Using an 18th century Supreme Court case, the taxpayer’s attorneys defeated the IRS. This type of law is known as “common law”. It means a law created by a court case.
The USA has tax laws in three forms. They are:
1. common law,
2. tax laws passed by Congress and
3. IRS regulations.
The IRS wrote a wacky regulation provide a tax penalty if your taxable income was below zero. Well, the IRS attorney should have not pushed this taxpayer. This great taxpayer places principles above money. With a team of excellent lawyers, the IRS was wiped out. These great attorneys went back two centuries to a Supreme Court case in the 1800s.
Saving taxes require you to have a great tax team. You have to find the right business attorney and CPA. You will not save taxes by getting year-end deductions. Spending a $1 to save fifty cents is not tax planning.
I have the judges ruling in blue below regarding the “rule of lenity.” I have my annotations in red. The name of this recent Tax Court case is Yitzchok D. Rand and Shulamis Klugman vs. IRS.
If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.
“Beyond the previously discussed canons of statutory construction on which we rely, our Opinion is further supported by another canon: the rule of lenity.
The rule of lenity is an “ancient maxim” that “is perhaps not much less old than construction itself. It is founded on the tenderness of the law for the rights of individuals; and on the plain principle that the power of punishment is vested in the legislative, not in the judicial department. It is the legislature, not the Court, which is to define a crime, and ordain its punishment.” United States v. Wiltberger, 18 U.S. 76, 95 (1820). This is a Supreme Court case from 1820. A Supreme Court case is the law of the Land.
Thus, under the rule of lenity statutes that impose a penalty are to be construed in favor of the more lenient punishment. Black’s Law Dictionary 1449 (9th ed. 2009). And although often considered in the criminal context, the rule of lenity has been applied in the civil context and specifically with regard to civil tax penalties.
In Commissioner v. Acker, 361 U.S. 87 (1959), the IRS sought to impose two penalties on a taxpayer as a result of the taxpayer’s failure to file a declaration of estimated income tax. This is also a Supreme Court case.
One penalty was for a failure to file the declaration. The other, however, was for a “substantial underestimate of estimated tax.” The latter penalty came about because, by regulation, the failure to file a declaration of estimated tax was deemed to be an estimate of zero. In rejecting the latter penalty, the Supreme Court stated: “We are here concerned with a taxing Act which imposes a penalty.
The law is settled that ‘penal statutes are to be construed strictly,’ and that one ‘is not to be subjected to a penalty unless the words of the statute plainly impose it.’” Id. at 91 (fn. ref. omitted) (quoting FCC v. Am. Broadcasting Co., 347 U.S. 284, 296 (1954), and Keppel v. Tiffin Sav. Bank, 197 U.S. 356, 362 (1905)). This last case is a Supreme Court case from 1905.
Here, the words of the relevant statutes do not plainly impose a penalty on refunds resulting from overstated earned income credits, additional child tax credits, or recovery rebate credits. Because the penalty is not plainly imposed on the refundable portion of the credits, the rule of lenity further confirms what we have already concluded: that section 6662 does not impose a penalty on the refundable portion of erroneously claimed earned income credits, additional child tax credits, and recovery rebate credits.”