If you admit you got the money, you can't dodge tax just by claiming it didn't come from a 'federally taxable activity.' Try that line after the judge warns you, and you might earn yourself a bonus penalty under §6673.
Holding
The Tax Court found that Myrna Marin left $205,281 of taxable income off her 2021 return. That meant she owed the usual late-filing penalty under §6651(a)(1). But Marin didn't stop there. She kept repeating arguments the court had already called frivolous, so they tacked on a $2,500 penalty under §6673(a)(1) for good measure.
The IRS also tried for an accuracy-related penalty under §6662(a), but ended up conceding that one before the finish line.
Why It Matters
The income issue is straightforward. Marin admitted receiving the amounts identified by the IRS, and federal tax law plainly treated them as gross income.
The IRS still had to establish an evidentiary foundation. Because the case was appealable to the Ninth Circuit, the IRS had to connect Marin to the unreported income before the usual presumption of correctness applied. Information returns, her Wage and Income Transcript, and her admissions satisfied that requirement.
The §6673 penalty is the more consequential part of the decision. The Court warned Marin that her arguments were frivolous and could result in a penalty. She repeated them anyway, including in her post-trial brief.
The decision does not expand the scope of gross income. It applies settled law and reinforces the risk of penalties for continuing to litigate positions that courts have repeatedly rejected.
Key Facts
Marin filed her 2021 Form 1040 on January 23, 2023. She reported only $15,150 in state unemployment benefits.
The IRS determined that she failed to report $205,281 consisting of:
$154,566 of rental income
$12 of interest
$107 of dividends
$50,596 of gambling winnings
The IRS issued a notice of deficiency on March 25, 2024, determining a $47,846 deficiency, an $11,041 addition to tax under §6651(a)(1), and a $9,569 accuracy-related penalty under §6662(a).
Marin stipulated before trial that she received the amounts identified by the IRS. She nevertheless argued that the payments were not taxable because they did not arise from a federally taxable activity.
The Court warned her that courts had repeatedly rejected those arguments as frivolous and that §6673 could authorize a penalty. Marin continued to make the same arguments after the trial.
The IRS conceded the §6662(a) accuracy-related penalty.
Statutory or Regulatory Framework
Section 61 generally defines gross income to include all income from any source and expressly mentions interest, rents, and dividends; furthermore, gambling winnings are considered gross income in accordance with well-settled precedent.
In cases where income is unreported, the IRS has to establish first an evidentiary basis linking the taxpayer to that income; after that, the taxpayer has to prove that the determination is wrong or that an exclusion applies.
An addition to the tax under section 6651(a)(1) will be imposed if the taxpayer does not prove that they had reasonable cause and that there was no willful neglect.
Under section 6673(a)(1) the Tax Court has the power to impose a penalty of $25,000 if a taxpayer holds a frivolous or groundless position or uses the proceeding mainly for the purpose of delay.
Arguments
Taxpayer argued:
The payments reported by third parties did not arise from a federally taxable activity.
The amounts, therefore, did not constitute taxable income.
Government argued:
Information returns, Marin’s Wage and Income Transcript, and her admissions established receipt of the income.
Federal tax law includes the amounts in gross income.
Marin filed her return late and did not establish reasonable cause.
Her continued reliance on frivolous arguments justified a §6673 penalty.
Court’s Reasoning
The IRS established the required connection to the income. Third-party information returns, Marin’s Wage and Income Transcript, and her admissions supplied the evidentiary foundation required under Ninth Circuit precedent.
Marin did not dispute receipt. Her argument concerned only whether the amounts were taxable.
Federal law treated the payments as gross income. Section 61 covered the rents, interest, and dividends, while established precedent covered the gambling winnings. Marin identified no applicable exclusion.
Her legal theory was frivolous. The Court treated her claim that the payments were outside the federal tax system as a variation of arguments repeatedly rejected by federal courts.
The late-filing addition applied. Marin filed after the April 18, 2022, deadline and offered no reasonable-cause explanation.
Her continued conduct justified the §6673 penalty. She persisted after the Court warned her that the arguments lacked merit and could result in a penalty.
Result
Bottom line: The Tax Court sided with the IRS on the $205,281 of unreported income, added the late-filing penalty, slapped on a $2,500 §6673 penalty, and adjusted the final numbers to reflect the IRS's concession on the accuracy penalty.
The Takeaway
The income issue is settled law. The real lesson is about the §6673 penalty: if a court tells you your argument is frivolous and you keep pushing it, you can end up owing more than just the original tax bill.
List of Citations
I.R.C. §61: Defines gross income broadly and includes interest, rents, and dividends.
I.R.C. §63: Defines taxable income generally as gross income minus allowable deductions.
I.R.C. §6201(d): Addresses reliance on third-party information returns when a taxpayer reasonably disputes reported income.
I.R.C. §6651(a)(1): Imposes an addition to tax for failure to timely file a return absent reasonable cause.
I.R.C. §6673(a)(1): Authorizes penalties for frivolous or groundless positions and proceedings maintained primarily for delay.
I.R.C. §7491(c): Places the burden of production on the IRS for certain penalties and additions to tax.
Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for deficiency determinations.
Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation connecting the taxpayer to unreported income.
Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999): Applies the Ninth Circuit evidentiary-foundation requirement.
Walquist v. Commissioner, 152 T.C. 61 (2019): Addresses the IRS’s burden in unreported-income cases.
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955): Establishes the broad scope of gross income.
Campodonico v. United States, 222 F.2d 310 (9th Cir. 1955): Treats gambling winnings as gross income.
Wilcox v. Commissioner, 848 F.2d 1007 (9th Cir. 1988): Rejects frivolous challenges to federal income taxation.
Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984): Recognizes that courts need not extensively address plainly frivolous tax arguments.
Wnuck v. Commissioner, 136 T.C. 498 (2011): Addresses the treatment of frivolous tax positions.
Higbee v. Commissioner, 116 T.C. 438 (2001): Explains the IRS’s burden of production for penalties and additions to tax.