Opinion ID: 27585
Heading Depth: 4
Heading Rank: 1

Heading: any valuation overstatement (within the meaning of section 6659(c)),

Text: 26 (ii) any loss disallowed by reason of section 465(a) and any credit disallowed under section 46(c)(8), 27 (iii) any straddle (as defined in section 1092(c) without regard to subsections (d) and (e) of section 1092), 28 (iv) any use of an accounting method specified in regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period, and 29 (v) any sham or fraudulent transaction. 30 (B) Regulatory authority. The Secretary may by regulations specify other types of transactions which will be treated as tax motivated for purposes of this subsection and may by regulations provide that specified transactions being treated as tax motivated will no longer be so treated.... [Emphasis added.] 31 The Secretary exercised the authority granted in I.R.C. § 6621(c)(3)(B), and enacted Temporary Regulation § 301.6621-2T (TTR § 301.6621-2T), which provides, in relevant part: 32 Q-2. What is a tax motivated underpayment? 33 A-2. A tax motivated underpayment is the portion of a deficiency (as defined in section 6211) of tax imposed by subtitle A (income taxes) that is attributable to any of the following tax motivated transactions: 34
35 ... 36 (6) Any deduction disallowed with respect to any other tax motivated transactions (see A-4 of this section). 37 ... 38 Q-4. Are any transactions other than those specified in A-2 of this section and those involving the use of accounting methods under circumstances specified in A-3 of this section considered tax motivated transactions under A-2(6) of this section? 39 A-4. Yes. Deductions disallowed under the following provisions are considered to be attributable to tax motivated transactions: 40 (1) Any deduction disallowed for any period under section 183, relating to an activity engaged in by an individual or an S corporation that is not engaged in for profit .... 11 41 To summarize the foregoing, I.R.C. § 6621(c) authorized the imposition of 120% of the usual interest rate on underpayments of tax in excess of $1,000, but only if they were attributable to tax motivated transactions as defined either in I.R.C. § 6621(c)(3)(A) or in the regulations enacted by the Secretary pursuant to I.R.C. § 6621(c)(3)(B). Exercising this authority, the Secretary added a sixth category of tax motivated transactions to the five specified by the Congress in I.R.C. § 6621(c)(3)(A) by promulgating TTR § 301.6621-2T: Any deduction disallowed for any period under section 183, relating to an activity engaged in by an individual or an S corporation that is not engaged in for profit. 42 As a threshold matter, Taxpayers argue that the Commissioner abused his discretion by imposing the tax from the date the payment was due, instead of giving them the opportunity to resolve this matter without payment of interest at the penalty increased rate. At oral argument, they asked specifically that we reverse the Tax Court's decision and render judgment in their favor as to the interest that accrued between the due date of the relevant tax returns and the 1990 notice of deficiency. In support of this request, they argue that the legislative history of I.R.C. § 6621(c) shows that the section was intended to serve as a tool for managing the Tax Court's docket, by providing incentive for taxpayers to concede to the Commissioner's assessment of tax deficiencies without resorting to litigation. Instead of furthering the legislative intent, Taxpayers argue, the Commissioner's imposition of the I.R.C. § 6621(c) rate, of which they learned only when they received the notice of deficiency, amounted to a penalty. As noted above, 12 I.R.C. § 6621(c) expressly applies to interest accruing after December 31, 1984, even if the offending transaction was entered into before the date of its enactment. According to Taxpayers, the Commissioner's penalizing imposition of I.R.C. § 6621(c) interest is therefore particularly unfair on these facts, because their investment in the partnerships, which is the only transaction for which this penalty could serve any deterrent purpose, pre-dated the enactment of I.R.C. § 6621(c). 43 We are not persuaded by Taxpayers' arguments on this point. If I.R.C. § 6621(c) is applicable at all to Taxpayers' underpayment, it is applicable from the due date of the tax that they have been determined to owe. The initial language of I.R.C. § 6621(c) references interest payable under section 6601. I.R.C. § 6601, in turn, states: 44 § 6601. Interest on underpayment, nonpayment, or extensions of time for payment, of tax. 45 (a) General rule. If any amount of tax imposed by this title (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. 13 46 The application of this provision is mechanical, and we find no abuse of discretion by the Commissioner in calculating the interest from the date that Taxpayers' tax deficiency was due. 47 Neither are we persuaded by Taxpayers' invocation of the legislative intent of I.R.C. § 6621(c). In combination, I.R.C. §§ 6621(c) and 6601 are unambiguous, requiring the imposition of interest starting from the last such date of the period for which the unpaid tax was due. As the Commissioner emphasizes, in the absence of ambiguity, we are not to look beyond the plain wording of the statute or regulation to divine legislative intent. 14 48 The larger question presented here is the propriety of imposing the I.R.C. § 6621(c) interest rate on Taxpayers' underpayment at all. In contesting the imposition of that rate, Taxpayers argue that the Tax Court erred in failing to analyze whether they, the Taxpayers, had a profit motive when they invested in the subject partnerships. Our close analysis of this argument leads us to conclude that indeed it was error, on these facts, to impose the I.R.C. § 6621(c) interest rate at all, irrespective of the individual partners' profit motive, because there was no deduction disallowed under § 183, as TTR § 301.6621-2T pellucidly requires. We therefore reverse the Tax Court's ruling and hold that the I.R.C. § 6621(c) interest rate is inapplicable to Taxpayers' underpayment of tax. 15 49 To repeat, I.R.C. § 6621(c) interest may be imposed only when there is a substantial underpayment of tax that is attributable to a tax motivated transaction as defined either in I.R.C. § 6621(c)(3)(A) or in the regulations enacted by the Secretary pursuant to I.R.C. § 6621(c)(3)(B). As any underpayment of $1,000 or more is deemed substantial, that element of the section is not at issue. And, the Commissioner does not contend that any of the definitional categories of tax motivated transaction listed under I.R.C. § 6621(c)(3)(A) apply. Rather, the only kind of tax motivated transaction that is proffered by the Commissioner is the one found in TTR § 301.6621-2T, A4: 50 Deductions disallowed under the following provisions are considered to be attributable to tax motivated transactions: 51 (1) Any deduction disallowed for any period under [I.R.C.] section 183, relating to an activity engaged in by an individual or an S corporation that is not engaged in for profit. [Emphasis added.] 52 The Commissioner maintains that because the Tax Court determined that the partnerships in which Taxpayers invested lacked a profit motive under I.R.C. § 183, the requirements of TTR § 301.6621-2T were met, and it was proper to impose the I.R.C. § 6621(c) interest rate. This application of TTR § 301.6621-2T, which was adopted by the Tax Court and blessed by the Ninth and Tenth Circuits, impermissibly broadens the reach of this penalty. 53 Examination of the plain language of TTR § 301.6621-2T establishes that the essential elements of the type of tax motivated transaction defined by that regulation are as follows: There must be (1) a deduction (2) that is disallowed under I.R.C. § 183, (3) that is related to an activity engaged in by an individual or an S corporation, and (4) that is not engaged in for profit. Despite this clear and unambiguous regulatory mandate, however, the Commissioner's appellate brief asserts that, [p]ursuant to [the Secretary's] statutory grant of authority, the Treasury Regulations under I.R.C. § 6621(c) adopt the profit motive test of § 183 as a litmus test for `tax motivated transactions.' Similarly, the Tax Court, in its Memorandum Opinion, quoted Hildebrand v. Commissioner of Internal Revenue, 16 as it insisted: 54 Section 6621(c)(1) imposes an increased rate of interest on any substantial underpayment attributable to tax motivated transactions, which include activities not engaged in for profit. 17 55 These statements are both imprecise and flatly incorrect. The TTR § 301.6621-2T definition indisputably requires that a deduction be disallowed under I.R.C. § 183 before the increased penalty may be imposed, not that an activity be determined to lack profit motive under the factors of I.R.C. § 183. Being disallowed under I.R.C. § 183 is not congruent with being tested — and found wanting — under the factors set forth in I.R.C. § 183. Indeed, the Taxpayers' deductions were not disallowed under I.R.C. § 183 but were, as the Commissioner notes, purportedly found to be lacking in profit motive under the factors set forth in the regulations that accompany I.R.C. § 183. More importantly, even if the Commissioner had wanted to disallow the Taxpayers' deductions under I.R.C. § 183 for purposes of TTR § 301.6621-2T, he could not have done so!