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12.

United States Attorney General Opinion, June 3, 1919

31 U.S. Op. Atty. Gen. 459

COMPROMISE OF PENALTIES ARISING UNDER INCOME-TAX LAWS.

[459] The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, is authorized to compromise claims for penalties imposed and interest charged against taxpayers for delinquencies under the income tax laws in all cases where, in his judgment, such compromises are for the interest of the United States.

TO THE SECRETARY OF THE TREASURY.

SIR:

I have had under careful consideration for some time a request from your predecessor for an opinion as to the power of the Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, to compromise claims for certain penalties arising under the income-tax laws. The specific claims mentioned are:

  1. Claims for amounts 50 per cent in addition to amounts of income and excess-profit taxes assessed under [460] authority of section 3176 of Revised Statutes, as amended by section 16 of the act of September 8, 1916 (39 Stat. 775), and of section 212 of the act of October 3, 1917 (40 Stat. 307), in cases of failure to make and file returns or lists within the time prescribed by law or by the collector;

  2. Claims for amounts 100 per cent in addition to amounts of income and excess-profit taxes assessed under authority of said sections in cases of false or fraudulent returns or lists willfully made; and

  3. Claims for sums of 5 per cent on amounts of income and excess-profit taxes not paid when due and interest at the rate of 1 per cent per month on said taxes, the collection of which is authorized by sections 9(a) and 14(a) of the act of September 8, 1916 (39 Stat. 763, 772), and section 212 of the act of October 3, 1917 (40 Stat. 307).

The exact question submitted is whether, under the authority of section 3229 of Revised Statutes, the Commissioner of Internal Revenue is authorized to compromise these penalties in cases in which there is no doubt as to the legal liability of the taxpayer or as to the collectibility of the claim, but in which, in the opinion of the Secretary of the Treasury and that of the commissioner, considerations of justice, equity, and public policy warrant a reduction of the amounts to be collected on the ground that the statutory amounts are in the nature of penalties for delinquencies, and that, though such amounts are technically due and are collectible, the collection of them inflicts punishment which is unduly severe in view of the culpability.

Section 3229 of the Revised Statutes is as follows:

'The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the internal-revenue laws instead of commencing suit thereon; and, with the advice and consent of the said Secretary and the recommendation of the Attorney Geenral, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the commissioner the opinion of the Solicitor of Internal Revenue, or of the officer acting as such, with his reasons therefor, with a [461] statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed, and the amount actually paid in accordance with the terms of the compromise.'

It will be obsered that the power to compromise is given in very broad and general terms. Congress has not seen fit to specify the considerations which shall control the commissioner in determining whether a case ought or ought not to be compromised instead of commencing suit, nor to place any limitation upon this exercise of power, except that his action shall be with the advice and consent of the Secretary of the Treasury. After suit is commenced the power is to be exercised only with the advice and consent of the Secretary of the Treasury and the recommendation of the Attorney General.

The act of Congress which, somewhat condensed and shortened, was carried into the Revised Statutes as section 3229 was section 102 of the act of July 20, 1868 (15 Stat. 125, 166). That act conferred the power to compromise in all cases arising under the internal-revenue laws where, instead of commencing or proceeding with a suit, 'it may appear to the Commissioner of Internal Revenue to be for the interest of the United States to compromise the same.' The language just quoted was omitted from section 3229. It will be seen, therefore, that the original act authorized a compromise whenever, in the opinion of the Commissioner of Internal Revenue it was 'for the interest of the United States.' These words were by way of limitation upon his power. Their omission from section 3229, therefore, can not be said to render the power more restricted than it was under the original act. Certainly, then, section 3229 can not be given a narrower meaning than to say that the power is conferr ed to make any compromise which in the opinion of the commissioner, acting with the advice and consent of the Secretary of the Treasury, and, in the event suit has been commenced, upon the recommendation of the Attorney General, will be for the interest of the United States. The fact that the act applies to both civil and criminal cases, and the further fact that when a compromise [462] is made there shall be placed on file the opinion of the Solicitor of Internal Revenue stating the seasons for the compromise, the amount of tax assessed, the amount of additional tax or penalty imposed, and the amount actually paid, make it plain that whatever power to compromise is given extends to penalties, such as those mentioned in the request for this opinion.

Opinions of my predessors touching the nature and extent of the power of the commissioner to make compromises are more or less conflicting and it will not, I think, serve any useful purpose to review and attempt to reconcile them. I have given them, as well as all decisions of the courts bearing in any way on the question, careful consideration and will content myself with stating my conclusions.

Your request does not relate to compromises of taxes, but only to penalties and interest imposed on account of delinquencies of the taxpayer. I shall accordingly confine my opinion to penalties and interest.

It seems clear that Congress has left it to the judgment and discretion of the commissioner to determine when it is to the interest of the United States to compromise such claims instead of commencing or prosecuting suits therefor, and that the only limitation placed upon the exercise of this judgment and discretion is that his action shall be with the advice and consent of the cabinet officers mentioned in the statute. And I am of opinion that, subject to this limitation, he has the power to compromise the penalties and interest mentioned in the request for this opinion whenever, in his judgment, such compromises are for the interest of the United States. Congress has not said that such compromises may be made only when in the judgment of the commissioner more money can thereby be realized than can be realized by commencing and prosecuting a suit. It can not be said, therefore, as a matter of law, that the power to compromise is limited to cases in which either the liability f or the penalty or the collectibility of the claim is doubtful. In these matters I think the judgment of the commissioner as to what is for the interest of the United States is made conclusive. What considerations shall control are fixed by no rule of law, but depend upon [463] his own discretion and sound judgment exercised in good faith. It may be that with respect to the amount of tax to be collected, or the amount of penalty resulting from wilfull fraud, the commissioner may never find a case in which he will feel justified in accepting less than can be legally collected, whereas in cases of penalties resulting from accident, negligence, or technical omission, he may honestly believe that the interests of the United States will be best served by accepting less than the full penalty. In such cases, I am of opinion that he has the right to compromise upon any ground which, in his judgment, renders the compromise for the interest of the United States.

Respectfully,

A. MITCHELL PALMER.