United States v. 2010-03-17 | 07-17256 | SEIU V. USA | precedential | opinion |

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 SERVICE EMPLOYEES INTERNATIONAL
UNION, 100 OAK STREET
CORPORATION, No. 07-17256 Plaintiffs-Appellees,
 D.C. No. v. 3:05-cv-04189-JL
UNITED STATES OF AMERICA, UNITED
STATES INTERNAL REVENUE SERVICE,
Defendants-Appellants. 
 SERVICE EMPLOYEES INTERNATIONAL
UNION, 100 OAK STREET No. 08-16105
CORPORATION, D.C. No. Plaintiffs-Appellants,  3:05-cv-04189-JL
v. OPINION
UNITED STATES OF AMERICA,
Defendant-Appellee. 
Appeal from the United States District Court
for the Northern District of California
James Larson, Chief Magistrate Judge, Presiding
Argued and Submitted
April 14, 2009—San Francisco, California
Filed March 17, 2010
Before: Thomas G. Nelson, Andrew J. Kleinfeld and
Milan D. Smith, Jr., Circuit Judges.
4349

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Opinion by Judge Kleinfeld
4350 SEIU v. UNITED STATES

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COUNSEL
Nathan J. Hochman, Assistant Attorney General, Robert W.
Metzler, Ivan C. Dale (argued), Tax Division, Department of
Justice, Washington, DC; Joseph P. Russoniello, United
States Attorney, San Francisco, California; for the United
States of America (appellant in 07-17256 and appellee in 08-
16105).
William E. Taggart, Jr., Oakland, California, for Service
Employees International Union and 100 Oak Street Corpora-
tion (appellees in 07-17256 and appellants in 08-16105).
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OPINION
KLEINFELD, Circuit Judge:
We address whether penalties on tax exempt organizations
for late filing of informational returns may be reduced by dis-
trict courts as a matter of discretion. We conclude that they
may not be.
I. Facts.
Labor unions do not have to pay income or other federal
taxes.1 But they do have to file informational returns disclos-
ing their income, disbursements, etc.2 Service Employees
International Union (“SEIU”) and its subsidiary 100 Oak
Street Corporation (“Oak Street”, SEIU’s Oakland address)
are labor organizations enjoying the tax exemption and bur-
dened by the return requirement.
SEIU filed its 1999 informational return twenty months
late, and Oak Street filed its 1998 informational return four
months late. The IRS applied a statutory formula based on the
length of delay and gross receipts, and imposed the penalties
provided for by the statute.3 SEIU had gross receipts of $11
million, Oak Street under $1 million, and the statutory for-
mula generated penalties of $50,000 on the union and $2,460
on Oak Street. Neither SEIU nor Oak Street paid their penal-
ties. The IRS sent to each a “Final Notice of Intent to Levy
and Notice of Your Right to a Hearing.” The union and Oak
Street each requested a “collection due process hearing” as
provided for by statute with the IRS Office of Appeals.4 They
argued that the late filing should be excused for reasonable
126 U.S.C. § 501(a), (c)(5).
2Labor unions must file IRS Form 990. 26 U.S.C. § 6033(a)(1); 26
C.F.R. § 1.6033-2(a).
326 U.S.C. § 6652(c)(1)(A).
4Id. § 6330(a).
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cause, because although their accountant had sent the returns
in time for timely filing, and they had signed the returns
months or years before they sent them for filing, their failure
to send them in resulted from some sort of administrative
oversight. They also argued that the penalties, $50,000 for the
SEIU and $2,460 for Oak Street, were excessive. The IRS
denied relief, noting various problems with the union’s argu-
ments, including lack of personal knowledge by one if its two
affiants, absence of signatures on the affidavits by both affi-
ants, and multiple delays.
SEIU and Oak Street did not pay the penalties or make
offers in compromise.5 Instead, they appealed to the United
States Tax Court, seeking to overturn the IRS’s decisions.6
The Tax Court dismissed their appeals for lack of jurisdiction.7
They then appealed to the district court for review of the IRS
determinations.8 They argued that the penalties should not
have been imposed because they had “reasonable cause”
under the statute9 and even if not, should be reduced. On cross
motions for summary judgment, the district court concluded
that there was no “reasonable cause,” but that as a matter of
discretion the IRS should have reduced the penalties. The dis-
trict court entered judgment in favor of the IRS, but for only
25% of the $50,000 penalty on SEIU and 50% of the $2,460
penalty on Oak Street, a net of $13,730 for the two of them
($12,500 for SEIU and $1,230 for Oak Street) instead of
$52,460. The district court denied the IRS any prejudgment
interest, but denied costs to the union and Oak Street.
5See id. § 7122; 26 C.F.R. § 301.7122-1.
626 U.S.C. § 6330(d)(1)(A) (2000). The statute was amended in 2006
to remove subparts (A) and (B) from § 6630(d)(1). Pension Protection Act
of 2006, Pub. L. 109-280, 120 Stat. 1019, § 855(b) (Aug. 17, 2006).
7Serv. Employees Int’l Union v. Comm’r, 125 T.C. 63 (2005).
826 U.S.C. § 6330(d)(1)(B) (2000).
926 U.S.C. § 6652(c)(4).
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The IRS appeals the reduction in the amounts of the penal-
ties and argues that in its capacity as an appellate court, the
district court had no jurisdiction to enter a money judgment.
The union and Oak Street cross appeal the district court order
denying them a costs award. The union does not cross appeal
the district court rejection of its claim that its delay was
excused by “reasonable cause.”
II. Analysis.
We have jurisdiction under 28 U.S.C. § 1291. We review
summary judgment de novo.10
The IRS argues that the amount of penalty is not subject to
discretion. It is right.
[1] The statute provides a formula, $20 a day times the
number of days of delay, subject to a ceiling, for exempt orga-
nizations with receipts not exceeding $1 million, or $100 a
day if gross receipts exceed $1 million.11 The ceiling is the
lesser of $10,000 or 5% of gross receipts for tax exempt orga-
nizations with gross receipts of no more than $1 million, and
$50,000 for tax exempt organizations with gross receipts
exceeding $1 million. For SEIU the formula amounts are
$100 per day and a $50,000 ceiling, for Oak Street, $20 per
day, and a $10,000 ceiling. Because the formula yields
$63,500 for SEIU’s 635 day delay, the union got the benefit
of the $50,000 ceiling. Oak Street owed $2,460 for its 123 day
delay, so the ceiling did not apply.12 The statute uses manda-
tory language in all respects, leaving the IRS no discretion in
deciding how much of a penalty to impose.
10See Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026,
1028-29 (9th Cir. 2001).
1126 U.S.C. § 6652(c)(1)(A).
12Oak Street’s gross receipts for the year were $240,000, 5% of which
is $12,000.
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Here is the language:
(c) Returns by exempt organizations and by cer-
tain trusts.
(1) Annual returns under section
6033(a)(1) or 6012(a)(6).
(A) Penalty on organization.
In the case of—
(i) a failure to file a return required under
section 6033(a)(1) (relating to returns by
exempt organizations) . . . on the date
and in the manner prescribed therefor
(determined with regard to any extension
of time for filing), or . . .
. . .
there shall be paid by the exempt organi-
zation $20 for each day during which
such failure continues. The maximum
penalty under this subparagraph on failures
with respect to any 1 return shall not exceed
the lesser of $10,000 or 5 percent of the
gross receipts of the organization for the
year. In the case of an organization having
gross receipts exceeding $1,000,000 for any
year, with respect to the return required
under section 6033(a)(1) . . . for such year,
the first sentence of this subparagraph shall
be applied by substituting “$100” for “$20”
and, in lieu of applying the second sentence
of this subparagraph, the maximum penalty
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under this subparagraph shall not exceed
$50,000.13
“There shall be paid $X” is language commanding a statu-
torily required amount. This language does not confer on the
agency discretion to decide how much ought to be paid. “The
word ‘shall’ is ordinarily ‘The language of command.’ ”14
[2] The penalty set by § 6652(c)(1)(A) is “either fully
enforceable or fully unenforceable.”15 A tax exempt organiza-
tion may avoid the penalty if they actually filed their return
on time or the reasonable cause exception applies.16 The rea-
sonable cause exception provides that “[n]o penalty shall be
imposed under this subsection with respect to any failure if it
is shown that such failure is due to reasonable cause.”17 The
reasonable cause exception supports the IRS’s all-or-nothing
interpretation, because it says “no penalty,” not a reduced penal-
ty.18
The Eleventh Circuit reads the analogous statutory provi-
sion for individuals19 the same way we read the language for
1326 U.S.C. § 6652(c)(1)(A) (emphasis added).
14Anderson v. Yungkau, 329 U.S. 482, 485 (1947) (quoting Escoe v.
Zerbst, 295 U.S. 490, 493 (1935)); see also Lopez v. Davis, 531 U.S. 230,
241 (2001) (“Congress used ‘shall’ to impose discretionless obligations”);
Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35
(1998) (“[T]he mandatory ‘shall,’ . . . normally creates an obligation
impervious to judicial discretion.”).
15See United States v. Sanford (In re Sanford), 979 F.2d 1511, 1513
(11th Cir. 1992); see also McMahan v. Comm’r, 114 F.3d 366, 368 (2d
Cir. 1997).
1626 U.S.C. § 6652(c)(4).
17Id.
18Id.; cf. United States v. Boyle, 469 U.S. 241, 245 (1984) (describing
“reasonable cause” as a way “[t]o escape the penalty” for filing a tax
return late).
1926 U.S.C. § 6651(a)(1)-(2).
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tax exempt organizations.20 “Reducing the amount of these
penalties would supplant Congress’ determination of the
proper amount of penalty, as set forth in the statutory formu-
las.”21 Likewise the Second Circuit.22
[3] The union argues that the IRS “had discretion under
IRC § 6652(c)(4) to abate the late filing penalties for ‘reason-
able cause,’ ” but that is not correct. That statute too is man-
datory, not discretionary. It provides that “[n]o penalty shall
be imposed” if the “failure is due to reasonable cause.”23 If a
nonprofit fails to file the informational return on time for rea-
sonable cause, the IRS has no discretion whether to impose or
reduce the penalty; it is flatly prohibited from imposing any
penalty at all.
The union argues that “[t]he IRS has abated penalties . . .
on hundreds, if not thousands, of occasions,” and courts have
approved the abatements, citing a Tax Court decision, Brown
v. Commissioner.24 We have no idea, beyond what the cited
case says, whether any of the supposedly abated penalties are
of the sort at issue here. The Brown case SEIU cites does not
support its argument. Brown had not filed his tax returns or
paid his personal income tax, so the IRS prepared a substitute
return for him and assessed tax based on it. When he subse-
quently filed and showed that his income was less than had
been attributed to him, the IRS abated the tax on his personal
income (not the penalty for late filing of a nonprofit’s infor-
mational return) to bring the tax into accord with what he
actually owed on the income he had actually earned.25 That is
20Sanford, 979 F.2d at 1513.
21Id.
22McMahan, 114 F.3d at 368 (“A failure to file a tax return on the date
prescribed leads to a mandatory penalty unless the taxpayer shows that
such failure was due to reasonable cause and not due to willful neglect.”).
2326 U.S.C. § 6652(c)(4).
24Brown v. Comm’r, 85 T.C.M. (CCH) 1015 (2003).
25Id. at *1.
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not partial reduction of a penalty, just more accurate determi-
nation of tax due. Some penalties are discretionary, but the
union has not pointed to any decision by any court that holds
that the penalty at issue here, the § 6652 penalty on nonprofits
for late filing of informational returns, is discretionary or may
be reduced in the discretion of the IRS or a reviewing court.
The district court cited two cases for the proposition that
the appeals officer and the district court had discretion to
reduce the penalty, Dixon v Commissioner26 and Schikore v.
BankAmerica.27 They are too remote from the issues in this
case to be of much use. Dixon holds that a pattern of govern-
ment misconduct amounted to a fraud on the court, so no
showing of prejudice was necessary to granting taxpayers
relief.28 There is no pattern of government misconduct or
fraud on the court in the case at bar, and no late filing by a
nonprofit of its informational return in Dixon. Though Dixon
holds that we have inherent power to vacate a Tax Court judg-
ment, sanction a party for fraud on the court, and fashion an
appropriate remedy, it holds these things in a context too
remote from the case at bar to be of much use for resolving
this case. Schikore holds that an ERISA retirement plan
administrator abused its discretion by denying a retiree the
benefit of the mailbox rule where she timely mailed in her
election form but the plan did not timely receive it,29 matters
of no relevance to the case at bar.
[4] We do not know from the record in this case whether
the SEIU and Oak Street could have achieved some reduction
in their penalties by making an offer in compromise.30 They
26Dixon v. Comm’r, 316 F.3d 1041 (9th Cir. 2003).
27Schikore v. BankAmerica Supplemental Retirement Plan, 269 F.3d
956 (9th Cir. 2001).
28316 F.3d at 1046-47.
29269 F.3d at 961.
30See 26 U.S.C. § 7122; 26 C.F.R. § 301.7122-1(a)(2) (“An agreement
to compromise may relate to a civil or criminal liability for taxes, interest,
or penalties.”).
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made none. Without a compromise, neither the words of the
applicable penalty statute, nor the cases construing it, furnish
any basis for discretionary reduction of the penalty. Congress
may have written the statute with so little give to let nonprof-
its know they could expect no breaks if they filed their infor-
mational returns late, or to prevent those adjudicating claims
from showing more lenience toward nonprofits they liked, or
for some other reason, but regardless, that is what Congress
did. Under the statute, there is no task for the agency or the
court to perform, in the absence of reasonable cause for the
failure to file, except simple arithmetic.
[5] The government contends that the district court lacked
authority to enter a money judgment, and should have treated
the case as an appeal. The district court’s jurisdiction is
indeed over the taxpayer’s “appeal,” and SEIU does not con-
test the government’s position, contending only that the judg-
ment could have been fashioned differently. Because the
SEIU does not contest this position, and the merits are now
fully resolved, we need not explicate the matter, and there is
nothing left for the district court to do on remand but affirm.
SEIU cross appeals the district court’s denial of costs in its
favor. Its theory is that it was entitled to be treated as a pre-
vailing party because it won a reduction in penalties, and the
burden was on the government to prove that its position was
substantially justified if it was to avoid costs.31 Since we
reverse the reduction in penalties, the claim for costs as a par-
tially prevailing party is moot.
The reduction in penalties in 07-17256 is REVERSED.
The denial of costs in 08-16105 is AFFIRMED.
31SEIU relies on 26 U.S.C. § 7430.
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