COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. ESTATE OF ARTHUR H. McCOY, DECEASED, ROBERT McCOY, EXECUTOR No. 87-75 In the Supreme Court of the United States October Term, 1987 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit Reply Memorandum for the Petitioner We have argued in our petition that the court of appeals' decision forgiving interest and the late-payment penalty "in order to achieve a fair and just result" (Pet. App. 1a) is wholly indefensible on two distinct grounds. First, the court of appeals exceeded its authority in ruling on these matters because they were not before the Tax Court and hence were not within the Sixth Circuit's appellate jurisdiction. Second, the interest and penalty were both imposed pursuant to unambiguous statutory provisions, and the court of appeals erred in forgiving them on grounds not authorized by Congress. In light of respondent's brief in opposition, it is appropriate to make a few additional comments. 1. Respondent attempts to defend the court of appeals' unprecedented decision to forgive the statutory late-payment penalty on the ground that the estate's failure to pay the assessed tax was "'due to reasonable cause.'" Br. in Opp. 10-11 (quoting I.R.C. Section 6651(a)(3)). As we noted in our petition (at 9-11), the court of appeals lacked jurisdiction to consider the propriety of the Section 6651 penalty. The court of appeals, moreover, was in no position to make a finding of "reasonable cause" (Pet. 12-13) and did not purport to do so; indeed, the words "reasonable cause" do not appear in its opinion. See Pet. App. 1a-2a. Even putting these defects aside, however, respondent's attempted defense of the merits of the court of appeals' order is wholly without foundation. In essence, respondent argues that it was acting in good faith in appealing the Tax Court's adverse decision on the estate tax question, and that its good-faith prosecution of the appeal excused it from having to pay the tax until all appellate proceedings were concluded. A good faith disagreement about the correct tax treatment, of course, may suffice to negate the conclusion that a taxpayer was negligent and hence insulate him from the negligence penalty imposed by Section 6653(a). See, e.g., Dillin v. Commissioner, 56 T.C. 228, 248 (1971). But such a disagreement does not provide "reasonable cause," within the meaning of Section 6651(a), for failure to pay an assessed tax. The relevant regulation provides (Treas. Reg. Section 301.6651-1(c)(1)): "A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship * * * if he paid on the due date." Respondent does not state that it was unable to pay or that timely payment would have resulted in "undue hardship," and the court of appeals clearly made no such findings (see Pet. App. 1a-2a). Thus, respondent's failure to pay the assessed tax was not "due to reasonable cause," and respondent was liable for the late-payment penalty as a matter of law. As we noted in our petition (at 9-10 n.4), the Internal Revenue Code provides that a taxpayer in certain circumstances may avoid paying a tax deficiency pending the outcome of an appeal from an adverse Tax Court decision; under Section 7485, the taxpayer may postpone assessment of the tax in question by filing an appeal bond. Respondent, however, chose not to exercise that option. /1/ The tax accordingly was assessed and, when respondent declined to make payment, the estate became liable for the late-payment penalty of Section 6651. The court of appeals' decision to "forgive" this penalty eviscerates the "reasonable cause" language of Section 6651 and completely eliminates the statutory requirement of an appeal bond. Contrary to respondent's assertion, moreover, the court's decision in this regard does not at all turn upon "the stipulated facts and unique circumstances of (this) case" (see Br. in Opp. 6). Rather, the logic of the decision would excuse any taxpayer from paying assessed taxes that are due and payable until all avenues of appeal have been exhausted, and thus it could encourage protracted litigation (see Pet. 14). 2. Respondent's effort to defend the court of appeals' decision to forgive the imposition of interest (Br. in Opp. 11-13) is equally unavailing. As we explained in our petition (at 11-12), Section 6601(a) states that interest "shall be paid" on overdue taxes, and the statute plainly makes no provision for interest to be "forgiven" in order to further some vague principle of equity. Cf. West Virginia v. United States, No. 85-937 (Jan. 13, 1987), slip op. 5 n.3, 7-8 (holding that award of prejudgment interest in favor of the United States does not depend upon "a balancing of equities between the parties"). /2/ Moreover, even if Section 6601(a) did permit exceptions on equitable grounds, respondent would not be an obvious candidate for such relief. It is undisputed that respondent neglected to comply with the applicable time limits for electing special-use valuation, and hence that the estate substantially underpaid its estate tax when it filed its return. Respondent's pursuit of this litigation has been based entirely on the claim that a subsequent enactment by Congress had the effect of curing retroactively respondent's failure to make a timely election. That claim has been rejected by every court that has considered it, and there is no reason why respondent should be relieved of its statutory duty to pay interest on the unpaid tax; equity does not require the government to give taxpayers an interest-free loan while they pursue protracted and unsuccessful litigation. /3/ 3. Respondent cites several cases, notably Hormel v. Helvering, 312 U.S. 552 (1941), to support its contention (Br. in Opp. 7-10) that the court of appeals could exercise jurisdiction to forgive the interest and penalty even though the Tax Court decision under review did not address and could not have addressed those questions. As we explained in our petition (at 8 n.3), however, cases like Hormel v. Helvering, supra, are addressed to the situation where a litigant seeks to raise a new argument on appeal to support its contention that the lower court was either correct or incorrect in reaching the judgment that it reached. /4/ For prudential reasons, appellate courts are usually reluctant to consider such new arguments, but they do have the power to do so if they determine that the interests of justice would be served thereby. In this case, however, the Sixth Circuit did not address a new argument relevant to the subject matter of the dispute in the Tax Court; rather, the court of appeals decided an entirely different pair of claims that had no effect on the Tax Court's judgment at all. Respondent concedes that the interest and penalty issues were not raised and "could not have been raised in the Tax Court" (Br. in Opp. 7), and the court of appeals affirmed the Tax Court with respect to the only issue that was before it. For the court of appeals to have addressed the entirely separate issues of interest and penalty was outside the scope of its appellate jurisdiction. Rather, those matters should have been raised by respondent in a trial court by means of a refund suit. For the reasons stated above, as well as those stated in our petition, it is therefore respectfully submitted that the petition for a writ of certiorari should be granted, and that the March 2, 1987, order of the court of appeals should be summarily reversed. CHARLES FRIED Solicitor General SEPTEMBER 1987 /1/ Respondent concedes (Br. in Opp. 4 n.3) that it did not file an appeal bond to stay assessment and collection of the estate tax, stating that it chose instead to ask the IRS for an extension of time "until December 31, 1986," to pay the tax. But the mere pendency of an appeal obviously provided respondent with no basis to expect the IRS to grant such an extension. Moreover, even if the requested extension had been granted, respondent would still have been liable for the late-payment penalty, since respondent had requested an extension only until December 31, 1986, but did not pay the tax until after the Sixth Circuit issued its decision affirming the Tax Court on January 23, 1987. Respondent also implies (id. at 4-5 n.3) that its failure to pay the assessed tax was justifiable because the Tax Court's decision, which was then on appeal, had not yet become final. It is true that the Tax Court decision was not yet "final" (and, indeed, it is not yet final) by reason of the special finality definition set forth in Section 7481(a) of the Code. Respondent's attempt to justify non-payment on that basis, however, runs afoul of Section 7485 of the Code, which requires, as a precondition to a stay of assessment and collection, the filing of an appeal bond, "(n)otwithstanding any provision of law imposing restrictions on the assessment and collection of deficiencies." As we have noted, no such bond was filed here. /2/ We stated in our petition (at 12) that "the courts of appeals have uniformly rejected the idea that a taxpayer can be relieved of his obligation to pay interest on a tax deficiency because of supposed equitable considerations." Although respondent asserts that this statement "is wrong" (Br. in Opp. 12), respondent offers no evidence to support its assertion, and it cites no case, apart from the decision below, in which a court of appeals has forgiven interest on a tax deficiency for equitable reasons. /3/ Respondent's reliance (Br. in Opp. 11-12) on American Propeller & Mfg. Co. v. United States, 300 U.S. 475 (1937), is misplaced. The law in effect when that case was decided provided that interest was due only when a tax remained unpaid "for ten days after notice and demand by the collector." Revenue Act of 1918, ch. 18, Section 250(e), 40 Stat. 1083 (quoted in 300 U.S. at 477 n.1). This Court, citing the absence of any evidence in the record that the collector had given notice and made demand for the tax, concluded that "(Section) 250(e) in the particular under consideration was not complied with" and hence that no interest was payable (300 U.S. at 478-480). The Court noted that this result was also supported by the conceded inequity of the government's position (id. at 478, 480) -- namely, that it was trying to collect interest for a period in which a net debt ran from the government to the taxpayer -- but the Court did not hold that equitable considerations could overcome an unqualified statutory requirement that interest be paid. Rather, the Court stated that equitable considerations counseled against affirming the interest award unless interest was due "under plain compulsion of law" (id. at 478). As we have noted, the Court went on to hold that interest was not due under the law as it then stood. /4/ For example, the Court in Hormel approved an appellate court's consideration of a new theory justifying the taxation of certain trust income. The question resolved by the appellate court, however -- the taxability of that income -- was the same as that passed upon by the trial court.