A lower court should not have reduced an IRS penalty on the Service Employees International Union for failure to file informational tax returns, the Ninth U.S. Circuit Court of Appeals has ruled.
In a March 17 decision written by Circuit Judge Andrew Kleinfeld, the court ordered the penalty to be reinstated in full, and also rejected SEIU's request for attorney fees. The union had argued that since the U.S. District Court had lowered the penalty, it should be considered the prevailing party, and thus should have its legal fees paid by the IRS. "Since we reverse the reduction in penalties, the claim for costs as a partially prevailing party is moot," Judge Kleinfeld wrote.
Labor unions do not have to pay income or other federal taxes, but they do have to file informational returns disclosing income, disbursements and other information. The SEIU filed its 1999 informational return 20 months late, and a subsidiary filed its 1998 return four months late.
The IRS applied a statutory formula based on the length of delay and gross receipts, and imposed penalties of $50,000 for the 1999 return (based on gross receipts of $11 million) and $2,460 for the 1998 return (based on gross receipts under $1 million for the subsidiary). The subsidiary is 100 Oak Street Corporation, named for the union's street address in Oakland.
SEIU argued that the penalties should be dismissed for reasonable cause, blaming the late filing on an administrative oversight. The union also argued that the penalties were excessive. The IRS denied relief, and SEIU went to court – without paying the penalties or making an offer in compromise.
The District Court concluded that there was no reasonable cause for the late filings, but that as a matter of discretion the IRS should have reduced the penalties. The court ordered the $50,000 penalty reduced by 75 percent, and cut the smaller penalty in half.
This reduction was improper, the Ninth Circuit ruled. The formula for calculating the late penalty is not subject to discretion by the IRS, and the courts have no authority to substitute their opinion of a proper penalty in place of the statutory system approved by Congress and the president, Judge Kleinfeld wrote.
"Some penalties are discretionary, but the union has not pointed to any decision by any court that holds that the penalty at issue here, the Section 6652 penalty on nonprofits for late filing of informational returns, is discretionary or may be reduced in the discretion of the IRS or a reviewing court," the judge wrote.
The judge also noted that the union caught a break, because the formula yields a $63,500 for SEIU's 635-day delay, but the union got the benefit of a $50,000 cap for tax-exempt organizations with gross receipts exceeding $1 million.
The case, Service Employees International Union v. United States, was argued in San Francisco on April 14, 2009.
(Cal-Tax: It is interesting that the SEIU, one of the most vocal supporters of tax increases, fought a 10-year legal battle to try to avoid paying penalties for breaking federal tax laws.)
Cal-TaxReports, March 29, 2010
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