Tax Court Sticks to Its Farhy Holding that the § 6038(b) Penalty Is Not Assessable (11/19/24)

I have previously written on the saga where the Tax Court held that the IRS had no assessment authority for the § 6038(b) penalty and was reversed by the D.C. Court of Appeals. See --

• Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (4/3/23; 4/23/23), here (discussing Farhy v. Commissioner, 160 T.C. 399 (2023)) and
• DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (5/3/24; 5/4/24), here (discussing  Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024)).

In Mukhi v. Commissioner, 163 T.C. ___, No. 8 (11/18/24) (reviewed opinion), TN here* and GS here, the Tax Court reaffirmed its Farhy holding because the case is appealable to the Eighth Circuit,  permitting the Tax Court to reach its own decision without being bound by the precedent of the D.C. Circuit in its Farhy decision. Only Judge Nega dissented without opinion, presumably on the basis of the D.C. Circuit Farhy decision.

This is a notice only blog. I think the Tax Court decision in Mukhi and Farhy wrong on the merits for reasons I have written on before in the cited blogs. When I say the Tax Court is wrong on the merits, I am not speaking to whether or not is should have sustained a wrong decision on stare decisis. On the issue of stare decisis, the Tax Court said (Slip Op. 5):

          The Tax Court adheres to the doctrine of stare decisis and thus affords precedential weight to our prior reviewed and division opinions. See Analog Devices, Inc. & Subs. v. Commissioner, 147 T.C. 429, 443 (2016). Because of our nationwide jurisdiction, the Court takes seriously its obligation to facilitate uniformity in the tax law. See Bankers Union Life Ins. Co. v. Commissioner, 62 T.C. 661, 675 (1974). When one of our decisions is reversed by an appellate court, the Court will “thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, . . . follow the higher court.” Lawrence v. Commissioner, 27 T.C. 713, 716–17 (1957), rev’d per curiam on other grounds, 258 F.2d 562 (9th Cir. 1958). But if the Court  remains convinced that our original decision was right, the proper course is to “follow [our] own honest beliefs until the Supreme Court decides the point” and thus continue to apply our own precedent. Id. Our decision in Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), created “a narrow exception” to this approach. Lardas v. Commissioner, 99 T.C. 490, 494 (1992). In a given case, when a “squarely [o]n point” decision of the appellate court to which an appeal would lie contradicts our own precedent, we will follow the appellate court’s decision. See Golsen, 54 T.C. at 757. To do otherwise would be “futile and wasteful” given the inevitable reversal from the appellate court. See Lardas, 99 T.C.at 494–95.

* Note, those wanting to read the Tax Court Slip Opinion can retrieve it from the Tax Court docket entries here at #93. This is because the Tax Court does not provide permalinks to its opinions as do many Courts of Appeals and the Supreme Court. The Tax Court provides only temporary links which time out.

NTA 2023 Annual Report and 2024 Purple Book (1/15/24)

The National Taxpayer Advocate has issued her 2023 annual report (here allowing download of the Full Report, the Executive Summary, and the NTA Purple Book Compilation of Legislative Recommendations, and Research Reports). The Full Report and its components have much that tax procedure enthusiasts will want to consider. I bullet point here some of the items that caught my eye on a quick overview. I may come back with more detail later.

• MOST LITIGATED ISSUES – NATIONAL TAXPAYER ADVOCATE RECOMMENDATIONS TO MITIGATE DISPUTE, pp. 169-171, beginning here.
• The 2024 Purple Book: Compilation of Legislative Recommendations, here.

Some of these are repeats of carryover issues from earlier years. For example, her recommendations on § 6751(b), which I discuss in Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here.

My only comments are:

Regulations Interpreting Pre-1996 Code Provisions; Fixing Farhy (5/11/23; 5/12/23)

In Farhy v. Commissioner, 160 T.C. No. 6 (4/3/23), TN here and GS here, the Tax Court held that the Code did not give the IRS authority to assess § 6038(b)(1) or (2) penalties, here. Specifically, the Tax Court held that § 6201(a) did not authorize these penalties. I posted some concerns about the correctness of Farhy in a blog. 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. Is there some possible self-help fix the IRS could use to pre-empt the Tax Court’s Farhy decision?

An interpretive regulation could fix the problem for the IRS. I noted such a fix for the Eleventh Circuit’s opinion in Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021),  11^th Cir. here and GS here holding an interpretive regulation from the 1980s procedurally invalid for the foot-fault of failing to respond in the regulation to a comment which the Court second-guessed to be material to the rulemaking enterprise. The fix is for Treasury to adopt a replacement interpretive regulation and make it retroactive to the effective date of the regulation or retroactive to some point in between that would pick up all the syndicated shelters currently in the pipeline. Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (Federal Tax Procedure Blog 1/6/22; 5/12/23), here. That proposed fix was anchored in the pre-1996 § 7805(a), which generally unquestionably allowed retroactivity for interpretive regulations and that authority remained for pre-1996 Code provisions.

The same fix can work for § 6201(a). The relevant statutory language is:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.

That text’s "including" clause should be sufficiently capacious to be read as including provisions not specifically enumerated. § 7701(c) (“The terms ‘includes’ and ‘including’ when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.”) That avoids a dumb result -- Congress imposes a penalty treated generally as a tax without authority to assess which is just a formal recording of a liability Congress clearly meant to impose.

Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (4/3/23; 4/23/23)

In Farhy v. Commissioner, 160 T.C. 399 (2023), TN here and GS here, the Tax Court held in a CDP case that collection efforts for the § 6038(b) penalties for initial and continuation failure to file Forms 5471 were not authorized because there was no assessment authority for § 6038(b) penalties. Section 6038(b) is here. Assessments are required for IRS collection actions such as liens and levies, thus the collection action failed.

My comments:

1. I find the Farhy holding odd; indeed, I think it is wrong. The statute is clear that Congress intended the § 6038(b) penalties to apply. The penalty for the initial failure seems to be automatically imposed by the statute's literal terms without any action by the IRS. § 6038(b) (“If any person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), [the Form 5471] such person shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists.”) There is no authority—and the Tax Court in Farhy cites none—for the proposition that Congress intended to exclude the § 6038(b) penalty from usual IRS collection tools. Instead, at best, the Tax Court finds a footfault in the interlocking statutory provisions.

2. The Code treats penalties as taxes, and 6201(a), here, authorizes “assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.”  (Emphasis supplied by JAT.) “Including” at least suggests that, so long as the tax (penalty) is imposed by Title 26, assessment authority can include more than the types of liabilities specifically listed. More importantly, it would not facially exclude the § 6038(b) penalties and should be capacious enough to cover the § 6038(b) penalties, particularly because there is no reason to think that Congress intended otherwise.

3. An assessment is simply a recording on the IRS books that a taxpayer owes a liability. In Hibbs v. Winn, 542 U.S. 88, 100 (2004), here, the Supreme Court described assessments (cleaned up):

          As used in the Internal Revenue Code (IRC), the term “assessment” involves a recording of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The “assessment” is essentially a bookkeeping notation. Section 6201(a) authorizes the Secretary of the Treasury “to make . . . assessments of all taxes . . . imposed by this title.” 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.” §6203. n2 See also M. Saltzman, IRS Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal Revenue Service signs “summary list” of assessment to record amount of tax liability, “the official act of assessment has occurred for purposes of the Code”).
   n. 2 Section 301.6203-1 of the Treasury Regulations states that an assessment is accomplished by the “assessment officer signing the summary record of assessment,” which, “through supporting records,” provides “identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.” 26 C.F.R. §301.6203-1 (2003).

If the statute says a delinquent filer is subject to the penalty, it makes no sense that the IRS can’t record the liability on its books—easily meeting the definition of an assessment. And, what logic is it that the IRS cannot record on its books a clear liability such as § 6038(b)?