IRS SANCTIONS IMPOSED AND UPHELD AGAINST WINNERS

IRS SANCTIONS IMPOSED AND UPHELD AGAINST WINNERS

One would think that when the Taxpayers win a case or prevail in a settlement of their defense claims against the Internal Revenue Service any sanctions handed out by the court would be against the IRS. Not necessarily so as Mr. and Mrs. Robert Gillespie, a couple in their early eighties, and their counsel Robert Alan Jones discovered recently.

Mr. and Mrs. Gillespie who have operated small businesses for years in Wabash, IN, but are now retired, ran afoul of the IRS in the late nineties when they invested in an asset protection and business trust arrangement. The Gillespies failed to appeal the IRS rejection of the program to the United States Tax Court and all of their legitimate business and personal deductions as well as the business trust benefits were disallowed. This resulted in a tax bill multiplied many times over until it reached some $498,000.

When the IRS attempted to collect this bogus amount which the Gillespies were and are totally unable to pay, they retained Mr. Jones a former federal prosecutor, and nationally known tax defense counsel to represent them. Mr. Jones secured what is known as a "Collection Due Process" hearing for them pursuant to Internal Revenue Code§ 6330. Unfortunately, the IRS settlement officer did not give them a hearing, instead labeling their representative’s written letter request for information necessary to prepare for the hearing as the hearing itself. She then issued a "notice of determination" upholding the IRS’ bogus bill.

Of course the Gillespies through their counsel Mr. Jones, following the law petitioned the Tax Court for appellate review of the settlement officer’s negative determination. At this point the local office of the IRS Office of Chief Counsel, and IRS Appeals reviewed the entire proceedings in depth and agreed with Mr. Jones that the actual liability was vastly overstated. The IRS agreed to settle the $498,000 bill for less than $44,000 including penalties: the actual amount owed.

Unfortunately for the Gillespies and Mr. Robert Alan Jones the case did not end there. The case was called for trial, or settlement. On its first scheduled calendar call, (Gillespie v. Commissioner of Internal Revenue, Case no. 3405-05L, et al.) the Tax Court mindful of the settlement that had already been reached, ordered the Gillespies and Mr. Jones to show cause why they should not be sanctioned. The reason: for filing a frivolous petition to delay the collection of taxes previously determined by the IRS to be valid.

After a short hearing and later briefing by parties on both sides, the Tax Court imposed sanctions on Mr. Gillespie, and "excess costs" sanctions on Mr. Jones attributable to the delay in the proceedings caused by the filing of the "frivolous petition" in Tax Court. (See T.C. Memo. 2007-202.) Of course the only way to reduce the $498,000 bill by 90% was to file a petition in Tax Court and settle the matter within the system. The sanctions are for many thousands of dollars and may teach taxpayers and their attorneys that the price of trying and winning is more prohibitive than accepting the original injustice.

The Tax Court decision was appealed to the United States Circuit Court of Appeals for the Seventh Circuit in Chicago, Illinois. To no ones surprise the Circuit Court in an unpublished opinion (292 Fed.Appx. 517, 2008 WL 4218808) upheld the Tax Court’s ruling while ignoring the fact that the Gillespies had never been given a hearing of any kind although it is a specific requirement of the statute.

Mr. Jones is currently contemplating filing a petition for certiorari in the United States Supreme Court. However, it appears that the law as handed down by the Court, is not on the side of the taxpayer if he wins below, but is on the side of the government, win or lose. For all practitioners and their counsel this is a chilling and sad state of affairs.