Couple Asks Supreme Court to Review Supervisory Penalty Approval

DANIEL E. LARKIN AND CHRISTINE LARKIN,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

In The
Supreme Court of the United States

On Petition for a Writ of Certiorari to the
United States Court of Appeals for the
District of Columbia Circuit

PETITION FOR WRIT OF CERTIORARI

GUINEVERE MOORE
Counsel of Record
AJAY GUPTA
Moore Tax Law Group LLC
150 N. Wacker Dr., Suite 1250
Chicago, IL 60606
(312) 549-9990
guinevere.moore@mooretaxlawgroup.com
ajay.gupta@mooretaxlawgroup.com

QUESTIONS PRESENTED

1. Does the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, Title III, which enacted new sections 6751 and 7491 of the Internal Revenue Code, 26 U.S.C. §§ 6751 and 7491, require the Secretary of the Treasury to come forward with evidence of written supervisory approval in any court proceeding with respect to the liability of any individual taxpayer for penalties, rendering the written supervisory approval requirement contained in section 6751(b)(1), 26 U.S.C. § 6751(b)(1), an element of the Internal Revenue Service's prima facie case for that penalty?

2. If so, may a Court of Appeals deny relief to an individual taxpayer who argued during trial the Secretary of the Treasury's inability to sustain the penalty at issue, solely on the grounds that the taxpayer did not specifically cite section 6751(b)(1), 26 U.S.C. § 6751(b)(1), notwithstanding the Secretary of the Treasury's failure to offer any evidence of compliance with the written supervisory approval requirement set forth in section 6751(b)(1)?

PARTIES TO THE PROCEEDING AND RELATED PROCEEDINGS

The parties to the proceeding below are as follows:

Petitioners are Daniel and Christine Larkin. Mr. and Mrs. Larkin were the petitioners in the United States Tax Court and the appellants in the United States Court of Appeals for the District of Columbia Circuit.

Respondents are the Internal Revenue Service, the Department of the Treasury, and the United States of America. Respondents were respondents in the United States Tax Court and appellees in the United States Court of Appeals for the District of Columbia Circuit.

The related proceedings below are:

1) Larkin v. Commissioner, No. 14886-08, United States Tax Court. Decision entered September 14, 2017.

2) Larkin v. Commissioner, No. 17-1252, United States Court of Appeals for the District of Columbia Circuit. Judgment entered April 21, 2020. Rehearing denied, June 15, 2020.

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TABLE OF CONTENTS

QUESTIONS PRESENTED

PARTIES TO THE PROCEEDINGS AND RELATED PROCEEDINGS

TABLE OF AUTHORITIES

OPINIONS BELOW

STATEMENT OF JURISDICTION

CONSTITUTIONAL AND STATUTORY PROVISIONS

STATEMENT OF THE CASE

REASONS FOR GRANTING THE PETITION

CONCLUSION

APPENDIX:

Opinion of the United States Court of Appeals for the District of Columbia Circuit, No. 17-1252, Larkin v. Commissioner, filed April 21, 2020

Memorandum Findings of Fact and Opinion of the United States Tax Court, Docket Nos. 14886-08 and 19940-09, Larkin v. Commissioner, filed April 3, 2017

Order of the United States Tax Court, Docket Nos. 14886-08 and 19940-09, Larkin v. Commissioner, filed May 17, 2017

Order and Decision of the United States Tax Court, Docket No. 14886-08, Larkin v. Commissioner, filed September 14, 2017

Order and Decision of the United States Tax Court, Docket No. 19940-09, Larkin v. Commissioner, filed September 14, 2017

Order on Rehearing of the United States Court of Appeals for the District of Columbia Circuit, No. 17-1252, Larkin v. Commissioner, filed June 15, 2020

26 U.S. Code § 6751

26 U.S. Code § 7491

Petition of Larkin, et al., filed in the United States Tax Court on June 17, 2008

Petition of Larkin, et al., filed in the United States Tax Court on August 25, 2009

Excerpt from the petitioners' Opening Post-Trial Brief, filed in the United StatesTax Court on January 12, 2011

Excerpt from the appellants' Opening Brief, filed in the United States Court of Appeals for the District of Columbia Circuit, No. 17-1252, Larkin v. Commissioner, on October 19, 2019

Petition for Rehearing, filed in the United States Court of Appeals for the District of Columbia Circuit, No. 17-1252, Larkin v. Commissioner, on June 2, 2020

Excerpt from the IRS Collections, Activities, Penalties, and Appeals, Table 26: Civil Penalties Assessed and Abetted, by Type of Tax and Type of Penalty, Fiscal Year 2019

Excerpt from the Annual Report to Congress 2018, National Taxpayer Advocate, Vol.1, Most Serious Problems #20

TABLE OF AUTHORITIES

CASES

Ballard v. Commissioner, 544 U.S. 40 (2005)

Baxter v. Commissioner, 910 F.3d 150 (4th Cir. 2018)

Becker v. Commissioner, 751 F.2d 146 (3d Cir.1985)

Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019)

Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017)

Christensen v. Commissioner, 786 F.2d 1382 (9th Cir.1986)

Curtis Inv. Co., LLC v. Commissioner, 909 F.3d 1339 (11th Cir. 2018)

Curtis Inv. Co., LLC v. Commissioner, T.C. Memo. 2017-150

Eaglehawk Carbon, Inc. v. United States, 122 Fed. Cl. 209 (2015)

FMC Corp. v. Holliday, 498 U.S. 52 (1990)

Fargo v. Commissioner, 447 F.3d 706 (9th Cir. 2006)

Golsen v. Commissioner, 54 T.C. 742 (1970)

Graev v. Commissioner, 147 T.C. 460 (2016)

Guilbeau v.W.W. Henry Co., 85 F.3d 1149 (5th Cir. 1996)

Kaufman v. Commissioner, 784 F.3d 56 (1st Cir. 2015)

Kaufman v. Commissioner, T.C. Memo. 2014-52

Kenna Trading, LLC v. Commissioner, 143 T.C. 322 (2014)

Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985)

Marks v.Commissioner, 947 F.2d 983 (D.C. Cir. 1991)

Mellow Partners v. Commissioner, 890 F.3d 1070 (D.C. Cir. 2018)

Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552 (1990)

Seligman v. Commissioner, 84 T.C. 191 (1985)

Sugarloaf Fund, LLC v. Commissioner, 911 F.3d 854 (7th Cir. 2018)

Sundstrand Corp. v. Commissioner, 96 T.C. 226 (1991)

United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365 (1988)

United States v. Boisdoré's Heirs, 49 U.S. 113 (1850)

United States v. Horne, 714 F.2d 206 (1st Cir. 1983)

United States v. Raynor, 302 U.S. 540 (1938)

Valen Mfg. Co. v.United States, 90 F.3d 1190 (6th Cir. 1996)

STATUTES

26 U.S.C. § 6203

26 U.S.C. § 6213

26 U.S.C. § 6751

26 U.S.C. § 7491

28 U.S.C. § 1254

RULES

Fed. Rule Civ. Proc. 50

U.S. Tax Court Rule 1

U.S. Tax Court Rule 34

U.S. Tax Court Rule 121

U.S. Tax Court Rule 151

OTHER AUTHORITIES

H.R. Conf. Rep. No. 105–599 (1998)

S. Rep. No. 105–174 (1998)

Internal Revenue Service Restructuring And Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685

Chief Counsel Notice CC-2018-006 (June 6, 2018)

Internal Revenue Manual, (“I.R.M.”) 20.1.1.2.3.1 (Oct. 19, 2020)

I.R.M. 20.1.1.2.3 (Oct. 19, 2020

I.R.M. 20.1.1.1.4. (Nov. 21, 2017)

Annual Report to Congress 2018, National Taxpayer Advocate, Vol. 1, Most Serious Problems #20, Pre-Trial Settlements in the U.S. Tax Court

IRS Collections, Activities, Penalties, and Appeals, Table 26

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PETITION FOR WRIT OF CERTIORARI

Petitioners Daniel E. Larkin and Christine Larkin (the “Petitioners”) respectfully petition for a writ of certiorari to review the judgment of the United States Court of Appeals for the District of Columbia Circuit.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the District of Columbia Circuit is available at 2020 WL 2301462 as Larkin v. Commissioner (April 21, 2020), and is included in the Appendix at A1. The order of the United States Court of Appeals for the District of Columbia Circuit denying rehearing (June 15, 2020) is included in the Appendix at A92. The opinion of the United States Tax Court is available at T.C. Memo 2017-54 as Larkin v. Commissioner (April 3, 2017), and is included as in the Appendix at A8.

STATEMENT OF JURISDICTION

The opinion and judgment of the United States Court of Appeals for the District of Columbia Circuit in this matter is dated April 21, 2020. The United States Court of Appeals for the District of Columbia Circuit denied a petition for rehearing on June 15, 2020. Pursuant to this Court's March 19, 2020, Order regarding filing deadlines, the deadline for filing a petition for writ of certiorari due on or after March 19, 2020, is extended to 150 days from the date of the lower court judgment, order denying discretionary review, or order denying a timely petition for rehearing. One hundred-fifty days after June 15, 2020, is November 12, 2020. Jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

The pertinent statutory provisions involved in this case are sections 6751 and 7491 of the Internal Revenue Code, 26 U.S.C. §§ 6751 and 7491.¹ Those provisions are reproduced in the Appendix at A94 and A95, respectively.

STATEMENT OF THE CASE

This is a case about whether Congress means what it says when it places the burden of production on the Secretary of the Treasury (“Secretary”) in any court proceeding with respect to the liability of any individual for any penalty, and if so, whether courts will hold the Secretary to the standard delineated in the Internal Revenue Code and find in favor of taxpayer-petitioners when the Secretary fails to meet that standard.

The Petitioners in this case are individual taxpayers who filed a pro se petition in the United States Tax Court (the “Tax Court”), disputing adjustments to tax and additions to tax, including accuracy penalties pursuant to section 6662 (the “section 6662 accuracy penalties”) proposed by the Commissioner of the Internal Revenue Service (the “Commissioner,” and the “IRS,” respectively). App. A97. In their petition to the Tax Court, at trial, and in their post-trial briefs, the Petitioners disputed the imposition of the section 6662 accuracy penalties. App. A102, A109.

Neither the Petitioners nor the Commissioner expressly cited to or addressed section 6751(b)(1), which prohibits the Secretary from assessing penalties under Title 26 of the United States Code “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination” during the pendency of the Tax Court trial. Notwithstanding the Commissioner's failure to introduce any evidence of written supervisory approval of the initial determination of the section 6662 accuracy penalties at issue in the case, as required by section 6751(b)(1), the Tax Court “conclude[d] that [the Commissioner] met his burden of production” with regard to those penalties. App. A8.

The Petitioners timely appealed the Tax Court decision. In their opening brief, the Petitioners set forth as a basis for relief the Commissioner's failure to introduce evidence of compliance with the requirements set forth in section 6751(b)(1). App. A113. The Petitioners argued on appeal that, under section 7491(c), the Commissioner had the burden of production, and that the failure to submit proof of compliance with section 6751(b)(1) required a finding in Petitioners' favor on the penalties. App. A113. The United States Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”) did not consider the Commissioner's failure to introduce evidence of compliance with section 6751(b)(1)'s requirements on appeal, instead holding the Petitioners' arguments on that score to be “either forfeited or meritless.” App. A1. But it is the Commissioner, and not the individual taxpayers, who bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty. 26 U.S.C. § 7491(c). The Commissioner's failure to introduce any evidence of compliance with the statutory requirements set forth in section 6751(b)(1) should have been dispositive of the issue of penalties, notwithstanding the Petitioners' failure to raise that specific issue at trial. The Court of Appeals erred when it held Petitioners' attempt to raise section 6751(b)(1) for the first time on appeal was either waived or meritless, because the Commissioner never met his burden of production to establish compliance with section 6751(b)(1), a prima facie element of “any court proceeding with respect to the liability of any individual for any penalty,” as provided by section 7491(c).

REASONS FOR GRANTING THE PETITION

Congress enacted the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105– 206, 112 Stat. 685 (the “IRS Reform Act”), after a series of investigations revealed the need for reorganization of both the IRS, S. Rep. No. 105–174, p.8 (1998) (hereinafter S. Rep. No. 105–174), and the tax administration and judicial systems, which put individual and small business taxpayers “at a disadvantage when forced to litigate with the Internal Revenue Service,” S. Rep. No. 105–174, p.44. Two new sections of the Code that were added as part of the IRS Reform Act are relevant here.

First, Congress added new Code section 6751, which prohibits the Secretary from assessing a penalty under Title 26 “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination” (the “written supervisory approval requirement”). 26 U.S.C § 6751(b)(1). Section 6751 was added to ensure that the IRS could impose penalties on taxpayers only “where appropriate,” and that the agency should not be allowed to wield those penalties “as a bargaining chip” to coerce taxpayers into settling. S. Rep. No. 105–174, p. 65.

Second, Congresses added new Code section 7491, which provided several new important taxpayer protections, one of which impacts individual taxpayers such as petitioners. Specifically, section 7491(c) provides that “[n]otwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.” 26 U.S.C. § 7491(c).

A. The Second Circuit's Chai Decision Imparted Original Meaning to the Text of Section 7491(c) to Ascertain the Proper Timing and Functionality of the Written Supervisory Approval Requirement.

Section 7491(c) overrides all other provisions of the Code and attaches to all individual taxpayer litigation over every penalty under the Code. Specifically, the statute applies “[n]otwithstanding any other provision of this title,” and places “the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title” on the Secretary. The provision was enacted as section 3001(c) of the IRS Reform Act. See § 3001 of the IRS Reform Act of 1998, Pub. L. 105–206, 112 Stat. 685, 26 U.S.C. § 7491(c).

The accompanying House Conference Report explicates the meaning of the key terms in the provision, observing that:

[I]n any court proceeding, the Secretary must initially come forward with evidence that it is appropriate to apply a particular penalty to the taxpayer before the court can impose the penalty. This provision is not intended to require the Secretary to introduce evidence of elements such as reasonable cause or substantial authority. Rather, the Secretary must come forward initially with evidence regarding the appropriateness of applying a particular penalty to the taxpayer; if the taxpayer believes that, because of reasonable cause, substantial authority, or a similar provision, it is inappropriate to impose the penalty, it is the taxpayer's responsibility (and not the Secretary's obligation) to raise those issues. H.R. Conf. Rep. No. 105–599, p. 241 (1998) (hereinafter H.R. Conf. Rep. No. 105– 599).

In Chai v. Commissioner, 851 F.3d 190, 222 (2d Cir. 2017), affirming in part and reversing in part T.C. Memo. 2015-42, the Second Circuit focused on the distinction in the legislative history between the elements of the IRS's prima facie case for a penalty, on one hand, and the taxpayer's affirmative defenses on the other, and placed the written supervisory approval requirement of section 6751(b)(1) squarely within the former category. Importantly, the Second Circuit held that the “written-approval requirement — as a mandatory, statutory element of a penalty claim — is distinct from affirmative defenses based on 'reasonable cause, substantial authority, or a similar provision,' which need be raised by the taxpayer.” Chai, 851 F.3d, at 222, n.26 (citing H.R. Conf. Rep. No. 105–599, p. 241).

Like section 7491(c), section 6751(b)(1) encompasses every penalty in the Code (with few exceptions). It provides 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.” 26 U.S.C § 6751(b)(1). In Chai, the Commissioner urged the Second Circuit to adopt his construction of the provision, which focused almost exclusively on the term “assessment,” the formal administrative act by which the IRS records a taxpayer's liability on its books and which, by law, must await the culmination of any Tax Court litigation. Chai, 851 F.3d, at 216-218. See also 26 U.S.C. §§ 6203 (providing that an “assessment shall be made by recording the liability of the taxpayer in the office of the Secretary”); and 6213(a) (providing that “no assessment . . . shall be made . . . until the decision of the Tax Court has become final”). But see 26 U.S.C. § 6213(c) (providing that “[i]f the taxpayer does not file a petition with the Tax Court within the time prescribed . . . the deficiency, notice of which has been mailed to the taxpayer, shall be assessed, and shall be paid upon notice and demand from the Secretary.”)

Specifically, in Chai, the Commissioner argued that because section 6751(b)(1) requires written supervisory approval of the “initial determination of . . . assessment” of a penalty, like the act of assessment itself, the approval requirement too should wait on the conclusion of any Tax Court litigation over that penalty. Chai, 851 F.3d, at 218. That argument carried the day in the Tax Court. See Graev v. Commissioner, 147 T.C. 460, 484 (2016) (holding that during Tax Court litigation over a penalty, “it is premature to decide what additional burden, if any, section 6751(b)(1) might impose upon the IRS in assessing” that penalty), supplemented and overruled in part, 149 T.C. 485 (2017).

The Second Circuit in Chai explicitly rejected that argument and the Tax Court's endorsement of it, pointing out that “[i]f supervisory approval is to be required at all, it must be the case that the approval is obtained when the supervisor has the discretion to give or withhold it.” Chai, 851 F.3d, at 220. The Second Circuit observed that any such “discretion is lost once the Tax Court decision becomes final.” Id. Consequently, the Second Circuit held that “for the supervisor's discretion to be given force, the approval must be issued before the Tax Court proceeding is even initiated.” Id.

The Second Circuit then turned to the burden-shifting requirement of section 7491(c), and, reading that in pari materia with section 6751(b)(1), concluded that “the written-approval requirement of § 6751(b)(1) is appropriately viewed as an element of a penalty claim, and therefore part of the IRS's prima facie penalty case.” Chai, 851 F.3d, at 222. In other words, the Commissioner's failure to produce at an individual's trial sufficient evidence of the IRS's compliance with the written supervisory approval requirement is adequate grounds for “judgment as a matter of law” in favor of the taxpayer. Id.

Because Chai distilled the true meaning of section 7491(c) as originally enacted, namely to establish the appropriate status and import of the written supervisory approval requirement in court proceedings over a tax penalty, this Court should affirm that decision and explicitly hold that evidence of written supervisory approval is an element of the Commissioner's prima facie penalty case. Indeed, holding otherwise would render section 7491(c) meaningless. See Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 562 (1990) (where the Court expressed “deep reluctance” to interpret statutory provisions “so as to render superfluous other provisions in the same enactment.” (citation omitted)).

The Commissioner must comply with section 6751(b)(1), regardless of whether a taxpayer raises compliance (or lack thereof) as a defense to penalties during any court proceeding. And absent any contrary provision, a taxpayer challenging the Commissioner's determinations set forth in a Notice of Deficiency must advance each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency. See United States Tax Court Rule 34(b). Section 7491(c) is that contrary provision, expressly providing that — with respect to any liability of any individual for any penalty under Title 26 — the Secretary shall have the burden of production in any court proceeding. If section 7491(c) is not read to require the Secretary to come forward with evidence establishing the appropriateness of applying a particular penalty to a given individual taxpayer in court proceedings, the provision is rendered devoid of all meaning. Indeed, this Court has historically imposed on courts the obligation to give statutory language its “fair meaning in accord with the evident intent of Congress.” United States v. Raynor, 302 U.S. 540, 552. See also Lowe v. Securities and Exchange Commission, 472 U.S. 181, 208, n. 53 (1985) (emphasizing that courts must read every statute as to “give effect to every word that Congress used.”) If Congress did not intend to shift the burden of production in any court proceeding with respect to the liability of any individual for any penalty under Title 26, and instead intended individual taxpayers to be responsible for establishing the prima facie case for penalties not applying, “surely it would have expressed it in straightforward English.” FMC Corp. v. Holliday, 498 U.S. 52, 66 (1990) (Stevens, J., dissenting).

B. The Court Should Clarify the Role of the Written Supervisory Approval Requirement in the Judicial Redetermination of Penalties.

The two provisions of the Code at issue here, sections 6751 and 7491, were enacted together and are intended to work in tandem. Together, the provisions act as a check against IRS agents' using the specter of penalties to intimidate taxpayers during audit, and to level the playing field for individual taxpayers who “are frequently at a disadvantage when forced to litigate with the Internal Revenue Service.” S. Rep. No. 105–174, p. 45. Specifically, section 7491(c) requires the Commissioner to bear the burden of production in any court proceeding with respect to penalties assessed against individuals, and section 6751(b)(1) requires the immediate supervisor of the individual within the IRS who makes the initial penalty determination to approve that penalty in writing. 26 U.S.C. §§ 7491(c) and 6751(b)(1).

For close to two decades, however, those provisions, enacted along with dozens of other new Code sections in the IRS Reform Act, remained “dead letters,” affecting neither agency practice nor judicial resolution of tax penalty disputes.

Eventually, in Chai, 851 F.3d 190, 222, the Second Circuit read both provisions in pari materia to conclude that “the written-approval requirement of § 6751(b)(1) is appropriately viewed as an element of a penalty claim, and therefore part of the IRS's prima facie penalty case.” In doing so, the Second Circuit overturned the Tax Court precedent that, in turn, affirmed the IRS's long-held understanding that the supervisor of the IRS individual making the initial penalty determination need not give her written approval until any Tax Court litigation relating to the penalty has been resolved and the agency is ready to record the corresponding liability on the taxpayer's account. See Graev, 147 T.C., at 478.

In Chai, the Second Circuit harmonized the Secretary's burden of production under section 7491(c) with the written supervisory approval requirement under section 6751(b)(1) to require the Commissioner to come forward with evidence of written supervisory approval of the initial determination of the penalty at issue in order for the penalty to be sustained. The Second Circuit gave effect both to the plain language of section 7491(c), which squarely places the burden of production on the Secretary “in any court proceeding with respect to the liability of any individual for any penalty,” as well as the plain language of section 6751(b)(1), which unambiguously prevents the Secretary from assessing any penalty under Title 26 absent written supervisory approval of the initial determination of that penalty. Put another way, the Secretary is required to obtain written supervisory approval of the initial determination of penalties under Title 26, and where, as here, a court proceeding involves an individual's liability for a penalty under Title 26, the Secretary must come forward with evidence that the proposed penalty is correct — including compliance with section 6751(b)— in order to establish his prima facie case for the penalty.

The Second Circuit's overarching reading of sections 7491(c) and 6751(b)(1) relied upon Congress's core intent when enacting both statutes, that is, to deter “the IRS's improper leveraging of undue penalties.” Chai, 851 F. 3d, at 220. Indeed, “[i]f deficiency proceeding reviews of penalty determinations were sufficient to deter or detect” the IRS's improper imposition of penalties “then Congress would have not felt compelled to enact § 7491(c). . . along with § 6751.” Id.

The Second Circuit's discussion of the legislative history of sections 7941(c) and 6751(b), specifically its emphasis on the identical Congressional intent justifying the enactment of the statutes, further enhances the accuracy of the Circuit's intertwined interpretation of the statutes and its corresponding conclusion that the written supervisory approval requirement constitutes an integral element of the IRS's prima facie penalty case. Indeed, as this Court noted, judicial interpretation is “a holistic endeavor,” United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371 (1988), pursuant to which “we must . . . look to the provisions of the whole law, and to its object and policy.” United States v. Boisdoré's Heirs, 49 U.S. 113, 122 (1850).

After Chai, the procedural safeguards against taxpayer intimidation sometimes work exactly as Congress envisaged. Indeed, the holding has already begun to have a salutary effect on IRS practice. For penalties that it has determined since that decision, the IRS apparently has been routinely obtaining the requisite written supervisory approval and placing it in the taxpayer's file before sending him a notice of deficiency — the so-called ticket to Tax Court. See, e.g., I.R.M. 20.1.1.2.3.1 (Oct. 19, 2020); I.R.M. 20.1.1.2.3 (Oct. 19, 2020); and I.R.M. 20.1.1.1.4. (Nov. 21, 2017). And for earlier-determined penalties that taxpayers are challenging in Tax Court trials, the Commissioner now comes forward with proof of such approval during his case in chief, if he does have that proof, or if he does not, concedes the penalty. See, e.g., CC-2018-006, at 4 (June 6, 2018) (directing IRS counsel to concede penalties when no documentary evidence of compliance with section 6751(b)(1) can be located). But those concessions, at least in cases appealable to Circuits other than the Second, seem to be acts of administrative grace rather than judicial mandate, and the Commissioner is free to change this policy at any time when a taxpayer's case is not appealable to the Second Circuit. See, e.g., Eaglehawk Carbon, Inc. v. United States, 122 Fed. Cl. 209, 221 (2015) (noting that “it is beyond cavil” that I.R.M. provisions “do[ ] not have the force of law”); Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006) (noting that “[th]e Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers”); Valen Mfg. Co. v. United States, 90 F.3d 1190, 1194 (6th Cir. 1996) (noting that [“[t]he provisions of the manual, however, only 'govern the internal affairs of the Internal Revenue Service. They do not have the force and effect of law,'” quoting United States v. Horne, 714 F.2d 206, 207 (1st Cir. 1983)); and Marks v. Commissioner, 947 F.2d 983, 986, n.1 (D.C. Cir. 1991) (noting that [i]t is well-settled . . . that the provisions of the [I.R.M.] are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law.”)

The Commissioner's position on appeal, namely that an individual taxpayer must raise section 6751(b)(1) for the court to consider whether the Commissioner complied with the requirements therein, chisels away at Chai's holding. Specifically, for an individual taxpayer whose Tax Court trial concluded before this change in IRS practice (which, as noted above, may be changed back at any time), even a taxpayer who challenged the appropriateness of the penalty at trial, but failed to specifically identify the written supervisory approval requirement or cite section 6751(b)(1), the Commissioner insists that the issue was waived at trial. Apparently, the Commissioner would require individual taxpayers in the Tax Court, the vast majority of whom proceed pro se, to have chanted “written supervisory approval” or “section 6751(b)(1),” almost like a talismanic incantation, to become eligible for the protection of the very procedural safeguard that Congress designed with unsophisticated litigants in mind when enacting sections 7491 and 6751(b)(1). While not explicitly denying that written supervisory approval constitutes an element of his prima facie case, the Commissioner, nonetheless, resists the implication that Chai fused this element with its case. Consequently, the Commissioner maintains that unless preceded by a post-trial motion arguing insufficiency of evidence, the issue may not be raised on appeal.

Although that argument is destined to be a non-starter in the Second Circuit, it has gained traction outside it. At least four other circuits — the Fourth, Seventh, Eleventh, and the District of Columbia — while not disagreeing with the Second that the written supervisory approval should be obtained before the Tax Court litigation commences, have eschewed going further and unequivocally holding that this approval is part of the IRS's prima facie penalty case in that litigation. See Baxter v. Commissioner, 910 F.3d 150, 169, n.3 (4th Cir. 2018); Sugarloaf Fund, LLC v. Commissioner, 911 F.3d 854, 860 (7th Cir. 2018); Curtis Inv. Co., LLC v. Commissioner, 909 F.3d 1339, 1354 (11th Cir. 2018); and Mellow Partners v. Commissioner, 890 F.3d 1070, 1081-1082 (D.C. Cir. 2018).

Under the so-called Golsen Rule, Golsen v. Commissioner, 54 T.C. 742 (1970), taxpayers who are residents of the Second Circuit may raise the Secretary's compliance with section 6751(b)(1), or lack thereof, for the first time in a post-trial brief, but taxpayers who are not residents of the Second Circuit may not. This cannot be what Congress intended when it enacted the IRS Reform Act.

Outside of the Second Circuit, each of these Courts of Appeals that has considered the matter has precluded a taxpayer from invoking Chai to argue that the Commissioner failed to make a prima facie case for the penalty at trial on the ground that the taxpayer did not specifically identify the written supervisory approval requirement or cite section 6751(b)(1) during trial or in a post-trial motion. In doing so, these Circuits have failed to consider section 7491(c)'s import.

Resolution of this issue is a matter of great national importance and will impact millions of taxpayers, as well as have a significant impact on the tax administration system and judicial review of IRS determinations. Penalties constitute a significant portion of the total tax revenue collected by the IRS. For instance, during fiscal year 2019, the IRS assessed 40,161,325 civil penalties, with an aggregate value of nearly $40.5 billion, out of which 32,828,655 penalties, with an aggregate value of nearly $14.2 billion, pertained to individual and estate and trust income tax returns. See IRS Collections, Activities, Penalties, and Appeals, Table 26, found at https://www.irs.gov/statistics/collections-activities-penalties-and-appeals (as visited on Nov. 9, 2020, and included in the Appendix at A134).

The United States Tax Court is the only prepayment judicial venue available to taxpayers who dispute IRS determinations. 26 U.S.C. § 6213. Over 80 percent of petitioners in the Tax Court proceed pro se. See Annual Report to Congress 2018, National Taxpayer Advocate, Vol. 1, Most Serious Problems #20, Pre-Trial Settlements in the U.S. Tax Court, online at https://taxpayeradvocate.irs.gov/Media/Default/Documents/2018-ARC/ARC18_Volume1_MSP_20_TAXCOURT.pdf (as visited Nov. 9, 2020, and included in the Appendix at A135). Guidance on what the Commissioner's statutory obligations are in court proceedings when individual penalties under Title 26 are at issue will establish a uniform approach that would in turn further Congress's intent to administer the Code in a just and equal manner.

This Court should resolve any procedural uncertainty in the IRS's penalty collection practice under section 6751(b)(1). Specifically, this Court should clarify the exact role the written supervisory approval requirement has in the process by which penalties are first administratively determined and later judicially sustained. By unambiguously declaring that the written supervisory approval is part of the Commissioner's prima facie penalty case, the Court will provide clear guidance to the IRS, and will help institutionalize the agency's current practice of conceding penalties in cases in which it cannot adduce at trial evidence of this approval — regardless of a litigant's legal acumen, lack thereof, or geographical location.

This Court's clarification of the Commissioner's intertwined responsibilities to adhere to the written supervisory approval requirement of section 6751(b)(1) and to establish compliance with that requirement in any court proceeding in which a liability for an individual's penalty is at issue will provide much-needed clarity for every case pertaining to penalties under Title 26, ensure the consistent administration of penalties, and protect the taxpayers' right to a fair and just tax system. Most importantly, clarification of the Commissioner's obligations under section 7491(c) would finally give the plain meaning of that statute the import Congress intended when it was enacted.

Indeed, by vindicating the soundness of the Second Circuit's Chai decision and rendering it beyond dispute, the Court will also signal to the Commissioner that it is imperative to cease minimizing the decision's effect by withholding its benefits from taxpayers, many of whom are pro se litigants in the Tax Court who did not recite the magic words, “written supervisory approval” or “section 6751(b)(1).” The Court should make clear that, because the written supervisory approval is an element of the Commissioner's prima facie penalty case, any objection at an individual's trial to the adequacy of the administrative record supporting the penalty suffices for properly placing the issue before any court of appeals.

C. Post-Chai Appellate Decisions Have Cabined the Impact of the Chai Decision by Imposing Undue Demands on Pro Se Litigants.

Since the Second Circuit decided Chai, at least four other Courts of Appeals have heard from taxpayers whose Tax Court trials concluded earlier. None has disagreed with Chai that the IRS should have obtained the section 6751(b)(1)'s written supervisory approval before the Tax Court litigation commenced. But none has also explicitly held proof of that approval to be an element of the Commissioner's prima facie case in the Tax Court trial, notwithstanding section 7491(c)'s imposition of the burden of production on the IRS “in any court proceeding with respect to the liability of any individual for any penalty.” 26 U.S.C. § 7491(c). Instead, they have all declined to address the section 6751(b)(1) argument on the ground that the taxpayers, even those who proceeded pro se in the Tax Court, did not precisely identify and cite the provision when objecting to the penalties at issue.

1. Circuits Outside the Second Have Faulted Taxpayers for Not Isolating the Written Supervisory Approval Requirement in their Tax Court Submissions.

In Sugarloaf Fund, LLC v. Commissioner, 911 F.3d 854 (7th Cir. 2018), the Seventh Circuit heard an appeal from a Tax Court trial, Kenna Trading, LLC v. Commissioner, 143 T.C. 322 (2014), in which both the partnership and individual taxpayers involved proceeded pro se, with the individual taxpayer appearing for the partnership as its officer. Although the taxpayers' post-trial briefs seem silent on this, the Tax Court nonetheless concluded that the Commissioner “has met his burden of production” with respect to the penalties at issue. Kenna Trading, LLC, 143 T.C., at 370.

On appeal, the Seventh Circuit rebuffed the taxpayers' attempt to argue the absence of evidence of written supervisory approval in the trial record, pointing to a stipulation by the taxpayers in their Tax Court trial “that the Commissioner had properly obtained approval for the penalties.” Sugarloaf Fund, LLC, 911 F.3d, at 860. The Seventh Circuit concluded that the taxpayers “cannot now be heard on appeal to contend that any procedural requirements imposed by §§ 6751 and 7491 are jurisdictional and incapable of being waived, and we see nothing in these statutes precluding waiver.” Id. Significantly, the Seventh Circuit did not address whether the written supervisory approval constitutes an element of the Commissioner's prima facie case.

Similarly, in another pre-Chai consolidated trial, Curtis Investment Company, LLC v. Commissioner, T.C. Memo. 2017-150, 38, the Tax Court summarily concluded that the Commissioner “has satisfied his burden of production,” without addressing the section 6751(b)(1)'s written supervisory approval requirement. Two separate appeals were taken by two different taxpayers involved in that consolidated trial — one to the Fourth Circuit, and the other to the Eleventh. After Chai was handed down, both appellants filed supplemental appellate briefs citing the case. In Baxter v. Commissioner, 910 F.3d 150, 169, n.3 (4th Cir. 2018), the Fourth Circuit “decline[d] to address it” because “[t]axpayers did not raise that argument before the Tax Court or in its [sic] opening brief to this Court.” In Curtis Investment Company, LLC v. Commissioner, 909 F.3d 1339, 1354 (11th Cir. 2018), the Eleventh Circuit gave the matter fuller consideration, but it too “decline[d] to consider this non-jurisdictional challenge for the first time now,” pointing out that the taxpayer “could have brought a challenge under §6751(b)(1) during or after Tax Court proceedings prior to appeal.”

The District of Columbia Circuit's holdings in this respect have been most troubling for taxpayers. In Mellow Partners v. Commissioner, 890 F.3d 1070, 1081 (D.C. Cir. 2018), another post-Chai appeal, the District of Columbia Circuit rejected the taxpayer's attempt to invoke the case, stating that the taxpayer “did not raise its § 6751(b)(1) challenge at any point during the Tax Court proceedings.” The Circuit went on, “[n]othing precluded . . .[the taxpayer] from doing so. Section 6751 has been in existence since 1998.” Mellow Partners, 890 F.3d, at 1081. And it concluded that the taxpayer “was free to raise the same, straightforward statutory interpretation argument the taxpayer in Chai made — that is, that the language of section 6751(b)(1) requires IRS to obtain written approval by a certain point in the process in order to impose penalties.” Mellow Partners, 890 F.3d, at 1082.

But Mellow Partners was decided at the Tax Court without trial. In its Tax Court petition, the taxpayer did assign error to the penalties at issue. See Mellow Partners, 890 F.3d, at 1075. After the Tax Court denied the taxpayer's motion to dismiss for lack of subject matter jurisdiction on an unrelated ground, the taxpayer agreed to accept the IRS's proposed adjustments rather than proceed to trial. See Mellow Partners, 890 F.3d, at 1071-1072. Significantly, the parties did not settle the case, as evidenced by the taxpayer's appealing the Tax Court's ruling on subject matter jurisdiction.

Notwithstanding that the taxpayer never had an opportunity at trial to challenge the Commissioner on his burden of production on the written supervisory approval requirement, the District of Columbia Circuit faulted the taxpayer for not “rais[ing] the § 6751(b)(1) issue while the dispute remained pending in the Tax Court.” Mellow Partners, 890 F.3d, at 1081. For support, the District of Columbia Circuit cited a pre-Chai case, observing that “[i]n this regard, we find the First Circuit's decision in Kaufman v. Commissioner, 784 F.3d 56 (1st Cir. 2015) — which was issued prior to Chai — more apposite here.” Mellow Partners, 890 F.3d, at 1082.

The District of Columbia Circuit has since reaffirmed its Mellow Partners holding, and precluded a taxpayer from arguing on appeal that the Commissioner had failed to meet his burden of production with respect to the penalty at issue. See Blau v. Commissioner, 924 F.3d 1261, 1271-1272 (D.C. Cir. 2019). The District of Columbia Circuit rejected the taxpayer's plea “to excuse its failure to raise this argument before the Tax Court on the ground that prior to Chai it did not clearly have a claim the IRS violated § 6751(b)(1),” responding laconically, “Fiddlesticks.” Blau, 924 F.3d, at 1272. And yet again, the District of Columbia Circuit relied on Kaufman, the First Circuit's pre-Chai case. See id.

To be sure, many of these cases do not involve individual taxpayers, yet they relied on Kaufman, 784. F.3d 56, the First Circuit pre-Chai case that did involve an individual. This Court's clarification and careful attention to the plain meaning of section 7491(c) is needed to ensure that administration of our revenue laws is carried out as Congress intended.

2. Tax Court Rules Do Not Provide for a Directed Verdict or other Procedural Path for Taxpayers to Establish the Secretary's Failure to Meet His Burden of Production.

Courts that have not followed Chai's decision have failed to perform the analysis necessary to arrive at the proper conclusion the Second Circuit reached in that case. They either failed to consider or summarily dismissed the legitimate procedural hurdles preventing taxpayers from effectively raising the Secretary's failure to meet the requirements set forth in section 6751 as part of his burden of production under section 7491.

First, prior to enactment of the IRS Reform Act, a judicially created body of law created a rebuttable presumption that the Commissioner's determinations in a Notice of Deficiency are correct. S. Rep. No. 105–174, p.43. Section 7491 creates several mechanisms by which taxpayers may shift the burden of proof to the Commissioner, and section 7491(c) is the only one which requires no action by the taxpayer to trigger this burden-shifting. Regardless of whether a taxpayer participates or cooperates in an IRS examination, if the taxpayer is an individual and a court proceeding is initiated, then the Commissioner bears the burden of production for any penalty under Title 26. Congress's clear intent to take the burden of production off of individual taxpayers who dispute penalties and shift it to the Secretary must not be frustrated.

Second, the Tax Court Rules do not contemplate a directed verdict or motion for judgment on the pleadings by which individual taxpayers could raise lack of written supervisory approval after the Commissioner's case has finished. The Tax Court Rules provide when “there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure,” and the Federal Rules of Civil Procedure will be considered. Rule 1(b) of the United States Tax Court. But in general, there is no procedural mechanism by which a taxpayer may move after the Commissioner's case has been entered for judgment on a particular issue.

The idea that the First Circuit's Kaufman decision, which was issued before the pioneering Chai decision clarified that written supervisory approval is an essential element of the Commissioner's prima facie case, could be advanced as grounds for precluding taxpayers from invoking Chai is a real head scratcher. In any case, the First Circuit merely followed the familiar pattern created by the Tax Court's laconic conclusion that the Commissioner “has met his burden of producing sufficient evidence that it is proper to impose the . . . penalty.” Kaufman v. Commissioner, T.C. Memo. 2014-52, at 67. As a result, the First Circuit deemed it fatal that the taxpayer “did not raise this argument below.” Kaufman, 784 F.3d, at 71. Perplexingly, the First Circuit added that “whose burden it was to show compliance with § 6751 is beside the point.” Id.

But shifting the burden of production for a penalty from individual taxpayers to the Commissioner was the very point Congress had in mind when enacting section 7491(c). As both the plain language of the statute and the legislative history demonstrate, Congress intended for the Commissioner to “initially come forward with evidence that it is appropriate to apply a particular penalty to the taxpayer before the court can impose the penalty.” H.R. Conf. Rept. No. 105–599, p. 241. And Chai correctly considered the section 6751(b)(1)'s written supervisory approval requirement to be squarely within that evidence required of the Commissioner.

To be sure, Chai analogized the section 6751(b)(1) argument that the taxpayer advanced in that case in his post-trial briefs to “a post-trial motion for judgment as a matter of law.” Chai, 851 F.3d, at 222. And to be equally sure, the Federal Rule of Civil Procedure 50(b), which governs a post-trial motion for judgment as a matter of law, requires the movant to “specify the judgment sought and the law and facts that entitle the movant to the judgment.” Fed. Rule Civ. Proc. 50(a)(2). But the essential purpose of this “specificity” requirement “is to assure the responding party an opportunity to cure any deficiency in that party's proof that may have been overlooked until called to the party's attention by a late motion for judgment.” Guilbeau v. W.W. Henry Co., 85 F.3d 1149, 1160 (5th Cir. 1996) (quoting the advisory's committee's note to the 1991 amendment to Fed. Rule Civ. Proc. 50). Chai, on the other hand, held that “it was not . . . [the taxpayer's] obligation to alert the Commissioner to the elements of his claim.” Chai, 851 F.3d, at 223.

And as stated above, the Tax Court has its own rules of procedure that “govern the practice and procedure in all cases and proceedings before the Court.” Tax Court Rule 1. If there is no applicable Tax Court Rule, “the Court . . . may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.” Id. The only motion for judgment as a matter of law contemplated in the Tax Court Rules is a motion for summary judgment, which may not be made any “later than 60 days before the first day of the Court's session at which the case is calendared for trial.” Tax Court Rule 121(a). It is not at all clear exactly how taxpayers in the Tax Court should move for a post-trial judgment as a matter of law and argue that the Commissioner has failed to meet his burden of production with respect to the written supervisory approval requirement of section 6751(b)(1).

The only procedural avenue available to taxpayers appears to be the post-trial brief envisaged by the Tax Court Rule 151, which states that “[b]riefs shall be filed after trial or submission of a case, except as otherwise directed by the presiding Judge.” But the Tax Court, which “is not without leeway in interpreting its own Rules,” Ballard v. Commissioner, 544 U.S. 40, 59 (2005), has held that a party generally cannot raise a new issue in such a brief. See, e.g., Sundstrand Corp. v. Commissioner, 96 T.C. 226, 346-348 (1991); and Seligman v. Commissioner, 84 T.C. 191, 199 (1985) (declining to “consider issues first raised” in a party's post-trial brief because “raising new issues for the first time on brief . . . deprives the Court of complete argument and research of such contentions”), aff'd, 796 F.2d 116 (5th Cir. 1986).

All of this goes to show that while some Courts of Appeals have blithely assumed that taxpayers could have explicitly argued section 6751(b)(1) in the Tax Court, the proper procedural route is far from being clearly delineated. And for taxpayers proceeding pro se in the Tax Court, navigating through unfamiliar procedural, evidentiary, and legal pitfalls, that route is even more confusing. On the other hand, Courts of Appeals generally require the Tax Court to liberally construe pro se submissions when applying its rules of procedure. See, e.g., Christensen v. Commissioner, 786 F.2d 1382, 1384-1385 (9th Cir.1986); Becker v. Commissioner, 751 F.2d 146, 149 (3d Cir.1985).

It follows that, as long as an individual taxpayer argued, at some point in the Tax Court proceedings, that the penalty at issue has no basis or should not be sustained, the act of disputing the penalties generally suffices for purposes of alerting the Commissioner with respect to his burden of production. Accordingly, on appeal, the Commissioner may not hide behind the argument that the taxpayer did not isolate and specifically argue the section 6751(b)(1)'s written supervisory approval requirement in the Tax Court. This Court should instruct the Courts of Appeals to remain faithful to their self -professed concern for pro se taxpayers in the Tax Court and liberally construe a trial-stage challenge from them to a penalty, arguing the paucity of the administrative record, as one encompassing all elements of the Commissioner's prima facie case, including the written supervisory approval requirement of section 6751(b)(1).

CONCLUSION

Congress recognized that individual taxpayers needed additional protections when forced to litigate against the IRS, and that all taxpayers needed additional protections when penalties are introduced into discussions with the IRS. “More than 80 percent of cases in Tax Court are brought by unrepresented taxpayers.” See Annual Report to Congress (2018), National Taxpayer Advocate, Vol. 1, Most Serious Problems #20, Pre-Trial Settlements in the United States Tax Court, found at https://taxpayeradvocate.irs.gov/Media/Default/Documents/2018-ARC/ARC18_Volume1_MSP_20_TAXCOURT.pdf (as visited Nov. 9, 2020, and included in the Appendix at A135).

For those reasons, Congress added sections 6751 and 7491 to the Code, requiring the Commissioner to come forward with evidence of written supervisory approval of penalties in any court proceeding where an individual's liability for penalties is at issue as part of the Commissioner's prima facie case. This Court should grant the Petition for Writ of Certiorari to ensure that the safeguards Congress built into the Code over twenty years ago to protect taxpayers and deter the IRS's improper leveraging of penalties are given their plain meaning, as originally enacted.

Respectfully submitted,

GUINEVERE MOORE
Counsel of Record
AJAY GUPTA
Moore Tax Law Group LLC
150 N. Wacker Dr., Suite 1250
Chicago, IL 60606
(312) 549-9990
guinevere.moore@mooretaxlawgroup.com
ajay.gupta@mooretaxlawgroup.com