UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
July 7, 1983
Myron Smith and Barbara Smith, Plaintiffs
United States of America, Defendant
The opinion of the court was delivered by: LOWE
Memorandum Opinion and Order
LOWE, District Judge:
Myron and Barbara Smith (plaintiffs) commenced this action seeking a refund, with interest and costs, of penalties incurred for failure to file a timely tax return and for delinquency in payment of the taxes owed on such return. The United States government (defendant) now moves for summary judgment on the ground that the penalties imposed on plaintiff were justified and non-refundable under § 6651 of the Internal Revenue Code.
Plaintiffs dispute this position in a cross-motion for summary judgment which argues that the defendant misinterpreted and misapplied § 6651.
The facts underlying this action are simple. On November 27, 1978, plaintiffs filed their overdue 1975 joint income tax return.
Upon filing this return, plaintiffs owed the sum of $50,953.28 for unpaid taxes.
Pursuant to § 6651, the Internal Revenue Service (IRS) assessed penalties for late filing and non-payment of taxes. These penalties in the amount of $19,617.01 were paid in full by plaintiffs.
Plaintiffs contend that § 6651 limits the aggregate of late filing and late payment penalties to no more than 25 percent of the net amount of income taxes due. The government argues that in a case such as the present one, where a taxpayer has failed to file or pay within five months of the date a return is due, the statute permits the accrual of a penalty exceeding 25 percent. For the reasons set forth below, the Court agrees with government and grants summary judgment in its favor.
Standard of Review
On a summary judgment motion, the Court does not act as a trier of fact but, on the record before it, determines whether there are any genuine issues of material fact. F.R. Civ. P. 56; FLLI Moretti Cereali v. Continental Grain Co., 563 F.2d 563, 566 (2d Cir. 1977), citing United States v. Bosurgi, 530 F.2d 1105 (2d Cir. 1976); Travelers Indemnity Co. v. M.S. Kiso Maru, 471 F. Supp. 898, 900 (S. D. N.Y. 1979); see 10A Wright & Miller, Federal Practice and Procedure: Civil § 2725 at 75 and § 2728 at 178 (1983).
In the case at hand, the parties stipulate that there are no disputed factual issues; the sole question before the Court is a question of law, which may properly be resolved on a motion for summary judgment.
Sections 6651(a)(1) and 6651(a)(2) respectively provide for penalties to be assessed against a taxpayer for failure to file a tax return and for delinquent tax payment. Section 6651(a)(1) states that a 5% penalty (on the amount of tax owed) is to be levied upon the taxpayer for each month that a filing is overdue until five months have passed or, in other words, until a 25% maximum penalty has been reached. Upon failure to pay the amount shown on a return, § 6651(a)(2) separately provides that a.5% penalty shall be assessed upon the taxpayer for each unpaid month with a maximum penalty of 25%, which would not be reached for fifty months.
The IRS has interpreted subsections (a)(1) and (a)(2) of § 6651 to provide for two separate and very different penalties, which operate independently of one another except when the penalties are to be imposed simultaneously, a situation governed by subsection (c). 26 C.F.R. § 301.6651-1 (1982). Subsection (c) provides that for any period during which failure to file overlaps with failure to pay, the 5% monthly penalty for failure to file must be offset by the.5% monthly penalty for nonpayment. Thus, under the IRS interpretation, a taxpayer who failed to file or pay for fifty months or longer could be penalized 25% for failure to pay (.5% X 50 months) and 22.5% for failure to file (5% X 5 months offset by.5 X 5 months for the period during which the nonpayment penalty was also imposed).
Plaintiffs dispute this interpretation, arguing that the 25% ceiling provided for in sub-sections (a)(1) and (a)(2) limits the combined penalties which may be assessed for delinquent filing and late payment.
The IRS interpretation of § 6651 must, of course, be accorded substantial deference. This is so because "Congress has delegated to the Commissioner, not to the courts, the task of prescribing 'all needful rules and regulations for the enforcement' of the Internal Revenue Code." United States v. Correll, 389 U.S. 299, 307, 19 L. Ed. 2d 537, 88 S. Ct. 445 (1967). Interpretative regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501, 92 L. Ed. 831, 68 S. Ct. 695 (1948); accord National Muffler Dealers Assn. v. United States, 440 U.S. 472, 477, 59 L. Ed. 2d 519, 99 S. Ct. 1304 (1979).
In the present case, the language and structure of § 6651, as well as its legislative history, support the IRS interpretation. As discussed above, both Sections 6651(a)(1) and 6651(a)(2) by their own terms provide for 25% maximum penalties. The only subsection governing the relationship between (a)(1) and (a)(2) is subsection (c) which provides for offsetting in the case of overlap, but imposes no maximum on the combined penalties which may be imposed under (a)(1) and (a)(2). Thus the Court can find no evidence on the face of the statute that the 25% limitations were intended to apply to the late filing penalty and the nonpayment penalty aggregately. The legislative history of § 6651 further reinforces the notion that subsections (a)(1) and (a)(2) are distinct provisions, each with its own separate maximum. Prior to enactment of the Tax Reform Act of 1969, the only penalty for late payment of taxes was an annual assessment of interest at a statutory rate of 6%. The penalty for failure to file was, as it is today, 5% per month with a 25% limitation.
The change in the penalty for late payment came about as a result of congressional concern that, since the cost of borrowing money at that time was higher than 6%, it was to the advantage of taxpayers to file on the due date, but delay in paying their taxes. The 6% annual penalty constructively operated as a 6% bargain loan to delinquent taxpayers. To correct this problem, the Senate Finance Committee proposed the adoption of 6651(a)(2) which, as it was originally drafted, would have imposed a 5% monthly penalty for non-payment of taxes, with a 25% maximum. S. Rep. No. 91-552, 91st Cong., 1st Sess. (1969) at 2027, 2037, 2336-37, 2455;
see 4 Bittker, Federal Taxation of Income, Estates and Gifts § 114.32 at 114-31 (1981). As finally enacted, the non-payment penalty in § 6651(a)(2) was changed to.5% per month, with the same 25% maximum. The penalty for failure to file was left distinctly intact. There is absolutely no indication in the legislative history that the enactment of subsection (a)(2) was intended to impose a new limitation on the aggregate penalties available under sections (a)(1) and (a)(2). In fact such a limitation, which would have resulted in a decrease in the total penalties which could be imposed, would have been contrary to the general purpose of the amendment, which was to expand potential penalties for non-payment of taxes.
In short, this Court finds that the IRS interpretation of § 6651 is consistent with both the language and purpose of the statute. Therefore, we are bound to uphold it. The same result was reached in Gerdes v. United States [80-2 USTC P 13,370], 498 F. Supp. 385 (N.D. Cal. 1980), the only other case directly to address this issue.
We conclude, as did the Court in Gerdes, that:
The 25 percent ceiling found in Sections 6651(a)(1) and (a)(2) applies to penalties assessed under each respective paragraph. The 25 percent ceiling, however, does not apply to the combined penalties assessed under both paragraphs.
Gerdes, at 388.
Therefore, the Court finds that the penalty imposed upon plaintiffs was calculated in accordance with § 6651,
and grants summary judgment in favor of the government.