May v. Comm'r

T.C. Memo. 2016-43

UNITED STATES TAX COURT

HOWARD E. MAY AND ESTATE OF JUDITH A. MAY, DECEASED,
MARCIA M. MAY, PERSONAL REPRESENTATIVE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket No. 14545-12L. Filed March 8, 2016.

Donald W. MacPherson and Bradley S. MacPherson, for petitioners.

Brandon A. Keim, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

LAUBER, Judge: In our prior report in this case, we held that respondent

may proceed with collection of petitioners’ unpaid 2004 Federal income tax

*
This opinion supplements our previously filed Memorandum Opinion in
May v. Commissioner, T.C. Memo. 2014-194.
 -2-

[*2] liability; decided that petitioners shall pay a penalty of $500 to the United

States under section 6673(a)(1); and contemplated sanctioning petitioners’

counsel, Donald W. MacPherson (Mr. MacPherson), for advancing frivolous argu-

ments and unnecessarily prolonging these proceedings.1 By order dated

September 26, 2014, we ordered Mr. MacPherson to show cause why we should

not require him to pay respondent’s excess costs pursuant to section 6673(a)(2) or

sanction him pursuant to Rule 33(b). We also asked respondent to express his

view as to whether the Court should sanction Mr. MacPherson and to provide a

computation of any excess costs that the Internal Revenue Service (IRS) had

incurred. Having considered their responses, we will order Mr. MacPherson to

pay respondent’s excess costs of $7,188.

Background

Neither Howard May nor Judith May, then husband and wife, filed a timely

Federal income tax return for 2004. The IRS prepared a substitute for return

(SFR) for petitioner-husband using third-party information and issued a notice of

deficiency to him in 2010. The IRS did not prepare an SFR for petitioner-wife and

1
All statutory references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar. All references to
“Mr. MacPherson” are to Donald W. MacPherson, and not to Bradley S. Mac-
Pherson, who subsequently entered an appearance in this case.
 -3-

[*3] did not issue a notice of deficiency to her.2 Petitioner-husband did not seek

redetermination of the deficiency in this Court and the IRS assessed the

deficiency.

In early 2011 petitioners jointly submitted a Form 1040, U.S. Individual

Income Tax Return, for 2004. The IRS thereupon combined its computer-based

tax modules for petitioner-husband and petitioner-wife. As a result of that combi-

nation, petitioners’ consolidated Form 4340, Certificate of Assessments, Pay-

ments, and Other Specified Matters, for 2004 indicated (incorrectly) that the IRS

had issued notices of deficiency both to petitioner-husband and to petitioner-wife.

That was because the “notice of deficiency” transaction code, which was origi-

nally posted correctly to petitioner-husband’s tax module, migrated to petitioners’

consolidated tax module after the IRS received their untimely 2004 joint return.

This computer entry was later corrected.

After receiving the late-filed 2004 return, the IRS abated the tax previously

assessed against petitioner-husband in an amount necessary to conform the assess-

ment to the amount petitioners had self-reported. Accordingly, petitioners’ Form

4340 for 2004, as of year end 2012, reflected the following: $16,465 of tax as-

2
Judith May died in 2013 and was replaced as a party by her estate’s
personal representative. For convenience, we will continue to refer to Howard
May’s deceased wife as “petitioner-wife.”
 -4-

[*4] sessed on August 30, 2010; $4,407 of tax abated on May 2, 2011; and

$12,058 of net assessed tax. The net assessed tax reflects the tax that petitioners

self-reported on their late-filed return, which they had not paid in full.

The IRS initiated proceedings to collect petitioners’ unpaid 2004 tax liabili-

ty. On October 10, 2011, the IRS sent petitioners a Final Notice of Intent to Levy

and Notice of Your Right to a Hearing, and petitioners timely requested a

collection due process (CDP) hearing. In their request petitioners stated that they

intended to seek relief through collection alternatives, hardship waivers, penalty

abatement, and a challenge to their underlying tax liability for 2004. Petitioners

also demanded that the IRS “produce 23c, RACS 006 and any other assessment

documents”; a signed assessment document “with legible signatures and [the]

typed name of [the] officer who signed”; and the delegation order authorizing the

assessment officer to sign the assessment.

The CDP hearing was assigned to Settlement Officer Silva (SO Silva). SO

Silva sent a letter to petitioners and Mr. MacPherson scheduling a telephone CDP

hearing for March 6, 2012. The letter explained that, if petitioners wished the IRS

to consider collection alternatives, they should provide before the conference a

completed Form 433-A, Collection Information Statement for Wage Earners and

Self-Employed Individuals, along with supporting financial information.
 -5-

[*5] On February 7, 2012, Mr. MacPherson wrote SO Silva to request an exten-

sion of time to provide the requested documents. SO Silva granted that request,

but Mr. MacPherson submitted no documents by the extended deadline. On

March 6, 2012, the day of the scheduled hearing, SO Silva received a fax from Mr.

MacPherson requesting that the hearing be continued. SO Silva granted that

request and rescheduled the hearing for March 14, 2012. SO Silva called Mr.

MacPherson at the rescheduled hearing time, but he was not available.

Later that day, SO Silva sent petitioners a letter, with a copy to Mr.

MacPherson, noting that Mr. MacPherson had been unavailable for the hearing

and that she had not received any documents relevant to consideration of col-

lection alternatives. Mr. MacPherson called SO Silva the next day to say that he

had been ill and was confused about the rescheduled hearing. SO Silva granted

him an extension of time until March 28, 2012, to submit the required financial

information. Mr. MacPherson submitted no relevant documents by that date.

Instead he submitted, on March 29, 2012, another letter demanding that the IRS

produce delegation orders, certificates of assessment with original signatures, and

so on.

At this point SO Silva reviewed the computer transcripts of petitioners’

2004 account and concluded that the requirements of applicable law and adminis-
 -6-

[*6] trative procedure had been met. She confirmed that the net assessed tax for

2004, which corresponded to the tax liability petitioners had self-reported on their

late-filed 2004 return, had been properly assessed. She determined that petitioners

were not entitled to consideration of a collection alternative because they had

failed to provide the required financial information despite several extensions of

time in which to do so. She accordingly closed the case and, on May 8, 2012, the

IRS sent petitioners a notice of determination sustaining the collection action.

Shortly before the scheduled CDP hearing, Mr. MacPherson had filed with

the IRS a Freedom of Information Act (FOIA) request seeking copies of “the

forms 23C, 4340, RACS006 and any other assessment documents” for petitioners’

2001-2010 tax years. On April 2, 2012, the IRS disclosure office supplied him

with the requested documents, stating that “[t]his is a full grant of your request.”

The cover letter noted that “the Form 23C and Revenue Accounting Control Sys-

tem (RACS) 006 reports are a summary record of assessment that does not identify

specific taxpayers by name.”

On June 7, 2012, petitioners timely petitioned this Court for review. The

only ground of error alleged in the petition, prepared and signed by Mr. MacPher-

son, concerned the supposed impropriety of the assessment for 2004. The petition

acknowledged that petitioners “agreed to” that assessment by self-reporting a lia-
 -7-

[*7] bility in that amount on their late-filed 2004 return. The petition nevertheless

contended that the assessment “was not legally made” because the IRS had not

supplied “a proper assessment document” bearing “the signature of the assessment

officer” together with a copy of the delegation order authorizing the officer to

make the assessment. The petition alleged that petitioners had “requested of

respondent a summary record of assessment Form 23C, RACS 006, and a Form

4340” but that “respondent failed to supply petitioners with a Form 23C,

RACS006 [or] Form 4340.” Mr. MacPherson advanced this contention even

though the IRS had provided those documents to him on April 2, 2012, in

response to his FOIA request.

On August 1, 2012, after filing his answer, counsel for respondent notified

Mr. MacPherson that the assessment-focused arguments he advanced in the

petition had been identified, in Notice 2010-33, 2010-17 I.R.B. 609, as frivolous

tax positions. This letter advised Mr. MacPherson that, if he persisted in pressing

such arguments, respondent would ask the Court to impose a penalty for taking a

“frivolous or groundless” position in a Tax Court proceeding or instituting such

proceeding “primarily for delay.” See sec. 6673(a)(1)(A) and (B).

In early 2013 counsel for respondent discovered that petitioner-wife should

have been afforded an opportunity to dispute her 2004 tax liability at the CDP
 -8-

[*8] hearing because she (unlike petitioner-husband) had not received a notice of

deficiency. Respondent accordingly moved to remand the case to the IRS Appeals

Office for a supplemental CDP hearing to give petitioner-wife “an opportunity to

provide evidence disputing [her] underlying liability” for 2004. Petitioners did not

oppose that request, and we granted it.

Mr. MacPherson represented petitioner-wife at the supplemental hearing.

During that hearing he advanced no arguments and submitted no evidence con-

cerning her actual tax liability for 2004, which was the stated purpose for the

remand. Rather, he advanced the same series of assessment-focused contentions

that he had previously been warned were frivolous. SO Silva again reviewed

petitioners’ account transcripts and confirmed that petitioner-wife’s tax liability

for 2004 had been properly assessed in the amount that she had self-reported on

her delinquent return. SO Silva further determined that petitioners had not sub-

mitted, either at the original or the supplemental CDP hearing, any documentation

that would entitle them to consideration of a collection alternative. On May 29,

2013, the IRS issued a supplemental notice of determination sustaining the pro-

posed collection action.

On July 26, 2013, Mr. MacPherson filed on petitioners’ behalf an amend-

ment to petition. It alleged that SO Silva’s actions in connection with the sup-
 -9-

[*9] plemental hearing “emphasize[d] the need for production by respondent to

petitioners of a Form 23C or RACS 006.” Mr. MacPherson advanced this conten-

tion even though he was already in possession of those assessment documents.

On September 18, 2013, respondent moved for summary judgment and for

imposition of a penalty under section 6673(a). Mr. MacPherson filed a response

(including 17 exhibits) that totaled 159 pages. From this welter of paper we dis-

cerned two theories. First, he contended that SO Silva had abused her discretion

by relying on computerized account transcripts, rather than physical source docu-

ments, to verify that the IRS had properly assessed petitioners’ self-reported tax

liabilities. Second, he contended that these liabilities were not owed, or were per

se uncollectible, because SO Silva failed to furnish petitioners with copies of

signed records of assessment accompanied by a delegation order attesting to the

assessing official’s capacity to assess.3

In May v. Commissioner, T.C. Memo. 2014-194, we rejected both argu-

ments and granted summary judgment for respondent. First, we held that SO Silva

could properly rely on the computerized account transcripts for petitioners’

3
The arguments Mr. MacPherson advanced ranged from accusing the IRS of
defrauding the public to asserting that sec. 301.6203-1, Proced. & Admin. Regs.,
should be invalidated because it mentions district and regional directors, positions
that no longer exist. Many of his arguments, besides being frivolous, were not
raised at the CDP hearing, and we therefore declined to address them.
 - 10 -

[*10] account, as opposed to original source documents, to verify that the 2004

assessments had been properly made, noting established case law to this effect.

See, e.g., Craig v. Commissioner, 119 T.C. 252, 262 (2002) (holding that section

6330(c)(1) does not “mandate that the Appeals officer actually give a taxpayer a

copy of the verification upon which the Appeals officer relied”); Sherwood v.

Commissioner, T.C. Memo. 2005-268, 90 T.C.M. (CCH) 512, 515. Second, we

held that SO Silva’s refusal to supply petitioners with delegation orders and as-

sessment source documents containing original signatures was entirely proper and

provided no basis on which they could challenge their tax liability for 2004, again

noting established case law to this effect. See Koff v. United States, 3 F.3d 1297,

1298 (9th Cir. 1993); Roberts v. Commissioner, 118 T.C. 365, 370 n.7 (2002),

aff’d, 329 F.3d 1224 (11th Cir. 2003); Nestor v. Commissioner, 118 T.C. 162,

166-167 (2002) (“There is no requirement under internal revenue laws or

regulations that the Appeals officer give the taxpayer a copy of the delegation

* * * [order] from the Secretary to the person * * * who signed the verification

required under section 6330(c)(1)).”); Battle v. Commissioner, T.C. Memo. 2009-

171, 98 T.C.M. (CCH) 45, 48.

We further held that petitioners’ assessment-focused arguments were frivo-

lous and had been interposed solely to delay the collection of their 2004 tax liabili-
 - 11 -

[*11] ty. May v. Commissioner, at *17-*19. Because respondent (to his credit)

had acknowledged an error that supported remand of the case to the IRS Appeals

Office, we found at least a scintilla of support for a portion of petitioners’ original

position. We accordingly concluded that a relatively modest penalty was justified

and required petitioners to pay to the United States a section 6673(a)(1) penalty of

$500.

Finally, we concluded that Mr. MacPherson could be deserving of sanction

under section 6673(a)(2) or Rule 33(b) for advancing frivolous arguments and

unnecessarily prolonging the proceedings. We ordered him to show cause why he

should not be sanctioned. We concurrently ordered respondent to express his

views on this point and to furnish the Court with computations of any excess costs

the IRS had incurred on account of Mr. MacPherson’s conduct.

On October 24, 2014, Mr. MacPherson filed on behalf of petitioners a

motion for reconsideration (including 52 exhibits) that totaled 259 pages. This

document presented rambling variations on the assessment-focused arguments that

the Court had rejected in its opinion. Mr. MacPherson concurrently filed a separ-

ate 42-page motion for reconsideration, supposedly on his own behalf. This as-

serted that the regulation governing “method of assessment,” section 301.6203-1,

Proced. & Admin. Regs., was invalid when promulgated in 1954 because the
 - 12 -

[*12] Department of the Treasury had allowed an insufficient number of days for

public notice and comment. Petitioners had not advanced this argument previous-

ly at any stage of this litigation, and it was not addressed in the Court’s opinion.

We denied both motions for reconsideration.

On November 10, 2014, respondent filed a response to our order concerning

sanctions. In respondent’s view, “the tactics used in this case were designed to

delay collection because, with the exception of the underlying liability challenge

that was quickly abandoned on remand, the pleadings and other filings in this case

raised nothing but frivolous, groundless, and statutorily-precluded arguments,

which could have no purpose but to delay collection.” Respondent sought attor-

ney’s fees only for the period after May 29, 2013, the date on which the supple-

mental notice of determination was issued. During that period, respondent’s trial

attorney logged 24.75 hours and a law clerk logged 34.75 hours, chiefly in prepar-

ing respondent’s motion for summary judgment with supporting memorandum and

affidavit. Employing hourly rates of $150 and $100, respectively, respondent re-

quested that we award excess costs of $7,188. Mr. MacPherson does not chal-

lenge the reasonableness of these rates but contends that the 59.5 hours expended

were excessive.
 - 13 -

[*13] On December 3, 2014, Mr. MacPherson filed a response to our order con-

cerning sanctions that totaled (including exhibits) 299 pages. This document was

largely cut and pasted from his 259-page motion for reconsideration. It reiterated

the assessment-focused arguments he had made previously.

Discussion

Section 6673(a)(2)(A) provides that “[w]henever it appears to the Tax Court

that any attorney * * * has multiplied the proceedings in any case unreasonably

and vexatiously,” we may require that the attorney “pay personally the excess

costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”

We may sua sponte impose such costs on the offending attorney. See Waltner v.

Commissioner, T.C. Memo. 2014-133, at *23; Edwards v. Commissioner, T.C.

Memo. 2002-169, aff’d, 119 F. App’x 293 (D.C. Cir. 2005); Leach v. Commis-

sioner, T.C. Memo. 1993-215.

Shortly after this case was docketed in this Court, respondent’s counsel no-

tified Mr. MacPherson that his assessment-focused arguments had been identified

as “frivolous” in Notice 2010-33, supra. This Notice explicitly characterizes as

“frivolous” the submission that

[v]erification under section 6330 that the requirements of any appli-
cable law or administrative procedure have been met may only be
based on one or more particular forms or documents (which must be
 - 14 -

[*14] in a certain format), such as a summary record of assessment, or
that the particular forms or documents or the ones on which
verification was actually determined must be provided to a taxpayer
at a collection due process hearing. [Id., 2010-17 I.R.B. at 611-612.]

These are precisely the arguments that Mr. MacPherson has advanced at every

stage of this proceeding.

The case was later remanded to the IRS Appeals Office to enable petitioner-

wife, if she wished, to challenge her underlying tax liability for 2004. Rather than

advance a good-faith argument (if one existed) concerning that liability, Mr. Mac-

Pherson continued to press the same assessment-focused arguments that he had

recently been told were frivolous. He then persisted in advancing those same

arguments repeatedly in this Court. These arguments were frivolous, not only in a

legal, but also in a factual sense. He argued again and again that “respondent

failed to supply petitioners with a Form 23C, RACS006 [or] Form 4340” even

though the IRS had provided those documents to him, months or years earlier, in

response to his FOIA request.

Mr. MacPherson also represented the taxpayers in Best v. Commissioner,

T.C. Memo. 2014-72. He advanced on behalf of those taxpayers, and we found

frivolous, exactly the same assessment-focused arguments that we have found fri-

volous here. In a Supplemental Memorandum Opinion in Best, we concluded that
 - 15 -

[*15] Mr. MacPherson, by advancing these arguments, had “multiplied the

proceedings * * * unreasonably and vexatiously,” sec. 6673(a)(2), and required

him to pay the excess costs incurred by respondent, Best v. Commissioner, T.C.

Memo. 2016-32, at *20-*21. For the reasons stated at length in that opinion, we

reach the same conclusion here. We find that Mr. MacPherson knowingly or

recklessly advanced arguments that he knew were frivolous and lacking in any

legal basis. Because his actions thus manifested subjective bad faith, they are

deserving of sanction under section 6673(a)(2). See Moore v. Keegan Mgmt. Co.

(In re Keegan Mgmt. Co., Sec. Litig.), 78 F.3d 431, 436 (9th Cir. 1996); Reliance

Ins. Co. v. Sweeney Corp. 792 F.2d 1137, 1138 (D.C. Cir. 1986); Takaba v. Com-

missioner, 119 T.C. 285, 296-297 (2002).4

As in Best, we will limit our sanctions to the lodestar amount submitted by

respondent, which covers attorney’s fees incurred during the period after the

supplemental notice of determination was issued. Mr. MacPherson does not chal-

4
For the reasons stated in our Supplemental Memorandum Opinion in Best,
T.C. Memo. 2016-32, at *16, we find that Mr. MacPherson’s conduct also violated
Rule 33(b) and the Model Rules of Professional Conduct. Rule 33(b) clearly
imposes “an affirmative duty on each attorney to conduct a reasonable inquiry into
the viability of a pleading before it is signed.” Versteeg v. Commissioner, 91 T.C.
339, 343 (1988). Mr. MacPherson advanced arguments that were legally and
factually baseless, and we find that his arguments to modify or reverse existing
law were not made in good faith. He has intentionally abused the judicial process,
and we may sanction him for that.
 - 16 -

[*16] lenge the reasonableness of the hourly rates respondent employed or the

number of hours his personnel logged, contending only that the number of hours

was excessive relative to the tasks performed. We do not find 59.5 hours to be an

excessive amount of time for preparing a 37-page memorandum in support of

summary judgment, a supporting affidavit, and miscellaneous court papers during

this period. We will accordingly make absolute the order to show cause and award

the United States $7,188 as a penalty imposed against Mr. MacPherson under

section 6673(a)(2).

To reflect the foregoing,

The order to show cause will be

made absolute.