More on § 6751(b)'s Written Supervisor Approval Requirement (2/4/20)

Keith Fogg has a great post today on the continuing § 6751(b) saga.  Belair Woods – The Ghouls Continue (Procedurally Taxing Blog 2/4/20) here.  Readers know that saga – the § 6751(b), here, requirement that a penalty cannot be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.”  I have covered this saga in many posts, but the most relevant is the one I posted when Belair Woods was decided along with other contemporaneous decisions.  FTP2019 Update 05 - § 6751(b)'s Requirement for Supervisor Written Approval for Penalties (Federal Tax Procedure Blog 1/11/20; 11/17/23), here.  Another good read on the issue is Bryan Camp’s Lesson From The Tax Court: A Practical Interpretation Of The Penalty Approval Statute § 6751 (Tax Prof Blog 1/13/20), here.

Keith, Bryan and I lament the shoddy legislation.  But, the courts (and we) have to take the statute and it is,

If one were a textualist (such as Justice Kagan who famously asserted "we're all textualists now," but she did not mean it exactly as Justice Scalia did), then you would, as Judge Lauber did, focus on the word "determination" because that is the word the statute uses.  My quick and dirty search on LII for the the word determination in the IRC 1986 (26 USC) shows the word used 511 times.  I looked at some of those, but could not discern that the word is a sufficient term of art that might be applicable to § 6751(b).  So, it is unclear what determination means, particularly when drafted by a bunch of ideologues with no background for tax procedure or even appreciation of the IRS. (See my comment #2 below.)

We could apply a dictionary (a favorite of textualists who view anything but the text (particularly legislative history) with disdain).  I do note in passing that, use of a dictionary, seems to make the dictionary something like legislative history (and politically unaccountable legislative history), but let’s move on.

Merrian-Webster, here, on line offers several nuanced definitions of “determination” applicable in different contexts.  These are the ones that seem appropriate (emphasis supplied):

1alaw : a judicial decision settling and ending a controversy
b: the resolving of a question by argument or reasoning
3a: the act of deciding definitely and firmly
b: firm or fixed intention to achieve a desired end

So, let’s say that this dictionary captures the word determination in 1998 when § 6751(b) was enacted.  I think it is fair to say that the concept in use of the word “determination” is that a decision has been made.  It is not that the actor (a court, a government agent, or everyday person) is thinking about doing something; it is that the actor has made a decision to do something.

But, the statute also says that the determination must be the "initial determination."  I don't think a dictionary is going to help there, but the statutory text does indicate that there can be more than one determination and that the locus for the text  is the first one.

Judge Lauber addresses this concept (Slip Op. 14-16):

The statute requires approval for the initial determination of a penalty assessment, not for a tentative proposal or hypothesis. As the Second Circuit noted in Chai, a “determination” denotes a “consequential moment” of IRS action. See Chai, 851 F.3d at 220-221 (analogizing the “initial determination” of a penalty to the “first determination made by the Social Security Administration of a person’s eligibility for benefits” (quoting Black’s Law Dictionary 460 (7th ed. 1999))). The natural place to look for an initial “determination” of a penalty assessment is a document that formally communicates to the taxpayer a definite decision to assert penalties.  

As used elsewhere in the Code, the words “determine” and “determination” carry with them a sense of definiteness and formality. In the deficiency context the IRS issues a notice of deficiency when it “determines” that a deficiency exists. Sec. 6212(a). The essential purpose of that document is to provide formal notice that a deficiency “has been determined.” Pietz v. Commissioner, 59 T.C. 207, 213-214 (1972). In collection due process (CDP) cases, we review the “determination” of the Appeals Office set forth in a “notice of determination.” See sec. 6330(d)(1); IRM pt. 5.1.9.3.9 (Feb. 7, 2014). In each instance, the “determination” is embodied in a written communication to the taxpayer that notifies him of a final IRS decision and of his right to appeal that decision to the Tax Court. 

The “initial determination” of a penalty may occur earlier in the administrative process, but it still must be a formal act with features resembling those that a “determination” itself displays. Like the 30-day letter involved in Clay, the “initial determination” of a penalty assessment will be embodied in a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties. 

I think the foregoing analysis is within the reasonable bounds of a textualist approach to the statute applying the concept of initial determination to the IRS audit processes.  (Even this textualist approach as stated in the quote is, I think, somewhat informed by the legislative history.)

But the other judges, embracing their spins on the legislative history, want to untether the statutory “initial determination” requirement from its normal meaning of something like a determination as Judge Lauber defined it roughly consistent with textualism.  Of course, many textualist judges (generally conservative or libertarian (to the extent there is a difference)) treat legislative history as bogus, a “fake” referrant to statutory interpretation because people out to influence or subvert the system contort the legislative history, they imagine, so that it cannot really be a fair description of what the drafters intended the text to mean.  (OK, I avoid going into whether the proper meaning is what the drafters’ intended or the mythical public man would have read the statute to mean (original public meaning).)  But, at least in the context of this particular shoddy legislation, some judges are more than willing to find meaning for the words in the legislative history, even if they point to a meaning otherwise not carried by the words “determination” or "initial determination."

The legislative history says that a purpose–perhaps the–purpose of the requirement was to prevent agents from using the threat of penalties as bargaining points (chips), thus extracting some concessions from taxpayers that the true merits would not support.  The problem at the outset, of course, is that a threat is not a determination, initial or otherwise, and raising the possibility of discussion of a penalty is not a determination, initial or otherwise.  But the notion for resort to legislative history is that Congress cannot have meant what it said in the statute, or what it said under with the ordinary tools of statutory interpretation.

So, the other judges want to hold open the possibility that, if in some unspecified way, the agent somehow seriously raises the threat or perhaps even consideration of penalties that is sufficient to invoke the written supervisor approval requirement.  (Maybe these judges would exclude nonserious agents jokes about a penalty from being an initial determination; maybe not.)  That just makes no sense.  To be sure, an ideologically driven Congress (as was the case in 1998) could make that a requirement, but it certainly did not by use of the words determination or initial determination.  And such a broader holding would be dumb. I could conjure many examples, but here are two.

Example 1: The agent is interviewing the taxpayer who made a clearly improper claim for a business deduction (say a claim that an apartment that he uses for an extra-marital get away).  All the agent sees on the Schedule C is a miscellaneous line item for $24,000.  The agent inquires into that deduction.  The taxpayer thinking that he has been caught, properly describes the nature of the claimed deduction.  The taxpayer and the agent then know that the agent will deny that deduction.  So, the agent asks further questions related to a possible penalty.  What did you tell the return preparer about the deduction?  What documents did you provide the return preparer?  Did you discuss the deduction and how to report it with any other tax professional (such as a lawyer)?  The taxpayer and the agent both know at that point that the possibility of a penalty are clearly on the table and open for "discussion."  Has the agent made a determination?  Does it matter what the subjective intent of the agent is?  Say the agent has decided to recommend assertion of the penalty, but has not conveyed that determination to the taxpayer, instead just talking with the taxpayer as if penalties are an open issue (without any affirmative misrepresentation as to his subjective intent)?  Does it matter what the subjective understanding of the taxpayer is?  Are we really going to have penalty issues turn on subjective intent and understandings in the audit process?

Example 2: An agent is assigned an audit of a taxpayer that the IRS has determined from disclosures made by the promoter engaged in a Son-of-Boss transaction.    Readers will recall that Son-of-Boss is perhaps the quintessential bullshit tax shelter.  The taxpayer did not disclose the transaction on his original return.  The IRS has already announced in Announcement 2004-46, here, that, through settlement, the taxpayer can obtain a mitigated penalty of 10% or 20%.  The notion is that, if they do not settle, the penalties can and likely will be worse.  This raises the issue as to whether the Announcement itself even in advance of the specific taxpayer audit is the point at which the written supervisor approval is required even though the taxpayer had not been identified for audit?  How exactly would (or could) that work?  What about when the agent is assigned the case knowing it is a Son-of-Boss audit in which he will assert penalties?  What if, on the first meeting with the taxpayer or the taxpayer’s professional, the agent makes sure that taxpayer or professional knows that the penalties are on the table because the taxpayer did not enter the settlement?

I agree with Keith and Bryan that Judge Lauber’s plurality opinion offers the analysis.  (So, some may ask, what is a plurality opinion and what does that mean in the real world; here's the Wikipedia definition; I will write something on that sometime soon, using Belair Words as the jumping off point, since everyone who has gotten this far knows the parameters (mostly) of § 6751(b).)

JAT Comments;

1.  I agree that amendments to the statute, drafted by persons knowledgeable about how the system works, would be the best solution.  But, given Congress’ dysfunction, amendments are unlikely and might even be a bigger problem than the current statute.  I think that the IRS can provide a reasonable (perhaps not perfect) solution by interpretive regulation under its Chevron and Brand X authority.  I am talking about reasonable regulations and not regulations to support an extreme litigating position.  I think the IRS and Treasury can do that and produce a result that serves the taxpayer community, the IRS and the courts and get all of them out of the business of ad hoc determinations on marginal facts.  (E.g., did the agent cock his eye and begin asking questions directed only to facts relevant to a potential penalty?)

2.  This shoddy piece of legislation came in as part of larger IRS bashing legislation (and predicate hearings) from Congress.  The legislation was IRS Restructuring and Reform Act of 1998 ("the 1998 Act"), Pub. L. No. 105-206, 112 Stat. 685, 722 (July 22, 1998).   The 1998 Act contains other shoddy legislation where it was clear that the drafters did not know what they were doing.  Here is how I describe the process leading to the 1998 Act in my Federal Tax Procedure book (footnotes omitted):

The engine that fueled the Act was a highly publicized and politicized Senate Finance Committee (“SFC”) hearing into alleged IRS abuse.  Prior to those hearings, a blue ribbon panel had recommended significant changes to the IRS, but the SFC hearings so politicized the issues that I believe Congress lost its ability or desire to act rationally and in the best interests of the country.  The politicians on the Committee set about a path of slandering an agency that was, in fact, serving the country a lot better than those politicians asserted solely for political gain.  Those politicians unfairly brought discredit upon an agency that fairly–not perfectly–served a critical role in the operation of democracy as we know it.  Further, those politicians passed legislation that, on balance, created more problems than it solved.  Beyond the specifics of the legislation, the hearings and public ill-will fueled by the hearings sent shock waves throughout the IRS and, in some major respects, debilitated it from serving its critical mission.  A subsequent investigation by Congress’ own semi-independent investment authority, the Government Accountability Office (often initialized “GAO”), determined that the SFC’s politically charged allegations of IRS abuse were in major part false.  In short, for political gain, Congress trashed and I think substantially damaged a fine agency that served this country well; just as any large organization, it needed fixes but most of the problems Congress imagined were nonexistent and its solutions to the nonexistent problem were inappropriate.