Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-08-16105/USCOURTS-ca9-08-16105-0/pdf.json

Parties Involved:
100 Oak Street Corporation
Appellant
Service Employees International Union
Appellant
United States of America
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SERVICE EMPLOYEES INTERNATIONAL 

UNION, 100 OAK STREET

CORPORATION,

No. 07-17256 Plaintiffs-Appellees,  D.C. No. v.

3:05-cv-04189-JL

UNITED STATES OF AMERICA, UNITED

STATES INTERNAL REVENUE SERVICE,

Defendants-Appellants. 

SERVICE EMPLOYEES INTERNATIONAL 

UNION, 100 OAK STREET No. 08-16105 CORPORATION,

Plaintiffs-Appellants, D.C. No.  3:05-cv-04189-JL

v.

OPINION UNITED STATES OF AMERICA,

Defendant-Appellee. 

Appeal from the United States District Court

for the Northern District of California

James Larson, Chief Magistrate Judge, Presiding

Argued and Submitted

April 14, 2009—San Francisco, California

Filed March 17, 2010

Before: Thomas G. Nelson, Andrew J. Kleinfeld and

Milan D. Smith, Jr., Circuit Judges.

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Opinion by Judge Kleinfeld

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COUNSEL

Nathan J. Hochman, Assistant Attorney General, Robert W.

Metzler, Ivan C. Dale (argued), Tax Division, Department of

Justice, Washington, DC; Joseph P. Russoniello, United

States Attorney, San Francisco, California; for the United

States of America (appellant in 07-17256 and appellee in 08-

16105).

William E. Taggart, Jr., Oakland, California, for Service

Employees International Union and 100 Oak Street Corporation (appellees in 07-17256 and appellants in 08-16105).

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OPINION

KLEINFELD, Circuit Judge:

We address whether penalties on tax exempt organizations

for late filing of informational returns may be reduced by district courts as a matter of discretion. We conclude that they

may not be.

I. Facts.

Labor unions do not have to pay income or other federal

taxes.1 But they do have to file informational returns disclosing their income, disbursements, etc.2

 Service Employees

International Union (“SEIU”) and its subsidiary 100 Oak

Street Corporation (“Oak Street”, SEIU’s Oakland address)

are labor organizations enjoying the tax exemption and burdened by the return requirement. 

SEIU filed its 1999 informational return twenty months

late, and Oak Street filed its 1998 informational return four

months late. The IRS applied a statutory formula based on the

length of delay and gross receipts, and imposed the penalties

provided for by the statute.3 SEIU had gross receipts of $11

million, Oak Street under $1 million, and the statutory formula generated penalties of $50,000 on the union and $2,460

on Oak Street. Neither SEIU nor Oak Street paid their penalties. The IRS sent to each a “Final Notice of Intent to Levy

and Notice of Your Right to a Hearing.” The union and Oak

Street each requested a “collection due process hearing” as

provided for by statute with the IRS Office of Appeals.4 They

argued that the late filing should be excused for reasonable

1

26 U.S.C. § 501(a), (c)(5). 

2Labor unions must file IRS Form 990. 26 U.S.C. § 6033(a)(1); 26

C.F.R. § 1.6033-2(a). 

3

26 U.S.C. § 6652(c)(1)(A). 

4

Id. § 6330(a). 

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cause, because although their accountant had sent the returns

in time for timely filing, and they had signed the returns

months or years before they sent them for filing, their failure

to send them in resulted from some sort of administrative

oversight. They also argued that the penalties, $50,000 for the

SEIU and $2,460 for Oak Street, were excessive. The IRS

denied relief, noting various problems with the union’s arguments, including lack of personal knowledge by one if its two

affiants, absence of signatures on the affidavits by both affiants, and multiple delays. 

SEIU and Oak Street did not pay the penalties or make

offers in compromise.5 Instead, they appealed to the United

States Tax Court, seeking to overturn the IRS’s decisions.6

The Tax Court dismissed their appeals for lack of jurisdiction.7

They then appealed to the district court for review of the IRS

determinations.8 They argued that the penalties should not

have been imposed because they had “reasonable cause”

under the statute9 and even if not, should be reduced. On cross

motions for summary judgment, the district court concluded

that there was no “reasonable cause,” but that as a matter of

discretion the IRS should have reduced the penalties. The district court entered judgment in favor of the IRS, but for only

25% of the $50,000 penalty on SEIU and 50% of the $2,460

penalty on Oak Street, a net of $13,730 for the two of them

($12,500 for SEIU and $1,230 for Oak Street) instead of

$52,460. The district court denied the IRS any prejudgment

interest, but denied costs to the union and Oak Street.

5

See id. § 7122; 26 C.F.R. § 301.7122-1. 

6

26 U.S.C. § 6330(d)(1)(A) (2000). The statute was amended in 2006

to remove subparts (A) and (B) from § 6630(d)(1). Pension Protection Act

of 2006, Pub. L. 109-280, 120 Stat. 1019, § 855(b) (Aug. 17, 2006). 

7

Serv. Employees Int’l Union v. Comm’r, 125 T.C. 63 (2005). 

8

26 U.S.C. § 6330(d)(1)(B) (2000). 

9

26 U.S.C. § 6652(c)(4). 

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The IRS appeals the reduction in the amounts of the penalties and argues that in its capacity as an appellate court, the

district court had no jurisdiction to enter a money judgment.

The union and Oak Street cross appeal the district court order

denying them a costs award. The union does not cross appeal

the district court rejection of its claim that its delay was

excused by “reasonable cause.”

II. Analysis.

We have jurisdiction under 28 U.S.C. § 1291. We review

summary judgment de novo.10

The IRS argues that the amount of penalty is not subject to

discretion. It is right.

[1] The statute provides a formula, $20 a day times the

number of days of delay, subject to a ceiling, for exempt organizations with receipts not exceeding $1 million, or $100 a

day if gross receipts exceed $1 million.11 The ceiling is the

lesser of $10,000 or 5% of gross receipts for tax exempt organizations with gross receipts of no more than $1 million, and

$50,000 for tax exempt organizations with gross receipts

exceeding $1 million. For SEIU the formula amounts are

$100 per day and a $50,000 ceiling, for Oak Street, $20 per

day, and a $10,000 ceiling. Because the formula yields

$63,500 for SEIU’s 635 day delay, the union got the benefit

of the $50,000 ceiling. Oak Street owed $2,460 for its 123 day

delay, so the ceiling did not apply.12 The statute uses mandatory language in all respects, leaving the IRS no discretion in

deciding how much of a penalty to impose.

10See Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026,

1028-29 (9th Cir. 2001). 

1126 U.S.C. § 6652(c)(1)(A). 

12Oak Street’s gross receipts for the year were $240,000, 5% of which

is $12,000. 

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Here is the language:

(c) Returns by exempt organizations and by certain trusts.

(1) Annual returns under section

6033(a)(1) or 6012(a)(6).

(A) Penalty on organization.

In the case of—

(i) a failure to file a return required under

section 6033(a)(1) (relating to returns by

exempt organizations) . . . on the date

and in the manner prescribed therefor

(determined with regard to any extension

of time for filing), or . . . 

. . . 

there shall be paid by the exempt organization $20 for each day during which

such failure continues. The maximum

penalty under this subparagraph on failures

with respect to any 1 return shall not exceed

the lesser of $10,000 or 5 percent of the

gross receipts of the organization for the

year. In the case of an organization having

gross receipts exceeding $1,000,000 for any

year, with respect to the return required

under section 6033(a)(1) . . . for such year,

the first sentence of this subparagraph shall

be applied by substituting “$100” for “$20”

and, in lieu of applying the second sentence

of this subparagraph, the maximum penalty

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under this subparagraph shall not exceed

$50,000.13

“There shall be paid $X” is language commanding a statutorily required amount. This language does not confer on the

agency discretion to decide how much ought to be paid. “The

word ‘shall’ is ordinarily ‘The language of command.’ ”

14

[2] The penalty set by § 6652(c)(1)(A) is “either fully

enforceable or fully unenforceable.”

15 A tax exempt organization may avoid the penalty if they actually filed their return

on time or the reasonable cause exception applies.16 The reasonable cause exception provides that “[n]o penalty shall be

imposed under this subsection with respect to any failure if it

is shown that such failure is due to reasonable cause.”

17 The

reasonable cause exception supports the IRS’s all-or-nothing

interpretation, because it says “no penalty,” not a reduced penalty.18

The Eleventh Circuit reads the analogous statutory provision for individuals19 the same way we read the language for

1326 U.S.C. § 6652(c)(1)(A) (emphasis added). 

14Anderson v. Yungkau, 329 U.S. 482, 485 (1947) (quoting Escoe v.

Zerbst, 295 U.S. 490, 493 (1935)); see also Lopez v. Davis, 531 U.S. 230,

241 (2001) (“Congress used ‘shall’ to impose discretionless obligations”);

Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35

(1998) (“[T]he mandatory ‘shall,’ . . . normally creates an obligation

impervious to judicial discretion.”). 

15See United States v. Sanford (In re Sanford), 979 F.2d 1511, 1513

(11th Cir. 1992); see also McMahan v. Comm’r, 114 F.3d 366, 368 (2d

Cir. 1997). 

1626 U.S.C. § 6652(c)(4). 

17Id.

18Id.; cf. United States v. Boyle, 469 U.S. 241, 245 (1984) (describing

“reasonable cause” as a way “[t]o escape the penalty” for filing a tax

return late). 

1926 U.S.C. § 6651(a)(1)-(2). 

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tax exempt organizations.20 “Reducing the amount of these

penalties would supplant Congress’ determination of the

proper amount of penalty, as set forth in the statutory formulas.”21 Likewise the Second Circuit.22

[3] The union argues that the IRS “had discretion under

IRC § 6652(c)(4) to abate the late filing penalties for ‘reasonable cause,’ ” but that is not correct. That statute too is mandatory, not discretionary. It provides that “[n]o penalty shall

be imposed” if the “failure is due to reasonable cause.”

23 If a

nonprofit fails to file the informational return on time for reasonable cause, the IRS has no discretion whether to impose or

reduce the penalty; it is flatly prohibited from imposing any

penalty at all.

The union argues that “[t]he IRS has abated penalties . . .

on hundreds, if not thousands, of occasions,” and courts have

approved the abatements, citing a Tax Court decision, Brown

v. Commissioner.

24 We have no idea, beyond what the cited

case says, whether any of the supposedly abated penalties are

of the sort at issue here. The Brown case SEIU cites does not

support its argument. Brown had not filed his tax returns or

paid his personal income tax, so the IRS prepared a substitute

return for him and assessed tax based on it. When he subsequently filed and showed that his income was less than had

been attributed to him, the IRS abated the tax on his personal

income (not the penalty for late filing of a nonprofit’s informational return) to bring the tax into accord with what he

actually owed on the income he had actually earned.25 That is

20Sanford, 979 F.2d at 1513. 

21Id.

22McMahan, 114 F.3d at 368 (“A failure to file a tax return on the date

prescribed leads to a mandatory penalty unless the taxpayer shows that

such failure was due to reasonable cause and not due to willful neglect.”).

2326 U.S.C. § 6652(c)(4). 

24Brown v. Comm’r, 85 T.C.M. (CCH) 1015 (2003). 

25Id. at *1. 

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not partial reduction of a penalty, just more accurate determination of tax due. Some penalties are discretionary, but the

union has not pointed to any decision by any court that holds

that the penalty at issue here, the § 6652 penalty on nonprofits

for late filing of informational returns, is discretionary or may

be reduced in the discretion of the IRS or a reviewing court.

The district court cited two cases for the proposition that

the appeals officer and the district court had discretion to

reduce the penalty, Dixon v Commissioner26 and Schikore v.

BankAmerica.

27 They are too remote from the issues in this

case to be of much use. Dixon holds that a pattern of government misconduct amounted to a fraud on the court, so no

showing of prejudice was necessary to granting taxpayers

relief.28 There is no pattern of government misconduct or

fraud on the court in the case at bar, and no late filing by a

nonprofit of its informational return in Dixon. Though Dixon

holds that we have inherent power to vacate a Tax Court judgment, sanction a party for fraud on the court, and fashion an

appropriate remedy, it holds these things in a context too

remote from the case at bar to be of much use for resolving

this case. Schikore holds that an ERISA retirement plan

administrator abused its discretion by denying a retiree the

benefit of the mailbox rule where she timely mailed in her

election form but the plan did not timely receive it,29 matters

of no relevance to the case at bar.

[4] We do not know from the record in this case whether

the SEIU and Oak Street could have achieved some reduction

in their penalties by making an offer in compromise.30 They

26Dixon v. Comm’r, 316 F.3d 1041 (9th Cir. 2003). 

27Schikore v. BankAmerica Supplemental Retirement Plan, 269 F.3d

956 (9th Cir. 2001). 

28316 F.3d at 1046-47. 

29269 F.3d at 961. 

30See 26 U.S.C. § 7122; 26 C.F.R. § 301.7122-1(a)(2) (“An agreement

to compromise may relate to a civil or criminal liability for taxes, interest,

or penalties.”). 

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made none. Without a compromise, neither the words of the

applicable penalty statute, nor the cases construing it, furnish

any basis for discretionary reduction of the penalty. Congress

may have written the statute with so little give to let nonprofits know they could expect no breaks if they filed their informational returns late, or to prevent those adjudicating claims

from showing more lenience toward nonprofits they liked, or

for some other reason, but regardless, that is what Congress

did. Under the statute, there is no task for the agency or the

court to perform, in the absence of reasonable cause for the

failure to file, except simple arithmetic.

[5] The government contends that the district court lacked

authority to enter a money judgment, and should have treated

the case as an appeal. The district court’s jurisdiction is

indeed over the taxpayer’s “appeal,” and SEIU does not contest the government’s position, contending only that the judgment could have been fashioned differently. Because the

SEIU does not contest this position, and the merits are now

fully resolved, we need not explicate the matter, and there is

nothing left for the district court to do on remand but affirm.

SEIU cross appeals the district court’s denial of costs in its

favor. Its theory is that it was entitled to be treated as a prevailing party because it won a reduction in penalties, and the

burden was on the government to prove that its position was

substantially justified if it was to avoid costs.31 Since we

reverse the reduction in penalties, the claim for costs as a partially prevailing party is moot.

The reduction in penalties in 07-17256 is REVERSED.

The denial of costs in 08-16105 is AFFIRMED.

31SEIU relies on 26 U.S.C. § 7430. 

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