In re Tax Refund Litigation
| Decision Date | 02 November 1988 |
| Docket Number | No. MDL 731.,MDL 731. |
| Citation | 698 F. Supp. 439 |
| Parties | In re TAX REFUND LITIGATION. |
| Court | U.S. District Court — Eastern District of New York |
Kostelanetz Ritholz Tigue & Fink, New York City by Jules Ritholz, Edward Kesselman, David J. Cohen, for plaintiff Irving Cohen.
Caplin & Drysdale, Chartered, Washington, D.C. by Scott D. Michel, for plaintiffs Barrister Associates, Parliament Securities Corporation, Paul F. Belloff and Robert Gold.
U.S. Dept. of Justice, Office of Special Litigation, Washington, D.C. by John B. Consevage, Trial Atty., Tax Div., and Andrew J. Maloney, U.S. Atty., E.D.N.Y., Brooklyn, N.Y. by Pamela R. Perron, Asst. U.S. Atty., for I.R.S.
This is an action for a refund of money paid to the Internal Revenue Service (the "Service") as a civil penalty pursuant to 26 U.S.C. § 6700 (1982) ("section 6700") which provides for the imposition of a penalty on those who promote "abusive tax shelters." The plaintiff, Irving Cohen, is an officer of several corporations that allegedly engaged in activities violative of the statute. The penalties relate to literary properties leased to a series of limited partnerships that were then sold by Barrister Associates. The tax credit was passed through to Barrister Associates.
The Service assessed a penalty against plaintiff for the years 1982 and 1983. The penalty was in the amount of $3,687,000 ($1,000 × 3,687 sales). Plaintiff paid the requisite 15% of the penalty assessed and filed a claim for a refund. He subsequently commenced this action for a refund bringing this motion for partial summary judgment in which he is joined by Barrister Associates, Parliament Securities Corporation, Paul F. Belloff and Robert Gold (the "Barrister Plaintiffs").1 Plaintiff claims that he is entitled to a partial refund because the Service's assessment exceeds the amount required under the statute. Plaintiff contends that the proper penalty amount is $3,214,061 which reflects 10% of the gross income he derived from all sales because 10% of his gross income was greater than $1,000. The Service claims that its calculation of the penalty is reasonable and should be accorded deference.
The Service claims that each election of a literary property was a separate "activity" within the meaning of the statute. Therefore, it argues that application of the $1,000 penalty to each of the 3,687 elections is in accordance with the statutory mandate. In support of its $3,687,000 penalty calculation, it points out that since that sum is greater than 10% of the gross income derived from each election, it is the appropriate penalty assessment.
Plaintiff, however, claims that this transactional or "each sale" method of assessment is improper. He argues that the $1,000 amount is only appropriate when 10% of the gross income derived from all sales (not each sale), is less than $1,000. It is a minimum amount to insure that the penalty reflects a sufficient amount to deter the promotion of abusive tax shelters.
The issue is whether the Service's transactional or "each sale" method of assessment or the taxpayer's 10% of gross income from all sales method of assessment is correct. This controversy has surfaced in a number of district courts. Unfortunately, the decisions reflect different interpretations. Some courts have accepted the Service's interpretation, while others have accepted the taxpayer's.
Based upon an examination of the plain language of the statute, the impracticality of the Service's interpretation and the legislative history, plaintiff's interpretation of the penalty provision of section 6700 appears to be the correct interpretation. In addition, those cases which examine the statute and its history support this conclusion.
Title 26 U.S.C. § 6700 (1982) provides:
The position of both parties is that the plain language of the statute is in accord with their respective interpretations. However, a close reading of the statute supports the conclusion that when Congress used the word "activity," it did not intend to refer to each sale. Congress, when referring to each sale, in section (a)(2), uses the term "such organization or sale." Therefore, it is difficult to imagine why it would not have used that same term in section (a)(2)(B), as well, if it meant to apply the penalty to each sale. Furthermore, as Judge Williams noted in examining this issue:
The use of that language ("such organization or sale") demonstrates that Congress knew how to refer to each sale if that is what it wanted to do. When Congress used the word "activity," therefore, it meant something different: not each sale but rather the salesperson's overall activity of promoting abusive tax shelters.
Spriggs v. United States, 660 F.Supp. 789 (E.D.Va.1987), aff'd, 850 F.2d 690 (4th Cir. 1988).3
In Spriggs, plaintiff sought redetermination of the amount of the penalty for the sale of abusive taxshelters. On the parties cross motions for summary judgment, the court concluded that the $1,000 is a minimum penalty applied when 10% of the gross income derived from the salesperson's overall sales activity for the year is less than $1,000. The Service argued that the term "activity" meant "sale" and, therefore, the $1,000 penalty applied to each sale because 10% of the income derived from each sale was less than $1,000. However, the court rejected this argument and held that the plaintiff taxpayer's interpretation was correct. In further support of its conclusion, the Spriggs court reasoned that had Congress intended to impose a penalty on each sale, it would have expressly provided for a "per sale" penalty.4
Although the Service argues that it should be accorded deference because it is the agency charged with administering the tax penalty, a reasonableness standard cannot be waived. The results achieved, when using the Service's method of calculation, reveal that its interpretation is impractical and unreasonable. This is so because the results are unfair and clearly not what Congress intended. In some situations a total forfeiture of income results.5 Certainly, if Congress intended a 100% penalty, it would not have chosen a percentage penalty. Moreover, the intent of Congress was to punish those who engaged in the illegal act of promoting abusive tax shelters. It did not intend to punish the violators according to the manner in which they sell.6 However, using the Service's interpretation, two salesmen who sell the same amount can be penalized in different degrees depending on their sales techniques. This result is not supported by any logical reading of the statute or the legislative history. Moreover, it clearly contravenes the principles of statutory construction which require courts to avoid harsh, unjust, oppressive or arbitrary results.
Although the history of section 6700 does not reveal the intent of Congress concerning the interpretation of the penalty provision, the history of the Tax Reform Act of 1984, Pub.L. No. 98-369, § 143(a), 98 Stat 494, 682, which raised the penalty from 10% to 20% of income derived from the activity, is helpful. It suggests that the intent of Congress was for the $1,000 amount to be a minimum penalty which applies only to small promoters 10% of whose overall income would not yield a meaningful penalty. The House Committee Report on the 1984 Act ("the Report") states:
The bill increases the penalty for promoting abusive tax shelters to the greater of 20% of the gross income derived, from the activity, or $1,000. The committee did not increase the $1,000 penalty because, as originally enacted, the $1,000 penalty was intended to be a minimum penalty on small promoters who derive little income from the deals they promote.
H.R.Rep. No. 432, 98th Cong., 2d Sess. 1, 1357-1358, reprinted in 1984 U.S.Code Cong. & Admin.News, 697, 1009.
An intelligent reading of this report coincides with the plaintiff's interpretation. Using the previously mentioned illustration, where two salesmen sell the same number of units, make the same profit, but sell to a different number of investors, how can the one who sold to more people be deemed a "small promoter" when the $1,000 penalty is applied to each of his sales? Both salesmen derived the same income and, at income levels of $30,000, neither were "small promoters." This result, therefore, defies all logic. Small promoters, within the meaning of the Report, are those who make less than a $10,000 profit (10% of their income is less than $1,000). The $1,000 amount is a minimum penalty to insure that they are sufficiently penalized. There is absolutely no rational basis for more strictly penalizing those who sell less units to more people.
To continue reading
Request your trial
-
In re Tax Refund Litigation
...theory regarding the imposition of multiple $1000 penalties and directed that the penalties be reassessed. See In re Tax Refund Litigation, 698 F.Supp. 439, 443-44 (E.D. N.Y.1988). On July 24, 1989, the IRS assessed the following penalties against each of the Townsend ...............&n......
-
MDL-731 Tax Refund Litigation of Organizers and Promoters of Inv. Plans Involving Book Properties Leasing, In re, MDL-731--TAX
...that the $1000 penalty is to be used only when ten percent of the gross income from all transactions is less than $1000. In re Tax Refund Litigation, 698 F.Supp. at 443. Because ten percent of Barrister Associates' income from the tax shelter promotion exceeded $1000, the district ordered t......
- US v. Crozzoli, CR-88-0042.
-
Hill v. US
...the penalty evenly, and, therefore, their interpretation is more correct. This same argument was expressed in In re Tax Refund Litigation, 698 F.Supp. 439, 442 (E.D.N.Y.1988). These courts are troubled by the fact that two salespeople who sell the same amount but use different techniques ca......