SCOTUS Reports

Tag: Penalty Assessment

  • Kraske v. Commissioner, 161 T.C. No. 7 (2023): Timeliness of Supervisory Approval for Penalties under I.R.C. § 6751(b)

    Kraske v. Commissioner, 161 T. C. No. 7 (2023)

    In Kraske v. Commissioner, the U. S. Tax Court ruled that supervisory approval for penalties under I. R. C. § 6751(b) is timely if given before the supervisor loses discretion, following the Ninth Circuit’s precedent in Laidlaw’s Harley Davidson. This decision impacts how and when the IRS must approve penalties, ensuring discretion remains with the supervisor until the case is transferred to Appeals.

    Parties

    Wolfgang Frederick Kraske, the petitioner, proceeded pro se. The respondent was the Commissioner of Internal Revenue, represented by Alexander D. DeVitis and Christine A. Fukushima.

    Facts

    The IRS examined Wolfgang Frederick Kraske’s federal income tax returns for 2011 and 2012. On June 2, 2014, a tax compliance officer (TCO) issued Kraske a 15-day letter proposing deficiencies and penalties under I. R. C. § 6662(a) and (b)(2). Kraske was given 15 days to request a conference with the IRS Office of Appeals. On July 16, 2014, Kraske mailed a request for Appeals consideration, which was received by the TCO on July 24, 2014. On July 21, 2014, the TCO’s immediate supervisor approved the penalties. The case was forwarded to Appeals on August 12, 2014, after which Kraske was unable to reach a settlement, leading to a notice of deficiency issued on July 28, 2015.

    Procedural History

    Kraske timely filed a petition with the U. S. Tax Court, challenging the penalties under I. R. C. § 6662(a) and (b)(2). The court previously sustained the tax deficiencies for 2011 and 2012 in a separate opinion, T. C. Memo. 2023-128. The current opinion focuses on the timeliness of the supervisory approval of the penalties under I. R. C. § 6751(b). The court applied the Golsen doctrine, following the Ninth Circuit’s precedent in Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F. 4th 1066 (9th Cir. 2022), which reversed and remanded 154 T. C. 68 (2020).

    Issue(s)

    Whether the written supervisory approval of the penalties under I. R. C. § 6751(b) was timely, given that it occurred after the issuance of the 15-day letter but before the case was transferred to the IRS Office of Appeals.

    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 Ninth Circuit in Laidlaw’s Harley Davidson held that supervisory approval must be obtained before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment.

    Holding

    The U. S. Tax Court held that the written supervisory approval for the penalties was timely under the standard set by the Ninth Circuit in Laidlaw’s Harley Davidson, as the supervisor retained discretion to approve or withhold approval when she did so on July 21, 2014, before the case was transferred to Appeals.

    Reasoning

    The court applied the Golsen doctrine, following the Ninth Circuit’s decision in Laidlaw’s Harley Davidson, which held that supervisory approval under § 6751(b) is timely if given before the supervisor loses discretion. The court rejected its prior position in Clay v. Commissioner, which required approval before formal communication of the penalty to the taxpayer. The Ninth Circuit’s rationale was deemed to extend to penalties subject to deficiency procedures, and the court found that the supervisor retained discretion when approving the penalties on July 21, 2014, as the case had not yet been transferred to Appeals. The court noted that this timeline was consistent with the Ninth Circuit’s findings in Laidlaw’s Harley Davidson. The court also considered the broader implications of the Ninth Circuit’s holding, which emphasized the importance of supervisory discretion over formal communication deadlines.

    Disposition

    The court entered a decision for the respondent, affirming the imposition of the penalties under I. R. C. § 6662(a) and (b)(2).

    Significance/Impact

    Kraske v. Commissioner clarifies the timing requirements for supervisory approval under I. R. C. § 6751(b), aligning with the Ninth Circuit’s precedent. This ruling ensures that supervisory approval is considered timely if given before the supervisor loses discretion, which may occur upon transfer to Appeals. The decision impacts IRS procedures and taxpayer rights, emphasizing the importance of maintaining supervisory discretion throughout the penalty assessment process. It also highlights the application of the Golsen doctrine, where the Tax Court follows the precedent of the Court of Appeals with jurisdiction over the appeal, ensuring consistency and judicial efficiency. Subsequent courts may refer to this case when addressing similar issues regarding the timeliness of penalty approvals.

  • 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.

  • Gardner v. Comm’r, 145 T.C. 161 (2015): Application of Penalties for Promoting Abusive Tax Shelters

    Gardner v. Commissioner, 145 T. C. 161 (2015)

    In Gardner v. Commissioner, the U. S. Tax Court upheld the IRS’s imposition of $47,000 penalties on Fredric and Elizabeth Gardner for promoting an abusive tax shelter involving corporations sole. The court found that the Gardners made false statements about tax benefits, leading to their liability under I. R. C. § 6700. The decision reinforces the IRS’s authority to penalize promoters of tax shelters and clarifies that such penalties are not dependent on the actions of the shelter’s purchasers.

    Parties

    Fredric A. Gardner and Elizabeth A. Gardner, petitioners, were the defendants in a prior action brought by the United States in the U. S. District Court for the District of Arizona. In the Tax Court, they were the petitioners challenging the IRS’s collection actions regarding the assessed penalties. The respondent was the Commissioner of Internal Revenue.

    Facts

    Fredric and Elizabeth Gardner, a husband and wife, operated Bethel Aram Ministries (BAM), an unincorporated association they formed in 1993. They promoted a plan involving corporations sole, claiming it could reduce federal income tax liabilities. The plan involved assigning personal income to a corporation sole, which they claimed would transform taxable income into nontaxable income. They also advised customers to create trusts and LLCs, asserting that income assigned to these entities would be tax-free and that donations to churches would generate charitable deductions. The Gardners solicited “donations” in exchange for their services, and they held seminars and retreats to promote their plan. In 2008, the U. S. District Court for the District of Arizona found that the Gardners had organized more than 300 corporations sole and made false statements regarding tax benefits, leading to an injunction against further promotion of the plan. The IRS subsequently assessed $47,000 penalties against each Gardner under I. R. C. § 6700 for their activities in 2003, which the Gardners did not pay, prompting the IRS to commence collection actions.

    Procedural History

    The U. S. District Court for the District of Arizona granted the United States’ motion for summary judgment and permanently enjoined the Gardners from promoting their corporation sole plan on March 24, 2008. This decision was affirmed by the Ninth Circuit Court of Appeals. Following the injunction, the IRS assessed $47,000 penalties against each Gardner under I. R. C. § 6700 for the year 2003. After the Gardners failed to pay these penalties, the IRS filed a notice of lien against Fredric Gardner and proposed levies against both Gardners. The Gardners separately challenged these collection actions before different IRS settlement officers, who sustained the IRS’s actions. The Gardners then sought judicial review in the U. S. Tax Court under I. R. C. § 6330(d)(1).

    Issue(s)

    Whether each petitioner is liable for the assessed $47,000 penalty under I. R. C. § 6700, and whether the IRS settlement officers abused their discretion in sustaining the IRS’s lien against Fredric Gardner and in determining that the IRS’s proposed levy actions against both Gardners could proceed?

    Rule(s) of Law

    I. R. C. § 6700 imposes a penalty on any person who organizes or participates in the sale of a tax shelter and makes or furnishes statements regarding the allowability of deductions or tax credits, the excludability of income, or the securing of other tax benefits, knowing or having reason to know that such statements are false or fraudulent as to any material matter. The penalty is $1,000 per violation unless the person establishes that the gross income derived from the activity was less than $1,000. I. R. C. § 6330 provides for a hearing before the IRS may proceed with a levy and allows the taxpayer to challenge the existence or amount of the underlying tax liability if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability.

    Holding

    The U. S. Tax Court held that the Gardners were liable for the $47,000 penalties under I. R. C. § 6700, as the IRS established that they had sold the corporation sole plan to at least 47 individuals. The court also held that the IRS settlement officers did not abuse their discretion in sustaining the lien against Fredric Gardner and in determining that the proposed levy actions against both Gardners could proceed.

    Reasoning

    The court applied the doctrine of collateral estoppel, finding that the issues in the Tax Court case were identical to those determined by the District Court, which had found the Gardners liable under I. R. C. § 6700. The court also considered the legislative history of I. R. C. § 6700, which indicates that the actions of the plan participants are not relevant to the application of the penalty. The court reviewed the IRS’s evidence, which included bank records and tax returns of 47 individuals who purchased the corporation sole plan, and found that the IRS had met its burden of proof in establishing the Gardners’ liability for the penalties. The court rejected the Gardners’ argument that the IRS did not prove that the purchasers used the plan to avoid taxes, emphasizing that the focus of I. R. C. § 6700 is on the promoter, not the recipient. The court also addressed the Gardners’ contention that the IRS improperly designated 2003 as the year of the penalty, finding that the designation was for administrative purposes and did not prejudice the Gardners. Finally, the court found no abuse of discretion in the IRS settlement officers’ determinations, as they verified the procedural requirements and considered the Gardners’ arguments.

    Disposition

    The U. S. Tax Court entered decisions for the respondent, sustaining the IRS’s lien against Fredric Gardner and allowing the IRS’s proposed levy actions against both Gardners to proceed.

    Significance/Impact

    The Gardner decision reinforces the IRS’s authority to penalize promoters of abusive tax shelters under I. R. C. § 6700, even if the purchasers of the shelter do not rely on the plan or underreport their taxes. The case clarifies that the penalty is assessed based on the promoter’s actions, not the purchaser’s actions, and that the IRS may designate a year for the penalty for administrative purposes without prejudicing the taxpayer. The decision also underscores the importance of the doctrine of collateral estoppel in tax litigation, preventing the relitigation of issues already decided by a court of competent jurisdiction. The case has implications for tax practitioners and promoters, emphasizing the need for accurate representations regarding tax benefits and the potential for significant penalties for promoting abusive tax shelters.