Grajales v. Comm'r of Internal Revenue

47 F.4th 58

Kirgizia I. GRAJALES, Plaintiff-Appellant,

v.COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.^†

Docket No. 21-1420

August Term 2021

United States Court of Appeals, Second Circuit.

Argued: May 19, 2022

Decided: August 24, 2022

FRANK AGOSTINO, Agostino & Associates, P.C., Hackensack, NJ (Phillip J. Colastano and Andrew D. Lendrum, Agostino & Associates, P.C., on the brief), for Plaintiff-Appellant.

POOJA A. BOISTURE, Department of Justice, Tax Division, Washington, D.C. (David A. Hubbert and Jacob Christensen, Department of Justice, Tax Division, on the brief), for Defendant-Appellee.

Before: JACOBS, WESLEY, NARDINI, Circuit Judges.

WESLEY, Circuit Judge:

Kirgizia Grajales (the "Petitioner") petitioned the United States Tax Court to redetermine her income tax deficiency after the Commissioner of Internal Revenue concluded that she was subject to a 10-percent exaction (the "Exaction") under 26 U.S.C. § 72(t) of the Internal Revenue Code (the "Code") for early distributions she made from her pension plan. Petitioner argues that the Exaction is not a tax but is, rather, a penalty, an additional amount, or an addition to tax within the meaning of Section 6751(c) of the Code—the imposition of which, under Section 6751(b)(1), requires written approval by the immediate supervisor of the relevant IRS official. The parties agree that the Commissioner did not obtain written supervisory approval for his initial determination to impose the Exaction.

After the parties submitted the case based on a stipulated record under Tax Court Rule 122, the United States Tax Court (Thornton, J. ) ruled that the Exaction is a tax, and therefore is not subject to the written supervisory approval requirement. We affirm the decision of the Tax Court; the plain and unambiguous language of Section 72(t) establishes that the Exaction is a tax, not a penalty, an additional amount, or an addition to tax within the meaning of Section 6751(c) that requires written supervisory approval. Petitioner is liable for the Exaction.

BACKGROUND

I. Facts¹

During the period relevant to this appeal, Petitioner was an employee of the State of New York and was a member of the State's pension plan—the New York State and Local Employees Retirement System. In 2015, at age 42, she borrowed from her pension account. Petitioner and the Commissioner received a Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. , reporting the gross distributions from her pension as $9,025.86 for 2015. When Petitioner timely filed her tax return for 2015, she did not report any of her retirement plan distributions as income.

In July 2017, the Commissioner issued Petitioner a notice of deficiency for the 2015 tax year determining that since Petitioner did not report her distributions, she had an income tax deficiency of $3,030.00. The notice also stated that Petitioner was subject to the Exaction in the amount of approximately $902.

Petitioner timely petitioned the Tax Court, requesting it redetermine her income tax deficiency.² The parties moved jointly under Tax Court Rule 122 to submit the case to the Tax Court based on a stipulated record without a trial. In their joint stipulation, the parties agreed that only $908.62 of Petitioner's pension plan distributions were taxable as an early distribution and, therefore, Petitioner's potential liability for the Exaction came to $90.86. Petitioner argued that she was not liable for the Exaction because Section 6751(b) required the Commissioner to obtain written supervisory approval for its initial determination of Petitioner's liability for the Exaction. The parties stipulated that the Commissioner had not obtained written supervisory approval for its determination of the Exaction. The Commissioner argued that none was required as the Exaction was a tax, not a "penalty," "addition to tax," or "additional amount" within the meaning of Sections 6751(b) and (c). The only remaining issue for the Tax Court was whether the Commissioner's failure to obtain written approval precluded Petitioner's liability for the Exaction. This issue turns on whether the Exaction is a tax or a penalty, when "penalty" is defined to include both any "addition to tax" or any "additional amount."

II. The Tax Court's Decision

The Tax Court held that the Exaction was a tax rather than a penalty within the meaning of Sections 6751(b) and (c), and that Petitioner was liable in the amount of $90.86 for the Exaction. The Tax Court first determined that, in other contexts, it has repeatedly held that Section 72(t) is a tax; it saw no need to characterize Section 72(t) any differently. While citing an array of its decisions, the Tax Court heavily relied on its opinion in El v. Comm'r , 144 T.C. 140 (2015). The Tax Court noted that El held that Section 72(t) labels the Exaction a tax and not a penalty, that several other provisions in the Code explicitly refer to the Exaction under Section 72(t) as a tax, and that Section 72(t) appears in chapter 1 with several income taxes whereas Section 6751 appears in chapter 68 with most of the other penalties in the Code.

The Tax Court then rejected Petitioner's argument that Section 72(t) should be considered an "additional amount" within the meaning of Section 6751(c). It reasoned that the phrase is "a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A" and the Exaction "is not a civil penalty enumerated in chapter 68." Grajales v. Comm'r , 156 T.C. 55, 58–59 (2021).

Next, the Tax Court rejected Petitioner's argument that the Supreme Court's opinion in National Federation of Independent Business v. Sebelius (NFIB) , 567 U.S. 519, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012), required it to adopt a functional approach to interpreting Section 72(t). The court ruled that NFIB did not require a functional approach as the stipulated case did not present a constitutional issue. The court reasoned that NFIB directed it "to look to the statutory text as ‘the best evidence of Congress's intent,’ " id. at 61 (quoting NFIB , 567 U.S. at 544, 132 S.Ct. 2566 ), which "expressly labels [the Exaction] a ‘tax’, consistently with the larger statutory structure," id. (citing El , 144 T.C. at 148 ).

Lastly, the Tax Court held that the bankruptcy cases Petitioner relied on as holding that the Exaction is a penalty were not controlling. The court explained that those cases were "based on the application of bankruptcy policy" and were "limited to determining priority of claims in bankruptcy proceedings." Id.

DISCUSSION³

The sole issue on appeal—a novel one for us—is whether the Exaction is a penalty within the meaning of Section 6751(c) that requires written supervisory approval under Section 6751(b).

When interpreting the meaning of a statutory provision, "the best evidence of Congress's intent is the statutory text." NFIB , 567 U.S. at 544, 132 S.Ct. 2566. Statutory interpretation always "begins with the plain language of the statute." Peralta-Taveras v. Att'y Gen. , 488 F.3d 580, 584 (2d Cir. 2007) ; see Panjiva, Inc. v. U.S. Customs and Border Prot. , 975 F.3d 171, 176 (2d Cir. 2020). We must not look merely at the plain language of a particular clause, "but consider in connection with it the whole statute." Dada v. Mukasey , 554 U.S. 1, 16, 128 S.Ct. 2307, 171 L.Ed.2d 178 (2008) (internal quotation marks omitted). Indeed, "the true meaning of a single section of a statute in a setting as complex as that of the revenue acts, however precise its language, cannot be ascertained if it be considered apart from related sections." Comm'r v. Engle , 464 U.S. 206, 223, 104 S.Ct. 597, 78 L.Ed.2d 420 (1984). When Congress uses certain language in one section of the statute yet omits it in another section of the same Act, "it is generally presumed that Congress acts intentionally and purposefully in the disparate inclusion or exclusion" of that language. Homaidan v. Sallie Mae, Inc. , 3 F.4th 595, 602 (2d Cir. 2021) (quoting Russello v. U.S. , 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983) ). And where "the statutory language provides a clear answer," our inquiry "ends there." Peralta-Taveras , 488 F.3d at 584 (quoting Hughes Aircraft Co. v. Jacobson , 525 U.S. 432, 438, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999) ). Typically, we may resort to the legislative history and other canons of statutory construction only if the plain language is ambiguous or unclear. See Panjiva , 975 F.3d at 176 ; Auburn Hous. Auth. v. Martinez , 277 F.3d 138, 143 (2d Cir. 2002).

This appeal turns on the construction of three statutory provisions in the Code: Section 72(t), Section 6751(b), and Section 6751(c). Section 72 concerns how amounts received as annuities are treated for tax purposes. See 26 U.S.C. § 72. Section 72(t) is captioned "10-percent additional tax on early distributions from qualified retirement plans." Id. § 72(t). Subsection 72(t)(1), subtitled "Imposition of additional tax," states:

If any taxpayer receives any amount from a qualified retirement plan ..., the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

Id. § 72(t)(1). Sections 6751(b) and (c) appear later in the Code at chapter 68, entitled "Additions to the Tax, Additional Amounts, and Assessable Penalties." Section 6751(b) states "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate." 26 U.S.C. § 6751(b). Section 6751(c) explains that "[f]or purposes of this section, the term ‘penalty’ includes any addition to tax or any additional amount." Id. § 6751(c).

Petitioner argues that the plain language of Section 72(t) shows that the...