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LATTERMAN v. UNITED STATES

May 11, 1988

EARL M. LATTERMAN, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant



The opinion of the court was delivered by: DIAMOND

 DIAMOND, UNITED STATES DISTRICT JUDGE.

 This is a tax refund action in which the plaintiff-taxpayer seeks a refund of certain interest accrued on an excise tax imposed pursuant to I.R.C. § 4975(c) (1982). Although the plaintiff acknowledges liability for the excise tax, he challenges the defendant's statutory authority under the Internal Revenue Code ("Code") to impose the accrued interest.

 Presently before the court are cross-motions for summary judgment. For reasons set forth below, we conclude that the defendant was authorized by the Code to impose the interest payment upon plaintiff and, accordingly, we will grant the defendant's motion for summary judgment and deny plaintiff's motion for summary judgment.

 Background

 The plaintiff, Earl M. Latterman ("plaintiff"), commenced this action seeking a refund of an interest payment added to an excise tax imposed upon and collected from him by the defendant, the United States of America, more specifically the United States Internal Revenue Service ("IRS").

 On December 13, 1983, plaintiff received Statements of Tax Due from the IRS in an amount totalling $ 22,669. The $ 22,669 figure was an excise tax levied upon plaintiff pursuant to I.R.C. § 4975(a) (1982) for prohibited transactions made by plaintiff in regard to certain qualified pension plans in the years 1975-1978 inclusive. The excise tax amount is equal to five percent of those amounts involved in the prohibited pension fund transactions.

 In addition to the excise tax notification, the IRS also notified plaintiff on December 13, 1983, that interest amounting to $ 16,894.44 had accumulated on the unpaid excise taxes and that such interest was due.

 Plaintiff did not challenge the assessment of the excise taxes and paid to the IRS the sum of $ 22,669 on December 20, 1983, some seven days after receiving Statements of Tax Due. Plaintiff did, however, object to the accumulation of interest and initially refused to pay to the IRS the interest amount.

 In his attempt to obviate the interest payment to the IRS, plaintiff pointed to I.R.C. § 6601(e)(2)(A) which provides that no interest may accrue on a "penalty" imposed by the Code if the penalty is paid within 10 days from the date of the IRS' notice and demand of the penalty. *fn1" Plaintiff maintained that the excise tax imposed by I.R.C. § 4975(a) is an "assessable penalty" within the meaning of I.R.C. § 6601(e)(2)(A). Because plaintiff paid the alleged penalty within 10 days of notice and demand, plaintiff tried to persuade the IRS that interest should not have been imposed in this case.

 In response, the IRS maintained that the excise tax assessed by § 4975 is a "tax" within the meaning of I.R.C. § 6601(a) (1982), which provides that interest accrues on any tax not paid on or before the last date prescribed for payment. *fn2" The IRS established that the last date for payment of a § 4975(a) excise tax is the last day of the seventh month after the end of the taxable year in which the prohibited transaction occurred. *fn3" Because plaintiff failed to make payments of the tax in a timely fashion under IRS rules and regulations, the IRS asserted that interest was properly applied.

 Because the IRS would not deviate from its position with respect to § 4975(a) and to avoid further accruals of interest and a possible federal tax lien, plaintiff finally paid the interest amount under protest. On the date of eventual payment, February 28, 1984, the interest amount had matured to $ 16,991.77, which amount was paid fully by plaintiff.

 On that same date, plaintiff filed with the IRS a claim of refund of the interest payments tendered on the same ground that the IRS was without statutory authority to impose interest payments. The issue raised by the parties before the court is whether the excise tax imposed under § 4975(a) is a " penalty" within the meaning of § 6601(e)(2)(A) or a "tax" within the meaning of § 6601(a).

 Plaintiff fulfilled his preliminary obligation of I.R.C. § 7422 (1982) by filing a claim of refund for all disputed amounts with the IRS pursuant to service regulations. After the IRS failed to satisfy the claim of refund by adhering to its previous interpretation of § 4975, plaintiff commenced this action for which he also seeks attorney fees under I.R.C. § 7430 (1982). The court ...


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