Supervisory Approval Required for Listed Transaction Penalty

(Parker Tax Publishing February 2020)

The Tax Court held that the penalty under Code Sec. 6707A for failing to report a listed transaction is subject to the requirement under Code Sec. 6751(b)(1) that the initial determination of the penalty be approved in writing by the immediate supervisor of the person making the initial determination. The court rejected the IRS's argument that written supervisory approval could occur any time before the Code Sec. 6707A penalty was assessed and found that, by its terms, Code Sec. 6751(b)(1) requires written supervisory approval of the initial determination of all penalties under the Code. Laidlaw's Harley Davidson Sales, Inc. v. Comm'r, 154 T.C. No. 4 (2020).

Background

Laidlaw's Harley Davidson Sales, Inc. (LHDS) participated in the Sterling Benefit Plan, an employee benefit plan that the IRS determined was a listed transaction. Under Code Sec. 6011, taxpayers that fail to timely disclose their participation in such a transaction are subject to a penalty under Code Sec. 6707A. LHDS filed a tax return for its 2008 tax year that did not report its participation in the plan. LHDS later amended its 2008 return to disclose its participation.

Sandra Czora was the IRS agent assigned to examine LHDS's return for potential liability for a penalty for failing to include reportable transaction information with its original return. Czora first notified LHDS of the proposed Code Sec. 6707A penalty in a 30-day letter issued in May 2011. The 30-day letter notified LHDS of its right to request a conference with the IRS Office of Appeals and emphasized that if LHDS took no action, the IRS would assess the penalty and begin collection procedures. Enclosed with the 30-day letter was a revenue agent's report and other documents detailing Czora's calculation of the proposed penalty. The 30-day letter and its attachments were signed only by Czora and not by any supervisor.

LHDS requested a conference with Appeals in order to dispute Czora's imposition of the Code Sec. 6707A penalty. In August 2011 - more than a month after the submission of LHDS's written protest, and nearly three months after the date on the 30-day letter - Group Manager Virginia Korzec, Czora's immediate supervisor, approved Czora's assertion of the Code Sec. 6707A penalty by signing a Civil Penalty Approval Form.

Appeals Officer (AO) Roger Olson handled LHDS's penalty hearing. In August 2013, Olson closed the case and recommended assessment of the Code Sec. 6707A penalty. The IRS assessed the penalty in September 2013. The IRS then sent LHDS a notice of intent to levy. LHDS responded by requesting a collection due process (CDP) hearing. LHDS's request stated that it did not intend to pursue collection alternatives but instead sought to challenge various aspects of how Olson conducted the penalty hearing. In April 2014, AO Florence Barba sent LHDS a letter scheduling the CDP hearing and requesting supporting documentation to allow her to evaluate potential collection alternatives. Barba's letter stated that LHDS had had a prior opportunity, during the penalty hearing, to challenge the merits of its liability for the Code Sec. 6707A penalty. The letter warned that, absent evidence to the contrary, LHDS would therefore not be permitted to challenge its underlying liability during the CDP hearing.

Barba conducted LHDS's CDP hearing by telephone in May 2014. During the hearing, LHDS indicated that it remained uninterested in collection alternatives and instead attempted to dispute its underlying liability for the Code Sec. 6707A penalty. Barba issued a notice of determination sustaining the levy notice. The notice of determination included a statement that Barba had verified IRS compliance with the requirements of any applicable law, regulation, or administrative procedure with respect to the penalty assessment and the levy notice. That verification statement, however, did not specifically address the IRS's compliance with Code Sec. 6751(b)(1), which requires the immediate supervisor of the individual making the initial penalty determination to approve the initial determination in writing.

LHDS petitioned the Tax Court to challenge the notice of determination. In a motion for summary judgment, LHDS argued that Appeals erred by failing to determine that the penalty assessment was invalid because the IRS had not complied with Code Sec. 6751(b)(1). The IRS responded that the plain language of Code Sec. 6751(b)(1), as applied to Code Sec. 6707A penalties (or, for that matter, to any of the other so-called "assessable penalties" found in Code Secs. 6671-6725), demands only that written supervisory approval of an assessable penalty occur before the IRS's assessment of the penalty - a standard with which the IRS complied in this case. The IRS argued that under Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017), all that matters is that written supervisory approval be obtained while the IRS supervisor still retains the discretion to give or withhold approval. Reasoning that supervisory discretion with respect to assessable penalties is not interrupted by an intervening judicial proceeding before the assessment, the IRS argued that any approval before assessment is necessarily timely.

Tax Court's Analysis

The Tax Court granted summary judgment for LHDS. The court noted that in Graev v. Comm'r, 149 T.C. No. 23 (2017), it explained in a footnote that Code Sec. 6751(b)(1) applies to the assessment of all penalties under the Code, including not only penalties subject to deficiency procedures but "a great many so-called assessable penalties" which are generally not subject to deficiency procedures. However, the court observed that assessable penalties were not at issue in Graev. The court explained that in several post-Graev decisions it has held that Code Sec. 6751(b)(1) applies to other assessable penalties, but it had not yet addressed whether the supervisory approval requirement applies to the assessable penalty of Code Sec. 6707A.

The Tax Court cited Clay v. Comm'r, 152 T.C. No. 13 (2019), where it held that a 30-day letter was an initial determination under Code Sec. 6751(b)(1), and that the IRS therefore had to obtain written supervisory approval before formally communicating the determination of penalties in a 30-day letter. Although Clay was a deficiency case, the Tax Court found that it did not limit its holding to the deficiency context. On the contrary, in ATL & Sons Holdings, Inc. v. Comm'r, 152 T.C. No. 8 (2019), and Palmolive Building Investors, LLC v Comm'r, 152 T.C. No. 4 (2019), the court applied the reasoning of Clay to non-deficiency cases, including those involving assessable penalties.

Accordingly, the Tax Court held that, in the case of the assessable penalty under Code Sec. 6707A, Code Sec. 6751(b)(1) requires the IRS to obtain written supervisory approval before it formally communicates to the taxpayer its determination that the taxpayer is liable for the penalty. Applying this rule, the Tax Court found that the 30-day letter was the initial determination to impose a penalty on LHDS. The court found that written supervisory approval did not occur until three months after that letter was issued, when Korzec signed the Civil Penalty Approval Form. Consequently, the court concluded that Appeals abused its discretion by summarily determining that the IRS had complied with applicable law and procedures.

The Tax Court rejected the IRS's reading of the Second Circuit's decision in Chai. The court noted that in Chai, the Second Circuit said that Code Sec. 6751(b)(1) would make little sense if it permitted approval of an "initial" penalty determination up until and even contemporaneously with the IRS's final determination. The Tax Court also found that Chai did not hold that supervisory approval always satisfies Code Sec. 6751(b)(1) if it is obtained right before the notice of deficiency is issued. Rather, the court found that under Chai, supervisory approval must be obtained no later than when the notice of deficiency is issued, but sometimes, as in Clay and in this case, it must be obtained earlier. The Tax Court also noted the importance of the legislative history of Code Sec. 6751(b)(1) in the Second Circuit's analysis. The Second Circuit found that the purpose of Code Sec. 6751(b)(1) was to curb perceived abuses arising out of the IRS's use of unjustified penalties to pressure taxpayers into settlement, and the Tax Court found that the IRS's interpretation plainly contradicted this congressional purpose.

For a discussion of procedural requirements for computing penalties, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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