Mitchell, In re, 91-35392

• Citation: 977 F.2d 1318
• Decision Date: 09 October 1992
• Docket Number: No. 91-35392,91-35392
• Parties: -5884, 61 USLW 2265, 92-2 USTC P 50,512 In re James E. MITCHELL and Diane C. Mitchell, Debtors. James E. MITCHELL; Diane C. Mitchell, Appellees, v. UNITED STATES of America, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1318

977 F.2d 1318

70 A.F.T.R.2d 92-5884, 61 USLW 2265,

92-2 USTC P 50,512

In re James E. MITCHELL and Diane C. Mitchell, Debtors.

James E. MITCHELL; Diane C. Mitchell, Appellees, v. UNITED STATES of America, Appellant.

No. 91-35392.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 19, 1992.

Decided Oct. 9, 1992.

Shirley D. Peterson, Asst. Atty. Gen., U.S. Dept. of Justice, Washington, D.C., for appellant.

James E. Mitchell, in pro per, for appellee.

Appeal from the United States District Court for the Western District of Washington.

Before: WRIGHT, BEEZER and LEAVY, Circuit Judges.

BEEZER, Circuit Judge:

We consider whether a person, who has some involvement in the filing of an "S corporation" tax return and its related Forms K-1 that will result in understatements of income tax, should pay an aiding and abetting penalty for each K-1. 26 U.S.C. § 6701(a), (b) (1988). This core adversary proceeding began in the bankruptcy court, the judgment of which the district court affirmed. Both courts agree that James Mitchell is liable only for a single $10,000 penalty because the return at issue is that of a corporation. Mitchell v. United States (In re Mitchell ), 109 B.R. 434 (Bankr.W.D.Wash.1989), amended, 109 B.R. 441 (Bankr.W.D.Wash.), aff'd, 90-2 U.S. Tax Cas. (CCH) p 50,495, 1990 WL 142016 (W.D.Wash.1990). We have jurisdiction over the district court's affirmance of the bankruptcy court's final order, 28 U.S.C. §§ 158(d), 1291, and we reverse.

I

Mitchell organized and operated a tax shelter (Cascade Hydro) that invested in hydroelectric dams in Whatcom County, Washington. The projects were not successful, and the shelter improperly passed deductions on to investors. Mitchell argued before the bankruptcy court that he did not have the requisite knowledge to support imposition of an aiding and abetting penalty. The bankruptcy court disagreed and the district court affirmed determining that a § 6701(a) aiding and abetting penalty was warranted. Mitchell, 109 B.R. at 438, aff'd, 90-2 U.S.Tax Cas. (CCH) p 50,495, at 85,633. The question whether an aiding and abetting penalty was warranted is not before us.

The issue before us is the amount of the penalty Mitchell was assessed for 1985. ¹ In 1985, Mitchell incorporated Cascade Hydro as an S corporation, which afforded both limited liability and the capacity to pass tax deductions on to the investors. See generally Cornelius v. Commissioner, 494 F.2d 465, 468-69 (5th Cir.1974) (explaining how an S corporation simultaneously affords the advantages of the corporate business form and the partnership tax regime). The government sought a penalty of $34,000 for 1985--$1,000 for each S corporation K-1 issued.

The bankruptcy court penalized Mitchell only $10,000 for 1985. In response to the government's motion for reconsideration, the bankruptcy court stated:

Mitchell relies on the fact that he did not prepare the 1985 return for [the tax shelter], nor did he personally prepare the K-1 forms sent to the stockholders. Mitchell admits that he reviewed and approved the 1985 corporate return. However, it is certainly assumable if not admitted that the data upon which the return was based was supplied to the preparer by Mitchell.

Mitchell, 109 B.R. at 442. The bankruptcy court went on to distinguish Mitchell's behind the scenes involvement from the direct involvement of an accountant in Kuchan v. United States, 679 F.Supp. 764 (N.D.Ill.1988), who had prepared corporate returns and had prepared a transmittal letter, which was attached to Schedule Cs (self-employment income) that were mailed to tax shelter investors. Mitchell, 109 B.R. at 442, amending 109 B.R. at 439 (§ 6701 requires direct involvement and evidence showed only that Mitchell prepared the corporate return, not "the returns of the individual shareholders") (basing $10,000 penalty on corporate penalty provision, § 6701(b)(2)).

The district court treated Mitchell's lack of direct involvement as a finding of fact and affirmed:

[The accountant in Kuchan ] prepared the "transmittal letter" sent to [the tax shelter] investors in 1983, 1984 and 1985: precisely the direct involvement in the false or fraudulent tax returns of the individual ... shareholders that the bankruptcy court found absent here.

Mitchell, 90-2 U.S.Tax Cas. (CCH) p 50,495, at 85,636. The district court then criticized the government's "core declaration that [the] corporate income tax return for 1985 'does not relate to the tax liability of a corporation.' " Id. The government appeals the determination of the amount of the 1985 penalty.

II

We confront a statutory construction issue of first impression in this circuit. We review de novo statutory construction, which is a pure question of law. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

Statutory construction always starts with the language of the statute itself. This starting point is the ending point when the statute clearly and unambiguously expresses Congress' intent. United States v. Ron Pair Enters., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Particular phrases must be construed in light of the overall purpose and structure of the whole statutory scheme. Dole v. United Steelworkers, 494 U.S. 26, 35, 110 S.Ct. 929, 934, 108 L.Ed.2d 23 (1990). A court looks to the legislative history if the statute is unclear. Blum v. Stenson, 465 U.S. 886, 896, 104 S.Ct. 1541, 1547, 79 L.Ed.2d 891 (1984).

The relevant portions of the statute are as follows Penalties for aiding and abetting understatement of tax liability

(a) Imposition of penalty.--Any person--

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document in connection with any matter arising under the internal revenue laws,

(2) who knows that such portion will be used in connection with any material matter arising under the internal revenue laws, and

(3) who knows that such portion (if so used) will result in an understatement of the liability for tax of another person,

shall pay a penalty with respect to each such document in the amount determined under subsection (b).

(b) Amount of penalty.--

(1) In general.--Except as provided in paragraph (2), the amount of the penalty imposed by subsection (a) shall be $1,000.

(2) Corporations.--If the return, affidavit, claim, or other document relates to the tax liability of a corporation, the amount of the penalty imposed by subsection (a) shall be $10,000.

(3) Only 1 penalty per person per period.--If any person is subject to a penalty under subsection (a) with respect to any document relating to any taxpayer for any taxable period (or where there is no taxable period, any taxable event), such person shall not be subject to a penalty under subsection (a) with respect to any other document relating to such taxpayer for such taxable period (or event).

26 U.S.C. § 6701 (1988).

The basic structure of the statute requires us first to identify any documents that aid and abet the understatement of another person's tax liability. § 6701(a). Then we quantify the liability associated with each of the documents so identified. § 6701(b).

The Sixth Circuit addressed § 6701 penalties in Mullikin v. United States, 952 F.2d 920 (6th Cir.1991), petition for cert. filed, --- U.S. ----, 113 S.Ct. 85, 121 L.Ed.2d 49 (1992). James Mullikin kept the books for Vanco International, Inc. (Vanco). He did not account for cash wages, which resulted in understatements (1) of Vanco's liability for payroll and withholding taxes on its Forms 941 for the eight quarters in 1982 and 1983, and (2) of the taxable income on Forms W-2 for nine employees in 1982 and ten in 1983. The IRS sought 8 $10,000 penalties under § 6701(b)(2) and 19 $1,000 penalties under § 6701(b)(1), for a total of $99,000. Id. at 921-23.

The Mullikin district court held that the 1982 penalties were time-barred, and that Mullikin was subject to only one penalty per year for the Form 941 understatements. It assessed a total penalty of $20,000; $10,000 for one 1983 Form 941 understatement and $10,000 for 10 1983 Form W-2 understatements. Id. at 922 & n. 1. The Sixth Circuit reversed, holding that there was no time bar, id. at 922, 924-29, and that for purposes of Forms 941, each quarter was a taxable period. Id. at 922, 930-32. The Sixth Circuit found no other error by the district court, and remanded. Id. at 933.

The Sixth Circuit clearly approved the district court's construction of § 6701 imposing penalties based on which taxpayer's liability was understated. The Sixth Circuit also recognized that interrelated tax records could provide a basis for simultaneously imposing penalties under the individual and corporate provisions of § 6701, with § 6701(b)(3) placing the limit on the amount of the penalties. As we explain below, we agree with the Sixth Circuit's sensible construction of these aspects of § 6701. ²

The first requirement of § 6701(a)(1) is that the person to be penalized must "aid[ ] or assist[ ] in, procure[ ], or advise[ ] with respect to." Mitchell supplied the information for the S corporation return and its related Forms K-1. He employed Jerry Stewart to prepare the returns, and then he reviewed and signed them. Mitchell, 90-2 U.S.Tax Cas. (CCH) p 50,495, at 85,636. In fact, before the bankruptcy court the parties agreed "that Mitchell aided or assisted in the preparation and/or presentation of the Cascade Hydro returns for the years 1984 and 1985," 109 B.R. at 437, and the bankruptcy court found that "Mitchell, as the principal party involved, reviewed and signed the Cascade Hydro tax returns and the K-1 forms for the limited partners and/or shareholders which showed their purported shares of the deductions and credits." Id. at 436. Based on these factual findings and concessions,...