Pending before the Court are petitioners' motion to disqualify the Judge and declare section 7443(f)
The information below is based upon examination of the pleadings, moving papers, responses, and attachments submitted in connection with this case. Factual recitations are meant to provide context for our analysis of petitioners' motions and to set forth matters that appear undisputed. They do not, however, constitute findings of fact in the event of a subsequent trial or trials. Rule 1(b); Fed. R. Civ. P. 52(a). Petitioners, Douglas and Lisa Mae Thompson, were married during the taxable years 2003-07 and filed their personal income tax returns jointly. Respondent determined the following Federal income tax deficiencies and penalties for tax years 2003-07 in a notice of deficiency issued on December 18, 2012:
The deficiencies in petitioners' Federal income tax arose out of an alleged loss from a flow-through distressed asset debt transaction that petitioners reported on their Federal income tax return for the tax year 2005.
Petitioners resided in California when they timely filed the petition.
Disqualification of a Judge and Constitutionality of Section 7443(f)
In their motion to disqualify the Judge and to declare section 7443(f) unconstitutional, petitioners argue that we should recuse ourselves from consideration of this case until the alleged constitutional infirmity of section 7443(f) is cured.
Section 7443(f) authorizes the President to remove Judges of the Tax Court "after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause." Petitioners contend that this section violates basic principles of separation of powers. In a recently released Opinion of this Court, however, we held that the Presidential authority to remove Tax Court Judges for cause under section 7443(f) is constitutional and that we need not recuse ourselves.
Petitioners did not advance in their motion any arguments that we have not addressed in
Constitutionality of Section 6662A
Legal Standard for Motion for Judgment on the Pleadings
"A judgment on the pleadings is a judgment based solely on the allegations and information contained in the pleadings and not on any outside matters."
Because petitioners argue that section 6662A is unconstitutional on its face and do not raise any issues as to its application to their particular situation, deciding this issue on a motion for a judgment on the pleadings is appropriate.
Application of the Eighth Amendment to Section 6662A
Section 6662A(a) imposes a penalty on any reportable transaction under-statement. If a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement under section 6662A, the penalty is imposed at a rate of 30%, and there are no available defenses. Secs. 6662A(c), 6664(d)(2). However, if a taxpayer sufficiently discloses the details of the transaction, the penalty rate is 20% of the amount of the reportable transaction understatement. Sec. 6662A(a). In this latter instance, a taxpayer may be able to avoid the penalty under section 6662A if he or she shows reasonable cause and good faith, as well as that there is or was substantial authority for a position he or she took on a tax return, and the taxpayer reasonably believed that such treatment was more likely than not the proper treatment of the transaction in question. Sec. 6664(d)(1) and (2).
The Eighth Amendment to the United States Constitution provides: "Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." "The Excessive Fines Clause limits the government's power to extract payments, whether in cash or in kind, `as
In a case discussing application of the Double Jeopardy Clause to a State tax on possession of illegal drugs, the Supreme Court stated: "Criminal fines, civil penalties, civil forfeitures, and taxes all share certain features: They generate government revenues, impose fiscal burdens on individuals, and deter certain behavior. All of these sanctions are subject to constitutional constraints."
To pass the constitutional proportionality inquiry under the Excessive Fines Clause, the amount of the forfeiture or fine must bear some relationship to the gravity of the offense that it is designed to punish.
This Court has stated before that "[t]he purpose of civil tax penalties is to encourage voluntary compliance."
Similarly, this Court has found contentions that civil tax penalties violate the Excessive Fines Clause to be meritless in numerous other cases.
Petitioners argue that because Congress intended section 6662A to deter taxpayers from entering into tax avoidance transactions, it is not purely remedial and is subject to review under the Eighth Amendment as a form of punishment. We are not persuaded by this argument. As the Supreme Court noted in
Discussion of the tax penalties with respect to listed or reportable transactions dates back to the end of 1990s. The Secretary of the Treasury stated that tax shelters represented the most significant compliance problem confronting the U.S. system of taxation. Lawrence H. Summers, U.S. Sec'y of the Treasury, Remarks to the Federal Bar Association: Tackling the Growth of Corporate Tax Shelters (Feb. 28, 2000). Besides reducing tax base, tax shelters "breed disrespect for the system by participants and observers, and waste valuable public and private sector resources." S. Comm. on Finance, 107th Cong., Technical Explanation of Tax Shelter Transparency Act (News Release May 10, 2002). In response to that challenge, the Department of the Treasury issued regulations requiring disclosure of certain transactions and maintenance of customer lists by promoters of tax shelters. Secs. 301.6111-2, 301.6112-1, Proced. & Admin. Regs. However, the initial results were underwhelming. As a result, Congress enacted a number of penalties related to disclosure of certain transactions and failure to report them properly on tax returns as a part of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, secs. 811(a), 812(a) 118 Stat. at 1575, 1577.
In that regard, it is instructive to consider the reasons for enacting a "sister" section of 6662A, section 6707A, which provides a penalty for failure to disclose reportable transactions:
The Committee believes that the best way to combat tax shelters is to be aware of them. The Treasury Department, using the tools available, issued regulations requiring disclosure of certain transactions and requiring organizers and promoters of tax-engineered transactions to maintain customer lists and make these lists available to the IRS. Nevertheless, the Committee believes that additional legislation is needed to provide the Treasury Department with additional tools to assist its efforts to curtail abusive transactions. * * *
H.R. Rept. No. 108-548 (Part I), at 261 (2004). In explaining the reasons for enacting section 6662A, the House of Representatives Committee on Ways and Means stated:
Because disclosure is so vital to combating abusive tax avoidance transactions, the Committee believes that taxpayers should be subject to a strict liability penalty on an understatement of tax that is attributable to non-disclosed listed transactions or non-disclosed reportable transactions that have a significant purpose of tax avoidance. Furthermore, in order to deter taxpayers from entering into tax avoidance transactions, the Committee believes that a more meaningful (but not a strict liability) accuracy-related penalty should apply to such transactions even when disclosed.
H.R. Rept. No. 108-548 (Part I),
Assuming arguendo that the Excessive Fines Clause is implicated in this case, the penalty under section 6662A is not so grossly disproportionate as to fail the
We disagree. The penalty under section 6662A applies only to listed transactions—which are considered per se abusive—and to reportable transactions if a significant purpose is avoidance or evasion of Federal income tax.
Finally, petitioners argue that the section 6662A 30% penalty for undisclosed transactions violates the Excessive Fines Clause because section 6662A imposes a higher penalty rate on undisclosed reportable transactions and takes away defenses that would be available for disclosed transactions. Again, we disagree. Legislative history makes it clear that Congress saw voluntary disclosure as a key element in curbing the abuse of tax shelters. By imposing a strict liability penalty at a higher rate on undisclosed transactions, Congress wanted to take away taxpayers' ability to ignore or manipulate the existing rules. Tax shelters are notoriously difficult to detect and hard to prosecute. Some promoters and taxpayers, aware of low tax return audit rates, consciously engage in attempts to game the tax system and get away with questionable transactions. The higher penalty may not even make up for the lost revenue and prosecution expenses related to detecting, prosecuting, and resolving these transactions. In any event, it serves as an important deterrent that alters taxpayers' cost-benefit analysis when they consider participating in reportable or listed transactions.
Both petitioners' motion to disqualify the Judge and motion for judgment on the pleadings will be denied. Section 7443(f) and penalties under section 6662A do not violate the United States Constitution.