Solowiejczyk v. Commissioner, 85 T. C. 552 (1985)

The application of increased interest rates under Section 6621(d) to tax motivated transactions is constitutional and applies to interest accruing after the effective date, regardless of when the tax return was filed.

Summary

In Solowiejczyk v. Commissioner, the U. S. Tax Court addressed the constitutionality and application of Section 6621(d) of the Internal Revenue Code, which imposes an increased interest rate on substantial underpayments attributable to tax motivated transactions. The petitioners, who had conceded a tax deficiency, contested the application of Section 6621(d) to their 1978 tax return, arguing it constituted retroactive application. The court held that Section 6621(d) applies to interest accruing after December 31, 1984, and is not unconstitutional. The court also declined to impose damages under Section 6673, finding the petitioners’ actions did not warrant such a penalty.

Facts

Henry and Anita Solowiejczyk filed their 1978 Federal income tax return on or before April 15, 1979, claiming deductions and credits related to book properties. The IRS disallowed these claims, resulting in a deficiency of $41,089, which the petitioners conceded. The IRS sought to apply Section 6621(d) for increased interest rates on the underpayment due to a valuation overstatement. The petitioners argued that applying Section 6621(d) to their return filed before January 1, 1982, was unconstitutional as it constituted retroactive application.

Procedural History

The petitioners filed their case on October 25, 1982. The IRS began discovery in February 1983, and after the petitioners’ non-compliance, filed motions to compel in August 1983. The case was set for trial in October 1984 but was continued due to medical issues. The petitioners conceded the deficiency on January 14, 1985, and the IRS filed amendments to its answer alleging liability for increased interest under Section 6621(d) and potential damages under Section 6673.

Issue(s)

1. Whether Sections 6621(d)(1) and 6621(d)(3)(A)(i) are unconstitutional as applied to the petitioners’ case?
2. Whether the petitioners are liable for damages under Section 6673?
3. Whether Section 6673 is unconstitutional as applied to the petitioners’ case?

Holding

1. No, because the application of Section 6621(d) to interest accruing after December 31, 1984, does not constitute retroactive application.
2. No, because the court found that the petitioners’ actions did not warrant the imposition of damages under Section 6673.
3. The court did not need to address this issue as no damages were imposed under Section 6673.

Court’s Reasoning

The court reasoned that Section 6621(d) applies to interest accruing after December 31, 1984, regardless of the filing date of the tax return. The court emphasized that the event triggering Section 6621(d) is the existence of an underpayment attributable to a valuation overstatement after the effective date of the section, not the filing of the return. The court cited the Conference Committee’s statement that Section 6621(d) applies “regardless of the date the return was filed,” reinforcing its broad application. The court also considered the legislative intent to impose additional interest on tax motivated transactions broadly. Regarding Section 6673, the court exercised discretion and declined to impose damages, finding the petitioners’ actions did not meet the threshold for frivolous or delay tactics.

Practical Implications

This decision clarifies that increased interest rates under Section 6621(d) can be applied to underpayments resulting from tax motivated transactions, even if the tax return was filed before the effective date of the section, as long as the interest accrues after the effective date. This ruling has significant implications for tax practitioners and taxpayers, emphasizing the importance of accurate valuations and the potential for increased interest on underpayments due to tax motivated transactions. The decision also underscores the Tax Court’s discretion in imposing damages under Section 6673, which may influence how taxpayers and their counsel approach litigation strategies. Subsequent cases have applied this ruling to similar situations involving tax motivated transactions and interest accrual post-effective date.