In Smith International v. Robinson, No. 10498, (La. App. 1 Cir. January 9, 2020), the Louisiana First Circuit Court of Appeal held that the Louisiana Department of Revenue (the “Department”) may not impose a late payment penalty when a taxpayer has paid the amount reported to be due on its tax return. The Court’s holding limits the ability of both the Department and local tax collectors to “stack” both late payment and understatement penalties, resulting in the taxpayer being subjected to penalties that equal or exceed 35% of additional tax assessed after an audit.  While this result is contrary to an earlier Fourth Circuit decision,[1] discussed below, most appeals filed by non-Louisiana taxpayers lie to the First Circuit so this is a welcome development for many.  Further, the result in Smith International parallels the interpretation of the comparable federal tax penalties on which Louisiana penalty provisions are based.  That is, the federal tax code imposes different penalties for delinquent payment and negligent understatement of the tax shown due on a return.[2]  In addition, the First Circuit affirmed the jurisdiction of the Board of Tax Appeals to consider the propriety of the imposition of penalties in certain circumstances, affording an important remedy to taxpayers in situations in which penalties are improperly imposed.

The dispute in Smith International involved a corporation income and franchise tax audit for the 2008 through 2010 tax periods.  After paying the assessment of additional corporation franchise tax and interest, Smith International (“Smith” or “the taxpayer”) appealed the Department’s assessment of late payment and negligence (i.e., understatement) penalties to the Louisiana Board of Tax Appeals (the “Board”).  The taxpayer challenged the imposition of the late payment penalty under La. R.S. 47:1602(A) as not applying when the amount shown due on the return has been timely paid.  The taxpayer also challenged the imposition of the negligence penalty under La. R.S. 47:1604.1, because, for the tax periods at issue (prior to July 1, 2015), the negligence penalty applied only in the event of “willful negligence or intentional disregard of rules and regulations.”[3]  The Department disagreed and also filed an exception alleging that the Board lacked jurisdiction to redetermine the imposition of penalties where the Department itself had declined to waive them.

The Board of Tax Appeals Decision

In Smith International v. Secretary, Department of Revenue, 2018 WL 4608117 (La. Bd. Tax. App. April 10, 2018), the Board quickly dispatched the Department’s exception of lack of subject matter jurisdiction by explaining that the Taxpayer’s petition did not request a waiver of penalties, but rather asserted that the penalties were not owed in the first instance. The Board then noted that La. R.S. 47:1407 grants it jurisdiction over all matters related to appeals for redetermination of an assessment, including the assessment of penalties.  This holding is important because the Department routinely disputes the Board’s ability to review penalty assessments, and a contrary holding would leave taxpayers without this important remedy in appropriate circumstances.

The Board then addressed the issue of the late payment penalty, finding the imposition to be improper because, under the plain language of the statute, the penalty only applied when the “taxpayer fails to timely remit to the secretary of the Department of Revenue the total amount of tax that is due on a return which [the taxpayer] has filed.”[4]

Finally, the Board held that the Department was prohibited from applying Act 128 retroactively to tax periods before July 1, 2015, its effective date. In so holding, the Board noted that, under Louisiana law, and in the absence of contrary legislative expression, a substantive law – i.e., a law which establishes new rules, rights, and duties, or changes existing duties – may only be applied prospectively.  Because Act 128 increased the amount of the understatement penalty for negligence and removed the willfulness requirement, the Board concluded that Act 128 was a substantive law that could not be applied retroactively.

The First Circuit’s Holdings

On appeal, the Department challenged the Board’s rulings on its exception for lack of subject matter jurisdiction and the application of the late payment penalty to the Louisiana First Circuit Court of Appeal. The Department did not, however, appeal the Board’s ruling that Act 128 could not be applied retroactively.

In its opinion, the First Circuit affirmed that the Louisiana Board of Tax Appeals has jurisdiction to redetermine the assessment of penalties by the Department. The court agreed with lower tribunal that the taxpayer was not requesting a review of the Department’s denial of a request for waiver of penalties, but in fact, was challenging the imposition of penalties in the first instance as not supported by applicable law.  With respect to the substantive dispute, the assessment of the late payment penalty, the court considered the proper interpretation of the delinquent payment penalty in La. R.S. 47:1602(A), specifically, whether a penalty is due when a taxpayer (i) makes a timely return and remits payment as shown on the return, but (ii) fails to timely remit payment of any higher amount ultimately determined to be due by the Secretary.  After reviewing the statute, the Court concluded that the Legislature’s intent in creating the late payment penalty was to address a taxpayer’s failure to timely file a return and remit payment with that return, not to penalize a taxpayer’s failure to file a correct return.  Because Smith paid the amount identified as due on the face of its franchise tax returns when it remitted them, the Court concluded that Smith was not subject to the late payment penalty.

The First Circuit in Smith International took pains to explain its disagreement with a pre-amendment case, City of New Orleans’ Dept. of Finance v. Touro Infirmary, in which the Louisiana Fourth Circuit Court of Appeal took a different view of the statutory delinquency penalty.  The Touro Infirmary court had interpreted the penalty statute’s language “due on a return [the taxpayer] has filed” to mean “the total amount of tax owed by the taxpayer for the period that is supposed to be covered by the tax return.”[5]  The court in Touro Infirmary expressed its concern that a literal reading of the statute could allow a taxpayer to intentionally understate the amount of tax due on its return and still not be subject to the penalty.  While this is arguably a policy decision by the court which disagreed with the import of the language chosen by the legislature, it should be noted that the court was interpreting the law at a time when the Department had no true negligent understatement penalty in its arsenal. In its decision in Smith International, the First Circuit Court of Appeal explained that it disagreed with the Touro Infirmary court’s reasoning and noted the presence of separate penalty provisions that apply when a taxpayer makes an incorrect (that is, negligently understated) or even a fraudulent return. The First Circuit nonetheless read the relevant statutes and correctly distinguished between a situation in which a taxpayer incorrectly reports tax and one in which a taxpayer simply doesn’t pay tax that is due, understanding that different penalties apply in those fundamentally different situations.[6]

Implications

As a result of the First Circuit’s holding in Smith International, it now appears there is a split in the circuits in Louisiana regarding the assessment of the late payment penalty when a return is timely filed and the amount shown due thereon is paid.  Nevertheless, because the First Circuit Court of Appeal has exclusive jurisdiction to review appeals from the Board for disputes between the state and non-Louisiana taxpayers, this decision has the potential to benefit a significant number of taxpayers.  Still, the Smith International ruling regarding the interpretation of the late payment penalty statute is binding only in the First Circuit.  Also of note, because the Department did not appeal the Board’s decision regarding the retroactive application of Act 128, the Board’s decision on that matter is technically not binding.

The Smith International decision is nonetheless a significant taxpayer victory.  As a matter of routine, the Department assesses both late payment and negligence (i.e., understatement) penalties when additional tax is determined to be due after audit.  Those “stacked” penalties often amount to a significant amount of the additional tax due.  It should be noted that the late payment penalty statute applicable to local sales and use tax, La. R.S. 47:337.70(A)(1), contains language identical to the state statue at issue in Smith International.  Thus, the Court’s holding in Smith International appears to apply to both state and locally assessed late payment penalties.[7]

Application of the penalty for delinquency to the same negligent understatement (or, in effect, treating the delinquency provision as another understatement/negligence provision), is improperly cumulative and misunderstands the nature of the delinquency penalty under Louisiana law. Any taxpayer currently subject to audit by the Department or a local tax collector should review the audit results and determine whether the Department or the tax collector are improperly attempting to assess late payment or negligence penalties. In addition, any taxpayer currently appealing an assessment to the Board or a district court should review its petition to determine whether it properly pleaded that assessed late payment or negligence penalties are not owed.

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Jason Brown at (504) 293-5769, Willie Kolarik at (225) 382-3441, or Sanders Colbert at (504) 585-3021.

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[1] City of New Orleans’ Dept. of Finance v. Touro Infirmary, 905 So. 2d 314, 328 (La. App. 4 Cir. April 27, 2005).

[2] The Internal Revenue Code provides, in §6651, that a delinquency penalty applies to a failure “to pay the amount shown as tax on any return” while IRC §6662 applies an understatement or negligence penalty to the amount which was “required to be shown on the return.”

[3] La. R.S. 47:1604.1 (Effective to June 30, 2015).

[4] La. R.S. 47:1602(A) (emphasis added).

[5] City of New Orleans’ Dept. of Finance v. Touro Infirmary, 905 So. 2d 314, 328 (La. App. 4 Cir. April 27, 2005).

[6] It should be noted that, in its decision in Smith International, the First Circuit also considered another pre-amendment decision, specifically, Enterprise Leasing Co. of New Orleans v. Curtis, wherein the Court found a taxpayer liable for late payment penalties even though the taxpayer paid the amount of tax shown as due on the face of its returns.  In Enterprise Leasing, however, the First Circuit was considering only whether a good faith exception applied to the delinquency penalty. Enterprise Leasing Co. of New Orleans v. Curtis, 977 S02d 975 (La. App. 1 Cir. November 2, 2007)

[7] In addition, the local negligence penalty statute, La. R.S. 47:337.73, requires a finding of willfulness and was not amended by Act 128.