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Mei Productions v. Commissioner (T.C. Memo. 2020-11)

On January 14, 2020, the Tax Court issued a Memorandum Opinion in the case of Mei Productions v. Commissioner (T.C. Memo. 2020-11). The issue presented in Mei Productions was whether the petitioner was liable for the failure to pay under IRC § 6651(a)(3) (failure to timely pay tax assessed as an amendment to an original return).

Background

The petitioner is a California corporation, which admitted that it erroneously claimed an approximately $200,000 deduction for expenses due to a change in its accounting method under IRC § 481A (adjustments required by changes in method of accounting). The IRS disallowed the deduction and asserted the accuracy related penalty under IRC § 6662(a). The petitioner submitted an amended return, correcting the error, but did not remit payment with the amended return. Thereafter, the IRS assessed the IRC § 6651(a)(3) failure to pay penalty. The petitioner filed a timely petition with the Tax Court redetermination of the deficiency and the penalty. The parties ultimately settled the deficiency proceeding for approximately $50,000.  This settlement amount, however, did not include the IRC § 6651(a)(3) failure to file penalty.

In the interim, the IRS assessed against the petitioner an additional $80,000 liability, provided the petitioner with notice and demand, and, upon nonpayment, sent the petitioner a Notice LT11 (Notice of Intent to Levy), which advised the petitioner that it had a right to a collection due process (CDP) appeal, which the petitioner timely requested. The Form 12153 (Request for a CDP Hearing) challenged the underlying liability claiming that the amended return eliminated much of the liability.

During the CDP hearing, the petitioner contended that the IRC § 6651(a)(3) penalty should be abated on the basis of IRS error. Appeals countered that the amended return reported the additional liability ($80,000), and the petitioner had agreed in the deficiency case that the assessment was valid. Appeals rejected the petitioner’s reasonable cause argument and its request for relief under the “first time abate” program. Appeals sustained the levy and sent a notice of determination to the petitioner. The petitioner timely petitioned the Tax Court for redetermination.

Right to Challenge Underlying Liability

The Tax Court found that the petitioner had not received a notice of deficiency with respect to the liability for the IRC § 6651(a)(3) penalty and that the petitioner did not otherwise have an earlier opportunity to dispute the underlying tax liability.  As such, the petitioner was permitted to challenge its underlying liability for the IRC § 6651(a)(3) penalty at the Tax Court level. See IRC § 6330(c)(2)(B); Treas. Reg. § 301.6330-1(e)(3), Q&A-E2.

Addition to Tax for Failure to Timely Pay Under IRC § 6651(a)(3)

IRC § 6651(a)(3) imposes an addition to tax for the failure of a taxpayer to timely pay the tax assessed on an amended return within 21 calendar days of notice and demand for payment. See IRM pt. 20.1.2.3.8.5. The petitioner contends that because the $80,000 assessment was itself unlawful, the IRC § 6651(a)(3) addition to tax for the year at issue is ipso facto unlawful, too.

It is important to note that although the IRS generally has the burden of production under IRC § 7491 with regard to a taxpayer’s liability for penalties and additions to tax, in this case, because the petitioner is a corporation, not an individual, the initial burden of production rests on the shoulders of the petitioner. See IRC § 7491(c); Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 231 (2018); NT, Inc. v. Commissioner, 124 T.C. 191, 195 (2006)). Specifically, the petitioner argues that the assessment violated IRC § 6213(a)’s restriction on the assessment of penalties after a petition for redetermination of deficiency has been filed with the Tax Court. Unfortunately for the taxpayer, the Tax Court was not moved by this argument.

Amended Return Reporting Underpayment is Admission by Taxpayer of Liability

It is important to note, for this case, and for your practice in general, that an amended return filed by a taxpayer reporting an amount due is an admission by that taxpayer of an underpaid tax liability. See Badaracco v. Commissioner, 464 U.S. 386, 399 (1984); Cooley v. Commissioner, T.C. Memo. 2004-49, *17.

Pursuant to IRC § 6331, the IRS is authorized to collect all taxes imposed under the Code. An assessment of tax is the first step in that process. IRC § 6201.  Assessments come in two flavors – summary assessments and, more commonly, deficiency assessments. Pursuant to the deficiency procedures, before any assessment can be made, the IRS must send a notice of deficiency to the taxpayer by certified or registered mail regarding its determinations. IRC § 6212(a); IRC § 6213. If the taxpayer timely petitions the Tax Court for redetermination of the deficiency, the IRS may not further assess the deficiency (or any additions to tax and penalties thereto) while the case is before the Tax Court. IRC § 6213(a).

The IRS may summarily assess the amount of tax shown not only on a taxpayer’s original return but also the amount of any additional tax shown on a subsequently filed amended return. IRC § 6201(a)(1); Meyer v. Commissioner, 97 T.C. 555, 559 (1991). The IRS may also summarily assess and collect certain additions to tax and civil penalties. See Meyer, 97 T.C. at 559; IRC § 6665(b). The preconditions for making such an assessment are a valid filed (original or amended) return and, most importantly, the taxpayer’s unconditional admission of liability for the tax shown thereon. See Powerstein v. Commissioner, 99 T.C. 466, 474-475 (1992); Estate of Brourman v. Commissioner, T.C. Memo. 2013-99, at *4-*5.

The taxpayer went ahead and admitted that it was liable for an underpayment of tax when it filed its amended return. With the dodo corporation having admitted liability by filing its amended return, the IRS summarily assessed the failure to pay penalty under IRC § 6651(a)(3).  Because summary assessments are not subject to the deficiency procedures, no notice of deficiency was required to be sent to the petitioner.  See IRC § 6211; IRC § 6212; IRC § 6213; Meyer 97 T.C. at 560.  As a consequence, the assessment of the IRC § 6651(a)(3) penalty was appropriate and did not violate IRC § 6213(a).

Original opinion: (T.C. Memo. 2020-11) Mei Productions v. Commissioner

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