829 F.3d 795
7th Cir.2016Background
- Charles King, an employer, failed to pay payroll (employment) taxes for several years; IRS assessed taxes, penalties, and interest.
- King requested an installment payment plan; IRS initially said it would honor the request but later required additional financial information and ultimately denied installment relief because King had sufficient income/assets to have paid when due.
- King paid the taxes in October 2011 and sought abatement of interest accruing after March 5, 2009 (the date IRS said it would honor the installment request), arguing he would have paid earlier had IRS said up front it would deny a plan.
- IRS denied abatement under 26 U.S.C. § 6404(a), treating the interest as not "excessive in amount"; abatement under § 6404(e) (errors/delays) does not apply to payroll taxes.
- Tax Court held that "excessive in amount" can incorporate an "unfairness under all the facts and circumstances" standard and ordered abatement for a two-month period; the government appealed.
- King died during appeal; his widow did not participate. Seventh Circuit found the appeal not moot and reviewed the merits.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether interest abatement under §6404(a)(1) may be based on a broad "unfairness" standard | King: "Excessive" includes unfairness; IRS's failure to communicate deficiencies was unfair and made interest excessive | IRS: "Excessive in amount" means amount in excess of correct tax liability; no basis for fairness-based abatements | Court: Rejected Tax Court's fairness test; "excessive" means "in excess of the correct tax liability" per Treasury regulation; abatement denied |
| Whether the Treasury regulation construing "excessive" is controlling | King: Tax Court relied on plain meaning; regulation is "less-than-illuminating" | IRS: 26 C.F.R. §301.6404-1(a) reasonably interprets statute to mean excess over correct liability; agency interpretation entitled to deference | Court: Upheld regulation as a reasonable gap-filling interpretation; Tax Court's contrary reading reversed |
| Risk that a fairness standard would encourage delayed payments and revenue loss | King: (implicit) fairness-based relief appropriate in particular equities | IRS: Broad unfairness test invites delay and arbitrary litigation, harming revenue collection | Court: Agrees with IRS; vagueness and adverse policy consequences counsel against fairness standard |
| Mootness / Appellee absence after death | IRS: Case remains live because IRS contests abatement and third parties could claim funds; appeal not moot | (No appellee participation) | Court: Appeal not moot; proceeds on merits |
Key Cases Cited
- Chevron U.S.A. Inc. v. Nat. Res. Def. Council, 467 U.S. 837 (1984) (establishes judicial deference framework for agency statutory interpretations)
- Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011) (agencies make interpretive choices filling gaps in the Internal Revenue Code)
- Scanlon White, Inc. v. Commissioner, 472 F.3d 1173 (10th Cir. 2006) (§6404(e) does not apply to employment taxes)