Planned Investments, Inc. v. United States

Planned Investments, Inc. (PI) (plaintiff) sold a tax shelter. PI earned $64,000 from the shelter sales, which it reported on its federal tax return for the period between December 10, 1982, and November 30, 1983. PI stopped selling the shelter after being advised by its attorney in January 1983 that such sales could subject PI to tax penalties pursuant to Internal Revenue Code (code) § 6700. In late 1984, PI learned that the Internal Revenue Service (IRS) had determined that the shelter was abusive. In February and September 1985, PI met with the IRS to discuss PI’s shelter sales and the IRS’s potential imposition of a § 6700 penalty. In March 1986, the IRS sent PI written notice that it was penalizing PI $64,000 pursuant to § 6700. However, the IRS’s notice erroneously described the tax period as ending in December 1985 and mistakenly stated the IRS’s computation formula. The notice also failed to describe the specific activity for which PI was being punished. PI promptly paid $150 of the penalty and asked the IRS to abate the penalty and refund the $150. The IRS disallowed PI’s request via a letter that bore the heading “In Re: Section 6700: Promoting Abusive Tax Shelter Penalty” and stated that the penalty was $64,000 but again erroneously stated that the penalty was for 1985. PI sued the United States (defendant) seeking an abatement and refund. The district court granted summary judgment to PI, ruling that the IRS’s notice failed to provide PI with fair notice because it stated the wrong tax period and PI could not reasonably have determined that it was being penalized for 1982 conduct. The district court also rejected the United States’ contention that PI was not prejudiced or misled by any notice defects because PI had actual knowledge of the penalty’s basis and had a full opportunity to challenge the IRS’s position. The United States appealed.