Farhy v. Commissioner: The D.C. Circuit Held Section 6038(b) Penalties Assessable

Review the primary official source.

In Farhy v. Commissioner, the D.C. Circuit held that penalties for failing to furnish specified foreign-corporation information under section 6038(b) are assessable even though the provision does not use one formula expressly directing assessment. The court reversed the Tax Court’s contrary decision and remanded with instructions to enter decision for the Commissioner. The holding governs cases appealable to the D.C. Circuit; the Tax Court has declined to follow it in a case appealable elsewhere.

The dispute concerned collection procedure

The taxpayer had controlling interests in foreign corporations and did not file required Forms 5471 after notice. The IRS assessed initial and continuation penalties under section 6038(b), and the taxpayer challenged whether those penalties could be assessed administratively.

The question was not whether the reporting duty exists. It was whether the statutory scheme authorizes assessment and the administrative collection consequences that follow.

The D.C. Circuit read the provisions together

The court examined section 6038’s text, structure, function, related penalty provisions, and the longstanding administrative practice. It concluded that section 6038(b) penalties are assessable by implication and rejected the proposed set of exclusive textual formulas for assessability.

The opinion emphasized the coordinated design of the initial penalty, continuation penalty, and enforcement process. It remanded with instructions to enter decision for the Commissioner.

The Tax Court’s earlier ruling no longer controlled this case

The Tax Court had accepted the taxpayer’s position. The appellate court reversed, so summaries that rely only on the lower ruling are incomplete. Jurisdiction and later authority matter when assessing how the appellate holding applies elsewhere.

The opinion did not erase reasonable-cause provisions, notice questions, the accuracy of the information demand, or other defenses that may depend on the record. It resolved the assessment-authority issue presented.

Preserve the foreign-reporting record

Keep entity ownership records, filing obligations by year, Forms 5471 and attachments, extensions, IRS notices, response dates, transmission proof, professional advice, and evidence offered for reasonable cause. Map each penalty period and statutory notice separately.

A taxpayer should not assume that paying, protesting, petitioning, or requesting abatement has the same procedural effect in every posture. The forum, assessment date, notice, and collection stage determine the available route and deadline.