                      119 T.C. No. 18



                UNITED STATES TAX COURT



            BRIAN G. TAKABA, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5454-99.                Filed December 16, 2002



     This case is before the Court to consider whether
P must pay a penalty pursuant to sec. 6673(a)(1),
I.R.C., and whether P’s counsel must pay certain of R’s
costs pursuant to sec. 6673(a)(2), I.R.C. P, initially
pro se, made frivolous arguments, which were continued
by P’s counsel, who further advocated the frivolous
argument that the regulations under sec. 861, I.R.C.,
establish that, although P is a U.S. citizen, P’s
income in the form of remuneration for services and
bank interest received from sources within the United
States is not subject to tax.
     1. Held: P is liable for a penalty under sec.
6673(a)(1), I.R.C., since his position in this case is
frivolous.
     2. Held, further, P’s counsel is liable for R’s
excess costs under sec. 6673(a)(2), I.R.C., since he
both knowingly and recklessly made frivolous arguments,
thus unreasonably and vexatiously multiplying these
proceedings.
                                - 2 -

     Paul J. Sulla, Jr., for petitioner.

     David Lau, for respondent.



                               OPINION

     HALPERN, Judge:    This case is before the Court to consider

whether petitioner must pay a penalty pursuant to section

6673(a)(1) and whether petitioner’s counsel, Paul J. Sulla, Jr.

(Mr. Sulla), must pay certain of respondent’s costs pursuant to

section 6673(a)(2).    For the reasons that follow, the Court shall

impose on petitioner a penalty of $15,000 and on Mr. Sulla a

liability of $10,500.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                             Background

Previous Proceedings

     Previously, this case was before the Court on respondent’s

motions for summary judgment and to award damages (the motions

for summary judgment and for damages, respectively).   By order

dated June 6, 2001 (the June 6 order), we granted the motion for

summary judgment, took under advisement the motion for damages,

and ordered petitioner and Mr. Sulla to prepare to show cause why

a penalty under section 6673(a)(1) should not be imposed on
                               - 3 -

petitioner and costs under section 6673(a)(2) should not be

imposed on Mr. Sulla.   Petitioner and Mr. Sulla appeared and were

heard in response to the orders to show cause at the trial

session of the Court commencing on June 18, 2001, in Honolulu,

Hawaii (the 2001 trial session).    Due in part to the length of

Mr. Sulla’s argument, the Court ordered additional submissions

with respect to its orders to show cause.

June 6 Order

     The following is extracted or summarized from the June 6

order and is helpful to explain our imposition of a penalty and

costs.

     By notice of deficiency dated December 21, 1998 (the

notice), respondent determined a deficiency of $3,407 in

petitioner’s 1996 income tax and additions to tax of $669.52,

$295.35, and $165.64 under sections 6651(a)(1) (failure to file a

return), 6651(a)(2) (failure to pay tax), and 6654(a) (failure to

pay estimated tax), respectively.

     The facts that we relied on in granting the motion for

summary judgment are as follows:

     During 1996, petitioner was employed by Thunderbug,
     Inc. (Thunderbug), a domestic (United States)
     corporation doing business as Magnum Motorsport.
     During 1996, petitioner received remuneration in the
     amount of $29,251 from Thunderbug as compensation for
     labor or services performed by petitioner in the United
     States. Petitioner also received interest in 1996 from
     American Savings Bank in the amount of $13. Petitioner
     failed to file a U.S. Income tax return for 1996.
     Petitioner did not make any estimated tax payments for
                              - 4 -

     1996. Petitioner was a citizen of the United States
     for 1996, and continues to be a citizen of the United
     States to the present.

     In granting the motion for summary judgment, we rejected

petitioner’s arguments that he (1) did not receive any wages (as

defined by section 3401(a)) or gross income from any source that

could be included as taxable income, thereby making his income

exempt from taxes, and (2) is not required to file a Form 1040,

U.S. Individual Income Tax Return, because that form (for 1996)

does not have an Office of Management and Budget approval number

and is therefore a bogus form he is allowed by law to ignore

without penalty.

     With respect to the motion for damages, we set forth the

provisions of section 6673(a)(1) (reproduced infra), and stated:

          A taxpayer's position is frivolous "if it is
     contrary to established law and unsupported by a
     reasoned, colorable argument for change in the law.
     * * * The inquiry is objective. If a person should
     have known that his position is groundless, a court may
     and should impose sanctions." Coleman v. Commissioner,
     791 F.2d 68, 71 (7th Cir. 1986); see also Hansen v.
     Commissioner, 820 F.2d 1464, 1470 (9th Cir. 1987)
     (trial court's finding that taxpayer should have known
     that claim was frivolous allows for section 6673
     penalty); Booker v. Commissioner, T.C. Memo. 1996-261.

          This Court has imposed penalties on taxpayers for
     making arguments similar to those made by petitioner.
     See Aldrich v. Commissioner, supra; McCart v.
     Commissioner, supra; Liddane v. Commissioner, T.C.
     Memo. 1998-259; Wesselman v. Commissioner, T.C. Memo.
     1996-85; see also Buchbinder v. Commissioner, 999 F.2d
     542 (9th Cir. 1993) (sanctions for frivolous appeal).
                                - 5 -

With respect to the imposition of costs on Mr. Sulla, we set

forth the pertinent provisions of section 6673(a)(2) (also

reproduced infra) and stated:

           The “Declaration of Paul J. Sulla, Jr.” and
     “Petitioner’s Memorandum of Points and Authorities in
     Opposition to Motion for Summary Judgment”, signed by
     Paul J. Sulla, Jr., both attached to petitioner’s
     memorandum, indicate Mr. Sulla’s advocacy of
     petitioner’s nonmeritorious positions in this case.
     * * *

As stated, we ordered both petitioner and Mr. Sulla to show cause

why they should not be sanctioned under section 6673(a).

Pertinent Events Preceding the 2001 Trial Session

     Respondent determined the deficiencies in, and additions to,

tax set forth in the notice on the basis of (1) information

reported to respondent by petitioner’s employer, Thunderbug, and

his bank, American Savings Bank, and (2) the fact that petitioner

did not file any return for 1996 or pay any estimated tax.

     The petition was filed on March 22, 1999, petitioner

appearing on his own behalf.    Mr. Sulla did not enter his

appearance until June 21, 2000.

     By the petition, petitioner denies “having any ‘income’ from

any source for * * * [1996] that is the subject of a tax.”    He

denies “being required to file any annual return” for 1996.

Finally, he denies “being liable for any penalties/additions to

tax for” 1996.
                               - 6 -

     On May 20, 1999, respondent received from petitioner a

request for the production of documents.       By that request,

petitioner asked for “[a]ll records that Respondent intends to

use at trial to establish that the Sixteenth Amendment authorized

Congress to tax Petitioner’s income.”

     By letter dated August 5, 1999, petitioner delivered to

respondent petitioner’s “Demand for Answers to a More Definite

Statement”, in which, among other things, petitioner demanded

answers to the following questions:

     On the first page of the 1040 Instruction Booklet, the
     Commissioner of the IRS states “Thank you for making
     this nations’s tax system the most effective system of
     voluntary compliance in the world”.

          (1)   Why does the Commissioner say that?
          (2)   What does that mean?
          (3)   And how does it affect the Demandant
                [petitioner]?

                *    *    *    *       *   *      *

     Is the Untied States/Internal Revenue service, Honolulu
     appeals Office #50089 in this case, in a condition of
     bankruptcy? If so, what authority does the United
     State/Internal Revenue Service, Honolulu Appeals Office
     #50089 claim as a right to make a claim against the
     Demandant in United States/Internal Revenue Service,
     Honolulu Appeals Office #50089's name as a principal?

                *    *    *    *       *   *      *

     What facts are relied upon, if any, to assert that
     Demandant is a citizen, state resident, juristic
     person, or other legal person belonging to the Internal
     Revenue Service, Honolulu Appeals Office #50089?

     State all facts relied upon which would put the
     Demandant in any venue, or jurisdiction other than one
     of common law?
                               - 7 -

                *    *     *   *       *   *   *

     Is the statute, ordinance or regulation that you rely
     on to compel me to file tax returns, and pay a tax
     founded upon duties owed by citizen, resident or
     creation of the state?

          (a)    If so, what state?

          (b)   Where is the definition of that state found
                in the statutes, ordinances, or regulations
                relief [sic] upon?

     On January 19, 2000, respondent’s counsel sent a letter to

petitioner advising him that his position was frivolous and that

respondent would ask the Court to impose damages against him

under section 6673(a).

     In a letter dated April 6, 2000, from petitioner to

respondent’s counsel, petitioner states the following:

          I reviewed the sections of the code that you
     supplied me [sections 1, 61, 6012, attached to
     counsel’s letter of March 24, 2000]. There is no
     statement in any of those sections that specifically
     states that “income” is the thing that is being taxed.
     Until you establish a legal and factual basis for your
     claim that “income” is the subject of the tax[,] the
     amount and sources of my “income” is not relevant to
     the issue. The IRS issued the notice of deficiency
     claiming that “income” is the subject of the tax and
     that because I have “income” I am required to pay a tax
     on that “income”. I can’t wait to get IRS employees on
     the stand and ask them “On what factual basis do you
     claim that “income” is the subject of the tax?”

     In another letter to respondent’s counsel, dated May 4,

2000, petitioner states:   “Provide me any documentation to

support any claim that my services to Thunderbug did not have a

fair market value of $29,264.00 and that the property that
                               - 8 -

Thunderbug gave me in return did not have a fair market value of

$29,264.00.   Provide me any documentation that you may have to

show that ‘income’ is the subject of the tax.”

     This case was set for trial at the trial session of this

Court commencing on June 19, 2000, in Honolulu, Hawaii (the 2000

trial session).   Petitioner prepared a trial memorandum (the

trial memorandum), as required by our standing pretrial order.1

In the trial memorandum, petitioner claims that:

     (1)   “Based on advice from his professionals Petitioner

challenges Respondent’s claim that Petitioner has failed to

comply with the law by not filing federal income tax returns.”

     (2)   “Based on advice from his professionals Petitioner

challenges Respondent’s claim that petitioner is a ‘taxpayer’ as

defined by I.R.C. § 1313(b) and 7701(A)(14).”

     Attached to respondent’s copy of the trial memorandum are

documents purporting to be letters to petitioner from the

aforementioned “professionals”.   The principal argument of those

so-called professionals is that the filing and payment of taxes

is voluntary.

     At the call of the case from that calendar at the 2000 trial

session, petitioner informed the presiding Judge, Judge Marvel,

that he was attempting to hire an attorney to represent him.



     1
        There is no copy of petitioner’s trial memorandum in the
record, but both parties describe it in their filings.
                                - 9 -

That attorney was Mr. Sulla (who, as stated, entered his

appearance on June 21, 2000).    In a subsequent telephone

conference among Judge Marvel, Mr. Sulla, and respondent’s

counsel, Judge Marvel advised Mr. Sulla that, if petitioner

continued to present frivolous arguments, the Court would impose

penalties.   The Court further advised Mr. Sulla that he bore the

responsibility to straighten his client out.    Petitioner’s

request for a continuance was granted.

     By letter to respondent’s counsel dated September 12, 2000,

Mr. Sulla reviewed petitioner’s arguments as to why he did not

owe income tax for 1996.    Those arguments include the following:

(1) Petitioner had no income from any source taxable under the

Internal Revenue Code; (2) no provision of the Internal Revenue

Code obligates petitioner to file a Form 1040, U.S. Individual

Income Tax Return, and, therefore, payment of the Federal income

tax is voluntary, and (3) the Form 1040 provided by the Internal

Revenue Service is a “bootleg” request because it does not

conform to the requirements of the Paperwork Reduction Act of

1980, as amended, in that the form does not display a control

number, an expiration date, or a statement whether the form is

voluntary or mandatory.    Mr. Sulla did not disavow those

positions, but asked of respondent’s counsel:    “Any responses or

interpretations, supported by authorities, which you would assert

in opposition to the positions taken by [petitioner]”.
                               - 10 -

     On September 18, 2000, Mr. Sulla filed a status report with

the Court advising the Court of petitioner’s “newly-revealed”

interpretation of the Internal Revenue Code and supporting

regulations, i.e., that, under regulations interpreting section

861, “remuneration for services earned in the United States by a

United States citizen from a United States employer was not an

operative source of gross income under IRS [IRC] Section 61, and

hence exempt income.”   Notwithstanding such new interpretation

(hereafter, sometimes, the 861 argument), Mr. Sulla continued:

“Petitioner does not want to waive or withdraw his two previously

set forth arguments.”

     By letter to Mr. Sulla dated October 4, 2000, respondent’s

counsel advised Mr. Sulla that “the arguments presented by or on

behalf of Mr. Takaba to date have been found to be frivolous.”

     By letter to Mr. Sulla dated February 5, 2001, respondent’s

counsel reiterated his advice that petitioner’s arguments

(including the 861 argument) were frivolous.    He quoted from and

referred Mr. Sulla to section 1.1-1(a), Income Tax Regs., which,

in pertinent part, provides:    “Section 1 of the Code imposes an

income tax on the income of every individual who is a citizen or

resident of the United States”.    He analyzed in detail the 861

argument, advising Mr. Sulla that he had misread section 861 and

the associated regulations.    He provided citations to cases

rejecting the argument that the regulations under section 861
                               - 11 -

provide a tax exemption for U.S. source income of U.S. citizens,

including Williams v. Commissioner, 114 T.C. 136 (2000), and

Aiello v. Commissioner, T.C. Memo. 1995-40.    He quoted our

statement in Williams v. Commissioner, supra at 138-139, that:

“Petitioner’s arguments are reminiscent of tax-protester rhetoric

that has been universally rejected by this and other courts.”    He

also quoted that portion of our report in Aiello in which we

refer to the position of the Court of Appeals for the Ninth

Circuit:

     The Court of Appeals for the Ninth Circuit, to which
     any appeal in this case will lie, has stated,
     “Compensation for labor or services, paid in the form
     of wages or salary, has been universally held by the
     courts of this republic to be income, subject to the
     income tax laws currently applicable.” United States
     v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981). * * *

He stated:    “Although you apparently understood our arguments in

this case, you dismissed them as ‘a normal response from a tax

collector’.   But you provide no support for your interpretation

of sections 61 and 861.   Please provide us with any cases

supporting your position.”   He warned Mr. Sulla that respondent

would seek a penalty against petitioner under section 6673(a)(1)

and was considering asking the Court to impose costs on Mr. Sulla

pursuant to section 6673(a)(2).

     Mr. Sulla reiterated the 861 argument in his declaration

attached to petitioner’s “Memorandum in Opposition to Motion for

Summary Judgment and Motion for Damages” (sometimes, petitioner’s
                              - 12 -

memorandum):   “[T]he clear and unequivocal language contained

under the several provisions of 26 CFR § 1.861 shows that the

income of United States citizens from the remuneration of

services from sources within the United States are not included

as taxable or non-exempt income.”   The 861 argument is also

contained in petitioner’s memorandum of points and authorities in

opposition to motion for summary judgment, which is signed by Mr.

Sulla.

     Also attached to petitioner’s memorandum is petitioner’s

affidavit.   Attached to the affidavit are Exhibits, including an

Exhibit B, a letter to the Internal Revenue Service, dated April

11, 2001, in which, among other things, petitioner states:

     pursuant to the filing of the attached and completed
     IRS Form(s) I hereby challenge, controvert and/or
     refute any and all claims that I made any “wages” as
     defined in Title 26 United States Code(USC) § 3401(a)
     and/or that I received any remuneration from any source
     for the afore said year(s) that is includable in “gross
     income”, as defined in the operative sections of the
     IRC as listed in Title 26 Code of Federal Regulations
     (CFR) § 1.861-8(f)(1). * * *

2001 Trial Session

     At the 2001 trial session, Mr. Sulla attempted to show cause

why we should not make absolute our orders sanctioning him and

petitioner under section 6673(a).   He attempted to show the good

faith of his argument that the wages and interest received by

petitioner in 1996 are exempt from Federal income taxation.     He

stated as a factual predicate for his argument that petitioner is
                               - 13 -

a citizen of the State of Hawaii, he worked in the State of

Hawaii, his employer is from the State of Hawaii, his employment

activity took place in the State of Hawaii, and he was paid in

the State of Hawaii.    He agreed with the following summary by the

Court of his argument:   “I take your argument to be that a United

States citizen, a resident of Hawaii, working in Hawaii for a

U.S. corporation, earning a salary or wages, is not taxable under

the Internal Revenue Code on that compensation as income, is that

your position?”   He responded:   “Yes, Your Honor.    My position is

that it is intrastate income and that the Internal Revenue Code

does not reach intrastate income.”      He further explained:   “I

can’t find a constitutional power of Congress to tax that

[intrastate] income.”    He added:

     [I]n essence, Your Honor, I am stating that a U.S.
     person earning income from a U.S. source, whether it be
     interstate or intrastate, while he’s in the United
     States, as long as it’s not from a federal possessions
     corporation or a –- involved, or federal government
     involved, that would not be taxable income as defined
     and as stated in the regulations, Code of Regulations;
     and it would * * * be considered * * * exempt income.

He stated that he found support for his analysis in section 861

and the regulations thereunder.      He agreed with the Court that

his analysis led to the conclusion that a vast amount of the

wages and interest paid to U.S. citizens and residents is not

taxable under the Internal Revenue Code.      He conceded, however,

that he found no support for his reading of section 861 and the

regulations in any reported case.      Indeed, he stated that he had
                                - 14 -

consulted a legal research firm that reported to him:    “That they

found no case, rule, or regulation addressing the argument that

domestic and foreign source rules under Section 861, modify or

limit the definition of gross income under Section 61.”

                              Discussion

I.    Introduction

       By the motion for damages, respondent has asked that we

impose a penalty on petitioner in the amount of $25,000, or in

such lesser amount that we deem appropriate, pursuant to section

6673(a)(1).    On our own, because of Mr. Sulla’s advocacy of

petitioner’s positions in this case, we have ordered Mr. Sulla to

show cause why we should not impose costs on him pursuant to

section 6673(a)(2).

II.    Section 6673

       In pertinent part, section 6673 provides:

       SEC. 6673 SANCTIONS AND COSTS AWARDED BY COURTS

            (a)   Tax Court Proceedings.--

                 (1) Procedures instituted primarily for
            delay, etc.–-Whenever it appears to the Tax Court
            that--

                       (A) proceedings before it have been
                  instituted or maintained by the taxpayer
                  primarily for delay,

                       (B) the taxpayer’s position in such
                  proceeding is frivolous or groundless, or

                       (C) the taxpayer unreasonably
                  failed to pursue available
                  administrative remedies,
                                 - 15 -


            the Tax Court, in its decision, may require the
            taxpayer to pay to the United States a penalty not
            in excess of $25,000.

                  (2) Counsel’s liability for excessive costs.

       –-Whenever it appears to the Tax Court that any
       attorney or other person admitted to practice before
       the Tax Court has multiplied the proceedings in any
       case unreasonably and vexatiously, the Tax Court may
       require--

                       (A) that such attorney or other person
                  pay personally the excess costs, expenses,
                  and attorneys’ fees reasonably incurred
                  because of such conduct * * *

III.    Discussion

       A.   Section 6673(a)(1) Liability of Petitioner

       Respondent asks that we impose damages on petitioner under

section 6673(a)(1) because petitioner “filed and maintained this

action primarily for delay” and “his position * * * is frivolous

or groundless.”      Although disagreeing that he instituted or

maintained these proceedings primarily for delay, petitioner

virtually concedes that his initial arguments are frivolous:

“Prior to Petitioner’s counsel’s entry, the Petitioner was

maintaining several well known alleged ‘tax protester’ arguments

in reliance upon professional opinions dating back to 1995.”      We

agree that petitioner’s initial arguments are frivolous.      A

taxpayer’s position is frivolous if it is contrary to established

law and unsupported by a reasoned, colorable argument for a

change in the law.      E.g., Nis Family Trust v. Commissioner, 115
                              - 16 -

T.C. 523, 544 (2000).   It is unclear to us whether petitioner is

defending his initial arguments on the ground that, in good

faith, he made those arguments in reliance on what he claims to

be professional advice.2   In any event, that reliance is

unsubstantiated.

     Petitioner relies on the 861 argument to defend against

imposition of a section 6673(a)(1) penalty.   The 861 argument is

that the regulations under section 861 establish that

petitioner’s income in the form of remuneration for services and

bank interest received from sources within the United States is

not taxable income (or is not “non-exempt income”).   The 861

argument is contrary to established law and, for that reason,

frivolous.   In Corcoran v. Commissioner, T.C. Memo. 2002-18, the

taxpayer made a similar argument.   We characterized the

taxpayer’s argument as “without factual or legal foundation”, and

addressed it as follows:

          Section 1 imposes an income tax on the income of
     every individual who is a citizen or resident of the
     United States. Sec. 1.1-1(a)(1), Income Tax Regs.
     Section 61(a) provides that except as otherwise
     provided in subtitle A (income taxes) gross income


     2
        There is some question whether it is necessary for a
court to find that a taxpayer acted in bad faith in order to
impose a penalty on him under sec. 6673(a)(1)(B) for putting
forth a frivolous or groundless position. Compare Branch v.
I.R.S, 846 F.2d 36, 37 (8th Cir. 1988) (“A taxpayer’s asserted
good faith is not relevant to the assessment of frivolous return
[sec. 6702] penalties.”) with May v. Commissioner, 752 F.2d 1301,
1306 (8th Cir. 1985) (“showing of willfulness or lack of good
faith is required [for section 6673(a)(1) damages]”).
                             - 17 -

     includes “all income from whatever source derived,”
     including compensation for services and interest.
     Secs. 61(a)(1), (4). * * *

          Ignoring these statutory provisions, petitioners
     argue that their compensation for services * * * and
     interest do not constitute gross income because these
     items of income are not listed in section 1.861-8(f),
     Income Tax Regs. Their argument is misplaced and takes
     section 1.861-8(f), Income Tax Regs., out of context.
     The rules of sections 861-865 have significance in
     determining whether income is considered from sources
     within or without the United States. The source rules
     do not exclude from U.S. taxation income earned by U.S.
     citizens from sources within the United States. See,
     e.g., Williams v. Commissioner, 114 T.C. 136, 138-139
     (2000) (rejecting claim that income is not subject to
     tax because it is not from any of the sources listed in
     sec. 1.861-8(a), Income Tax Regs.); Aiello v.
     Commissioner, T.C. Memo. 1995-40 (rejecting claim that
     the only sources of income for purposes of sec. 61 are
     listed in sec. 861); Great-West Life Assur. Co. v.
     United States, 230 Ct. Cl. 477, 678 F.2d 180, 183
     (1982) (“The determination of where income is derived
     or ‘sourced’ is generally of no moment to either United
     States citizens or United States corporations, for such
     persons are subject to tax under section 1 and section
     11, respectively, on their worldwide income.”).

     Petitioner’s position, that respondent erred in determining

a deficiency in, and additions to, petitioner’s 1996 Federal

income tax, is frivolous, since all of petitioner’s arguments in

support of that position are frivolous.   Petitioner deserves a

penalty under section 6673(a)(1), and that penalty should be

substantial, if it is to have the desired deterrent effect.      Cf.

Talmage v. Commissioner, T.C. Memo. 1996-114 (text at n.5), affd.

without published opinion 101 F.3d 695 (4th Cir. 1996).    The

purpose of section 6673 is to compel taxpayers to think and to

conform their conduct to settled principles before they file
                              - 18 -

returns and litigate.   Coleman v. Commissioner, 791 F.2d 68, 71

(7th Cir. 1986); see also Grasselli v. Commissioner, T.C. Memo.

1994-581 (quoting Coleman).

     We have set forth in some detail the various arguments made

by petitioner during the course of this litigation.   Petitioner

has wandered far afield from the track established by the

petition, that he had no income from any source subject to tax

and is not required to file a return (themselves frivolous

arguments).   At various times, he has argued that the Sixteenth

Amendment does not authorize Congress to tax his income, his

services were worth what his employer paid him, the income tax is

voluntary, he is not a taxpayer, and he did not receive any

wages.   He has asked respondent ridiculous questions and

threatened to put respondent’s agents on the stand and question

them on their basis for claiming that income is subject to tax.

He has delayed this case by asking for a continuance after having

been warned accurately by respondent’s counsel that his arguments

were frivolous.   He did not heed Judge Marvel’s caution on the

same point.   On the basis of petitioner’s activities in bringing

and prosecuting this case, we shall make absolute our order to

show cause by granting the motion for damages to the extent that

we shall impose on petitioner a penalty under section 6673(a)(1)

in the amount of $15,000.
                                - 19 -

     B.   Section 6673(a)(2) Liability of Mr. Sulla

           1.   Introduction

     Section 6673(a)(2) empowers us to impose costs on an

attorney who has multiplied the proceedings in any case

unreasonably and vexatiously.    Section 6673(a)(2) is a relatively

new provision, having been added to the Internal Revenue Code by

the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239,

sec. 7731(a), 103 Stat. 2400.    Section 6673(a)(2) is derived from

section 1927 of the Judicial Code, 28 U.S.C. sec. 1927 (1988).

See H. Rept. 101-247, at 1399-1400 (1989).

     In Harper v. Commissioner, 99 T.C. 533, 545 (1992), we noted

the dearth of opinions interpreting and applying section

6673(a)(2), and relied upon case law under 28 U.S.C. sec. 1927

(1988) to ascertain the level of misconduct justifying sanctions.

The language of 28 U.S.C. sec. 1927 (1988)3 is substantially

identical to that of section 6673(a)(2), and the two statutes

serve the same purposes in different forums.    See Johnson v.

Commissioner, 289 F.3d 452 (7th Cir. 2002), affg. 116 T.C. 111

(2001); Harper v. Commissioner, supra at 545.    The interpretation

given section 6673(a)(2) and 28 U.S.C. sec. 1927 (1988) has

historically been the same.


     3
        Title 28 U.S.C. sec. 1927 (1988) provides: “Any attorney
* * * who so multiplies the proceedings in any case unreasonably
and vexatiously may be required by the court to satisfy
personally the excess costs, expenses, and attorneys’ fees
reasonably incurred because of such conduct.”
                              - 20 -

     In Harper v. Commissioner, supra, we found that, while most

Courts of Appeals require a finding of bad faith as a condition

for imposing sanctions under 28 U.S.C. sec. 1927 (1988), a few

have adopted the lower threshold of recklessness.     Harper v.

Commissioner, supra at 545-546.   Among those few is the Court of

Appeals for the District of Columbia Circuit.   See Reliance Ins.

Co. v. Sweeney Corp., 792 F.2d 1137, 1138 (D.C. Cir. 1986).        The

venue for appeal of the sanctions we imposed on Mr. Sulla may be

to that Court of Appeals.   See sec. 7482(b)(1) (second sentence).

But compare Johnson v. Commissioner, supra (affirming Tax Court’s

imposition of section 6673(a)(2) liability without discussion of

venue), with Dornbusch v. Commissioner, 860 F.2d 611 (5th Cir.

1988) (appellate venue lies in the Court of Appeals for the

District of Columbia Circuit under the second sentence of section

7482(b)(1) in the case of an appeal of a criminal contempt

sentence imposed on a witness by the Tax Court).4    If the

appellate venue for Mr. Sulla is not the Court of Appeals for the

District of Columbia Circuit, it is likely the Court of Appeals

for the Ninth Circuit.   See sec. 7482(b)(1)(A).    The Court of

Appeals for the Ninth Circuit has occasionally stated that



     4
        In Johnson v. Commissioner, 289 F.3d 452 (7th Cir. 2002),
affg. 116 T.C. 111 (2001), the Court of Appeals for the Seventh
Circuit may have been the appropriate venue for appeal pursuant
to sec. 7482(b)(2), which allows an appeal to any U.S. Court of
Appeals if agreed to in writing by the Secretary and the
taxpayer.
                                 - 21 -

sanctions under 28 U.S.C. sec. 1927 (1988) are appropriate where

the attorney conduct multiplying the proceedings was reckless.

B.K.B. v. Maui Police Dept., 276 F.3d 1091, 1107 (9th Cir. 2002);

Fink v. Gomez, 239 F.3d 989, 993 (9th Cir. 2001); United States

v. Associated Convalescent Enters., Inc., 766 F.2d 1342 (9th Cir.

1985).   Because we are uncertain of appellate venue, and because

we find that petitioner’s counsel’s conduct would constitute bad

faith under the Court of Appeals for the Ninth Circuit cases

applying a bad faith standard, e.g., In re Keegan Mgmt. Co., Sec.

Litig., 78 F.3d 431, 436 (9th Cir. 1996), we shall, for purposes

of this case (and without deciding the standard in this Court)

(and without deciding the standard in this Court), adopt that

standard.    See Nis Family Trust v. Commissioner, 115 T.C. at 548.

            2.    Bad Faith

            a.    Petitioner’s Initial Arguments

     In the view of the Court of Appeals for the Ninth Circuit,

“bad faith” is present when an attorney knowingly or recklessly

raises a frivolous argument.      In re Keegan Mgmt. Co., Sec.

Litig., supra; Estate of Blas v. Winkler, 792 F.2d 858, 860 (9th

Cir. 1986).      As discussed supra in section III.A., both

petitioner’s initial arguments and the 861 argument are

frivolous.    We recognize that petitioner originally appeared in

this case pro se.     Mr. Sulla appeared on June 21, 2000, at the

time of the 2000 trial session.     At that time, he was advised by
                                - 22 -

Judge Marvel that the Court viewed petitioner’s arguments as

frivolous and that he bore the responsibility to straighten out

his client.    Mr. Sulla claims that, following his appearance,

petitioner abandoned his initial arguments and relied exclusively

on the 861 argument.    Nevertheless, by letter to respondent’s

counsel dated September 12, 2000 (the September 12 letter), Mr.

Sulla reviewed petitioner’s initial arguments and did not

disclaim them; indeed, he asked respondent’s counsel to rebut

them.    In the status report filed by Mr. Sulla on September 18,

2000 (the status report), Mr. Sulla set forth the 861 argument.

He also stated:    “Petitioner does not want to waive or withdraw

his two previously set forth arguments.”    In “Petitioner’s

Surreply to Respondent’s Memorandum of Points and Authorities”

(petitioner’s final filing in this case (the surreply)), Mr.

Sulla states:

     Any reservation of the Petitioner’s prior arguments by
     Petitioner’s counsel at that time while signaling to
     Respondent’s counsel and to Court that Petitioner’s
     counsel was informally conceding these arguments is not
     inconsistent. This negotiating posture by Petitioner’s
     counsel at the initial contact with the Court and
     Respondent would normally be construed, among
     professionals in negotiations, as a strong signal of a
     parties’ primary position. * * *

             A party may retain any number of different
        theories of action or defense “in reserve”. The
        reservation of positions has no bearing on what the
        party ultimately corresponds, argues or pleads. * * *
        [Emphasis added.]
                              - 23 -

     By the time of the September 12 letter and the status

report, Mr. Sulla had ample time to review petitioner’s initial

arguments.   We believe from Mr. Sulla’s statements in the

surreply that he knew those arguments were frivolous but, in

order to gain a tactical advantage, did not disclaim them.    Thus,

Mr. Sulla knowingly maintained petitioner’s frivolous arguments,

and that constitutes bad faith.5

          b.   The 861 Argument

     Moreover, we believe that Mr. Sulla was reckless in making

the 861 argument.   The Court of Appeals for the Ninth Circuit has

not defined the term “reckless” for purposes of determining

whether an attorney acts in bad faith by recklessly making a


     5
        Mr. Sulla’s conduct with respect to petitioner’s initial
arguments (and, indeed, the 861 argument) also raises questions
under the Rules. Rule 201(a) requires practitioners to carry on
their practice in accordance with letter and spirit of the Model
Rules of Professional Conduct of the American Bar Association
(the Model Rules). In pertinent part, Model Rule 3.1 states: “A
lawyer shall not bring or defend a proceeding, or assert or
controvert an issue therein, unless there is a basis in law and
fact for doing so that is not frivolous”. Model Rule 3.2
requires a lawyer to make reasonable efforts to expedite
litigation. Model Rule 3.3 imposes on lawyers a duty of candor
towards the tribunal, which includes the requirement that a
lawyer not knowingly make a false statement of law to the
tribunal. A comment following Model Rule 3.3 states: “Legal
argument based on a knowingly false representation of law
constitutes dishonesty toward the tribunal.” We question whether
Mr. Sulla’s “negotiating posture” and his apparent advice to
petitioner that he “reserve” his initial arguments violate Model
Rules 3.1 and 3.2. We also question whether Mr. Sulla breached
his duty of candor to the Court when, in the status report, he
reported that petitioner would not waive or withdraw arguments
that Mr. Sulla knew to be frivolous and was maintaining only to
gain some negotiating advantage.
                                - 24 -

frivolous argument.   “Recklessness involves a greater degree of

fault than negligence but a lesser degree of fault than

intentional wrongdoing.”   Black’s Law Dictionary 1277 (7th ed.

1999).   In certain areas of the law, scienter (the fact of an

act’s having been done knowingly) is an element of recklessness.

See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).

The Court of Appeals for the Ninth Circuit has not stated whether

scienter is an element of recklessness for purposes of

determining whether an attorney recklessly made a frivolous

argument.   It has, however, interpreted 28 U.S.C. sec. 1927

(1988) to require a finding of “subjective bad faith”, e.g.,

B.K.B. v. Maui Police Dept., supra at 1107, which suggests that

state of the mind, i.e., scienter, is an element.    For guidance

in making the necessary finding, we look to situations in which

scienter is an element of a reckless false claim.

     For a public official to recover damages for a defamatory

falsehood relating to his official conduct, the official must

prove that the statement was made with “‘actual malice’ that is,

with knowledge that it was false or with reckless disregard of

whether it was false or not”.     New York Times Co. v. Sullivan,

376 U.S. 254, 280 (1964) (emphasis added).    Scienter is an

element of such “reckless disregard”:    “The defendant must be

proved to have subjectively ‘entertained serious doubts as to the

truth of his publication.’”     Alioto v. Cowles Communications,
                              - 25 -

Inc., 519 F.2d 777, 779 (9th Cir. 1975) (quoting St. Amant v.

Thompson, 390 U.S. 727, 731 (1968)).   Nevertheless, the Supreme

Court has said that, in determining the existence of actual

malice in a defamation action:   “[R]ecklessness may be found

where there are obvious reasons to doubt the veracity of the

informant or the accuracy of his reports.”     St. Amant v.

Thompson, supra at 732.   In the same paragraph, the Court also

says that a defendant is not likely to prevail “when the

publisher’s allegations are so inherently improbable that only a

reckless man would have put them in circulation.”     Id.     The Court

of Appeals for the Ninth Circuit has likewise determined that the

scienter necessary to show “deliberate recklessness” in a civil

securities fraud action is shown when the danger of misleading

customers “‘is either known to the defendant or is so obvious

that the actor must have been aware of it.’”     In re Silicon

Graphics Inc. Sec. Litig., 183 F.3d 970, 975-977 (9th Cir. 1999)

(quoting Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569

(9th Cir. 1990), for definition of reckless conduct).       The

reckless disregard inquiry appropriate for determining actual

malice in a defamation action, like the deliberate recklessness

inquiry appropriate in a civil securities fraud action, is an

appropriate model for determining whether Mr. Sulla recklessly

raised a frivolous argument, since common to all three inquiries
                                - 26 -

is scienter and a false (or, in the securities fraud context,

misleading) statement.

     We find that Mr. Sulla was reckless in making the 861

argument.   We do so because (1) there were obvious reasons for

Mr. Sulla to doubt his interpretation of the regulations and (2)

the conclusions to be drawn from the 861 argument are so

inherently improbable that only a reckless man would have made

that argument.   As stated, the 861 argument is that the

regulations under section 861 establish that, although petitioner

is a U.S. citizen, petitioner’s income in the form of

remuneration for services and bank interest received from sources

within the United States is not taxable income (or is not “non-

exempt income”).     The most obvious reason for Mr. Sulla to doubt

his interpretation of the regulations is that it is flatly

contradicted by section 1.1-1, Income Tax Regs.     In pertinent

part, section 1.1-1, Income Tax Regs., provides:

     SEC. 1.1-1 Income tax on individuals.--

          (a) General rule. (1) Section 1 of the Code
     imposes an income tax on the income of every individual
     who is a citizen or resident of the United States * * *

                 *     *    *    *    *    *    *

          (b) Citizens or residents of the United States
     liable to tax. In general, all citizens of the United
     States, wherever resident, * * * are liable to the
     income taxes imposed by the Code whether the income is
     received from sources within or without the United
     States. * * *
                               - 27 -

Mr. Sulla acknowledges the authority of Treasury Regulations.      In

Petitioner’s Memorandum of Points and Authorities in Opposition

to Motion for Summary Judgment (exhibit A to petitioner’s

memorandum), Mr. Sulla states:    “When the Treasury regulations

are published they become official notice to the public of what

the law requires.”   In that same document, he quotes from section

1.   Moreover, in respondent’s counsel’s letter to Mr. Sulla dated

February 5, 2001 (the February 5 letter), respondent’s counsel

specifically directed Mr. Sulla to section 1.1-1(a), Income Tax

Regs., and quoted a portion of that regulation.    In the February

5 letter, respondent’s counsel also advised Mr. Sulla that he had

misread section 861 and the associated regulations, and he

provided citations to cases rejecting the argument that the

regulations under section 861 provide a tax exemption for U.S.

source income of U.S. citizens.    Mr. Sulla has indicated that he

read those cases.    He should not, therefore, have missed the fact

that, in one of the cited cases, Williams v. Commissioner, 114

T.C. at 144, we penalized the taxpayer under section 6673(a)(1)

for raising frivolous arguments, stating:    “Petitioner’s

arguments concerning the underlying deficiency amount to tax

protester rhetoric and are manifestly frivolous and groundless.”

Respondent’s counsel asked Mr. Sulla to provide him with any

cases supporting his position.    Of course, Mr. Sulla did not do
                               - 28 -

so.   In fact, Mr. Sulla consulted a legal research firm and

learned that there are no such cases.

      Mr. Sulla may have dismissed respondent’s arguments as “a

normal response from a tax collector”, but he cannot disregard

authority that was placed in front of his eyes and that was plain

to see.   We have no doubt that Mr. Sulla realized that there was

some risk that the 861 argument was frivolous.   Such risk was

apparent from the conclusion of the legal research firm that he

consulted that no case, rule, or regulation supported the 861

argument.   We need not concern ourselves with the subjective

valuation that Mr. Sulla placed on that risk.    It is sufficient

that the risk was significant and plain to see, and that he saw

it.   We need not concern ourselves with idiosyncratic thinking or

tolerate willful obtuseness.   Cf. Coleman v. Commissioner, 791

F.2d 68, 72 (7th Cir. 1986).   Moreover, even if Mr. Sulla had not

been presented with sufficient evidence contradicting the 861

argument, the 861 argument, on its face, is inherently

improbable, because it leads to conclusions that defy common

sense; i.e., U.S. citizens and residents earning income within

the United States are taxable only on income earned from

possessions, corporations, and the Federal Government, and the

vast amount of wages and interest paid to U.S. citizens and

residents is not taxable under the Internal Revenue Code.   We

agree with what the Court of Appeals for the Tenth Circuit said
                                - 29 -

in Charczuk v. Commissioner, 771 F.2d 471, 475 (10th Cir. 1985),

affg. T.C. Memo. 1983-433, before imposing costs on a taxpayer’s

counsel under 28 U.S.C. sec. 1927:       “Courts are in no way

obligated to tolerate arguments that thoroughly defy common

sense.”   The conclusions to be drawn from the 861 argument

thoroughly defy common sense.    We find that Mr. Sulla acted

recklessly in making the 861 argument and, thus, he acted in bad

faith.

          3.    Unreasonable and Vexatious Multiplication of the
                Proceedings

     Mr. Sulla unreasonably and vexatiously multiplied the

proceedings before the Court by championing petitioner’s initial,

frivolous arguments and by introducing a new frivolous argument,

the 861 argument.    Either action is a ground to find him liable

for excess costs.    This case should have concluded with

petitioner’s capitulation shortly after Mr. Sulla made his

appearance.    Mr. Sulla’s actions caused needless delay; if he

caused additional expense to respondent, he should bear those

additional expenses.    See Cook v. Am. S.S. Co., 134 F.3d 771, 774

(6th Cir. 1998) (in the context of 28 U.S.C. sec. 1927).

     Before proceeding to determine the excess costs that Mr.

Sulla must bear, we pause to state that we are mindful that there

can be a thin line between zealous advocacy and frivolity.       We

must be careful not to cross that line and impose costs on

zealous (but unsuccessful) advocacy.       We must be careful not to
                                - 30 -

stifle the enthusiasm or chill the creativity that is the very

lifeblood of the law.   Edwards v. Commissioner, T.C. Memo. 2002-

169 (quoting Greenhouse v. United States, 780 F. Supp. 136, 144

(S.D.N.Y. 1991)).   We do not intend by today’s ruling to stifle

the enthusiasm or chill the creativity of counsel in this Court.

Counsel, however, must reject arguments that he knows to be

frivolous.   If he advances arguments that he knows, or should

know, risk being dismissed as frivolous, he risks the imposition

on him of the opposing party’s excess costs.

          4.   Costs

     “Attorney’s fees awarded under section 6673(a)(2) are to be

computed by multiplying the number of excess hours reasonably

expended on the litigation by a reasonable hourly rate.      The

product is known as the ‘lodestar’ amount.”     Harper v.

Commissioner, 99 T.C. at 549.    To assist us in computing the

lodestar amount, respondent has provided us with the declarations

of attorneys David L. Lau and Peter R. Hochman (the Lau and

Hochman declarations, respectively).     Attached to the Lau

declaration is a copy of respondent’s internal time keeping

records, showing the total time expended on this case by, among

others, Messrs. Lau and Hochman.    In the Lau and Hochman

declarations, Messrs. Lau and Hochman calculate their time,

dating from Mr. Sulla’s appearance, spent working on this case
                               - 31 -

and which each claims was due to Mr. Sulla’s actions “vexatiously

multiplying these proceedings” (excess hours).

     Respondent asks reimbursement for 58 hours of Mr. Lau’s time

at $150 an hour.    Mr. Lau is the attorney with day-to-day

responsibility for the case.    He is an attorney employed in the

Office of Chief Counsel in Honolulu, Hawaii.     He has been a

member of the Hawaii State Bar since 1982.     He has detailed the

time he spent on the case from June 20, 2000, onward, which

involves time spent on research, drafting, telephone calls,

review of submissions to the Court, consultations with Mr.

Hochman, and appearances.    Based on various factors, including

the cost of living and attorney wages in Honolulu, Hawaii, and

awards in previous cases, respondent asks reimbursement at a rate

of $150 an hour for Mr. Lau’s time.      The hourly rate properly

charged for the time of a Government attorney is the “amount to

which attorneys of like skill in the area would typically be

entitled for a given type of work on the basis of an hourly rate

of compensation.”    Harper v. Commissioner, 99 T.C. at 551.     Mr.

Sulla does not question the reasonableness of that rate.      We do

not, however, believe that 58 hours is the number of excess hours

that Mr. Lau expended on this case.     Respondent begins his

computation of excess hours for Mr. Lau on June 20, 2000, adding

1 hour for time spent in preparing for and participating in a

conference call with Judge Marvel and Mr. Sulla.     Notwithstanding
                               - 32 -

that Mr. Sulla adopted and added to petitioner’s frivolous

arguments, thus unreasonably and vexatiously multiplying the

proceedings in this case, we shall extend him the benefit of the

doubt until such time as we are sure that he had adopted (and

added to) petitioner’s positions.   We believe that we can safely

say that he did so as of September 18, 2000, the date on which he

filed the status report (advising the Court of the 861 argument

and petitioner’s failure to waive or withdraw his initial

arguments).   Mr. Lau declares that he spent 41 hours working on

the case after that date.   We are familiar with the procedural

and factual history of this case and believe that 41 hours was

reasonably necessary for Mr. Lau to do the work he described.

See United States v. $12,248 U.S. Currency, 957 F.2d 1513, 1520

(9th Cir. 1991).    We disagree with Mr. Sulla that some of the 41

hours in question are not excess hours because they are normal to

any litigation.    Petitioner’s position is totally without merit,

and this litigation should not have been continued 1 minute after

Mr. Sulla familiarized himself with the facts.   We find that $150

is a reasonable hourly charge for Mr. Lau’s time and that he

reasonably expended 41 excess hours on this litigation.   The

lodestar amount for Mr. Lau’s time is $6,150.

     Respondent asks reimbursement for 21.75 hours of Mr.

Hochman’s time, at a rate of $200 an hour.   Mr. Hochman is Mr.

Lau’s supervisor.   He is an Associate Area Counsel in the Office
                               - 33 -

of Chief Counsel in Honolulu, Hawaii.     Mr. Hochman has been

practicing law since at least 1982.     Respondent asks

reimbursement at a rate of $200 an hour for Mr. Hochman’s time.

Mr. Sulla does not question the reasonableness of that rate.     All

of the hours claimed for Mr. Hochman were expended after Mr.

Sulla filed the status report.    We believe that 21.75 hours was

reasonably necessary for Mr. Hochman to do the work he described.

We find that $200 is a reasonable hourly charge for Mr. Hochman’s

time and that he reasonably expended 21.75 excess hours on this

litigation.    The lodestar amount for Mr. Hochman’s time is

$4,350.

     The total lodestar amount for the time of Mr. Lau and Mr.

Hochman is $10,500.   Respondent has not itemized costs for travel

expense, photocopying, or supplies used in preparing the cases.

Respondent limits his request for costs to the total lodestar

amount.   We shall require Mr. Sulla to pay costs in that amount.

          5.    Conclusion

     We find that $10,500 is a reasonable amount for respondent’s

excess attorney’s fees incurred by reason of Mr. Sulla’s

unreasonable and vexatious multiplication of these proceedings.

Therefore, we shall make the order to show cause absolute and

order Mr. Sulla personally to pay respondent $10,500 pursuant to

section 6673(a)(2), that he make payment by means of a certified

check, cashier’s check, or money order in favor of the Internal
                              - 34 -

Revenue Service, that such payment be delivered to respondent’s

counsel at the Office of Chief Counsel in Honolulu, Hawaii, not

later than 30 days from the date the order is served, and that

respondent report to the Court if such payment is not timely

received.

IV.   Conclusion

      To reflect the foregoing,


                                       An appropriate order will

                                  be issued and an order and decision

                                  will be entered.
