Opinion ID: 603772
Heading Depth: 3
Heading Rank: 1

Heading: Assessment on an Annualized Basis

Text: 59 Appellants Barrister Associates, Chadwick, Belloff, Gold, Universal, and Townsend argue that the government must assess the Section 6700 penalty with reference to a discrete taxable year and only on income actually earned during that year. For simplicity, we will examine the specifics of this argument with regard to Barrister Associates, although our conclusions apply to all appellants. 60 In its 1989 assessment against Barrister Associates, the government allocated the $534,692.50 penalty between 1982 and 1983, with $215,255 assigned to 1982, and the remaining $319,437.50 to 1983. The portion of the penalty assessed for 1982 was based on all of the general partnership fees attributable to the thirty-five Barrister Equipment Associates limited partnerships promoted in 1982, regardless of whether those fees were actually received in 1982. The same method was used to compute the 1983 portion of the penalty. See In re Tax Refund Litigation, 766 F.Supp. at 1258-59. However, when the district court entered its judgment, it simply found Barrister Associates liable for the entire $534,692.50, without reference to particular taxable years. 61 In assessing the penalty against Barrister Associates, the government assigned to a particular year all of the income attributable to the limited partnerships promoted during that year, whether or not the income was actually earned in that year. The district court approved this technique. Id. Barrister Associates argues that this violates I.R.C. § 6671(a), which provides that penalties and liabilities provided by this subchapter [which includes I.R.C. § 6700] ... shall be assessed and collected in the same manner as taxes. Taxes, Barrister Associates correctly notes, are assessed annually, with reference to a particular calendar period. Cf. 26 C.F.R. § 301.6203-1 (1991) (summary record of tax assessment shall identify, inter alia, the taxable period, if applicable). Barrister Associates concludes that the Section 6700 penalty must also be assessed with reference to a taxable period. 62 In determining the penalty owed for 1982, Barrister Associates argues, the government should have looked only to the limited partnership fees (and other income) Barrister Associates actually received in 1982. Money earned in later years could be considered only when (and if) the government assessed a penalty for those years. Under the rule suggested by Barrister Associates, therefore, the government would have to divide a Section 6700 penalty assessment into discrete taxable periods, and, in computing the penalty for each period, consider only gross income actually earned during that period. We disagree. 2 63 The plain language of the statute is contrary to Barrister Associates' argument. In enacting Section 6700, Congress expressly authorized the IRS to assess a penalty on future income, that is, on income to be derived from the promotion of an abusive tax shelter. I.R.C. § 6700; see S.Rep. No. 494, 97th Cong., 2d Sess. 248 (1982), reprinted in 1982 U.S.C.C.A.N. 781, 1015 (In determining the penalty with respect to the amount of gross income yet to be derived from an activity, the Secretary may look only to unrealized amounts which the promoter or other person may reasonably expect to realize.) (emphasis added). A holding that the government could assess a penalty only on income actually earned would disregard Congress's unambiguous direction that the penalty be imposed on future earnings. We cannot ignore their unambiguous language. See, e.g., Connecticut Nat'l Bank v. Germain, --- U.S. ----, ----, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992). 64 The Internal Revenue Code thus does not obligate the IRS to assess Section 6700 penalties only on income actually earned during discrete taxable periods. Unlike the assessment of, for example, a tax deficiency, see I.R.C. §§ 6211-6216, which is directly tied to the payment of a particular tax owed in a particular taxable period, the assessment of a Section 6700 penalty turns on income earned from specific conduct--the organization or promotion of an abusive tax shelter--that may occur at times different from those in which income is actually realized. This is in contrast to other Internal Revenue Code penalties, which depend on whether, and how often, an individual avoids certain tax obligations arising in a particular taxable period. See, e.g., I.R.C. § 6704 (civil penalty for failing to keep certain records; penalty for any calendar year shall be $50, multiplied by the number of individuals with respect to whom such failure occurs in such year); I.R.C. § 6723 (person who fails to include correct information on an information return shall pay a penalty for each failure). Other circuits have similarly found that Section 6700 penalties need not be assessed with reference to a discrete taxable period. See Sage v. United States, 908 F.2d 18, 22 (5th Cir.1990); Planned Invs. Inc. v. United States, 881 F.2d 340, 344 (6th Cir.1989); Gates v. United States, 874 F.2d 584, 588 (8th Cir.1989). But see Bond v. United States, 872 F.2d 898, 901 (9th Cir.1989) (dicta that Section 6700 penalties should be assessed on an annualized basis). 65 Barrister Associates argues, however, that, because the practical difficulties in assessing the penalty without reference to discrete taxable periods are so great, this construction of Section 6700 reads [the section] out of the Internal Revenue Code. The argument underlying this bit of hyperbole is that: income, whether subject to a tax or a penalty, can only be measured by reference to some time period. If this temporal dimension is ignored, it becomes impossible to measure and tax or penalize income in any rational manner. The government thus collects taxes on an annual and retrospective basis because of the intractable problem of predicting with accuracy the individual future incomes of millions of taxpayers. 66 However, the instant matter raises issues of a less intractable dimension. For purposes of calculating a Section 6700 penalty, the government is concerned only with gross income to be derived from a particular, well-defined activity. With regard to such an activity, it is far less daunting to predict future earnings, at least those earnings that a person may reasonably expect to realize. S.Rep. No. 494, 97th Cong., 2d Sess. 267, 1982 U.S.C.C.A.N. p. 1015. We therefore see no practical obstacles to assessing the penalty on income expected in later years. 67