Court Opinion

ID: 9472898
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:14:15.044001+00
Date Added: 2024-06-11T17:43:13.200640
License: Public Domain

WILLIAM J. CAMPBELL, Senior District Judge,
dissenting.
I regret that I cannot agree with the majority either in its construction of the statute or in its application to this case. The majority utilizes a general negligence analysis which is not justified by the language of the statute or the legislative history. In doing so it has given a broad interpretation to the statute in contravention of the principle that penal statutes are to be strictly construed. Furthermore, the majority has failed to present all the material facts and thus does not properly analyze the appellant’s conduct. While the penalty assessed is quite modest, the sanction is important to the professional standing of the appellant. Moreover, this is the first published case involving this aspect of 26 U.S.C. § 6694(a). For these reasons, it is important that this case receive careful consideration.
The facts were presented to the district court in the form of a lengthy written stipulation. As noted by the majority, it is undisputed that the trial balance sheet indicated loans to the corporation from Dr. Busch and included entries for interest expense.1 However, the balance sheet also noted that Rubert-Busch, M.D., S.C. borrowed money from the Michigan Avenue National Bank. The data submitted to Brockhouse did not indicate to whom the interest was paid as that information was irrelevant to the preparation of the corporate tax returns. Furthermore, the Busches’ 1977 income tax return, which the appellant compared with the data for the 1978 return, accurately reflected no income from interest on loans to the corporation. These facts are crucial to an evaluation of appellant’s conduct because they indicate that the information presented to him did not create the implication that Dr. Busch received interest income from the corporation in 1978. It is a common business practice for sole shareholders to make interest-free loans to their corporations. Such transactions can be compared to taking money out of one pocket and putting it in the other pocket. The data presented to Brockhouse was entirely consistent with this scenario. Therefore, I believe it is overstating the case to say that appellant ignored the implications of the information provided to him.
The majority notes that the appellant prepared the income tax return of Dr. and Mrs. Busch without requiring them to comply with the Goldman, Weiss data questionnaire procedure.2 The district judge relied heavily on this fact as evidence of Brock-house’s lack of due diligence. However, the information was given to the appellant by Robert Eubank, the corporation’s business manager and Dr. Busch’s personal financial consultant. The data was prepared by the corporation’s part-time bookkeeper who had a degree in law and business and was employed on a full-time basis by a national firm of certified public accountants. The fact that Brockhouse did not require compliance with the questionnaire procedure is not compelling, or even persuasive, evidence of negligence where the information was gathered by experienced specialists and not laypersons.
*1254Turning to the statute in issue, the majority utilizes a general negligence analysis in determining the applicability of the penalty. They state:
Congress did not limit the applicability of section 6694 to situations involving disregard of rules or regulations applicable to the facts as provided by the taxpayer. Rather, it applies generally to “negligent disregard.” p. 1251
I do not understand what “negligent disregard” in the abstract is, but I do know that such a selective editing of the statute is not supported by the legislative history. The majority relies on Marcello v. Commissioner, 380 F.2d 499 (5th Cir.1967), cert. den., 389 U.S. 1044, 88 S.Ct. 787, 19 L.Ed.2d 835 (1968), a case applying 26 U.S.C. § 6653(a), as authority for the application of a general negligence standard. The justification for such reliance is provided in a footnote:
Congress has indicated that § 6694(a) is to be interpreted in a manner similar to § 6653(a). See H.R.Rep. No. 658, 94th Cong., 2d Sess. 278, reprinted in 1976 U.S.Code Cong. & Ad.News at 3174. fn. 4
This statement is an oversimplification. The penalty provision in § 6653 applies to taxpayers for under-payments “due to negligence or intentional disregard of rules or regulations” [Emphasis supplied]. The penalty provision in § 6694 applies to “negligent or intentional disregard of rules or regulations” [Emphasis supplied]. Thus, under § 6653 two discrete standards of conduct are involved: general negligence and intentional disregard of rules or regulations, see discussion Marcello, supra, 380 F.2d at 505-507. However, under § 6694 there must be a disregard of rules or regulations (either negligent or intentional) in order to impose the penalty.
Whenever § 6653 is referred to in the legislative history of § 6694 its relevance is limited to the “disregard of rules or regulations” provision:
The penalty applies generally to every negligent or intentional disregard of such regulations and rulings except that a good faith dispute by an income tax return preparer about an interpretation of a statute (expressed in regulations or rulings) is not considered a negligent or intentional disregard of rulings and regulations. The provision is thus to be interpreted in a manner similar to the interpretation given the provision under present law (sec. 6653(a)) relating to the disregard of rules and regulations by taxpayers on their own returns.
H.R.Rep. No. 94-658, 94th Cong. 2d Sess. 278, reprinted in 1976 U.S.Code & Admin. News at 3174; see also, S.Rep. No. 94-938, 94th Cong. 2d Sess. 355, reprinted in 1976 U.S.Code & Admin.News at 3784; H.R.Rep. No. 95-1800, 95th Cong.2d Sess. 284, reprinted in 1978 U.S.Code & Admin.News at 7279.3 The legislative history further indicates that Congress did not intend that all negligence would be subject to penalties under § 6694(a):
[T]he bill establishes new penalties for certain negligent or willful attempts to understate a taxpayer’s tax liability. H.R.Rep. No. 94-658, supra p. 278; see also, S.Rep. No. 94-938, supra p. 355.
Such a construction does not contravene the legislative purpose of the penalty:
These penalties are primarily aimed at deterring income tax return preparers who prepare a large number of returns from engaging in negligent or fraudulent practices designed to understate a taxpayer’s liability.
H.R.Rep. No. 94-658, supra p. 278; see also, S.Rep. No. 94-938, supra p. 355; see, *1255e.g., United States v. Ernst & Whinney, 735 F.2d 1296 (11th Cir.1984).
In summary, the language of the statute does not provide that the penalty applies to all acts of negligence by an income tax preparer. While clearly § 6694(a) is mo-delled after § 6653(a) there is a significant difference in the terms of the statutes and we must assume that that distinction was intended by Congress. This conclusion is buttressed by a review of the legislative history. There is an additional consideration which reinforces, and to my mind solidifies, this analysis: odioso restinjenda sunt (translation: things odious must be strictly construed). This ancient principle of common law is so venerated that it is even applied to the tax gatherer:
We are here concerned with a taxing Act which imposes a penalty. The law is settled that “penal statutes are to be construed strictly,” Federal Communications Commission v. American Broadcasting Co., 347 U.S. 284, 296, 74 S.Ct. 593, 601, 98 L.Ed. 699, and that one “is not to be subjected to a penalty unless the words of the statute plainly impose it,” [Footnote and Citations omitted]. Commissioner v. Acker, 361 U.S. 87, 91, 80 S.Ct. 144, 147, 4 L.Ed.2d 127 (1959).
Thus, we are strictly limited to determining whether Brockhouse “disregarded a rule or regulation” either negligently or intentionally. The standard provided in the IRS’s regulations is:
A preparer is not considered to have negligently or intentionally disregarded a rule or regulation if the preparer exercises due diligence in an effort to apply the rules and regulations to the information given to the preparer to determine the taxpayer’s correct liability for tax. 26 C.F.R. § 1.6694-1(a).
In this case, there is no question that Brockhouse properly applied the rules and regulations to the information he received. The underpayment of tax occurred because he was not informed that Dr. Busch received interest on his loans to the corporation. The issue then becomes whether he was justified in relying on the information provided. Rev.Proc. 80-40 provides:
.03 The penalty under section 6694(a) of the Code generally will not apply where a preparer in good faith relies without verification upon information furnished by the taxpayer. Thus, the preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence in order to verify independently the taxpayer’s information.
This language further exculpates the appellant. There is a caveat, however:
[T]he preparer may not ignore the implications of information furnished to the preparer or which was actually known by the preparer. The preparer shall make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Rev.Proc. 80-40.
I have no quarrel with this standard of conduct, but I do not think the appellant violated it in this case. It is undisputed that Brockhouse did not have any personal knowledge of the financial operations of Rubert-Busch, M.D., S.C. Furthermore, I do not believe we can find that the information provided to him appeared incorrect or incomplete. The corporation’s trial balance sheet, the Busches’ income data, and their 1977 income tax return are all consistent with a situation in which a sole shareholder made interest-free loans to his corporation. There was no data presented to Brock-house which contradicted that common scenario. Thus, I do not believe that we can find that the appellant ignored the implication of the information provided to him.4
*1256In conclusion, I believe there is no basis for finding that Brockhouse disregarded any rule or regulation of the IRS. That is the conduct described in the statute and that is the conduct that Congress intended to penalize. If Congress had intended to sanction all negligence by income tax preparers, it would have said so. But it did not and we should not redraft the legislation. We are duty bound to apply the plain language of the statute and to construe it narrowly. Under those guidelines I believe it is clear that the imposition of the penalty in this case is in error and the District Court should be reversed.

. The stipulation of the parties reads:
This trial balance sheet contained an item showing loans made by the Corporation to its sole shareholder. Stip. ¶ 14.
This is apparently an error as it is undisputed that Dr. Busch made the loans to the corporation.

. The majority indicates in footnote 6 that it did not consider this fact to be significant in evaluating Brockhouse’s conduct. I agree with them on that point and I discuss the issue only because the district court found that evidence to be persuasive.

. In the Revenue Act of 1978 certain technical corrections were made with respect to the Tax Reform Act of 1976. The Conference Report to that portion of the legislation addressed § 6694 and reiterated the discussion quoted above, concluding with this statement:
The conferees further direct that the Internal Revenue Service shall reasonably interpret section 6694(a) according to the standards of section 6653(a) and in light of all the facts and circumstances of each case, taking into account any and all mitigating factors.
Out of context it might appear to direct that the two statutes be applied identically. However, in the context of the report it does not.

. Revenue Ruling 80-265 presents two factual situations similar to ours with slight, but significant, differences. In Situation 1, the income tax preparer had no knowledge of any loans by the' sole shareholder to the corporation, although he did deduct an interest expense on the corporate return. Subsequently, it was determined by the IRS that the shareholder had loaned money to the corporation and received interest income on it. The Revenue Ruling concludes that the penalty provision of § 6694(a) does not apply to the income tax preparer in that situation. In Situation 2 the information relating to the corporation indicated that the shareholder had received *1256interest on loans to the corporation. However, the data provided the income tax preparer with respect to the shareholder’s individual return did not reflect the interest income. The failure to report that item of income on the shareholder’s tax return was determined to justify imposition of the penalty under § 6694(a). The reasoning was that in Situation 2 the income tax preparer had reason to believe that the information provided to him was incomplete, while in Situation 1 he did not. Our case falls in between those two situations and, utilizing the same analysis, the penalty should not apply.