Kapp v. Comm'r, T.C. Memo. 2019-84

• Decision Date: 09 July 2019
• Docket Number: Docket No. 18468-11L,T.C. Memo. 2019-84,Docket No. 18470-11L.
• Parties: MARTIN A. KAPP, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

MARTIN A. KAPP, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2019-84
Docket No. 18468-11L
Docket No. 18470-11L.

UNITED STATES TAX COURT

July 9, 2019

P and his employees prepared thousands of tax returns and/or schedules for mariner taxpayers for the taxable years 2000 through 2006. The tax returns and schedules consistently claimed expense deductions for meals and incidental expenses using revenue procedures permitting taxpayers to deduct the cost of meals and incidental expenses paid or incurred without the need to substantiate the amount. It was standard operating practice of marine companies (deep sea, tugboat, offshore, offshore oil rig, and marine ferry) to provide meals at no cost to mariners. Some of P's mariner clients were involved in litigation in this Court relating to the deductibility of meals and incidental expenses. While the Court held that mariner taxpayers were entitled to deduct incidental expenses incurred while at sea, this Court did not hold that they were entitled to deductions for meals, the cost of which they did not incur. Johnson v. Commissioner, 115 T.C. 210 (2000); Westling v. Commissioner, T.C. Memo. 2000-289.

Page 2

P claimed a full victory in the Johnson and Westling cases and indicated in websites and advertisements that mariners could use revenue procedures to deduct the cost of meals even if furnished by the employer. P and his employees continued to prepare returns and schedules claiming such deductions. Beginning in November 2003 and into 2004 the IRS investigated P's return preparation practices. There was a series of meetings between P and his counsel and IRS representatives. P was advised in writing in the spring of 2005 by his counsel that there was little if any authority which would permit a mariner taxpayer to use the revenue procedures to deduct the cost of meals furnished by the employer. Despite this advice, P continued to prepare returns and schedules claiming such deductions and continued to assert in public domains that mariner taxpayers could qualify for a meal deduction in such circumstances.

The United States filed a complaint in April 2006 seeking an injunction "to restrain and enjoin * * * [P] from preparing federal income tax returns based on the mariner tax deduction". In August 2007 the U.S. District Court for the Central District of California granted the Government's motion for summary judgment, holding that P be permanently enjoined pursuant to I.R.C. sec. 7407 and that the so-called mariner tax deduction was illegal and in violation of I.R.C. sec. 6694. The order related to the period Jan. 1, 2000, through Aug. 20, 2007. In compliance with the order of the U.S. District Court to provide a list of persons or entities for whom he prepared returns (or portions of a return) asserting or claiming the position that mariners may claim a tax deduction for meals provided without cost, P filed a 117-page client list naming more than 5,000 taxpayers. P appealed the entry of permanent injunction, and the U.S. Court of Appeals for the Ninth Circuit affirmed the decision of the U.S. District Court. United States v. Kapp, 564 F.3d 1103 (9th Cir. 2009). After the permanent injunction, this Court issued two additional opinions relating to P's mariner clients. The Court again made clear that the Opinion in Johnson addressed the issue that a mariner taxpayer could not deduct the cost of meals furnished by the employer. Zbylut v. Commissioner, T.C. Memo. 2008-44; Balla v. Commissioner, T.C. Memo. 2008-18.

Page 3

In June 2008 the IRS assessed I.R.C. sec. 6701 penalties based on 5,193 tax returns and/or schedules prepared by P for the period 2000 through 2006. The IRS issued lien and levy notices, and P submitted a written request for a CDP hearing. P challenged the penalties at the hearing. After notices of determination were issued, P filed a timely petition challenging the penalties determined for the taxable years 2000 through 2006. The Court dismissed as to taxable years 2000 and 2001 for lack of jurisdiction. Therefore, the penalties at issue are based on 5,167 tax returns and/or schedules P prepared for taxable years 2002 through 2006.

Held: R has satisfied his burden of proving that P prepared tax returns for the years in issue with knowledge that the returns and/or schedules prepared would result in understatements of tax.

Held, further, R's determination is sustained to the extent that relevant returns were made part of this record.

Robert B. Martin, Jr., for petitioner.

Norah Demirjian, Halvor R. Melom, and Daniel V. Triplett, Jr., for respondent.

CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION .................. 6

FINDINGS OF FACT ............................................... 8

I. Petitioner's Education and Professional History ................. 8

II. Petitioner's Practice and Mariner Clients Generally .............. 9

III. The Johnson and Westling Cases ........................... 11

IV. IRS Guidance After the Johnson and Westling Cases ........... 16

A. Revenue Procedures for the Years in Issue ............... 16

Page 4

B. Chief Counsel Advice ............................... 18

V. Petitioner's Actions After the Johnson and Westling Cases ....... 19

A. Communications With Ric Hulshoff .................... 19
B. Communications With Mariner Clients ................. 20
C. Websites .......................................... 21
D. Articles ........................................... 23
E. Documents Created for Mariner Clients ................. 27

VI. Marine Company Industry Practices ......................... 29

A. Cheramie Marine ................................... 29
B. Matson Navigation Co ............................... 31
C. Dann Ocean Towing ................................ 32
D. Mariner Edward Roach .............................. 34
E. Edison Chouest Offshore (ECO) ....................... 35

VII. Petitioner's Conversations With Charles Comeaux ............. 36

VIII. Petitioner's Income Tax Return Preparation Practices for Years in Issue .................................................. 38

A. Income Tax Return Preparation Practices Generally ....... 38
B. Supplemental Sailor Travel Schedules .................. 39
C. Mr. Roach's Income Tax Returns for 2004 Through 2006 . . 40

IX. The IRS Investigation .................................... 42

A. Examining Officer Tiffany Sim ........................ 42
B. Revenue Agent George Campos ....................... 44
C. Draft Interoffice Memorandum ........................ 52
D. Petitioner's Website Posting During the Investigation ...... 53

X. Civil Case and the Permanent Injunction ..................... 55

A. Civil Complaint .................................... 55
B. Petitioner's Actions After the Complaint Was Filed ....... 57
C. Depositions ....................................... 57
D. Permanent Injunction ................................ 59

XI. Compliance With the Permanent Injunction and Amended Returns . 62

A. Client List ........................................ 62
B. Amended Income Tax Returns ........................ 63
C. Letter to Michael Pahl ............................... 64

XII. Appeal to the Court of Appeals for the Ninth Circuit ............ 65

XIII. The Balla and Zbylut Cases Before the Tax Court .............. 66

A. Balla v. Commissioner .............................. 66
B. Zbylut v. Commissioner ............................. 69

Page 5

XIV. Penalty Assessment ...................................... 71

XV. Income Tax Returns in the Record .......................... 72

XVI. CDP Hearing and Petition ................................. 74

OPINION ........................................................ 75

I. Procedural Matters ....................................... 75

A. Evidentiary Objections .............................. 76

1. Admissibility of Civil Penalty Approval Form ....... 76
2. Respondent's Relevancy Objections .............. 83
3. Petitioner's Relevancy Objection ................. 84

B. Petitioner's Motions To Strike ........................ 85

1. Appendix 1 .................................. 88
2. Appendix 2 .................................. 88

II. Collection Review and Section 6701(a) ...................... 91

A. Collection Due Process .............................. 92
B. Section 6701 Penalty ................................ 96

1. Burden of Proof ............................... 97
2. Aiding, Assisting, or Preparing With Knowledge of Use of Document ................................. 99
3. Knowledge ................................. 100
4. Understatement of Liability .................... 109

APPENDIX A .................................................... 116

APPENDIX B .................................................... 120

APPENDIX C .................................................... 122

Page 6

MEMORANDUM FINDINGS OF FACT AND OPINION

PANUTHOS, Special Trial Judge: These consolidated cases are before us for review of two determinations by the Internal Revenue Service (IRS or respondent)¹ Office of Appeals (Appeals Office) following two collection due process (CDP) hearings conducted pursuant to sections 6320(b) and (c) and 6330(b) and (c).² Petitioner (also referred to as Mr. Kapp) seeks review of the determinations by the IRS to uphold two notices of Federal tax lien filing (lien notices) and a notice of proposed levy to collect section 6701 penalties related to tax returns and tax documents petitioner prepared for his clients for tax years

Page 7

2002, 2003, 2004, 2005, and 2006.³ Petitioner timely petitioned this Court with respect to each notice of determination.⁴

The issue before the Court is whether and to what extent the collection action should be sustained. Since petitioner did not present collection alternatives, the only real issue is whether petitioner is liable for section 6701 penalties for tax years 2002, 2003, 2004, 2005, and 2006 (years in issue).⁵

The section 6701 penalties for the tax years in issue are as follows:

Page 8

Year	Amount
2002	$100,000
2003	105,000
2

...