In episode 56 of How Tax Works, Matt Foreman discusses Kwong v. United States, 179 Fed. Cl. 382 (2025), specifically whether interest and penalties must be abated, plus bonus commentary about whether Kwong will be reversed on appeal.

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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

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Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

Matthew Foreman [00:00:00]:
Hello and welcome to the 56th episode of How Tax Works. I’m Matt Foreman. In this episode I’ll discuss the imposition of penalties and interest and the curious case of Terry Kwong. How Tax Works is meant for informational entertainment purposes only. This may be attorney advertising and it is absolutely not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law regulations,

Matthew Foreman [00:00:36]:
Case law, and guidance to demystify how taxes shape the financial and business decisions we all make. Before we get started, a few administrative things. New episodes every two weeks. The next episode I’m not sure, I’m not going to record it for a couple weeks, but it’s either the imposition of penalties under 6039F of the code for late and non filing of forms of such forms such as 3520, 3520-A and 5471s I think 54, 72 as well. I also might talk about the New York City Pied-a-terre-tax which is brand spanking new, comes into effect on July 1st and is really an interesting tax, sort of the next generation of wealth taxes. But I don’t know what I’m gonna. I have to outline them first so I don’t know what’s going to be next. But you’ll, you’ll find out in two weeks.

Matthew Foreman [00:01:27]:
Right. If you have any questions, comments or constructive criticism, you can email me my FRB email address, webinars, speaking engagements, go to LinkedIn. That’s, that’s where I talk about them. So let’s talk about penalty’s interest in Terry Kwong. So Terry Kwong, it is a really weird fact pattern and an example of the need for precise or at least careful drafting. Precise is probably an expectation that’s unreasonable given my thoughts on legislators. So the facts, there’s a lot going on in the facts. I am not going to go through the facts in significant detail.

Matthew Foreman [00:02:07]:
I’m going to give them a brief overview because they’re kind of not relevant. The relevant part is actually the, the law which is interesting because it is for, for a case that has a lot of factual information and the facts are really kind of important. The facts kind of don’t matter. They’re actually more generally applicative applicable. Get that right. And you think so the facts. Terry Kwong owned a business US person. He owned and managed real estate.

Matthew Foreman [00:02:40]:
He lived so somewhere in the northern district of California. And I know that because this is a case from the Northern District of California. It is technically only applicable to those who live in the Northern District of California. It is not applicable to people elsewhere. So people say that you have to do this. This is the law now. I say maybe, there is going to be more litigation on it.

Matthew Foreman [00:03:05]:
I will give my thoughts on the likelihood of success at the end. We’ll see. Terry Mr. Kwong owned a business and he owned and managed real estate. He took a loss. The loss was disallowed. There were delinquency penalties. The tax years involved with 2007-2010-2011-2015 and 2016.

Matthew Foreman [00:03:23]:
So 2007, for those scoring at home, that is the year that I graduated from law school, took and passed the bar. Okay. I didn’t get a license until 2009 because I was lazy and filling out paperwork, but that was the year that I took and I graduated law school and passed the bar. All right. There are more details, but again, they’re not interesting and they’re not relevant, so I’m just going to skip them here. There is one note, okay. In page four, the decision says, and I’m quoting the briefing in this case was a journey. They then outline it.

Matthew Foreman [00:03:57]:
What very obvious, two things. One, the judge is done with this case. It has been way too long for them and they don’t want to deal with it anymore. And two, they’re not convinced that either of the parties had a good handle on the facts. They’re kind of annoyed about that, but they actually do a really good job. The judge does a very, very good job, in my view, of going through the facts, going through the analysis and explaining their decision. So I appreciate that, particularly for a judge that probably does not do a lot, easily assume, does not do a tremendous amount of tax analysis in their every day. The issue is section 7508A, not 7508a, but capital A, which was amended in 2019 and 2021.

Matthew Foreman [00:04:46]:
The 2021 amendment is actually irrelevant. They talk about it why it’s irrelevant in the decision. I’m not really going to talk about it because it’s not relevant and I don’t want to spend. I thought about including that, but it would take me about five minutes and it’s not relevant. This issue can’t come up anymore because of 2021 amendment and the issuance of another executive order in 2023. So it’s kind of. Anyway, so what does 7508A do? It permits the Secretary of the treasury to postpone a taxpayer’s deadline to file their tax return. Generally, during a period of natural disaster.

Matthew Foreman [00:05:29]:
That’s what it does. The treasury, the Secretary, the. There is an automatic extension that begins on the earliest incident date in the declaration and runs until 60 days. I’m quoting here. Okay. Begins on, quote, the earliest incident date in the declaration, end quote. And the automatic extension runs until, quote, 60 days after the latest incident date. So specified end quote.

Matthew Foreman [00:05:54]:
In 20 again, 2021, 7508A was amended. That’s not relevant here, so I’m not going to talk about it. The initial declaration was March 13, 2020. And on March 22nd it was declared to be the beginning. The beginning was on January 20, 2020 and continuing. Okay. There was no end date in the declaration. The declaration was also not by the Secretary of Treasury and was by the President.

Matthew Foreman [00:06:20]:
The President has all of the authority of the Secretary of Treasury and as we know then some. So even though it was not by the Secretary of the Treasury, it was done on the Secretary of the Treasury’s authority because the President can overrule the Secretary of the Treasury because they are the President. To quote Thomas Jefferson in Hamilton. If you don’t know that reference, you should go see Hamilton. It’s on Disney plus it is exceptional even though there’s a lot of fictional parts of it. Anyway, that’s not relevant. The declaration was amended to end on May 11, 2020 at 60. Add 660 days and we’re in July 2023.

Matthew Foreman [00:07:01]:
I believe the 10th for those of us who do math, but I’m not 100 sure. So we’re basically there now based on when this this bad boy this episode’s going to release. Congress did not intend for 75 the deferral under 7508A to apply for longer than three years. But that’s what the statute says. In fact, the Amendment they amended 7508A in November 2021. Again, I said I’m not gonna talk about it. Here we are. And it dealt with that and prevents that from happening again.

Matthew Foreman [00:07:36]:
Basically, it says it can only know last for so long. But the key is that 7508A has a plain and unambiguous meaning. So there is no need to look further. Intent is irrelevant if the meaning is plain and unambiguous. Okay. Lot of. There’s a lot of analysis that’s done as a tax practitioner because the meanings are not always plain and unambiguous. The entire episode 55 deals with a statute that is neither plain nor unambig.

Matthew Foreman [00:08:13]:
That the statute, the definitions in the statute are neither plain nor unambiguous. They’re confusing and poorly drafted. And here we are, right? So let’s get some music in here. And then we’re going to talk about the IRS’s arguments, statutes, the, the taxpayers arguments, and then we’re going to kind of bring it home. This is going to be a little shorter of a one of an episode for a variety of reasons. It’s not the most technical issue, but I think it’s really interesting. It’s one I want to do an episode on. So let’s get.

Matthew Foreman [00:08:41]:
Let’s get some music in here. Maybe you’ll dance to it. It’s a real, real good one. When I recorded this, I know tomorrow I’m gonna call the IRS and probably sit on hold while I get some stuff done. So I will. I will get to. To hear this wonderful song myself.

Matthew Foreman [00:08:57]:
So let’s get some music in. Be right back in a moment. So the IRS’s argument is basically that the regulations control. I’m going to give a really long argument, really long string site. But here we are. Treasury Regulation 3, Section 301.7508A-1 G3 Roman at 2. Again, Roman at 2, Little Roman. Right.

Matthew Foreman [00:09:45]:
So lowercase I’s. I was in law school. I think it was law school. No, I was in my LLM program and the professor said Romanette and like no one knew what he meant by Romanette. So that was kind of fascinating. I’ve been practicing for a while and I called them little eyes. But here we are. So anyway, that Treasure regulations section says that the postponement of the period cannot exceed one year.

Matthew Foreman [00:10:06]:
So it’s against regulations. However, we are in the era of Loper Bright, right? And the court must exercise independent judgment to determine whether the agency that issued the regulation had statutory authority. Look, let’s be honest here. This statute is plain and unambiguous. So we’re ignoring the regulation because the statute is unambiguous and the regulation contradicts the statement. I actually agree with that statement. We are. We should ignore the regulation because it’s.

Matthew Foreman [00:10:39]:
It contradicts it. One of the really interesting ones is there’s one in. In the 469 regs that some of them, I think, really overstep. Plus they’re temporary anyway. I think that’s really interesting. I think they need to update 469 to include the examples of the hours or give better authority to do it anyway. So the result. Right.

Matthew Foreman [00:11:02]:
And I’m really. Look, read the case. Because maybe don’t. I don’t know. But if you read the case, it is. It is a long and windy road. I see how the judge was done with the facts, but. But basically, the result is that an automatic extension period began on January 20, 2020, and ended July 10, 2023.

Matthew Foreman [00:11:24]:
Under section 6511a, not cap A, lowercase A, the taxpayer must file a request for refund no later than two years from the time the payment was made. What this means is that the two years in which 6511a didn’t toll during the period from January 20, 2020 through July 10, 2023. Right. So it’s the later of two years from the time the payment was made or three years from the date the return had to be filed, which is the imposition date, which means that you have until July 10, 2026. That’s your three years. Okay. To file for a request for a refund. That’s it.

Matthew Foreman [00:12:05]:
In conclusion, this is bonkers, okay? This opens a significant number of statutes. This reopens a significant number of issues that comes up. This reopens a whole lot of penalties and interest. Because penalties are imposed for late filing. They can’t. Because it wasn’t filed late and interest was imposed for late payments, and they can’t be done. There’s no imposition of late. There cannot be interest imposed because it was not filed late and the payments were not late.

Matthew Foreman [00:12:34]:
Right. So it reopened. Statues that were closed. Everyone request refunds, let, you know, go out, do it. It’s really important. Fire and brimstone coming down from the skies. What’s gonna happen? Right? Fire and brimstone coming down from the skies. Rivers and seas boiling.

Matthew Foreman [00:12:49]:
40 years of darkness. Earthquakes. Volcanoes. The dead rising from the grave. Human sacrifice. Cats and dogs living together. Mass hysteria. Right.

Matthew Foreman [00:12:58]:
If you get that reference, congratulations. If you don’t, you should watch Ghostbusters. Great film. Pretty solidly dated at this point, but still a good flick. So I think that’s a really important one. But, look, it’s not gonna be that bad. But I’ve always loved that quote, so we’re gonna go with it. Look, I think that on a very literal level, the Northern District of California got this one right.

Matthew Foreman [00:13:23]:
I really do. I think if you read it very tightly, I think that’s what it says. I think that the 9th Circuit. Get the circuit right in California has a really interesting argument. And I Think there’s going to be a lot of litigation, and I think that the IRS is going to expedite one of these cases into tax court because they want the tax court to go through this. I have real concerns that this gets overruled for a reason very similar to Farhi, which I may talk about in the next one, which was the overturning of penalty for 50 a late non filed 5471. And the reason I think this gets overturned is not because the judge got the answer technically wrong. They did not.

Matthew Foreman [00:14:18]:
I want to make that abundantly clear that I think the judge got this answer technically correct. I should say correct on the merits. However, I am of the opinion that this is one of those ones where you’d have to look at this and say there is literally no way this is what Congress intended. They changed the statute later. Obviously, this is not what they intended. We have to correct this. The counter argument to that is extremely simple and straightforward. That’s not what the statute said.

Matthew Foreman [00:14:56]:
That’s not, that’s not what the pronouncement said. The United States of America, the government has to live with their own mediocre drafting. And that is an extremely strong. I don’t know if it’s correct, but I always struggle with the idea that the Congress can get two bites of the apple. Now, I, I saw someone who said that they think that the fact that the statute was corrected later works against the government’s favor. I think that’s correct because Congress viewed it as, oh, we made a mistake, we changed it in 2021, but that was not the statute then tere’s also an argument that the statute being adjusted in 2021, the period ended in 2021 plus 60 days.

Matthew Foreman [00:15:52]:
It did not. You know, the, the argument in this, I think, is, in this, from this judge is correct essentially that the statute itself, the executive order itself only relates to the older statute, the original enabling statute, not the 2021 modification, although it was actually predated 2020. It predated 2019. It was modified in 2019. And I think that that’s important. I just think this is one of those ones. And if you look at Farhi and then there was a recent decision as well in this, and I think what they, they say, which I think is really, really important in a lot of them, is there’s no way this is what Congress intended. You have to look at the intent no matter what.

Matthew Foreman [00:16:39]:
Even if you think it’s clear, it’s pretty clear that this is not what Congress intended it to say. Now, for those of us who get in arguments over whether there should be an Oxford comma or serial comma, important to remember there’s a case in Maine where the lack of that comma made a sentence officially ambiguous, that the state of Maine lost a couple million dollars in revenue. I think that legislatures have to be held to the words they choose. They’re given tremendous power and authority to do things. They should be required to get it right. And if it’s at all ambiguous or the statutes, meaning in a very literal sense, cuts against what they’re saying it intended to mean, I think that is too bad and so sad. I do, however, I think that I could see a judge looking at this and going, well, there’s no way they intended for this to happen. Yet the treasury saying this, it’s not actually contradicting the statute, it’s clarifying the statute, that, okay, it says this, but there is a limitation period, or they’re saying, look, this is what Congress intended to have happen.

Matthew Foreman [00:17:51]:
This is what should have happened, therefore, this is what happened. I don’t know. It’s not the worst argument I’ve ever seen in my life, but I think you could see a situation where the courts give Congress two bites at the apple because they look at the intent and they enforce based on intent, not based on what they actually did. Again, I am not saying that’s right saying it’s wrong. Actually, I think I am saying it’s wrong. But that’s what. That’s what I’m saying I think will happen. So I think it’s really important to know that.

Matthew Foreman [00:18:26]:
I think it gets overturned, and I think it’d be incorrect for it to be overturned, because I think that, you know, this is it. And look, it’s not like it’s as much. Well, maybe it is as much money as the tariffs, but, you know, mediocre drafting and mediocre executive orders, that’s not, you know, each individual taxpayer’s fault. It’s incumbent upon taxpayers as voters to demand that our legislatures think about what they’re doing and make sure that they work through problems. Obviously, and I think I speak for everyone that no one in November of 2019 thought, you know, we’d be where we are today in terms of having a pandemic and sort of everything that’s going on. But by the same token, you know, having a piece of legislation that enables an executive order or unelected official treasury secretary, for example, to do something and to do it really functionally without guardrails, right, to say, well, you know, we don’t have to worry about how long or anything like that. You could say for 60 days, you could say for a year. You know, you could say for a period of time.

Matthew Foreman [00:19:36]:
And they did not. So was it the intent to have it go forever? No, but that’s what the statute says. You know, in the mortal words of the dude, that’s a bummer, man. You know that? That’s how it goes. So that’s it. That was the 56th episode of How Tax Works. Hope you learned something. I’ll be back in two short weeks.

Matthew Foreman [00:19:55]:
The 57th episode. Again, I’m either going to talk about penalties under 6039F, or maybe the New York City pied-a-terre tax. I just have to decide what I want to do, and then I’ll do it. I’m sure there’s basically no one who sits around and goes, oh, boy, I wish he talked about this instead of this. I can’t wait two weeks. It’s too exciting. That’d be. I mean, I’d be kind of neat, but I don’t think there’s anyone who does that.

Matthew Foreman [00:20:19]:
So, you know, I hope it’s not too disappointing and, you know, like, I’ll get to them eventually, but that’s it for now. Again, hope to see you in two weeks, or hope you listen to me in two weeks. I can’t see me, but thank you all so much. Thank you for listening.