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Tax Court’s Deficiency Jurisdiction Does Not Cover Some Penalties

MAY 13, 2022

Alberto Aroeste et al. v. Commissioner

DATED MAY 13, 2022
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Alberto Aroeste et al. v. Commissioner

ALBERTO AROESTE & ESTELA AROESTE
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

United States Tax Court
Washington, DC 20217

ORDER

By Order issued April 26, 2022, these deficiency cases were consolidated for the purpose of trial, briefing, and opinion. Prior to the consolidation of these cases, respondent filed: (1) a Motion to Dismiss for Lack of Jurisdiction and to Strike as to Penalties under I.R.C. 6038(b) and 6677 on April 7, 2021, in the case at docket No. 13024-20 (motion to dismiss at docket No. 13024-20), and (2) a Motion to Dismiss for Lack of Jurisdiction and to Strike as to FBAR Penalties on March 8, 2022, in the case at docket No. 15372-20 (motion to dismiss at docket No. 15372-20).1

I. Background

On November 9, 2020, Alberto Aroeste filed a Petition commencing the case at docket No. 13024-20 and Estela Aroeste filed a separate Petition commencing the case at docket No. 15372-20. The Petitions filed in both cases were in response to a joint notice of deficiency issued to Mr. Aroeste and Mrs. Aroeste (collectively petitioners), determining deficiencies in their income tax for taxable years 2012, 2013, and 2014.

A. Docket No. 13024-20

In the Petition filed at docket No. 13024-20, Mr. Aroeste disputes the deficiencies set forth in the notice of deficiency and also the penalties imposed by respondent under sections 6038(b) and 6677. Mr. Aroeste attached to his Petition, inter alia: (1) a letter dated April 6, 2020, in which the Commissioner notified him of the imposition of penalties under section 6038(b) for failure to file Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, for taxable years 2006 through 2010; and (2) a letter dated April 6, 2020, in which the Commissioner notified him of the imposition of penalties under section 6677 for failure to file Forms 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Forms 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, for taxable years 2010 through 2014.

On April 7, 2021, respondent filed a motion to dismiss at docket No. 13024-20. Respondent moves that this case, insofar as it relates to penalties imposed by respondent under sections 6038(b) and 6677 for failure to file Forms 5471, 3520, and 3520-A, be dismissed for lack of jurisdiction upon the ground that the Court does not have deficiency jurisdiction over these penalties, nor has respondent issued any notice to Mr. Aroeste under sections 6320(c) or 6330(d) that would form the basis for a petition to this Court regarding these penalties for the taxable years 2006 through 2014. Respondent further moves that all portions of the preamble to the Petition, paragraphs 7, 7(s), 7(t), and 7(u) of the Petition, and paragraph 3 of the prayer of the Petition, in which reference is made to penalties under sections 6038(b) and 6677, be stricken. In support of his motion, based upon a diligent search of respondent's records, respondent represents that there is no record, information, or other evidence indicating that a notice of determination authorized by sections 6320(c) or 6330(d) was mailed to Mr. Aroeste with respect to penalties imposed by respondent under sections 6038(b) or 6677 for the taxable years 2006 through 2014. Respondent further represents that respondent's Revenue Agent who conducted the examination of petitioners stated that no assessments of penalties under sections 6038(b) or 6677 for the taxable years 2006 through 2014 have been made; therefore, no notices under sections 6320(c) or 6330(d) could have been issued to Mr. Aroeste.

On June 7, 2021, Mr. Aroeste filed an Objection to respondent's motion to dismiss at docket No. 13024-20 (Mr. Aroeste's objection). On September 9, 2021, respondent filed a Response to Mr. Aroeste's objection to respondent's motion to dismiss at docket No. 13024-20.

B. Docket No. 15372-20

In the Petition filed at docket No. 15372-20, Mrs. Aroeste disputes the deficiencies set forth in the notice of deficiency. In paragraph 8(u) of the Petition, Mrs. Aroeste alleges that, in addition to the notice of deficiency at issue, the Commissioner has assessed non-willful penalties for failure to file Foreign Bank Account Reports (FBAR) under U.S.C. Title 31, with respect to bank accounts located in Mexico. In paragraph 8(v) of the Petition, Mrs. Aroeste further alleges that she filed a protest letter addressed to the Internal Revenue Service against the non-willful FBAR penalties on August 21, 2020, that her protest letter is still pending a final resolution, and that the outcome of this Tax Court case regarding Mrs. Aroeste's residency should have a major impact of the Title 31 penalties imposed by the Commissioner.

On March 8, 2022, respondent filed a motion to dismiss at docket No. 15372-20. Respondent moves that this case be dismissed for lack of jurisdiction insofar as it relates to FBAR penalties under Title 31 on the ground that the Court does not have deficiency jurisdiction over these penalties. Respondent further moves that paragraphs 8(u) and 8(v) of the Petition, in which reference is made to FBAR penalties, be stricken.

On March 28, 2022, Mrs. Aroeste filed an Objection to respondent's motion to dismiss at docket No. 15372-20. In that objection, Mrs. Aroeste represents that she did not request in her Petition for the Court to redetermine any FBAR penalties. Mrs. Aroeste further represents that the references to FBAR penalties in paragraphs 8(u) and 8(v) of the Petition were merely part of the facts listed as background. Thus, Mrs. Aroeste asserts that, because she is not contesting any FBAR penalties with this Court, respondent's motion should be denied as moot.

II. Discussion

This Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The Tax Court is without authority to enlarge upon that statutory grant. See Phillips Petroleum Co. v. Commissioner, 92 T.C. 885, 888 (1989). We nevertheless have jurisdiction to determine whether we have jurisdiction. Hambrick v. Commissioner, 118 T.C. 348 (2002); Pyo v. Commissioner, 83 T.C. 626, 632 (1984); Kluger v. Commissioner, 83 T.C. 309, 314 (1984). In addition, jurisdiction must be proven affirmatively, and a party invoking our jurisdiction bears the burden of proving that we have jurisdiction over the party's case. See Fehrs v. Commissioner, 65 T.C. 346, 348 (1975); Wheeler's Peachtree Pharmacy, Inc. v. Commissioner, 35 T.C. 177, 180 (1960).

In a deficiency case, this Court's jurisdiction is dependent upon the issuance of a valid statutory notice of deficiency and a timely filed petition. See Levitt v. Commissioner, 97 T.C. 437, 441 (1991). Section 6212 authorizes the Secretary to issue notices of deficiency with respect to deficiencies determined in taxes imposed by subtitle A (income and excess profits taxes), subtitle B (estate and gift taxes), and chapters 41, 42, 43, 44, and 45 (certain excise taxes, not including the excise tax imposed by section 4371 of chapter 34). Phillips Petroleum Co., 92 T.C. at 888; see also §6211(a)(1). Section 6213(a) gives the taxpayer the right to file a petition with the Tax Court for redetermination of the deficiency. Sections 7442 and 6213 confer jurisdiction on the Tax Court to redetermine deficiencies.

A. Respondent's Motion at Docket No. 13024-20

Respondent argues that the case at docket No. 13024-20, insofar as it relates to penalties imposed by respondent under sections 6038(b) and 6677, should be dismissed for lack of jurisdiction on the grounds that the Court does not have deficiency jurisdiction over these penalties and that respondent has not issued any notice to Mr. Aroeste under sections 6320(c) or 6330(d) regarding these penalties that would confer jurisdiction on this Court. Mr. Aroeste argues that this Court has jurisdiction, pursuant to section 7442, over such penalties because this is a deficiency case properly brought within the Court's jurisdiction.

As discussed above, this Court has jurisdiction under section 6213 to redetermine deficiencies in income, estate, and gift taxes “imposed by subtitle A or B” and deficiencies in certain excise taxes imposed by “chapter 41, 42, 43, or 44.” §§6212(a), 6213(a); see also Ruesch v. Commissioner, 154 T.C. 289, 297 (2020), aff'd in part, vacated in part, remanded, 25 F.4th 67 (2d Cir. 2022). Section 6214(a) also provides this Court with jurisdiction over “additional amounts” and “additions to tax,” which we have long interpreted as only referring to certain penalty provisions in chapter 68 of the Code. See Whistleblower 22716-13W v. Commissioner, 146 T.C. 84, 92–95 (2016) (describing “additional amounts” and “additions to tax” as terms of art referencing subchapter A of chapter 68's heading); Bregin v. Commissioner, 74 T.C. 1097, 1102–04 (1980). By negative implication, any other taxes — even if imposed in Title 26 — fall outside this Court's deficiency jurisdiction. Williams v. Commissioner, 131 T.C. 54, 58 (2008).

Penalties under section 6038(b) are imposed by respondent under subtitle F, chapter 61, and are thus outside the Court's deficiency jurisdiction. Ruesch, 154 T.C. at 297. Penalties under section 6677 are imposed by respondent under subtitle F, chapter 68, subchapter B, and are explicitly exempt from the deficiency procedures for income, estate, gift, and certain excise taxes. §6677(e); see also Smith v. Commissioner, 133 T.C. 424, 428–29, n.3, 4 (2009). Furthermore, the notice of deficiency issued to petitioners in this case did not determine the section 6038(b) or section 6677 penalties. Respondent informed Mr. Aroeste, by letters dated April 6, 2020, that the penalties would be imposed based on his determinations that Mr. Aroeste failed to file Forms 5471 for taxable years 2006 through 2010 and Forms 3520 and 3520-A for taxable years 2010 through 2014. See §§6038(b), 6677(a). Accordingly, we conclude that we lack deficiency jurisdiction to redetermine the section 6038(b) and 6677 penalties.

Mr. Aroeste nevertheless asks this Court to issue a decision with respect to all items included in the notice of deficiency, which he argues includes whether he should be liable for the penalties under sections 6038(b) and 6677, because based on the doctrine of collateral estoppel, both the income tax deficiency and the penalties are dependent upon the very same legal issues. Mr. Aroeste further argues that, based on the doctrine of collateral estoppel, the Court's determination as to the applicability of the penalties under sections 6038(b) and 6677 is required to prevent redundant litigation, to achieve economy of judicial time, and to fulfill the need for certainty in legal relations. We disagree. Collateral estoppel precludes parties (and their privies) from relitigating issues actually and necessarily litigated and decided in a final prior judgment by a court of competent jurisdiction. Peck v. Commissioner, 90 T.C. 162, 166 (1988), aff'd 904 F.2d 525 (9th Cir. 1990), citing Gammill v. Commissioner, 62 T.C. 607, 613 (1974). Because there has been no final prior judgment by a court of competent jurisdiction rendered with respect to the issues in this case, the doctrine of collateral estoppel is inapplicable.

Based on the foregoing, we will grant respondent's motion to dismiss at docket No. 13024-20.

B. Respondent's Motion at Docket No. 15372-20

Respondent argues that the case at docket No. 15372-20 should be dismissed for lack of jurisdiction insofar as it relates to FBAR penalties under Title 31 on the ground that the Court does not have deficiency jurisdiction over these penalties. We have held that the “Secretary of the Treasury is authorized by 31 U.S.C. sec. 5321(b)(1) to assess the FBAR penalty; no notice of deficiency is authorized by section 6212(a) nor required by section 6213(a) before that assessment may be made; and the penalty therefore falls outside our jurisdiction to review deficiency determinations.” Williams, 131 T.C. at 58. Thus, as an general matter, we agree with respondent that we lack jurisdiction to redetermine FBAR penalties in deficiency cases. However, in the case at docket No. 15372-20, the Petition does not seek a redetermination of any FBAR penalties and Mrs. Aroeste stated that she is not contesting any FBAR penalties before this Court. Since Mrs. Aroeste is not requesting this Court to exercise jurisdiction over any FBAR penalties in this case, we will deny respondent's motion to dismiss for lack of jurisdiction.

Respondent further argues that paragraphs 8(u) and 8(v) of the Petition, in which reference is made to the FBAR penalties, should be stricken. Respondent asserts that the statements regarding the FBAR penalties have no relation to the matter before this Court and the possible impact, if any, of the outcome of this case on respondent's determination regarding the penalties is irrelevant to this proceeding.

Pursuant to Rule 52, “the Court may order stricken from any pleading any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter.” Motions to strike are not favored by the federal courts. A matter will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation. Estate of Jephson v. Commissioner, 81 T.C. 999, 1001 (1983). In general, a motion to strike should be denied if: (1) the allegations have a possible relation to the controversy; (2) doubt exists as to whether under any contingency the matter may raise an issue; or (3) the matter that is the subject of the motion involves disputed and substantial questions of law. Id. In addition, a motion to strike usually will not be granted unless there is a showing of prejudice to the moving party. Id.

Based on our review of the pleadings and respondent's motion, the Court cannot conclude at this time that the factual allegations in paragraphs 8(u) and 8(v) of the Petition have no possible bearing upon the subject matter of the litigation. Furthermore, respondent has not made any showing of prejudice. Accordingly, we will deny respondent's motion to dismiss at docket No. 15372-20 insofar as it seeks to strike paragraphs 8(u) and 8(v) of the Petition without prejudice.

Upon due consideration and for cause, it is

ORDERED that respondent's Motion to Dismiss for Lack of Jurisdiction and to strike as to penalties under I.R.C. 6038(b) and 6677 at Docket No. 13024-20 filed April 7, 2021, is granted, and the portions of the preamble to the Petition, paragraphs 7, 7(s), 7(t), and 7(u) of the Petition, and paragraph 3 of the prayer of the Petition, in which reference is made to penalties under sections 6038(b) and 6677, are deemed stricken. It is further

ORDERED that respondent's Motion to Dismiss for Lack of Jurisdiction and to strike as to FBAR penalties at Docket No. 15372-20 filed March 8, 2022, is denied without prejudice. It is further.

ORDERED that jurisdiction of these consolidated cases is no longer retained by the undersigned and these cases are restored to the general docket for trial or other disposition.

(Signed) Joseph W. Nega
Judge

FOOTNOTES

1 Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

END FOOTNOTES

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