Alon Farhy ( 2023 )

United States Tax Court
160 T.C. No. 6ALON FARHY,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 10647-21L. Filed April 3, 2023.
—————
P failed to file Forms 5471, Information Return of
U.S. Persons With Respect to Certain Foreign
Corporations, for his 2003–10 taxable years as required by
I.R.C. § 6038(a). P’s failure to file the information returns
was willful and not due to reasonable cause. R assessed an
initial penalty under I.R.C. § 6038(b)(1) and continuation
penalties under I.R.C. § 6038(b)(2) against P for each of his
2003–10 taxable years. R proposed a levy to collect the
unpaid penalties, and P timely requested an I.R.C. § 6330
hearing. After the hearing, R issued a notice of
determination sustaining the proposed levy. P timely
petitioned this Court.
Held: R lacks statutory authority to assess penalties
under I.R.C. § 6038(b)(1) or (2) against P.
Held, further, R may not proceed with collection of
these penalties from P via the proposed levy.
—————
Edward M. Robbins, Jr., for petitioner.
Cassidy B. Collins, for respondent.
Served 04/03/23
2
OPINION
MARVEL, Judge: This case is before the Court for disposition
pursuant to Rule 122. 1 Petitioner seeks review of respondent’s
determination to proceed with a proposed levy to collect section 6038(b)
penalties that respondent assessed against petitioner. After
stipulations, the only issue remaining for decision is whether
respondent has statutory authority to assess penalties provided by
section 6038(b). For the reasons discussed herein, we decide this issue
in favor of petitioner and hold that respondent may not proceed with
collection via the proposed levy.
Background
The parties submitted this case fully stipulated under Rule 122.
The stipulated facts and facts drawn from the stipulated Exhibits are
incorporated herein by this reference. Petitioner resided in Israel when
he petitioned the Court. 2
During his 2003 through 2010 taxable years (years at issue),
petitioner owned 100% of Katumba Capital, Inc., a foreign corporation
incorporated in Belize. From 2005 (at the latest) through 2010
petitioner also owned 100% of Morningstar Ventures, Inc., a foreign
corporation incorporated in Belize. During the years at issue, petitioner
participated in an illegal scheme to reduce the amount of income tax
that he owed, and on February 14, 2012, he signed an affidavit
describing his role in that illegal scheme. He was granted immunity
from prosecution in a nonprosecution agreement that he signed on
September 20, 2012.
For the years at issue, petitioner had a reporting requirement
under section 6038(a) to report his ownership interests in both Katumba
Capital and Morningstar Ventures. For each year at issue, petitioner
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
2 Unless otherwise agreed by the parties in writing, venue for an appeal would
be the U.S. Court of Appeals for the District of Columbia Circuit. See § 7482(b)(1)
(flush language).
3
was required to file Form 5471, Information Return of U.S. Persons With
Respect to Certain Foreign Corporations, but he did not.
On February 9, 2016, the Internal Revenue Service (IRS) mailed
petitioner notice of his failure to file the required Forms 5471 for the
years at issue, but petitioner never filed them. For each year at issue,
petitioner’s failure to file the Form 5471 was willful and not due to
reasonable cause.
On November 5, 2018, the IRS assessed an initial penalty under
section 6038(b)(1) of $10,000 for each year at issue, and on November
12, 2018, the IRS assessed continuation penalties under section
6038(b)(2) totaling $50,000 for each year at issue. These assessments
are reflected on copies of Form 4340, Certificate of Assessments,
Payments, and Other Specified Matters, that the parties have submitted
as stipulated exhibits. The IRS complied with the written supervisory
approval requirements in section 6751(b) for the section 6038 penalties
for the years at issue.
On January 30, 2019, the IRS issued to petitioner Letter 1058,
Final Notice of Intent to Levy and Notice of Your Right to a Hearing
(levy notice). The IRS, through the levy notice, sought to collect section
6038 penalties that the IRS had assessed because petitioner was
required, but failed, to file Forms 5471 for the years at issue.
Petitioner timely requested a hearing pursuant to section 6330.
On February 19, 2019, petitioner’s counsel mailed the IRS a letter
enclosing Form 12153, Request for a Collection Due Process or
Equivalent Hearing. Among other issues, petitioner disputed whether
the IRS has legal authority to assess section 6038 penalties. 3
On June 4, 2021, respondent issued petitioner a Notice of
Determination Concerning Collection Actions under IRC Sections 6320
or 6330 of the Internal Revenue Code (Notice of Determination),
regarding petitioner’s liabilities for unpaid civil penalties imposed
pursuant to section 6038. The Notice of Determination sustained
respondent’s proposed collection action. Petitioner timely filed a
3 An attachment to petitioner’s Form 12153 refers to an earlier and related
Form 12153 dated November 26, 2018, for the income tax liabilities for the years at
issue. The parties resolved petitioner’s income tax liabilities for the years at issue via
a stipulated decision in a separate case in this Court. See Docket No. 11202-21L.
However, the section 6330 hearings were conducted concurrently at the administrative
level.
4
Petition with this Court for a review of the determination on June 9,
2021. The parties have stipulated that, except for the assessment
authority issue in dispute, 4 the settlement officer conducting the section
6330 hearing obtained verification from the IRS that the requirements
of any applicable law or administrative procedure have been met as
required by section 6330(c)(1). The parties have also stipulated that the
settlement officer considered any issues raised at the hearing and
whether any proposed collection action balanced the need for the
efficient collection of taxes with petitioner’s legitimate concern that any
collection action be no more intrusive than necessary. Finally, the
parties stipulate that, except for the assessment authority issue in
dispute, any error by the settlement officer was a harmless error and
the settlement officer did not abuse his discretion in sustaining the levy
proposed in the levy notice.
Discussion
A. Jurisdiction and Standard of Review
The Court has jurisdiction to review the IRS’s determination
concerning a levy action when the taxpayer timely petitions for review. 5
§ 6330(d)(1). Petitioner has timely petitioned for review of the Notice of
Determination, which concerns a proposed levy action. We therefore
hold that we have jurisdiction to review the Notice of Determination.
Where the validity of the taxpayer’s underlying liability is
properly at issue, we review the underlying liability de novo. See
§ 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. 604, 609–10 (2000). We
review the IRS’s determinations respecting any nonliability issues for
abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 181–82 (2000).
The key facts are fully stipulated and are also described in the Notice of
Determination. “Where, as here, we are faced with a question of
law . . . , our holding does not depend on the standard of review we
apply. We must reject erroneous views of the law.” Manko v.
Commissioner, 126 T.C. 195, 199 (2006); see Kendricks v. Commissioner,
4 The IRS’s Taxpayer Advocate Service has alerted the IRS and Congress to
the assessment authority issue that is presented in this case. See Taxpayer Advocate
Service, National Taxpayer Advocate Annual Report to Congress 119–31 (2020).
5 In Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022), the Supreme Court
of the United States held that the timeliness requirement in section 6330(d)(1) (i.e.,
the requirement that a petition be filed with this Court within 30 days of a
determination) is not jurisdictional. That requirement is not at issue here because
petitioner timely filed his Petition.
5
124 T.C. 69, 75 (2005); McCorkle v. Commissioner, 124 T.C. 56, 63
(2005); see also Freije v. Commissioner, 125 T.C. 14, 32–37 (2005)
(setting aside a determination to proceed with collection because the
appeals officer’s verification that the requirements of applicable law
were met was “incorrect” because of an “error as a matter of law,”
specifically an assessment that was “simply invalid,” and holding that a
taxpayer’s ability to dispute his underlying tax liability pursuant to
section 6330(c)(2)(B) does not cure an invalid assessment).
B. Assessment Authority for Section 6038(b) Penalties
Section 6038(b)(1) imposes a penalty of $10,000, with respect to
each annual accounting period for which a failure exists, if any person
fails timely to furnish certain required information with respect to any
foreign business entity. Section 6038(b)(2) imposes a continuation
penalty of $10,000 for each 30-day period (or fraction thereof) during
which such failure continues with respect to any annual accounting
period after an initial 90-day notice period, subject to a maximum of
$50,000. 6 There is no statutory provision, in the Code or otherwise,
specifically authorizing assessment of these penalties.
Section 6201(a) authorizes and requires the Secretary of the
Treasury to make assessments of all taxes (including interest,
additional amounts, additions to tax, and assessable penalties) imposed
by the Code. 7 The Secretary of the Treasury has delegated these duties
to the Commissioner of Internal Revenue, who has delegated them in
turn to other IRS officials. See Treas. Reg. §§ 301.6201-1(a), 301.7601-1,
301.7701-9. Assessment is “the formal recording of a taxpayer’s tax
liability.” Baltic v. Commissioner, 129 T.C. 178, 183 (2007); see § 6203.
When a tax (including for this purpose a deemed tax, such as an
additional amount, addition to tax, assessable penalty, or interest, as
explained below) is assessed, the IRS may take certain actions to collect
the tax administratively. See, e.g., § 6502(a) (permitting collection of a
tax by levy, and generally providing a ten-year period of limitation for
collection by a proceeding in court or by levy, when a tax has been
assessed); § 6322 (providing that the lien imposed by section 6321 arises
6 Both types of penalties are subject to a reasonable cause exception.
§ 6038(c)(4)(B). That exception is not at issue in this case because the parties have
stipulated there was no reasonable cause for petitioner’s failure to meet the
requirements of section 6038(a).
7 A materially identical version of this portion of section 6201(a) has existed
since 1954. See Internal Revenue Code of 1954, ch. 736, § 6201, 68A Stat. 3, 767.
6
when an assessment is made); see also Goldston v. United States (In re
Goldston), 104 F.3d 1198, 1200–01 (10th Cir. 1997) (“Abundant
precedent exists for the proposition in a variety of tax contexts that
liability for federal taxes does not hinge on whether the IRS has made a
valid assessment. . . . While the absence of an assessment prevents the
IRS from administratively collecting the tax, it may still file a civil
action . . . .”). The IRS may immediately assess, inter alia, the tax
determined by a taxpayer on his or her own return, § 6201(a)(1), as well
as certain assessable penalties not subject to the Code’s deficiency
procedures, see Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008).
However, the term “assessable penalties” as used in section 6201(a) is
left undefined, creating uncertainty about which penalties the IRS may
assess and ultimately collect through administrative means.
“Agencies have only those powers given to them by Congress . . . .”
West Virginia v. EPA, 142 S. Ct. 2587, 2609 (2022). Petitioner contends
that the IRS lacks authority to assess the section 6038(b) penalties at
issue. Petitioner argues that there is no law giving the IRS authority to
assess penalties under section 6038(b) and that while the United States
may be able to collect liabilities for these penalties through a civil action,
see 28 U.S.C. § 2461(a), the IRS may not assess or administratively
collect these penalties.
Petitioner contends that section 6038(b), unlike a bevy of other
penalty sections in the Code (discussed below), contains no provision
authorizing assessment of the penalty it provides for. Therefore,
petitioner argues, a section 6038(b) penalty is not an assessable penalty,
although it may be collected through a civil action.
Respondent contends that the term “assessable penalties”
includes any penalties found in the Code that are not subject to the
Code’s deficiency procedures. Respondent points out that neither
section 6201 nor any other Code section limits the term “assessable
penalties” to those found in subchapter B of chapter 68 of subtitle F of
the Code (entitled “Assessable Penalties”). Respondent argues that
reading that subchapter as the exclusive location for assessable
penalties would contravene section 7806(b), which provides in relevant
part that
[n]o inference, implication, or presumption of legislative
construction shall be drawn or made by reason of the
location or grouping of any particular section or provision
or portion of this title, nor shall any table of contents, table
7
of cross references, or similar outline, analysis, or
descriptive matter relating to the contents of this title be
given any legal effect.
Respondent also argues that in any case, the term “taxes” in section
6201 is broad enough to encompass section 6038 penalties. Respondent
cites Ruesch v. Commissioner, 154 T.C. 289 (2020), aff’d in part, vacated
and remanded in part, 25 F.4th 67 (2d Cir. 2022), for support for his
statutory construction arguments. Finally, respondent argues that the
legislative history surrounding the enactment of penalties in section
6038(b) provides support for his position.
We conclude that petitioner’s reading of the Code is the correct
one. Congress has explicitly authorized assessment with respect to
myriad penalty provisions in the Code, but not for section 6038(b)
penalties. Section 6671(a) provides that the numerous penalties found
in subchapter B of chapter 68 of subtitle F (i.e., in sections 6671–6725)
“shall be assessed and collected in the same manner as taxes,” subjecting
those penalties to the Secretary’s assessment authority under section
6201. Section 6665(a)(1) contains a similar statement that the additions
to tax, additional amounts, and penalties provided in chapter 68 of
subtitle F (i.e., in sections 6651–6751) “shall be assessed, collected, and
paid in the same manner as taxes.” Code sections outside of chapter 68
of subtitle F whose violations the Code specifically penalizes commonly
(1) contain their own express provision specifying the treatment of
penalties or other amounts as a tax or an assessable penalty for
purposes of assessment and collection, see, e.g., §§ 527(j)(1), 856(g)(5)(C),
857(f)(2)(A), 4980H(d)(1), 5000A(g)(1), 5114(c)(3), 5684(b), 5761(e),
9707(f); (2) contain a cross-reference to a provision within chapter 68 of
subtitle F providing a penalty for their violation, see, e.g., §§ 1275(c)(4),
6033(o), 6043(d), 6046(f), 6046A(e), 6420(i)(2), 6421(j)(1), 6427(p)(1),
7501(b); or (3) are expressly covered by a penalty provision within
chapter 68 of subtitle F, see, e.g., §§ 6652(c), 6674, 6675, 6677, 6679,
6685, 6686, 6688, 6689, 6690, 6692, 6693, 6695, 6698, 6699, 6704, 6705,
6706, 6707, 6707A, 6708, 6709(c), 6710, 6712, 6714, 6717, 6718, 6719,
6720. In contrast, section 6038 contains only a cross-reference to a
criminal penalty provision, section 7203. § 6038(f)(1).
Furthermore, 28 U.S.C. § 2461(a) expressly provides that
“[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for
the violation of an Act of Congress without specifying the mode of
recovery or enforcement thereof, it may be recovered in a civil action.”
Here, the section 6038(b) penalties at issue are prescribed for the
8
violation of section 6038(a)(1) and (2), which was enacted by the Revenue
Act of 1962, Pub. L. No. 87-834, § 20(a), 76 Stat. 960, 1059, and amended
by other Acts of Congress since then. However, no mode of recovery or
enforcement is specified for these penalties, unlike for myriad other
penalties in the Code. We are loath to disturb this well-established
statutory framework by inferring the power to administratively assess
and collect the section 6038(b) penalties when Congress did not see fit
to grant that power to the Secretary of the Treasury expressly as it did
for other penalties in the Code.
Respondent’s arguments are unavailing. We agree with
respondent that the term “assessable penalties” as used in section
6201(a) is not limited to penalties found in subchapter B of chapter 68
of subtitle F (titled “Assessable Penalties”), 8 but the term “assessable
penalties” used in section 6201 does not automatically apply to all
penalties in the Code not subject to deficiency procedures. “Assessable
penalties” is not a term used to distinguish between penalties subject to
deficiency procedures and those that are not. “The label of ‘assessable
penalty[]’ . . . 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.” Smith v. Commissioner, 133 T.C. 424,
428 (2009). While some provisions explicitly exempt certain assessable
penalties from deficiency procedures, see id. at 428 & n.3, others do not
specify whether those procedures apply. In those cases, we consider
whether the assessable penalty at issue is “included in the statutory
definition of ‘deficiency[,]’” or whether the assessable penalty “depend[s]
upon a deficiency” or, to the contrary, “may be assessed even if there is
an overpayment of tax.” 9 Id. at 429; cf. § 6665(b)(1) (applying deficiency
procedures to the portion of the addition to tax under section 6651
“which is attributable to a deficiency in tax described in section 6211”);
Wilson v. Commissioner, 118 T.C. 537, 540–41 (2002). However, if we
were to consider whether section 6038(b) penalties are subject to
deficiency procedures without first deciding whether the section 6038
penalties must be paid upon notice and demand and assessed and
8 As explained above, some Code sections outside chapter 68 of subtitle F
contain their own express provision authorizing assessment of penalties provided
therein.
9 We note that respondent’s own internal guidance has concluded that the
section 6676 penalty, an assessable penalty, is subject to deficiency procedures on the
basis of a similar line of reasoning. See I.R.S. Chief Couns. Adv. Mem. 201520005 (May
15, 2015).
9
collected in the same manner as taxes, we would be putting the
proverbial cart before the horse. That is because there is no provision in
the first place providing that these penalties “must be paid upon notice
and demand and assessed and collected in the same manner as taxes.”
Smith, 133 T.C. at 428. Simply put, while section 6038(b) provides for
penalties, it does not provide for assessable penalties. Respondent’s
argument that section 6038(b) penalties are necessarily assessable
penalties because they are not subject to deficiency procedures assumes
a faulty premise and must be rejected. 10
Respondent’s argument that the term “taxes” in section 6201(a)
encompasses the section 6038(b) penalties (even if they are not
assessable penalties) fares no better. Precedent firmly establishes that
taxes and penalties are distinct categories of exactions, at least in the
absence of a provision treating them as the same. See Grajales v.
Commissioner, 156 T.C. 55, 61 (2021) (analyzing whether an exaction is
a tax or penalty by reference to the label Congress chose to apply to it),
aff’d, 47 F.4th 58 (2d Cir. 2022); see also Nat’l Fed’n of Indep. Bus. v.
Sebelius, 567 U.S. 519, 546 (2012) (“The Code contains many provisions
treating taxes and assessable penalties as distinct terms. . . . There
would, for example, be no need for § 6671(a) to deem ‘tax’ to refer to
certain assessable penalties if the Code already included all such
penalties in the term ‘tax.’”); Chadwick v. Commissioner, 154 T.C. 84, 93
(2020) (stating that sections 6665 and 6671 “do not characterize
‘penalties’ as something other than penalties” but instead simply specify
the manner in which penalties within their scope are to be assessed and
collected); cf. Liberty Univ., Inc. v. Lew, 733 F.3d 72, 87–89 (4th Cir.
2013) (holding that employer mandate exaction in section 4980H is not
a tax for purposes of the Anti-Injunction Act in part because it is not
included in subchapter B of chapter 68 and no other provision deems it
a tax). Section 6665(a)(2) deems any reference in the Code to
“‘tax’ . . . also to refer to the additions to the tax, additional amounts,
and penalties provided by” chapter 68 of subtitle F, and a similar
provision specifically applicable to the penalties in subchapter B of that
chapter is found in section 6671(a). There would be no need for these
provisions to deem “tax” to refer to certain penalties if the Code already
10 Neither party has argued that section 6038(b) penalties constitute
“additional amounts” or “additions to the tax” for purposes of section 6201(a), and we
note that our precedent forecloses that argument. See Whistleblower 22716-13W v.
Commissioner, 146 T.C. 84, 92–96 (2016) (stating that “additional amounts” and
“additions to the tax” are terms of art in the Code and holding that certain penalties
were not “additional amounts” because they were neither enumerated in chapter 68
nor assessed, collected, or paid in the same manner as taxes).
10
included those penalties in the term “tax.” The adjective “assessable”
would also be unnecessary to modify the term “penalties” in section 6201
if section 6201 authorized the Commissioner to assess all penalties
provided in the Code. 11
The Code also contains some detailed provisions governing (1) the
circumstances under which it deems certain amounts to be a “tax” for
assessment and collection purposes and (2) the consequences of deeming
a penalty to be assessable. For example, section 6665(b) includes
specific provisions regarding the circumstances under which certain
additions to tax (or portions thereof) are or are not deemed to be taxes
for purposes of subchapter B of chapter 63 of subtitle F (relating to
deficiency procedures for income, estate, gift, and certain excise taxes).
Cf. Smith, 133 T.C. at 429 n.4 (listing penalties in subchapter B of
chapter 68 containing specific exclusions from the application of
deficiency procedures). Section 5761 expressly distinguishes between
the circumstances under which a penalty under that section may be
recovered by civil action or through administrative assessment and
collection. See § 5761(a) (providing that a person who fails to comply
with certain Code requirements shall “be liable to a penalty of $1,000,
to be recovered, with costs of suit, in a civil action, except where a
penalty under subsection (b) or (c) or under section 6651 or 6653 or
part II of subchapter A of chapter 68 may be collected from such person
by assessment”). Moreover, at least one Code provision, section
5000A(g)(2)(B), specifically restricts the collection actions that may be
taken after the assessment of a penalty that is otherwise “assessed and
collected in the same manner as an assessable penalty under subchapter
B of chapter 68.” § 5000A(g)(1). Given this detailed statutory
framework, we decline to substitute the Commissioner’s judgment for
Congress’ decision not to deem the section 6038(b) penalties “taxes” for
assessment and collection purposes.
We recognize that when section 6201(a) states that the “taxes . . .
imposed by this title” whose assessments the Secretary of the Treasury
is authorized and required to make “includ[e] interest, additional
amounts, additions to the tax, and assessable penalties,” there is no
11 In comparison, the Code uses the term “any . . . penalty” in describing civil
actions that require the authorization of the Secretary of the Treasury and the
direction of the Attorney General to commence. See § 7401 (providing that no civil
action for the collection or recovery of “taxes, or of any fine, penalty, or forfeiture,” shall
be commenced unless the Secretary of the Treasury authorizes or sanctions the
proceedings and the Attorney General or his delegate directs that the action be
commenced).
11
indication that this list is necessarily exclusive. See § 7701(c). However,
we reject the notion that the assessment authority provided by section
6201(a) covers all penalties, or virtually any exaction, imposed by the
Code simply because it covers taxes and certain other exactions
specifically included. All of the items specifically included in the term
“taxes . . . imposed by this title” as used in section 6201(a) have a close
connection to that term. “[A]ny reference” in the Code to “‘tax’ imposed
by this title” is also deemed to refer to additional amounts, additions to
tax, and penalties provided by chapter 68 (the latter of which, as we
have explained, are assessable penalties by reason of section 6665(a)(1)).
§ 6665(a)(2); see also § 6671(a). Similarly, section 6601(e)(1) provides
that “[a]ny reference in this title (except subchapter B of chapter 63,
relating to deficiency procedures) to any tax imposed by this title shall
be deemed also to refer to interest imposed by this section on such tax.”
None of these limited inclusions in the term “taxes . . . imposed by this
title” in section 6201 has any similarity to a fixed-dollar information
reporting penalty that is nowhere deemed a tax or authorized or
required to be assessed or collected in the same manner as a tax or
assessable penalty. Moreover, when Congress has seen fit to add other
items to a list that includes interest, additional amounts, additions to
tax, and assessable penalties, it has done so expressly. See § 6321
(providing that the amount of the lien that arises after a person neglects
or refuses to pay any tax after demand includes “any interest, additional
amount, addition to tax, or assessable penalty, together with any costs
that may accrue in addition thereto”).
Our holding in no way contravenes section 7806(b) because we do
not define the term “assessable penalties” as used in section 6201(a) by
reference to the title of subchapter B of chapter 68 of subtitle F nor by
reference to the grouping of similar provisions in that subchapter.
Instead, we conclude that the term “assessable penalties” as used in
section 6201(a) includes penalties that “must be paid upon notice and
demand and assessed and collected in the same manner as taxes,”
Smith, 133 T.C. at 428, regardless of their location within the Code. Our
conclusion recognizes that the term “assessable penalties” as used in
section 6201(a) encompasses some exactions outside of subchapter B of
chapter 68 of subtitle F in addition to the substantial number of
penalties within that subchapter that are assessable by reason of section
6671(a).
12
We also reject respondent’s reliance on our holding in Ruesch
because Ruesch has no bearing on the issue before us. 12 In Ruesch, 154
T.C. at 290, the taxpayer did not pay assessed section 6038(b) penalties
upon notice and demand. The IRS certified the taxpayer’s liability for
those penalties to the Secretary of State as a “seriously delinquent tax
debt” within the meaning of section 7345(b). Ruesch, 154 T.C. at 290–91.
The taxpayer filed a petition challenging the correctness of the
Commissioner’s certification as well as the taxpayer’s underlying
liability for the section 6038(b) penalties. Ruesch, 154 T.C. at 291. The
IRS subsequently discovered that the taxpayer had timely submitted a
request for a collection due process or equivalent hearing with respect
to the section 6038(b) penalties. Ruesch, 154 T.C. at 291. That request
suspended collection of the taxpayer’s tax debt so that it was no longer
seriously delinquent within the meaning of section 7345(b)(2)(B)(i).
Ruesch, 154 T.C. at 291. The IRS accordingly reversed its certification
as erroneous and so notified the Secretary of State. Id. The IRS also
filed motions with this Court, one of which sought to dismiss the
challenge to the section 6038(b) penalties for lack of jurisdiction, which
we granted. Ruesch, 154 T.C. at 291. We did not make any merits
determination as to the taxpayer’s challenge to the underlying liability.
We noted specifically that the taxpayer might have a prepayment forum
in this Court to consider the contention that the penalties were illegally
assessed “upon . . . receipt of a notice of determination following
completion of [the taxpayer’s collection due process] proceeding,” similar
to the challenge that petitioner now brings. Id. at 297. We held that we
had no jurisdiction either under section 7345 or pursuant to our
deficiency jurisdiction to consider the taxpayer’s underlying liability for
12 In a recent opinion, we observed that “the U.S. Court of Appeals for the
Second Circuit vacated for mootness the portion of our order in Ruesch resolving the
jurisdictional question” at issue in that case. Adams v. Commissioner, No. 1527-21P,
160 T.C., slip op. at 10 (Jan. 24, 2023). We also observed that the view of “virtually all
the courts of appeals is that when a judgment is vacated, the vacatur deprives the
underlying opinion of any precedential effect.” Id. at 11. Nonetheless, for two reasons,
we do not rely on that ground here to reject respondent’s reliance on Ruesch. First, in
Adams we expressly “readopt[ed] our holding in Ruesch,” noting that “the Second
Circuit simply held that the question was moot in that particular case. Accordingly,
although our opinion in Ruesch was deprived of its precedential effect, it has not lost
its persuasive value.” Id. at 12. Second, we noted that the view of the D.C. Circuit, to
which an appeal would lie in this case, see supra note 2, regarding the effect of vacatur
“appears to be more nuanced” than that of its sister circuits, Adams, 160 T.C., slip op.
at 12 n.7. It is therefore uncertain whether the jurisdictional holding of Ruesch ever
lost its precedential effect for purposes of this case and others in which an appeal would
lie to the D.C. Circuit. Nonetheless, we determine that our holding in Ruesch simply
does not control the issue before us.
13
the penalties in the absence of such a notice of determination.
Ruesch, 154 T.C. at 297.
In so holding, we did acknowledge that section 6038 penalties are
not subject to deficiency procedures. Specifically, we stated:
After the IRS mails a taxpayer a timely notice of deficiency,
this Court has jurisdiction to redetermine deficiencies in
income, estate, and gift taxes ‘imposed by subtitle A or B’
and deficiencies in certain excise taxes imposed by ‘chapter
41, 42, 43, or 44.’ Secs. 6212(a), 6213(a). The section 6038
penalties assessed against [the taxpayer] are imposed by
subtitle F, chapter 61, and thus lie outside our deficiency
jurisdiction.[13]
Ruesch, 154 T.C. at 297. We also noted that the taxpayer did not allege
receipt of a notice of deficiency with respect to these penalties. Id. None
of these statements is inconsistent with this Opinion. As already
explained, the mere fact that a penalty is not subject to deficiency
procedures does not automatically give rise to the conclusion that it is
an assessable penalty, such as where, as here, Congress has not given
the Commissioner the authority to assess the penalty.
Finally, respondent relies on a passage in the legislative history
surrounding the enactment of section 6038(b) penalties to support his
arguments. A Senate Finance Committee report states that the existing
sanction addressing violations of section 6038(a), now found in section
6038(c), “reducing creditable foreign taxes is of no use if the U.S. person
required to report paid no foreign income taxes during the year in
question.” See S. Rep. No. 97-494 (Vol. 1), at 299 (1982), as reprinted in
1982 U.S.C.C.A.N. 781, 1042. The report further states, referring to
13 In addition to our explanation in Ruesch of why deficiency procedures do not
apply to section 6038(b) penalties, we note also here that section 6038(b) penalties do
not depend on the existence of a deficiency. See Smith, 133 T.C. at 428–29. The
penalties depend only on a failure to furnish information in a timely manner. While
section 6662(a), (b)(7), and (j) imposes an accuracy-related penalty on an undisclosed
foreign financial asset understatement, challenges to which we may review under our
deficiency jurisdiction, section 6038(b) penalties are separate penalties. We cannot use
the existence of the undisclosed foreign financial asset understatement penalty to find
that the Commissioner may assess section 6038(b) penalties. Likewise, while a
taxpayer’s violation of section 6038 gives rise to the application of a tolling provision
for the assessment of tax in section 6501(c)(8), that tolling provision does not itself
provide any authority for finding that section 6038(b) penalties may be assessed by the
Commissioner.
14
section 6038(c)(3): “Where both penalties are applied, the amount of the
reduction in the foreign tax credit is reduced by the amount of the fixed-
dollar penalty imposed. It is intended that the reduction in foreign tax
credit penalty may be waived in some cases where the flat $1,000
penalty will be imposed.” S. Rep. No. 97-494 (Vol. 1), at 300, 1982
U.S.C.C.A.N. at 1043. These statements say nothing about the manner
in which section 6038(b) penalties are to be collected. Our holding today
does nothing to frustrate the operation of the provision found in section
6038(c)(3) for coordination of the two penalties. The United States may,
of course, choose which penalty to pursue or to pursue both, in which
case section 6038(c)(3) may apply to reduce the amount of the section
6038(c) penalty. Our holding concerns only the applicable manner of
collection for section 6038(b) penalties.
Respondent also points to a statement in the report that the
penalty found in section 6038(c) was not commonly imposed “because
the penalty is complicated.” S. Rep. No. 97-494 (Vol. 1), at 299, 1982
U.S.C.C.A.N. at 1042. Read in context, this statement is referring to the
fact that a penalty imposing a foreign tax credit reduction has
unpredictable effects because on the one hand, “a taxpayer could incur
a substantial penalty for a minor failure,” but on the other hand,
“reducing creditable foreign taxes is of no use if the U.S. person required
to report paid no foreign income taxes during the year in question.” Id.It is not a statement referring to the manner of assessment or collection
for penalties imposed under either provision.
Conclusion
Respondent assessed penalties under section 6038(b) against
petitioner without statutory authority to do so. Accordingly, we hold
that respondent may not proceed with the collection of these penalties
from petitioner via the proposed levy.
We have considered all of the parties’ arguments and, to the
extent they are not discussed herein, find them to be irrelevant, moot,
or without merit.
To reflect the foregoing,
An appropriate decision will be entered for petitioner.