100 F.4th 223
D.C. Cir.2024Background
- Alon Farhy, a U.S. permanent resident, failed to report his ownership of Belizean corporations as required by IRC § 6038(a), incurring over $500,000 in penalties under § 6038(b).
- The IRS assessed these penalties and initiated administrative collection efforts, including sending Farhy a notice of intent to levy his property.
- Farhy did not challenge his liability under § 6038(b), only the IRS's authority to assess and administratively collect the penalty instead of suing in court.
- The Tax Court agreed with Farhy, holding the IRS lacked statutory authority under § 6038(b) to assess and collect the penalty administratively.
- The United States appealed to the D.C. Circuit, which reviewed the Tax Court's legal ruling de novo.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether penalties under IRC § 6038(b) are "assessable," allowing IRS administrative collection | Only penalties specifically designated as assessable (by statute or chapter inclusion) can be administratively assessed; § 6038(b) penalties are not | § 6038(b) penalties are assessable due to statutory structure, history, and longstanding IRS practice, even absent explicit assessement language | The court held § 6038(b) penalties are assessable, reversing the Tax Court |
| Whether IRS must sue in federal court to collect § 6038(b) penalties | IRS lacks authority to assess; must bring a civil action | Administrative collection is authorized; requiring a suit would defeat legislative purpose | IRS can administratively assess and collect § 6038(b) penalties |
| Implications of statutory coordination between § 6038(b) and (c) penalties | Coordination doesn’t mean both are assessable; only foreign tax credit penalty is | Coordination, penalty structure, and legislative history mean both are assessable | Both penalties should be harmonized and assessable by IRS |
| Who decides the reasonable cause defense for § 6038(b) penalties | Must be determined by court if IRS must sue to collect | The IRS, as statute grants discretion to Secretary | Service/Secretary makes this determination, reinforcing assessability |
Key Cases Cited
- United States v. Galletti, 541 U.S. 114 (IRS assessment process explained)
- Flora v. United States, 362 U.S. 145 (taxpayers’ jurisdiction for refund suits after payment)
- Hibbs v. Winn, 542 U.S. 88 (explains consequences and nature of IRS assessment)
- Laing v. United States, 423 U.S. 161 (definition of deficiency and administrative tax collection framework)
- Commodity Futures Trading Comm’n v. Shor, 478 U.S. 833 (Congressional acquiescence to longstanding agency interpretation)