Appeals Decision in Farhy Limited to DC Circuit?

On May 3, 2024 the the D.C. Circuit Court of Appeals overturned the Tax Court's decision in Farhy v. Commissioner, 160 T.C. No. 6 (2023), which held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code §6038(b). 

So Where Does That Leave Us?

For one thing this Appeal's decision controls cases, in the DC circuit.

It is also persuasive authority for other circuits, as it relates to interpreting IRC §6038(b) in that it would be unlikely if not just inconsistent for Congress to allow the IRS to assert penalties under §6038(c), but not under §6038 (b) and it goes on to buttress its decision with Congressional Reenactment Doctrine by stating:

"[Our court's] conclusion is buttressed by more than forty years of congressional acquiescence
to the IRS’s practice of assessing section 6038(b) penalties. 'It is well established that when
Congress revisits a statute giving rise to a longstanding administrative interpretation without
pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation
is persuasive evidence that the interpretation is the one intended by Congress.’ Since adding
subsection (b) in 1982, Congress has amended section 6038 seven times; each time, it has
left undisturbed the IRS’s practice of assessing and administratively collecting penalties
imposed under section 6038(b)."

Whether the Congressional Reenactment Doctrine in this decision is dicta and does not need to be followed, I leave up to each of you.

Furthermore, the Tax Court in Mukhi v. Commissioner of Internal Revenue, stated that even though Farhy is on appeal in the D.C. Circuit, Mukhi's case, if appealed, would go to the Eighth Circuit, meaning any ruling from the D.C. Circuit wouldn't be binding for Mukhi, the court said.

So you can still argue that the IRS cannot assess certain information reporting penalties in other circuits and in Tax Court. Whether you be successful, still remains to  be seen?

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Read more at: Tax Times blog