Friday, January 31, 2020

Legislative Rules And Chevron Deference An Oxymoron? (1/31/20; 2/10/20)

Today, I address courts frequent statements about Chevron deference applying to legislative rules.  I was reading the decision in Renewable Fuels Ass'n v. U.S. EPA (10th Cir. 1/24/20), here.  In the decision the Tenth Circuit says (cleaned up):
Legislative rules and formal adjudications are always entitled to Chevron deference, while less formal pronouncements like interpretive rules and informal adjudications may or may not be entitled to Chevron deference. 
This blog entry concentrates on the claim that legislative rules are always entitled to Chevron deference.  I claim that legislative rules are never entitled to Chevron deference because they are not interpretations of law; rather, legislative rules are the law, which means deference simply is not meaningful (just as courts do not defer to a statute).  (Caveat I do note one possible nuance in that, since the scope of a legislative rulemaking authority delegation is an interpretation, it is possible that the scope could be subject to agency interpretation and deference to that interpretation, although I argue that even as to scope deference is not appropriate.)

I start with an acknowledgement that the judges and scholars often claim that legislative rules (which must be regulations) are entitled to Chevron deference or some variant thereof.  E.g., Guedes v. Bureau of ATF, 920 F.3d 1, 17 (D.C. Cir. 2019), here (“Legislative rules generally Chevron deference,” quoting  Nat'l Mining Ass'n v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014)); Kristin E. Hickman, Unpacking the Force of Law, 66 Vand. L. Rev. 465, 509 (2013) (“Where an agency employs notice-and-comment rulemaking under clear congressional authority to adopt rules and regulations, there is little doubt that the courts will treat the rule both as legislative and as eligible for Chevron deference.”).  I could go on and on and on with variants of this claim.

Contrary to the this claim that legislative rules (regulations) are subject to Chevron deference, I claim that Chevron deference has a limited, if any, role for legislative rules.  I address this and other similar claims about Chevron in my article.  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN:  Because my claim is laid out in more detail in the article, I just set forth here my reasoning for the claim.

1.  Legislative rules which the APA commands be promulgated by notice and comment regulation and be prospective only are the law if within the scope of the legislative authority Congress delegated to the agency.  Courts say that such legislative rules are like statutes and have the force of law.

2.  Deference is a concept of deferring to an interpretation of ambiguous statutory text rather than deferring to the statutory text itself.  So, too for a legislative rule which has the effect of a statute.  Courts do not defer to statutes or their equivalent, legislative rules.

3.  There is a theoretically possible place for Chevron deference to legislative rules in the agency's interpretation of the scope of the legislative rulemaking authority in the statutory text.  (I discuss below in paragraph 7 why I don't think Chevron is applicable to the scope issue, so I flag here that that is the only possible application of Chevron to legislative rules.)  Once it is determined that the legislative rule is within the scope, the legislative rule is the law and deference to the law is an oxymoron.

4,  Of course, agencies can in other interpretive documents interpret the legislative rule and, if appropriate, have Chevron, Skidmore-type, or Auer deference apply to the interpretation of the legislative rule.  But the legislative rule within the scope of the delegation is the law without any deference whatever.  Indeed the concept of deference to the law -- whether the law is in a statute or a legislative rule -- is an oxymoron (except possible as to scope of the legislative authority delegation).

Tuesday, January 28, 2020

Updated Article on APA Interpretive Regulations (1/28/20)

In June, I posted an a blog on article on the APA issue of the continued viability of the interpretive regulation.  Article on the Continued Viability of the APA Category of Interpretive Regulations (6/21/19), here.  I have now posted a substantial update of the article at the same URL on SSRN.

The SSRN cite for the revised article is:  Townsend, John A., The Report of the Death of the Interpretive Regulation Is an Exaggeration (January 25, 2020). Available at SSRN:

The revised abstract is:
There is a claim about in the scholarly administrative law community that the APA category of interpretive regulations, including tax regulations under IRC § 7805(a), are no longer a viable category under the Administrative Procedure Act ("APA). Instead, so the claim goes, regulations that have historically been considered interpretive because all they do is reasonably interpret ambiguous statutory text are now legislative regulations under the APA thus subject to the APAs legislative regulations’ requirements for Notice and Comment and Prospectivity. 
In the article, I quote, with permission, a noted scholar who claims:  
• "regulations promulgated under 7805(a) are legislative rules as that term is understood for purposes of the Administrative Procedure Act;"
• "Administrative law doctrine says that legislative rules are those that carry the force of law, while interpretative rules do not. Although the force of law concept is blurry at the margins, I do not see any possible way that one could conclude that 7805(a) regulations do not carry the force of law;"
• "In summary, there are no Treasury regulations that are interpretative rules as that term is understood for purposes of the Administrative Procedure Act -- irrespective of the terminology embraced by the tax community."  
If that claim is true for § 7805(a) regulations, it is true for all agency regulations interpreting the statute under similar agency grants (either express or implied).
My limited anecdotal polling from talking with administrative law professors is that the claim is a mainstream scholarly position. And courts noise around with the concept, although usually without nuance. 
By contrast, in the recent oral argument in Kisor v. Wilkie (Sup. Ct. No. 18-15), transcript p. 10), Justice Breyer, an administrative law scholar (taught administrative law at Harvard Law School), said “there are hundreds of thousands, possibly millions of interpretive regulations.” And courts regularly refer to interpretive regulations as if they were a viable APA category. 
So which is it? Are interpretive regulations generally and Treasury interpretive regulations specifically a viable APA category? 

Thursday, January 23, 2020

Does the Period Go Inside or Outside the End Quote? A Tax Court and Supreme Court Comparison (1/23/20; 1/25/20)

Added 4/9/20:  I have been advised that the Tax Court has a style manual that, paraphrased, says the rule is:  "periods go inside quotes only if the period is part of the quote (ie you are quoting to the end of the quoted sentence).  Otherwise, periods go outside the quote because the period is not part of the quote."  (Caveat: for the foregoing paraphrasing which I received from another person, I followed the Supreme Court style manual by including the period inside the quote even though the original had additional words before the period in the original.) I have not  seen the manual and am  trying to obtain a copy.  If anyone knows of a public link to it or has it and can provide it to me, I would greatly appreciate it.  (Please email to

The balance of this web post is the same as it existed prior to 4/9/20.

Note that this blog has been revised, most importantly, to include the Supreme Court Style Guide.  See below after the spreadsheet on Supreme Court opinions.

Also, I am updating the lists below from time to time on a page to the right titled: Updates on the Tax Court's Continued Love Affair with Periods Outside Quotations (1/4/20; 2/29/20), here.

Readers will have noticed that, occasionally, in my blogs I nit pick, but usually only as a detour from the topic of the blog.  Today, a nit pick is the topic of the blog.

Recently, I started paying some attention to the Tax Court opinions placement of end quotes – inside or outside the period.  I noticed that in some of my anecdotal reads that Tax Court opinions (of all sorts, T.C., and T.C.M. and Summary) are inconsistent on that weighty topic.

The American rule, as I understand is, always inside the end quote.  See, e.g.:
  • Dreyer’s English (2019), p. 55 (“Though semicolons, because they are elusive and enigmatic and they like it that way, are set outside terminal quotation marks, periods and commas—and if I make this point once, I’ll make it a thousand times, and trust me, I will—are always set inside. Always.”)
  • Why do periods and commas go inside quotation marks in MLA style? (The MLA (Modern Language Association) Style Center 2/1/2018), here (“ William Strunk, Jr., and E. B. White, writing in 1959, noted that ‘[t]ypographical usage dictates the comma be inside the marks, though logically it seems not to belong there’” and “if you are preparing a paper for a class or for publication in the United States, place periods and commas inside quotation marks.”)
  • How to Use Quotation Marks: mysteries of combining quotation marks with other punctuation marks (Grammar Girl Quick and Dirty Tips 12/26/13), here, (“ in American English we always put periods and commas inside quotation marks”).
  • Periods and Quotation Marks (The Writing Cooperative 9/1/18), here (“The period should go inside the quotation marks.”
  • Bryan A. Garner, Correct Placement Of Punctuation In Relation To Quotation Marks (Above the Law 5/12/14), here,
So, having a choice today between watching the impeachment hearings, I decided that I could better occupy myself with other things.  I did. One of those things was to prepare the spreadsheets offered below in this blog.

TRAC Report on Fewer Civil Tax Cases in District Courts (1/23/20)

TRAC has this report:  Federal Civil Tax Suits Fall by Half Over Last Decade (TRAC 1/22/20), here.  Note that this report does not include Tax Court proceedings where most civil tax cases occur.  Nor does it include Court of Federal Claims filings where many tax refund suits are brought.

The latest available data from the federal courts show that during the first quarter of FY 2020 (October 2019 - December 2019) the government reported 158 new civil filings of federal tax suits. According to the case-by-case information analyzed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, this number is down by 19 percent over the same period from FY 2019 when the number of civil filings of this type totaled 194. 
If filings continue at the same pace for the rest of this fiscal year, total civil tax filings will be 632, down from 736 during the past fiscal year. Ten years ago during FY 2010 there were a total of 1,205 such suits. 
Federal civil tax suits cover a range of issues. Out of the 158 suits filed during the first quarter of FY 2020, a total of 65 (41%) were suits filed against the United States. See Figure 2. Over half of the suits filed by taxpayers were suits for refunds of taxes or penalties. Taxpayers also sued the Internal Revenue Service IRS to quash summons or to move litigation from the court in which the suit was filed. The remaining 93 (59%) of suits filed during this period were filed by the U.S. Frequently these were specific actions to enforce an IRS summons or a tax lien, but others involved various miscellaneous collection and regulatory matters. 
JAT Comments:

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:

Wednesday, January 22, 2020

Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20)

After publishing this blog entry, a new article was published about Microsoft's transfer pricing planning and the audit.  I discuss that article in my comments below (Comment #4.)

In United States v. Microsoft, 2020 U.S. Dist. LEXIS 8781 (W.D. Wash. 1/17/20), here, the district court resolved a contentious summons enforcement proceeding started in December 2014.  (See the CourtListener docket entries, here.)  Summons enforcement proceedings are supposed to be “summary in nature.”  United States v. Clarke, 573 U.S. 248, 254 (2014) (citing United States v. Stuart, 489 U.S. 353, 369 (1989)).

So, why was this summons enforcement proceeding not so summary, taking just over 5 years to resolve?  A hint at the answer is the amount of the tax savings involved (perhaps $5 billion over 10 years, achieved at a cost of $10 million (I don't think that planning included tax professional fees)), the promoter tax shelter context (involving one of the prominent bullshit promoter tax shelter players, KPMG, in the early 2000s), and the sheer number of attorneys appearing in the case (many of whom are amici).  (For the attorneys, see the CourtListener list which may be reviewed by clicking on the “Parties and Attorneys on the CourtListener docket list above; the Government lists 4 attorneys, Microsoft lists 14 (included terminated attorneys), and the amici attorneys are more than I want to count; the relative imbalance between the attorneys for Government and attorneys for the parties opposing the Government reminds me of the old saying about Texas rangers–one mob, one Ranger; in this case one mob, 4 Government attorneys.)

Well, there is not much in the case.  It is, after all, a summons enforcement proceeding where, once the minimal Powell standards are met, the summons is enforced.  United States v. Powell, 379 U.S. 48 (1964).  The Court thus early on ordered the summons enforced.  United States v. Microsoft Corp., 154 F. Supp. 3d 1134 (2015).  But that left the privilege assertions to be thrashed over, hence the delay.

So, what’s the context for this battle?  Not surprisingly, high-dollar transfer pricing cost sharing arrangements that has drawn similar high dollar litigation with loads of attorneys.  E.g., Altera Corp. v. Commissioner, 926 F.3d 1061 17143 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019) (with an analogous melange of attorneys, including amici).  As the Microsoft Court said in the most recent opinion (the one linked in the opening paragraph):
Ultimately Microsoft did enter into cost sharing arrangements through technology licensing agreements. Because those cost sharing arrangements were required by law to be arm's length transactions, the design and implementation details are a central focus of the government's examination. The government expresses skepticism that a third party would be likely to enter into the agreements, thereby satisfying the arm's length standard, because the agreements contained several unique provisions. Dkt. #146 at ¶¶ 18-20. While many of the terms changed before and afterward the agreements were to have been formed, they remained favorable for Microsoft's income tax liability. Id. at ¶¶ 9-11. The government believes that the transactions were "designed and implemented for the purpose of avoiding tax." Id. at ¶ 20. n1
   n1 The government expresses further skepticism on the basis that the agreements effectively netted the Puerto Rican entity $30 billion for the "routine" reproduction of CDs containing software and did not otherwise have a significant impact on Microsoft's operations. Dkt. #146 at ¶¶ 15-20. 
Microsoft maintains that nothing was abnormal about its actions. [*7]  Microsoft argues that transfer pricing disputes with the government were prevalent and, "[r]ecognizing the inevitability of an [Internal Revenue Service ("IRS")] challenge, Microsoft was determined to be adequately prepared to defend these cost sharing arrangements." Dkt. #140 at 6; see also Dkt. #143 at ¶ 23. To this end, and because of the complexity of facts relevant to corporate international tax, Microsoft employed KPMG "to help the lawyers provide legal advice" and to give its own tax advice. Dkt. #140 at 1; Dkt. #143 at ¶¶ 7, 10. Mr. Boyle, then Microsoft's Corporate Vice President and Tax Counsel, maintains that the materials at issue were prepared for his use and that they were "prepared in anticipation of an administrative dispute or litigation with the IRS over the Puerto Rican cost sharing arrangement, the pricing of the software sales to Microsoft, and other issues expected to be in dispute relating to those transactions." Dkt. #143 at ¶ 23.

Tuesday, January 21, 2020

Presumption of Correctness and Burden of Proof (Persuasion) (1/21/20; 12/28/22)

As revised 12/28/22.

As revised on 12/28/22, the blog below is too long and has some diversions.  I try to be helpful to readers by the following very short summary.


Too often courts refer to a "presumption of correctness" that applies to IRS determinations.  The presumption of correctness must be distinguished from a presumption of regularity often said to attach to Government action.  The presumption of regularity applies (if at all) to presume procedural regularity.  For example, if the IRS issues a notice of deficiency, it may be presumed that the IRS undertook the procedural steps required to issue the notice of deficiency.  As to the correctness of the deficiency determined in the notice, however, the presumption of regularity does not apply.  That is the context in which the presumption of correctness is often deployed. 

Often, the reference to presumption of correctness is in conjunction with a statement that the taxpayer bears the burden of proof (meaning burden of persuasion) to prove that the determination is incorrect. The presumption of correctness is meaningless gloss.  In classic procedure theory, a presumption merely shifts a burden of production from the party with the burden of persuasion onto the other party.  In tax cases, however, the taxpayer has the burden of persuasion and, for that reason, necessarily has the burden of production. All a presumption of correctness could do is to shift to the taxpayer a burden of production already imposed on the taxpayer by the burden of persuasion. Hence, the invocation of the presumption of correctness to shift the burden of production to the taxpayer is like (as one court said) covering with a handkerchief something already covered by a blanket.

That’s the proposition presented in the rest of the blog.  My recommendation is that courts (including the Tax Court), tax litigators, and scholars just quit talking about the presumption of correctness in tax context as if it means something. It does not mean anything and, for that reason, at least poses the possibility of being misleading. And, talking about the presumption of correctness shows that they really don’t understand what they are claiming.


This blog is a bit of a diversion, perhaps rant, about the loose use of the presumption of correctness much bandied about in tax judicial opinions.  What set me off this morning (the date of the original blog) was the Tax Court opinion in Onyeani v. Commissioner, T.C. Memo. 2020-15, here.  In Onyeani, Onyeani petitioned for redetermination after a notice of deficiency was issued for 2015.  Nothing unusual there.  Procedurally, though it was not a typical case because it had been preceded by a termination assessment under § 6851(a).  Those termination assessments happen.  But what happens way more often is the nit I pick today relating to burden of proof (persuasion) and presumption of correctness.

In Onyeani, Judge Lauber says (p. 19):
The Commissioner’s determinations in a notice of deficiency are generally presumed correct. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). 
In the next sentence, Judge Lauber calls this the presumption of correctness, a common wording.

So what’s my beef?  At the very minimum, Rule 142, here, says nothing about presumptions--of correctness or otherwise.  The relevant part of Rule 142 is:
(a) General: (1) The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court; and except that, in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer, it shall be upon the respondent. As to affirmative defenses, see Rule 39. 
Welch v. Helvering, 290 U.S. 111, 115 (1933), here does say something about presumptions of correctness (emphasis supplied):
“[The Commissioner’s] ruling [NOD] has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong. “
Note that Supreme Court did not say in Welch that the IRS determination has the presumption of correctness because the taxpayer had the burden of persuasion or that the taxpayer had the burden of persuasion because the IRS determination was presumed correct.  Rather, the Supreme Court used the conjunctive that would not necessarily indicate that the two are the same; it did not say, for example, that the taxpayer bears the burden of proof (persuasion) because the IRS determination is presumed correct. Courts have read Welch as saying because, but those courts are wrong.  As I note below, the assignment of the burden of proof (persuasion) is free-standing for policy reasons as recognized in testimony to Congress before Welch and the assignment of the burden of persuasion carries with it the assignment of the burden of production which is the only function of a presumption.

To avoid further confusion, I need to distinguish between the burden of persuasion and the burden of production.  I do this in the context of a jury trial where the difference between the two are better developed (although they apply in bench trials such as in the Tax Court as well).  The burden of persuasion determines which party wins after all the evidence is in loses if the trier of fact (the jury) is in equipoise as to any crucial fact.  It comes into play at the end of the trial (although allocation of the burden of persuasion will influence how the parties present the evidence during trial.)  The burden of production is a concept to require, at any key point in trial (before the end of trial), which party loses by directed verdict from the judge without submission to the jury if that party does not introduce further evidence.  For further reading on these burdens, see John A. Townsend, Federal Tax Procedure (2022 Practitioner Ed.) pp. 596-597 (2019), which may be downloaded here.  I also refer readers to a parallel discussion in, John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389, 405-406 (2020), SSRN here.

Thursday, January 16, 2020

Criminal Tax Evasion and Civil Fraud–If Found by the Trier, Can There be a Reasonable Cause/Good faith Defense (1/16/20; 1/17/20)

I have blogged several times on my Federal Tax Crimes Blog about how the “good faith” defense is subsumed in the definition of willfulness for tax crimes.  Willful is the intentional violation of a known legal duty.  If a trier of fact determines that the defendant intentionally violated a known legal duty, then per se that person did not have a good faith defense.  Accordingly, if the trial court in a criminal case where willfulness is an element of a tax crime properly instructs the jury on the willful element, the fact that the judge did not separately instruct the jury that good faith (such as reliance on tax professional) is a “defense” is not error or, at least not reversible error.  Simply put, proof of willfulness negates the good faith defense.  The defendant cannot have intended to violate a known legal duty and then have reasonable cause/good faith in violating that known legal duty.  Accordingly, for example, consider the following:  "[T]o prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.”  United States v. Stadtmauer, 620 F3d 237, 257 n. 22 (3d Cir. 2010).

Now I want to move this concept to the civil arena.  Section 6663, here, imposes a civil fraud penalty.  The conduct penalized under § 6663 is “fraud.”  Basically, the conduct penalized under § 6663 is the same conduct that is tax evasion in the criminal context – intentional violation of a known legal duty.  (There may be different verbal formulations, but that is the essence of it in both the criminal and civil arenas.)  So, if proof of tax evasion negates a reasonable cause defense, one would think that proof of civil fraud negates a reasonable cause defense.

Although I think this logic is irrefutable, some courts nevertheless act like they believe otherwise.  For example, in Purvis v. Commissioner, T.C. Memo. 2020-13, at *33-*48, here, the Tax Court found that the taxpayers committed civil fraud subject to the penalty under § 6663.  The Court concluded after 15 pages analyzing the evidence (*48):   “Accordingly, we hold that petitioners are liable for the section 6663(a) fraud penalties for the years at issue.”

The Court then  (at *49-*50) considered the reasonable cause defense.  But why did the Court do that after the Court found that the taxpayer had intended to violate a known legal duty?

One reason is the way the statutory provisions are written.  Specifically, § 6663 imposes the penalty for fraud but then, § 6664(c)(1), here, states (emphasis supplied): “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”  But, as established in the criminal context, the taxpayer (called defendant in a criminal context) cannot have intended to violate a known legal duty if he had a reasonable cause/good faith defense.  That surely must be true in the civil context as well.

I would appreciate readers view on this issue.  Specifically, is it possible for the Government (the IRS in a Tax Court case) to prove civil fraud by clear and convincing evidence and the taxpayer then establish a reasonable cause/good faith defense?

One other thought.  The regulations for the reasonable cause defense under § 6664 on only address the accuracy related penalty under § 6662.  See Regs. § 1.6664-4, titled "Reasonable cause and good faith exception to section 6662 penalties." I suspect that this analysis is the reason.  The reasonable cause defense is an oxymoron if § 6663 civil fraud is proved.  But § 6664(c) is not the only time that Congress has legislated an oxymoron.

Addendum 1/17/20 12:00pm:

Saturday, January 11, 2020

FTP2019 Update 05 - § 6751(b)'s Requirement for Supervisor Written Approval for Penalties (1/11/20; 11/17/23)

Yesterday, I posted this as a standalone blog entry, but decided to incorporate it into the FTPB Update series.  Accordingly, I changed the caption and provide below a table entry showing the changes to the Federal Tax Procedure Book.  Otherwise I leave the blog as posted.

Section Affected
Edition page numbers
Ch. 8.  Penalties.
   III. Civil Penalties.
   L. Penalty Administration.
 1. Authority to Assess; Notice.
Practitioner Ed. pp. 414-419
Student Ed. pp. 287-289

This week, the Tax Court issued two T.C. opinions (one of which was a reviewed opinion) and a T.C. Memo Opinion dealing with the ongoing refinement, through interpretation, of the meaning of § 6751(b), here, which is:
No penalty under this title shall be assessed 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.
There are some exceptions, but the focus in most of the cases (including the ones decided this week) has been the text quoted above.

The opinions are: Belair Woods, LLC v. Commissioner, 154 T.C. ___, No. 1 (2020) (reviewed), here; Frost v. Commissioner, 154 T.C. ___, No. 2 (2020), here; and Tribune Media Company v. Commissioner, T.C. Memo. 2020-2, here.  An excellent discussion of the opinions are presented in Bryan Camp's offering Lesson From The Tax Court: A Practical Interpretation Of The Penalty Approval Statute § 6751 (Tax Prof Blog 1/13/20), here. (Note:  I added this link to Bryan's article on 1/13/20.)

Rather than discussing those opinions, I offer an  overview of the current state of play on the interpretation of § 6751(b) from my Federal Tax Procedure book as I now have it in the working draft for the 2019 editions (which will be published in August 2020).  The key holdings of the cases are incorporated in this overview.  The overview in the blog below does not include footnotes; for those wanting the footnotes, I offer the text and footnotes in pdf format here. Here is a cut and paste of the overview without footnotes.  I do not indent to show that this is quoted text.

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.”  The purpose of the requirement was 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.  This wording of 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, 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.  I attempt to bullet-point key features of the statutory prohibition under the current state of play.  I state the current state of play in general overview, but do not develop many of the nuances, some of which are yet to come.  There undoubtedly will be further refinements as the courts address various unique fact patterns, so stay tuned.  With those caveats, here is my summary:

The most significant issue has been the timing of the written approval.  Once the courts accepted that timing must be before the assessment despite the statutory text, the issue is to identify the timing of the initial determination required for the written approval.  The statutory text provides no guide for determining that earlier timing, but by focusing on the requirement for an “initial determination” and the legislative history, courts have looked to some event indicating more than a communication to the taxpayer that the agent was considering penalties.  The initial determination is “the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.”  In the context of an audit, the initial determination is the 30-day letter (or equivalent such as the 60-day letter in a TEFRA audit) sent to the taxpayer stating Examination’s determination to assert one or more penalties and offering the taxpayer a right to contest the determination in Appeals.  Mere notice that to the taxpayer the agent is considering asserting penalties and asking the taxpayer to discuss the penalties is not the determination requiring written approval.  However, if the RAR is prepared asserting the penalty and delivered to the taxpayer, written approval must be before or contemporaneous with the RAR.  And, even a notice that the IRS has preliminarily determined to assert a penalty that the taxpayer can avoid by action on his part is not the initial determination requiring written approval.