The U.S. Tax Court has sent a message to the trustees of grantor-type trusts that they may be held personally liable for any penalties that result from filing a federal income tax return taking a position that the IRS deems to be “frivolous.” The court explained that it does not matter if the trustee believed the returns to be correct, only that the IRS labeled the position as frivolous.

The court’s April 10 ruling in Stanojevich v. Comm’r, 160 T.C. No. 7 (T.C. 2023), is notable because of its finding that a taxpayer may be found liable for a §6702(a) penalty for filing a frivolous return that was not his personal return. In so ruling, the court upheld the IRS’s determination that the trustee was liable for $5,000 for each year the penalty was imposed.

Trustee claimed trust owed no tax
In 2013, Srbislav B. Stanojevich, asked the IRS for an employer tax identification number (EIN) for SFT. In his request, Stanojevich said SFT was a grantor-type trust and that he was its trustee. The IRS granted SFT an EIN. Stanojevich later filed a Form 1041, U.S. Income Tax Return for Estates and Trusts, for tax years 2009 through 2012 on behalf of SFT as the trustee and signed SFT’s returns as an authorized representative.

The returns filed by Stanojevich showed SFT’s taxable income was interest income of $40,709 for 2009, $48,096 for 2010, $57,091 for 2011 and $58,176 for 2012. Each return reported that the trust had federal income tax withheld at an amount that was equal to each year’s taxable income, leaving SFT with zero income each year. Stanojevich then claimed the trust was entitled to an overpayment equal to the amount of tax withheld. SFT’s returns included Forms 1099 that reported payments to and from the trust. Some of the Forms 1099 also reported federal income tax withholdings.

The IRS found the Forms 1099 were false and that each of SFT’s returns was frivolous for the purposes of §6702(a). The IRS eventually assessed penalties of $5,000 against Stanojevich for each tax year. The court agreed that Stanojevich had filed frivolous returns and moved on to the question of whether a §6702(a) penalty could be assessed against a taxpayer for a return that was not their own personal return.

Court finds penalties appropriate
The court found nothing in §6702 that could be read as limiting the application of §6702(a) penalties to a person who filed their own returns. The fact Congress gave the trustee the duties and responsibilities associated with filing a trust’s income tax return supported the court’s conclusion that it was appropriate to file a §6702 penalty on a trustee who files a frivolous return on behalf of the trust. Finally, the court found the fact that Stanojevich was the one who actually filed SFT’s returns meant that he should be subject to any related penalties.

For more information on trusts, check out our three-part on-demand webinar that will be available in August:

Trusts Part 1 - Forming a Trust
Trusts Part 2 - Operating a Trust
Trusts Part 3 - Terminating a Trust