IRS Supervisor Approval Not Required for Tax Court to Assess Frivolous Arguments' Penalty

(Parker Tax Publishing July 2018)

The Tax Court held that its authority to impose a penalty under Code Sec. 6673 for making a frivolous argument before the Tax Court is not subject to the IRS supervisor approval requirement in Code Sec. 6751(b)(1). The Tax Court found that (1) Congress's intent in enacting the supervisor approval requirement was to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle, while Code Sec. 6673 is designed to deter bad behavior in the Tax Court and conserve judicial resources, and (2) Code Sec. 6751(b)(1) was clearly not intended as a mechanism to restrain the Tax Court. Williams v. Comm'r, 151 T.C. No. 1 (2018).

In 2012, Benton Williams received wages, unemployment compensation, and an early distribution from a qualified retirement plan, but did not file a tax return. The IRS prepared a substitute for return (SFR) that consisted of a Form 13496, Code Sec. 6020(b) Certification; a Form 4549, Income Tax Examination Changes; and a Form 886-A, Explanation of Items. In 2015, the IRS sent Williams a notice of deficiency, and Williams petitioned the Tax Court.

Williams filed a motion for summary judgment asserting that the income he received in 2012 was not taxable under the Code. He made what the Tax Court described as shopworn tax protester arguments that have been universally rejected. Before trial, counsel for the IRS sent Williams two letters informing him that the arguments in his motion were frivolous and that the IRS would move for the Tax Court to impose a penalty under Code Sec. 6673(a)(1) if he persisted. Code Sec. 6673(a)(1) authorizes the court to impose a penalty of up to $25,000 if the taxpayer initiated or maintained Tax Court proceedings primarily for delay, or if the taxpayer's position is frivolous or groundless.

At trial, Williams acknowledged that his motion had been denied and that the Tax Court would not recognize his arguments. The Tax Court later warned Williams that the type of arguments he was pursuing was the sort that have generated Code Sec. 6673(a)(1) penalties. However, Williams continued raising frivolous arguments. The IRS filed a motion asking the Tax Court to impose a Code Sec. 6673(a)(1) penalty.

When the IRS assesses a penalty, Code Sec. 6751(b)(1) requires that the initial penalty determination be personally approved in writing by the immediate supervisor of the IRS employee making the determination, or a designated higher level official. In Graev v. Comm'r, 149 T.C. No. 23 (2017), the Tax Court agreed with the holding in Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017) that the IRS must offer evidence of its compliance with Code Sec. 6751(b)(1) in order to meet its burden of production. Graev did not address whether Code Sec. 6751(b)(1) applies to a Code Sec. 6673(a)(1) penalty.

The Tax Court considered that question in this case and held that its authority to impose a Code Sec. 6673(a)(1) penalty is not subject to the approval requirement in Code Sec. 6751(b)(1). The Tax Court analyzed the statutory construction of the two provisions and found that they were not in conflict; in enacting the supervisor approval requirement, Congress did not intend to repeal Code Sec. 6673(a)(1) or to modify longstanding Tax Court procedural rules, the court found.

The Tax Court explained that when Congress enacted Code Sec. 6751, it intended that penalties be imposed only where appropriate and not as a bargaining chip. The court observed that this intent was key to the holding in Chai, where the Second Circuit concluded that the statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.

The Tax Court found that Code Sec. 6673, on the other hand, was enacted to give the Tax Court a tool to combat frivolous litigation and reduce its congested docket. The court noted that in 1989, Congress amended Code Sec. 6673 to increase the award amount from $5,000 to $25,000 and to designate the award a "penalty" rather than "damages." The purpose of the change in term was to make it clear that damages incurred by the U.S. need not be proven before the court can impose a penalty. The Tax Court concluded that Code Sec. 6751(b)(1) was intended to apply only to IRS determinations, while Code Sec. 6673 has an entirely different purpose, and there was no conflict between the two.

The Tax Court noted that Congress's objective in preventing coercive settlements is expressed in Code Sec. 6751(b)(1) where it provides that an IRS manager approve penalties that the IRS has the authority to determine. The "individual" described in the statute is an IRS employee, and the Tax Court is not mentioned in Code Sec. 6751 or its legislative history. The Tax Court concluded that Code Sec. 6751(b)(1) was clearly not intended as a mechanism to restrain the Tax Court.

The Tax Court found further support for its holding in analogous Code provisions that give federal district and appellate courts the power to impose penalties on taxpayers who make frivolous arguments. The Tax Court concluded that Code Sec. 6751(b)(1) was not intended as a broad restraint mechanism on the federal judiciary. In the court's view, Congress did not intend for the statute to cover the imposition of penalties that could be imposed by courts because of misbehavior by a litigant during the course of a judicial proceeding.

For a discussion of penalties for frivolous tax submissions, see Parker Tax ¶262,145. For a discussion of procedural requirements in 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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