Yet another in my “misunderstanding” series is the tale of Steven Yari, 143 T. C. 7, filed 9/15/14. And it merits a full-dress T. C. because Judge Wherry addresses for the first time whether the Section 6707A nondisclosure chop applies to the initial (non-disclosing) tax return, or to subsequent amendments thereof.
The issue comes up on a CDP, because the Section 6707A chop couldn’t be included in the deficiency proceeding that Steve and IRS settled. Tax Court had no jurisdiction to review a Section 6707A chop in a deficiency proceeding, but Judge Wherry finds that Tax Court does have jurisdiction in a CDP.
But while Steve was going through the CDP, Congress changed the method of calculating the Section 6707A chop.
Steve’s deliction giving rise to all this was an abusive Roth IRA. It’s the old story of putting stock from a Sub S in a Roth, having an operating entity (here an LLC) pay the Sub S for “management fees”, and funneling the deductible fees into the nontaxable Roth. See Notice 2004-8, 2004-1 C.B. 333, for more about this nefarious scheme.
Steve, an admitted non-discloser, was in the middle of the CDP when the change in method took place, so the CDP was put on hold while IRS (not Appeals) considered whether the old method or the new method should apply. And that depends upon whether the tax shown on original return or last amended return applies.
Judge Wherry: “The parties scarcely mention, much less substantively discuss, this midhearing ‘time-out’ and apparent referral to the IRS examination function. We therefore will not further comment on these events.” 143 T. C. 7, at p. 7, footnote 3. All I can say is, mighty strange.
Anyway, Steve had amended his return for the year at issue twice after the deficiency was settled, and the last amendment (which no one is fighting about), would give Steve a $5K penalty per the new method, while his return pre-amendments would hit him with a $100K chop.
“Petitioner urges us to use the amended returns to determine the decrease in tax, and respondent says we must look to the original return. These disparate positions stem from a fundamental disagreement as to what the phrase ‘decrease in tax shown on the return as a result of the transaction’ means.”” 143 T. C. 7, at p. 12. (Footnote omitted, but it says the Regs just parrot the statute)..
Tough luck, Steve, but Judge Wherry sees no basis in the plain language of 6707A to give you a bye. “We think the statute is clear and unambiguous: The penalty is calculated with reference to the ‘tax shown on the return’. Sec. 6707A(b). When we look to the penalty provision as a whole, it is clear that Congress has penalized the failure to disclose participation in a listed or otherwise reportable transaction on the return or other information statement giving rise to the disclosure obligation. If the taxpayer fails to report the transaction on that return or information statement, then the penalty is based on the tax shown on that return or information statement, not some other, later filed return or some hypothetical tax. Congress did not say that the penalty should be calculated by reference to tax shown on a return; it did not say to calculate the penalty using the tax required to be shown; and it did not say to calculate the penalty using the decrease in tax resulting from participation in the transaction. Congress very clearly linked the penalty to the tax shown on a particular return–the return giving rise to the reporting obligation.” 143 T. C. 7, at pp. 14-15 (emphasis by the Court).
Yes, it’s harsh. And yes, plain language isn’t always so plain, as Judge Wherry goes to some lengths to show.
“We observe that the process of divining the legislative intent underlying a statute’s language and structure, while subject to canons of construction and well-established methodologies, is hardly an exact science. Compare, e.g., Halbig v. Burwell, No. 14-5018, __ F.3d __, 2014 WL 3579745, at *13-*17 (D.C. Cir. July 22, 2014) (having found sec. 36B unambiguous, concluding that weight of legislative history, including overall congressional policy goals, did not override statute’s plain meaning, which was that tax credits were unavailable to participants in health insurance exchanges established by the Federal Government), vacated and rehearing en banc granted, __ F.3d __, 2014 WL __ (D.C. Cir. Sept. 4, 2014), with King v. Burwell, No. 14-1158, __ F.3d __, 2014 WL 3582800, at *9-*10 (4th Cir. July 22, 2014) (having found sec. 36B ambiguous, concluding that legislative history did not support either plausible interpretation, and deferring to agency’s determination that statute permitted tax credits for participants in Federal health insurance exchanges, as consistent with overall congressional policy goals).” 2014 T. C. 7, at p. 15, footnote 5.
Maybe grounds for appeal, Steve.
But for those similarly situated, better ‘fess up early, or it will not go well with you.