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.
