Opinion ID: 36852
Heading Depth: 1
Heading Rank: 4

Heading: 6621(c) Increased Interest

Text: 32 Despite its repeal in 1989, the draconian interest provision enacted as § 6221(c) continues to dog taxpayers for returns filed during the early 1980s. Consequently, these taxpayers contest the Government's imposition of additional interest pursuant to 26 U.S.C. § 6621(c). 6 The provision imposes an interest rate of 120% of the statutory rate on any substantial underpayment attributable to tax motivated transactions. 7 26 U.S.C. § 6621(c)(1) (1988). A substantial underpayment is any underpayment exceeding $1,000 per tax year. Id. § 6621(c)(2). Included in the statutory definition of tax motivated transaction is any sham or fraudulent transaction. Id. § 6621(c)(3)(A)(v). 33 The taxpayers contend that the trial courts are precluded from upholding the § 6621(c) interest assessment because their underlying settlement agreements do not establish that their underpayments were attributable to tax motivated transactions. In the FPAAs, the Government asserted several bases for the disallowance of certain deductions. Among them was a sham or fraudulent transaction, which qualifies as a tax motivated transaction for the purposes of 6621(c). 26 U.S.C. § 6621(c)(3)(A)(v). Because the taxpayers settled with the IRS, however, there was never any need for a court to examine the IRS's claimed bases for disallowance and make a determination about their application. 34 The taxpayers principally rely on Todd v. Comm'r, 862 F.2d 540 (5th Cir.1988). Todd dealt with the IRS's imposition of the § 6659(a) penalty. However, because both sections employ the same attributable to language, the analysis in Todd is instructive in the § 6621(c) context. In Todd, this court held that the taxpayers' underpayment was not attributable to a valuation overstatement and thus § 6659(a)'s penalty did not apply. The taxpayers in Todd did not settle with the IRS but instead chose to challenge the IRS's disallowances in the Tax Court. In that proceeding, the Tax Court held that the Todds were not entitled to their deductions and tax credits because the assets had not been put into service during the tax year. Id. at 541. On appeal, this court reasoned that because the deductions and credits were disallowed for a reason totally unrelated to any valuation overstatement, the resulting underpayment could not be attributable to a valuation overstatement. Id. at 542. 35 The court then applied a treasury regulation formula that determines the portion of deductions to which the higher interest rate applies. 8 Because the court had already determined that no portion of the disallowed deductions and credits were attributable to the valuation overstatement, the two sides of the equation were equal. 9 The court noted that where the deductions and credits ... were inappropriate altogether, the Todds' valuation of the property supposedly generating the tax benefits had no impact whatsoever on the amount of tax actually owed. Id. at 543. Or, stated another way, the Todds' underpayment was not attributable to a valuation overstatement. 36 In McCrary v. Comm'r, 92 T.C. 827, 1989 WL 35568 (1989), a case also heavily relied on by the taxpayers, the Tax Court adopted the reasoning in Todd and concluded that the McCrarys were not subject to § 6659(a) or § 6621(c) interest on the disallowed investment tax credit. The McCrarys conceded one of the IRS's grounds for disallowing the investment tax credit, thus eliminating the need for a trial on these issues in the Tax Court. Id. at 851. The ground conceded by the McCrarys (that their agreement was a license and not a lease) was neither a valuation overstatement nor a tax motivated transaction. The Tax Court noted that alternative grounds could have justified the disallowance, including sham transaction, which would have qualified for the § 6621(c) addition to tax. However, the Tax Court declined to address the sham transaction issue, which was unnecessary to support the conceded disallowance, for the sole purpose of applying § 6621(c). Id. at 859. 37 The taxpayers also rely on Heasley v. Comm'r, 902 F.2d 380 (5th Cir.1990), in which this court relied on and extended the Todd rule. In Heasley, the IRS relied on a variety of reasons for disallowing the Heasleys' claimed tax credits. The Heasleys, like the taxpayers here, conceded the deficiency, but continued their suit in the Tax Court to challenge the § 6659(a) and § 6621(c) additions to tax. The Tax Court concluded that the Heasleys' underpayment was attributable to a valuation overstatement under § 6659(a). The Fifth Circuit reversed. With regard to § 6659(a), this court held that even though the Tax Court specifically found that the underpayment was attributable to a valuation overstatement, a situation that differed from that in Todd, 38 [w]henever the IRS totally disallows a deduction or credit, the IRS may not penalize the taxpayer for a valuation overstatement included in that deduction or credit. In such a case, the underpayment is not attributable to a valuation overstatement. Instead, it is attributable to claiming an improper deduction or credit. 39 Heasley, 902 F.2d at 383. 40 These cases afford a conceptual lens through which to view the statutory phrase attributable to in the context of § 6621(c). In Todd, the Government argued that attributable to really meant capable of being attributed, such that any time a taxpayer's underpayment was capable of being attributed to a valuation overstatement, the penalty would apply. 862 F.2d at 542. However, the Todd court reasoned that the formula indicated that Congress did not intend for the penalty to apply every time valuation overstatement was at issue. Likewise, the § 6621(c) formula, supra, determines the amount of tax motivated underpayment by first taking into account any other proper, but nontax-motivated, deductions. On a theoretical level, the formula provides the same reinforcement for viewing attributable to narrowly in the § 6621(c) context. 10 When so viewed, it follows that when the FPAA lists several independent reasons for disallowing the taxpayers' deductions, there is no way to determine, without additional superfluous litigation, whether the taxpayers' underpayment is attributable to a reason that also qualifies as a tax-motivated transaction (such as a sham). 41 The Tax Court has twice embraced this narrow view of attributable to in § 6621(c) cases and decided that a taxpayer's blanket concession precludes a finding that any underpayment is attributable to a tax motivated transaction. First, in Rogers v. Comm'r, 60 T.C.M. (CCH) 1386 (1990), the taxpayers conceded the IRS's ability to disallow deductions. The Tax Court relied on McCrary, supra, and reasoned that because the determination of whether there was a tax-motivated transaction was made only concerning the disputes over the additions to tax and increased interest, we could not conclude that the taxpayer required a trial that otherwise would have been unnecessary. Id. at 1397. The taxpayers also cite Schachter v. Comm'r, 67 T.C.M. (CCH) 3092, 1994 WL 263329,  (1994), in which the court noted that because the taxpayer entered into a stipulation of settled issues and conceded the disallowance of deductions, these actions obviated the need for a trial on the numerous issues raised in the deficiency notice for the purpose of identifying which, if any of them, provided the substantive ground or grounds for disallowance.... The Schachter court was also persuaded that because of the numerous grounds alleged in the notice of deficiency, it was impossible to say that the underpayment was attributable to any one ground. The court noted: 42 Here, as in [ McCrary ] and [ Rogers ], the melange of alleged grounds, some of which were tax motivated grounds — but others were not — prevent us from saying, after the concession, that the underpayment was attributable to a particular ground. We are not inclined, in these circumstances, to rely on petitioners' burden of proof to show that the transaction was not tax motivated, all or in part, for the purpose of section 6621(c). The objectives of administrative efficiency and judicial economy have been well served by the closing agreement and petitioner's concession. Those objectives would not be served by requiring a trial on the substantive issues for the sole purpose of determining whether petitioner is liable for 20 percent more interest on the deficiency under section 6621(c). 43 Id. at . 44 The same situation is present in these cases: the taxpayers settled or conceded the disallowances and paid the delinquent taxes, thus removing the need for a trial on the merits of those issues. This court can conceive of no good reason to treat the taxpayers in this case differently from the taxpayers in Todd, McCrary, Heasley, Rogers, or Schachter. There is no way, given the multiple reasons provided for the disallowance in the FPAAs, to determine whether the underpayments are attributable to a tax motivated transaction. Additionally, § 6621(c) was one of the provisions enacted by Congress to deal with the Tax Court backlog. Todd, 862 F.2d at 544 n. 14. Yet, fifteen years after the statute's repeal, imposing the penalty in situations such as this does nothing to relieve the Tax Court's backlog, when the taxpayers have in fact settled with the IRS. Because, under the circumstances of these cases, the taxpayers' underpayments are not attributable to a tax motivated transaction as a matter of law, the IRS may not assess the additional interest against them. We thus endorse the result in Weiner, albeit on different grounds, but reverse that in Kraemer.