Ninth Circuit Rules on IRC 6751(b) Assessable Penalty, Davidson

Ninth Circuit Rules on IRC 6751(b) Assessable Penalty, Davidson

Ninth Circuit Rules on IRC 6751(b) Assessable Penalty, Davidson

In the recent case, Laidlaw Hardley Davidsons Inc. vs. Commissioner of Internal Revenue, the Ninth Circuit Court of Appeals reversed a decision by the Tax Court that had held the Taxpayer should not have to pay the penalty because the Supervisor did not provide written approval before issuing certain assessed penalties. By way of brief background, an assessed penalty is one of the most complicated types of penalty, because the taxpayer does not get a full opportunity to dispute the penalty before it is issued. Rather, the penalty is first assessed by the Internal Revenue Service and then the taxpayer has the opportunity to dispute the penalty. In this case, while the Tax Court agreed the taxpayer was wrongfully penalized in accordance with the procedural requirements of 6751(b), the Ninth Circuit Court of Appeals reversed and sided with the Internal Revenue Service. Let’s go through some of the basics of the Ninth Circuits’ ruling in Laidlaw’s Hardley Davidsons Sales, Inc., vs. Commissioner.

IRC 6707A

Imposition of penalty

    • Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).

Amount of penalty

In general

    • Except as otherwise provided in this subsection, the amount of the penalty under subsection (a) with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes).

IRC 6751

(b) Approval of assessment

  • In general
    • 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.

  • Exceptions
    • Paragraph (1) shall not apply to— (A) any addition to tax under section 6651, 6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9) thereof); or (B)any other penalty automatically calculated through electronic means.

Taxpayer Failed to Disclose a Listed Transaction

The Internal Revenue Service has a certain list of transactions that need to be reported, referred to as “Listed Transactions.” One of the more common types of list of transactions you may have heard about lately is Syndicated Conservation Easement Transactions. The IRS learned that the taxpayer had not reported the Listed Transaction and a penalty was subsequently issued. While the penalty was assessed, it had not allegedly been approved by a supervisor — and thus missed the requirement of Internal Revenue Code Section 6751.

What Happened at the IRS 

      • The IRS determined that P, a C corporation, failed to timely disclose its participation in a listed transaction as required under I.R.C. sec. 6011 when it filed a Form 1120, “U.S. Corporation Income Tax Return”, for the tax year ending May 31, 2008.

      • The revenue agent responsible for examining P’s May 2008 return issued a 30-day letter to P that proposed to assert a penalty under I.R.C. sec. 6707A against P for failing to disclose reportable transaction information with that return and that gave P the right to appeal that proposal to the IRS Office of Appeals (“Appeals”).

      • That 30-day letter was the first formal communication to P of the determination to assess the I.R.C. sec. 6707A penalty. Roughly three months after the 30-day letter was issued, the agent’s immediate supervisor approved the penalty assertion and signed a Form 300, “Civil Penalty Approval Form”.

Administrative Appeal was Denied

Taxpayer attempted an administrative appeal of the IRS penalty, but unfortunately, it was unsuccessful — so the Taxpayer moved on to a Collection Due Process Hearing, which was also unsuccessful — and then the taxpayer filed with the Tax Court. The Tax Court remanded the matter back to the appeals office and it was determined that the IRS had not properly complied with Internal Revenue Code section 6751(b) – because there was no supervisor approval before the assessment of the penalty.

Tax Court Ruling 

The Tax Court held the following:

        • Held: The written supervisory approval requirement of I.R.C. sec. 6751(b)(1) applies to the assessable penalty imposed by I.R.C. sec. 6707A for failure to disclose reportable transaction information.

        • Heldfurther, the proposal of an assessable penalty under I.R.C. sec. 6707A in the 30-day letter to P embodied, as in Clay v. Commissioner, 152 T.C. 223, 249 (2019), an “initial determination” for purposes of I.R.C. sec. 6751(b)(1), which required written supervisory approval.

        • Heldfurther, Appeals abused its discretion by summarily determining that the IRS had met “any applicable law or administrative procedure” for purposes of I.R.C. sec. 6330(c)(1), since the IRS had failed to comply with I.R.C. sec. 6751(b)(1) because it obtained written supervisory approval for the I.R.C. sec. 6707A penalty only after the revenue agent issued to P the 30-day letter proposing to assert the penalty. 

Why Did The Appeals Court Reverse the Tax Court?

As provided by the Court:

      • Taxpayer defends the Tax Court’s ruling that § 6751(b)(1) requires supervisory approval before the IRS formally communicates a proposed penalty to a taxpayer.

      • The problem with Taxpayer’s and the Tax Court’s interpretation is that it has no basis in the text of the statute. Section 6751(b)(1) “contains no express requirement that the written approval be obtained at any particular time prior to assessment.” Chai, 851 F.3d at 218. The statute does not make any reference to the communication of a proposed penalty to the taxpayer, much less a “formal” communication.

      • However, the language of the statute provides no reason to conclude that an “initial determination” is transformed into “something more like a final determination” simply because the revenue agent who made the initial determination subsequently mailed a letter to the taxpayer describing it.

      • We think “initial,” as used in § 6751(b)(1)’s phrase “initial determination,” more naturally indicates that a subordinate’s determination to assert a penalty lacks the imprimatur of having received supervisory approval, rather than that the determination has not yet been formally communicated to the taxpayer. Moreover, Taxpayer does not argue that the “determination” that Supervisor Korzec approved differed in any way from RA Czora’s initial determination to assert the § 6707A penalty.

      • Finally, this case does not involve a notice of deficiency, which, as discussed above, could limit a supervisor’s discretion to prevent the assessment of a penalty.

Assessable Penalties in California are More Dangerous

The important takeaway from this ruling is that it can be much more difficult for Taxpayers to defend against Assessable Penalties — and that just relying on the semantics between the terms “assessment,” determination,” or “approval” can be an uphill battle.

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