The Ninth Circuit Court of Appeals held that courts and the IRS have no discretion to reduce the amount of the late-filing penalty for tax-exempt organizations under IRC § 6652(c)(1)(A), overruling a district court decision ( Service Employees Int’l Union, docket no. 07-17256 (9th Cir. 3/17/10)).
The Service Employees International Union (SEIU) is an organization that is exempt from paying income tax, but is required to annually file Form 990, Return of Organization Exempt From Income Tax. The SEIU filed its 1999 Form 990 20 months late; its subsidiary, 100 Oak Street Corp., filed its 1998 Form 990 four months late. Section 6652(c)(1)(A) mandates a late-filing penalty for tax-exempt organizations that file their information returns late. The IRS applied the formula in section 6652 to impose a $50,000 penalty on the SEIU and a $2,460 penalty on 100 Oak Street Corp.
After going through the IRS appeals process, the SEIU and its subsidiary appealed to U.S. district court. The court found that the union did not have reasonable cause for its failure to file timely information returns, but held that the IRS, “as a matter of discretion,” should have reduced the penalty amounts. The district court reduced the SEIU’s penalty to $12,500 (25% of the original amount) and 100 Oak Street Corp.’s penalty to $1,230 (50% of the original amount).
The IRS appealed to the Ninth Circuit, arguing that the amount of the penalty is not subject to discretion. The Ninth Circuit agreed.
Section 6652 provides a formula for determining the late-filing penalty. For exempt organizations with $1 million or less in receipts, the formula calls for a penalty of $20 per day, up to $10,000 or 5% of the organization’s gross receipts, whichever is less. For exempt organizations with more than $1 million in receipts, the formula calls for a penalty of $100 per day, up to $50,000.
The Ninth Circuit found that in providing the formula, the Code section “uses mandatory language in all respects, leaving the IRS no discretion in deciding how much penalty to impose.” The court pointed to the words, “there shall be paid,” in section 6652(c)(1) and said, “[t]his language does not confer on the agency discretion to decide how much ought to be paid.”
The court said the union could not point to any court case holding that the section 6652 penalty was discretionary, and it dismissed as too remote from the issues the few cases the district court had cited for the proposition that the IRS and courts have discretion to reduce the penalty.
The Ninth Circuit therefore overruled the district court and reversed the reduction in the penalty amounts.