Free Motion for Leave to File Out of Time - District Court of Federal Claims - federal

Case 1:98-cv-00533-CFL

Document 141-2

Filed 08/09/2007

Page 1 of 5

IN THE UNITED STATES COURT OF FEDERAL CLAIMS

FENTON GINGERICH, et. al. Plaintiffs, V. UNITED STATES OF AMERICA, Defendant.

§ § § § § § § § §

DOCKET NO. 98-533 T JUDGE LETTOW

PLAINTIFFS' RESPONSE TO GOVERNMENT OBJECTION TO REFUND OF §6621(C ) PENALTY INTEREST

Plaintiffs, Fenton Gingerich, et. al., would respectfully show the Court that §6621(c) penalty interest is interest, which can only be assessed and collected if the underlying tax assessment is timely. In support, Plaintiffs would respectfully show the Court as follows: §6621(c) Penalty Interest is Interest In general, interest is payable on unpaid tax at the rate established under §6621. §6601(a). Section 6621(c) "penalty interest" is §6601 "interest" that is assessed at a higher rate than the general §6621 rate: In the case of interest payable under section 6601 with respect to any substantial underpayment attributable to tax motivated transactions, the rate of interest under this section shall be 120 percent of the underpayment rate established under this subsection. §6621(c)(1). The Fifth Circuit has held that §6621(c) penalty interest is interest and not an addition to tax, such as a penalty. Matter of Hardee, 137 F.3d 337, 341-2 (5th Cir., 1998)(examining the language of the provision, which refers to "interest;" the placement of the provision with interest and not

1

F:\T W W R8077.G I1.wpd

Case 1:98-cv-00533-CFL

Document 141-2

Filed 08/09/2007

Page 2 of 5

penalties in the Tax Code; the manner of imposition, which is as interest; and legislative history which refer to interest in the amendments). Any Reference to Tax Includes Interest and §6621(c) Penalty Interest Any reference to "tax" in the Internal Revenue Code shall be deemed to also refer to interest. §6601(e)(1). As this Court recently recognized, "Congress has explicitly expanded the definition of the word `tax' as used in the Internal Revenue Code beyond the word's ordinary meaning by specifying that `[a]ny reference in this title [ i.e., the Internal Revenue Code] ... to any tax imposed by this title shall be deemed also to refer to interest imposed by this section [ i.e., § 6601] on such tax.'" McGann v. United States, 76 Fed.Cl. 745, 751-2 (2007). As this Court also held, interest assessed at the enhanced rate provided by former § 6621(c) is also included within the statutory definition of the term "tax." McGann at 752. In the context of a bankruptcy discharge, the Fifth Circuit has similarly held that §6621(c) penalty interest is part of the underlying tax debt and not a penalty. Matter of Hardee, at 342. The Period for Assessing and Collecting Interest Corresponds to the Period for Assessing Tax Interest prescribed under §6601, which includes §6621(c) penalty interest, shall be assessed, collected, and paid in the same manner as taxes. §6601(e)(1). Interest on any tax may be assessed and collected at any time during the period that the related tax may be collected. §6601(g). Generally there is a ten year period for collecting an assessment of tax, but only where the assessment of tax "has been made within the applicable period of limitation ...." §6502(a). Consequently, interest may only be assessed and collected if the associated tax is timely assessed. Here there was a one year statute of limitations for assessing tax with respect to partnership

2

F:\T W W R8077.G I1.wpd

Case 1:98-cv-00533-CFL

Document 141-2

Filed 08/09/2007

Page 3 of 5

items that began to run when the partnership items became nonpartenrship items upon settlement. §6229(f) and §6231(b)(1)(C). In this case, the Court held: The IRS thereafter failed to assess applicable taxes within the statutorily prescribed one-year period. See I.R.C. §§6229(f), 6231(b)(1). Thus, the assessments were time barred, and plaintiffs are entitled to a refund. Because the tax was untimely assessed, the government lacked authority to assess and collect interest, including §6621(c) penalty interest. Untimely Tax and Interest Assessments Must Be Refunded An "overpayment" is the amount of tax ( which by definition includes interest and §6621(c) penalty interest) that is assessed or collected after the expiration of the limitations for assessment. §6402. Overpayments shall be refunded to the taxpayer. §6402(a); Cohen v. United States, 995 F.2d 205, 207 (Fed.Cir. 1993)(payment of a time-barred tax liability is an overpayment subject to mandatory refund). There is No Special Exception for Interest Assessments Under TEFRA The government has asserted that because §6621(c) penalty interest is an affected item that cannot be settled by an exchange of letters, the assessment of §6621(c) penalty interest was timely made within one year of the date of the closing agreement. However, there is no factual or legal support for that assertion. As this Court held, the closing agreement was not the operative settlement that converted partnership items to nonpartnership items and started the one year limitations period for assessing the resulting tax. The exchange of letters was the operative agreement. All of the tax and interest assessed related to partnership items settled in that exchange of letters. Moreover, there is no special or post-settlement limitations period for assessment of interest

3

F:\T W W R8077.G I1.wpd

Case 1:98-cv-00533-CFL

Document 141-2

Filed 08/09/2007

Page 4 of 5

under TEFRA. The general rules for assessment of interest discussed above control. Neither the Definition of a Deficiency or an Underpayment Is Relevant to the Issue at Hand The government also cryptically asserts that the assessment of interest was valid even if the underlying assessment of tax was not, citing §§ 6211(a), 6221(c)(2) [sic], and 6253(c) [sic]. However, those provisions are inapplicable to this issue. Section 6211(a) defines a "deficiency" as the amount by which the tax that should have been reported and paid on the original tax return exceeds the amount actually reported and paid. For tax years prior to December 31, 1989, the Internal Revenue Code included the now repealed additions to tax/penalties under §6653, which defined an underpayment against which the penalties could be imposed as a §6211 deficiency. §6653(c). This definition had the effect of making it possible for the government to assess this penalty against an underpayment/deficiency of tax even if the underpayment was subsequently "cured," e.g. by payment of an anticipated underpayment determination or reversal of the offensive tax item by filing a subsequent amended return. Pursuant to § 6621(c)(2), the enhanced rate of interest applies to a substantial "underpayment" of taxes. However, unlike §6653, §6621(c) does not define the term underpayment. Moreover, the issue here is the timeliness of the assessment. Nothing in the government's ungainly linking of various references to "underpayment" in the Tax Code addresses that issue. The Government's Objection Is Untimely Finally, as discussed at greater length in Plaintiffs' Report of Overpayment Amounts to Be Refunded, the government failed to timely object to refund of §6621(c) penalty interest. The government had over nine (9) years to raise this issue, but did not until the Court ruled in favor of Plaintiffs. The government consistently represented to the Court over those nine years that the only

4

F:\T W W R8077.G I1.wpd

Case 1:98-cv-00533-CFL

Document 141-2

Filed 08/09/2007

Page 5 of 5

issue was timeliness of the assessments. The government has never before objected to Plaintiffs' assertions that the full amounts of the assessments were untimely assessed and should be refunded. In its motion for summary judgment, the government agreed in the first paragraph that the total amount in controversy included §6621(c) penalty interest. Not only is the government's belated objection an unfair surprise that would prejudice Plaintiffs, but the government's position is facially and legally incorrect.

Respectfully,

/s/ Teresa J. Womack Teresa J. Womack Redding & Associates, P.C. 2914 W. T.C. Jester Houston, Texas 77018 Telephone: (713) 965-9244 Fax: (713) 621-5227 ATTORNEY FOR PLAINTIFFS

5

F:\T W W R8077.G I1.wpd