Foreign Trust Owner Counters DOJ’s Arguments in Penalty Case

EMILY S. WILSON, AS EXECUTRIX OF THE ESTATE OF JOSEPH A. WILSON,
THE ESTATE OF JOSEPH A. WILSON,
Plaintiffs-Appellees
v.
UNITED STATES,
Defendant-Appellant

IN THE UNITED STATES COURT OF
APPEALS FOR THE SECOND CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK (No. 2:19-cv-05037-BMC)

BRIEF FOR THE APPELLEES

Robert M. Adler
Nossaman LLP
1401 New York Ave., NW
Suite 800
Washington, D.C. 20005
202-887-1428

Gary Redish
Michael Cohen
Winne Banta, Basralian & Kahn, P.C.
21 Main St., Court Plaza So. — W. Wing
Hackensack, NJ 07601
201-487-3800

Attorneys for Appellees

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TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

GLOSSARY

STATEMENT OF JURISDICTION

STANDARD OF REVIEW

STATEMENT OF THE ISSUES

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

CONCLUSION

CERTIFICATE OF COMPLIANCE

STATUTORY APPENDIX

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Adler v. Comm'r, 330 F.2d 91 (9th Cir. 1964)

Berkshire Hathaway Inc. v. United States, 802 F.2d 429 (Fed. Cir. 1986)

Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1998)

Bradley v. United States, 817 F.2d 1400 (9th Cir. 1987)

Christensen v. Qwest Pension Plan, 462 F.3d 913 (8th Cir. 2006)

Cmty. Health Ctr. v. Wilson-Coker, 311 F.3d 132 (2d Cir. 2002)

Comm'r of Internal Revenue v. Engle, 464 U.S. 206 (1984)

Comm'r v. Acker, 361 U.S. 87 (1959)

Donaldson v. United States, 400 U.S. 517 (1971)

Downey v. Adloox, Inc., 789 F. App'x 903 (2d. Cir 2019)

Esden v. Bank of Bos., 229 F.3d 154 (2d Cir. 2000)

Exxon Mobil Corp. v. Comm'r, 689 F.3d 191 (2d. Cir. 2012)

Gould v. Gould, 25 U.S. 151 (1917)

Guild v. Comm'r, 543 F.2d 425 (2d Cir. 1976)

Hall v. U.S., 566 U.S. 506 (2012)

Local 705 Int'l Bhd. Of Teamsters v. Daniel, 439 U.S. 551 (1979)

Long Island Care At Home, Ltd. v. Coke, 551 U.S. 158 (2007)

Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011)

Estate of McLendon v. Comm'r, 135 F.3d 1017 (5th Cir. 1998)

Nathel v. Comm'r, 615 F.3d 83 (2d. Cir. 2010)

In re New York Times SEC Servs Inc., 371 F.3d 68 (2d Cir. 2004)

Pender Peanut Corp. v. United States, 20 Cl. Ct. 447 (1990)

Railway Labor Executives' Association v. Interstate Comm., 735 F.2d. 691 (2d. Cir. 1984)

Rand v. Comm'r, 141 TC 376 (2013)

Ransom v. FIA Card Servs. N.A., 562 U.S. 61 (2011)

Rauenhorst v. Comm'r, 119 T.C. 157 (T.C. 2002)

Salazar, et al. v. Comm'r of Internal Revenue, 338 F. App'x 75 (2d. Cir 2009)

Skidmore v. Swift & Co., 323 U.S. 134 (1944)

U.S. v. Marshall, 798 F.3d 296 (5th Cir. 2015)

U.S. v. Rutherford, 442 U.S. 554 (1979)

United States v. Frame, 885 F.2d 1119 (3rd Cir. 1989)

United States v. Mead Corp., 533 U.S. 218 (2001)

United States v. Merriam, 263 U.S. 179 (1923)

In re Wiley, 552 B.R. 338 (Bankr. N.D.T. 2016)

Wilson v. United States, 2019 U.S. Dist. LEXIS 199902 (E.D.N.Y. Nov. 17, 2019)

Wong v. Doar, 571 F.3d 247 (2d Cir. 2009)

In re WorldCom, Inc. 723 F.3d 346 (2d Cir. 2013)

Statutes

28 U.S.C. §1291

I.R.C. 6677(b)(2) and (c)(2)

I.R.C. §294(d)(1)(a)

I.R.C. §294(d)(2)

I.R.C. §671

I.R.C. §6048

I.R.C. §6048(a)

I.R.C. §6048(b)

I.R.C. §6048(b)(1)

I.R.C. §6048(b)(1)(A)

I.R.C. §6048(b)'s

I.R.C. §6048(c)

I.R.C. §6048(c)(1)

I.R.C. §6048(c)(2)

I.R.C. § 6662

I.R.C. §6677

I.R.C. §6677(a)

I.R.C. §6677(a) and (c)(3)

I.R.C. §6677(b)

I.R.C. §6677(b)(2) and (c)(2)

I.R.C. §6677(c)(2)

I.R.C. §6677(d)

I.R.C. §7803(a)(2)(A)

I.R.C. §6048

I.R.C. §6677

Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat 71 (2010)

Internal Revenue Code §6677(b)(2)

Pub.L. 87-834, § 7(f), Oct. 16, 1962, 76 Stat. 987

Pub.L. 87-834, § 7(g), Oct. 16, 1962, 76 Stat. 988

Pub.L. 91-172, Title I, § 101(j) (53), Dec. 30, 1969, 83 Stat. 531

Pub.L. 93-406, Title II, § 1016(a) (21), Sept. 2, 1974, 88 Stat. 931

Pub.L. 94-455, Title X, § 1013(d) (1), (e) (3), (4), Title XIX, § 1906(b) (13) (A), Oct. 4, 1976, 90 Stat. 1616, 1834

Pub.L. 94-455, Title X, § 1013(d) (2), Oct. 4, 1976, 90 Stat. 1616

Pub.L. 97-248, Title III, § 341(b), Sept. 3, 1982, 96 Stat. 635

Pub.L. 104-188, Title I, § 1901(a), Aug. 20, 1996, 110 Stat. 1904

Pub.L. 104-188, Title I, § 1901(b), Aug. 20, 1996, 110 Stat. 1907

Pub.L. 105-34, Title X, § 1027(b), Title XVI, § 1601(i)(1), Aug. 5, 1997, 111 Stat. 926, 1092

Pub.L. 111-147, Title V, § 534(a), Mar. 18, 2010, 124 Stat. 114

Pub.L. 111-147, Title V, § 535(a), Mar. 18, 2010, 124 Stat. 115

Small Business Job Protection Act of 1996, Pub. L. No, 104-188, 110 Stat 1755 (1996)

Other Authorities

I.R.S., Prior Year Forms and Instructions, https://www.irs.gov/forms-pubs/prior-year

Chief Counsel Advice Memorandum 201150029

Chief Counsel Notice C-C-2003-014, 2003 WL 24016799 (May 8, 2003)

Fed. R. App. P. 27(d)(2) and 32(f)

Fed. R. App. P. 27(d)(2)(A) and 32(c)(1)

Fed. R. App. P. 32(a)(5)

Fed. R. App. P. 32(a)(6)

Policy Statements on the Tax Regulatory Process (Mar. 5, 2019), available at https://home.treasury.gov/system/files/131/Policy-Statement-on-the-Tax-Regulatory-Process-3-4-19.pdf

Rev. Rul. 75-267, 1975 2 C.B. 254, 1975

Tax Ct. Memo LEXIS 311

Treas. Reg. §1.671-2(b)

GLOSSARY

The Estate	The Estate of Joseph A. Wilson
Government	United States Government
I.R.C.	Internal Revenue Code (26 U.S.C.)
I.R.S.	Internal Revenue Service
IRM	Internal Revenue Manual
Taxpayer	Joseph A. Wilson
The Trust	The Perfect Partner Trust

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STATEMENT OF JURISDICTION

In the proceedings before the U.S. District Court for the Eastern District of New York (Judge Brian M. Cogan), the Court granted partial summary judgment for the Plaintiffs. It held that the failure of the taxpayer, Joseph A. Wilson (the “Taxpayer” or “Mr. Wilson”), to timely file the 2007 Internal Revenue Service (“I.R.S.”) Form 3520, reporting the distributions in that year from a foreign grantor trust, the Perfect Partner Trust (the “Trust”), was subject to the 5% penalty provision in Internal Revenue Code (“I.R.C.”) §6677(b)(2). Under I.R.C. §6677(c)(2), the penalty was 5% of the Trust's year-end account balances. The District Court's decision has been reported as Wilson v. United States, 2019 U.S. Dist. LEXIS 199902 (E.D.N.Y. Nov. 17, 2019).

The parties thereafter stipulated that the calendar year 2007 year-end balances for the Trust were “zero.” (JA 188-191). The District Court proceeded to enter judgment for the Plaintiffs. (JA 192). The judgment provided that the I.R.S. should make a full refund to the Plaintiffs of the $3,221,183 penalty previously paid to the I.R.S., together with statutory interest. (JA 192). This constituted a final appealable Order. On February 14, 2020, the Government timely filed its notice of appeal (JA 193).

This Court has proper jurisdiction of this Appeal under 28 U.S.C. §1291.

STANDARD OF REVIEW

This Court's review of the District Court's grant of summary judgment is de novo. See Downey v. Adloox, Inc., 789 F. App'x 903, 905 (2d. Cir 2019).

STATEMENT OF THE ISSUES

Mr. Wilson was the owner of the Trust. The Trust was a grantor trust, so that the owner was taxable on the Trust's income. As a result this treatment, as the owner of a grantor trust, the income of the Trust was included in Mr. Wilson's taxable income regardless of whether the Trust made distributions to him. I.R.C. §671. The Trust itself was ignored for tax purposes¹. See Treas. Reg. §1.671-2(b); see also Rev. Rul. 75-267, 1975 — 2 C.B 254, 1975 IRB Lexis 219.

In its decision granting partial summary judgment to the Plaintiffs, the District Court stated (as the Plaintiffs acknowledged throughout) that Mr. Wilson did not timely comply with I.R.C. §6048(b)'s requirement to timely file Form 3520 for 2007. The Court held that this failure resulted in a penalty, under I.R.C. §6677(b)(2) and (c)(2), of 5% of the 2007 year-end account balances of the Trust. The parties proceeded to stipulate that the Trust had “zero” balances in its accounts at that time. (JA 188). Accordingly, the penalty was “zero.”

The issue presented is whether, as the District Court held, Mr. Wilson was required, as the Trust owner, to timely file Form 3520 in 2007. Assuming that to be the case, Form 3520, together with Form 3520-A or a “substitute” Form 3520-A would have provided the I.R.S. with all of the requisite information pertaining to the Trust's distributions during that year.

The Government, in attempting to prevail in its Appeal, has created a novel and unsupportable position that there was no requirement in 2007 for Mr. Wilson, as the owner of the Trust, to file the annual Form 3520. Instead, the Government contends that Mr. Wilson's only filing obligation (in addition to ensuring that the Trust filed Form 3520-A) was to file Form 3520 as the trust beneficiary.² Because the 2007 Form 3520 was not timely filed, the Government asserts that Mr. Wilson violated I.R.C. §6048(c) (which pertains to beneficiaries — not owners); and therefore, the appropriate penalty was 35% of the amount distributed under provided by I.R.C. §6677(a) and (c)(3).

By taking this position, the Government is attempting to avoid the real issue presented herein — whether, when a single person is both owner and beneficiary, the reporting obligation falls on that person as owner under I.R.C. §6048(b) or as beneficiary under I.R.C. §6048(c) and, therefore, whether the penalty in this case is 5% of the year-end account balances under I.R.C. §6677(b)(2) and (c)(2) or 35% of the distribution under I.R.C. §6677(a) and (c)(3). The Government must avoid this issue given its acknowledgement in this Appeal that when there is an ambiguous provision in a tax statute, such an ambiguity must be resolved in favor of the taxpayer.

As set forth below, the Government's positions are meritless. Its effort to ignore the clear and well understood requirement that owners of grantor trusts must file an annual Form 3520 is not supportable.

STATEMENT OF THE CASE

A. Factual Background

The factual background in this case is not in dispute. As stated by the District Court in its decision, as alleged in the complaint, Mr. Wilson established the Trust in 2003 as the sole grantor. Wilson, 2019 U.S. Dist. LEXIS 199902 at *1-2. He was also its sole beneficiary. Id. at *2. The singular purpose of the Trust was to “place assets beyond the reach of his then-wife, who he had reason to believe was preparing to file a divorce action against him.” Id. She, in fact, later did. Id. Mr. Wilson funded the Trust with approximately $9 million in U.S. Treasury bills, accruing annual interest up to 5% or less. Id. These funds have previously been taxed.

In 2007, upon conclusion of the divorce proceedings, Mr. Wilson terminated the Trust and transferred its assets — at that point some $9,203,381 — back to his bank accounts in the United States. Id.

Mr. Wilson was late in filing various I.R.S. information returns pertaining to the Trust and its activities for calendar years 2005-2007. In addition to income tax reporting and payment requirements, there were two types of annual information returns that the I.R.S. required to be filed.

The first return was Form 3520 which is an annual return to be filed by the owner of a foreign trust reporting the activities of the trust for the year including its Part II. Similarly, a beneficiary — who is not also an owner of the trust — is required to file Form 3520 and provide the information requested in its Part III for trust beneficiaries. The second was an annual Form 3520-A which the trust itself must file. The owner of the trust is required by I.R.C. §6048(b)(1) to “ensure” its filing. If the Trust did not timely file this form, the owner was required to prepare and file, together with Form 3520, a “substitute” Form 3520-A which contained the same information. Form 3520-A or its substitute provides the I.R.S. with the same requisite information pertaining to distributions made by the trust during the year as Part III of Form 3520 requires to be provided by beneficiaries. As the Government acknowledges, “The substitute Form 3520-A must report all distributions . . .” See Brief, page 48 n.20.

For calendar years 2003-2004, the required annual information returns (Forms 3520 and 3520-A) were timely filed with the I.R.S. (Cmpl. ¶ 11) (JA 8). All pertinent information was provided in these returns to the I.R.S., including a copy of the trust instrument itself. Id.

For 2005-2007, these information returns were not timely filed. (Cmpl. ¶ 11) (JA 8). The I.R.S. assessed penalties for the late filing of Forms 3520-A at the statutory rate of 5% of the year-end account balances of the Trust, pursuant to I.R.C. §6677(b)(2) and (c)(2). These penalties were settled in I.R.S. Appeals. The agreed-upon penalties for 2005 and 2006, promptly paid by Mr. Wilson, were $235,358 and $239,447, respectively, $474,805 in total³. These were obviously significant penalties. Mr. Wilson paid a heavy price for his late I.R.S. filings. Mr. Wilson did not walk away scot-free, as the Government argues, asserting that if no penalty were imposed for Mr. Wilson's late-filing of Form 3520, this would be an “absurd” result. Brief, page 40.

The I.R.S. originally assessed a penalty of $478,895 for the late filing of Form 3520-A for calendar year 2007. However, the I.R.S. then conceded that no penalty was due for the late filing of this return, given that the 2007 year-end account balances of the Trust were “zero.” I.R.S. Report Transmittal dated February 2, 2015. (SA Exhibit B, pages 6-7). Therefore, pursuant to I.R.C. §6677(c)(2), no penalty was imposed for 2007.

Despite the resolution of the other penalties for 2005-2007,, the I.R.S. continued to assert that Mr. Wilson was liable for the 35% penalty imposed for the late filing of Form 3520 for 2007. Mr. Wilson steadfastly took the positon that the I.R.S. was wrong — and that the proper penalty should be 5%, pursuant to I.R.C. 6677(b)(2) and (c)(2), for his failure to timely file Form 3520. Not being able to come to an agreement on this issue, a Claim for Refund was filed and after six months had elapsed, the Plaintiffs filed their lawsuit.

B. The District's Court Decision

The District Court held that Mr. Wilson, as the owner of the Trust, was required, under I.R.C. §6048(b), to timely file Form 3520 for calendar year 2007 reporting the distributions he received as the trust owner not as the beneficiary⁴. This Court went on to find that Mr. Wilson's failure to timely file Form 3520 meant that he was liable for a 5% penalty. Mr. Wilson was liable for a 5% penalty under I.R.C. §6677(b). Wilson, 2019 U.S. Dist. LEXIS 199902 at *16. In so holding, the Court rejected the Government's position that Mr. Wilson would have been liable for both a 5% penalty (as the trust owner) and a 35% penalty (as the trust beneficiary). Id. at *16-17. The Court stated that a single Form 3520 was required to be filed, and as such, this could not lead to two penalties being imposed — one for the owner and another for the beneficiary. Id.

The Court proceeded to hold that the “plain language” of I.R.C. §6677 provided that a trust owner could not be penalized as a beneficiary for violating the requirements of I.R.C. §6048(b) (“a plain language reading of 26 U.S.C. §6677 counsels that a trust owner cannot be penalized as a beneficiary for violating a provision for 26 U.S.C. §6048(b)”). Wilson, 2019 U.S. Dist. LEXIS 199902 at *17. The Court then referenced the “clear instruction[s]” in I.R.C. §6677(b)(2) that 5% should be substituted for 35%. The Court stated that this language was: “. . . not to choose between the two or to simply apply a 5% assessment without reference to an otherwise applicable penalty.” Id. at *17. Therefore, according to the Court, the statute mandated that 5% replace the 35% penalty whenever there is a “case of a return required under Section 6048(b).” Id.

The Court also held that if the foregoing analysis was not “inescapably evident” and an ambiguity existed in the statute as to whether a 5% (owner) or a 35% (beneficiary) penalty applied, such an ambiguity must be construed against the Government and in favor of the citizen citing, Gould v. Gould, 25 U.S. 151, 153 (1917). Id. at *17-18.

The Court further stated that “. . . aspects of Form 3520 itself imply that a foreign trust owner, who receives distributions from his own trust, should be treated as an owner — and not as a beneficiary — for failures related to the Form's filing. Id. at *19. The Court referenced Part III of the instructions for the 2007 Form 3520 which stated that if the information requested in Part II (pertaining to the owner), was provided and the trust had filed a Form 3520-A, then the taxpayer should “. . . not separately disclose distributions again in Part III.” Id. The Court further found that Part II was “only to be filled out by the 'U.S. Owner of a Foreign Trust and Form 3520-A is the 'Annual Information Return Of Foreign Trust With A U.S. Owner.'” Id. The Court proceeded to find: “. . . if a trust owner has received a distribution from his trust and thereafter reported the distribution in his 3520-A filing, he is not required to otherwise report the distribution on Form 3520.” Id. The Court further stated that: “. . . it would appear that Form 3520 disregards the beneficiary status of the trust owner in favor of his owner status at least for the limited purpose of tracking distributions to the owner.” Id.

The Court held that for Mr. Wilson, as the trust owner, the appropriate penalty, pursuant to I.R.C. §6677(c)(2), was 5% of the “gross reportable amount.” Id. The “gross reportable amount” was the amount of the trust's assets at the close of the year. Id. As stated by the District Court, although the language in I.R.C. §6677(a) was primarily concerned with subsequent late fees, it nonetheless provided (in its 2010 amendment) that the aggregate of the penalties was not to exceed “gross reportable amount”. The “gross reportable amount, under I.R.C. §6677(c)(2) was “the gross value . . . of the trust's assets at the end of the year treated as owned by the United States person . . .” Wilson, 2019 U.S. Dist. LEXIS 199902 at *18. As previously stated, the parties stipulated that the Trust's year-end assets were “zero.” This Court proceeded to enter judgment for the Plaintiffs in the full amount of the claimed tax refund, together with statutory interest. (JA 192).

SUMMARY OF ARGUMENT

Mr. Wilson, as the owner of the grantor trust, was required, under I.R.C. §6048(b), to file Form 3520. As the District Court held, Mr. Wilson was also required to “ensure” that the Trust filed Form 3520-A or a “substitute” Form 3520-A, if the Trust had not filed that return. These filings would have provided the I.R.S. with all of the requisite information pertaining to the distributions made to Mr. Wilson in 2007. He was not required to otherwise report the distributions in Part III on Form 3520, as the beneficiary.

As the District Court correctly held, the 5% penalty applicable to a violation of I.R.C. §6048(b) applied. Pursuant to I.R.C. §6677(c)(2), the 5% penalty was based on the amount of the Trust's account balances at the close of 2007; and, because there were “zero” account balances, no penalty was imposed.

The District Court correctly held that “a plain language reading” of I.R.C. §6677 counseled that Mr. Wilson, as the trust owner, could not be penalized as beneficiary for violating a provision for 26 U.S.C. §6048(b). In any event, even should an ambiguity exist (Mr. Wilson believes that it did not), then as held by this Court and other Circuit Courts, as well as by the Supreme Court, this ambiguity must be resolved in favor of Mr. Wilson as the taxpayer particularly since the tax penalty statute is involved. As set forth infra, the Government agrees.

The Government's position that in 2007, there was no requirement for Mr. Wilson, as the trust owner to file an annual Form 3520, is novel at best; and, runs counter to Form 3520 (and its instructions), as well as the to the I.R.S. frequently stated position that these annual returns were required to be filed by the trust owner.

The District Court's decision should be affirmed.

I. THE STATUTORY SCHEME

I.R.C. §6677(a) provides for a civil penalty if any return required to be filed by I.R.C. §6048 is not timely filed⁵. I.R.C. §6677(b)(2)⁶ provides that, in the case of a return required to be filed under I.RC. §6048(b)(2), the penalty is 5% rather than 35%. If the taxpayer demonstrates that the failure to timely file the return was due to “reasonable cause,” no penalty is due. I.R.C. §6677(d).

In 2007, the year in question, I.R.C. §6048(b)(1)(A) provided that if at any time during a taxable year of a United States person, that person was treated as the “owner of any portion of a foreign trust,” that person “. . . shall be responsible to ensure that — (A) such trust makes a return for such year which sets forth a full and complete accounting of all trust activities and operations for the year . . . and such other information as the Secretary may prescribe . . .”⁷

I.R.C. §6048(c)(1) provided that if any United States person received, during any taxable year, a distribution from a foreign trust, then that person was to file a return reporting the aggregate amount of the distributions received as well as “such other information as the Secretary may prescribe.”

Congress amended §6048(b) in 2010. The amended statute, I.R.C. §6048(b)(1), provided that a United States person, treated as the owner of a foreign trust or any portion thereof, “shall submit such information as the Secretary may prescribe with respect to such trust for such year”⁸. The statute continued to require that the owner was to “ensure” that the trust filed an annual tax return reporting trust activities for the year. I.R.C. §6048(c) (pertaining to beneficiary reporting requirements) was not amended.

II. THE GOVERNMENT REPEATEDLY MISSTATES THE REPORTING REQUIREMENTS FOR THE OWNER OF A FOREIGN TRUST AND THE PENALTY ATTACHED TO A LATE FILING OF THE REQUIRED RETURN

Throughout its Brief, whenever the Government recites the reporting requirements for a grantor trust, the Government omits the requirement involved herein — the required annual filing by the trust owner of Form 3520. The Government does not affirmatively state its position that the Trust owner is not required to file Form 3520 — it is a matter of omission. The Government repeatedly sets out the reporting requirements but does not include the requirement that trust owners file annual Forms 3520.

The Government contends that there were “three distinct reporting requirements” for U.S. persons' transactions with foreign trusts: (1) reporting a U.S. person's transfer of property to a foreign trust; (2) requiring a U.S. owner to “ensure” filing of an annual trust return reporting the trust's activities; and (3) reporting a U.S. person's receipt of distributions from the trust. See Brief pages 6-7, 9, 16, n.9, and 24-25.

What becomes apparent is that by omission of the trust owner's requirement to file an annual Form 3520, the Government's position is that, on an annual basis, the only reporting obligation of a trust owner, pursuant to I.R.C. §6048(b), was to “ensure” that the trust filed Form 3520-A. See Brief, page 19 (“. . . that U.S. owners ensure that the foreign trust files an annual return reporting the trust's activities, § 6048(b) . . .”; Brief, page 16, n.9 (“In fact, taxpayer was required to file two different returns in 2007: as the owner of the Trust, he was responsible for ensuring that the trust filed Form 3520-A, and as the recipient of a distribution from the trust, he was required to file Form 3520.”).

The Government deliberately omits the trust owner's annual requirement to file Form 3520. In an effort to avoid the fact that Form 3520, and its detailed instructions, required its annual filing by the trust owner, the Government attempts to dismiss this by contending that the instructions for Form 3520 (which specifically stated that the trust owner was required to file an annual Form 3520) should be ignored and that they “. . . cannot override the plain text of the relevant statutes” and “. . . taxpayers cannot rely on Internal Revenue Service instructions to justify a reporting position otherwise inconsistent with controlling statutory provisions.” Brief, pages 48-49⁹ (citation omitted). However, these instructions are consistent with I.R.C. §6048, particularly given I.R.S. frequently stated position that Congress authorized it to require the filing by trust owners of annual Forms 3520. The I.R.S. cannot claim that Form 3520 is required and that it is authorized to require Form 3520 when convenient, then disclaim that requirement here, and effectively claim that the I.R.S. violated I.R.C. §6048 by requiring Form 3520 be filed annually, because, in these particular circumstances, this might result in one penalty applying and not the other.

To provide even superficial appeal to its position that trust owners were not required to file Form 3520 annually, the Government takes the next step — and asserts that the penalty provision under I.R.C. §6677(b)(2) and (c)(2) pertaining to a violation of I.R.C. §6048(b) only pertains to a late filing of Form 3520-A. Obviously omitted was any recognition that the 5% penalty provision under this statute also applied to a late filing by the trust owner of Form 3520. Brief, page 3 (“an owner who fails to ensure that its foreign trust meets annual reporting requirements is subject to a penalty equal to 5% . . .”). See also, Brief, page 9 (“If the trust's U.S. owner fails to ensure the trust meets its reporting obligations under §6048(b) . . .”)

III. AN ANNUAL FORM 3520 WAS REQUIRED TO BE FILED BY A TRUST OWNER

A. The I.R.S. has clearly stated that it had been authorized by Congress, prior to the 2010 amendment of I.R.C. §6048(b), to require trust owners to file annual Forms 3520

As stated, the Government's position herein is that I.R.C. §6048(b), in effect in 2007, did not require the U.S. owner of a grantor trust to file an annual information return. Instead, the Government contends that in 2007, the only obligation of the grantor trust owner was to “ensure” that the trust itself filed an annual information return (Form 3520-A). Importantly, beginning as early as 1997, the I.R.S. has never taken this position in any of its publications or pronouncements.

In addition to Form 3520 and its instructions, as early as 2003, the I.R.S. made it clear that the trust owner was required to file an annual Form 3520. See, eNotice 2003 — 25, 2003 IRB LEXIS 144, which stated in pertinent part:

Internal Revenue I.R.C. §6048 requires information reporting with respect to certain foreign trusts. Persons subject to these information reporting rules must file Form 3520 . . . Form 3520 generally is filed on an annual basis on or before the due date for the U.S. owner's or U.S. beneficiary's income tax return.

See SA, Exhibit B, pages 11-12.

Further, the I.R.S. has repeatedly stated that, prior to the 2010 amendment of I.R.C. §6048(b), it interpreted this Code section as providing it with authority to require the grantor trusts to file annual Forms 3520. These were statements which repeatedly appeared in the Internal Revenue Manual (“IRM”¹⁰).¹¹.

IRM 3.21.19.10, 2012 WL 7425702 (2012) (as in effect December 2012) stated, in pertinent part, in para. no. 2:

Note: Beginning with 1997, Form 3520 and its instructions required U.S. Owners of a foreign trust to complete Part II of Form 3520 even if they did not have any transactions with the trust that were reportable on Parts I or III. However, this requirement was not explicitly stated in the Code. Recent legislation, effective for tax years beginning after March 18, 2010, now codifies this requirement that a U.S. owner of a foreign trust must file a Form 3520 every year.

Reminder: Inform the U.S. Owner that they must complete the 2^nd checkbox on page 1 of Form 3520, and Part II of the form.

See SA Exhibit F, pages 21-23.

This language was repeated verbatim in IRM 3.21.19.11 (Jan. 1, 2015) (as in effect December 2014 (page 2). See SA, Exhibit G, pages 25-27. The important “Note” language was once again repeated in IRM 3.21.19.12 (Nov. 10, 2015) (page 2) (as in effect December 2016). See SA, Exhibit H, pages 29-31¹².

I.R.S. Notice 97-34 is the only document proffered by the Government in support of its position that the trust owner was not required to file an annual Form 3520. See Brief, page 7-8, 16, n.9, 45-46. However, even that publication recognized that there was a requirement for a trust owner to file an annual Form 3520. It stated, in pertinent part (page 13): “The authorization of agent agreement must be executed by the foreign trust and the U.S. agent prior to the due date of the U.S. owner's Form 3520 for the taxable year that he or she is considered the owner of the trust.”

B. I.R.S. Forms 3520 and 3520-A and their respective instructions clearly state that the owner of a foreign grantor trust is required to annually file Form 3520

Beginning in 1997, the I.R.S. fully implemented its understanding that Congress had authorized it to require owners of grantor trusts to file annual information forms. Forms 3520 (and their instructions) were published by the I.R.S. beginning in 1997. They required trust owners to annually file Forms

3520.¹³ Forms 3520 and their instructions for 1997-2006 appear in the Supplemental Appendix as Exhibits J-S. See also SA, pages 54-242. See also, I.R.S., Prior Year Forms and Instructions, https://www.irs.gov/forms-pubs/prior-year.

Beginning in 1997, the I.R.S. instructions to Form 3520 stated that the trust owner was required to file the annual information return. See Instructions, page 1, “Who Must File,” para. no. 2. (“File Form 3520 if . . . you are a U.S. person who, during the current year is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules). See SA, Exhibits J, page 60..

Form 3520 instructed that if a person was the “U.S. owner of all or any portion of a foreign trust at any time during the tax year,” that person was instructed to check the second box at the top of the first page of the form as well as the other required identifying information on that page. The form further specified that by checking this box, the individual was to “see the instructions for Part II.” Part II then required that the U.S. owner of a foreign trust provide the names and addresses (as well as other identifying information) for other owners of the trust. Line 22 asked whether the trust had filed Form 3520-A for the current year; and, if the answer was “Yes,” a copy of the Foreign Grantor Trust Owner Statement was to be attached. If the answer was “No,” then the owner was required to complete and attach a “substitute” Form 3520-A for the foreign trust.

Form 3520-A and its instructions, required the disclosure of the same information which was otherwise required of a trust beneficiary to provide in completing Part III of Form 3520 designated as “Distributions To a U.S. Person From a Foreign Trust During the Current Tax Year.” (JA 125).

Line 5 of Form 3520-A asked: “Did the trust transfer any property . . . to another person) . . . during the tax year?” If the answer was “Yes,” then a statement was to be attached. (JA 133). The instructions to Form 3520-A (pages 3-4) required that this statement include the name of the U.S. taxpayer (and identification number) to whom the property was transferred, a description of the property transferred and its estimated fair market value. (JA 130-131). Further, Line 17b of Form 3520-A requested information on “Distributions to U.S. Owners,” including the date of distribution(s) and the fair market value. Line 17c requested that the trust provide this information on distributions to U.S. beneficiaries.

The fact that the I.R.S. specified separate reporting for U.S. owners and for U.S. beneficiaries is significant to the issues presented herein. The I.R.S. return and its instructions evidence that the I.R.S. did not view a distribution to the trust owner to be reported as a distribution to a trust beneficiary. They further evidence that the I.R.S. did not view a distribution made to a trust owner as falling within the reporting requirements I.R.C. §6048(c) for beneficiaries.

The I.R.S.' view that distributions to the owner should be reported as the owner — and not the beneficiary — is further evidenced by the I.R.S. instructions to Part III of Form 3520 (page 6). (JA 114). They stated:

If you received an amount from a portion of a foreign trust of which you are treated as the owner and you have correctly reported any information required on Part II and the trust has filed a Form 3520-A with the I.R.S. do not separately disclose distributions again in Part III¹⁴.¹⁵

IV. THE GOVERNMENT SHOULD NOT BE PERMITTED TO IGNORE OR WALK-BACK ITS LONG STANDING POSITION THAT AN OWNER OF A FOREIGN TRUST IS REQUIRED TO FILE AN ANNUAL FORM 3520.

The Government should not be permitted to ignore its frequently stated requirement, beginning in 1997, that a trust owner is required to file an annual Form 3520 and its public statements that it had been authorized by Congress to require this filing.

A. The Government cannot be allowed to litigate against the I.R.S.' publicly stated positions

The Government's position herein runs counter to the I.R.S.' long established practice to require annual Forms 3520 filed by trust owners as well as its statements evidencing that it believed Congress properly authorized the I.R.S. to require the annual filing of these Forms. Yet, the I.R.S. has never withdrawn or modified its position that annual Forms 3520 must be filed by trust owners. As held in Estate of McLendon v. Comm'r, 135 F.3d 1017, 1024-1025 (5^th Cir. 1998), rev'g T.C. Memo. 1996-307, 1996 Tax Ct. Memo LEXIS 311 the I.R.S. is bound by its own revenue rulings and cannot ignore them in litigation. See also, Rauenhorst v. Comm'r, 119 T.C. 157, 173 (T.C. 2002). Following Rauenhorst, the I.R.S. Office of Chief Counsel issued a notice stating that says policy is not to take litigating positions which are inconsistent with the I.R.S. published guidance. Chief Counsel Notice C-C-2003-014, 2003 WL 24016799 (May 8, 2003). In March 2019, the Treasure Department and the I.R.S. issued a policy statement providing that the I.R.S. will not take positions inconsistent with its sub-regulatory guidance. This includes revenue rulings, revenue procedures, notices and announcements. See, Policy Statements on the Tax Regulatory Process (Mar. 5, 2019), available at https://home.treasury.gov/system/files/131/Policy-Statement-on-the-Tax-Regulatory-Process-3-4-19.pdf

Although no revenue ruling is involved in this case, the point nonetheless stands: the I.R.S. should not be allowed to litigate against its previously stated positions solely in order to attempt to prevail in this litigation.

B. The I.R.S. interpretation of I.R.C. §6048(b), that it was authorized to require trust owners to file an annual Form 3520 is entitled to Chevron step 2 deference; or, failing that it is entitled to Skidmore deference

The I.R.S.' interpretation is entitled to Chevron step 2 deference. “[A]dministrative implementation of a . . . statutory provision qualifies for Chevron deference when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” United States v. Mead Corp., 533 U.S. 218, 226-27 (2001). The I.R.S. has been charged with the broad responsibility to prescribe “. . . all needful rules and regulations” for the enforcement of tax laws. See Comm'r of Internal Revenue v. Engle, 464 U.S. 206, 226-27 (1984); see also I.R.C. §7803(a)(2)(A) (“The Commissioner [of the I.R.S.] shall have such duties and powers as the Secretary [of the Treasury] may prescribe, including the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party.”); Donaldson v. United States, 400 U.S. 517, 534 (1971) (“We bear in mind that the Internal Revenue Service is organized to carry out the broad responsibilities of the Secretary of the Treasury . . . for the administration and enforcement of the internal revenue laws.”). As the agency administering the I.R.C., the I.R.S. enjoys “primary interpretational authority.” Cmty. Health Ctr. v. Wilson-Coker, 311 F.3d 132, 138 (2d Cir. 2002) (quoting Mead Corp., 533 U.S. at 230, n.11).

Pursuant to Chevron step two deference, the Court should not disturb the I.R.S.' interpretation of the authority granted to it by Congress unless it is “arbitrary or capricious, . . . or manifestly contrary to the statute.” Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 534 (2011). There is no such inconsistency herein. The I.R.S. reasonably interpreted the “as the Secretary may prescribe” language appearing in I.R.C. §6048(b) as granting it this authority — and it proceeded to require that trust owners annually file Forms 3520.

The Supreme Court has plainly stated that an agency's authority to administer a congressionally created program “. . . necessarily requires the formulation of policy and the making of rules to fill any gap left implicitly or explicitly, by Congress” and when an agency fills such a gap reasonably, and in accordance with other applicable requirements, the Courts accept the result as legally binding. Long Island Care At Home, Ltd. v. Coke, 551 U.S. 158, 165 (2007), citing Chevron 467 U.S. at 843.

In any event, Skidmore deference should be given to the I.R.S.' interpretation of I.R.C. §6048(b). In Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), the Court held that: “. . . the rulings interpretations and opinions of the Administrator under this Act, while not controlling upon the Courts by reason of their authority, do constitute a body of experience and informed judgment to which Courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” Similarly, in Local 705 Int'l Bhd. Of Teamsters v. Daniel, 439 U.S. 551 (1979), the Court stated at 556 n.20: “It is a common place in our jurisprudence that an administrative agency's consistent, long standing interpretation of the statute under which it operates is entitled to considerable weight.”

Decisions by this Court have similarly held. See Wong v. Doar, 571 F.3d 247, 260 (2d Cir. 2009) (even relatively informal interpretations warrant respectful consideration if given by a federal agency which “. . . administers a large complex regulatory scheme . . .”); In re New York Times SEC Servs Inc., 371 F.3d 68, 82-83 (2d Cir. 2004) (considerable weight is given to an agency's consistent, long-standing interpretation of the statute under which it operates); Esden v. Bank of Bos., 229 F.3d 154, 169 (2d Cir. 2000) (applying deference to I.R.S. notice); see also In re WorldCom, Inc. 723 F.3d 346, 358 (2d Cir. 2013) (I.R.S. rulings may be entitled to deference); Nathel v. Comm'r, 615 F.3d 83, 93 (2d. Cir. 2010) (general counsel memoranda may be entitled to deference).

The Government's newly minted and unsupported interpretation of I.R.C. §6048(b) is not entitled to any deference by this Court. As held in U.S. v. Rutherford, 442 U.S. 554, 553 (1979), once an agency's construction of a statute has been fully brought to the attention of the public and the Congress, and “. . . Congress has not acted to correct any misperception of its statutory objectives”, then “. . . deference is particularly appropriate . . .” See also Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 213 (1998) (“[d]eference to what appears to be nothing more than an agency's convenient litigating position would be entirely inappropriate”).

V. THE DISTRICT COURT CORRECTLY HELD THAT THE APPROPRIATE PENALTY, WHEN FORM 3520 IS NOT TIMELY FILED, IS 5% OF THE TRUST'S YEAR-END ACCOUNT BALANCES

The District Court held that the 5% penalty for failure to timely comply with the filing requirement under I.R.C. §6048(b) is 5% of the “gross reportable amount.” The 5% penalty provision, as applied to the failure of an owner of a foreign trust to timely filed Form 3520, was set out in various I.R.S. publications. In the I.R.S.' Chief Counsel Advice Memorandum 201150029, (2011 I.R.S. CCA LEXIS 254), states at *5-6 that:

If a U.S. person fails to file a Form 3520 when required by Section 6048(b) or a foreign trust that is treated as owned by a U.S. person fails to file Form 3520-A and that U.S. person does not file a substitute Form 3520-A, the U.S. person will owe an initial penalty under Section 6677(b) equal to the greater of $10,000 or 5 percent of the “gross reportable amount”. Here, “gross reportable amount” means the value of the foreign trust's assets at the close of the year treated as owned by the U.S. person. I.R.C.§6677(c)(2). (emphasis supplied).

See SA, Exhibit E, pages 14-19.

The Government incorrectly contends that for there to be no penalty in these circumstances would be an “absurd” result in that this is not what Congress intended. Brief, page 40 and cases cited therein. None of these cases deal with the statutes involved in this case. The 5% penalty on the amount of the trust's assets at year-end, appearing in I.R.C. §6048(c)(2), applies to both the penalty for a trust owner who fails to timely file Form 3520 and the owner's failure to ensure that the trust filed Form 3520-A. Importantly, the Government acknowledges that the appropriate penalty for the late filing of Form 3520-A is “. . . 5 percent of the trust's assets at the end of 2007, which in this case is zero.” Brief, page 28. Given the Government's admission, it cannot be heard to assert that a “zero” penalty for Mr. Wilson's failure to timely file Form 3520 in 2007 is “absurd.” There is no daylight between the two.

In other circumstances, 5% of the trust assets at year-end can be more prohibitive than 5% or even 35% of the distributions which were not timely reported by the beneficiary. For example, if a $100,000 distribution was not timely reported, and the trust's assets at year-end were $10 million, then a 5% penalty (on the trust owner) would amount to $500,000 — five times the amount of the distribution. A 35% penalty, based on the $100,000 distribution, which was not timely reported by the beneficiary, would be $35,000 — a fraction of the penalty imposed on the owner. The Government clearly would not be arguing that this penalty leads to an “absurd” result when a trust owner pays a penalty of $500,000 for a late reported $100,000 distribution.

VI. THE GOVERNMENT'S CONTENTION THAT BOTH A 35% AND A 5% PENALTY CAN BE INDEPENDENTLY ASSESSED IN THESE CIRCUMSTANCES LACKS MERIT

The Government contends that two penalties are applicable herein — a 5% penalty for failure to ensure that the Trust timely Form 3520-A and a 35% penalty for failure to timely file Form 3520 reporting the distributions in 2007. Brief, pages 28, 37. The Government's 5% penalty assertion is based on its position that the only filing requirement in 2007 under I.R.C. § 6048(b) was for the trust owner to “ensure” that the trust timely filed Form 3520-A. Therefore, its position is that a 5% penalty can be asserted for that failure as well as a 35% failure of penalty for the beneficiary's failure to timely file Form 3520.

Indeed, if a beneficiary (who was not a trust owner) does not timely file Form 3520, a 35% penalty can be assessed. And if a Form 3520-A is not timely filed, a 5% penalty can also be assessed against the trust owner. As is apparent, when a trust owner fails to timely file Form 3520, a 5% penalty can be assessed. A 5% penalty can also be assessed against the owner if the Form 3520-A for that year is not timely filed. That situation was initially presented herein, where the I.R.S. originally assessed a 5% penalty for late filing of Form 3520-A for 2007. However, as stated, that penalty was dropped after the I.R.S. accepted the fact that the year-end account balance for the Trust was “zero.”

What is clear is that the I.R.S. cannot assess for the late filing of Form 3520, both a 5% and a 35% penalty against the same person who happens to be the owner and the beneficiary. As the District Court correctly held, a single Form 3520 is involved and two penalties cannot be assessed based on a late filing of one Form. Wilson, 2019 U.S. Dist. LEXIS 199902 at *16-17. Further, the District Court stated: “There is a clear instruction under 26 U.S.C. §6677(b)(2) to 'substitute for 35%, not to choose between the two or to simply apply a 5% assessment without reference to an authorize applicable penalty. Therefore, the statute mandates that the 5% replace the 35% whenever there is a 'case of a return required under section 6048(b)"” (emphasis in original). Wilson, 2019 U.S. Dist. LEXIS 199902 at *17.

The statute itself specifies that only one penalty can be imposed in this situation. I.R.C. §6677(a) provides that a person required to file a return “. . . shall pay a penalty . . .” (emphasis supplied). Moreover, as early as 1996, the Joint Committee on Taxation made it clear that only one penalty can be imposed: “A U.S. owner's failure to provide an annual reporting of trust activities will result in an initial penalty equal to 5 percent of the “gross reportable amount.”” Joint Committee on Taxation, General Explanation of Tax Legislation enacted in the 104^th Congress, JCS-12-96 (December 18, 1996) (emphasis supplied).

The only decision cited by the Government to support its two penalty proposition is In re Wiley, 552 B.R. 338 (Bankr. N.D.T. 2016). Brief, page 29. However, Wiley did not involve a penalty against the owner for failing to timely file Form 3520. Instead, Wiley dealt with a penalty assessed against the owner for failing to timely ensure that the trust filed Form 3520-A, as well as a penalty assessed against the beneficiary pursuant to I.R.C. §6048(c). See Wiley, 552 B.R. 338 at 213, 556.

The Government relies on I.R.S. Chief Counsel Advisory 20120828 to support its argument that separate penalties apply when a taxpayer fails to file Forms 3520 and 3520-A. Brief, page 30. In the first place, this Advisory states (page 2): “This advice may not be used or cited as precedent.” Further, it nowhere states that a 5% penalty can be imposed against the owner for failure to timely file Form 3520 and a 35% penalty can also be assessed against a beneficiary who is a trust owner.

VII. THE GOVERNMENT'S CONTENTION THAT THE DISTRICT COURT REMOVED THE REPORTING REQUIREMENT FOR TRUST DISTRIBUTIONS LACKS MERIT

The Government totally mischaracterizes, or perhaps does not fully understand, the District Court's decision. The Government views this decision as holding that an owner of a foreign trust who received distributions from that trust need not report them. See Brief, page 18 (“. . . which it read as implying that a foreign trust owner who receives distributions from his own trust need not report those distributions.”); Brief, page 21 (“The District Court's reading of the statute improperly nullifies the requirements that taxpayers report transfer to or distributions from a foreign trust and eliminates the penalties for those violations . . .”).

Mr. Wilson has never asserted that there was no reporting obligation for a trust distribution. Similarly, the District Court did not nullify any reporting requirement. Instead, the District Court's decision confirmed that Mr. Wilson, as the owner of the foreign trust was required to file the annual Form 3520. That form, together with the required Form 3520-A, would have provided the I.R.S. with all of the requisite information pertaining to the trust distributions. Wilson, 2019 U.S. Dist. LEXIS 199902 at *16.

VIII. THE SUPREME COURT, AS WELL AS THIS AND OTHER CIRCUIT COURTS, HAVE UNIFORMLY HELD THAT A TAXPAYER CANNOT BE SUBJECTED TO A PENALTY UNLESS THE WORDS OF THE STATUTE PLAINLY IMPOSE A PENALTY, WHICH I.R.C. §6048 CLEARLY DID NOT IN THE CIRCUMSTANCES PRESENTED HEREIN

As stated, Mr. Wilson's position is that the statutory scheme is clear — only a 5% penalty can properly be assessed against him for the late filing of the Form 3520 in question, and that penalty is based on the Trust's year-end account balances which were “zero”.

In any event, should there be any ambiguity, it must be resolved in his favor. The Supreme Court's strongly stated maxim applies: where a statute imposing a tax penalty is not clear as to whether the penalty may be imposed, or on whom it is imposed, the ambiguity must be resolved in the taxpayer's favor¹⁶. Numerous circuit courts have similarly applied this principle in tax and other areas.

In a frequently cited decision, the Supreme Court held in Gould, 245 U.S. at 153:

In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the Government, and in favor of the citizen. (citation omitted)

Gould was followed by the Supreme Court in United States v. Merriam, 263 U.S. 179, 187-188 (1923) (“. . . in statutes levying taxes . . . [i]f the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer”).

Later, in a landmark Supreme Court decision involving the interpretation of a tax penalty statute, Comm'r of Internal Revenue v. Acker, 361 U.S. 87 (1959), the Court reaffirmed this principle. At issue was whether a tax penalty could be asserted under former I.R.C. §294(d)(1)(a) for the failure to file a declaration of estimated income tax and a separate penalty under former I.R.C. §294(d)(2) for the filing of a return that substantially underestimated the tax which was due. The I.R.C. itself did not contain language which indicated whether or not both penalties could be assessed. However, a Treasury Regulation provided that both penalties could be assessed. Relying on that regulation, the I.R.S. asserted both penalties applied. However, the Supreme Court rejected that position, holding that both penalties could not be assessed.

In reaching this conclusion, the Supreme Court did not find any express or necessarily implied language that authorized a penalty for underestimating a tax when no estimated return was filed. Acker, 361 U.S. at 91. The Court proceeded to hold that “[t]he law is settled that 'penal statutes are to be construed strictly'.” Id. (citation omitted). It further held “one 'is not to be subjected to a penalty unless the words of the statute plainly impose it.'” Id. (citation omitted).

Similarly, in the present case, there is no language in I.R.C. §6048(c) which places the reporting requirement for a trust distribution on Mr. Wilson when he was also the trust owner. As in Acker, 361 U.S. at 93-94, the I.R.S.' position herein is “no more than an attempted addition to the statute of something which is not there.”

This Court has similarly held. See Exxon Mobil Corp. v. Comm'r, 689 F.3d 191, 199 (2d. Cir. 2012) (“We are particularly mindful of the longstanding canon of construction that where 'the words [of a tax statute] are doubtful, the doubt must be resolved against the government and in favor of the taxpayer'”) (quoting United States v. Merriam, 263 U.S. at 188).

Decisions from other circuits are consistent with this Circuit. In U.S. v. Marshall, 798 F.3d 296, 318 (5th Cir. 2015), the Court stated: “if 'the words of a tax statute are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.'” Id. (citations omitted). This decision is representative of a host of similar decisions from the Circuits. See, e.g., Bradley v. United States, 817 F.2d 1400, 1402-1403 (9th Cir. 1987) (“[a] tax provision which imposes a penalty is to be construed strictly; a penalty cannot be assessed unless the words of the provision plainly impose it”); Christensen v. Qwest Pension Plan, 462 F.3d 913, 919 (8th Cir. 2006) ('“We agree with the [District Court's decision] that this is a statutory penalty that may not be imposed 'unless the words of the statute plainly impose it'”; citing Acker); United States v. Frame, 885 F.2d 1119, 1142 (3rd Cir. 1989) (“If this charge were an additional penalty imposed by the Secretary, it would be invalid”; quoting from Acker); and Railway Labor Executives' Association v. Interstate Comm., 735 F.2d. 691, 701 n.10 (2d. Cir. 1984): (“If the Congress wishes to impose a tax or a penalty upon a citizen, it must act, not simply talk.”)

Tax Court decisions have also held that ambiguities in tax statutes are to be resolved in favor of a taxpayer when the I.R.S. seeks to impose a penalty. For example, the Tax Court in Rand v. Comm'r, 141 TC 376, 393 (2013), had before it an issue as to whether a penalty should be imposed on a tax return preparer. The Court applied the “rule of lenity,” stating:

The rule of lenity is an 'ancient maxim' that 'is perhaps not much less old than construction itself. It is founded on the tenderness of the law for the rights of individuals; and on the plain principal that the power of punishment is vested in the legislative, not in the judicial department. It is the legislature, not the Court, which is to define a crime, and ordain its punishment' (citation omitted). Thus, under the rule of lenity statutes that impose a penalty are to be construed in favor of the more lenient punishment (citation omitted). And although often considered in the criminal context, the rule of lenity has been applied in the civil context and specifically with regard to civil tax penalties (citing to Acker).

The Tax Court proceeded to hold:

Here, the words of the relevant statutes do not plainly impose a penalty on . . . [b]ecause the penalty is not plainly imposed . . . the rule of lenity further confirms what we have already concluded: that [I.R.C. § 6662] does not impose a penalty . . . Id.

Cases from the Court of Federal Claims have followed the same “strict construction” rule when the Government has attempted to impose a penalty. For example, Pender Peanut Corp. v. United States, 20 Cl. Ct. 447, 453 (1990) involved a penalty imposed by the U.S. Department of Agriculture. The Court stated: “A statute must plainly authorize an agency's power to impose penalties.” (quoting Tiffany v. National Bank of Missouri, 85 U.S. 409, 410 (1874) and Acker). The Court continued: “Consistent with the Supreme Court's mandate, the Claims Court carefully construes language which imposes a penalty:

It is a venerable rule of statutory interpretation that a statute imposing a penalty, 'must receive a strict, that is, a literal construction.' (citation omitted). Id.

Further, the Court of Appeals for the Federal Circuit held in Berkshire Hathaway Inc. v. United States, 802 F.2d 429, 431 n.6 (Fed. Cir. 1986): “We agree with the Claims Court that [I.R.C.] §6655 imposes a penalty and, therefore, the strict construction rule would apply.”

Any ambiguity presented herein as to whether the reporting requirement for a trust distribution falls under I.R.C. §6048(b) or (c) must be resolved in Mr. Wilson's favor the reporting obligation fell on him as the trust owner under I.R.C. §6048(b).

CONCLUSION

For the foregoing reasons, the Appellees respectfully submit that the District Court's decision should be affirmed.

Date: September 28, 2020

Respectfully submitted,

Robert M. Adler
Nossaman LLP
1401 New York Ave.
Suite 800
Washington, D.C. 20005

Gary Redish
Michael Cohen
Winne Banta, Basralian, & Kahn, P.C.
21 Main Street
Court Plaza South — West Wing
Hackensack, NJ 07601

Attorneys for the Appellees, Emily S. Wilson as Executor for the Estate of Joseph A. Wilson and the Estate of Joseph A. Wilson