SCOTUS Reports

Tag: I.R.C. § 6751(b)(1)

  • Piper Trucking & Leasing, LLC v. Commissioner of Internal Revenue, 161 T.C. No. 3 (2023): Automated Penalties and Supervisory Approval Requirements

    Piper Trucking & Leasing, LLC v. Commissioner of Internal Revenue, 161 T. C. No. 3 (2023)

    The U. S. Tax Court ruled that penalties automatically assessed by the IRS’s CAWR computer program do not require supervisory approval under I. R. C. § 6751(b)(1). This decision clarifies that penalties calculated through electronic means are exempt from the approval requirement, impacting how the IRS enforces tax compliance.

    Parties

    Piper Trucking & Leasing, LLC, as Petitioner, and the Commissioner of Internal Revenue, as Respondent, in a case heard before the United States Tax Court.

    Facts

    Piper Trucking & Leasing, LLC, a single-member limited liability company based in Celina, Ohio, failed to file Forms W-2 for the year 2015 with the Social Security Administration (SSA). The SSA issued two warning letters to Piper Trucking, which went unheeded, leading to the transfer of the company’s information to the IRS. The IRS’s Combined Annual Wage Reporting (CAWR) computer program then automatically assessed a penalty under I. R. C. § 6721(e) against Piper Trucking for failing to file these forms. Piper Trucking did not respond to the penalty notice, and the IRS subsequently filed a Notice of Federal Tax Lien and issued a notice of determination sustaining the lien.

    Procedural History

    The IRS assessed the penalty on March 4, 2019, and sent a Notice of Federal Tax Lien Filing on September 17, 2019. Piper Trucking requested a Collection Due Process (CDP) hearing, which was scheduled for June 24, 2020, but neither the company nor its representative attended. A second hearing was scheduled for June 30, 2020, which Piper Trucking’s representative attended but failed to submit the required documentation by the set deadline. On April 30, 2021, the IRS issued a Notice of Determination Concerning Collection Actions sustaining the lien filing. Piper Trucking timely filed a Petition with the U. S. Tax Court on June 4, 2021. The Tax Court denied the IRS’s first Motion for Summary Judgment on September 27, 2022, due to a lack of evidence regarding supervisory approval of the penalty. Both parties filed subsequent Motions for Summary Judgment on November 9, 2022, and December 5, 2022, respectively.

    Issue(s)

    Whether a penalty assessed under I. R. C. § 6721(e) through the IRS’s CAWR computer program requires supervisory approval under I. R. C. § 6751(b)(1).

    Rule(s) of Law

    I. R. C. § 6751(b)(1) mandates that no penalty shall be assessed unless the initial determination to assert such penalty is approved in writing by the immediate supervisor of the person making the determination. However, I. R. C. § 6751(b)(2)(B) exempts penalties “automatically calculated through electronic means” from this requirement.

    Holding

    The U. S. Tax Court held that a penalty assessed under I. R. C. § 6721(e) through the IRS’s CAWR computer program does not require supervisory approval under I. R. C. § 6751(b)(1) because it is “automatically calculated through electronic means. “

    Reasoning

    The court’s reasoning was grounded in the statutory language of I. R. C. § 6751(b)(2)(B), which explicitly exempts penalties calculated through electronic means from the supervisory approval requirement. The court referenced Walquist v. Commissioner, 152 T. C. 61 (2019), which established that penalties assessed without human intervention through an IRS computer program are considered automatically calculated. The court emphasized that the penalty in question was assessed entirely by the CAWR program without any human involvement, thus falling squarely within the statutory exception. The court also noted that Piper Trucking did not dispute the underlying liability during the CDP hearing, which further supported the court’s decision to review the IRS’s administrative determinations for abuse of discretion. The court concluded that the IRS’s Appeals officer met the requirements of I. R. C. § 6330(c) and did not abuse discretion in sustaining the lien.

    Disposition

    The U. S. Tax Court granted summary judgment in favor of the Commissioner of Internal Revenue, affirming the penalty assessment and the sustaining of the lien.

    Significance/Impact

    This decision clarifies the scope of I. R. C. § 6751(b)(1) by affirming that penalties automatically assessed by IRS computer systems do not require supervisory approval. It has significant implications for IRS enforcement practices, particularly in the context of automated penalty assessments. The ruling may lead to increased reliance on automated systems for penalty assessments, potentially streamlining IRS operations but also raising questions about due process and the role of human oversight in tax enforcement. The decision also underscores the importance of taxpayers engaging with the IRS during CDP hearings, as failure to do so can limit their ability to challenge underlying liabilities.

  • Sand Investment Co., LLC v. Commissioner, 157 T.C. 11 (2021): Interpretation of ‘Immediate Supervisor’ under I.R.C. § 6751(b)(1)

    Sand Investment Co. , LLC v. Commissioner, 157 T. C. 11 (U. S. Tax Court 2021)

    The U. S. Tax Court clarified the definition of ‘immediate supervisor’ under I. R. C. § 6751(b)(1), ruling that it pertains to the individual who directly oversees an agent’s substantive work on an examination, not merely their hierarchical superior. This decision ensures that penalty assessments are reviewed by those most familiar with the case, aligning with Congress’s intent to prevent unjustified penalty assertions.

    Parties

    Sand Investment Co. , LLC, with Inland Capital Management, LLC as the tax matters partner, was the petitioner. The respondent was the Commissioner of Internal Revenue.

    Facts

    Sand Investment Co. , LLC, a South Carolina limited liability company treated as a partnership for federal income tax purposes, claimed a charitable contribution deduction of $80,150,000 for a conservation easement donation in 2015. The Internal Revenue Service (IRS) examined Sand’s tax return and assigned the case to Revenue Agent (RA) Adrienne Cooper, supervised by Gregory Burris of Team 1124 in the IRS Large Business & International Division (LB&I). In September 2018, RA Cooper was promoted and transferred to a new team under William Wilson’s supervision, but she continued working on the Sand examination under Burris’s supervision. On September 27, 2018, RA Cooper decided to assert accuracy-related penalties against Sand. She prepared a penalty approval form, which Burris signed on November 20, 2018, before RA Cooper informed Sand of the potential penalties on November 21, 2018. Wilson signed the form on November 23, 2018. The IRS issued a final partnership administrative adjustment (FPAA) on February 8, 2019, disallowing the deduction and asserting penalties.

    Procedural History

    Sand filed a motion for partial summary judgment, arguing that Wilson, as RA Cooper’s new team manager, was her ‘immediate supervisor’ under I. R. C. § 6751(b)(1) and that his approval of the penalties was untimely. The IRS filed a cross-motion, asserting that Burris, who supervised RA Cooper’s work on the Sand examination, was the relevant ‘immediate supervisor’ and that his approval was timely. The Tax Court granted the IRS’s motion and denied Sand’s motion.

    Issue(s)

    Whether, for purposes of I. R. C. § 6751(b)(1), the ‘immediate supervisor’ of an IRS agent who makes an initial determination of a penalty assessment is the person who directly supervises the agent’s substantive work on an examination or the agent’s hierarchical superior in the IRS organizational structure?

    Rule(s) of Law

    I. R. C. § 6751(b)(1) requires that the initial determination of a penalty assessment be personally approved in writing by the ‘immediate supervisor’ of the individual making such determination. The court interpreted ‘immediate supervisor’ to mean the individual who directly oversees the agent’s substantive work on an examination, rather than the agent’s hierarchical superior.

    Holding

    The court held that for purposes of I. R. C. § 6751(b)(1), the ‘immediate supervisor’ is the individual who directly supervises the examining agent’s work on an examination. Therefore, Burris, who supervised RA Cooper’s work on the Sand examination, was her ‘immediate supervisor’, and his timely approval of the penalties satisfied the requirements of the statute.

    Reasoning

    The court’s reasoning focused on the statutory text and legislative intent of I. R. C. § 6751(b)(1). It noted that the term ‘immediate supervisor’ was not defined in the statute, but its ordinary meaning suggested the person who directly oversees the agent’s substantive work. The court cited legislative history indicating that Congress intended to prevent IRS agents from using penalties as bargaining chips during settlement negotiations, suggesting that the person most familiar with the case should review penalty determinations. The court rejected Sand’s argument that the ‘immediate supervisor’ should be the agent’s hierarchical superior, emphasizing that the relevant supervisor is the one overseeing the agent’s work on the examination. The court also considered the Internal Revenue Manual’s guidance, which indicated that the issue manager, in this case Burris, should approve penalties. The court concluded that Burris, as the case and issue manager who supervised RA Cooper’s work throughout the examination, was the appropriate ‘immediate supervisor’ to approve the penalties.

    Disposition

    The court granted the IRS’s motion for partial summary judgment and denied Sand’s motion, affirming that the IRS complied with I. R. C. § 6751(b)(1) by securing timely approval of the penalties from RA Cooper’s ‘immediate supervisor’, Burris.

    Significance/Impact

    This decision clarifies the application of I. R. C. § 6751(b)(1), emphasizing that the ‘immediate supervisor’ for penalty approval purposes is the individual directly overseeing the agent’s substantive work on an examination. This interpretation aligns with Congress’s intent to ensure that penalty assessments are reviewed by those most knowledgeable about the case, potentially affecting future IRS penalty determinations and related litigation. The ruling may influence how the IRS structures its examination teams and assigns supervisory responsibilities, ensuring that penalty approvals are handled by those with the deepest understanding of the case’s facts and issues.

  • Beland v. Commissioner, 156 T.C. 5 (2021): Timeliness of Supervisory Approval for Civil Fraud Penalty

    Beland v. Commissioner, 156 T. C. 5 (U. S. Tax Court 2021)

    In Beland v. Commissioner, the U. S. Tax Court ruled that the IRS must obtain supervisory approval before formally communicating a penalty determination to taxpayers. The court found that presenting a completed Revenue Agent Report (RAR) at a closing conference, even without accompanying appeal rights, constitutes an initial determination requiring prior approval under I. R. C. § 6751(b)(1). This decision reinforces the procedural safeguards for taxpayers facing penalties and clarifies the timing of required supervisory consent.

    Parties

    Brian D. Beland and Denae A. Beland (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Belands were the taxpayers challenging the IRS’s assessment of a civil fraud penalty. The Commissioner represented the IRS in this dispute.

    Facts

    The IRS commenced an examination of the Belands’ 2011 joint tax return. Revenue Agent Ivana Raymond (RA Raymond) conducted the examination, and after multiple meetings, including one with the Belands’ CPA, the case was referred to a Fraud Technical Advisor. On June 5, 2015, an administrative summons was issued for the Belands to appear before RA Raymond on June 30, 2015, which was postponed due to the birth of their second child. The Belands were then compelled to appear on August 19, 2015, for a closing conference. During this meeting, RA Raymond presented a completed and signed Form 4549 (RAR) reflecting a civil fraud penalty under I. R. C. § 6663(a). The Belands declined to consent to the penalty or extend the limitations period. Two days after the meeting, RA Raymond obtained supervisory approval for the penalty, and subsequently, a notice of deficiency was issued. The Belands moved for partial summary judgment, arguing that the civil fraud penalty was not timely approved as required by I. R. C. § 6751(b)(1).

    Procedural History

    The Belands filed a petition for redetermination of the deficiency and penalties in the U. S. Tax Court. They moved for partial summary judgment on the issue of whether the civil fraud penalty was timely approved under I. R. C. § 6751(b)(1). The court granted the Belands’ motion for partial summary judgment, holding that the RAR presented at the closing conference constituted the initial determination of the penalty, which required prior supervisory approval.

    Issue(s)

    Whether the presentation of a completed Revenue Agent Report (RAR) at a closing conference, without accompanying appeal rights, constitutes the IRS’s initial determination of a civil fraud penalty under I. R. C. § 6751(b)(1), necessitating prior supervisory approval.

    Rule(s) of Law

    I. R. C. § 6751(b)(1) requires that no penalty 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. The Tax Court has held that the initial determination is the first formal communication to the taxpayer of the IRS’s decision to assess penalties, which may be embodied in a completed RAR (see Clay v. Commissioner, 152 T. C. 223 (2019); Belair Woods, LLC v. Commissioner, 154 T. C. 1 (2020)).

    Holding

    The Tax Court held that the completed RAR presented to the Belands at the closing conference constituted the IRS’s initial determination to assess the civil fraud penalty, necessitating prior supervisory approval under I. R. C. § 6751(b)(1). Since supervisory approval was obtained after the RAR was presented, the court granted the Belands’ motion for partial summary judgment, invalidating the civil fraud penalty.

    Reasoning

    The court reasoned that the RAR, signed by RA Raymond and presented to the Belands at the closing conference, was a formal and unequivocal communication of the IRS’s decision to assert the civil fraud penalty. The RAR’s content and context, including the absence of any indication that it was preliminary, demonstrated that it was not a mere discussion tool but a formal assessment. The court rejected the IRS’s argument that appeal rights must accompany an initial determination, emphasizing that the focus should be on the document and the circumstances of its delivery. The court also noted that the IRS’s actions post-presentation of the RAR were ministerial, confirming that the penalty decision was finalized at the meeting. The court’s analysis included references to previous cases such as Clay, Belair Woods, and Oropeza II, which established the criteria for identifying an initial determination. The court emphasized the importance of procedural safeguards for taxpayers, ensuring that supervisory approval is obtained before penalties are formally communicated.

    Disposition

    The Tax Court granted the Belands’ motion for partial summary judgment, invalidating the civil fraud penalty due to the lack of timely supervisory approval under I. R. C. § 6751(b)(1).

    Significance/Impact

    The Beland decision reinforces the procedural requirements under I. R. C. § 6751(b)(1), emphasizing that supervisory approval must be obtained before the IRS formally communicates a penalty determination to taxpayers. This ruling clarifies that even at a closing conference, the presentation of a completed RAR constitutes an initial determination, necessitating prior approval. The decision impacts IRS examination procedures, requiring agents to secure approval before presenting penalty assessments, and provides taxpayers with greater procedural protections against untimely penalty assessments. Subsequent cases have cited Beland to affirm the timing and nature of initial determinations, solidifying its doctrinal importance in tax penalty law.

  • Thompson v. Commissioner, 155 T.C. No. 5 (2020): Supervisory Approval of Penalties Under I.R.C. § 6751(b)(1)

    Thompson v. Commissioner, 155 T. C. No. 5 (U. S. Tax Ct. 2020)

    In Thompson v. Commissioner, the U. S. Tax Court ruled that the IRS’s settlement offers during an ongoing audit do not constitute the “initial determination” of a penalty assessment, thus not requiring prior supervisory approval under I. R. C. § 6751(b)(1). The court also affirmed that approval by an acting immediate supervisor is sufficient under the statute. This decision clarifies the timing and nature of supervisory approval needed for penalty assessments, impacting how the IRS must proceed in audits involving penalties.

    Parties

    Douglas M. Thompson and Lisa Mae Thompson (Petitioners) filed a petition in the U. S. Tax Court against the Commissioner of Internal Revenue (Respondent). The case proceeded through the Tax Court with no further appeals noted in the provided text.

    Facts

    Douglas M. and Lisa Mae Thompson participated in a distressed asset trust (DAT) transaction, which they reported on their 2005 tax return. The IRS assigned Revenue Agent James Damasiewicz to examine their tax returns for multiple years, including 2005. During the examination, Damasiewicz sent the Thompsons two letters offering settlements related to the DAT transaction. The 2007 letter proposed a settlement with a reduced accuracy-related penalty of 10% under I. R. C. § 6662, while the 2009 letter offered a 15% penalty and waived the I. R. C. § 6662A penalty. The Thompsons did not accept either offer. After completing the examination, Damasiewicz concluded the Thompsons owed tax and penalties for 2003 through 2007. His acting immediate supervisor, Linda Barath, approved the penalties in writing before the IRS issued a notice of deficiency to the Thompsons on December 18, 2012, asserting the penalties under I. R. C. §§ 6662(h) and 6662A.

    Procedural History

    The Thompsons filed a petition in the U. S. Tax Court seeking redetermination of the deficiencies and penalties asserted in the notice of deficiency. They moved for partial summary judgment, arguing that the IRS failed to comply with I. R. C. § 6751(b)(1) because the penalties were not approved by Damasiewicz’s supervisor before the settlement offers were made. The Tax Court considered the motion for partial summary judgment, applying the standard of review for summary judgment, which requires no genuine dispute of material fact and that a decision may be rendered as a matter of law.

    Issue(s)

    Whether the IRS’s settlement offers during an ongoing audit constitute the “initial determination” of a penalty assessment, thus requiring prior supervisory approval under I. R. C. § 6751(b)(1)?

    Whether the supervisory approval requirement of I. R. C. § 6751(b)(1) was satisfied when the revenue agent’s acting immediate supervisor approved the penalties?

    Rule(s) of Law

    I. R. C. § 6751(b)(1) states that “[n]o 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. ” The Tax Court has interpreted the “initial determination” to mean a formal communication that the Examination Division has completed its work and made an unequivocal decision to assert penalties, as established in Belair Woods, LLC v. Commissioner, 154 T. C. ___ (2020).

    Holding

    The Tax Court held that the IRS’s settlement offers to the Thompsons did not constitute the “initial determination” of a penalty assessment under I. R. C. § 6751(b)(1), and thus did not require prior supervisory approval. The court further held that the supervisory approval requirement was satisfied when Damasiewicz’s acting immediate supervisor approved the penalties before the IRS issued the notice of deficiency. Consequently, the Thompsons’ motion for partial summary judgment was denied.

    Reasoning

    The Tax Court reasoned that the settlement offers were not “determinations” but rather preliminary proposals within an ongoing examination. The court emphasized that the offers did not reflect the IRS’s completion of its work and did not assert specific penalties based on a completed audit but rather offered reduced penalties based on Announcement 2005-80. The court cited Belair Woods, LLC v. Commissioner, which defined the “initial determination” as a formal communication of the Examination Division’s completed work and unequivocal decision to assert penalties. The court also rejected the Thompsons’ argument that approval by an acting supervisor was insufficient, stating that the statute requires only the approval of the immediate supervisor, without mandating a “meaningful review. ” The court further dismissed the Thompsons’ invocation of the rule of lenity, finding no ambiguity in the statute that would require a construction in favor of the taxpayer.

    Disposition

    The Tax Court denied the Thompsons’ motion for partial summary judgment.

    Significance/Impact

    Thompson v. Commissioner clarifies the application of I. R. C. § 6751(b)(1) by distinguishing between settlement offers and formal penalty determinations. It establishes that settlement offers during an ongoing examination do not trigger the supervisory approval requirement, thus allowing the IRS flexibility in negotiating with taxpayers. The decision also affirms that approval by an acting supervisor is sufficient under the statute, providing clarity on the scope of “immediate supervisor” in this context. This ruling impacts IRS procedures for penalty assessments and may influence future cases involving similar issues of supervisory approval timing and authority.