Part I. Rulings — Internal Revenue Bulletin 2006-15

Section 42.—Low-Income Housing Credit

Low-income housing credit; satisfac- tory bond; “bond factor” amounts for the period January through June 2006. This ruling provides the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through June 2006.

Rev. Rul. 2006–14

In Rev. Rul. 90–60, 1990–2 C.B. 3, the Internal Revenue Service provided

guidance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alternative to providing a surety bond for taxpayers to avoid or defer recapture of

the low-income housing tax credits under § 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low-income buildings or interests therein during the period January through June 2006.

Table 1 Rev. Rul. 2006–14 Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
	Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year
Month of Disposition	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
Jan ’06 Feb ’06 Mar ’06 Apr ’06 May ’06 Jun ’06	16.49 16.49 16.49 16.49 16.49 16.49	30.74 30.74 30.74 30.74 30.74 30.74	43.01 43.01 43.01 43.01 43.01 43.01	53.65 53.65 53.65 53.65 53.65 53.65	62.94 62.94 62.94 62.94 62.94 62.94	64.28 64.14 64.00 63.87 63.73 63.61	65.95 65.81 65.67 65.53 65.40 65.27	67.76 67.62 67.47 67.33 67.20 67.06	69.76 69.61 69.46 69.32 69.18 69.05	72.19 72.03 71.89 71.73 71.58 71.44	74.98 74.80 74.63 74.46 74.30 74.15

Table 1 (cont’d) Rev. Rul. 2006–14 Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
	Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year
Month of Disposition	2003	2004	2005	2006
Jan ’06 Feb ’06 Mar ’06 Apr ’06 May ’06 Jun ’06	78.01 77.81 77.61 77.42 77.25 77.08	81.02 80.77 80.53 80.32 80.12 79.93	83.60 83.28 83.00 82.76 82.54 82.35	83.98 83.98 83.98 83.98 83.98 83.98

2006–15 I.R.B. 740 April 10, 2006

The IRS and Treasury Department believe that it may not always be practical or efficient for tax administration to have a foreign entity act as the agent for the group. Accordingly, where a foreign entity is the common parent because it is treated as a domestic corporation by reason of section 7874 or a section 953(d) election (a Foreign Common Parent), the temporary regulations provide the IRS with the authority to designate a domestic member of the group to be the sole agent (a Domestic Substitute Agent) even though the group’s common parent continues in existence.

These temporary regulations provide flexibility in the method of communication the IRS may use to designate a Domestic Substitute Agent, allowing notification by mail or by faxed transmission. In addition, these regulations provide specificity for the determination of the effective date of the designation of a Domestic Substitute Agent: the designation is effective on the earliest of the 14th day following the date of a mailing, the 4th day following a faxed transmission, or the date the Commissioner receives written confirmation of the designation by a duly authorized officer of the designated agent, within the meaning of section 6062.

Special Analyses

It has been determined that these temporary regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has been determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists for dispensing with the notice and public comment procedures and that, pursuant to 5 U.S.C. 553(d)(3), good cause exists to dispense with a delayed effective date. The regulations are necessary to allow the IRS to avoid potentially serious tax administration problems that may arise when a foreign entity is the agent for a consolidated group, and to provide immediate guidance to taxpayers regarding the IRS’ authority to designate a substitute agent for the group in such a case. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the Notice of Proposed Rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief

For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B. 255; Rev. Rul. 2001–53, 2001–2 C.B. 488; Rev. Rul. 2002–72, 2002–2 C.B. 759; Rev. Rul. 2003–117, 2003–2 C.B. 1051; Rev. Rul. 2004–100, 2004–2 C.B. 718; and Rev. Rul. 2005–67, 2005–43 I.R.B. 771.

DRAFTING INFORMATION

The principal author of this revenue ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. McDonnell at (202) 622–3040 (not a toll-free call).

Section 1502.—Regulations

26 CFR 1.1502–77: Agent for the group.

T.D. 9255

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Agent for a Consolidated Group With Foreign Common Parent

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains temporary regulations under section 1502 that provide the IRS with the authority to designate a domestic member of the consolidated group as a substitute agent to act as the sole agent for the group where a foreign entity is the common parent. The regulations affect corporations that join in the filing of a consolidated Federal income tax return where the common parent of the consolidated group is a foreign entity that is treated as a domestic corporation pursuant to section 7874(b) of the Internal Revenue Code (Code) or as the result of a section 953(d) election. The text of these temporary regulations also

serves as the text of the proposed regulations (REG–164247–05) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective March 14, 2006.

Applicability Dates: These regulations apply to taxable years for which the due date (without extensions) for filing returns is after March 14, 2006. The applicability of these regulations will expire on or before March 10, 2009.

FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 622–7750, (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Section 1504(b)(3) of the Internal Revenue Code of 1986 (Code) excludes foreign corporations from the definition of “includible corporation.” As a result, a foreign entity generally cannot be a member of a consolidated group. In certain cases, section 7874 treats a foreign entity as a domestic corporation and section 953(d) allows a foreign insurance company to make an election to be treated as a domestic corporation. As a result, a foreign entity could be the common parent or a subsidiary of a consolidated group if it is treated as a domestic corporation under either section 7874(b) or section 953(d). Under §1.1502–77(a)(1)(i) of the regulations, the common parent for a consolidated return year is generally the sole agent (agent for the group) that is authorized to act in its own name with respect to all matters relating to the tax liability for that consolidated return year for each member of the group, and any successor of a member (as defined in §1.1502–77(a)(1)(iii)). The common parent’s agency for a consolidated return year generally continues until the common parent ceases to exist, regardless of whether any subsidiaries in that year cease to be members of the group, whether the group files a consolidated return in any later year, or whether the common parent ceases to be the common parent or a member of the group in a later year. Section 1.1502–77(d) provides rules for designating a substitute agent if the common parent’s existence terminates.

April 10, 2006 741 2006–15 I.R.B.

Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Stephen R. Cleary of the Office of Associate Chief Counsel (Corporate). Other personnel from the Treasury Department and the IRS participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.1502–77T also issued under 26 U.S.C. 1502 * * * Par. 2. Section 1.1502–77 is amended by adding and reserving paragraph (i) and adding paragraph (j) to read as follows:

§1.1502–77 Agent for the group.

- - - (i) [Reserved] (j) Designation by Commissioner if common parent is treated as a domestic corporation under section 7874 or section 953(d) [Reserved]. For further guidance, see §1.1502–77T(j).

Par. 3. Section 1.1502–77T is added to read as follows:

§1.1502–77T Agent for the group (temporary).

(a) through (i) [Reserved]. For further guidance, see §1.1502–77(a) through (i).

(j) Designation by Commissioner if common parent is treated as a domestic corporation under section 7874 or section 953(d) —(1) In general . If the common parent is an entity created or organized under the law of a foreign country and is treated as a domestic corporation by reason of section 7874 (or regulations thereunder) or a section 953(d) election (a Foreign Common Parent), the Commissioner may

at any time, with or without a request from any member of the group, designate another member of the group to act as the agent for the group (a Domestic Substitute Agent) for any taxable year for which the due date (without extensions) for filing returns is after March 14, 2006 and the Foreign Common Parent would otherwise be the agent for the group. For each such year, the Domestic Substitute Agent will be the sole agent for the group even though the Foreign Common Parent remains in existence. The Foreign Common Parent ceases to be the agent for the group when the Commissioner’s designation of a Domestic Substitute Agent becomes effective. The Commissioner may designate a Domestic Substitute Agent for the term of a single taxable year, multiple years, or on a continuing basis.

(2) Domestic Substitute Agent . The Domestic Substitute Agent, by designation or by succession, shall be a domestic corporation described in §1.1502–77(d)(1)(i)(A) (determined without regard to section 7874, a section 953(d) election, section 269B, or section 1504(d)). (3) Designation by the Commissioner . The Commissioner will notify the Domestic Substitute Agent in writing by mail or faxed transmission of the designation. The Domestic Substitute Agent’s designation is effective on the earliest of the 14 ^th day following the date of a mailing, the 4 ^th day following a faxed transmission, or the date the Commissioner receives written confirmation of the designation by a duly authorized officer of the Domestic Substitute Agent (within the meaning of section 6062). The Domestic Substitute Agent must give notice of its designation to the Foreign Common Parent and each corporation that was a member of the group during any part of any consolidated return year for which the Domestic Substitute Agent will be the agent. A failure of the Domestic Substitute Agent to notify the Foreign Common Parent or any member of the group does not invalidate the designation. The Commissioner will send a copy of the notification to the Foreign Common Parent, and if applicable, to any Domestic Substitute Agent the designation replaces; a failure to send a copy of the notification does not invalidate the designation.

(4) Term of agency —(i) In general . If the Commissioner designates a Domestic

Substitute Agent for a taxable year, the Domestic Substitute Agent will remain the agent for such year until the group ceases to exist or the Domestic Substitute Agent ceases to exist, ceases to be a member of the group, is replaced by a successor, or is replaced by the Commissioner. This designee remains the agent for such year regardless of whether one or more corporations that were members of the group during any part of such year cease to be members of the group, whether the group files a consolidated return for any subsequent year, or, except as provided by paragraphs (j)(4)(iv)(B) and (j)(4)(v) of this section, whether the group remains in existence with a new common parent in any subsequent year.

(ii) Agency of Domestic Substitute Agent upon termination of the group . If the Domestic Substitute Agent is the agent for the group for a year in which the group terminates, the Domestic Substitute Agent shall be the agent for that taxable year (and any prior taxable year for which it is the agent for the group) so long as the Domestic Substitute Agent continues its corporate existence unless it is replaced by a successor or a new designee by the Commissioner.

(iii) Replacement of §1.1502–77(d)(1) agent . If, pursuant to §1.1502–77(d)(1), the common parent of the group designates a Foreign Common Parent as the agent for the group for any taxable year, the Commissioner may, at any time, designate a Domestic Substitute Agent to replace the Foreign Common Parent, even if the Commissioner approved the terminating common parent’s designation.

(iv) Group continues with a new com- mon parent —(A) Year the new common parent becomes the common parent . If subsequent to a transaction to which section 7874 applies or a section 953(d) election, the group remains in existence with a new common parent and such new common parent is a domestic corporation (determined without regard to section 7874, a section 953(d) election, or section 269B), such new common parent will become the agent for the group with respect to the entire consolidated return year (including the portion of the year preceding the date on which the new common parent became the common parent)) and the former Domestic Substitute Agent will no longer be the agent for the group for any part of that year.

2006–15 I.R.B. 742 April 10, 2006

(B) Years preceding the year the new common parent becomes the common par- ent . If after the Commissioner’s designation of a Domestic Substitute Agent the group remains in existence with a new common parent, and such new common parent is a domestic corporation (determined without regard to section 7874, a section 953(d) election, or section 269B), the Commissioner may designate the new common parent as the agent for the group for any of the group’s prior taxable years (for which the due date (without extensions) for filing returns is after March 14, 2006) in which the new common parent was a member of the group. For this purpose, the new common parent is treated as having been a member of the group for any taxable year it is primarily liable for the group’s income tax liability.

(v) Replacement of Domestic Substitute Agent by the Commissioner . The Commissioner may at any time, with or without a request from any member of the group, designate a replacement for a Domestic Substitute Agent (or a successor to such agent).

(5) Deemed §1.1502–77(d) designa- tion —(i) Section 1.1502–78 adjustments . If the Commissioner designates a Domestic Substitute Agent under this paragraph (j), it will be treated as a designation of a substitute agent under §1.1502–77(d) for the purposes of §1.1502–78.

(ii) Default Substitute Agent . If the Domestic Substitute Agent goes out of existence and has a single successor that is eligible to be a Domestic Substitute Agent, such successor becomes the Domestic Substitute Agent and is treated as a default substitute agent under §1.1502–77(d)(2). See §1.1502–77(d)(4) regarding the consequences of the successor’s failure to notify the Commissioner of its status as a default substitute agent. The default substitute agent shall use procedures in section 9 of Rev. Proc. 2002–43, 2002–2 C.B. 99, or a corresponding provision of a successor revenue procedure for notification. (See §601.601(d)(2)(ii) of this chapter.)

(6) Request that IRS designate a Do- mestic Substitute Agent —(i) Original designation . If the common parent of the group is a Foreign Common Parent, and the IRS has not designated a Domestic Substitute Agent, one or more members of the group may request the IRS to make

a designation for taxable years for which the due date (without extensions) for filing returns is after March 14, 2006. Such request is deemed to be a request under §1.1502–77(d)(3)(i). Members of the group shall use the procedures in section 10 of Rev. Proc. 2002–43, 2002–2 C.B. 99, or a corresponding provision of a successor revenue procedure for this purpose. (See §601.601(d)(2)(ii) of this chapter.)

(ii) Request that IRS replace a pre- viously designated substitute agent . If the IRS designates a Domestic Substitute Agent pursuant to this paragraph (j), one or more members of the group may request that the IRS replace the designated Domestic Substitute Agent with another member (or successor to another member). Such a request is deemed to be a request pursuant to §1.1502–77(d)(3)(ii). Members of the group shall use the procedures in section 11 of Rev. Proc. 2002–43, 2002–2 C.B. 99, or a corresponding provision of a successor revenue procedure for this purpose. (See §601.601(d)(2)(ii) of this chapter.)

(7) Effective Date . This paragraph (j) applies to taxable years for which the due date (without extensions) for filing returns is after March 14, 2006. The applicability of this paragraph (j) expires on or before March 10, 2009.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

Approved March 9, 2006.

Eric Solomon, Acting Deputy Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on March 9, 2006, 4:15 p.m., and published in the issue of the Federal Register for March 14, 2006, 71 F.R. 13001)

Section 3401.—Definitions

26 CFR 31.3401(c)–1: Employee. (Also Section 3401(a)–1.)

Frivolous tax returns; only certain persons subject to federal income tax. This ruling emphasizes to taxpayers, promoters, and return preparers that all individuals are subject to federal income tax. Any argument that Forms W–2 only record and report payments made to federal employees, or that only federal employees or

residents of the District of Columbia or federal territories and enclaves earn wages subject to tax, has no merit and is frivolous.

Rev. Rul. 2006–18

PURPOSE

The Service is aware that some taxpayers are claiming that only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to federal tax. These taxpayers may attempt to avoid their federal tax liability by submitting a Form 4852 ( Substitute for W–2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. ) to the Internal Revenue Service with a zero on the line for the amount of wages received. These taxpayers may also file tax returns showing no income and claiming a refund for withheld income taxes. The Service is also aware that some promoters market a book, package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, promoters, and return preparers that all individuals are subject to federal income tax. This revenue ruling also provides that the terms “employee” and “wages” carry the meanings given to them in the Internal Revenue Code, regulations, and publications of the Internal Revenue Service. Under the Internal Revenue Code, wages include any compensation received due to the performance of services as an employee, and the term employee includes any individual for whom the legal relationship between the individual and the person for whom the individual performs services is the legal relationship of employer and employee. All wages are included in gross income for purposes of determining federal income tax liability, and are also subject to federal employment taxes. Any argument that Forms W–2 only record and report payments made to federal employees, or that only federal employees or residents of the District of Columbia or federal territories and enclaves earn wages subject to tax, has no merit and is frivolous.

April 10, 2006 743 2006–15 I.R.B.

gross income. Whether the compensation for services is in the form of wages, or in some other form, is irrelevant. The amount is still subject to income tax. All employees, not just federal employees and those living in federal territories and enclaves, are subject to income and employment taxes.

HOLDING

Federal income tax laws do not apply solely to federal employees and persons residing in the District of Columbia, or federal territories and enclaves, and any contrary contention is frivolous. The terms “employee” and “wages” as used by the Internal Revenue Code apply to all employees, unless specifically exempted by the Internal Revenue Code. The income tax withholding provisions do not affect whether an amount is gross income.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on the argument that Forms W–2 only record and report payments made to federal workers, or that only federal employees or residents of federal territories and enclaves earn wages, face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of tax the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of Federal income tax laws; (4) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on this frivolous position also may face criminal prosecution

The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s Frivolous Return Program. As part of this program, the Service determines whether taxpayers who have taken frivolous positions have filed all required tax returns, and computes the correct amount of tax and interest due, and determines whether civil or criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to federal income and employment taxes.

FACTS

Taxpayer A either 1) requests, by submitting a Form W–4, Employee’s With- holding Allowance Certificate, that his employer not withhold any amount of federal tax from wages earned, or 2) prepares a Form 4852 (Substitute for W–2) showing no wages received. In addition, taxpayer A either fails to file a return, or files a return with zero income claiming all withholding as a refund. Taxpayer A claims that he is not an “employee” and does not receive “wages” subject to federal income tax, as those terms are as defined in the Internal Revenue Code. Taxpayer A contends that the federal government can only legally demand an “income” tax from federal employees and persons residing in Washington, D.C. or federal territories and enclaves. Therefore, Taxpayer A claims that he does not have to pay “income” taxes — which Taxpayer A asserts also include employment taxes such as Federal

Insurance Contributions Act (FICA) taxes

to the federal government.

LAW AND ANALYSIS

Section 3401(a) provides that “wages” include all remuneration for services performed by an employee for his employer. Section 3121(a) provides a similar definition of wages for FICA tax purposes. The argument that only federal employees and persons residing in Washington, D.C. or federal territories and enclaves are subject to tax is based on a misinterpretation of section 3401(c), which defines “employee” and states that the term “includes an officer, employee or elected official of the United States, a State, or any political subdivision thereof . . . .” Section 31.3401(c)–1 of the Employment Tax Regulations provides that the term “employee” includes every individual performing services if the relationship between that individual and the person for whom he performs such services is the legal relationship of employer and employee. Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Thus, the word “includes” as used in the definition of “employee” under § 3401(c) is a term of enlargement, not of limitation. Courts have recognized that federal employees and officials are among those within the definition of “employee,” which also includes private citizens. See Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) (contention that taxpayer was not an “employee” is meritless, section 3401(c) does not limit withholding to the persons listed therein); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (under section 3401(c), the category of “employee” includes privately employed wage earners; the word “includes” is a term of enlargement not of limitation, and the reference to certain entities or categories is not intended to exclude all others); Pabon v. Commissioner, T.C. Memo. 1994–476 (1994) (taxpayer’s frivolous position that she was not subject to tax because she was not an employee of the federal or state governments warranted sanctions of $2,500).

The employment tax withholding provisions do not affect whether wages are gross income. Section 61 provides that compensation for services is includable in

2006–15 I.R.B. 744 April 10, 2006

under: (1) section 7201 for attempting to evade or defeat tax, the penalty for which is a significant fine and imprisonment for up to 5 years; (2) section 7203 for willful failure to file a return, the penalty for which is a significant fine and imprisonment for up to a year; (3) section 7206 for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years. Persons, including return preparers, who promote this frivolous position and those who assist taxpayers in claiming tax benefits based on frivolous positions may face civil and criminal penalties and also may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

DRAFTING INFORMATION

This revenue ruling was authored by the office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622–7950 (not a toll-free call).

Section 6012.—Persons Required to Make Returns of Income

26 CFR § 1.6012–1(a): Individuals required to make returns of income. (Also: 44 U.S.C. § 3501, et seq.)

Frivolous tax returns; reliance on Pa- perwork Reduction Act. This ruling emphasizes to taxpayers, promoters, and re

turn preparers that taxpayers are required to file a federal income tax return under section 6012 of the Code, and the regulations thereunder, and that the Paperwork Reduction Act of 1980 (PRA) does not relieve taxpayers of the duty to file. Any argument that the PRA relieves the taxpayer of the duty to file an income tax return has no merit and is frivolous.

Rev. Rul. 2006–21

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal income tax liability by contending that they are not required to file an income tax return because of the Paperwork Reduction Act of 1980, Pub. L. No. 96–511, 94 Stat. 2812 (codified at 44 U.S.C. § 3501, et seq .) (“PRA”). The PRA was enacted, among other reasons, to limit federal agencies’ information requests in order to minimize the paperwork burden for the public. The “public protection” provision of the PRA provides that no person shall be subject to any penalty for failing to maintain or provide information to any agency if the information collection request involved does not display a current control number assigned by the Office of Management and Budget (“OMB”). 44 U.S.C. § 3512. Taxpayers who attempt to rely on the PRA contend that they are not required to file a Form 1040, U.S. Individual Income Tax Return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number. The Service is also aware that some promoters, including return preparers, market a package, kit or other materials, advising or recommending that taxpayers take this frivolous position.

This revenue ruling emphasizes to taxpayers, promoters and return preparers that taxpayers are required to file a federal income tax return under section 6012 of the Internal Revenue Code, and the regulations thereunder, and that the PRA does not relieve taxpayers of the duty to file. Any argument that the PRA relieves the taxpayer of the duty to file an income tax return has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions. The Service will

take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil or criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether taxpayers may avoid their obligation to file federal income tax returns based on the PRA.

FACTS

Taxpayer A fails to file a federal income tax return, contending that it is not possible to comply with the filing requirement of Internal Revenue Code section 6012, because the Commissioner has not supplied an information collection request form that complies with the PRA.

LAW AND ANALYSIS

No law allows taxpayers to avoid their obligation under the Internal Revenue Code to file a federal tax return through reliance on the PRA. Courts repeatedly have rejected PRA-based arguments on a number of alternative grounds. Some courts have simply noted that the PRA applies to forms themselves, not to the instructions, and, because the Form 1040 does have a control number, there is no PRA violation. Other courts have held that Congress created the duty to file federal income tax returns in section 6012(a) and “Congress did not enact the PRA’s public protection provision to allow OMB to abrogate any duty imposed by Congress.” United States v. Neff, 954 F.2d 698, 699 (11 ^th Cir. 1992);

April 10, 2006 745 2006–15 I.R.B.

Section 6662.—Imposition of Accuracy-Related Penalty on Underpayments

Frivolous tax returns; “Native Amer- ican Treaty.” This ruling emphasizes to taxpayers, promoters, and return preparers that there is no right to exemption from federal income tax for Native Americans under an unspecified “Native American Treaty.” Any return position based on an unspecified “Native American Treaty” has no merit and is frivolous. As a general rule, Native Americans are subject to federal income tax just like every other American.

Rev. Rul. 2006–20

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by claiming tax exempt status based on a general “Native American Treaty.” The Service is also aware that some promoters, including return preparers, are advising or recommending that Native American taxpayers take the frivolous position that they are exempt from federal income tax based on an unspecified Native American treaty. Some promoters market a package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes based on these and other meritless arguments.

This revenue ruling emphasizes to taxpayers, promoters, and return preparers that there is no right to exemption from federal income tax for Native Americans under an unspecified “Native American Treaty.” Any return position based on an unspecified “Native American Treaty” has no merit and is frivolous. As a general rule, Native Americans are subject to federal income tax just like every other American.

see also Salberg v. United States, 969 F.2d 379, 383 (7 ^th Cir. 1992) (affirming conviction for tax evasion and failing to file a return, rejecting claims under the PRA); United States v. Holden, 963 F.2d 1114, 1116 (8 ^th Cir. 1992) (affirming conviction for failing to file a return and rejecting argument in favor of acquittal premised on the fact that tax instruction booklets fail to comply with the PRA); United States v. Hicks, 947 F.2d 1356, 1359 (9 ^th Cir. 1991) (affirming conviction for failing to file a return, finding requirement to provide information is required by statute, not by the Service); Lonsdale v. United States, 919 F.2d 1440, 1445 (10 ^th Cir. 1990) (finding the PRA inapplicable to “information collection request” forms issued during an investigation of an individual to determine tax liability); United States v. Wunder, 919 F.2d 34, 37 (6 ^th Cir. 1990) (rejecting claim of a PRA violation and affirming conviction for failing to file a return).

HOLDING

Taxpayers are required to file a federal income tax return under section 6012 of the Internal Revenue Code. The PRA does not relieve taxpayers of the duty to file, and any argument to the contrary has no merit and is frivolous.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liabilities. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on frivolous PRA-based arguments face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of tax the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of Federal income tax laws; (4) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed,

and fraudulent failure to file a return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on frivolous positions involving the PRA also may face criminal prosecution under: (1) section 7201 for attempting to evade or defeat tax, the penalty for which is a significant fine and imprisonment for up to 5 years; (2) section 7203 for willful failure to file a return, the penalty for which is a significant fine and imprisonment for up to a year; and (3) section 7206 for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on frivolous positions may face civil and criminal penalties and also may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty of up to $1,000 under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return, statement or other document under the internal revenue laws.

DRAFTING INFORMATION

This revenue ruling was authored by the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622–7950 (not a toll-free call).

2006–15 I.R.B. 746 April 10, 2006

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on the argument that they are exempt from income tax due to a general “Native American Treaty” face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of federal income tax laws; (4) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution under: (1) section 7201 for attempting to evade or defeat tax, the penalty for which is a significant fine and imprisonment for up to 5 years; (2) section 7203 for willful failure to file a return under, the penalty for which is a significant fine and imprisonment for up to 1 year; and (3) section 7206 for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years.

who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil or criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether taxpayers may avoid their federal income tax liability by claiming tax exempt status based on an unspecified “Native American Treaty.”

FACTS

Taxpayer A is a Native American and receives income from a tribal or non-tribal source. The income paid to taxpayer A is reported on an information return ( e.g., a Form 1099-MISC, Form W–2. etc.). Taxpayer A then either: 1) fails to report the income shown on the information return on his federal income tax return, claiming an erroneous exemption from federal income tax under an unspecified “Native American Treaty,” or 2) wrongly reports a loss offsetting the information return income on the “Other Income” line of his federal income tax return with an explanation that reads, “Less - Native American Treaty” or “Native American Treaty.”

LAW AND ANALYSIS

Native Americans are subject to the same income tax laws as other U.S. citizens unless there is an exemption explicitly created by treaty or statute. Squire v. Capoeman, 351 U.S. 1, 6 (1956); Estate of Poletti v. Commissioner, 99 T.C. 554, 557–58 (1992), aff’d, 34 F.3d 742 (9th Cir. 1994); Doxtator v. Commissioner, T.C. Memo. 2005–113. Any exemption must be based on clear and unambiguous treaty or statutory language. Squire, 351 U.S. at 6; Ramsey v. United States, 302 F.3d 1074 (9th Cir. 2002); Cook v. United States, 86 F.3d 1095 (Fed. Cir. 1996); Estate of Peterson v. Commissioner, 90 T.C. 249, 250 (1988). Under the Internal Revenue

Code, all individuals, including Native Americans, are subject to federal income tax. Section 1 imposes a tax on all taxable income. Section 61 provides that gross income includes all income from whatever source derived. Adjustments to income, deductions, and credits must be claimed in accordance with the provisions of the Internal Revenue Code and accompanying Treasury regulations. Although there are certain exemptions and other provisions throughout the Internal Revenue Code that apply to Native Americans, none of these exempt individual Native American taxpayers from federal tax. Moreover, under the Indian Gaming Regulatory Act, any distribution of casino gaming proceeds to individual tribe members is also subject to federal income tax.

Additionally, while there are numerous valid treaties between various Federally Recognized Indian Tribal Governments and the United States government, some of which may contain language providing for narrowly defined tax exemptions, these treaties have limited application to specific tribes. Any exemptions from federal tax are expressly stated in the language of the treaty. Taxpayers who are affected by such treaty language must be a member of a particular tribe having a treaty and must cite that specific treaty in claiming any exemption. There is no general treaty that is applicable to all Native Americans.

HOLDING

Taxpayer A made improper and unfounded claims for exemption from federal income tax by either failing to report his income or reporting it and claiming an offsetting deduction. Any claim that a taxpayer is exempt from federal income tax due to a general “Native American Treaty” is frivolous. Unless a taxpayer can cite a specific treaty or statutory language providing for exemption of income from federal income tax, that taxpayer is subject to all applicable federal income tax laws. Thus, Taxpayer A must report the income shown on the information return and may not report a loss or exemption attributable to a general Native American treaty to offset the income received from the tribal organization.

April 10, 2006 747 2006–15 I.R.B.

LAW AND ANALYSIS

The phrase “nunc pro tunc,” a Latin phrase translated as “now for then,” denotes that an act has retroactive legal effect through a court’s inherent power. Black’s Law Dictionary 1097 (8 ^th ed. 2004). When a document is signed “nunc pro tunc” as of a specified date, it means that a thing is now done which should have been done on the specified date. 56 Am. Jur. 2d Motions, Rules, and Orders § 58, at 45 (2000).

The term “nunc pro tunc” also describes a later record entry of a previous action that is intended to have effect as of the date of the action itself. Black’s Law Dictionary 1097. The inclusion of the phrase “nunc pro tunc” on the face of the return form or in other documents submitted to the Service has no legal effect, and does not validate an invalid return, make an untimely return timely, invalidate a signature, create a claim for refund of taxes previously paid, or reduce one’s federal tax liability.

To the extent taxpayers are attempting to validate an otherwise invalid return by writing or stamping the phrase “nunc pro tunc” on the face of a return or in attached documents, this phrase has no validating effect. For a document to qualify as a valid return, it must contain sufficient data to calculate tax liability, it must purport to be a return, there must be an honest and reasonable attempt to satisfy the requirements of the tax law, and the taxpayer must execute the return under penalties of perjury. Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6 ^th Cir. 1986). The inclusion of the phrase “nunc pro tunc” on the face of the return form or in the attachments does not provide any further information sufficient to calculate tax liability, or to satisfy any other requirements of the tax law. Accordingly, it does not validate an otherwise invalid return.

HOLDING

Inclusion of the phrase “nunc pro tunc” on a return or other document submitted to the Service has no legal effect and is therefore frivolous.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to

were willful, intentional or reckless); (2) a penalty of up to $1,000 under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, resulting in a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return statement or other document under the internal revenue laws.

DRAFTING INFORMATION

This revenue ruling was authored by the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact that office at (202) 622–7800 (not a toll-free call).

Section 6673.—Sanctions and Costs Awarded by Courts

Frivolous tax returns; “nunc pro tunc.” This ruling emphasizes to taxpayers, promoters, and return preparers that inserting the phrase “nunc pro tunc” on a return or other document submitted to the Service has no legal effect and does not validate an invalid return, make a delinquent return timely, invalidate a signature, create a claim for refund of taxes previously paid, or reduce one’s federal tax liability.

Rev. Rul. 2006–17

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal income tax liability by filing a return or submitting documents to the Service with the phrase “nunc pro tunc” written or stamped on the face of the return or document, and asserting that the phrase has some legal effect. The Service is also aware that some promoters, including return preparers, are advising or recommending that taxpayers take this frivolous position. Some promoters market a package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

This revenue ruling emphasizes to taxpayers, promoters, and return preparers that inserting the phrase “nunc pro tunc” on a return or other document submitted to the Service has no legal effect and does not validate an invalid return, make a delinquent return timely, invalidate a signature, create a claim for refund of taxes previously paid, or reduce one’s federal tax liability. Any argument that the inclusion of the phrase “nunc pro tunc” on a return or other document submitted to the Service has any legal effect has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions. The Service will take vigorous enforcement action against these taxpayers and against promoters and return preparers who assist taxpayers in taking these frivolous positions. Frivolous returns and other similar documents submitted to the Service are processed through the Service’s Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil or criminal penalties should apply. The Service also determines whether civil or criminal penalties should apply to return preparers, promoters, and others who assist taxpayers in taking frivolous positions, and recommends whether an injunction should be sought to halt these activities. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether inclusion of the phrase “nunc pro tunc” on a return or other document filed with the Service has any legal effect.

FACTS

Some taxpayers file returns or other documents with the Service that have the phrase “nunc pro tunc” stamped or written on the face of the return or document. These taxpayers assert that the phrase “nunc pro tunc” has some legal effect in reducing, eliminating, or altering in some way their federal income tax liability or other obligations under the tax laws.

2006–15 I.R.B. 748 April 10, 2006

through the Service’s Frivolous Return Program. As part of this program, the Service confirms whether taxpayers who take frivolous positions have filed all of their required tax returns, computes the correct amount of tax and interest due, and determines whether civil and criminal penalties should apply. Other information about frivolous tax positions is available on the Service website at www.irs.gov .

ISSUE

Whether taxpayers can eliminate their federal income tax liability by attributing income to a trust and claiming expense deductions related to that trust.

FACTS

Individual taxpayer A files a Form 1041 trust income tax return for the 2005 taxable year. On it, taxpayer A lists the full amount of income reported on his W–2, but claims a deduction for a “fiduciary fee” in the same amount. Taxpayer A requests a refund of the full amount of withholding.

LAW AND ANALYSIS

Many frivolous trust schemes involve the purported transfer of income and expenses to a trust, on the theory that the income and expenses then become that of the trust. Such schemes are ignored for federal tax purposes because taxpayers cannot assign personal income to a trust in order to avoid tax, because such trusts are shams for federal tax purposes, and because the grantor trust rules of the Internal Revenue Code (sections 671 through 679) tax the income to the individual grantor and not to the trust. See, e.g., United States v. Krall, 835 F.2d 711, 714 (8 th Cir. 1987); United States v. Buttorff, 761 F.2d 1056, 1060–61 (5 ^th Cir. 1985).

Income is ordinarily taxed to the person who earned it, and tax liability may not be shifted by assigning the income to another person. Commissioner v. Culbertson, 337 U.S. 733, 739–740 (1949); Helvering v. Eubank, 311 U.S. 122 (1940); Lucas v. Earl, 281 U.S. 111 (1930). The taxpayer is taxable on assigned income even if the income is paid directly to a trust. Wheeler v. United States, 768 F.2d 1333 (Fed. Cir. 1985); Saunders v. Commissioner, 720 F.2d 871 (5th Cir. 1983); Armantrout v. Commissioner, 67 T.C. 996 (1977), aff’d,

liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on the argument that the inclusion of the phrase “nunc pro tunc” on the face of their return or other document submitted to the Service has some legal effect, face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of tax the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of Federal income tax laws; (4) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution under: (1) section 7201 for attempting to evade or defeat tax, the penalty for which is a significant fine and imprisonment for up to 5 years; (2) section 7203 for willful failure to file a return under section 7203, the penalty for which is a significant fine and imprisonment for up to a year; and (3) section 7206 for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years; and (4) any other penalties pursuant to applicable provisions of federal law.

penalty under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, for which the penalty is a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

DRAFTING INFORMATION

Section 6702.—Frivolous Income Tax Return

Frivolous tax returns; use of sham trusts. This ruling emphasizes that an individual cannot escape taxation by attributing income to a purported trust. The Service will take vigorous enforcement action against frivolous arguments relating to trusts.

Rev. Rul. 2006–19

PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by filing a Form 1041, U.S. Income Tax Return for Estates and Trusts, listing income in the amount stated on their W–2, but claiming a deduction on the return for a “fiduciary fee” in the exact amount of that income. These taxpayers then request a refund of the full amount withheld with respect to that income.

This revenue ruling emphasizes that an individual cannot escape taxation by attributing income to a purported trust. The Service is committed to identifying taxpayers who attempt to avoid their federal tax obligations by taking frivolous positions, based on arguments relating to trusts. The Service will take vigorous enforcement action against frivolous arguments relating to trusts. The Service processes frivolous returns and other similar documents submitted to the Service

April 10, 2006 749 2006–15 I.R.B.

nificant fine and imprisonment for up to 5 years; (2) section 7203, for willful failure to file a return, the penalty for which is a significant fine and imprisonment for up to 1 year; and (3) section 7206, for making false statements on a return, statement, or other document, the penalty for which is a significant fine and imprisonment for up to 3 years.

Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on frivolous positions may face civil and criminal penalties and also may be enjoined by a court pursuant to sections 7407 and 7408. Potential penalties include: (1) a $250 penalty under section 6694 for each return or claim for refund prepared by an income tax return preparer who knew or should have known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty of up to $1,000 under section 6700 for each activity promoting abusive tax shelters; (3) a $1,000 penalty under section 6701 for aiding and abetting the understatement of tax; and (4) criminal prosecution under section 7206, resulting in a significant fine and imprisonment for up to 3 years, for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

DRAFTING INFORMATION

570 F.2d 210 (7th Cir. 1978). Thus, assignments of personal income and expenses to a trust are not valid for federal income tax purposes.

Even if the taxpayer created a valid trust under state law, the trust would be ignored for federal tax purposes because it is a sham. When the form of the transaction has not, in fact, altered economic relationships, income is taxed according to the substance of the transaction. Markosian v. Commissioner, 73 T.C. 1235 (1980). This rule applies regardless of whether the entity has a separate existence recognized under state law ( see Furman v. Commissioner, 45 T.C. 360 (1966), aff’d. per curiam 381 F.2d 22 (5th Cir. 1967)), and regardless of the form of the entity, such as a trust or common law business trust. See Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984).

In addition, the grantor trust provisions of the Internal Revenue Code require the attribution of the income and expenses of the trust to the individual. These provisions provide that all items of income, deduction, and credit of the trust, shall be included in computing the taxable income and credits of the grantors and other persons who have substantial powers of ownership or control over the trust. The power to control the beneficial enjoyment of the corpus or the income of the trust, the power to borrow from or deal with the trust without adequate and full consideration or security, the power to revoke the trust or to have the corpus or income revert to the grantor, the power to use the corpus or income of the trust for the benefit of the grantor, or similar powers, result in the trust being ignored for federal tax purposes and all income and allowable expenses being attributed to the individual grantor. See sections 671–679; Vnuk v. Commissioner, 621 F.2d 1318 (8th Cir. 1980); Rev. Rul. 75–257, 1975–2 C.B. 251. Finally, because no trust is deemed to exist for federal tax purposes, there is no

fiduciary relationship upon which trustees’ fees could be predicated and there is no ordinary and necessary business expense which could validly be claimed for such amounts. Thus, the claimed expense for trustees’ fees would be disallowed.

HOLDING

Individual taxpayers must file Form 1040 to report earned income and may not file Form 1041 reporting income through a trust in order to avoid federal income tax liability.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or evade their federal tax liability. In addition to liability for the tax due plus statutory interest, taxpayers who fail to file valid returns or pay tax based on a frivolous argument face substantial civil and criminal penalties. Potentially applicable civil penalties include: (1) the section 6662 accuracy-related penalties, which are generally equal to 20 percent of the amount of tax the taxpayer should have paid; (2) the section 6663 penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have paid; (3) a $500 penalty imposed under section 6702 when the taxpayer files a document that purports to be a return but that contains a frivolous position or suggests a desire by the taxpayer to delay or impede the administration of federal income tax laws; (4) the section 6651 additions to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return; and (5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous arguments in the United States Tax Court.

Taxpayers relying on these frivolous positions also may face criminal prosecution under the following provisions: (1) section 7201, for attempting to evade or defeat tax, the penalty for which is a sig

2006–15 I.R.B. 750 April 10, 2006