Sydney G. and Lisa M. Smith v. Commissioner , 133 T.C. No. 18 ( 2009 )

133 T.C. No. 18UNITED STATES TAX COURT
SYDNEY G. AND LISA M. SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9845-09. Filed December 21, 2009.
R issued Ps a notice of deficiency that determined
deficiencies in income tax and accuracy-related
penalties for 2003, 2004, 2005, and 2006 under secs.
6662, I.R.C., and 6662A, I.R.C. R subsequently sent Ps
notices of assessment for penalties assessed under sec.
6707A, I.R.C., for 2004, 2005, and 2006. R filed a
Motion to Dismiss for Lack of Jurisdiction and to
Strike as to the Section 6707A Penalties.
Held: This Court lacks jurisdiction to
redetermine sec. 6707A, I.R.C., penalties in a
deficiency proceeding.
Michael E. Lloyd and Stephen J. Pieklik, for petitioners.
John R. Bampfield, for respondent.
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OPINION
KROUPA, Judge: This matter is before the Court on
respondent’s Motion to Dismiss for Lack of Jurisdiction and to
Strike as to the Section 6707A Penalties. We decide for the
first time whether this Court has jurisdiction in a deficiency
proceeding to redetermine a taxpayer’s liability for section
6707A1 penalties. We conclude that we do not.
Background
We recite these facts solely for purposes of ruling on
respondent’s motion. Petitioners resided in Hawaii at the time
they filed the petition. Respondent issued petitioners a
deficiency notice for 2003, 2004, 2005, and 2006. Respondent
determined a deficiency in income tax for each challenged year,
as well as accuracy-related penalties under sections 6662 and
6662A as follows:
Penalties
Year Deficiency Sec. 6662 Sec. 6662A
2003 $637 $127.40 --
2004 65,065 5,433.20 $10,804.50
2005 33,683 94.60 10,500.00
2006 34,589 53.00 10,762.00
Respondent also sent petitioners notices of assessment of
section 6707A penalties for failure to report involvement in a
1
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
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listed transaction. The assessments were for 2004, 2005, and
2006, in the amount of $100,000 for each year, totaling $300,000.
Respondent also issued deficiency and assessment notices to
petitioner Mr. Smith’s solely owned company, Sydney G. Smith, MD,
Inc. (corporation). Respondent determined that the corporation
had deficiencies in income tax for 2004, 2005, and 2006 and was
liable for accuracy-related penalties under sections 6662 and
6662A. Respondent also assessed the corporation with section
6707A penalties for years 2004, 2005, and 2006, in the amount of
$200,000 for each year, totaling $600,000. Mr. Smith filed this
case separately from the case involving his corporation, Sydney
G. Smith, MD, Inc. v. Commissioner, Docket No. 10037-09.
Petitioners timely filed a petition challenging the
deficiency notice and the notices of assessment. Respondent then
filed a Motion to Dismiss for Lack of Jurisdiction and to Strike
as to the Section 6707A Penalties, stating that this Court lacks
jurisdiction to redetermine the section 6707A penalties.
Petitioners object and ask the Court to deny respondent’s motion
and find that this Court has jurisdiction to redetermine
liability for the section 6707A penalties.
The parties agree that we have jurisdiction to decide the
issues presented in the deficiency notice. The parties disagree,
however, whether this Court has jurisdiction to redetermine
petitioners’ liability for the section 6707A penalties.
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Discussion
We now consider whether we have jurisdiction to redetermine
petitioners’ liability for section 6707A penalties. We begin by
explaining the general principles of Tax Court jurisdiction.
Tax Court Jurisdiction
This Court is a court of limited jurisdiction and may
exercise jurisdiction only to the extent authorized by Congress.
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The Tax Court
is without authority to enlarge upon that statutory grant. See
Phillips Petroleum Co. v. Commissioner, 92 T.C. 885, 888 (1989).
We nevertheless have jurisdiction to determine whether we have
jurisdiction. Hambrick v. Commissioner, 118 T.C. 348 (2002); Pyo
v. Commissioner, 83 T.C. 626, 632 (1984); Kluger v. Commissioner,
83 T.C. 309, 314 (1984). We therefore find we have authority to
determine whether this Court has jurisdiction to redetermine
petitioners’ liability for the section 6707A penalties.
Respondent contends that we lack jurisdiction to redetermine
the section 6707A penalties and has therefore moved to strike
them from the pleading. This Court may strike from any pleading
any insufficient claim or defense or any redundant or immaterial
matter upon a timely motion of the parties or on our own
initiative. Rule 52. In determining whether we lack
jurisdiction and therefore may strike the portion relating to the
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section 6707A penalties, we turn now to the legislative history
of section 6707A.
Legislative History of Section 6707A
Congress enacted section 6707A to aid the Internal Revenue
Service’s (IRS) effort to stop abusive tax shelters, specifically
by imposing a penalty for a taxpayer’s failure to disclose
participation in certain tax-avoidance transactions known as
reportable transactions.2 See H. Rept. 108-548 (Part 1), at 261
(2004). Before section 6707A’s enactment, the Treasury
Department had issued regulations requiring taxpayers to disclose
participation in reportable transactions. See id. at 260; sec.
1.6011-4, Income Tax Regs. Even with the disclosure requirement,
however, the IRS often did not learn of the existence of tax
shelters until after it conducted audits. National Taxpayer
Advocate, 2008 Annual Report to Congress (Vol. Two), at 420
(2008). Congress believed that Treasury needed additional tools
to enforce compliance with the reportable transaction disclosure
regulations. Congress thereafter passed a law imposing a penalty
for failure to include information regarding participation in a
reportable transaction on a taxpayer’s tax return or statement.
H. Rept. 108-548 (Part 1), supra at 261. Congress codified the
2
Sec. 1.6011-4(b), Income Tax Regs., defines “reportable
transactions” to include “listed transactions” (e.g., a
transaction the Internal Revenue Service (IRS) has determined to
be a tax avoidance transaction and has identified by notice,
regulation, or other published guidance as a listed transaction).
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new penalty in section 6707A. American Jobs Creation Act of
2004, Pub. L. 108-357, sec. 811, 118 Stat. 1575.
The amount the IRS may assess a taxpayer for failure to
include information required under section 6011 with respect to a
reportable transaction other than a listed transaction is $10,000
in the case of an individual and $50,000 in any other case. Sec.
6707A(b)(1). If the failure is with respect to a listed
transaction the penalty is increased to $100,000 in the case of
an individual and $200,000 in any other case. Sec. 6707A(b)(2).
The penalty applies without regard to whether the transaction
ultimately results in an understatement of income, estate, gift,
or excise tax, or, for that matter, any tax whatsoever, and in
addition to any other penalty, including an accuracy-related
penalty, imposed by the Code. See sec. 6707A(f).
The Commissioner may rescind all or any portion of the
penalty imposed respecting a reportable transaction other than a
listed transaction. Sec. 6707A(d)(1). A determination by the
Commissioner regarding the rescission of a penalty may not be
reviewed in any judicial proceeding. Sec. 6707A(d)(2). The
legislative history indicates that the statute’s prohibition of
judicial review is not intended otherwise to limit the taxpayer’s
ability to litigate whether a penalty is appropriate. H. Rept.
108-548 (Part 1), supra at 262 n.233; see Rev. Proc. 2007-21,
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2007-1 C.B. 613. We turn now to petitioners’ liability for the
section 6707A penalties.
Tax Court Review of “Assessable Penalties”
Petitioners filed a petition with this Court asserting that
we have jurisdiction not only over the deficiency notice but also
over the assessed section 6707A penalties. Respondent counters
that our deficiency jurisdiction does not include section 6707A
penalties.
A section 6707A penalty is an “assessable penalty” located
under subchapter B of chapter 68, entitled “Assessable
Penalties.” Respondent asserts that petitioners may not seek a
redetermination by this Court of the section 6707A penalty
because it is an “assessable penalty.” The label of “assessable
penalty,” however, does not automatically bar a taxpayer from
using the deficiency procedures to challenge the liability. An
assessable penalty, rather, must be paid upon notice and demand
and assessed and collected in the same manner as taxes. Sec.
6671; Hickey v. Commissioner, T.C. Memo. 2009-2.
Certain penalties imposed under subchapter B of chapter 68
are explicitly exempt from the deficiency procedures.3 No such
3
Secs. 6677(e) (failure to file information with respect to
foreign trust), 6679(b) (failure to file returns, etc., with
respect to foreign corporations or foreign partnerships), 6682(c)
(false information with respect to withholding), 6693(d) (failure
to provide reports on certain tax-favored accounts or annuities),
6696(b) (rules applicable with respect to secs. 6694, 6695, and
(continued...)
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explicit limitation is found in section 6707A. Section 6707A’s
silence as to deficiency proceedings, however, does not vest this
Court with jurisdiction. This Court and others have held that
other penalties lacking such an explicit exemption are not
subject to the deficiency procedures. See Shaw v. United States,
331 F.2d 493 (9th Cir. 1964) (distinguishing section 6672
penalties not subject to deficiency proceedings from section 6651
additions subject to deficiency proceedings); Medeiros v.
Commissioner, 77 T.C. 1255 (1981) (this Court lacks jurisdiction
to review previously assessed section 6672 penalties), affd. 742
F.2d 1446 (2d Cir. 1983); Judd v. Commissioner, 74 T.C. 651(1981) (this Court lacks jurisdiction to review assessment of
section 6652 additions to tax).
“Deficiency” means, as relevant here, the amount by which
the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44
exceeds the amount shown as tax by the taxpayer upon his or her
return. Sec. 6211(a); see Granquist v. Hackleman, 264 F.2d 9, 15
(9th Cir. 1959). We conclude that section 6707A penalties are
not included in the statutory definition of “deficiency.” See
secs. 6671, 6211. Section 6707A penalties do not depend upon a
3
(...continued)
6695A), 6697(c) (assessable penalties with respect to liability
for tax of regulated investment companies), 6706(c) (original
issue discount information requirements), 6713(c) (disclosure or
use of information by preparers of returns), 6716(e) (failure to
file information with respect to certain transfers at death and
gifts).
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deficiency. They may be assessed even if there is an overpayment
of tax. The IRS imposes the penalty for failure to disclose a
reportable transaction.
We note that this Court has never exercised jurisdiction
over an assessable penalty that was not related to a deficiency,
even absent Congress’ explicitly circumscribing our jurisdiction.
See Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008)
(assessable penalties fall outside the deficiency notice regime
of sections 6212 to 6214 and thus fall outside this Court’s
deficiency jurisdiction). Moreover, most of the assessable
penalty provisions4 that do not implicate deficiency proceedings
concern a taxpayer’s failure to file a return or provide other
information similar to failing to disclose a reportable
transaction under section 6707A.
4
See secs. 6651 (failure to file a tax return or to pay a
tax; the deficiency procedures apply only to the portion of the
penalty attributable to the deficiency in taxes), 6677 (failure
to file information returns with respect to certain foreign
trusts), 6679 (failure to file returns, etc., with respect to
foreign corporations or foreign partnerships), 6686 (failure to
file returns or supply information by domestic international
sales corporation or foreign sales corporation), 6688 (assessable
penalties with respect to information required to be furnished
under sec. 7654), 6690 (fraudulent statement or failure to
furnish statement to plan participant), 6692 (failure to file
actuarial report), 6707 (failure to furnish information regarding
reportable transactions), 6708 (failure to maintain lists of
advisees with respect to reportable transactions), 6710 (failure
to disclose that contributions are nondeductible), 6711 (failure
by tax-exempt organization to disclose that certain information
or service available from Federal Government), 6712 (failure to
disclose treaty-based return positions).
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Here respondent issued a deficiency notice, which is a
condition precedent to Tax Court jurisdiction. See Medeiros v.
Commissioner, supra at 1260. The notice, however, did not
determine the section 6707A penalties. Respondent assessed
penalties based on his determinations that petitioners failed to
report a listed transaction as required by section 6011. Sec.
6707A(a). The section 6707A penalty is not within our deficiency
jurisdiction. See sec. 7442. Respondent may therefore assess
and collect the penalty without issuing a deficiency notice.5 We
accordingly conclude that we lack jurisdiction6 to redetermine the
5
The Court notes that the IRS is aware of the impact of the
sec. 6707A penalties on taxpayers. National Taxpayer Advocate,
2008 Annual Report to Congress (Vol. Two), at 420 (2008). The
IRS “believe[s] the imposition of such a large penalty on a
taxpayer who entered into a transaction that produced little or
even no tax savings and without regard to the taxpayer’s
knowledge or intent raises significant * * * concerns.” Id. at
421. Though Congress may later determine that this Court should
be given jurisdiction to review sec. 6707A penalties to address
these concerns, we are constricted at this time.
6
Though this Court is currently without jurisdiction,
petitioners may have other avenues for judicial review.
Petitioners may pay the penalties and seek recovery in a refund
court. See sec. 7422; 28 U.S.C. sec. 1346 (2006). In addition,
we would presumably have jurisdiction to redetermine a liability
challenge asserted by petitioners in a collection due process
hearing. See sec. 6330(d)(1); Williams v. Commissioner, 131 T.C.
54, 58 n.4 (2008); Callahan v. Commissioner, 130 T.C. 44, 48
(2008); D & M Painting Corp. v. United States, 103 AFTR 2d 2009-
1516, 2009-1 USTC par. 50,343 (W.D. Pa. 2009) (District Court
dismissed case because taxpayer could still seek redress by
either paying the tax or through obtaining a pre-levy hearing
pursuant to sec. 6330).
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section 6707A penalties and shall grant respondent’s motion to
dismiss and to strike as to the section 6707A penalties.7
For the foregoing reasons,
An appropriate order will
be issued.
7
We maintain jurisdiction as to petitioners’ deficiencies
and the accuracy-related penalties under secs. 6662 and 6662A.