Howell v. Commissioner

77 T.C. 916, 1981 U.S. Tax Ct. LEXIS 41

• Court: United States Tax Court
• Decided: October 22, 1981
• Docket: Docket No. 19104-80
• Status: Published

Opinions

OPINION

Dawson, Judge:

This case was assigned to Special Trial Judge Francis J. Cantrel for the purpose of conducting the hearing and ruling on petitioner’s motion to dismiss for lack of jurisdiction as to the imposition of additional excise taxes under section 4941(b)(1).² After a review of the record, we agree with and adopt his opinion which is set forth below.³

OPINION OF THE SPECIAL TRIAL JUDGE

Cantrel, Special Trial Judge:

This case is before the Court on petitioner’s motion to dismiss filed on December 8, 1980. The issue presented is whether the provisions of the Second Tier Tax Correction Act of 1980 (the act), Pub. L. 96-596, 94 Stat. 3469, are applicable to a docketed but untried case involving second tier excise taxes pending in the Tax Court on or prior to the date of enactment, December 24, 1980, or whether such case is controlled by our opinion in Adams v. Commissioner, 72 T.C. 81 (1979), on appeal (2d Cir., June 23, 1981).

A brief recitation of the procedural history of this case is necessary. On May 14, 1980, respondent mailed petitioner a statutory notice of deficiency determining therein the following excise tax deficiencies:

First tier tax Second tier tax

Year ending Dec. 31— sec. 4941(a)(1) sec. 4941(b)(1)

1973. $252.33 $10,093.24

1974. 926.62 37,064.62

1975. 495.73 19,829.00

Petitioner timely filed her petition contesting the imposition of these excise taxes on October 14, 1980,⁴ at which time she resided at 449 Paseo de La Reforma, Apartment 2B, Mexico City, Mexico. On December 8, 1980, she filed her motion to dismiss additional excise taxes under section 4941(b)(1), and a hearing was held thereon at Washington, D.C., on January 21, 1981. Petitioner filed a statement in lieu of appearance at the hearing, while respondent appeared and presented his arguments. At the conclusion of the hearing, the Court took petitioner’s motion under advisement. On April 3, 1981, petitioner filed a supplemental brief in support of her motion.

Section 4941 imposes two levels of excise taxes. Initially, section 4941(a)(1) imposes on the self-dealer a tax equal to 5 percent of the amount involved for each act of self-dealing between a disqualified person and a private foundation. This tax is levied for each year or part thereof, in the taxable period which begins on the dáte the act of self-dealing occurs and ends on the earliest of the date of the mailing of the notice of deficiency, the date the tax is assessed, or the date the self-dealing act is corrected. Section 4941(b)(1) imposes an additional tax of 200 percent of the amount involved if the act of self-dealing is not corrected within the taxable period. Correction requires undoing the transaction to the extent possible. Sec. 4941(e)(3).

Under prior law, the second tier tax was imposed at the end of the correction period, which was 90 days after the mailing of the notice of deficiency, extended by any period in which a deficiency could not be assessed.⁵ In Adams v. Commissioner, supra,⁶ upon which petitioner heavily relies, we held that the taxpayer prevailed with respect to the second tier taxes because there was no deficiency, as that term is defined in section 6211, on the date the notice of deficiency was mailed. We said:

On the date of the mailing of the notice of deficiency which determines the second-level tax, our decision with respect to that tax obviously has not yet become final. Since our decision is not final, under section 4941(e)(4) the correction period has not expired. Pursuant to section 4941(b)(1), the expiration of the correction period is a prerequisite to the imposition of the second-level tax. If the tax is not imposed until the correction period expires, it is clearly not imposed on the date of the mailing of the statutory notice and, therefore, there is no "deficiency” as that term is defined in section 6211(a). Because petitioner has sought this Court’s redetermination of a deficiency determined by respondent, and because no deficiency exists,, we are bound to enter a decision for petitioner as to the second-level tax. [72 T.C. at 85-86.]

The dismissal motion before the Court in this case involves the question of whether we must follow our Adams opinion, or whether the amendments made to the Internal Revenue Code by chapter 42, Second Tier Tax Correction Act of 1980, Pub. L. 96-596, 94 Stat. 3469, signed by the President on December 24, 1980, apply to this case.

Respondent, in oral argument, contended that this case is controlled by the amendments to section 4941 made by Pub. L. 96-596. Petitioner admits that the act "corrected the jurisdiction defect regarding the imposition of second level excise tax and other technical defects in the prior law” but she argues that the amendments are not applicable to this case where the notice of deficiency was "mailed to a taxpayer or to taxes assessed” before the date of enactment of the act. The notice of deficiency, here, was sent on May 14,1980, and Pub. L. 96-596 was signed into law on December 24, 1980. Moreover, in her brief, petitioner argues that respondent’s interpretation would give the act retroactive effect back to an indefinite date with respect to the second tier taxes, which violates due process by failing to clearly express Congress’ retroactive intent.

The act provides for effective dates as follows:

SEC. 2(d) Effective Dates.—

(1) First tier taxes. — The amendments made by this section with respect to any first tier tax shall take effect as if included in the Internal Revenue Code of 1954 when such tax was first imposed.

(2) Second tier taxes. — The amendments made by this section with respect to any second tier tax shall apply only with respect to taxes assessed after the date of the enactment of this Act. Nothing in the preceding sentence shall be construed to permit the assessment of a tax in a case to which, on the date of the enactment of this Act, the doctrine of res judicata applies.

(3) First and second tier tax. — For purposes of this subsection, the terms "first tier tax” and "second tier tax” have the respective meanings given to such terms by section 4962 of the Internal Revenue Code of 1954. [sec. 2(d), Pub. L. 96-596, 94 Stat. 3474.]

Since, in this case, the notice of deficiency was mailed prior to the enactment of the act’s amendments, the parties are not in agreement that the amendments automatically apply. The determination must be based on the language: "The amendments made by this section with respect to any second tier tax shall apply only with respect to taxes assessed after the date of the enactment of this Act.” (Dec. 24,1980.)

We first look to the literal meaning of "assessed.” Crooks v. Harrelson, 282 U.S. 55, 59 (1930); Mountain Water Co. v. Commissioner, 35 T.C. 418, 424 (1960), appeal dismissed (9th Cir., Mar. 16, 1961); O’Donnell v. Commissioner, 35 B.T.A. 251, 255 (1937), affd. sub nom. O’Donnell v. Helvering, 94 F.2d 852 (2d Cir. 1938). Assessment of a tax involves a ministerial function whereupon the Secretary records the liability of the taxpayer. Sec. 6203; sec. 301.6203-1, Proced. & Admin. Regs.; United States v. Dixieline Financial, Inc., 594 F.2d 1311, 1312 (9th Cir. 1979); In re O’Leary, an unreported case (W.D. Wis. 1972, 29 AFTR 2d 72-822, 72-1 USTC par. 9287); United States v. City of New York, 132 F. Supp. 779, 781 (E.D. N.Y. 1955), affd. on other grounds 233 F.2d 307 (2d Cir. 1956). However, an assessment cannot be made, except in exceptional circumstances,⁷ none of which are applicable to this case, until a notice of deficiency has been issued. Sec. 6213; sec. 301.6213.1(a)(2), Proced. & Admin. Regs.; Bregin v. Commissioner, 74 T.C. 1097, 1102 (1980).

Furthermore, no assessment can be made where a petition has been timely and validly filed in this Court until the decision of this Court becomes final. Sec. 6213(a); sec. 1.6213-1(c), Income Tax Regs.; Adams v. Commissioner, supra at 85; United States v. Walker, 217 F. Supp. 888, 890 (W.D. S.C. 1963). Thus, an assessment is not made until our decision becomes final. Consequently, the amendments made by Pub. L. 96-596, supra, are applicable in this case to the second tier taxes imposed by section 4941 because such taxes have not been "assessed” and the doctrine of res judicata clearly does not apply where the case has not yet been tried and decided on its merits.⁸

Petitioner has confused two distinct events by equating the mailing of the notice of deficiency with the assessment of the tax. The effective date provisions of Pub. L. 96-596, supra, are not controlled by the date the notice of deficiency is mailed. Instead, the act is clearly tied to the date of assessment, which occurs in this case after the mailing of the notice of deficiency. Our interpretation of the plain and ordinary meaning of the word "assessed” is augmented and supported by the following explanation contained in the House and Senate reports:

However, the second-tier tax is not to be assessed if the taxpayer files a petition with the Tax Court to redetermine that tax and the taxpayer corrects the prohibited act by the end of the correction period. * * *

*******

Thus, where the taxpayer petitions the Tax Court to redetermine a second-tier tax, the tax may not be assessed unless the Court decides (including a decision in any supplemental proceeding) that the taxpayer has engaged in an act giving rise to a first-tier tax and that the act was not timely corrected. [H. Rept. 96-912, at 3 (1980), 1980-2 C.B. 657-658; S. Rept. 96-1034, at 5 (1980).]

We think it is clear from these statements that Congress intended the interpretation that respondent has presented. A second tier tax may not be assessed until after this Court’s decision has become final, and thus the amendments made by Pub. L. 96-596, supra, are applicable to this case.

Petitioner also argues that such interpretation would give the act a retroactive effect and because its retroactivity is not clearly expressed by the setting of a fixed date, the amendments are being applied in an invalid manner. Petitioner relies on United States v. Darusmont, 449 U.S. 292 (1981). Her reliance thereon is unfounded. The language of the Supreme Court simply cannot be construed to require retroactivity back to a fixed date. There, the Supreme Court upheld the retroactive application of the minimum tax provisions of the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, which happened to be retroactively effective "to items of tax preference for taxable years beginning after December 31, 1975.” Sec. 301(g)(1), Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1553.

Retroactive tax statutes have long been upheld. Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916); United States v. Darusmont, supra. The retroactivity of a revenue statute is suspect where it involves a new tax, but not where it involves a mere change in rate or a technical amendment. Here we have what is akin to a technical amendment. This is not a case where the taxpayer had "no reason to suppose that any transactions of the sort will be taxed at all.” Cohan v. Commissioner, 39 F.2d 540, 545 (2d Cir. 1930); United States v. Darusmont, supra at 298. These amendments were enacted to correct procedural defects existing in the Internal Revenue Code from provisions added by the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487. These defects were discussed in our opinion in Adams v. Commissioner, supra at 89-92. The House and Senate reports make it clear that the amendments "should continue the original intent of the Congress” that prompted the enactment of the private foundation excise taxes in 1969. See S. Rept. 96-1034, supra at 5; H. Rept. 96-912, supra, at 2,1980-2 C.B. at 657.

Moreover, a corrective revenue measure, like the one involved in this case, can be made retroactive without going back to a fixed date. See Graham & Foster v. Goodcell, 282 U.S. 409 (1931).⁹ That case involved the retroactivity of section 611 of the Revenue Act of 1928, ch. 852, 45 Stat. 791, 26 U.S.C. sec. 2611. The need for corrective legislation arose when the Supreme Court held, contrary to a Treasury Department ruling,¹⁰ that the 5-year statute of limitations imposed by section 250(d) of the Revenue Acts of 1918 and 1921¹¹ did apply to collection proceedings by distraint.¹² As a result, many collections previously made had technically been barred by the statute of limitations. To avoid having the Treasury refund such money as an overpayment under section 607,¹³ Congress enacted section 611, which provided that any tax which was "within the period of limitations properly applicable thereto, assessed prior to June 2,1924, and if a claim in abatement was filed” staying collection, then "the payment of such part (made before or within one year after the enactment of this Act)[¹⁴] shall not be considered as an overpayment under the provisions of section 607.” (45 Stat. 875.) Although the taxpayer contended that section 611 was to apply prospectively, only, the Supreme Court held that section 611 expressly applies to taxes which were assessed prior to June 2, 1924, and its application was determined by the circumstances in which the tax had been paid, not the time for filing a claim for refund. Graham & Foster v. Goodcell, supra at 418-419.

The application of the amendments, here involved, similarly depends upon when the second tier tax is assessed, and not when the notice of deficiency for the excise taxes is mailed. Thus, these amendments can, and validly do, apply to acts of self-dealing which occurred before the enactment of the amendments, and which, when performed, were subject to an existing tax. As the Supreme Court said in Graham, "a distinction is made between a bare attempt of the legislature retroactively to create liabilities for transactions which, fully consummated in the past, are deemed to leave no ground for legislative intervention, and the case of a curative statute aptly designed to remedy mistakes and defects in the administration of government where the remedy can be applied without injustice.” 282 U.S. 429.

Accordingly, we hold that the amendments to section 4941, enacted by Pub. L. 96-596, which impose excise taxes for acts of self-dealing, are applicable to this case, where the acts ,of self-dealing and the mailing of the notice of deficiency both occurred before December 24, 1980, but the second tier excise taxes imposed by the notice of deficiency were not "assessed” before that date. We also hold that the retroactive effect of these amendments does not violate due process by failing to relate back to a fixed date. Therefore, the petitioner’s motion to dismiss for lack of jurisdiction insofar as the petition alleges error in the imposition of second tier excise taxes under section 4941(b)(1) will be denied.

An appropriate order will be issued.

Reviewed by the Court.

2 A11 section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.

3 Since this is a preliminary jurisdictional motion, the Court has concluded that the post-trial procedures of Rule 182, Tax Court Rules of Practice and Procedure, are not applicable in the present circumstances. This conclusion is based on the authority of the "otherwise provided” language of that Rule.

4 The notice of deficiency was addressed to petitioner in Mexico, allowing 150 days in which to file a petition in this Court. Sec. 6213(a). The envelope in which the petition was received by the Court was properly addressed, postage prepaid, and it bears a clearly legible U.S. postmeter stamp date of Oct. 9,1980. See sec. 7502.

5 Under the amendments enacted as Pub. L. 96-596,94 Stat. 3469, petitioner, as before, has the opportunity to correct during the correction period as defined in sec. 4962(e) and, furthermore, she is now given the opportunity to have another hearing conducted for the purpose of determining whether the act for which the second tier excise tax was imposed was corrected. Sec. 4961(b).

6 See also Larchmont Foundation, Inc. v. Commissioner, 72 T.C. 131 (1979), vacated and remanded (7th Cir., June 11, 1981); H. Fort Flowers Foundation, Inc. v. Commissioner, 72 T.C. 399 (1979), appeal dismissed (6th Cir., Apr. 7,1980).

7 Assessment can be made without the mailing of a notice of deficiency under sec. 6213(b) for mathematical or clerical errors on the taxpayer’s return or when arising out of tentative carryback or refund adjustments under sec. 6411 or 1341(b)(1) or for amounts already paid with respect to a tax, or under sec. 6861(a) relating to jeopardy assessments of income, estate, and gift taxes, or under sec. 6871(a) relating to immediate assessment of claims for income, estate, and gift taxes in bankruptcy and receivership cases, or under sec. 7485 where a petitioner, upon appealing a decision of this Court, fails to file bond, or if the taxpayer has waived the restrictions on assessment under sec. 6213(d).

8 It is unnecessary for us to comment on or consider in this case whether the doctrine of res judicata, as used in sec. 4941(d)(2), would apply to cases decided by this Court on their merits (findings of fact and opinion) prior to Dec. 24,1980. See, e.g., Adams v. Commissioner, 72 T.C. 81 (1979), on appeal (2d Cir., June 23, 1981); Larchmont Foundation, Inc. v. Commissioner, supra.

9 See also Milliken v. United States, 283 U.S. 15 (1931); Igleheart v. Commissioner, 28 B.T.A. 888 (1933).

10 I.T. 1446,1-2 C.B. 218 (1922).

11 Revenue Act of 1918, ch. 18,40 Stat. 1057; Revenue Act of 1921, ch. 136,42 Stat. 227.

12 Bowers v. New York & Albany Lighterage Co., 273 U.S. 346 (1927).

13 Revenue Act of 1928, ch. 852,45 Stat. 791,26 U.S.C. sec. 2611.

14 Enacted May 29,1928.