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 The Solicitor General, on behalf of the Commissioner of Internal Revenue, petitions for a writ of certiorari to review the March 2, 1987, order of the United States Court of Appeals for the Sixth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit TABLE OF CONTENTS Opinions below Jurisdiction Statute involved Question presented Statement Reasons for granting the petition Conclusion Appendix OPINIONS BELOW The order of the court of appeals forgiving the interest and penalty (App., infra, 1a-2a) is unreported. The opinion of the court of appeals sustaining the tax deficiency (App., infra, 3a-15a) is reported at 809 F.2d 333. The opinion of the Tax Court (App., infra, 19a-27a) is unofficially reported at 50 T.C.M. (CCH) 1194, and the decision of the Tax Court (App., infra, 28a) is unreported. JURISDICTION The judgement of the court of appeals sustaining the tax deficiency (App., infra, 16a-17a) was entered on January 23, 1987. The order of the court of appeals forgiving the interest and penalty (App., infra, 1a-2a) was entered on March 2, 1987. On May 26, 1987, Justice Scalia extended the time for filing a petition for writ of certiorari to and including July 13, 1987. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE INVOLVED The relevant portions of Sections 6601, 6651, and 7482 of the Internal Revenue Code (26 U.S.C.) are as follows: SEC. 6601. Interest on underpayment, nonpayment, or extensions of time for payment, of tax (a) General rule If any amount of tax imposed by this title (whether required to be shown on a return, or to be paid by stamp or by some other method) is not paid on or before the last date prescribed for payment, interest on such amount at an annual rate established under section 6621 shall be paid for the period from such last date to the date paid. * * * * * SEC. 6651. Failure to file tax return or to pay tax (a) Addition to the tax In case of failure -- * * * * * (3) to pay any amount in respect of any tax required to be shown on a return specified in paragraph (1) which is not so shown (including an assessment made pursuant to section 6213(b)) within 10 days of the date of the notice and demand therefore, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount of tax stated in such notice and demand 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate. * * * * * SEC. 7482. Courts of review (a) Jurisdiction The United States Courts of Appeals (other than the United States Court of Appeals for the Federal Circuit) shall have exclusive jurisdiction to review the decisions of the Tax Court, except as provided in section 1254 of Title 28 of the United States Code, in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury; and the judgment of any such court shall be final, except that it shall be subject to review by the Supreme Court of the United States upon certiorari, in the manner provided in section 1254 of Title 28 of the United States Code. * * * * * (c) Powers (1) To affirm, modify, or reverse Upon such review, such courts shall have power to affirm or, if the decision of the Tax Court is not in accordance with law, to modify or to reverse the decision of the Tax Court, with or without remanding the case for a rehearing, as justice may require. * * * * * QUESTION PRESENTED Whether the court of appeals exceeded its authority in granting a taxpayer's request to forgive interest on a tax deficiency, and to forgive a statutory late-payment penalty, "in order to achieve a fair and just result." STATEMENT 1. Arthur H. McCoy died testate on April 23, 1980, and respondent Robert McCoy was appointed executor of his estate. The defendent at the time of his death owned an undivided one-half interest in land used for his family farm, which had a fair market value of $235,140. Section 2032A of the Internal Revenue Code /1/ allows an estate to elect a special method for valuing certain real property, including farm property, for estate tax purposes. This method generally produces a lower valuation and hence a lower estate tax. At the time relevant here, this election was available only if the land was "qualified real property" and only if the election was made "not later than the time prescribed by Section 6075(a) for filing the (estate tax) return * * * (including extensions thereof) * * *." 26 U.S.C. (1976 ed.) 2032A(b) and (d)(1). Since an estate tax return under Section 6075(a) must be filed within nine months of the decedent's death, and since respondent did not obtain an extension of time to file that return, respondent was required to make an election under Section 2032A, if he desired to make one, no later than January 23, 1981. App., infra, 4a, 20a. It is undisputed that the decedent's farmland was "qualified real property" as that term was defined in 1980. Respondent, however, did not file an estate tax return electing to value that property under Section 2032A until February 11, 1981 -- 19 days after the election was required to be made. App., infra, 4a, 20a. The election was therefore untimely. The Commissioner accordingly concluded that the farmland had to be valued for estate tax purposes at its fair market value ($235,140), and not at the lower figure ($103,305) that respondent had reported in reliance on Section 2032A. App., infra, 20a. Based on that conclusion, the Commissioner determined a deficiency in estate tax in the amount of $22,159.72. No additions to tax were imposed at that time. App., infra, 19a-20a. Respondent sought redetermination of the deficiency in the Tax Court. Respondent conceded that his election was untimely -- and therefore ineffective -- under the law in existence at the time of the decedent's death. See App., infra, 21a. But respondent contended that the time for making the Section 2032A election had been extended retroactively by the effective-date provisions of the amendments to Section 2032A contained in the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. No. 97-34, Section 421(k)(5), 95 Stat. 314. The Tax Court rejected this contention and sustained the deficiency determined by the Commissioner. The court held that the relevant ERTA provisions afforded an additional period to make the Section 2032A election only to estates that had been ineligible to elect the benefits of that section prior to ERTA's enactment. The court ruled that Congress had not intended to confer a windfall on estates, like the instant estate, that were previously eligible for Section 2032A benefits, but which had not qualified for these benefits because their executors simply had failed to make a timely election (App., infra, 24a-27a). The court of appeals unanimously affirmed (App., infra, 3a-15a). Although it suggested that the original language of ERTA lent support to respondent's position (see id. at 6a-11a), it concluded that the Technical Corrections Act of 1982, Pub. L. No. 97-488, 96 Stat. 2365, which amended ERTA retroactively in order to clarify the relevant effective-date provisions, made clear that Congress did not intend the ERTA provisions to benefit previously eligible estates (App., infra, 11a-14a). Accordingly, the court held that respondent's election was untimely and ineffective, as respondent conceded it was under pre-ERTA law. 2. After the Tax Court's decision, respondent failed to file the appeal bond required by Section 7485 of the Code to stay assessment and collection of the deficiency that the Tax Court had determined. While the appeal was pending in the Sixth Circuit, therefore, the Commissioner duly assessed the deficiency and later issued a notice and demand for payment of the tax. See I.R.C. Sections 6201, 6213(a), 7485(a) and 6303. When respondent did not pay the deficiency within 10 days of notice and demand, an addition to tax under Section 6651(a)(3) thereupon accrued. That section provides that, if a taxpayer fails to pay a tax within 10 days of notice and demand therefor, there shall be added to the tax an amount equal to 0.5% of the tax (but not exceeding 25% in the aggregate) for each month that the failure continues, unless the taxpayer shows that his failure was "due to reasonable cause and not due to willful neglect." Shortly after the Sixth Circuit issued its judgment sustaining the tax deficiency, respondent filed, on February 7, 1987, a petition asking that court to "forgive" the interest that had accrued on the deficiency, as well as the Section 6651(a)(3) late-payment penalty. Respondent stated that the total amount of delinquent estate tax, interest, and penalty then exceeded $50,000. Respondent asserted that it would be inequitable to require the estate to pay the interest and the penalty in view of the fact that it had litigated in good faith the validity of its Section 2032A election. On March 2, 1987, the court of appeals entered an order granting respondent's petition, without requesting a response from the government (App., infra, 1a-2a). /2/ The court asserted that "interest and penalty should be forgiven in this case in order to achieve a fair and just result." The court therefore "ordered that the (Commissioner) collect only the tax assessed against (respondent) and that all interest, penalties and other late charges are forgiven." Ibid. REASONS FOR GRANTING THE PETITION The court of appeals' order is made of whole cloth; it has no basis whatever in law. To begin with, the questions of respondent's liability for interest and the late-payment penalty were beyond the scope of the Tax Court decision being reviewed by the court of appeals. Those questions, therefore, were outside the appellate court's jurisdiction. Apart from this jurisdictional defect, the court of appeals' ruling is insupportable on the merits. It was issued in defiance of the statutes that Congress has enacted, it conflicts with decisions of other appellate courts, and it seriously undermines settled principles of tax litigation. Such an arrogation of judicial power should not be countenanced by this Court. 1. Section 7482(a) of the Code grants the courts of appeals jurisdiction to review decisions of the Tax Court "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." Section 7482(c), entitled "Powers," states that the courts of appeals "shall have power to affirm or, if the decision of the Tax Court is not in accordance with law, to modify or to reverse the decision of the Tax Court." In reviewing a Tax Court decision, therefore, the duty of the court of appeals is to consider whether the Tax Court committed error. See generally Marbury v. Madison, 5 U.S. (1 Cranch) 137, 175 (1803) ("It is the essential criterion of appellate jurisdiction, that it revises and corrects the proceedings in a case already instituted, and does not create that cause."). A court of appeals plainly lacks jurisdiction to decide issues that were not the subject of the Tax Court proceeding or to grant relief that would be beyond the powers of the Tax Court itself. See, e.g., Taylor v. Commissioner, 258 F.2d 89, 93 (2d Cir. 1958); Vandenberge v. Commissioner, 147 F.2d 167, 168 (5th Cir.), cert. denied, 325 U.S. 875 (1945); cf. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943) (recognizing limited jurisdiction of Board of Tax Appeals). /3/ The court of appeals violated its jurisdictional bounds in this case. Its jurisdiction was "to review the decision() of the Tax Court" (I.R.C. Section 7482(a)), and the decision of the Tax Court was that "there is a deficiency in the amount of $22,159.72 in (respondent's) Federal estate tax" (App., infra, 28a). Because the court of appeals ruled that this decision was correct, the court should have done no more than affirm it. Instead, the Sixth Circuit went on to decide new questions relating to interest and penalty -- questions that were not presented, and could not possibly have been presented, to the Tax Court -- and to grant relief that the Tax Court itself would have had no jurisdiction to provide. The Tax Court itself could not have entertained a request by respondent to "forgive" interest on the estate tax deficiency. Interest on tax deficiencies is mandated by statute (I.R.C. Section 6601(a)), and it is well established that the Tax Court, as a court of limited jurisdiction, lacks general equitable powers. Commissioner v. Gooch, supra; Continental Equities, Inc. v. Commissioner, 551 F.2d 74 (5th Cir. 1977); Morse v. United States, 494 F.2d 876 (9th Cir. 1974); Schwartz v. Commissioner, 40 T.C. 191, 193-194 (1963). Indeed, the Tax Court does not have jurisdiction even to determine the correct amount of interest to be imposed on a deficiency. See, e.g., Commissioner v. Kilpatrick's Estate, 140 F.2d 887 (6th Cir. 1944); Estate of Baumgardner v. Commissioner, 85 T.C. 445, 452 (1985); Chapman v. Commissioner, 14 T.C. 943, 946-947 (1950), aff'd, 191 F.2d 816 (9th Cir. 1951), cert. denied, 343 U.S. 905 (1952). It is for that reason that the Tax Court's "decision" is limited to "an order specifying the amount of the deficiency." I.R.C. Section 7459(c); T.C. Rule 155; App., infra, 28a. The Tax Court's decision makes no reference to interest, which is computed subsequently and independently by the Commissioner. The Section 6651(a)(3) penalty was also outside the scope of the appeal. That "addition to the tax" is imposed when a taxpayer fails to pay a tax "within 10 days of the date of notice and demand therefor." "Notice and demand" for a tax cannot be made until the tax has been assessed (I.R.C. Section 6303), and the deficiency here was not assessed, and could not have been assessed, until after the Tax Court had entered its decision (I.R.C. Section 6213(a)). In the instant case, therefore, there was not even an occasion for imposition of a Section 6651(a)(3) penalty until after the Tax Court's decision had been rendered. It is thus obvious that no challenge to that penalty could have been mounted in the Tax Court, and that no reference to that penalty could have been made in the Tax Court decision under review here by the court of appeals. /4/ The fact that the interest and late-payment penalty could not have been challenged in the Tax Court does not mean that the estate was without an opportunity to litigate the validity of those items. The proper procedure would have been for respondent to have paid the statutorily-imposed interest and penalty and then sued for a refund in the district court or the Claims Court. The Sixth Circuit in the former case, and the Federal Circuit in the latter, would then have had jurisdiction to consider those issues on appeal from a judgment of the appropriate trial court. But the Sixth Circuit's undertaking to "forgive" the interest and the penalty, in the course of reviewing a Tax Court decision that did not address and could not have addressed those questions, quite plainly exceeded its jurisdiction. Indeed, besides transgressing general principles of appellate jurisdiction, the Sixth Circuit's order violates the specific mandate of Section 7421(a) of the Code, generally known as the "Anti-Injunction Act." That statute provides, with exceptions not relevant here, that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." The purpose of this provision is to allow the United States to assess and collect its taxes without judicial intervention, and to channel disputes over the correctness of such assessments and collection to the forums designated for refund suits. See, e.g., Bob Jones University v. Simon, 416 U.S. 725, 736 (1974); Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962). In particular, the Anti-Injunction Act prohibits injunctive relief with respect to the collection of interest on taxes (Transport Mfg. & Equipment Co. v. Trainor, 382 F.2d 793, 797 n.8 (8th Cir. 1967)) and with respect to collection of additions to tax imposed under Section 6651 (Professional Engineers, Inc. v. United States, 527 F.2d 597 (4th Cir. 1975); Shaw v. United States, 331 F.2d 493, 496 (9th Cir. 1964)). The Sixth Circuit here, by "order(ing) that the (Commissioner) collect only the tax assessed" to the exclusion of interest and penalty (App., infra, 2a), has restrained the Commissioner from collecting those latter sums. The court thus violated the limitation on judicial power set forth in Section 7421. /5/ 2. Quite apart from its jurisdictional defects, the court of appeals' order forgiving the interest and the penalty is insupportable on the merits. Section 6601 of the Code provides that, "(i)f any amount of tax imposed by this title * * * is not paid on or before the last date prescribed for payment, interest on such amount at the annual rate established under Section 6621 shall be paid for the period from such last date to the date paid" (emphasis added). The interest mandated by Section 6601 is not a sanction for late payment; rather, it represents compensation to the government for interest foregone due to the taxpayer's delay in payment. See, e.g., United States v. Childs, 266 U.S. 304, 309-310 (1924). The interest requirement is absolute; the statute contains no provision for judicial waiver of the interest requirement in order to achieve what the court of appeals described as "a fair and just result" (App., infra, 1a). Accordingly, 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. The Ninth Circuit has simply noted that the language of the statute is unequivocal. Grauvogel v. Commissioner, 768 F.2d 1087, 1090 (1985). The Tenth Circuit has pointed out that the purpose of the interest provision is to compensate the government for delay in payment, not to penalize the taxpayer; it accordingly has concluded that "(a) taxpayer cannot seek redetermination and review of a deficiency in tax, enjoy the delay, and when unsuccessful be heard to say that interest should not be exacted." Owens v. Commissioner, 125 F.2d 210, 213 (1942). And the Sixth Circuit itself, in reversing a district court order that had abated interest after one year because of court delays, has stated that such an order is "beyond the court's equitable powers * * * (and) plainly erroneous." Johnson v. United States, 602 F.2d 734, 739 (1979); see also United States v. Means, 621 F.2d 236, 238 (6th Cir. 1980). The court of appeals' action in forgiving the late-payment penalty was equally erroneous. Whereas Section 6601 makes the imposition of interest unconditional, Section 6651(a)(3) does excuse a taxpayer from the late-payment penalty if he shows that his failure to pay the tax on time was "due to reasonable cause and not due to willful neglect." But the court of appeals did not rest its order on any such finding. Indeed, it could scarcely have done so, since the existence of "reasonable cause" entails a question of fact (see United States v. Boyle, 469 U.S. 241, 249 n.8 (1985)); that factual question was not considered and could not have been considered by the Tax Court (see page 9, supra), and that question could not have been decided in the first instance by the court of appeals. /6/ If respondent wished to contest his liability for the late-payment penalty, his proper course was to pay it and then file a refund suit. In that case, the appropriate trial court would have determined whether his failure to make timely payment was excusable for "reasonable cause," and the appropriate court of appeals could have been asked to review that finding. But the Sixth Circuit here had absolutely no authority -- with or without the benefit of factual findings below -- to forgive the penalty "in order to achieve a fair and just result" (App., infra, 1a). 3. The decision of the court of appeals evades the clear mandate of two statutory provisions that arise almost daily in federal tax litigation. In enacting Section 6601, Congress has determined that a taxpayer who wishes to halt the accrual of interest must pay the deficiency while pursuing his claims in court. The decision below effectively grants taxpayers an interest-free loan while they are pursuing their claims in court, thus imposing on the government the cost of delay occasioned by unsuccessful taxpayer litigation. Similarly, in enacting Section 6651, Congress has created an additional incentive for taxpayers to pay their taxes promptly, providing for the exaction of a modest penalty where a late payment is not due to "reasonable cause." The decision below reads those words out of the statute, holding that the penalty is inapplicable whenever a court chooses to forgive it. These twin rulings, unless reversed, will only encourage taxpayers to pursue wasteful and dilatory litigation and could have a severely deleterious effect on the public fisc. Moreover, the court issued its decision in a casual, almost offhand, manner. It made no effort to explain its jurisdiction or its result, it ignored conflicting decisions of other appellate courts, and it did not even cite the statutes that it was purporting to construe. Compare Sumner v. Mata, 449 U.S. 539, 548 (1981). The court issued its unprecedented order without requesting a response from the government, and, when presented with a petition for rehearing from the government, evidently chose to ignore that document rather than address the arguments in it. The court of appeals' order is unpublished, and we do not often seek certiorari from unpublished orders, erroneous though they often seem to us. The Sixth Circuit's action here, however, is not the only example of its seeming willingness to ignore the language of tax statutes in a misguided effort to do equity. See Asphalt Products Co. v. Commissioner, 796 F.2d 843 (1986) (construing Section 6653(a) negligence penalty), rev'd per curiam, No. 86-1053 (June 1, 1987). And we do not think that a court should be permitted to ignore Acts of Congress, whether or not it chooses to publish its decision. CONCLUSION The petition for a writ of certiorari should be granted, and the March 2, 1987, order of the court of appeals should be summarily reversed. Respectfully submitted. CHARLES FRIED Solicitor General MICHAEL C. DURNEY Acting Assistant Attorney General ALBERT G. LAUBER, JR. Deputy Solicitor General ALAN I. HOROWITZ Assistant to the Solicitor General JONATHAN S. COHEN DOUGLAS G. COULTER Attorneys JULY 1987 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code (26 U.S.C.), as amended (the Code or I.R.C.). /2/ The government treated respondent's post-judgment petition for forgiveness of interest and penalty as a petition for rehearing, which is not to be responded to absent a request by the court. See Fed. R. App. P. 40. On March 16, 1987, the government filed a timely petition for rehearing of the court's March 2 order, together with a motion to recall the mandate, pointing out that the court's order exceeded its authority. On April 14, 1987, the court denied the motion to recall the mandate (App., infra, 18a), and the clerk subsequently informed the government that this denial should be treated as a denial of the government's petition for rehearing. Out of an abundance of caution, we have computed the time for filing this petition from March 2, 1987, the date of the order sought to be reviewed; Justice Scalia subsequently extended the time for filing the petition to and including July 13, 1987. /3/ There is of course no jurisdictional bar to a court of appeals' consideration of arguments not advanced in the Tax Court, although appellate courts are usually reluctant to entertain such arguments for prudential reasons. See Hormel v. Helvering, 312 U.S. 552 (1941). But such arguments, if entertained, must relate to an issue that was actually the subject of the Tax Court proceeding and that affects the correctness of the Tax Court decision being reviewed. /4/ Section 7485 of the Code provides that the assessment and collection of a deficiency determined by the Tax Court may be stayed while the taxpayer appeals the Tax Court decision, but "only if the taxpayer * * * has filed with the Tax Court a bond" to ensure payment. I.R.C. Section 7485(a)(1); T.C. Rule 192. Thus, respondent could have avoided the requirement of immediate payment of the deficiency following the Tax Court's decision and, by the same token, could have avoided imposition of the penalty that arose when the estate neglected to make timely payment. Respondent, however, failed to post the requisite appeal bond. /5/ There is an extremely limited exception to the prohibition of the Anti-Injunction Act, namely, where the taxpayer has no adequate remedy at law and "it is clear that under no circumstances could the Government ultimately prevail." Enochs v. Williams Packing & Navigation Co., 370 U.S. at 6-7. That exception obviously has no application here, since respondent could have raised its contentions about the interest and the penalty in a subsequent refund suit, and since respondent's contentions about the interest and the penalty are in any event incorrect, as we demonstrate below. /6/ The court of appeals, in its order forgiving the late-payment penalty, recited respondent's allegation (App., infra, 1a) that he had "reasonably relied" on the retroactive ERTA effective-date provision in litigating the validity of the estate's Section 2032A election. Whatever the truth of that allegation, it was wholly irrelevant to the question of respondent's liability for the late-payment penalty. That penalty was imposed, not because respondent was negligent in maintaining his legal position (compare I.R.C. Section 6653(a) (providing for a negligence penalty)), but because respondent failed to pay the tax after it had been properly assessed. The Code permits a taxpayer to postpose assessment while he litigates his position on appeal, but it requires him to post an appeal bond in order to do so (I.R.C. Section 7485(a)). When respondent failed to post an appeal bond, the tax was assessed and payment became due. See note 4, supra. In determining whether respondent had "reasonable cause" within the meaning of Section 6651(a)(3) for failure to pay at that point, the reasonableness of the legal theory that prompted him to initiate the litigation was completely immaterial. Appendix