporting

negative taxable income.

Respondent commenced an examination of petitioner’s 1996 and

1997 tax returns after July 22, 1998. In connection with the

examination, respondent sent petitioner a letter requesting that

he produce his records for examination. On January 21, 1999,

respondent’s revenue agent met petitioner and his adviser, Ilena

Hamilton, at respondent’s office.

Petitioner began the meeting by declaring he would not

provide any information concerning the trusts because he was

under some unspecified duty not to disclose trust information.

Petitioner told respondent’s revenue agent to obtain the trust

information from the trustees. Petitioner refused to identify

the trustees or to disclose how respondent could obtain the

information.
 - 5 -

Respondent’s revenue agent then asked whether petitioner had

brought any personal records to support his return. In response,

petitioner read a lengthy prepared statement objecting that it

was improper for respondent to audit more than 1 year’s return at

a time. He declared he would not provide any records until

respondent, in writing, answered certain questions, and even then

he would produce only those documents that would not “violate my

fourth amendment rights which guarantee the right to privacy of

one’s house, papers, effects and my fifth amendment right which

guaranties that one cannot be compelled to be a witness against

oneself”. Petitioner failed to specify how any of these

privileges would apply to the financial records that formed the

basis for his returns.

Petitioner demanded written answers to his questions before

he would consider cooperating with respondent’s examination.

Petitioner demanded answers in writing to the following

questions: (1) The basis for respondent’s examiner’s authority

to conduct the examination; (2) the statutory authority for the

examination; (3) “you have to show us where 7006 gets its

implementing implant, excuse me, implementing authority and if

that implementing authority on 7602 is all inclusive to the

outside of the definition”; and (4) whether respondent could

establish that petitioner had income from one of the sources

identified in section 1.861-8(f), Income Tax Regs.
 - 6 -

At the meeting, respondent’s examiner displayed her badge to

establish her authority to conduct the examination and cited

section 7602 to establish the statutory authority for the

examination. Respondent’s examiner advised petitioner both at

the meeting and in a letter dated February 10, 1999, that: (1)

Statutes are enforceable even if there are no regulations

interpreting them, and (2) section 1.861-8(f), Income Tax Regs.,

is irrelevant to petitioner’s returns and to the examination.

Petitioner did not produce his records in response to

respondent’s letter of February 10, 1999. Petitioner’s conduct

constituted refusal to cooperate with respondent’s examination.

On April 24, 1999, respondent issued a formal summons for

petitioner’s records. On June 3, 1999, petitioner sent a letter

to respondent making frivolous tax protester arguments by

selectively citing portions of statutes and court decisions out

of context. Petitioner signed his letter “Without prejudice UCC

10207”. The letter evidences and confirms petitioner’s continued

refusal to cooperate with respondent’s examination.

On June 12, 1999, petitioner attended a meeting with

respondent’s examining agents. Petitioner again failed to

produce records in response to the summons and continued to make

frivolous demands.

Because petitioner did not produce records to support his

return positions, respondent elected to use an indirect method to
 - 7 -

determine petitioner’s tax liability. On March 31, 2000,

respondent issued a notice of deficiency to petitioner.

Respondent did not send a 30-day letter before issuing the notice

of deficiency. The period of limitations for making an

assessment of petitioner’s 1996 tax liability would have

otherwise expired on April 15, 2000.

In the notice of deficiency, respondent determined that the

trusts petitioner created were shams and should be disregarded,

or were grantor trusts all of whose income is taxable to

petitioner. Respondent determined that petitioner’s reported

gross income should be increased by the gross income reported by

the trusts ($560,184 for 1996 and $495,048 for 1997) and by

unexplained deposits made to petitioner’s bank account ($170,619

for 1996 and $131,190 for 1997) and to one of petitioner’s trust

bank accounts ($2,900 for 1996). Respondent disallowed all

deductions claimed by petitioner and the trusts, because

petitioner failed to provide substantiation for the deductions

claimed on the returns ($574,430 for 1996 and $619,094 for 1997).

Respondent made other computational adjustments to petitioner’s

returns resulting from the additional income respondent

determined (such as determining that petitioner underreported

self-employment taxes by $42,103 for 1996 and $39,443 for 1997).

As a result of these adjustments, respondent determined that
 - 8 -

petitioner had Federal income tax deficiencies of $540,192 for

1996 and $511,866 for 1997.

Respondent also determined that petitioner is liable for 20-

percent accuracy-related penalties under section 6662(a) because

petitioner was negligent or disregarded rules and regulations in

understating his taxable income, made substantial understatements

of income tax, and had not shown reasonable cause for the

understatements. Applying the 20-percent rate to the

deficiencies, respondent determined penalties of $108,038 for

1996 and $102,373 for 1997.

Petitioner timely filed an original petition and an amended

petition with this Court. In his amended petition, petitioner

argued that all adjustments respondent made were erroneous.

Petitioner claimed his trusts were valid, and that the grantor

trust rules do not apply because he held neither legal nor

equitable title to the trust assets. Petitioner in his amended

petition also asserted the “Delpit” issue: that the Tax Court

lacks jurisdiction over his petition because respondent made the

determination without sending him a 30-day letter, without

advising him of his administrative rights, and without giving him

an opportunity for adequate administrative review. According to

petitioner’s counsel: “This denial has cost Petitioner undue

burden of Tax Court litigation that could have been resolved

administratively.”
 - 9 -

The trial of this case occurred over 2 days, separated by

more than 5 months. The delay in completing the trial was caused

in large part by the failure of petitioner’s counsel to organize

the exhibits she wished to include in the second of three

stipulations of fact. The first and third stipulations of fact,

prepared primarily by respondent, were filed with the Court at

the beginning of the first day of trial; the second stipulation

of fact was prepared by Ms. Spaid with substantial assistance

from respondent’s trial counsel, Dale A. Zusi, which was required

by Ms. Spaid’s disorganization. The second stipulation of fact

was subject to respondent’s numerous objections to many exhibits

on relevance, hearsay, authentication, or lack of foundation

grounds and was filed almost 4 months after the first day of

trial.

Before trial, in petitioner’s trial memorandum, and during

the first day of trial, Ms. Spaid made two additional claims on

petitioner’s behalf: That the statutory notice of deficiency was

invalid because the wholesale disallowance of deductions amounted

to a lack of determination, the “Scar” issue; and that the

Internal Revenue Service is not an agency of the U.S. Government,

the “Agency” issue.

At the beginning of the second day of trial, petitioner,

through Ms. Spaid, made two oral motions: (1) To shift the

burden of proof to respondent under section 7491(a), claiming
 - 10 -

that petitioner had cooperated at all levels; and (2) for

imposition of a penalty on respondent under section 6673(a)(1),

on the ground that respondent, by not offering petitioner an

Appeals Office conference before issuing the statutory notice,

had deprived petitioner of administrative remedies.

During both trial days, petitioner continued to claim that

the trusts were valid for Federal income tax purposes. The first

day of trial dealt primarily with the validity of the trusts and

events occurring during the audit. These subjects were also

covered during the second day of trial in the cross-examination

of the revenue agent who had examined petitioner’s returns and in

the direct testimony of petitioner. The second day of trial also

covered petitioner’s attempts to prove additional deductions

using amended returns for petitioner and the trusts.

More than 3 months after the second day of trial, and

shortly before posttrial briefs were originally due, respondent

and petitioner entered into a superseding stipulation of settled

issues that resolved many of the issues previously in dispute

between the parties. The parties stipulated that the trusts were

invalid for Federal income tax purposes, and that all the trust

income and deductions would be allocated to petitioner. In

addition, both petitioner and respondent made substantial

concessions regarding the deficiencies, including deductions
 - 11 -

and cost of goods sold claimed on Schedule C, Profit or Loss From

Business.

The parties also stipulated that petitioner failed to report

income of $62,061 in 1997, and that petitioner is entitled to

deductions on Schedule A, Itemized Deductions, of $21,929 for

1996 and $21,061 for 1997, subject to any statutory limitations

based on petitioner’s adjusted gross income. The parties

stipulated that petitioner is subject to self-employment tax and

is entitled to a deduction for one-half of the self-employment

tax and that the exemption and taxability of petitioner’s Social

Security receipts are computational and depend on petitioner’s

adjusted gross income.

Finally, the parties agreed that the only issues remaining

in dispute were petitioner’s failure to report $170,619 of income

in 1996;3 petitioner’s right to Schedule C deductions and cost of

goods sold in 1996, airplane expenses, and a home office

deduction; and accuracy-related penalties under section 6662(a).

In addition to those five issues, respondent requested in his

posttrial brief that we impose penalties against petitioner under

section 6673(a)(1). Petitioner objected to the imposition of

section 6673(a)(1) penalties, contending that his arguments were

3
On brief, respondent conceded that petitioner’s unreported
income for 1996 was $54,516, rather than $170,619; our opinion
sustained respondent’s concession to this effect, as well as
respondent’s other adjustments that remained in issue.
 - 12 -

correct and requesting that we specifically address the “Delpit”,

“Scar”, and “Agency” issues.

In our opinion in Edwards v. Commissioner, T.C. Memo. 2002-

169, we addressed the “Delpit”, “Scar”, and “Agency” issues,

demonstrating the frivolity of petitioner’s arguments on these

issues. We need not repeat the exercise here. We also concluded

that petitioner was not entitled to rely on the misrepresen-

tations of the promoter whose abusive trust package petitioner

had purchased. We suggested, however, that petitioner had

somewhat redeemed himself by conceding the abusive trust issue

before the parties’ briefs were due and that we would take

petitioner’s belated concession into account in determining

sanctions under section 6673(a).

In our opinion in Edwards, we found many of the positions

taken by petitioner when he instituted this proceeding, and

maintained throughout this proceeding, were frivolous and

groundless, and that petitioner unreasonably failed to pursue

administrative remedies. Accordingly, we agreed with respondent

that petitioner should be penalized under section 6673(a)(1).

We also opined that Ms. Spaid would be liable under section

6673(a)(2) for respondent’s costs, expenses, and attorney’s fees

incurred because of the frivolous arguments she had advanced. In

so holding, we found that Ms. Spaid had knowingly and recklessly

made frivolous arguments in pretrial memoranda, at trial, and in
 - 13 -

posttrial briefs. The consequence of Ms. Spaid’s knowing and

reckless behavior was to multiply the proceedings unreasonably

and vexatiously. We found that Ms. Spaid had continued to

advance the “Delpit”, “Scar”, and “Agency” issues long after we

warned her they were frivolous.

We recognized that petitioner originally appeared in this

case by filing his petition pro se, and that some of the

frivolous arguments were originally contained in the petition.

In this regard, we observed that Ms. Spaid was liable only for

the consequences of her own misconduct, including advancing

frivolous arguments initially developed by petitioner, but not

for actions taken by petitioner before Ms. Spaid’s appearance.

Respondent was ordered to submit an affidavit of the excess

costs, expenses, and attorney’s fees incurred as a result of Ms.

Spaid’s unreasonable and vexatious multiplication of the

proceedings.

Respondent’s trial attorney, Ms. Zusi, filed the affidavit

as ordered. Ms. Zusi reviewed respondent’s internal timekeeping

records, the legal files associated with the case, and the

various letters and motions pertaining to the case. These

documents show that Ms. Zusi and her supervisor, Debra K. Moe,

spent 495.5 hours and 67.5 hours, respectively, working on the

case. Ms. Zusi estimated that, out of these totals, she and Ms.

Moe spent 167 and 34 hours, respectively, on frivolous issues
 - 14 -

raised or maintained by Ms. Spaid that vexatiously multiplied the

proceedings. On the basis of Ms. Zusi’s and Ms. Moe’s years of

experience and the location of their office, respondent requested

a rate of $200 per hour for Ms. Zusi and Ms. Moe. Applying this

multiplier, respondent requested a total of $40,200 in attorney’s

fees.

Ms. Spaid filed an “Opposition to Affidavit in Support of

Attorney’s Fees for Sanctions”. Ms. Spaid’s submission objects

to the imposition of section 6673(a)(2) costs against her but

does not object to the imposition of a penalty against petitioner

under section 6673(a)(1). Ms. Spaid contends the “Agency”,

“Delpit”, and “Scar” issues were appropriate lines of inquiry.

With respect to the abusive trust issue, Ms. Spaid contends the

abusive trusts are not a sanctionable area. Ms. Spaid also takes

issue with respondent’s itemization of time spent on each

particular frivolous issue. Although Ms. Spaid did not file a

motion for reconsideration, the objection concludes with a

request for the Court to reconsider our position with respect to

section 6673(a)(2).

Petitioner filed an “Affidavit in Appellant’s Response to

Sanctioned Pursual” (sic). Petitioner’s submission repeats many

of the arguments we found to be frivolous in our opinion in

Edwards v. Commissioner, supra, and also repeats Ms. Spaid’s

prior request that the Court impose sanctions on respondent.
 - 15 -

Discussion

Section 6673(a)(1) Liability of Petitioner

Section 6673(a)(1) allows the Tax Court to impose a penalty

of up to $25,000, payable to the United States, when (A) a

taxpayer institutes or maintains a proceeding in the Tax Court

primarily for delay, (B) the taxpayer’s position in the

proceeding is frivolous or groundless, or (C) the taxpayer

unreasonably failed to pursue available administrative remedies.

In the case at hand, we hold that petitioner is subject to a

penalty under section 6673(a)(1) because he has taken frivolous

and groundless positions and unreasonably failed to pursue

available administrative remedies. Many of the positions

petitioner maintained throughout the Court proceedings were

frivolous or groundless. Petitioner’s “Delpit”, “Scar”, and

“Agency” arguments were entirely without merit. Petitioner’s

insistence, during most of the case, on the validity of the

trusts in the face of overwhelming contrary legal authority was

unjustified. At the administrative level, petitioner’s failure

to pursue available administrative remedies was unreasonable:

Petitioner refused to provide trust information to respondent’s

examiner, refused to produce records to support his return,

demanded written answers to irrelevant questions before he would

consider cooperating with respondent, made frivolous arguments in

response to a formal summons and failed to produce the records
 - 16 -

requested in the summons, and then cried foul when respondent did

not issue a 30-day letter, claiming he was not afforded an

opportunity for administrative review by respondent’s Appeals

Office.

In response to respondent’s affidavit, petitioner filed an

“Affidavit in Appellant’s Response to Sanctioned Pursual”. As if

to put himself in the worst possible light, petitioner chose to

respond to respondent’s affidavit of attorney’s fees by

advancing, to the extent the submission is coherent, the same

frivolous arguments we described as tax protester arguments

justifying imposition of sanctions under section 6673(a)(1). We

will not address these frivolous arguments again.

In our opinion in Edwards v. Commissioner, T.C. Memo. 2002-

169, we suggested that petitioner’s belated attempts to cooperate

with respondent at trial and posttrial by entering into a partial

stipulation of settled issues finally conceding the abusive trust

issue were mitigating factors that would be taken into account in

imposing a penalty. However, the penalty must be substantial for

it to have a deterrent effect. Takaba v. Commissioner, 119 T.C.

285, 295 (2002) (citing Coleman v. Commissioner, 791 F.2d 68, 71

(7th Cir. 1986)). The purpose of section 6673(a)(1) is to compel

taxpayers who litigate in our Court to conform their conduct to

well-settled rules. Id. In setting the penalty, we have

considered respondent’s affidavit of attorney’s fees, discussed
 - 17 -

below, in which respondent sets forth the considerable resources

expended in the case at hand. Additionally, we have taken into

account petitioner’s conduct throughout the administrative

proceedings, in which petitioner was uncooperative and

unreasonable. Petitioner’s “Affidavit in Appellant’s Response to

Sanctioned Pursual”, in which petitioner again succumbed to the

temptation to make frivolous arguments, confirms the necessity of

a substantial penalty. Therefore, on the basis of petitioner’s

misconduct in the administrative and Court proceedings, we shall

impose a penalty of $24,000 under section 6673(a)(1).

Section 6673(a)(2) Liability of Ms. Spaid

Section 6673(a)(2) authorizes the Court to impose costs on

an attorney who has unreasonably and vexatiously multiplied the

proceedings. Section 6673(a)(2) is modeled after section 1927 of

the Judicial Code, 28 U.S.C. sec. 1927 (2000), and the Court has

relied on cases arising under 28 U.S.C. section 1927 to ascertain

the level of misconduct justifying sanctions under section

6673(a)(2). See Takaba v. Commissioner, supra; Harper v.

Commissioner, 99 T.C. 533, 545 (1992).

In Takaba v. Commissioner, supra, we recently observed that

the venue for appeal of sanctions under section 6673(a)(2) may be

the Court of Appeals for the District of Columbia Circuit. See

id. at 297 (citing section 7482(b)(1)). We found that the Court

of Appeals for the District of Columbia Circuit had adopted a
 - 18 -

standard of recklessness for imposing sanctions under 28 U.S.C.

section 1927. Id. (citing Reliance Ins. Co. v. Sweeney Corp.,

792 F.2d 1137, 1138 (D.C. Cir. 1986)). We observed that if the

venue for appeal was not the Court of Appeals for the District of

Columbia Circuit, it would likely be the Court of Appeals for the

Ninth Circuit. Id. The Court of Appeals for the Ninth Circuit

had applied a bad faith standard in cases arising under 28 U.S.C.

section 1927. Id. Since the taxpayer’s counsel’s conduct

amounted to bad faith as defined by the Court of Appeals for the

Ninth Circuit, a higher standard than recklessness, and we were

uncertain of appropriate venue, we applied a bad faith standard

for purposes of that case. See id.

In our opinion in Edwards v. Commissioner, supra, we

observed that in the view of the Court of Appeals for the Ninth

Circuit, bad faith is present when an attorney knowingly or

recklessly raises a frivolous argument. Id. (citing In re Keegan

Mgmt. Co., Sec. Litig., 78 F.3d 431, 436 (9th Cir. 1996)). We

found that Ms. Spaid knowingly and recklessly made frivolous

arguments in pretrial memoranda, at trial, and in posttrial

briefs. In making these arguments, Ms. Spaid cited no relevant

supporting authority, and she either failed to perform the basic

research to discover or failed to disclose the substantial bodies

of authority specifically rejecting her arguments as frivolous.

Accordingly, we found the standard for bad faith used by the
 - 19 -

Court of Appeals for the Ninth Circuit had been satisfied. We

observe that Ms. Spaid’s conduct also satisfies the recklessness

standard for imposing sanctions under 28 U.S.C. section 1927 in

the Court of Appeals for the District of Columbia. See Takaba v.

Commissioner, supra at 297.

“Attorney’s fees awarded under section 6673(a)(2) are to be

computed by multiplying the number of excess hours reasonably

expended on the litigation by a reasonable hourly rate. The

product is known as the ‘lodestar’ amount.” Harper v.

Commissioner, supra at 549. Pursuant to the Court’s order,

respondent’s attorney of record, Ms. Zusi, submitted an affidavit

setting forth the costs incurred by respondent as a result of the

sanctionable behavior of Ms. Spaid. The affidavit contains a

detailed itemization of the time Ms. Zusi and Ms. Moe spent on

each instance of misconduct. Attached to the affidavit is a copy

of respondent’s records of time spent by Ms. Zusi and Ms. Moe.

Respondent requests reimbursement for 167 hours of Ms.

Zusi’s time at $200 an hour. Ms. Zusi is the abusive trust

coordinating attorney for the San Jose, California, area

counsel’s Small Business/Self-Employed Division of the Office of

Chief Counsel. She has been practicing law for 17 years, 14 of

which have been with respondent. Ms. Zusi detailed the time she

spent on the case, beginning with Ms. Spaid’s entry of appearance

on December 1, 2000, which included legal research, trial
 - 20 -

preparation, appearing at the calendar call and trial as counsel,

and preparing both respondent’s opening and reply briefs.

Respondent also asks for reimbursement of 34 hours of Ms.

Moe’s time at $200 an hour. Ms. Moe is an associate area counsel

in respondent’s San Jose, California, Office of Chief Counsel and

is Ms. Zusi’s supervisor. Ms. Moe has been with the Office of

Chief Counsel since 1984. The total attorney’s fees requested by

respondent for Ms. Zusi and Ms. Moe amount to $40,200.

On October 24, 2002, Ms. Spaid filed an “Opposition to

Affidavit in Support of Attorney’s Fees for Sanctions”. Ms.

Spaid’s submission objects to the imposition of section

6673(a)(2) costs against her but does not object to imposition of

the section 6673(a)(1) penalty against petitioner. Ms. Spaid

contends the “Agency”, “Delpit”, and “Scar” issues were

appropriate lines of inquiry. With respect to the “Delpit”

issue, Ms. Spaid’s objection declares she “felt it was time for

the court to look at the purpose of the administrative procedures

* * * thus changing the law in favor of the taxpayer.” The

objection states that the “Agency” issue was raised only in

“paperwork” and was never responded to by respondent. The

objection says that the “Scar” issue was raised because the

notice of deficiency had not allowed any deductions for

petitioner and that seemed “unfair on the face of it”. With

respect to the abusive trust issue, Ms. Spaid claims the abusive
 - 21 -

trust issue is not a sanctionable area. Ms. Spaid also takes

issue with respondent’s itemization of time spent on each

particular frivolous issue. She concludes with a request that we

reconsider our declared intention to impose sanctions under

section 6673(a)(2).

We will not reconsider our position under section

6673(a)(2). The “Delpit”, “Scar”, and “Agency” arguments have

been rejected by this and other courts as frivolous. See Edwards

v. Commissioner, T.C. Memo. 2002-169. Ms. Spaid, contrary to her

assertions, did not advance any good-faith arguments for changes

in existing law. Instead, she cobbled together a few out-of-

context quotes from cases that do not stand for the propositions

for which she cites them, and she never acknowledged the

existence of the substantial bodies of law contrary to her

frivolous positions.

Ms. Spaid’s assertion that the abusive trust issue is not a

“sanctionable area” again illustrates her penchant for practicing

law without reading cases. In our opinion in Edwards, we stated

clearly that the abusive trust issue was a frivolous issue and

observed that respondent had provided petitioner with copious

citations of our prior cases holding trusts like his to be

invalid abusive trusts. Notwithstanding the parties settled the

abusive trust issue in respondent’s favor, that happened only

shortly before posttrial briefs were originally due; Ms. Spaid is
 - 22 -

responsible for respondent’s costs reasonably incurred as a

result of having to prepare to defend against all her frivolous

arguments. However, we will not include any of the time spent

by respondent in considering Ms. Spaid’s frivolous arguments in

preparing respondent’s posttrial briefs, which properly made no

more than a passing reference to the lack of content of those

arguments. The time spent appears excessive and did not result

in any legal work product that was helpful to the Court.

In our opinion in Edwards v. Commissioner, supra, we decided

we would award respondent costs under section 6673(a)(2) for Ms.

Spaid’s knowing and reckless advocacy of frivolous issues. In

addition to her sanctionable conduct, Ms. Spaid exhibited a large

measure of disorganization and negligence in performing routine

litigation matters. We will not award respondent’s costs for the

time spent by Ms. Zusi and Ms. Moe that was directly attributable

to responding to Ms. Spaid’s disorganization and negligence. We

will reduce the fees requested by respondent to an amount that we

estimate is more commensurate with the time spent by Ms. Zusi and

Ms. Moe in responding to the frivolous arguments without regard

to the disorganized and negligent fashion in which Ms. Spaid

prepared for trial, including the time spent on discovery and

preparation of the second stipulation of facts, which was

primarily designed to provide support for Ms. Spaid’s frivolous

arguments. After considering respondent’s affidavit and Ms.
 - 23 -

Spaid’s response, we will order Ms. Spaid to reimburse respondent

for 54 hours of Ms. Zusi’s time and 11.25 of Ms. Moe’s time. See

appendix.

We find that the $200 hourly rate requested by respondent is

reasonable. See Nis Family Trust v. Commissioner, 115 T.C. 523,

552 (2000) (holding that $200 an hour was a reasonable rate for

both Ms. Zusi and Ms. Moe). Accordingly, the lodestar amount is

$10,800 for Ms. Zusi’s time and $2,250 for Ms. Moe’s time.

Respondent has not itemized costs for travel expenses,

photocopying, or supplies used in preparing the case, nor for the

time spent in preparing respondent’s affidavit. Respondent

limits his request for costs to the lodestar amount. We shall

require Ms. Spaid to pay $13,050 in respondent’s excess costs

reflecting the total lodestar amount.

Conclusion

In the case at hand, petitioner took frivolous and

groundless positions and unreasonably failed to pursue available

administrative remedies. We believe $24,000 is a substantial but

appropriate penalty for petitioner to pay the United States under

section 6673(a)(1). Therefore, the decision to be entered

against petitioner, in addition to determining the deficiencies

and section 6662(a) accuracy-related penalties, will require

petitioner to pay a penalty of $24,000 to the United States

pursuant to section 6673(a)(1).
 - 24 -

Ms. Spaid persisted in making frivolous arguments after

being repeatedly warned by respondent and the Court that those

arguments were frivolous. We find that $13,050 is a reasonable

amount for respondent’s excess attorney’s fees in preparing for

and responding to those arguments. Therefore, we shall order Ms.

Spaid personally to pay respondent $13,050 pursuant to section

6673(a)(2). Issuance of the Court’s order in this regard will be

postponed pending entry of the Court’s decision under Rule 155.

To reflect the foregoing,

An appropriate order will

be issued, and an order and

decision will be entered under

Rule 155.
 - 25 -

APPENDIX

On January 5, 2001, Ms. Zusi spent 2 hours reviewing an

informal discovery request from Ms. Spaid. Of the 33 items

requested, 18 were already in Ms. Spaid’s possession, 11 were

related to frivolous arguments, 3 were related to the trusts, and

1 was incomprehensible. We order Ms. Spaid to reimburse

respondent for 1 hour of Ms. Zusi’s time, the amount we estimate

was the result of Ms. Spaid’s knowing and reckless advocacy of

frivolous issues.

On January 10, 2001, Ms. Zusi spent 3.5 hours preparing for

a conference with Ms. Spaid and petitioner. Ms. Zusi had

received documents indicating Ms. Spaid would be asserting

frivolous issues relating to the abusive trusts and prepared

information packets for Ms. Spaid and petitioner. Ms. Zusi also

had to respond to Ms. Spaid’s motion for continuance. Ms. Spaid

admitted she filed the motion because she had missed the

discovery deadline. Since the motion for continuance was the

result of Ms. Spaid’s negligence, we reduce the number of

reimbursable hours by 1 hour. We order Ms. Spaid to reimburse

respondent for 2.5 hours of Ms. Zusi’s time.

On January 11, Ms. Zusi and Ms. Moe met petitioner, Ms.

Spaid, and some of petitioner’s “witnesses”. During the meeting,

the parties held a conference call with the Court in which Ms.

Spaid raised the “Delpit” and “Scar” issues, and the Court warned
 - 26 -

Ms. Spaid that these issues were frivolous. Ms. Zusi spent 3.5

hours dealing with frivolous issues, and Ms. Moe spent .75 hours

dealing with frivolous issues. We order Ms. Spaid to reimburse

respondent for 3.5 hours of Ms. Zusi’s time and .75 hour of Ms.

Moe’s time.

On January 17 and 19, 2001, Ms. Zusi spent 8 hours preparing

and mailing her response to Ms. Spaid’s informal discovery

request. Since, as we have stated, approximately one-half the

items in Ms. Spaid’s informal discovery request were requested

because of Ms. Spaid’s negligence, we order Ms. Spaid to

reimburse respondent for 4 hours of Ms. Zusi’s time.

On January 24, 2001, Ms. Zusi spent 3 hours on the “Delpit”,

“Scar”, and “Agency” issues. Ms. Zusi also shepardized a case

dealing with abusive trusts that Ms. Spaid claimed had been

overruled. We give Ms. Spaid the benefit of the doubt and

characterize her failure to verify the accuracy of her assertion

as negligence. We order Ms. Spaid to reimburse respondent for

2.5 hours of Ms. Zusi’s time.

On February 9, 2001, Ms. Zusi and Ms. Moe spent 3 and 0.5

hours, respectively, responding to and reviewing Ms. Spaid’s

supplement to her motion to continue. The motion to continue was

filed because Ms. Spaid missed the discovery deadline and is thus
 - 27 -

the product of Ms. Spaid’s negligence. We do not require Ms.

Spaid to reimburse respondent for the time spent on the

supplement to the motion to continue.

On February 12, 2001, Ms. Spaid faxed respondent copies of

proposed exhibits. Ms. Zusi spent approximately 3 hours

reviewing documents relating to frivolous issues. Ms. Moe spent

1 hour discussing the documents with Ms. Zusi. We order Ms.

Spaid to reimburse respondent for 3 hours of Ms. Zusi’s time and

none of Ms. Moe’s time because we believe any time Ms. Moe spent

on the frivolous issues was negligible.

On February 13-15, 2001, Ms. Zusi spent 6 hours preparing

respondent’s trial memorandum. Two of the six hours were related

to frivolous issues. Ms. Moe spent 2 hours reviewing the trial

memorandum. We order Ms. Spaid to reimburse respondent for 2

hours of Ms. Zusi’s time and none of Ms. Moe’s time because we

believe any time Ms. Moe spent on the frivolous issues was

negligible.

On February 28, 2001, Ms. Zusi and Ms. Moe prepared for and

participated in a conference call with Ms. Spaid and the Court in

which Ms. Spaid raised frivolous issues. Ms. Zusi spent

approximately 1.5 hours and Ms. Moe spent approximately 0.5 hours

dealing with the frivolous issues. We order Ms. Spaid to

reimburse respondent for 1.5 hours of Ms. Zusi’s time and 0.5

hour of Ms. Moe’s time.
 - 28 -

On March 14, 2001, Ms. Spaid faxed respondent 140 pages of

additional proposed exhibits to be incorporated into the second

stipulation of facts. All the documents related to frivolous

issues. Ms. Zusi spent 10 hours reviewing the documents and

preparing her objections. We order Ms. Spaid to reimburse

respondent for 10 hours of Ms. Zusi’s time.

On March 15, 2001, Ms. Zusi and Ms. Moe participated in a

conference call with the Court and Ms. Spaid regarding the second

stipulation of facts. Ms. Spaid faxed the proposed second

stipulation of facts to Ms. Zusi. Upon Ms. Zusi’s review, she

noted that none of her objections were shown on the proposed

stipulation. Ms. Zusi spent 10 hours reviewing and revising the

proposed second stipulation of facts. Ms. Moe spent .5 hour

reviewing Ms. Zusi’s revisions. While the entire second

stipulation of facts is frivolous, we believe that the lack of

objections and other organizational defects that Ms. Zusi

corrected were due to Ms. Spaid’s negligence. We therefore

order Ms. Spaid to reimburse respondent for 5 hours of Ms. Zusi’s

time. We do not order Ms. Spaid to reimburse any of Ms. Moe’s

time because we believe any time she spent on the frivolous

issues was negligible.

March 16, 2001, was the first day of trial; both Ms. Zusi

and Ms. Moe represented respondent. Approximately 5 of the 10

hours of the first day of trial were spent dealing with frivolous
 - 29 -

issues. We order Ms. Spaid to reimburse respondent for 5 hours

of Ms. Zusi’s time and 5 hours of Ms. Moe’s time.

On March 26, 2001, Ms. Spaid faxed Ms. Zusi copies of

various documents purporting to substantiate the validity of the

trusts. Ms. Zusi spent 2 hours on March 30 and April 6, 2001,

reviewing documents relating to frivolous issues and preparing to

rebut them. We order Ms. Spaid to reimburse respondent for 2

hours of Ms. Zusi’s time.

On June 20, 2001, Ms. Zusi and Ms. Moe participated in a

conference call with Ms. Spaid and the Court. The Court

expressed its displeasure with the format of the second

stipulation of facts prepared by Ms. Spaid. Pursuant to the

Court’s request, respondent’s counsel recompiled the second

stipulation of facts. Ms. Zusi and Ms. Moe spent 5 and 4 hours,

respectively, recompiling the second stipulation of facts.

We do not believe it is unreasonable for respondent to

request to be reimbursed for attorney’s fees for recompiling the

second stipulation of facts, which dealt entirely with frivolous

issues. However, we believe that respondent incurred the

attorney’s fees relating to the recompilation of the second

stipulation of facts as a result of Ms. Spaid’s negligent lack of

organization and do not order Ms. Spaid to pay respondent’s

attorney’s fees.
 - 30 -

On June 21, 2001, Ms. Zusi and Ms. Moe participated in a

conference call with Ms. Spaid and the Court. The purpose of the

conference call was to admonish Ms. Spaid that evidence of

deductions needed to be included in the record and explain to Ms.

Spaid that a gratuitous transfer of assets to a trust does not

result in a stepped-up basis for the assets. Respondent requests

reimbursement for 4.5 hours of Ms. Zusi’s time and 1 hour of Ms.

Moe’s time. We do not order Ms. Spaid to reimburse respondent

for any of the time Ms. Zusi and Ms. Moe spent preparing for and

participating in the conference call because the call dealt

almost entirely with issues that arose because of Ms. Spaid’s

negligence.

From July 2 to 6, 2001, Ms. Zusi spent 25.5 hours revising

the second stipulation of facts and preparing the accompanying

exhibits. Ms. Zusi’s affidavit states: “This time would not

have been necessary if Ms. Spaid had complied with the Court’s

directives and with the Tax Court Rules”. We believe the time

Ms. Zusi spent revising the second stipulation of facts was

caused by Ms. Spaid’s negligence, not her knowing and reckless

conduct. Accordingly, we do not order Ms. Spaid to reimburse

respondent for any of the time Ms. Zusi spent revising the second

stipulation of facts.

On July 17, 2001, Ms. Zusi and Ms. Moe spent 2 hours each

preparing for and participating in a conference call with Ms.
 - 31 -

Spaid and the Court. The conference call dealt solely with

frivolous issues raised by Ms. Spaid. We order Ms. Spaid to

reimburse respondent for 2 hours of Ms. Zusi’s time. We do not

order Ms. Spaid to reimburse respondent for Ms. Moe’s time.

On August 1, 2001, Ms. Zusi and Ms. Moe participated in a

conference call with the Court and Ms. Spaid. The conference

call concerned the second stipulation of facts and the

accompanying exhibits. Respondent requests reimbursement for 4

hours of Ms. Zusi’s time and 2 hours of Ms. Moe’s time. We do

not order Ms. Spaid to reimburse respondent for any of the time

spent by Ms. Zusi and Ms. Moe preparing for and participating in

the conference call because it was required by Ms. Spaid’s

negligence.

On August 16, 2001, Ms. Spaid faxed Ms. Zusi a warning that

Ms. Spaid would move for sanctions against the IRS under section

6673(a)(1), which does not provide for sanctions against the IRS.

Ms. Zusi spent 5 hours researching and preparing a defense to the

threatened sanctions. We order Ms. Spaid to reimburse respondent

for 5 hours of Ms. Zusi’s time.

On August 21, 2001, the trial was concluded. Approximately

5 hours of the trial were devoted to frivolous issues, including

the sham trusts and the “Delpit” and “Scar” issues. Ms. Zusi and

Ms. Moe both appeared on behalf of respondent. We order Ms.
 - 32 -

Spaid to reimburse respondent for 5 hours of Ms. Zusi’s time and

5 hours of Ms. Moe’s time.

On August 23 through November 9, 2001, November 13-28, 2001,

and January 18-29, 2002, Ms. Zusi prepared respondent’s original

posttrial brief and reply brief, which were reviewed by Ms. Moe.

Ms. Zusi alleges she spent 62 hours on frivolous issues, and that

Ms. Moe spent 5.75 hours reviewing and conferring with Ms. Zusi

on the frivolous issues. We do not order Ms. Spaid to reimburse

respondent for any of the time spent by Ms. Zusi and Ms. Moe in

preparing respondent’s posttrial and reply briefs. By this time,

the “Delpit”, “Scar”, and “Agency” arguments had clearly been

established as frivolous, petitioner had conceded the sham trust

issue, respondent’s briefs make only a passing reference to the

frivolous arguments, and, in any event, the time alleged to have

been spent on the frivolous arguments appears to be excessive.