SCOTUS Reports

Tag: Disclosure Obligation

  • Yari v. Commissioner, 143 T.C. 157 (2014): Calculation of IRC Sec. 6707A Penalty for Non-Disclosure of Listed Transactions

    Yari v. Commissioner, 143 T. C. 157 (2014)

    In Yari v. Commissioner, the U. S. Tax Court ruled on how to calculate the IRC Sec. 6707A penalty for failing to disclose participation in listed transactions. The court held that the penalty must be calculated based on the tax shown on the original return, not on subsequent amended returns, even if they reflect the true tax liability. This decision underscores the strict liability nature of the penalty and its focus on the disclosure obligation rather than actual tax savings.

    Parties

    Steven Yari, the petitioner, challenged the Commissioner of Internal Revenue, the respondent, regarding the calculation of a penalty assessed under IRC Sec. 6707A for the 2004 tax year. The case progressed from the IRS Appeals Office to the U. S. Tax Court.

    Facts

    Steven Yari engaged in a Roth IRA transaction identified by the IRS as a listed transaction. He and his wife filed a joint federal income tax return for 2004, which did not disclose their participation in the transaction. The IRS assessed a $100,000 penalty under IRC Sec. 6707A for the non-disclosure. During the audit, Yari discovered an error on the original return and filed amended returns that included income from the transaction, resulting in a negative taxable income. Despite these amendments, the IRS maintained the original penalty calculation. The Small Business Jobs Act of 2010 retroactively changed the penalty calculation method, but the IRS declined to recalculate Yari’s penalty based on the amended returns.

    Procedural History

    The IRS issued a notice of intent to levy to collect the penalty, prompting Yari to request a collection due process (CDP) hearing. The hearing was suspended when Congress amended IRC Sec. 6707A, and the IRS reconsidered the penalty calculation. The IRS upheld the original penalty, and the Appeals Office affirmed this decision. Yari then petitioned the U. S. Tax Court for review of the notice of determination sustaining the collection action. The Tax Court reviewed the case de novo regarding the penalty amount.

    Issue(s)

    Whether the IRC Sec. 6707A penalty for failing to disclose a listed transaction should be calculated based on the tax shown on the original return or the tax shown on subsequent amended returns?

    Rule(s) of Law

    IRC Sec. 6707A imposes a penalty on any person who fails to include on any return or statement information required under IRC Sec. 6011 about a reportable transaction. The penalty amount for listed transactions is 75% of the decrease in tax shown on the return as a result of such transaction (or which would have resulted if the transaction were respected for federal tax purposes). For individuals, the penalty has a minimum of $5,000 and a maximum of $100,000.

    Holding

    The U. S. Tax Court held that the IRC Sec. 6707A penalty must be calculated using the tax shown on the original return, not on subsequent amended returns. The court rejected Yari’s argument that the penalty should reflect the actual tax savings as shown on the amended returns.

    Reasoning

    The court’s reasoning focused on the plain language of IRC Sec. 6707A, which links the penalty to the tax shown on the return giving rise to the disclosure obligation. The court found the statute clear and unambiguous, emphasizing that the penalty aims to penalize the failure to disclose, not the actual tax savings achieved by the transaction. The court also considered legislative history and the context of the statutory scheme, noting that Congress had the opportunity to link the penalty to the tax required to be shown but chose instead to base it on the tax reported. The court rejected arguments based on the potential harshness of the penalty, affirming that IRC Sec. 6707A imposes a strict liability penalty. The court’s interpretation was further supported by comparing IRC Sec. 6707A with other sections, like IRC Sec. 6651, which explicitly allow for adjustments based on the tax required to be shown.

    Disposition

    The U. S. Tax Court entered a decision for the Commissioner, upholding the $100,000 penalty as calculated based on the tax shown on Yari’s original 2004 tax return.

    Significance/Impact

    This decision clarifies the calculation of the IRC Sec. 6707A penalty, emphasizing that it is based on the tax shown on the original return, not on subsequent amendments. It underscores the strict liability nature of the penalty and its focus on the disclosure obligation. The ruling impacts taxpayers who fail to disclose participation in listed transactions, as it removes the possibility of reducing the penalty through amended returns that reflect true tax liabilities. This case may influence future interpretations and applications of similar penalty provisions in the tax code, emphasizing the importance of timely and accurate disclosure of reportable transactions.

  • Steven Yari v. Commissioner of Internal Revenue, 143 T.C. No. 7 (2014): Calculation of Penalties Under I.R.C. § 6707A

    Steven Yari v. Commissioner of Internal Revenue, 143 T. C. No. 7 (2014)

    In Steven Yari v. Commissioner, the U. S. Tax Court ruled on the calculation of penalties under I. R. C. § 6707A for failure to disclose participation in a listed transaction. The court held that the penalty should be based on the tax reported on the original return, not subsequent amended returns. This decision clarifies the method of penalty calculation under the amended statute, impacting how taxpayers and the IRS assess penalties for undisclosed transactions.

    Parties

    Steven Yari (Petitioner) v. Commissioner of Internal Revenue (Respondent). Petitioner was the appellant at the Tax Court level following a collection due process (CDP) hearing.

    Facts

    Steven Yari formed Topaz Global Holdings, LLC, and Faryar, Inc. , an S corporation, which engaged in a management fee transaction. Yari’s Roth IRA acquired Faryar’s stock, resulting in unreported income. The IRS identified this as an abusive Roth IRA transaction and a listed transaction under Notice 2004-8. Yari and his wife filed a joint 2004 tax return without disclosing the transaction, leading to an audit and subsequent notices of deficiency. They settled the deficiency cases and filed amended returns reflecting changes. The IRS assessed a $100,000 penalty under I. R. C. § 6707A for Yari’s failure to disclose the listed transaction. After Congress amended § 6707A, Yari argued the penalty should be recalculated using the amended returns, reducing it to the statutory minimum of $5,000.

    Procedural History

    The IRS assessed the § 6707A penalty on September 11, 2008, and issued a notice of intent to levy on February 9, 2009. Yari requested a CDP hearing, which was suspended in October 2010 due to legislative changes. After the IRS Appeals Office upheld the penalty calculation, Yari petitioned the Tax Court for review. The court had jurisdiction under I. R. C. § 6330(d)(1) to review the penalty, and the standard of review was de novo as the underlying tax liability was at issue.

    Issue(s)

    Whether the penalty under I. R. C. § 6707A for failing to disclose a listed transaction should be calculated based on the tax shown on the original return or on subsequent amended returns?

    Rule(s) of Law

    I. R. C. § 6707A imposes a penalty on any person who fails to include on any return or statement information required under § 6011 regarding a reportable transaction. The penalty for failing to disclose a listed transaction is “75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes). ” I. R. C. § 6707A(b)(1). The statute prescribes minimum and maximum penalties of $5,000 and $100,000 for individuals, respectively.

    Holding

    The Tax Court held that the penalty under I. R. C. § 6707A must be calculated based on the tax shown on the original return, not subsequent amended returns. The court interpreted the statute to mean that the penalty is linked to the tax shown on the return giving rise to the disclosure obligation.

    Reasoning

    The court’s reasoning was based on the plain and unambiguous language of I. R. C. § 6707A, which refers to “the decrease in tax shown on the return. ” The court rejected Yari’s argument that the penalty should be based on the tax savings produced by the transaction as reflected in amended returns. The court found no legislative intent to the contrary and noted that Congress knew how to link penalties to the tax required to be shown but chose not to do so in § 6707A. The court also considered § 6707A a strict liability penalty, and while the result might be harsh in cases of overstated tax, it adhered to the statutory language. The legislative history and related statutes, such as § 6651(a)(2) and (c)(2), further supported the court’s interpretation. The court concluded that the settlement officer did not err in calculating the penalty based on the original return.

    Disposition

    The Tax Court entered a decision for the respondent, upholding the penalty calculation based on the tax shown on the original return.

    Significance/Impact

    The decision in Steven Yari v. Commissioner clarifies the method of calculating penalties under I. R. C. § 6707A for failing to disclose listed transactions. It establishes that the penalty must be based on the tax reported on the original return, which has significant implications for taxpayers and the IRS in assessing and challenging such penalties. This ruling may influence future cases involving similar penalties and underscores the importance of accurate and timely disclosure of reportable transactions. The decision also highlights the strict liability nature of § 6707A penalties, emphasizing the need for taxpayers to comply with disclosure requirements to avoid potential harsh penalties.