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.

Court Denies Summary Judgment to Party with Burden of Persuasion Because that Party's Testimony Evidence May Not Be Believed (11/24/19)

In Martinelli v.Commissioner, (T.C. Dkt No. 4122-18 Designated Order 9/20/19), here, the IRS issued a deficiency against Martinelli and separately apparently assessed a penalty under § 6038D(d) for failure to report a foreign financial account on Form 8938, Statement of Specified Foreign Financial Assets.  Readers may recall that foreign financial accounts have, for some time now, been reportable to Treasury on the FBAR and, beginning for years after 2010, on an IRS form, now designated Form 8938.  The §6038D(d) penalty is an assessable penalty, meaning that a notice of deficiency is not required, so, bottom line the Tax Court order holds that the penalty is not within the Court’s deficiency jurisdiction.

I will discuss the Designated Order below, but first offer the following introduction from my Federal Tax Procedure Book (footnotes omitted):

Reporting Foreign Financial Assets on Form 8938.

  In 2010, Congress enacted a tax return reporting requirement for foreign financial assets that parallels, but is different from the FBAR. The reporting is on Form 8938 which is attached to the income tax return.  Form 8938 is required in the following circumstances with the reporting thresholds as indicated: (i) an unmarried taxpayer having specified foreign financial assets that have a value of more than $50,000 on the last day of the year or $75,000 at any time during the year; (ii) married taxpayers residing in the U.S. and filing a joint return having specified foreign financial assets of more than $100,000 on the last day of the year or $150,000 at any time during the year; (iii) married taxpayers filing separate returns and residing in the U.S. having specified foreign financial assets of $50,000 on the last day of the tax year or more than $75,000 at any time during the year; and (iv) taxpayers living abroad (either for the entire tax year or for 330 days during 12 consecutive months ending in the tax year) (a) not filing a joint return and having specified foreign assets of  $200,000 on the last day of the year or $300,000 at any time during the year and (b) filing a joint return and having specified assets of $400,000 on the last day of the year or $600,000 at any time during the year.  There are certain limited exceptions for reporting assets that are reported elsewhere on tax forms (not the FBAR).

Reportable “specified foreign financial assets” are (1) depository or custodial accounts at foreign financial institutions and (2) to the extent not held in an account at a financial institution, (i) stocks or securities issued by foreign persons, (ii) any other financial instrument or contract held for investment that is issued by or has a counter-party that is not a U.S. person, and (ii) any interest in a foreign entity.  The IRS interprets these terms broadly, so IRS pronouncements must be consulted each time the issue arises, particularly during the early years of implementation when the IRS’s interpretations may be in a period of flux.  The assets and foreign institutions and the maximum values during the year must be reported.