Pallottini v. Commissioner, 90 T. C. 498 (1988)

When conflicting statutes are enacted, the court will look to the text of the statutes and their effective dates to determine the applicable rate of addition to tax.

Summary

In Pallottini v. Commissioner, the U. S. Tax Court resolved a conflict between two 1986 statutes, the Tax Reform Act (TRA) and the Omnibus Budget Reconciliation Act (OBRA), which proposed different rates for the addition to tax under Section 6661 for substantial understatements of tax. The court held that the 25% rate specified in OBRA, which was enacted before TRA, applied to penalties assessed after OBRA’s enactment date. The decision hinged on the effective date provisions and the explicit repeal of TRA’s amendment by OBRA. This case underscores the importance of statutory language and effective dates in resolving conflicts between laws.

Facts

The Commissioner assessed a deficiency and addition to tax against Guido John Pallottini and Joan M. Pallottini for the tax years 1981 and 1982. The parties settled all issues except the correct rate of the addition to tax under Section 6661 for 1982. The Tax Equity and Fiscal Responsibility Act of 1982 initially set the rate at 10%. However, in 1986, both TRA and OBRA amended Section 6661, with TRA increasing the rate to 20% for returns due after December 31, 1986, and OBRA increasing it to 25% for penalties assessed after October 21, 1986. OBRA was enacted one day before TRA and explicitly repealed TRA’s amendment.

Procedural History

The case was filed in the U. S. Tax Court. After settling all other issues, the court focused solely on the rate of the addition to tax under Section 6661. The Commissioner sought to apply the higher rate established by OBRA without amending the pleadings, which the court allowed under Section 6214(a) and Rule 41(b)(1) of the Tax Court Rules of Practice and Procedure, given the parties’ consent and agreement on the issue.

Issue(s)

1. Whether the rate of the addition to tax under Section 6661 for 1982 is 10%, 20%, or 25% given the conflicting amendments by TRA and OBRA.

Holding

1. Yes, the rate of the addition to tax under Section 6661 for 1982 is 25% because OBRA, which was enacted before TRA and explicitly repealed TRA’s amendment, applies to penalties assessed after October 21, 1986.

Court’s Reasoning

The court relied on the principle that when statutes conflict, the text of the statutes and their effective dates are paramount. OBRA’s amendment to Section 6661, setting the rate at 25%, was effective for penalties assessed after October 21, 1986, whereas TRA’s amendment to 20% applied to returns due after December 31, 1986. OBRA also explicitly repealed TRA’s amendment. The court found no legislative history contradicting the statutory language, thus adhering to OBRA’s 25% rate. The court cited Watt v. Alaska for the approach to resolving statutory conflicts and noted that OBRA’s repeal of TRA’s amendment was clear and direct. A concurring opinion by Judge Korner argued that the court should have also considered the principle that the last act passed by the legislature during the same session controls, though this was not necessary to the decision.

Practical Implications

This decision highlights the importance of statutory language and effective dates in resolving conflicts between laws. Practitioners should closely examine the text of conflicting statutes and their effective dates to determine the applicable law. The ruling reaffirms that the Tax Court can consider unpleaded issues with the parties’ consent, as seen in the application of OBRA’s rate without amending the pleadings. For taxpayers and tax professionals, understanding the applicable penalty rates under Section 6661 is crucial, especially in cases of substantial understatements of tax. Subsequent cases should apply this ruling when determining the appropriate rate of addition to tax under similar circumstances.