Some people have to learn the hard way. Mr. Pugh seems to be one of those people. Apparently a $10,000 penalty for his 2003 frivolous argument did not have the deterrent effect that the Tax Court hoped it would.
Back for more, Mr. Pugh reported $107,465 of wages on his 2004 tax return. He took a deduction for an equal amount on schedule A stating his wages were not taxable pursuant to section 1341 - Claim of Right (the same argument he made to the Tax Court in 2003). Section 1341 rarely comes into play these days. In short, it allows a taxpayer to take a deduction for income previously taxed which the taxpayer has to subsequently return.
For example, suppose in year 1 taxpayer A includes $25,000 in gross income because she thought she had an unrestricted right to the $25,000. Then in year 2 it turns out that taxpayer A did not have an unrestricted right to the entire $25,000, and is required to return $10,000. Under section 1341 she is allowed a $10,000 deduction in year 2 (there are other nuances but this makes the point).
Mr. Pugh of course did not return his 2004 wages (he did not return his 2003 wages either). Consequently he loses and the IRS's motion for summary judgment is granted.
Tax Court to Mr. Pugh: "in view of the fact that a $10,000 penalty was not a sufficient deterrent . . . we shall require petitioner to pay a penalty of $15,000."
The first case is the current decision. The second case is the decision from 2003.