The Tax Court held that it did not have jurisdiction to redetermine a taxpayer’s liability for Sec. 6707A penalties for failure to report involvement in a listed transaction.
Background
The IRS issued Sydney and Lisa Smith a deficiency notice for 2003, 2004, 2005, and 2006. The IRS determined that the Smiths had a deficiency in income tax for each challenged year, as well as accuracy-related penalties under Secs. 6662 and 6662A. For the four years, the total deficiencies were $133,974, and the penalties were $37,775. The IRS also sent notices of assessment in the amount of $100,000 for each year 2004 through 2006 for a Sec. 6707A penalty for failure to report an involvement in a listed transaction.
The Smiths timely filed a petition with the Tax Court challenging the deficiency notice and the notices of assessment. The IRS filed a motion to dismiss with respect to the Sec. 6707A penalties, asserting that the Tax Court did not have jurisdiction to redetermine those penalties.
Sec. 6707A
Congress enacted Sec. 6707A to aid the IRS’s effort to stop abusive tax shelters, specifically by imposing a penalty for a taxpayer’s failure to disclose participation in certain tax-avoidance transactions known as reportable transactions. The amount the IRS may assess a taxpayer for failure to include information required for a reportable transaction other than a listed transaction is $10,000 in the case of an individual and $50,000 in any other case. If the failure is for a listed transaction, the penalty is increased to $100,000 in the case of an individual and $200,000 in any other case. The penalty applies without regard to whether the transaction ultimately results in any understatement of tax and in addition to any other penalty, including an accuracy-related penalty, imposed by the Code.
Tax Court Jurisdiction over Assessable Penalties
Sec. 6707A is located in subchapter B, Assessable Penalties, of chapter 68 of the Code. Assessable penalties in general are not subject to deficiency proceedings and are therefore not within the Tax Court’s jurisdiction, but a taxpayer is not in all cases barred from using deficiency procedures to challenge a liability for an assessable penalty. In a similar vein, while some of the assessable penalties are explicitly exempted by statute from deficiency proceedings, those that are not explicitly exempted by statute may not be subject to them.
TheTax Court’s Decision
The Tax Court held that it did not have jurisdiction to redetermine the Sec. 6707A penalties assessed against the Smiths. Because Sec. 6707A penalties are not explicitly exempted by statute from deficiency proceedings, the Tax Court was required to examine whether a liability for a Sec. 6707A penalty is a deficiency to determine if the penalty was within its jurisdiction.
According to the Tax Court, “deficiency” for this purpose is defined by Sec. 6211(a) as the amount by which the tax imposed exceeds the amount shown as tax by the taxpayer upon his or her return. The Tax Court found that Sec. 6707A penalties do not depend upon a related tax deficiency and could be assessed even if there is an overpayment of tax. Rather, the IRS imposes the penalty for failure to disclose a reportable transaction. Therefore, the penalty is not included in the statutory definition of deficiency. Consequently, it is not subject to deficiency proceedings and is not within the Tax Court’s jurisdiction.
Reflections
Although it is probably small consolation to the Smiths, the Tax Court pointed out that they could challenge the imposition of a Sec. 6707A penalty in a refund proceeding in federal court. This case is an excellent example of the often harsh consequences of the mammoth and inflexible penalty amounts imposed by Sec. 6707A. The Smiths’ $300,000 Sec. 6707A penalty was more than double the amount of their tax deficiency. This lack of correlation between the tax benefits from the transaction and the Sec. 6707A penalty led the national taxpayer advocate to express concerns about the penalty in her latest report and has led the IRS to implement a moratorium on collection enforcement of the Sec. 6707A penalty in certain cases. The IRS has also announced that it will not file new lien notices where the amount due is solely related to the Sec. 6707A penalty. The moratorium (which was scheduled to expire on March 1) is supposed to give Congress time to legislate a fix to the problem. As of this writing, the Senate has passed a bill (S. 2917) that would make the penalty 75% of the tax benefit (within a minimum and maximum range); a similar bill is in committee in the House.
Smith, 133 T.C. No. 18 (2009)
