D.C. Circuit Court Reverses U.S. Tax Court in Farhy Decision

Published: May 23, 2024

Deferred gains from Qualified Opportunity Zone investments must be reported by Dec. 31, 2026. Learn what early planning steps and tax strategies CPAs should discuss with clients now.

 

By John Kelleher, CPA-Dallas 

 

In April 2023, the U.S. Tax Court decided that the IRS did not have the authority to assess penalties under IRC Section 6038(b) because the IRS was not expressly authorized to do so, and such penalties may only be assessed by obtaining a judgement from a federal court. As background, Alon Farhy was assessed $60,000 in penalties in 2018 for failing to include Forms 5471 reporting his ownership in two controlled foreign corporations with his federal tax return for years 2003-2010.  

 

The IRS appealed the case to the U.S. Court of Appeals in D.C. On May 3, 2024, the Court found that indeed the IRS does have the authority to administratively assess penalties despite the lack of specific language. The Tax Court, however, has indicated that it will abide by its decision and therefore is in contradiction of the U.S. Court of Appeals. Taxpayers outside of the D.C. district may wish to continue to challenge the assessment of IRC Section 6038(b) penalties in the U.S. Tax Court unless the U.S. Supreme Court otherwise decides to rule on the issue. 

 

 

 

Topics:

You May be Interested in

  • The IRS May Owe Your Clients Money from the COVID Period
    Recent court decisions have opened a largely overlooked opportunity for significant tax refunds based on mandatory disaster relief under IRC Section 7508A during the federally declared COVID-19 disaster period. As a result, interest and penalties assessed during this period may be invalid and refundable, and some taxpayers who received refunds may also be entitled to unpaid overpayment interest. While uncertainty remains and the IRS may resist such claims, timely protective refund filings are critical to preserve clients rights as the statute of limitations continues to run.
  • TXCPA Advocates for Accounting’s Recognition in Definition of Professional Degrees for Student Loan Eligibility
    TXCPA submitted a formal comment to the U.S. Department of Education urging recognition of accounting as a professional degree program to protect graduate-level federal loan access and strengthen the future CPA pipeline.
  • The Verdict is In. The Texas Franchise Tax is GILTI, Raising New Questions and Potential Issues
    Beginning with the 2026 report year, the Texas Comptroller will align the franchise tax with the current Internal Revenue Code, likely requiring GILTI to be included in total revenue. This change raises sourcing, statutory and potential constitutional questions for businesses with foreign operations, creating new uncertainty and possible tax impacts.
More News

Support the Next Generation

Donate to TXCPA scholarships and help aspiring accountants achieve their goals.

Scholarships