SCOTUS Reports

Tag: I.R.C. § 6662A

  • Thompson v. Commissioner, 148 T.C. 3 (2017): Constitutionality of Tax Court Judge Removal and Penalties for Undisclosed Tax Transactions

    Thompson v. Commissioner, 148 T. C. 3 (2017)

    In Thompson v. Commissioner, the U. S. Tax Court upheld the constitutionality of the President’s authority to remove Tax Court judges and the accuracy-related penalties under I. R. C. § 6662A for undisclosed tax transactions. The court rejected claims that these provisions violated the separation of powers and the Eighth Amendment’s Excessive Fines Clause, affirming that the penalties serve a remedial rather than punitive purpose and are not grossly disproportionate to the offense.

    Parties

    Douglas M. Thompson and Lisa Mae Thompson, as Petitioners, filed against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court.

    Facts

    Douglas and Lisa Mae Thompson, married during the taxable years 2003-2007, filed joint personal income tax returns. The Internal Revenue Service (IRS) issued a notice of deficiency on December 18, 2012, determining federal income tax deficiencies and penalties for those years, primarily stemming from a distressed asset debt transaction reported in 2005. This transaction, a listed transaction under Notice 2008-34, generated a loss that was carried back to 2003 and 2004 and forward to 2006 and 2007, shielding their income from taxation. The Thompsons failed to disclose the transaction, leading the IRS to impose a 30% penalty under I. R. C. §§ 6662A(c) and 6664(d)(2). The Thompsons resided in California at the time of filing the petition but later moved to Florida. On March 24, 2015, they conceded the disallowance of the bad debt deduction but contested the penalties.

    Procedural History

    The Thompsons filed a petition in the U. S. Tax Court challenging the penalties under I. R. C. §§ 6662(h) and 6662A. They also filed motions to disqualify the judge and declare I. R. C. § 7443(f) unconstitutional, arguing that the President’s power to remove Tax Court judges for cause violated separation of powers principles. Additionally, they moved for judgment on the pleadings to declare I. R. C. § 6662A unconstitutional under the Eighth Amendment. The Tax Court, following its decision in Battat v. Commissioner, denied both motions, upholding the constitutionality of § 7443(f) and the penalties under § 6662A.

    Issue(s)

    Whether I. R. C. § 7443(f), allowing the President to remove Tax Court judges for cause, violates the Constitution’s separation of powers?

    Whether the accuracy-related penalties under I. R. C. § 6662A for undisclosed reportable transactions violate the Eighth Amendment’s Excessive Fines Clause?

    Rule(s) of Law

    I. R. C. § 7443(f) authorizes the President to remove Tax Court judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause. “

    I. R. C. § 6662A imposes a 30% penalty on any reportable transaction understatement if the transaction is not adequately disclosed, with no available defenses. If disclosed, the penalty rate is 20%, and defenses may be available under § 6664(d)(1) and (2).

    The Eighth Amendment’s Excessive Fines Clause prohibits the imposition of excessive fines as punishment for an offense.

    Holding

    The court held that I. R. C. § 7443(f) does not violate the Constitution and that the Tax Court judges do not need to recuse themselves on that basis. Additionally, the court held that the accuracy-related penalties under I. R. C. § 6662A do not violate the Eighth Amendment.

    Reasoning

    The court’s reasoning for upholding § 7443(f) was based on its prior decision in Battat v. Commissioner, where it found the President’s removal authority constitutional and consistent with separation of powers principles. The court rejected the Thompsons’ arguments as they did not present new issues beyond those already addressed in Battat.

    Regarding § 6662A, the court reasoned that civil tax penalties are remedial, not punitive, as they encourage voluntary compliance and serve a revenue-raising purpose. The court cited Helvering v. Mitchell and other cases to support the remedial nature of tax penalties. The Thompsons’ contention that § 6662A’s deterrent purpose made it punitive was rejected, as the Supreme Court in Department of Revenue of Mont. v. Kurth Ranch clarified that a deterrent purpose alone does not make a tax penalty punitive.

    The court also applied the proportionality test from United States v. Bajakajian to assess whether the § 6662A penalty was grossly disproportional to the offense. It found that the penalty’s calculation, which considers the full tax benefit obtained from the transaction, was proportional to the harm caused and thus not excessive.

    Furthermore, the court rejected the argument that the higher penalty rate for undisclosed transactions violated the Excessive Fines Clause, emphasizing that Congress intended to incentivize disclosure as a key element in curbing tax shelter abuse.

    Disposition

    The court denied the Thompsons’ motion to disqualify the judge and their motion for judgment on the pleadings, affirming the constitutionality of I. R. C. § 7443(f) and the penalties under § 6662A.

    Significance/Impact

    Thompson v. Commissioner reaffirms the constitutional validity of the President’s authority to remove Tax Court judges and upholds the stringent penalties for undisclosed tax transactions. This decision strengthens the IRS’s enforcement mechanisms against tax shelters and reinforces the importance of disclosure in tax compliance. It also provides clarity on the application of the Excessive Fines Clause to civil tax penalties, likely influencing future challenges to similar penalties and reinforcing the remedial nature of such sanctions in tax law.

  • Snow v. Commissioner, 141 T.C. No. 6 (2013): Calculation of Underpayment for Accuracy-Related Penalty

    Snow v. Commissioner, 141 T. C. No. 6 (U. S. Tax Ct. 2013)

    In Snow v. Commissioner, the U. S. Tax Court upheld the IRS’s computation of an underpayment for the purpose of imposing a 20% accuracy-related penalty under I. R. C. § 6662(a). The court clarified how to calculate an underpayment when a taxpayer overstates tax withholdings, affirming that such overstatements increase the underpayment. This ruling follows the precedent set in Feller v. Commissioner and emphasizes the importance of accurately reporting tax withholdings on returns, impacting how tax liabilities and penalties are assessed.

    Parties

    Glenn Lee Snow, the petitioner, represented himself pro se. The respondent was the Commissioner of Internal Revenue, represented by Martha J. Weber.

    Facts

    Glenn Lee Snow filed his 2007 federal income tax return, claiming a refund of $16,684. 65 based on reported federal income tax withholdings of the same amount. However, Snow incorrectly included $5,562. 13 of Social Security and Medicare tax withholdings as federal income tax withholdings on his return. The IRS determined that only $11,117. 65 had been withheld as federal income tax, resulting in Snow receiving an erroneous refund of $5,567. Snow’s actual tax liability for the year was $12,968, leading the IRS to calculate an underpayment of $18,535, which included the tax liability plus the erroneous refund, and assessed a 20% accuracy-related penalty of $3,707 under I. R. C. § 6662(a).

    Procedural History

    Snow filed his 2007 tax return and received a refund of $16,684. 65. The IRS issued a notice of deficiency, asserting that Snow owed additional taxes due to the overstatement of withholdings and was liable for an accuracy-related penalty. Snow petitioned the U. S. Tax Court to challenge the computation of his underpayment for the penalty. The court had previously found Snow liable for the tax and penalties in a Memorandum Opinion (T. C. Memo. 2013-114). In this case, the Tax Court was tasked with reviewing the IRS’s computation of the underpayment for the accuracy-related penalty under Rule 155. Snow did not dispute his tax liability or the section 6673(a) penalty but objected to the computation of the section 6662(a) penalty.

    Issue(s)

    Whether the IRS correctly calculated the underpayment for purposes of imposing the accuracy-related penalty under I. R. C. § 6662(a) when the taxpayer overstated federal income tax withholdings on his return?

    Rule(s) of Law

    Under I. R. C. § 6662(a), a 20% accuracy-related penalty is imposed on any portion of an underpayment attributable to negligence or substantial understatement of income tax. The term “underpayment” is defined in I. R. C. § 6664(a) and further clarified by Treasury Regulation § 1. 6664-2. Specifically, Treasury Regulation § 1. 6664-2(c)(1) reduces the amount shown as tax on the return by the excess of the amount shown as withheld over the amounts actually withheld. The court in Feller v. Commissioner, 135 T. C. 497 (2010), upheld the validity of this regulation.

    Holding

    The U. S. Tax Court held that the IRS correctly calculated Snow’s underpayment for purposes of the accuracy-related penalty under I. R. C. § 6662(a). The underpayment was determined to be $18,535, which included Snow’s tax liability of $12,968 plus the $5,567 overstatement of withholdings. Consequently, the accuracy-related penalty of $3,707 (20% of $18,535) was upheld.

    Reasoning

    The court’s reasoning focused on the application of Treasury Regulation § 1. 6664-2, which provides a formula for calculating an underpayment. The court emphasized that the amount shown as tax on Snow’s return was reduced by the excess of the amount he claimed as withheld over the amounts actually withheld, resulting in a negative figure of $5,567. This negative amount was then added to the tax imposed to determine the underpayment. The court’s decision followed the precedent set in Feller v. Commissioner, which upheld the validity of the regulation. The court reasoned that Snow’s overstatement of withholdings increased the underpayment, and thus the accuracy-related penalty was correctly computed. The court also clarified the meaning of “rebates” and “amounts collected without assessment” under the regulation, finding that Snow had no such amounts that would reduce the underpayment. The court’s interpretation ensured that the penalty was based on the actual amount of revenue the government was deprived of due to Snow’s return.

    Disposition

    The court affirmed the IRS’s computation of the underpayment for the accuracy-related penalty and entered a decision for the respondent.

    Significance/Impact

    Snow v. Commissioner reinforces the importance of accurately reporting tax withholdings on returns, as overstatements can significantly impact the calculation of underpayments and subsequent penalties. The decision follows and expands upon the precedent set in Feller v. Commissioner, providing further guidance on the application of Treasury Regulation § 1. 6664-2. This ruling affects tax practitioners and taxpayers by clarifying how the IRS computes underpayments for penalty purposes, particularly when errors in withholding amounts are involved. The case underscores the need for meticulous attention to detail in tax reporting to avoid increased liabilities and penalties.