Tax Court trusts Congress’s use of subjunctive mood

In a case of first impression, the Tax Court held that the IRS may not assess underpayment interest or failure-to-pay additions to tax based on a criminal restitution award.

Facts: In 2010, Samuel and Zipora Klein pleaded guilty to making and signing a false federal income tax return for 2006. Samuel Klein admitted in his plea agreement that the married couple had underreported income on their joint returns for 2003 through 2006. The district court ordered the Kleins to pay $562,179 as restitution to the IRS. The amount reflected the IRS’s calculation of the tax loss from the couple’s underreporting for the four years, using the bank deposits method to reconstruct their income. Under Sec. 6201(a)(4), the IRS assessed not only the restitution amount against the Kleins, but also underpayment interest under Sec. 6601(a) and additions to tax for failure to pay under Sec. 6651(a)(3), based on the restitution amount. The Kleins paid part of the restitution amount in 2012 and the remainder in August 2014, but did not pay the interest or additions to tax.

Two months later, the IRS filed a notice of federal tax lien against the couple for the interest and the additions to tax for each year under Sec. 6651(a)(3). After a Collection Due Process appeal, the Kleins petitioned the Tax Court, where the IRS moved for summary judgment.

Issues: Sec. 6201(a)(4) allows the IRS to assess and collect the amount of restitution ordered under 18 U.S.C. Section 3556 (as it was in this case) “for failure to pay any tax imposed under [the Code] in the same manner as if such amount were such tax.” The question before the court was whether this provision allows the IRS to assess interest, which is assessed on an “amount of tax imposed” by the Code (Sec. 6601(a)), and failure-to-pay additions to tax, which are assessed on “any amount in respect of any tax required to be shown on a return … which is not so shown” (Sec. 6651(a)(3)), based on criminal restitution.

The IRS acknowledged that restitution is not literally a tax but argued that Congress, in enacting Sec. 6201(a)(4) in 2010, meant it to be treated as one, as an alternative means of collection. In support of this proposition, the Service pointed to the Internal Revenue Manual (IRM) for support, noting that IRM Section 25.26.1.2(6) states that a “restitution-based assessment” is “assessed and collected the same as any civil tax assessment. As such, interest and the failure to pay … penalty would apply as they would for any other civil tax assessment.”

Holding: The court focused primarily on the statutory language — particularly the grammar — of Sec. 6201(a)(4)(A), with its use of the subjunctive mood: “as if such amount were such tax.” This denotes, the court said, Congress’s intentional expression of a condition contrary to fact. Therefore, rather than making restitution a tax, which would support the imposition of interest or additions to tax, the court found that the provision serves the limited purpose of allowing the IRS to create an account to which restitution payments can be credited as a tax assessment, which is necessary because the IRS generally determines civil tax liability only after any criminal proceedings with respect to a taxpayer are concluded. The court dismissed the IRS’s reliance on the IRM, citing prior holdings that the IRM does not carry the force of law and is not binding on courts.

In denying the IRS’s motion, the Tax Court noted that, while the Service could not assess interest and additions to tax based on a restitution award, it was free to assess them upon the Kleins’ civil tax liabilities once those are finally determined.

• Klein, 149 T.C. No. 15 (2017)

— By Paul Bonner, a JofA senior editor.