Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (9/20/22)

In Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 9/13/22), CA11 here and GS here, the Eleventh Circuit has become the second Circuit to push against the machinations courts, principally the Tax Court, in trying to apply the written supervisor requirement of § 6751(b). In my Federal Tax Procedure book 370 (2022 Practitioner Edition) (available on SSRN here), I introduce the problem in the nonsensical statutory text (footnotes omitted):

Second, § 6751(b)(1) prohibits the assessment of a penalty “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Although not stated in the statute, the purpose of the requirement is to prevent agents from improperly using the threat of a penalty as inappropriate leverage–a “bargaining chip”–to extract concessions when the IRS institutionally had not made a determination to  assert a penalty. The wording of the statute, however, is facially nonsensical because there is no such thing in the tax law as the determination of an assessment and, in any event, the assessment comes long after the threat of penalties could have been made to bully taxpayers. In statutory interpretation lingo, if not nonsensical, the statutory text is “ambiguous,” a characterization which has spawned many opinions as the courts try to deal with the deficiencies in the statutory text through purposive interpretation strategies to apply the text as the courts think or speculate Congress intended but did not say in the statutory text. Section 6751(b) is a quintessential case illustrating this struggle to interpret and apply “ambiguous” statutory text on an ad hoc, case-by-case basis to interpret the “law” that can then be applied in future cases.

I then provide in the following pages (371-377) wanderings through the maze of opinions trying to make sense of this landscape. Basically, the wanderings show courts’ attempts to construct policy (or law) on an ad hoc basis around a statute with facially nonsensical text. These opinions behind these wanderings focus on IRS communications to the taxpayer rather than “the initial determination of such assessment,” as if communications were a proxy for that statutorily required initial determination.

The Eleventh Circuit decided that it could, and should, decide the case before it on the basis of the statutory text rather than the meanderings of courts crafting solutions, based principally on a purpose stated in the legislative history.

The crack in the dam on these ad hoc machinations came in an earlier opinion in Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022),  In Laidlaw’s, the Court swept past the mélange of factually nuanced cases and held “§ 6751(b)(1) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment.”  That was better than the ad hoc machinations, but left some possibility for more limited machinations.

Going further, in Kroner, the Court said (Slip Op. 7-8; 48 F.4th p. 1276):

            Kroner argues, citing a series of Tax Court decisions, that the statute restricts communications between the IRS and a taxpayer. The Tax Court has held that an initial determination of an assessment is any “communication that advises the taxpayer that [*8] penalties will be proposed . . . .” Clay v. Commissioner, 152 T.C. 223, 249 (2019), aff’d on other grounds, 990 F.3d 1296 (11th Cir. 2021). And the Tax Court has also held that a supervisor must approve the communication before it is delivered. See id. Essentially, the Tax Court reads the statute as follows: “No penalty shall be communicated to a taxpayer until such communication has been approved by the communicator’s immediate supervisor.”

            We disagree with Kroner and the Tax Court. We conclude that the IRS satisfies Section 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before it assesses those penalties. See Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 29 F.4th 1066, 1071 (9th Cir. 2022). Here, a supervisor approved Kroner’s penalties, and they have not yet been assessed. Accordingly, the IRS has not violated Section 6751(b).

            We believe this is the best reading of the statute for three reasons. First, we think it is more consistent with the meaning of the phrase “initial determination of such assessment,” which is  what must be approved. Second, we think it reflects the absence of any express timing requirement in the statute. And third, we think it is a workable reading in the light of the statute’s purpose. We address each reason in turn.

For further on Kroner, see Keith Fogg’s excellent discussion in The “What” and “When” of IRC 6751(b) (Procedurally Taxing Blog 9/15/22), here.

Judge Newsom’s concurring opinion in Kroner is a textualist’s cut on the dangers of the use of legislative history which seems to have driven all of the commotion and ad hoc decisions around § 6751(b). I am not so suspicious of the use of legislative history (selectively of course) to instill practical interpretive meaning to ambiguous statutory text. I do not argue that the Tax Court properly did so, but after all the Tax Court was driven in that direction by the Second Circuit in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017).

One day after Kroner, in a nonprecedential decision, the Eleventh Circuit remanded another case based on Kroner. Carter v. Commissioner,  2022 U.S. App. LEXIS 25749 (11th Cir. 9/14/22), CA11 here and GS here.

Finally, it seems to me that there are three ways to clean up this commotion about the proper interpretation and application of § 6751(b). 

• The Supreme Court could take certiorari but that too would likely be somewhat anecdotal addressing some narrow subset. And I am not sure the Supreme Court would want to or should go into this thicket of a poorly drafted statute.
• Congress could amend or repeal the statute with proper input from the IRS and the public.
• The IRS could use Kroner as an opportunity to clean up the mess holistically in appropriate notice and comment regulations. On the opportunity to fix the issue by regulation, I provided the following discussion in my Federal Tax Procedure Book 371 n. 1596 (2022 Practitioner Edition): 

   n1596 This appears to me to be a classic case where a well-considered statutory amendment or, failing that, comprehensive interpretive regulations could clean up the mess. The courts have already found the statute ambiguous, the condition required for “reasonable” interpretive regulations. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). By adopting well-considered interpretive regulations, the IRS could essentially moot out the plethora of prior and future court machinations to deal with the problem. See National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967, 981 (2005) (permitting the agency to adopt interpretive regulations contrary to prior judicial interpretations so long as the prior judicial interpretations are not compelled by the text of the statute, which would not be true here because the statute is ambiguous). I don’t think reversal of the court interpretations of § 6751(b) would be foreclosed under Brand X by prior judicial precedent that foreclose the agency new interpretation as occurred in United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012). An interpretive regulation, with notice and comment, by Treasury, the expert on IRS processes and the big picture, would likely produce a more holistic set of interpretations than courts can do anecdotally as unique cases arise. The problem with the regulations approach is that final regulations could take a very long time, perhaps a couple of years. But, since the regulations would be interpretive, Treasury could adopt a Temporary Regulation and, provided that the final Regulation is adopted within three years, the Temporary Regulation could be effective immediately (§ 7805(e)) and the final Regulation could be effective from the date of the Temporary Regulation (§ 7805(b)). And, perhaps even, the Temporary and Final Regulations might be persuasive authority under Skidmore v. Swift & Co., 323 U.S. 134 (1944) for application retroactively to the date of the statute for any case still in pipeline or getting there involving conduct prior to the effective date of the Temporary Regulation. Such retroactive application beyond the limits imposed by § 7805 is a long subject, I think that the interpretation might apply retroactively with the only limit being that the interpretation be within the scope of § 6751(b)’s ambiguity from the enactment of the statute.