The TFRP and the § 6751(b) Requirement for Supervisor Written Approval (11/9/15)

In United States v. Rozbruch, 2015 U.S. App. LEXIS 19223 (2d Cir. 2105), here, a nonprecedential opinion, the Second Circuit sustained the district court's holding that the TFRP penalty in the case under § 6672, here, did not fail the requirement in § 6751(b), here, for the written approval of "the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate."  The Court's holding is cryptic, so I will include the entire discussion of the argument on appeal:

Appellants argue that the District Court erred in holding that TFRPs imposed pursuant to Section 6672(a) of the Internal Revenue Code, 26 U.S.C. § 6672(a), do not trigger the written supervisory approval requirement of Section 6751(b)(1), id. § 6751(b)(1). But even assuming, without deciding, that TFRPs are governed by Section 6751(b)(1), the record here nevertheless supports a finding that the Government functionally satisfied Section 6751(b)(1)'s written supervisory approval requirement. Thus, we affirm the District Court's grant of summary judgment, which reduced to judgment Appellants' unpaid TFRPs. See Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 405 (2d Cir. 2006) ("[W]e are free to affirm a decision on any grounds supported in the record, even if it is not one on which the trial court relied.").

Apparently the Court cited Thyroff because the district court had not held for the Government based on functional satisfaction of § 6751(b)'s requirement.

The briefs are helpful in understanding how the Court threaded the needle to get to a summary affirmance while avoiding having to decide whether the TFRP was even subject to § 6751(b).  The briefs are here.

• Appellant's opening brief, here.
• Appellee U.S. Answering brief, here.
• Appellant's reply brief, here.

The gravamen of of the Appellant's argument is that the TFRP is a penalty subject to § 6751(b) because Congress said the TFRP is a penalty.  Appellant does make some policy arguments, but the force of the argument is that the TFRP is a penalty because Congress said so.  And this is true even though it functions, unlike other penalties, as simply a collection mechanism.  The Government's argument is that, although labeled a penalty, it is really just a fall-back collection device for the trust fund tax that was not withheld and paid over.  The applicability of § 6751(b) to the TFRP has not yet been decided, so, rather than decide the issue, the Court said that, even § 6751(b) did apply, there was functional satisfaction of the requirement.  I presume functional satisfaction is something like substantial compliance.  The reason, as recounted in more detail in the Government brief is that manager level approval was given in the process required to approve the TFRP.

Here is the relevant portion of the argument from the Government's brief (pp. 9-10):

2. IRS Procedures for the Assessment of TFRPs 

The statutory and internal IRS procedures that generally govern an IRS revenue officer’s recommendation and assessment of TFRPs against a responsible person are set forth in 26 U.S.C. § 6672 and Internal Revenue Manual (“IRM”) § 5.7.4. (PA 191-211). As the Rozbruch Defendants recognize, “[t]he IRM sets forth the policies, procedures, guidelines, instructions and delegations of authority that control the operation and administration of the IRS,” and serves as “the source that IRS agents, officers, and criminal investigators refer to for the governance of their day-to-day responsibilities” (Br. 32), but the IRM’s provisions are not mandatory and do not confer any legal rights on taxpayers. See, e.g., Fargo v. Comm’r, 447 F.3d 706, 713 (9th Cir. 2006); Valen Mfg. Co. v. United States, 90 F.3d 1190, 1194 (6th Cir. 1996). Pursuant to IRM § 5.7.4.5(7) and (10), revenue officers first recommend the assessment of TFRP liability by submitting a Form 4183, Penalty Assessment Recommendation, to a group manager. (PA 173-74, 203-04). Under IRM § 5.7.4.6(1)-(3), the group manager reviews and approves the TFRP recommendation by electronically signing the Form 4183. (PA 205 (“Group managers should document their concurrence with the proposed TFRP assessment in [the Integrated Collection System] when Form 4183 is approved.”)).  

Under 26 U.S.C. § 6672(b)(1)-(3), the IRS is prohibited from assessing the TFRP liability against the taxpayer unless he or she has had an opportunity to respond to a proposed assessment and obtain administrative review. Consistent with this statutory mandate, IRM § 5.7.4.7 provides that, after the Group Manager has approved the Form 4183 recommendation, the Revenue Officer is required to notify the taxpayer of the proposed TFRP assessment by issuing a “Letter 1153 (DO)” and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. (PA 174, 205-06). The Internal Revenue Code further provides that the IRS cannot assess a TFRP against a taxpayer until at least 60 days have passed after the notice required by § 6672(b)(2) was sent, so long as the taxpayer has not contested the proposed assessment. 26 U.S.C. § 6672(b)(2).

The detailed recitation of the facts indicate that the procedures were followed including that a group manager "approved the proposed assessments for these tax quarters with an electronic signature."  (See pp. 12-13.)

The U.S. Summary of the Argument (pp. 19-20) is:

The Rozbruch Defendants’ sole argument before this Court is that a TFRP is a “penalty” that triggers the managerial approval requirements of 26 U.S.C. § 6751(b)(1). But that issue is irrelevant to this appeal, because regardless of whether those requirements apply, the IRS satisfied them. In the district court, the government demonstrated that it obtained the managerial approvals specified by IRM § 5.2.4 before a TFRP is assessed—approvals that equally met the requirements of § 6751(b)(1). See infra Point I. 

In any event, to the extent the Court determines it is necessary to decide whether a TFRP is a “penalty” for the purposes of § 6751(b)(1), the district court was correct in deciding that the TFRP does not trigger the written managerial approval requirements of § 6751(b)(1). Under the IRS’s long-standing and constant policy, the government does not collect or retain more than the full amount of unpaid taxes withheld by employers from their employees’ pay, whether through the TFRP or other means; the TFRP thus serves merely as a collection device to ensure the taxes are paid, and not as a punishment for recalcitrant taxpayers. See infra Point II. For these reasons, the district court’s judgment should be affirmed.

Then, in the argument as to the functional satisfaction (pp. 21-23):

B. The IRS Satisfied All Preconditions to Assessment of a TFRP 

Whether a TFRP is a tax collection device or a “penalty,” the IRS satisfied all prerequisites for assessing it. This Court should affirm the district court’s judgment on that ground alone. To begin with, the IRS met all the requirements for assessing a TFRP. Section 6672(b) requires advance written notice to the taxpayer before a TFRP may be assessed. Of particular relevance here, IRM § 5.7.4 provides for written managerial approval of a revenue officer’s recommendation to assess the TFRP before the IRS can actually assess it—functionally, the same requirement imposed by § 6751(b)(1) for a penalty. Contrary to the Rozbruch Defendants’ assertions on appeal (Br. 5, 7, 27), the record in this case demonstrates that the IRS complied with the requirements of both §§ 6672(b) and 6751(b)(1). 

As set forth above, the IRS determined that the Rozbruchs were liable for TFRPs for sixteen tax quarters. For all sixteen tax quarters, and consistent with the IRM, an IRS group manager approved a revenue officer’s Form 4183 recommendation to assess TFRPs against the Rozbruchs. (PA 174-77, 213, 229, 245, 261, 296-97). Upon receiving Form 4183 approval for all sixteen tax quarters, and in accordance with 26 U.S.C. § 6672 and the IRM, a revenue officer sent the Rozbruchs a Letter 1153 (DO) and Form 2751, which notified them of the IRS’s intent to propose TFRP liability. (PA 174-77, 214-27, 230-59, 262-75). For all sixteen tax quarters, the Rozbruchs did not contest the proposed TFRP assessments. (PA 177). As a result, the IRS assessed TFRP liabilities against the Rozbruchs at least 60 days after the Letters 1153 (DO) and Forms 2751 were sent. (PA 177).  

Thus, even if this Court were to hold that the TFRP is a “penalty” that triggers the requirements of 26 U.S.C. § 6751(b)(1), the IRS met those requirements. Pursuant to section 5.7.4.5(7) and (10) of the IRM, revenue officers recommended the assessment of a TFRP liability by submitting a Form 4183 to a group manager. (PA 203-04). Pursuant to IRM § 5.7.4.6(1)-(3), a group manager reviewed and approved the TFRP recommendations by electronically signing the Form 4183. (PA 205). As this Court has acknowledged, “all that Section 6751 requires” by way of “written approval” is that “there is a written document or set thereof approving assessment, all bearing indications of personal consideration and approval by various superior officers.” Deyo v. United States, 296 F. App’x 157, 159 (2d Cir. 2008) (summary order). This Court further noted in Deyo that “Section 6751 requires only personal approval in writing, not any particular form of signature or even any signature at all. It does not matter whether a rubber stamp was used to provide the signatures.” Id. Accordingly, regardless of whether the TFRP assessments against the Rozbruchs were “taxes” or “penalties,” the question is immaterial because the group managers’ electronic signatures on the Forms 4183 in this case satisfied the “personal approval” requirement of 26 U.S.C. § 6751(b)(1). (PA 174-76, 213, 229, 245, 261, 296-97). Thus, whichever written managerial requirement applies to TFRPs, the IRS met it.  This Court should affirm for that reason alone.

The Government did argue, and the Second Circuit ducked the argument, that the TFRP is not subject to § 6751(b).  (See brief pp. 23 ff.)  That's a more difficult argument, which is well met in the reply brief.  Still, it may never need to be decided if the functionally equivalent TFRP pre-assessment procedures are followed.