SCOTUS Reports

Tag: Penalty Approval

  • 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.

  • Oropeza v. Commissioner, 155 T.C. No. 9 (2020): Timeliness of Supervisory Approval for Penalties Under IRC Section 6751(b)(1)

    Oropeza v. Commissioner, 155 T. C. No. 9 (2020)

    In Oropeza v. Commissioner, the U. S. Tax Court ruled that the IRS failed to secure timely supervisory approval for penalties asserted against the taxpayer, as required by IRC Section 6751(b)(1). The court found that the initial determination of penalties occurred when the IRS sent the taxpayer a Letter 5153 and Revenue Agent Report (RAR), not when the notice of deficiency was issued. This decision underscores the importance of timely supervisory approval in the penalty assessment process and impacts how the IRS must proceed in similar cases.

    Parties

    Jesus R. Oropeza, the Petitioner, filed a petition in the U. S. Tax Court against the Commissioner of Internal Revenue, the Respondent, challenging the imposition of penalties for the 2011 tax year. The case was designated as Docket No. 15309-15 and was filed on October 13, 2020.

    Facts

    The IRS opened an examination of Jesus R. Oropeza’s 2011 tax year. On January 14, 2015, as the period of limitations was about to expire, a revenue agent (RA) sent Oropeza a Letter 5153 and a Revenue Agent Report (RAR). The RAR proposed adjustments increasing Oropeza’s income and asserted a 20% accuracy-related penalty under IRC Section 6662(a), citing four potential bases for the penalty: negligence, substantial understatement of income tax, substantial valuation misstatement, and transaction lacking economic substance. Oropeza declined to extend the limitations period or agree to the proposed adjustments. On January 29, 2015, the RA’s supervisor signed a Civil Penalty Approval Form authorizing a 20% penalty for a substantial understatement of income tax. On May 1, 2015, the RA recommended a 40% penalty under IRC Section 6662(b)(6) for a nondisclosed noneconomic substance transaction, which was approved by the supervisor. The IRS issued a notice of deficiency on May 6, 2015, asserting the 40% penalty and, in the alternative, a 20% penalty for negligence or substantial understatement.

    Procedural History

    Oropeza timely petitioned the U. S. Tax Court for redetermination of the deficiency and penalties. The Commissioner filed a motion for partial summary judgment, contending that timely supervisory approval was obtained for the 40% and the alternative 20% penalty for a substantial understatement. Oropeza filed a cross-motion arguing that timely approval was not obtained for any penalties. The Tax Court granted Oropeza’s motion and denied the Commissioner’s cross-motion, finding that the IRS failed to secure timely supervisory approval for the penalties.

    Issue(s)

    Whether the IRS’s supervisory approval of the 20% penalty under IRC Section 6662(a) and the 40% penalty under IRC Section 6662(i) was timely as required by IRC Section 6751(b)(1)?

    Rule(s) of Law

    IRC Section 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 initial determination is considered to be embodied in the document by which the IRS formally notifies the taxpayer that the Examination Division has completed its work and made a definite decision to assert penalties.

    Holding

    The Tax Court held that the IRS did not satisfy the requirements of IRC Section 6751(b)(1) because written supervisory approval was not given for any penalties until after the Letter 5153 and RAR had been issued to Oropeza. Consequently, the court granted Oropeza’s motion for partial summary judgment and denied the Commissioner’s cross-motion.

    Reasoning

    The Tax Court reasoned that the initial determination of the penalties was made when the Letter 5153 and RAR were sent to Oropeza on January 14, 2015, not when the notice of deficiency was issued on May 6, 2015. The court relied on the precedent set in Belair Woods, LLC v. Commissioner, where the initial determination was considered to be embodied in the document that formally notified the taxpayer of the Examination Division’s definite decision to assert penalties. The court found that the RAR asserted a 20% penalty on four alternative grounds, including a substantial understatement of income tax and a transaction lacking economic substance, and that no timely supervisory approval was obtained for these penalties. Furthermore, the court clarified that IRC Section 6662(i) does not impose a distinct penalty but increases the rate of the penalty imposed under IRC Section 6662(a) and (b)(6). Since the base-level penalty under Section 6662(a) and (b)(6) was not timely approved, the IRS could not later secure approval for the rate increase under Section 6662(i). The court emphasized the importance of timely supervisory approval to prevent the unapproved threat of penalties being used as a bargaining chip.

    Disposition

    The Tax Court granted Oropeza’s motion for partial summary judgment and denied the Commissioner’s cross-motion, ruling that no penalties could be assessed due to the lack of timely supervisory approval.

    Significance/Impact

    This decision reaffirms the strict requirement of timely supervisory approval under IRC Section 6751(b)(1) and clarifies that the initial determination of a penalty occurs when the IRS formally communicates a definite decision to assert penalties to the taxpayer. It has significant implications for IRS penalty assessment procedures, particularly in cases involving the assertion of alternative penalties and rate enhancements. The ruling also underscores the importance of clear communication to taxpayers regarding penalty determinations and reinforces the statutory intent to prevent the use of penalties as a negotiation tool.