Yari v. Commissioner
143 T.C. 157
| Tax Ct. | 2014Background
- Petitioner (Yari) used a Roth IRA and related entities to shelter income via a management-fee S‑corporation structure; the IRS treated these as abusive/listed transactions under Notice 2004‑8.
- Petitioner filed an original 2004 joint return that did not disclose the listed transaction; during audit he later filed amended returns (including large items and an NOL carryback) and the parties entered a closing agreement resolving deficiencies.
- The IRS assessed a §6707A nondisclosure penalty of $100,000 for 2004 (listed‑transaction penalty) and issued a notice of intent to levy; petitioner requested a Collection Due Process (CDP) hearing challenging the penalty amount.
- While the CDP hearing was pending, Congress (SBJA 2010) changed how §6707A penalties are calculated — linking listed‑transaction penalties to 75% of the decrease in tax “shown on the return” with statutory minimums and maximums, effective retroactively for assessments after 2006.
- Petitioner asked the IRS to recalculate the penalty using tax shown on his amended returns; the IRS Appeals and settlement officer declined and issued a notice of determination sustaining levy. Petitioner petitioned the Tax Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tax Court has jurisdiction to review amount of a §6707A penalty in CDP proceeding | Yari: Tax Court can review the penalty amount in a §6330 CDP petition because he had no prior opportunity to dispute the penalty | Commissioner: (parties assumed court had jurisdiction) but IRS historically can assess §6707A without deficiency procedure | Court: Tax Court has jurisdiction under §6330 to review the penalty amount de novo because petitioner had no prior opportunity to contest it |
| Proper baseline for calculating §6707A listed‑transaction penalty under SBJA: which "return" controls | Yari: Penalty should be based on decrease in tax as shown on subsequent amended returns (i.e., reflect actual tax after amendments) | Comm'r: Penalty must be based on tax shown on the return that gave rise to the disclosure obligation (the originally filed return) | Court: Held for Commissioner; calculation is tied to the tax shown on the return that created the disclosure duty (original return), not later amended returns |
| Whether legislative history or equitable considerations require using actual tax saved (or tax required to be shown) instead of tax shown on original return | Yari: Legislative intent and Blue Book show Congress wanted proportionality to tax savings and to avoid harshness; thus amended returns or actual tax should control | Comm'r: Statute's plain text ties penalty to "tax shown on the return" and Congress knew how to craft exceptions (cites other Code provisions) | Court: Statute is plain and unambiguous; legislative history does not overcome the text; strict‑liability statutory scheme governs |
| Whether the SBJA amendment requires substituting the tax that should have been shown | Yari: The change was meant to relate penalty to tax savings (i.e., what tax should have been shown) | Comm'r: Congress tied penalty to tax shown on the return; no §6651(c)(2)‑type safe harbor was included in §6707A | Court: No substitution; without explicit statutory language, penalty uses tax shown on the return; harsh outcomes are a product of the text |
Key Cases Cited
- Arbaugh v. Y & H Corp., 546 U.S. 500 (jurisdictional limits for courts of limited jurisdiction)
- Reves v. Ernst & Young, 507 U.S. 170 (give effect to clear statutory language absent contrary legislative intent)
- Smith v. Commissioner, 133 T.C. 424 (Tax Court lacks deficiency jurisdiction to redetermine §6707A penalties)
- Sego v. Commissioner, 114 T.C. 604 (standard of review — when underlying liability is at issue, review is de novo)
- Goza v. Commissioner, 114 T.C. 176 (same point on standard of review in CDP matters)