DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (5/3/24; 5/4/24)

In Farhy v. Commissioner, ___ F.4th ___, 2024 U.S. App. LEXIS 10843 (D.C. Cir. 5/3/24), CADC here, TN here, and GS here, the Court of Appeals (Judge Pillard author) held that the IRS has assessment authority for the § 6038(b) penalty. In so holding, the Court rejected the Tax Court holding that the IRS did not have assessment authority. Judge Pillard’s opinion is well-reasoned and presented. Although it is not a short opinion, I highly recommend reading the whole thing.

I will say that the opinion talks in terms of Congress’ intent. Thus, for example, summarizing the reasoning (Slip op. 13-14, emphasis supplied by JAT):

We need not embrace either party’s tax code-wide default rule to resolve this case. We accordingly do not pass on those broader theories beyond explaining why Farhy’s does not preclude assessment of section 6038(b) penalties. Instead, we conclude that a narrower set of inferences suffices to show that Congress intended to render those penalties assessable. Read in light of its text, structure, and function, section 6038 itself is best interpreted to render assessable the fixed-dollar monetary [*14] penalties subsection (b) authorizes. As a result, the Commissioner’s authority to assess all “assessable penalties” encompasses the authority to assess penalties imposed under section 6038(b).

My analysis is that there was no congressional intent on assessment authority issue. But given the schema, one can fairly infer that, had Congress had an intent on the assessment authority issue, it would have been to confer assessment authority on the IRS. That is simply filling in the gaps as a matter of statutory interpretation.

For my thoughts on the issue (noting particularly my skepticism on the Tax Court’s now reversed decision, see my prior blog posts (chronological order)):

• Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (Federal Tax Procedure Blog 4/3/23; 4/23/23), here.
• Regulations Interpreting Pre-1996 Code Provisions; Fixing Farhy (Federal Tax Procedure Blog 5/11/23; 5/12/23), here.

Added 5/3/35 9:00 pm:

JAT Comments:

1. The Court issued an Order here as follows:

O R D E R

It is ORDERED, on the court's own motion, that the Clerk withhold issuance of the mandate herein until seven days after disposition of any timely petition for rehearing or petition for rehearing en banc. See Fed. R. App. P. 41(b); D.C. Cir. Rule 41. This instruction to the Clerk is without prejudice to the right of any party to move for expedited issuance of the mandate for good cause shown.

FOR THE COURT:

Mark J. Langer, Clerk

Question about the Order: How often does a Court (in this case a panel) make such an order that, it seems to me, invites a petition for rehearing? And, really speculating, is the panel inviting a petition for rehearing en banc because no panel member dissented? 

2. A comment aside directed to new tax procedure fans (students or early practitioners), in the opinion, the Court says at the end that (Slip op. 23, emphasis supplied):

For the foregoing reasons, we reverse the judgment of the Tax Court and remand with instructions to enter decision in favor of the Commissioner.

An appeal in a Tax Court case is from the Tax Court "decision" rather than "judgment." § 7482(a)(1) (conferring "exclusive jurisdiction to review the decisions of the Tax Court"). So, technically, the reversal is of the "decision: of the Tax Court, but the panel gets it right by ordering "decision" for the IRS. The decision is the equivalent of judgment in the district court. See Rule 58, FRCP.

Added 5/4/24 at 9:45 am

3. One issue is whether the Tax Court will accept the D.C. Circuit’s holding (as it sometimes does after such a Circuit reversal) or stick to its precedential holding in the Tax Court opinion in Farhy. Under the Tax Court’s Golsen rule, in cases appealable to a Circuit with a controlling precedent (such as Farhy here), the Golsen rule requires the Tax Court to decide cases consistent with the controlling Circuit precedent, even though (as in Farhy) the Tax Court has held otherwise in a precedential T.C. opinion. Until and unless the Tax Court reverses its Farhy precedent, the Tax Court will continue to apply that precedent in cases appealable to other Circuits. See On the Tax Court's Golsen Rule (Federal Tax Procedure Blog 12/3/23; 12/5/23), here. In the cases appealable to other Circuits, the Tax Court may reconsider its Fahry precedent in light of the subsequent Circuit Fahry opinion and issue a new precedential opinion. I think that, in the next opportunity, the Tax Court will at least reconsider based on the D.C. Circuit Farhy opinion, but there is no certainty what the Tax Court will do. 

• I think that, on its next occasion to reconsider its Farhy precedent, the Tax Court will have to work hard to avoid changing its precedent to align with the D.C. Circuit Farhy opinion because (i) the reasoning in the D.C. Circuit opinion is compelling and (ii) the Tax Court opinion in Farhy was not a reviewed opinion. In this regard, Farhy was decided by Senior Judge Marvel, so that no sitting Tax Court Judge who will participate in a reviewed opinion has expressed an opinion as to whether the Tax Court Farhy opinion is correct; at least conceptually, the Judges required for a reviewed opinion may not have investment in the outcome.
• The Tax Court previously declined to reconsider its Farhy opinion (Mukhi v. Commissioner, 162 T.C. ___, No. 8, slip op. 17-18 (2024)), but there was then no contrary Circuit opinion.