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Fallu Productions, Inc. v. United States

February 13, 2008


The opinion of the court was delivered by: Denise Cote, District Judge


This case raises the question of whether a taxpayer who pays its taxes on time and in the correct amount may nonetheless be penalized by the Internal Revenue Service ("IRS") for failing to deposit the tax payments electronically as prescribed by regulation. Plaintiff Fallu Productions, Inc. ("Fallu") and defendants the United States of America and the IRS (together, "the Government") have cross-moved for summary judgment. For the reasons stated below, summary judgment is granted to the Government.


Fallu is a film production company wholly owned by the actor Joe Pesci. From the second quarter of 2001 through the third quarter of 2002, Fallu failed to make its federal employment tax deposits electronically, as required under the Electronic Federal Tax Payment System ("EFTPS").*fn1 It did, however, otherwise pay those taxes in full and on time by depositing the funds at an approved bank. The Government imposed failure-to-deposit ("FTD") penalties for each of the relevant quarters, pursuant to 26 U.S.C. § 6656, and subsequently filed a tax lien against Fallu for the penalties owed. Following a hearing, the IRS granted Fallu an abatement of the first two penalties -- those covering the second and third quarters of 2001.*fn2 The penalties for the remaining quarters were sustained, and it is only these four unabated penalties that are before the Court in this case.*fn3

The parties agree on the above facts and have stipulated that the "only issue presented in this case" is the constitutionality of imposing penalties on Fallu for failing to pay its taxes electronically when it otherwise paid the taxes in the correct amount and on time. Fallu contends that the assessment of penalties in these circumstances deprives it of due process of law. It argues that imposing FTD penalties for a deficiency in the form of payment exceeds the plain meaning of the relevant statute and that, in any event, penalizing taxpayers for failing merely to deposit taxes electronically is arbitrary and capricious. By stipulation, Fallu waived any other defense to these penalties.


Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the court must view all facts in the light most favorable to the non-moving party. Sista v. CDC Ixis N. Am., Inc., 445 F.3d 161, 169 (2d Cir. 2006). "Claims turning entirely on the constitutional validity or invalidity of a statute are particularly conducive to disposition by summary judgment as they involve purely legal questions." Connecticut ex rel. Blumenthal v. Crotty, 346 F.3d 84, 93 (2d Cir. 2003).

As described above, no material facts are in dispute here and all that remains to be decided is a legal question. This case is, therefore, ripe for summary judgment.

I. Scope of § 6656

"Statutory construction begins with the plain text, and, where the statutory language provides a clear answer, it ends there as well." Raila v. United States, 355 F.3d 118, 120 (2d Cir. 2004) (citation omitted). Whether the meaning of a statute is unambiguous "is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). A court must "give effect, if possible, to every clause and word of a statute." State St. Bank & Trust Co. v. Salovaara, 326 F.3d 130, 139 (2d Cir. 2003) (citation omitted). In general, however, tax penalty provisions should "be strictly construed" in favor of taxpayers. Ivan Allen Co. v. United States, 422 U.S. 617, 627 (1975).

Section 6656 of the Internal Revenue Code ("the Code"), upon which the penalties at issue in this case were based, provides:

In the case of any failure by any person to deposit (as required by this title or by regulations of the Secretary under this title) on the date prescribed therefor any amount of tax imposed by this title in such government depository as is authorized under section 6302(c) to receive such deposit, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be imposed upon such person a penalty equal to the applicable percentage of the amount of the underpayment.

26 U.S.C. § 6656(a) (emphasis supplied). Treasury Regulation § 31.6302-1(h), promulgated under the EFTPS, requires that certain tax deposits be made electronically. Fallu admits that its employment tax deposits fell within that requirement for the periods at issue.

Focusing on the word "underpayment," Fallu asserts that this statute authorizes penalties only for a deficiency in the amount of taxes paid, not for a deficiency in the method by which payment is made. Such an interpretation, however, ignores the subsection's parenthetical statement. Its placement immediately following "failure . . . to deposit" emphasizes that the deposit itself must satisfy the requirements of the Code and applicable Treasury Regulations. Even narrowly construed, the statute authorizes FTD penalties for violating a regulatory requirement that deposits be made electronically, even if payment is made in full and on time by other means.*fn4 That ยง 6656(a) is titled "Underpayment of deposits" does not alter this conclusion ...

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