Key Points

  • Second Circuit holds that Section 6038(b) penalties may be assessed administratively.
  • The court vacated the judgment in Safdieh v. Comm'r and remanded.
  • The panel relied on Section 6038's history, purpose and statutory structure.
  • The decision accords with the D.C. Circuit's treatment of the issue.

The Court of Appeals for the Second Circuit held that the Commissioner of Internal Revenue may administratively assess penalties under Internal Revenue Code Section 6038(b), rejecting the position that the government must first obtain a judgment in federal district court. The court vacated the judgment under review and remanded for further proceedings.

The case, Safdieh v. Comm'r, concerned a $50,000 penalty assessment. Section 6038(b) provides a $10,000 penalty for each annual accounting period in which a required reporting failure exists. The court treated the question as one of collection authority: whether the penalty is assessable through the IRS administrative process or recoverable only through a civil action.

The court said the text of Section 6038(b) does not expressly resolve whether the penalty is assessable. It therefore relied on the provision's history, purpose and structure, including the relationship between the fixed-dollar penalty in subsection (b) and a foreign-tax-credit reduction in subsection (c).

On history, the panel explained that Congress added the fixed-dollar penalty in 1982 against the backdrop of an existing assessable penalty tied to reductions in foreign tax credits. According to the court, Congress adopted the newer penalty because the existing mechanism was difficult to use and did not adequately address reporting failures. The court viewed that legislative purpose as inconsistent with a requirement that the Commissioner file a separate district-court action to collect the fixed-dollar penalty.

The panel also relied on the IRS's longstanding practice of assessing Section 6038(b) penalties. It said Congress had amended Section 6038 repeatedly without curbing that practice, a history the court considered relevant evidence of the statute's meaning. The decision did not rest on deference to the IRS's interpretation, but on the court's own reading of the statutory context.

The structure of Section 6038 was another central part of the ruling. Section 6038(c) can reduce a taxpayer's foreign tax credit for certain reporting failures, while a coordination clause reduces that amount by the Section 6038(b) penalty. The panel concluded that requiring a district-court judgment for the subsection (b) penalty could prevent the Commissioner from coordinating the provisions at the same time.

The court also identified procedural consequences of Safdieh's proposed approach. A district-court action over the dollar penalty could proceed alongside Tax Court litigation involving the tax-credit reduction, potentially requiring separate courts to address overlapping questions. The panel said that result would complicate enforcement and create opportunities for duplication and gamesmanship.

The panel rejected the argument that 28 U.S.C. Section 2461(a) supplies the necessary authority for a civil suit. It noted that the provision is outside the Internal Revenue Code and said neither the court nor the parties had identified an example of its use to collect a tax or tax penalty during the decades before Section 6038(b) was enacted.

For practitioners, the decision forecloses in the Second Circuit the argument that administrative assessment is categorically unavailable for Section 6038(b) penalties. The court stated that the D.C. Circuit is the only other court of appeals to have addressed the issue and reached the same result. The Second Circuit's disposition vacates the judgment and sends the case back for further proceedings.