Individual Challenges Foreign Info Reporting Penalties

ALON FARHY,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITIONER'S SIMULTANEOUS OPENING BRIEF

Submitted here isPetitioner's Simultaneous Opening Brief. Attached is an excerpt from the National Taxpayer Advocate Annual Report to Congress 2020, laying out our issue in some detail. We incorporate it here in full. (See Attachment to this brief.)

DATE: September 8, 2022

EDWARD M. ROBBINS, JR.
U.S. Tax Court No. RE 0111
HOCHMAN SALKIN TOSCHER
PEREZ, P.C.
9100 Wilshire Boulevard, Suite 900W
Beverly Hills, California 90212
Tel. 310.801.4573
Fax. 310.859.1430
EdR@taxlitigator.com

Counsel for Petitioner

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TABLE OF CONTENTS

I. NATURE OF THE CONTROVERSY

II. PRELIMINARY STATEMENT

III. STATEMENT OF FACTS

IV. TAX ASSESSMENTS UNDER THE CODE

V. THE STATUTORY SCHEME FOR DELEGATION OF AUTHORITY TO ASSESS TAXES AND PENALTIES UNDER THE CODE

VI. CONCLUSION

TABLE OF AUTHORITIES

Cases

ATL & Sons Holdings, Inc. v. Commissioner, 152 T.C. 138 (2019)

Badaracco v. Commissioner, 464 U.S. 386 (1984)

Baltic v. Commissioner, 129 T.C. 178 (2007)

Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002)

Carey v. Piphus, 435 U.S. 247 (1978)

Ewing v. United States, 914 F.2d 499 (4th Cir. 1990)

Flora v. United States, 362 U.S. 145 (1960)

G. M. Leasing Corp. v. United States, 429 U.S. 338 (1977)

Graev v. Commissioner, 149 T.C. 485 (2017)

Hibbs v. Winn, 542 U.S. 88 (2004)

Hughes v. Rowe, 449 U.S. 5 (1980)

In re Graham, 981 F.2d 1135 (10th Cir. 1992)

Industrial Union Dept., AFL-CIO v. American Petroleum Institute, 448 U. S. 607 (plurality opinion)

Interior Glass Systems v. United States, 927 F.3d 1081 (9th Cir. 2019)

Kirkendall v. Department of the Army, 479 F.3d 830 (Fed. Cir. 2007)

Lamie v. U.S. Trustee, 540 U.S. 52 (2004)

Lewyt Corp. v. Commissioner, 349 U.S. 237 (1955)

Limtiaco v. Camacho, 549 U.S. 483 (2007)

Manko v. Commissioner, 126 T.C. 195, 200 (2006)

Meyer v. Commissioner, 97 T.C. 555 (1991)

NFIB v. Sebelius, 567 U.S. 519 (2012)

Oropallo v. United States, 994 F.2d 25 (1st Cir. 1993)

Philadelphia & Reading Corp. v. United States, 944 F.2d 1063 (3d Cir. 1991)

Richardson v. Smith, 301 F.2d 305 (3d Cir. 1962)

Richmond v. Commissioner, T.C. Memo. 2005-238

Roth v. Commissioner, 922 F.3d 1126 (10th Cir. 2019)

Russello v. United States, 464 U.S. 16 (1983)

Schroeder v. United States, 793 F.3d 1080 (9th Cir. 2015)

Sosa v. Alvarez-Machain, 542 U.S. 692 (2004)

Thompson v. Commissioner, 148 T.C. 59 (2017)

United States v. Dalm, 494 U.S. 596 (1990)

United States v. Galletti, 541 U.S. 114 (2004)

West Virginia v. Environmental Protection Agency, 597 U. S. ____ (2022)

Williams v. Commissioner, 131 T.C. 54 (2008)

Statutes

26 U.S.C. § 7801

26 U.S.C. § 7803(a)

28 U.S.C. § 1346(a)

28 U.S.C. § 1491(a)(1)

28 U.S.C. § 7422

Internal Revenue Code § 6038

Internal Revenue Code § 6038(b)

Internal Revenue Code § 6038(b)(1)

Internal Revenue Code § 6038A

Internal Revenue Code § 6038A(d)(1)

Internal Revenue Code § 6038B

Internal Revenue Code § 6038C

Internal Revenue Code § 6038D

Internal Revenue Code § 6046

Internal Revenue Code § 6048

Internal Revenue Code § 620

Internal Revenue Code § 6201(a)

Internal Revenue Code § 6201(a)(1)

Internal Revenue Code § 6203

Internal Revenue Code § 6212

Internal Revenue Code § 6212(a)

Internal Revenue Code § 6213(a)

Internal Revenue Code § 6213(c)

Internal Revenue Code § 6214(a)

Internal Revenue Code § 6215(a)

Internal Revenue Code § 6501(a)

Internal Revenue Code § 6651

Internal Revenue Code § 6655

Internal Revenue Code § 6662

Internal Revenue Code § 6663

Internal Revenue Code § 6665

Internal Revenue Code § 6665(a)

Internal Revenue Code § 6665(b)

Internal Revenue Code § 6671

Internal Revenue Code § 6677

Internal Revenue Code § 6679

Internal Revenue Code § 7601

Internal Revenue Code § 7803(c)

Internal Revenue Code § 7803(c)(2)(B)(ii)(III)

Internal Revenue Code §§ 6001 to 6117

Internal Revenue Code §§ 6321-6327

Internal Revenue Code §§ 6331-6344

Internal Revenue Code §§ 6651 to 6751

Internal Revenue Code §§ 6671-6725

Internal Revenue Code §§6301-6344

Internal Revenue Code §6601

Other Authorities

Norman J. Singer & Shambie Singer, Sutherland Statute sand Statutory Construction § 46:6 (7th ed. 2009)

Regulations

Treasury Regulations § 301.6203-1

Treasury Regulations § 301.7601-1

Treasury Regulations § 301.7701-9

Treasury Regulations §§ 301.6201-1(a)

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I. NATURE OF THE CONTROVERSY

There is one issue in this case, and it is a legal issue. Whether or not the assessment of the 6038 penalty was lawful and the resulting collection efforts unlawful.

This Collection Due Process (CDP) case involves a final levy notice for Petitioner's unpaid liabilities for section 6038 civil penalties for tax years 2003 through 2010. The section 6038 penalties arose from Petitioner's failure to file a required Forms 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). Petitioner maintains there is no law giving the Commissioner of Internal Revenue (“the Commissioner') the authority to assess a 6038 penalty, such as the one here. The assessment of the 6038 penalties was not authorized under the Code. Without the authority to assess a 6038 penalty, the Commissioner's purported assessments are ultra vires, null and void.¹ Without a valid assessment, the Commissioner cannot legally use his administrative collection powers to collect the penalty from Petitioner. The Tax Court should order the Commissioner to cease and desist from using its administrative collection powers to collect the 6038 penalties, because the tax penalties have not been validly assessed. Without a valid assessment, the Commissioner must request the Department of Justice to reduce the 6038 penalties to judgment and collect them using the collection powers available to the government in a United States District Court.

II. PRELIMINARY STATEMENT

Voluntary compliance is essential to our nation's federal tax system based on self-assessment. See G. M. Leasing Corp. v. United States, 429 U.S. 338, 350 (1977). Civil tax penalties serve an important function in encouraging voluntary compliance with the internal revenue laws and in deterring taxpayer abuses. Roth v. Commissioner, 922 F.3d 1126, 1131 (10th Cir. 2019); Thompson v. Commissioner, 148 T.C. 59, 64-65 (2017). Voluntary compliance is not helped when the Commissioner routinely, as here, illegally assesses penalties against taxpayers and then illegally uses his collection powers to force collection.

For over 60 years since the creation of section 6038, the Commissioner has been illegally collecting these 6038 penalties using the Commissioner's statutory forced collection powers without having the necessary assessment authority underlying these powers. In 2018 and thereafter, tax practitioners identified this problem and brought it to the attention of the Commissioner.² The Commissioner's response was to ignore the problem, and the Commissioner at that time advanced no theory to establish the Commissioner's assessment authority. In her Annual Report to Congress³ 2020, the National Taxpayer Advocate (NTA)⁴, formally brought the issue to the attention of the Commissioner, and the Commissioner first offered a written justification for these assessments and the resulting administrative collection action.⁵ The Commissioner's justification lacks merit. We quote and address the Commissioner's stated justification below. We await the Commissioner's opening brief to see if this stated justification has changed from his response identified in the NTA's 2020 Annual Report to Congress (Brief Attachment).

As noted in the Attachment to this brief, originally, these penalties were imposed manually on taxpayers whose missing filings were discovered during an audit. That manual process is still a part of current audit practice. However, beginning January 1, 2009, the Commissioner began systemic assessment of the monetary penalty under Code § 6038(b)(1) regarding Forms 5471, attached to late-filed Forms 1120, U.S. Corporation Income Tax Return. Beginning on January 1, 2014, the Commissioner expanded its systemic assessment of the monetary penalty under Code § 6038(b)(1) to Form 5471 attached to late-filed Form 1065, U.S. Return of Partnership Income. Similarly, on January 1, 2013, the Commissioner began systemically assessing a monetary penalty under Code § 6038A(d)(1) on Form 5472 attached to late-filed Form 1120 series returns. Thus, although this 6038 assessment problem was brought to the attention of the Commissioner, the systemic penalty regime has expanded in the last decade to cover a much greater number of taxpayers.

Each year thousands of taxpayers are summarily assessed the section 6038 penalties⁶ by a Commissioner lacking the authority to make these assessments, and those taxpayers, like any delinquent taxpayers, are subject to the Commissioner's administrative collection actions which should include, if and only if the assessment is legal, (1) the creation of a tax lien on all property and rights to property of the taxpayer, (2) a series of letters from the Commissioner directed to the taxpayer demanding payment and becoming increasingly threatening from letter to letter when the taxpayer does not pay, (3) filing of Notices of Federal Tax Lien giving the public notice of the taxpayer's unpaid assessments, (4) and ultimately levy and seizure of the taxpayer's property to satisfy the tax debt. It is easy to imagine the collective destress felt by all the taxpayers undergoing the collection treatment accompanying these illegal assessments. It is also easy to imagine their irritation when they discover the collection efforts directed at them were illegal.

III. STATEMENT OF FACTS⁷

The only relevant and material facts are: This Collection Due Process (CDP) case involves a final levy notice for Petitioner's unpaid liabilities for section 6038 civil penalties for tax years 2003 through 2010. The section 6038 arose from Petitioner's failure to file a required Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations).

IV. TAX ASSESSMENTS UNDER THE CODE

Section 6201(a) authorizes the Commissioner to make "assessments" of tax liabilities. An "assessment" is "the formal recording of a taxpayer's tax liability" on the Commissioner' records. Baltic v. Commissioner, 129 T.C. 178, 183 (2007); see also Hibbs v. Winn, 542 U.S. 88, 100 (2004) ("An assessment is made 'by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary'." (quoting section 6203). “Assessment” is a ministerial function: it is “the formal recording and establishment of a taxpayer's liability.” Roth, 922 F.3d at 1131 (citation and internal quotation marks omitted). An assessment is made “by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” Code § 6203; see also Treas. Reg. § 301.6203-1 (describing the method of assessment).

An assessment is a critical event in the life of a tax liability — critical for the taxpayer, the Commissioner, and the administration of the tax system. The most common assessment results from filing a tax return reflecting a tax due, commonly called a “self-assessment” or “summary assessment.”⁸ Other types of assessments are called a deficiency assessment, a jeopardy assessment, and a termination assessment. The statute of limitations sets forth the time in which an assessment can be enforced by legal action. The general rule is a tax may not be collected until it has been assessed and must be assessed within three years of filing the return.⁹ Even if the return is filed late, the three years run from filing the return. In processing a tax return, the Commissioner will assess the amount reflected on the return. After an assessment is recorded, if payment is not made, the Commissioner initiates the collection process, and the Commissioner can force collection of any unpaid part of the assessment from the taxpayer or the taxpayer's property. Once made, an assessment is presumed correct in any later litigation where the merits of the tax may be challenged (Tax Court, refund, suits to collect, and bankruptcy). In all other litigation involving an assessment, the assessment may not be collaterally attacked and has, in effect, the force and effect of a judgment. After the assessment (and notice and demand for payment), a lien attaches to all property and rights to property of the taxpayer. The lien may be perfected by the Commissioner filing a notice of federal tax lien establishing the Commissioner's priority over later creditors of the taxpayer, as well publicly recording that the taxpayer is delinquent in paying his taxes. But if the Commissioner fails to properly assess a tax, the Commissioner is prohibited from collecting the tax because of an improper assessment.¹⁰ The assessment procedures are found in chapter 63 of the Code, and include general assessment procedures (Subchapter A), deficiency procedures for income, estate, gift, and certain excise taxes (Subchapter B), and the tax treatment of partnership items under TEFRA and BBA (Subchapters C and D).

V. THE STATUTORY SCHEME FOR DELEGATION OF AUTHORITY TO ASSESS TAXES AND PENALTIES UNDER THE CODE

In analyzing our issue, we start with the basic rules. Agencies, like the Internal Revenue Service, have only those powers given to them by Congress. West Virginia v. Environmental Protection Agency, 597 U.S. ____ (2022).¹¹ Starting with this basic proposition, the Secretary of the Treasury has the authority to administer and enforce the Internal Revenue Code. 26 U.S.C. § 7801. The Secretary of the Treasury has delegated to the Commissioner the authority to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws. 26 U.S.C. § 7803(a). The Secretary has not authorized the Commissioner to administer, manage, conduct, direct, and supervise imaginary laws. As we demonstrate below, missing from the Code's elaborate rules for assessment is any authority to assess the section 6038 penalty at issue here. The Code provides authority to assess many of its penalties, but not all the foreign information reporting penalties are assessable. This failure expands to capture many other 6038 penalties, as discussed below.

Procedural restriction on assessment of civil tax penalties must be understood within the context of the Internal Revenue Code's statutory scheme for assessing penalties. In that regard, Congress has “authorized and required” the Secretary of the Treasury “to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by” the Internal Revenue Code. Code § 6201(a); see Code § 7601 (“The Secretary shall, to the extent he deems it practicable, cause officers or employees of the Treasury Department to proceed, from time to time, through each internal revenue district and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax.”). The Secretary has delegated these duties to the Commissioner of Internal Revenue, who has further delegated them to Commissioner officials. See Treas. Reg. §§ 301.6201-1(a), 301.7601-1, 301.7701-9. Still, “[t]he Federal tax system is basically one of self-assessment, whereby each taxpayer computes the tax due and then files the appropriate form of return along with the requisite payment.” United States v. Galletti, 541 U.S. 114, 122 (2004) (internal quotation omitted). The Commissioner may immediately “assess” the tax determined by the taxpayer on his or her return, and certain assessable penalties not subject to the Code's deficiency procedures (described below). Code § 6201(a)(1); Meyer v. Commissioner, 97 T.C. 555, 559-60 (1991).

If the Commissioner determines the taxpayer owes more tax — or there is a “deficiency” — he may send the taxpayer a “notice of deficiency.” Code § 6212(a). If the taxpayer does not file a petition for a redetermination with the Tax Court within 90 days, the Code provides that “the deficiency . . . shall be assessed.” Code § 6213(c). If, after receiving a notice of deficiency, the taxpayer files a timely petition in the Tax Court, the Commissioner is restricted from assessing the deficiency “until the decision of the Tax Court has become final.” Code § 6213(a). In this “deficiency proceeding,” the Tax Court has jurisdiction to “redetermine the correct amount of the deficiency . . . and to determine whether any additional amount, or any addition to the tax should be assessed.” Code §6214(a).

Some civil tax penalties imposed by the Code are subject to the deficiency procedures requiring the Commissioner to assert such penalties in a notice of deficiency (or in an answer to a Tax Court petition) before those penalties can be assessed. See Code § 6665(a). Section 6038 is not subject to deficiency provisions. If the Commissioner asserts penalties for the first time in an answer or amended answer to a taxpayer's petition in the Tax Court, the Tax Court “shall have jurisdiction . . . to determine whether [such penalties] should be assessed[.]” Id. At the conclusion of the Tax Court proceedings, “the entire amount redetermined as the deficiency by the decision of the Tax Court which has become final shall be assessed.” Code § 6215(a). Thus is the Commissioner authorized to assess the underlying tax and any additional amount, or any addition to the tax related to the underlying tax deficiency? For example, this authority captures for assessment the accuracy related penalties of Code § 6662 and the fraud penalty of Code § 6663.

But the majority of civil tax penalties imposed by the Commissioner are not subject to the Code's deficiency procedures. See Graev v. Commissioner, 149 T.C. 485, 517-19 (2017) (Holmes, J., concurring in result) (noting that only 7.22% of the total amount of civil tax penalties assessed between October 2015 and September 2016 were subject to the Code's deficiency procedures). For instance, the penalties imposed by § 6651 (failure to file return or pay tax); § 6654 (failure to pay estimated individual income tax), and § 6655 (failure to pay estimated corporate income tax) are generally not subject to the Code's deficiency procedures. Code § 6665(b). However, the Code provides that the penalties imposed outside the deficiency procedures and included in Chapter 68 may be summarily assessed. Code § 6665. Such penalties may be assessed immediately upon receipt of the taxpayer's return. Meyer, 97 T.C. at 559-60; ATL & Sons Holdings, Inc. v. Commissioner, 152 T.C. 138, 149-50 (2019).

Similarly, the “assessable penalties” provided in Subtitle F, Chapter 68, Subchapter B, of the Code (§§ 6671-6725) are not subject to the Code's deficiency regime. Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008). After a taxpayer's liability for tax, additions to tax, and penalties has been determined and assessed, if the taxpayer does not pay, then the Commissioner can employ administrative enforcement methods to collect the unpaid liability through filing a notice of federal tax lien or a levy action. Code §§ 6665(a), 6321-6327 (lien), 6331-6344 (levy); see Galletti, 541 U.S. at 122.

Otherwise, the taxpayer can obtain judicial review of an assessed tax liability (including assessed penalties) only through filing a proper refund suit in district court or the Court of Federal Claims after full payment of the liability. See 28 U.S.C. §§ 1346(a), 1491(a)(1); Code § 7422; Flora v. United States, 362 U.S. 145, 177 (1960); Interior Glass Systems v. United States, 927 F.3d 1081, 1086 (9th Cir. 2019).

A. There Is No Assessment Authority for Certain 6038 Penalties, Including Those in Our Case

Once the Service determines that a section 6038 penalty applies, the Internal Revenue Manual (“IRM” or “Manual”) instructs its agents to prepare a Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and Form 886-A, Explanation of Items, and forward to the Service Center to assess the penalty.¹² The Manual also states that section 6038 penalties are not subject to deficiency procedures^.13 The Manual fails to provide any authority or otherwise address how the Commissioner can automatically assess a nonassessable penalty.¹⁴

The Code distinguishes between assessable and non-assessable penalties. Section 6201(a) provides the general authority for the Commissioner's ability to assess all taxes, which include “interest, additional amounts, additions to the tax and assessable penalties imposed by this title (emphasis added).” The section states that to assess a penalty it must be an assessable penalty.

Section 6671 provides the rules for assessment of assessable penalties as identified in Chapter 68 — Subchapter B — Assessable Penalties (§§ 6671 to 6725). Chapter 68 (Additions to the Tax, Additional Amounts, and Assessable Penalties) also contains section 6665(a) a companion section to 6671 on a slightly different subject. Section 6665(a) appears to expand the assessable penalty assessment rules to include any penalty under Chapter 68, not just the penalties in Subchapter B.

B. The Assessment of International Penalties in This Case Are Illegal and Cannot Support Any Administrative Collection Effort by The Commissioner.

There is no statutory authority for assessing the penalties relating to the following foreign information returns:

• Section 6038: Information returns required for certain foreign corporations (Form 5471) and partnerships (Form 8865), and foreign disregarded entities (Form 8858); the associated penalty is in the text of section 6038 all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

• Section 6038A: Information returns required for certain foreign-owned U.S. corporations (Form 5472); the associated penalty is in the text of section 6038A all in Chapter 61 all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

• Section 6038B: information returns required for certain transfers to foreign persons (Forms 926 and 8865); the associated penalty is in the text of section 6038B all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

• Section 6038C: Information returns required for certain foreign corporations engaged in U.S. business (Form 5472); the associated penalty is in the text of sections 6038C all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

• Section 6038D: Information returns regarding foreign financial assets (Form 8938); the associated penalty is in the text of section 6038D all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

  Please notice that the lack of authority to assess for the information returns identified above does not extend to the following foreign information returns where Congress gave the Commissioner the assessment authority over the identified returns:

• Section 6048: Information returns required for certain reportable events for a foreign trust (Forms 3520 and 3520-A). However, the associated penalty, section 6677 is in Chapter 68 — Additions to the Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty;

• Section 6046: United States persons, in certain circumstances, required to file a return if they acquire or dispose of an interest in a foreign corporation, or if their proportional interest in a foreign corporation changes. (Form 5471 Schedule O). However, the associated penalty, section 6679 is in Chapter 68 — Additions to The Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty.

• Section 6046A: United States persons, in certain circumstances, required to file a return if they acquire or dispose of an interest in a foreign partnership, or if their proportional interest in a foreign partnership changes. (Form 8865). However, the associated penalty, section 6679 is in Chapter 68 — Additions to The Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty.

Here the Commissioner erroneously assessed 6038 penalties pertaining to Forms 5471 for Petitioner. Chapters 63 and 68 of the Code give the Commissioner the authority to assess the penalties found in section 6677 and section 6679. But there is no corresponding authority in the Code giving the Commissioner the authority to assess the section 6038 series of penalties. Since the Commissioner cannot assess the penalties, the Commissioner must request the Department of Justice to sue the taxpayer in District Court to collect the penalties and reduce them to a judgment.

C. The Commissioner's 2020 Position on This Matter

The Commissioner provided the National Taxpayer Advocate with a response to her Most Significant Problem No. 8 statement: We reproduce it here.

While the U.S. income tax system is based on self-disclosure and self-assessment by taxpayers, there are inherent challenges with obtaining and verifying taxpayer information in the international context. Accordingly, Congress enacted statutory penalties in Internal Revenue Code (IRC) Chapter 61 for failure to timely file information returns relating to cross-border business activities.

These information returns relate to both foreign taxpayers' activities and investments in the U.S. and U.S. taxpayers' activities and investments abroad. The IRS also utilizes the information in these annual returns to monitor and enforce tax compliance for other tax years and for other taxpayers (such as other shareholders or partners). The Treasury Inspector General for Tax Administration (TIGTA) recommended that the IRS consider systemic assessment of these penalties in 2006. After studying the issue further, the IRS began systemic assessment of some international information return penalties in 2009, and TIGTA evaluated IRS progress with implementing systemic assessment in 2013.

We disagree with the fundamental premise of the MSP that the IRS lacks legal authority to assess Chapter 61 penalties. The IRC provides two methods to assess penalties, either (1) pursuant to deficiency procedures or (2) as assessable penalties, that is, those penalties not subject to deficiency procedures. Penalties under Chapter 61, including IRC § 6038 and § 6038A, are meant to enforce reporting requirements and are not based on the tax shown on a return or the existence of a deficiency. As such, there is no legal basis for us to apply deficiency procedures to these penalties and the IRS has consistently treated Chapter 61 penalties as assessable.

IRC § 6201(a) provides the IRS authority to assess assessable penalties, that is, those penalties not subject to deficiency procedures. Neither that section nor the IRC in general limits assessable penalties to those described under IRC Subchapter 68B. To read the “Assessable Penalties” heading of that subchapter as the exclusive location of assessable penalties would be contrary to IRC § 7806, which expressly prohibits giving any legal effect to descriptive matter relating to the content of the IRC. Accordingly, there is authority to treat these penalties as immediately assessable, and the IRS is not required to first request that the Department of Justice file a suit to obtain a judgement for the penalties before collecting them.

The assessment of these penalties at filing, much like with other assessable penalties, provides the most equitable treatment of enforcement as it doesn't require the IRS to apply case selection criteria for examination. Meaning, all corporations and partnerships are held to the same standards of the law. The IRS recognizes the abatement rates for these systemically assessed penalties on corporations and partnerships are relatively high. We look forward to partnering with TAS to explore whether there are more efficient methods of administrating these penalties while maintaining the equitable treatment afforded through systemic assessments.¹⁵

The Commissioner doesn't have a credible answer to our complaint. The Commissioner correctly states that the Code does not provide authority for the use of deficiency procedures with respect to Chapter 61 penalties. Therefore, the Commissioner cannot use the assessment procedures against the Petitioner contained in the deficiency procedures. Further, the Commissioner has not provided and cannot provide any unambiguous statutory language or on-point judicial rulings based on which these 6038 penalties can be assessed.

Nevertheless, the Commissioner finds a sweeping grantof authority to assess these 6038 penalties in Code § 6201(a), which allows  the Commissioner to assess “taxes (including interest, additional amounts, additions to the tax, and assessable penalties).” In NFIB v. Sebelius, 567 U.S. 519, 546 (2012). the Supreme Court agreed that the plain language of Code § 6201 places assessable penalties within the definition of a tax for purposes of granting the Commissioner the authority to assess those penalties. To the Commissioner, this in turn supposedly gives him the ability to summarily assess any penalties not subject to deficiency procedures, whether or not those penalties are listed in Chapter 68, Subchapter B where “assessable penalties” are defined. In other words, even though the Code fails to explicitly recognize these 6038 penalties as assessable, like it has for other penalties, the 6038 penalties must be treated as assessable because they are not subject to deficiency procedures therefor not assessable under the deficiency procedures, and they are not specifically identified as “assessable penalties”.

The Commissioner cannot interpolate assessment authority over section 6038(b) penalties into the Code by referencing the Code as a whole. We are left to guess whether the Code creates "emanations" of power that created "penumbras" of authority within which the Commissioner can operate to assess the 6038 penalties even if he is not explicitly authorized in the Code. Or is the Commissioner falling back on an ipse dixit argument: “It is, because I say it is.” In 1980, Supreme Court held it “unreasonable to assume” that Congress gave an agency “unprecedented power[s]” in the “absence of a clear [legislative] mandate.” Industrial Union Dept., AFL-CIO v. American Petroleum Institute, 448 U. S. 607, 645 (plurality opinion). The unprecedented power the Commissioner claims here, assessing a penalty with no statutory authorization to do so, contravenes rules governing self-government, equality, fair notice, federalism, and the separation of powers. Is the Commissioner required to follow the law, like all taxpayers are so required, or not? The Commissioner's answer is “not”. The Commissioner is wrong.

A statute providing for a penalty and the Commissioner's authority to assess that penalty are two very distinct issues. Although the Code §§ 6038 and 6038A penalties are provided for in the Code, the authority to assess those penalties is not. To collect these penalties, the Department of Justice must sue the taxpayer to collect any unpaid penalties. The contention that Code § 6201 allows the assessment of Code §§ 6038 and 6038A penalties represents an overreach. The authority granted by Code § 6201(a) applies to the enumerated items, which, although extensive, do not include Code §§ 6038 and 6038A penalties residing within Chapter 61. Thus, although Code § 6201 contemplates the collection of assessable penalties enumerated in Chapter 68, Subchapter B, it does not provide authority, either directly or indirectly, for the assessment of Code §§ 6038 and 6038A penalties which reside in another Chapter, Chapter 61. The Commissioner lacks the legal ability to treat Code §§ 6038 and 6038A as giving rise to assessable penalties

Code § 6201 simply states that “assessable penalties” can be assessed and the cases cited by the Commissioner only decide that penalties not subject to deficiency procedures do not require deficiency procedures. These circumstances, either individually or in combination, cannot provide a basis for determining that Chapter 61 penalties are assessable in the first instance. The Commissioner primarily relies on the circular logic that just because the Commissioner cannot apply deficiency procedures, it therefore, by definition, must be able to resort to summary assessments. These are not either/or propositions, and the authority to assess is in no way conferred by the unavailability of deficiency procedures. The Commissioner simply has no ability to assess Chapter 61 penalties under the Code as currently codified. This unfortunate and likely unintended situation is why assessment and collection of Chapter 61 penalties should be referred to the Department of Justice.

The rules of statutory constriction do not help the Commissioner. Statutory construction always “begin[s] with the text of the statute.” Limtiaco v. Camacho, 549 U.S. 483, 488 (2007). It is well established that the “starting point in discerning congressional intent is the existing statutory text” and that “when the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms.” Schroeder v. United States, 793 F.3d 1080, 1082-83 (9th Cir. 2015) (quoting Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004)). The text of the Code is clear — the Commissioner has no assessment authority over the 6038 penalties here.

Tax laws are technical laws. They are not subject to the general principles of equity; instead, they require strict adherence to the explicit procedures they establish. See United States v. Dalm, 494 U.S. 596, 608 (1990); Lewyt Corp. v. Commissioner, 349 U.S. 237, 249 (1955); Oropallo v. United States, 994 F.2d 25, 28 n.3 (1st Cir. 1993); In re Graham, 981 F.2d 1135, 1138 (10th Cir. 1992); Ewing v. United States, 914 F.2d 499, 501 (4th Cir. 1990); Richardson v. Smith, 301 F.2d 305, 306 (3d Cir. 1962) (noting that “taxation is a game which must be played strictly in accordance with the rules”). Because the right at issue is partially procedural, much of the “harm” is deprivation of that procedure. Cf. Hughes v. Rowe, 449 U.S. 5, 13 & n.2 (1980); Carey v. Piphus, 435 U.S. 247, 266 (1978) (holding that deprivation of a party's procedural due process rights is actionable, even without injury).

The Commissioner fails to give proper weight to the words Congress chose, or to the distinction Congress drew by using different words in giving the Commissioner different assessment powers for different penalties. Badaracco v. Commissioner, 464 U.S. 386, 398 (1984) (“Courts are not authorized to rewrite a statute because they might deem its effect susceptible of improvement.”); Kirkendall v. Department of the Army, 479 F.3d 830, 857-58 (Fed. Cir. 2007); see also Sosa v. Alvarez-Machain, 542 U.S. 692, 711 n.9 (2004) (“[W]hen the legislature uses certain language in one part of the statute and different language in another, the court assumes different meanings were intended.” (quotation marks omitted)); 2A Norman J. Singer & Shambie Singer, Sutherland Statutes and Statutory Construction § 46:6 (7th ed. 2009). Here, there is no reason to think that Congress used the term “assessable penalties” to mean “every penalty mentioned in the Code.” Russello v. United States, 464 U.S. 16, 23 (1983) (“We would not presume to ascribe this difference [in language between subsections] to a simple mistake in draftsmanship.”); see also Barnhart v. Sigmon Coal Co., 534 U.S. 438, 454 (2002). Had Congress intended to give the Commissioner the power he now claims they would have said so. They did not say so.

Under the Code, the Commissioner has no assessment authority over our 6038 penalties, and he has shown us none. The government position lacks merit. And maintaining the Commissioner' position is even worse for thousands of taxpayers. By requiring them to first pay the penalty and incurring the litigation for District or Court of Claims Court poses an unfair burden to taxpayers but, more importantly the requirement is not supported by law. The government can eliminate its lack of assessment authority by having Congress pass a technical amendment to the Code specifying section 6038 assessment authority. Or Congress could amend Code § 6212 to require the Commissioner to issue a notice of deficiency before assessing penalties under Code §§ 6038, 6038A, 6038B, 6038C, and 6038D, thus giving the Commissioner the authority to assess under the deficiency procedures. Or the Commissioner could just follow the Code, as the taxpayers are required to follow the Code, and refer the 6038 liabilities to the Department of Justice for collection like other tax judgments. Instead, we are here.

VI. CONCLUSION

The Tax Court should order the Commissioner to cease and desist from using his administrative collection powers to collect the 6038 penalties at issue in this case, because the tax penalties have not been validly assessed. Without a valid assessment, the Commissioner must request the Department of Justice to reduce the 6038 penalties to judgment and collect them using the collection powers available to the government in a United States District Court.

DATE: September 8, 2022

EDWARD M. ROBBINS, JR.
U.S. Tax Court No. RE 0111
HOCHMAN SALKIN TOSCHER
PEREZ, P.C.
9100 Wilshire Boulevard, Suite 900W
Beverly Hills, California 90212
Tel. 310.801.4573
Fax. 310.859.1430
EdR@taxlitigator.com

Counsel for Petitioner