DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (5/3/24; 11/19/24)

In Farhy v. Commissioner, 100 F.4th 223 (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:

Barred Collection on Assessment Closes Unlimited Statute of Limitations on Assessment (9/24/12)

In ILM 201238028 (6/19/12), here, the IRS held that, even if the IRS otherwise has an unlimited statute of limitations (either for a fraud return or failure to file per Section 6501(c)(1) and (3)), once the IRS assesses a tax for the year, the unlimited statute on assessment becomes moot if the IRS does not collect the assessed tax within the 10-year collection statute of limitations period in Section 6502(a), here.  Under the facts in that memo, the IRS made the assessment after making a substitute for return under Section 6020(b) and issuing a notice of deficiency.  Once the assessment was made, the 10 year limitations period under Section 6502(a)(1) commenced and expired.  The IRS's reasoning is:

The Service may execute a return for any taxpayer who fails to make a return required by any internal revenue law or regulation at the time prescribed, or who makes, willfully or otherwise, a false or fraudulent return. I.R.C. § 6020(b). The execution of a section 6020(b) return will not start the running of the period of limitations on assessment and collection without assessment. I.R.C. § 6501(b)(3) [here]. Accordingly, until the taxpayer files his own return, there will be no deadline by which the Service must assess the tax or file a suit to collect without assessment. Once the Service chooses to assess the tax, however, a 10-year period of limitations on collection of that assessment begins. I.R.C. § 6502(a)(1).