The U.S. Tax Court held in Mukhi v. Commissioner, 163 T.C. No 8 (slip op.) (Nov. 18, 2024) (Mukhi II), that the IRS lacks statutory authority to assess the penalty imposed by section 6038(b). In doing so, the Tax Court reaffirmed its decision in Farhy v. Commissioner and rejected the reasoning of the U.S. Court of Appeals for the DC Circuit, which reversed Farhy on appeal. Mukhi II further unsettles the IRS's assessment authority for the section 6038(b) penalty and other similar penalties outside of Title 26, Subtitle F, Chapter 68 of the Internal Revenue Code (Code). Taxpayers residing in jurisdictions other than the DC Circuit with current or potential disputes over such penalties should continue to consider their potential legal rights and remedies.

In Mukhi v. Commissioner, No. 439-22L, 162 T.C., slip op. (Apr. 9, 2024) (Mukhi I), the IRS assessed section 6038(b) penalties against an individual who failed to file Forms 5471 with respect to three foreign corporations. After receiving an adverse Notice of Determination in a collection due process hearing, the taxpayer petitioned the Tax Court and argued that the IRS lacks authority to assess section 6038(b) penalties. The Tax Court held in favor of the taxpayer, relying entirely on its previous decision in Farhy, where the court held that the IRS lacked authority to assess section 6038(b) penalties based on the statute's plain language of the statute. The IRS appealed Farhy to the DC Circuit. After the Tax Court issued its decision in Mukhi I, the DC Circuit reversed the Tax Court's decision in Farhy and in response, the IRS filed a motion requesting reconsideration of Mukhi I, which the Tax Court granted. 

In Mukhi II, the Tax Court reaffirmed its holding in Farhy that the IRS lacks statutory authority to assess the section 6038(b) penalty, holding that the plain language of the statute lacks the authorizing language present in other Code provisions. The court then rejected several points raised by IRS and the DC Circuit regarding the legislative purpose and statutory structure of section 6038(b). 

We expect continued litigation on this issue as taxpayers challenge the assessment of section 6038(b) penalties and other similar penalties. Multiple cases presenting this issue have been decided by the Tax Court and are awaiting a potential appeal by the IRS. These include Mukhi II, which is appealable to the Eighth Circuit, and Safdieh v. Commissioner, which is appealable to the Second Circuit. Potential IRS appeals of these cases raise the prospect of a circuit split and potential review by the Supreme Court.

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