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. 

 

 

 

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