Tax Court Decision Reversed: Farhy v. Commr.

Taxpayers who were cheered on by the Tax Court’s decision in Farhy v. Commr. (160 T.C. No. 6) will now be saddened by the reversal of that decision by the D.C. Circuit Court of Appeal.

The taxpayer in Farhy, Alon Farhy, was a U.S. citizen who failed to report his ownership in certain foreign corporations as required and, accordingly, incurred penalties asserted by the I.R.S. Although Mr. Farhy’s substantive liability for the penalties was not in doubt, he convinced the Tax Court that the I.R.S.’s attempted method of enforcing the penalties – a procedure known as ‘assessment’ – was not authorized by that particular penalty’s statute. Assessable penalties can be imposed by the I.R.S. on notice and demand. Other penalties are collectible only if the government brings a legal proceeding in U.S. Federal District Court.

The Tax Court agreed with Mr. Farhy’s observation that no specific language allowed for the relevant penalty to be collected via assessment. The Circuit Court of Appeals reversed the U.S. Tax Court, finding that congressional intent as well as operational practicalities suggested otherwise.

After the Tax Court decision, practitioners speculated about what other penalties might be rendered unassessable by Farhy. This decision rendered that question moot.