Tax Court Holds the TFRP is a Penalty Subject to § 6751(b) Supervisor Written Approval Requirement (1/23/20)

Update 1/27/20 9:15am:  Bryan Camp offers an excellent discussion of Chadwick:  Bryan Camp, Lesson From The Tax Court: §6672 Trust Fund Recovery Penalty Is Really A Penalty ... Sort Of (Tax Prof Blog 1/27/20), here.

The Tax Court has been on a tear recently with precedential (including reviewed) T.C. opinions and significant T.C.M. opinions dealing with the nuances of § 6751(b)’s immediate supervisor written approval requirement.  See e.g., FTP2019 Update 05 - § 6751(b)'s Requirement for Supervisor Written Approval for Penalties (1/11/20; 11/23/20), here.  Tuesday, the Tax Court dropped another decision, Chadwick v. Commissioner, 154 T.C. ___, No. 5 (2020), here, holding that

A TFRP [Trust Fund Recovery Penalty in § 6672] is a “penalty” within the meaning of I.R.C. sec. 6751(b)(1). It is thus subject to the requirement that written supervisory approval be secured for the “initial determination of such assessment.

As I noted in the blog above, that was still an open issue, although Tuesday's Chadwick opinion, though precedential in the Tax Court, does not necessarily close the issue.  The IRS had taken the position that the TFRP is not a penalty for § 6751(b)’s immediate supervisor written approval requirement and may appeal.

The relevant portion of the opinion is Slip Op. 11-17.  That’s relatively short (those interested must read it), so I’ll just bullet point the key points in the Court’s analysis.

• The Code calls the TFRP a penalty.  “Section 6672 was in place in 1998 when Congress enacted section 6751, and Congress is presumed to have known that section 6672 refers to the liability it creates as a ‘penalty.’” (See Slip Op. 11 n. 2.)
• Congress placed § 6672 among the penalty sections of the Code.
• Section 6751(c) says that penalties include “includes any addition to tax or any additional amount.”
• The TFRP imposes liability for “willful” conduct, imposed as a sanction for not doing something.  “From the standpoint of the person sanctioned, they are “penalties” both as denominated by the Code and in the ordinary sense of the word.” (Slip Op. 15.)
• Apparently addressing the IRS argument that TFRP was a tax because assessed and collected in the same manner as taxes, the applicable section simply says that the TFRP and other penalties are collected “assessed and collected in the same manner as taxes.”  So this argument would exempt from § 6751 many penalties to which it plainly applies.  (Slip Op. 16.)

JAT Comments:

1.  I don’t think the opinion addresses what is the more salient point–the TFRP is not a tax but a collection mechanism for the tax.  Penalties as normally conceptualized in the Code are liabilities (sanctions) in addition to the tax.  Yet, if the underlying trust fund tax is paid (e.g., by the employer), there is no sanction.  Think in terms of IRC liabilities that are clearly penalties--the accuracy related and civil fraud penalties; if the taxpayer pays the tax, the penalties do not disappear.  The TFRP does.

2.  Compare similar secondary collection mechanisms in the Code that require some third party to pay the tax if the taxpayer does not.  These secondary collection mechanisms include transferee liability under § 6901, third party liability under § 3503 (similar to TFRP) for lenders, sureties or other persons supplying funds to the taxpayer under § 3505, and beneficiary and donee liability under § 6324.  (I set aside liability under the Federal Priority Statute in 31 U.S.C. § 3173, because that is not an IRC imposed liability/penalty.)  All of these IRC liabilities function in material part just like the TFRP–they impose liability on a person other than the taxpayer as a result of that person's failure to insure the tax was paid.  The only difference is that the TFRP, § 6672(a) calls the liability a “penalty.”  Will all of those secondary collection mechanisms now be subject to § 6751(b)?  Should the mere penalty label Congress puts on the TFRP control that result?

Now, I suppose that the liability might be considered a penalty if the IRS asserted and the courts allowed the TFRP to apply to multiple responsible persons to collect more than the tax involved.  Then it truly would be more than just a collection mechanism for the underlying tax and impose liability for misbehavior beyond the tax involved.  But that is not the case.

The fact that the IRS only collects the underlying tax (either from the employer or the responsible persons appears to be a matter of administrative or judicial largesse via an interpretation that is not consistent with the plain language of § 6672.  See Duncan v. Commissioner, 68 F.3d 315, 318 (9th Cir. 1995), here.

Those wanting to chase down other considerations of whether the TFRP is a "penalty," might enjoy Judge Posner's analysis in Mortenson v. National Union Fire Insurance Co., 249 F.3d 667 (7th Cir. 2001), here (considering the issue of "whether the statutory penalty imposed on responsible persons for willful nonpayment of payroll taxes is a "penalty" within the meaning of an exclusion in the D & O policy;" and holding that "section 6672(a) imposes the civil counterpart of a fine.")

3.  The legislative history of § 6751(b) indicates that Congress' concern was the agent's threat of using penalties as leverage to extract some other concession (usually some concession on the civil tax liability) that would otherwise not be appropriate.  But, the vis-a-vis the responsible person, there is no other liability on the table, so there is no other improper advantage to be extracted.  A § 6672 investigation is a one-off where the specter of the liability is on the table from the start of the investigation.

4. So, I am not convinced that Judge Lauber got this one right.

5. But, I do suspect that Judge Lauber's bottom-line holding will ultimately prevail.