Taxpayer Argues IRS Supervisory Penalty Approval Was Untimely

LAIDLAWS HARLEY DAVIDSON SALES, INC.,
Petitioner-Appellee
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant

IN THE UNITED STATES COURT
OF APPEALS FOR THE NINTH CIRCUIT

ON APPEAL FROM THE DECISION OF THE
UNITED STATES TAX COURT

BRIEF FOR THE APPELLEE

WILLIAM J. WISE
175 W. Jackson, Suite 240
Chicago, IL 60604
Telephone: 312-343-5204
Facsimile: 312-922-1794

Counsel for Petitioner-Appellee

DISCLOSURE STATEMENT

Pursuant to Federal Rule of Appellate procedure 26.1, Petitioner-Appellee is a nongovernmental corporation, but has no parent corporation. No publicly held corporation owns 10% or more of its stock.

STATEMENT REGARDING ORAL ARGUMENT

Petitioner-Appellee LAIDLAWS HARLEY DAVIDSON SALES, INC. (“taxpayer”) submits that oral argument would be of material benefit to the Court in addressing the unique issues presented by this appeal.

---

TABLE OF CONTENTS

DISCLOSURE STATEMENT

STATEMENT REGARDING ORAL ARGUMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF JURISDICTION

STATEMENT OF THE ISSUE

STATEMENT OF THE CASE

STANDARD OF REVIEW

SUMMARY OF ARGUMENT

ARGUMENT

THE TAX COURT CORRECTLY RULED THAT LAIDLAW'S HARLEY DAVIDSON SALES, INC. CANNOT BE SUBJECT TO A SECTION 6707A PENALTY BECAUSE THE INITIAL DETERMINATION OF THE PENALTY BY THE AGENT WAS NOT APPROVED BY HER IMMEDIATE SUPERVISOR AS REQUIRED BY 26 U.S.C. § 6751(b)(1)

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases:

Baker Hughes, Inc. v. United States, 943 F.3d 255, (5^th Cir. 2019)

Belair Woods, LLC v. Commissioner of Internal Revenue, 154 T.C. 1 (2020)

Bourdon v. United States Dep't of Homeland Sec. (DHS), 940 F. 3d 537 (11^th Cir. 2019)

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

Clay v. Commissioner of Internal Revenue, 152 T.C. 223 (2019)

Chavers v. Sec'y, Fla Dep't of Corr., 468 F. 3d 1273 (11^th Cir. 2006)

Esgar Corp. v. C.I.R., 744 F.3d 648 (10^th Cir. 2014)

Graev v. Commissioner of Internal Revenue, 149 T.C. 485 (2017) (Graev III)

Graev v. Commissioner of Internal Revenue, 140 T.C. 377 (2013) (Graev I)

Graev v. Commissioner of Internal Revenue, 147 T.C. 460 (2016) (Graev II)

Griswold v. United States, 59 F.3d 1571 (11^th Cir. 1995)

Knudsen v. Commissioner, 793 F.3d 1030 (9th Cir. 2015)

Roth v. C.I.R., 922 F.3d 1126 (10th Cir. 2019)

Romano-Murphy v. Commissioner, 816 F.3d 707, 719, (11^th Cir. 2016)

United States v. Tucker Truck Lines, Inc., 344 U.S. 33 (1952)

Statutes:

Internal Revenue Code (26 U.S.C.):

Internal Revenue Restructuring and Reform Act of 1998, Pub. L. No. 105-206, §3306(a), 112 Stat. 685 (1998)

Other Authorities:

Internal Revenue Manual, § 20.1.1.2.3.1 (2021)

Hearings on H.R. 2676 before the S. Committee on Finance 105^th Cong. 92 (1998) (statement of Stefan F, Tucker, Chair-Elect, Section of Taxation, American Bar Association)

Internal Revenue Service Letter 1807, titled Notice of Beginning of Administrative Proceeding

S. Rep. No. 105-174 (1998) 144 Cong Rec, 14, 690 (1998)

S. Rep. No. 105-174 (1998) 144 Cong Rec, 14, 690 (1998) (statement of Sen. Roth)

---

STATEMENT OF JURISDICTION

The taxpayer concurs with the Commissioner's Statement of Jurisdiction.

STATEMENT OF THE ISSUE

Whether the Tax Court correctly ruled that taxpayer was not subject to a civil tax penalty because the agent's immediate supervisor did not approve the initial determination of the penalty as required by 26 U.S.C. §6751(b)(1).

STATEMENT OF THE CASE

The taxpayer is not dissatisfied with the Commission's statement of the case as it sets forth the facts surrounding the dispute. Pursuant to Fed. R. App. P. 28(b) this section has been omitted from taxpayer's brief.

STANDARD OF REVIEW

The Commissioner correctly states the standard of review. Brief for the Appellant (Commissioner's Brief) at 27 (citing Knudsen v. Comm'r 793 F.3d 1039, 1033 (9^th Cir. 2015). But the Tax Court occupies a special status — “tested by every theoretical and practical reason for administrative finality, no administrative decisions are entitled to higher credit in the courts” — such that, “[w]hile its decisions may not be binding precedents for courts dealing with similar problems, uniform administration would be promoted by conforming to them where possible.” Dobson v. Comm'r of Internal Revenue, 320 U.S. 489, 499, 502 (1943); accord Roth v. Comm'r of Internal Revenue, 922 F.3d 1126, 1135 (10^th Cir. 2019).

SUMMARY OF ARGUMENT

Congress adopted 26 U.S.C. Section 6751(b) in 1998 to protect taxpayers against abusive use of the IRS's extensive power to impose penalties on taxpayers. The Commissioner is asking nothing less than that this Court disregard expressly stated Congressional intent and to thereby unleash IRS agents to abuse their power. The Tax Court has acted to enforce Congress' intent to prevent such abuse, and this Court should as well. The IRS has developed many tools to use for legitimate inquires of taxpayers without using unsupervised threats of onerous penalties to coerce settlements from taxpayers. The requirement of supervisory review of proposed penalties before they are formally asserted to the taxpayer is neither onerous nor unduly restrictive.

In a series of well-reasoned decisions, the Tax Court has created a bulwark against using unsupervised penalty threats as a prohibited “bargaining chip.” If an IRS agent wishes formally to inform a taxpayer that penalties are on the table — that is, if the agent has made an “initial determination” to assess penalties — the agent must first obtain supervisory approval.

Agents are certainly free to mention the possibility of penalties and encourage a discussion with taxpayers, so long as they do not formally propose the imposition of those penalties without having presented such proposals to a supervisor and secured written approval. Once a taxpayer is to be informed that an initial determination to impose penalties has been made — the threshold for supervisory review has been reached, and that threshold cannot be crossed without written approval.

The bright-line rule crafted by the Tax Court, whose expertise is worthy of credit, should be upheld by this Court. The Court should reject the Commissioner's efforts to remove the limit Congress has placed on the use of his enforcement powers.

ARGUMENT
THE TAX COURT CORRECTLY RULED THAT TAXPAYER CANNOT BE SUBJECT TO AN ACCURACY-RELATED PENALTY BECAUSE THE INITIAL DETERMINATION TO ASSESS THE PENALTY WAS NOT APPROVED BY A SUPERVISOR, AS REQUIRED BY 26 U.S.C. § 6751 (B)(1).

A. The Development of Tax Court Precedent on the Application of 26 U.S.C. § 6751(b)(1).

1. Section 6751(b)(1)

Adopted in the IRS Restructuring and Reform Act of 1998, Section 6751(b)(1) prohibits the assessment of certain tax penalties “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” 26 U.S.C. § 6751(b)(1).

Before enacting section 6751(b)(1), Congress heard compelling testimony that the Service was using penalties as a “negotiating tool.” Hearings on H.R. 2676 Before the S. Comm. On Finance, 105^th Cong. 92 (1998) (statement of Stefan F. Tucker, Chair-Elect, Section of Taxation, American Bar Association). According to this testimony, the Service used penalties as leverage: “[T]he IRS will often say if you don't settle, we are going to assert the penalties. If you do settle, we may not assert the penalties.” Id.

Congress thought it was improper for the Service to threaten penalties to coerce taxpayers. As the Senate Finance Committee's Report stated, “[t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip.” S. Rep. 105-174, at 65 (1998). “In order to prevent IRS employees from arbitrarily using penalties as leverage against taxpayers,” Congress enacted section 6751(b)(1), which “requires non-computer determined penalties to be approved by management.” 144 Cong. Rec. 14, 690 (1998) (statement of Sen. Roth).

“The statute was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” Chai v. Comm'r of Internal Revenue, 851 F.3d 190, 219 (2d Cir. 2017); accord Roth, 922 F.3d at 1133 (Congress intended” to prevent rogue IRS personnel from using penalties as leverage to extract concessions from taxpayers” (citation omitted)). After the second circuit issued its opinion in Chai, the Tax Court has faithfully enforced Section 6751(b)(1) — with the goal of ensuring that IRS agents cannot use threatened penalties coercively to leverage concessions from taxpayers. Although that precedent is not binding on a Court of Appeals, “[r]ulings by the Tax Court on matters of tax law are . . . persuasive authority, especially if consistently followed.” Esgar Corp. v. C.I.R., 744 F.3d 648, 652 (10^th Cir. 2014); accord Baker Hughes, Inc. v. United States, 943 F.3d 255, 260 n.1 (5th Cir. 2019); Roth, 922 F.3d at 1131. In a series of cases following the teachings of Chai the Tax Court has drawn a clear line requiring written supervisory approval, which the IRS must not cross. This case extends that line to cases involving penalties which the IRS can assess without Tax Court review of a taxpayer's liability for such penalties.

2. Graev v. Commissioner.

a. Graev I and II.

In Graev v. Commissioner of Internal Revenue, 140 T.C. 377 (2013) Graev I), the Tax Court upheld the IRS's disallowance of charitable-contribution deductions, as to which the IRS had assessed accuracy-related penalties under Section 6662. Id. At 378-79, 387, 409. The Tax Court addressed the accuracy-related penalties in Graev v. Commissioner of Internal Revenue, 147 T.C. 460 (2016) (Graev II), and held that Section 6751(b)(1) “imposes no particular deadline for the IRS to secure the required written approval before a penalty is assessed,” and that the taxpayers' challenge to the penalty was accordingly premature. Id. At 481-85.

b. The Second Circuit's Chai decision.

On March 20, 2017, the Second Circuit issued its decision in Chai v. Commissioner of Internal Revenue, 851 F.3d 190 (2d Cir. 2017). The dispute involved the taxpayer's liability for unpaid self-employment taxes, as to which the IRS asserted an accuracy-related penalty in the notice of deficiency. 851 F.3d at 194. The Tax Court rejected the taxpayer's objection that the IRS had failed to comply with Section 6751(b)(1). Id. At 195. On the taxpayer's appeal, the IRS relied on Graev II to argue that the question whether it had complied with Section 6751(b)(1) should be raised in a post-assessment proceeding. Id. At 216.

The Second Circuit first determined that the phrase “initial determination” is ambiguous, “[i]n light of the historical meaning of 'assessment,' i.e., an "assessment” is “the formal recording of a taxpayer's tax liability on the tax rolls” and is “the last of a number of steps required before the IRS can collect a 'deficiency' — a tax liability greater than what the taxpayer reported.” Id. At 218. Under that meaning, “one cannot 'determine' an assessment.” Id. At 219 (citation omitted). Having found this wording of the statute unclear as to meaning the court accordingly turned to the statute's legislative history, as set forth in Point A.1., supra, to ascertain Congressional intent. Id.

That history strongly rebuts the Graev majority's view that written approval may be accomplished at any time prior to, even if just before, assessment”:

Allowing, as would the Graev majority, an unapproved initial determination of the penalty to proceed through administrative proceedings, settlement negotiations, and potential tax Court proceedings, only to be approved sometime prior to assessment would do nothing to stem the abuses §6751(b)(1) was meant to prevent.

851 F.3d at 219. “The statute would make little sense if it permitted written approval of the 'initial determination' up until and even contemporaneously with the IRS's final determination.” Id. At 221.

The Second Circuit accordingly held:

[T]he last moment the approval of the initial determination actually matters is immediately before the taxpayer files suit (or penalties are asserted in a Tax Court proceeding). And for that matter, because a taxpayer can file a tax court petition at any time after receiving a notice of deficiency, the truly consequential moment of approval is the IRS's issuance of the notice of deficiency (or the filing of an answer or amended answer asserting penalties). Thus, we hold that § 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalties.

Id. at 221 (footnotes omitted; emphasis added). Because the IRS admittedly had produced no evidence of supervisory approval, the court vacated the accuracy-related penalty. Id. at 223.

The Commissioner, at P.31 of his brief, would have this Court read Chai as establishing a “notice-of-deficiency deadline" for supervisory approval and that here, because there was no statutory notice issued, he argues that supervisory approval may be given at any time prior to assessment. As subsequent Tax Court decisions have established, however, that reading runs directly counter to the legislative intent underlying Section 6751(b)(1). It would allow the IRS to do precisely that which Congress intended to forbid: use threatened civil penalties to coerce a taxpayer to settle by withholding the moment of supervisory approval until after the IRS has had an opportunity for such coercion.

c. Graev III.

Impelled by the Second Circuit's Chai opinion, the Tax Court issued a supplemental opinion in Graev. Graev v. Commissioner of Internal Revenue, 149 T.C. 485 (2017) (Graev III). That opinion sets forth the operative facts surrounding the penalty: (i) an IRS agent proposed disallowing both cash and noncash charitable deductions, and also proposed penalties related to the noncash contributions; (ii) the agent's immediate supervisor approved the penalty proposal; (iii) a proposed notice of deficiency was thereafter prepared; (iv) on review by an IRS attorney, the proposed notice was approved, but an “alternative penalty position” for the noncash contributions was added; (v) the attorney's supervisor approved the attorney's amendment; (vi) a revised notice of deficiency, which included penalties on the noncash contributions, was then prepared and sent to the taxpayers; (vii) after the taxpayers instituted a challenge in the Tax Court, the IRS's counsel filed an amended answer seeking penalties as to both the cash and noncash contributions; and (viii) counsel's supervisor approved the cash contribution penalties. Id. At 489-92.

Addressing the alternative penalties first proposed by the IRS attorney, the Tax Court held that the attorney's recommendation “was the initial determination” and the Section 6751(b)(1) was satisfied by the supervisor's approval of that determination. Id. At 494-95, 498. The court applied the same rational to the cash contribution penalties approved by IRS counsel's supervisor. Id. at 498.

3. After Graev III, the Tax Court draws a clear line.

a. Clay v. Commissioner.

In Clay v. Commissioner of Internal Revenue, 152 T.C. 223 (2019), the Tax Court applied Chai and Graev III to uphold the taxpayers' challenge to an assessment of penalties with respect to unpaid taxes. Id. at 246-49. The initial penalty determination in that case was made, as in this case, in a Revenue Agent Report (RAR), which is a “report sent to the taxpayer indicating the adjustments to income as reported on the return and the nature of the adjustments * * * (the revenue agent] proposes to make.” Id. at 232, 249 (citation omitted; alterations in original). The report was delivered to the taxpayers, together with a “30-day letter,” which gave the taxpayers 30 days “to file a protest and request a conference before the IRS Office of Appeals.” Id. At 232. As in this case, only after that letter and the RAR had been delivered to the taxpayers did the agent's supervisor approve the proposed penalties. Id. At 232-33.

The Commissioner, at P. 34 of his brief agrees that Revenue Agent Czora's RAR embodies the “initial determination of the penalty” for purposes of §6751(b)(1) and further agrees that her immediate supervisor did not approve the assertion of the penalty until months after Agent Czora asserted the penalty against Taxpayer. Thus the only question left open in this case is when must supervisory approval required by §6751(b)(1) be given?

The Tax Court noted in the Chai holding, i.e., that “written approval is required no later than the issuance of the notice of deficiency rather than the assessment of the tax.” Id. At 248. “But left open [in Chai] was the question we face: whether approval can come after the agent sends the taxpayer proposed adjustments that include penalties. In other words, must an agent secure penalty approval before sending to the taxpayer written notice the penalties will be proposed.” Id.

The Tax Court answered that question in accordance with Section 6751(b)(1)'s Congressionally mandated purpose:

The determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR. And when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals (via a 30-day letter), the issue of penalties is officially on the table. Therefore, we conclude that the initial determination for purposes of section 6751(b) was made no later than [the date] when [the IRS] issued the RAR to petitioners proposing adjustments including penalties and gave them the right to protest those proposed adjustments.

Id. at 249 (citations omitted; emphasis added). Because the agent's supervisor “approved the penalty determination . . . after the initial determination of proposed penalties had been communicated to petitioners . . . supervisory approval was not timely under section 6751(b).” Id. At 250.

In this case, Agent Czora's failure to secure supervisory approval prior to the issuance of the 30-day letter to Taxpayer enclosing the RAR was identical to the agent's failure in Clay.

b. Belair Woods v. Commissioner.

The Tax Court next addressed Section 6751(b)(1) in Belair Woods, LLC v. Commissioner of Internal Revenue, 154 T.C. 1 (2020). The court characterized its Clay holding as meaning that Section 6751(b)(1) “require[s] that supervisory approval for a penalty be secured no later than (1) the date on which the IRS issues the notice of deficiency or (2) the date, if earlier, on which the IRS formally communicates to the taxpayer the Examination Division's determination to assert a penalty and notifies the taxpayer of his right to appeal that determination.” 154 T.C. at 8.

In Belair Woods, a revenue agent's “60-day letter,” much like the 30-day letter in Clay and in this case had “formally communicated to Belair the Examination Division's definite decision to assert those penalties.” Id. At 9. Because that letter's recommendation had been approved by the agent's supervisor, the Tax Court held that the IRS had complied with Section 6751(b)(1). Id. at 9, 14-15.

But the questions in the case included whether earlier communications to the taxpayer had been the “initial determination” of penalties. The first of those communications (Letter 1807, titled Notice of Beginning of Administrative Proceeding), informed the taxpayer that “we're beginning our audit of your partnership's federal tax return.” Id. The “summary report” proposed denial of a charitable deduction and assessment of penalties. Id. at 4-5. After two rounds of conferences without an agreement, the revenue agent's supervisor signed off on approval of the proposed penalties. Id. at 5-6. The 60-day letter issued after that approval. Id. at 6.

The Tax Court held that “[t]he IRS thus secured supervisory approval for those penalties before formally communicating to Belair the Examination Division's definite decision to assert the penalties.” Id. at 9. Rejecting the taxpayer's argument that Letter 1807 had been the “initial determination,” the court held:

The “initial determination” of a penalty may occur earlier in the administrative process, but it still must be a formal act with features resembling those that a “determination” itself displays. Like the 30-day letter involved in Clay, the “initial determination” of a penalty assessment will be embodied in a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties.

* * * *

. . . The Letter 1807 informed Belair of the exam team's “proposed adjustments,” advising that “[a]ll proposed adjustment * * * will be discussed at the closing conference.” The summary report explained the penalties at issue and the defenses that might be available to Belair, including defenses based on “reasonable cause and good faith,” reliance on appraisals, and reliance on professional tax advice. This document surely advised Belair of the possibility that penalties might be proposed. But it was not “an unequivocal 'communication that advise[d] the taxpayer that penalties will be proposed.'”

154 T.C. at 10-11 (citation omitted; original emphasis).

Thus, “Section 6751(b)(1) does not require examining agents to get supervisory approval before taking exploratory steps to gather the pertinent facts.” Id. at 12 (emphasis added). The summary report issued to the taxpayer, which “transmitted] the exam teams' tentative penalty proposals, did not require prior supervisory approval.” Id. “Because the [revenue agent] secured supervisory approval . . . by the signing of the Civil Penalty Approval Form, before the Examination Division issued the 60-day letter, we hold that the IRS complied with section 6751(b)(1).” Id. at 15. The court concluded with a bright-line rule:

Section 6751(b)(1) requires supervisory approval, not for a preliminary proposal, but for the initial “determination” of a penalty. That term has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality. In a deficiency context such as this, we conclude that the “initial determination” of a penalty assessment — the “consequential moment” of IRS action, as the Second Circuit put it in Chai, 851 F.3d at 220-221 — is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.”

Id. at 15.

4. The Internal Revenue Manual.

On October 19, 2020, the Internal Revenue Manual (IRM) was amended to require that, “[f]or all penalties subject to IRC 6751(b)(1), written supervisory approval required under IRC 6751(b)(1) must be obtained prior to issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to”: (i) “[s]ign an agreement”; or (ii) “[c]onsent to assessment or proposal of the penalty.” Internal Revenue Manual, § 20.1.1.2.3.1 (2021) (original emphasis). As Court's have held, “[w]hile the IRS Manual does not have the force of law, the manual provisions do constitute persuasive authority.” See for example, Griswold v. United States, 59 F.3d 1571, 1576 n.8 (11^th Cir. 1995) (citation omitted); accord Romano-Murphy v. C.I.R., 816 F.3d 707, 719, (11^th Cir. 2016).

B. This Court Should Uphold the Tax Court's Application of Its Precedent.

The Tax Court's precedent is consistent with both Section 6751(b)(1)'s test and the underlying Congressional intent. And the court's decision in this case is faithful to that precedent.

1. The Tax Court precedent is consistent with the statutory text and its legislative intent.

The Commissioner argues at page of 31 of his brief that the Tax Court has erred because Section 6751(b)(1) only “requires supervisory approval before a penalty can be 'assessed.'” But on page 33 of his brief the Commissioner recognizes that the courts have found §6751(b)(1)'s phase “initial determination of such assessment” to be ambiguous; see Chai 851 F.3d at 218, Roth 922 F 3d at 1132. The Commissioner, beginning at page 39 of his brief (as he argued before the Tax Court) would interpret the ambiguity as only relating to what must be approved, not when the determination must be approved. The Commissioner's argument is best answered by Judge Gustafson in his opinion on this case. He said at 154 T.C. 80-82:

“C. The Commissioner's contentions.

The Commissioner maintains that the written supervisory approval in this case was timely because it preceded the IRS's assessment of the section 6707A penalty. In support of this view, he first cites Chai v. Commissioner, 851 F.3d at 218, for the proposition that section 6751(b)(1) does not expressly require written supervisory approval any earlier than before the act of assessment. He further contends that under Chai, all that matters for written supervisory approval is that approval be obtained when the IRS supervisor still retains the discretion to give or withhold that approval. Reasoning that supervisory discretion with respect to assessable penalties is not interrupted by an intervening judicial proceeding before the act of assessment, he argues that approval before their assessment is necessarily timely. Thus, the Commissioner concludes, because GM Korzec approved the section 6707A penalty in this case before it was assessed, the IRS complied with section 6751(b)(1). To the extent the Commissioner's theory is founded upon Chai, we think that theory must surely fail since Chai does not support it but rather contradicts it.

First, although the Court of Appeals for the Second Circuit did indeed observe in Chai that section 6751(b)(1) “contains no express requirement that the written approval by obtained at any particular time prior to assessment”, Chai v. Commissioner, 851 F.3d at 218, it went on to explain that the legislative history “strongly rebuts” the Commissioner's instant argument that “written approval may be accomplished at any time prior to, even if just before, assessment”, Id. At 219. Indeed, viewing the statute through the lens of that history, the Court of Appeals observed that section 6751(b)(1) “would make little sense” if it permitted approval of an “initial” penalty determination “up until and even contemporaneously with the IRS's final determination.” Id. at 221. Nothing about this rational suggests that assessable penalties require divergent treatment. Chai's reasoning thus contradicts the Commissioners argument.

Second, the Commissioner's argument distorts the holding in Chai about the significance of the supervisor's authority. It is true, as the Commissioner urges, that the Court of Appeals commented 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”, see id. At 220; and in a case such as Chai in which the penalty is initially determined in a notice of deficiency, section 6751(b)(1) “requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency”, id. at 221. However, the Court of Appeals did not hold that, in the deficiency context, supervisory approval always necessarily satisfies section 6751(b)(1) if that approval is obtained right before the notice of deficiency is issued. Rather, Chai noted the truism that supervisory approval must be obtained when the supervisor has authority to give it — and not later, when he has no such authority. In the deficiency context a supervisor in the IRS's examination function loses authority when the notice of deficiency is issued. In this respect the Court of Appeals followed the reasoning of the dissent in Graev v. Commissioner, 147 T.C. at 508 (Gustafson, J., dissenting), which stated that an IRS “examination supervisor has authority to approve a penalty determination only when the case is under the authority of the IRS”s examination function.

If the “initial determination” is first formally communicated in a notice of deficiency, then supervisory approval is timely if made right before the issuance of that notice. However, if the initial determination of penalty liability is made and formally communicated before the notice of deficiency and if that liability is ultimately included in the notice of deficiency, then supervisory approval right before issuance of the notice of deficiency may be too late — not because the supervisor lacks authority over the case, but because at that point he is approving not the “initial determination” but something more like a final determination. Supervisory approval of a penalty in a deficiency case must be obtained “no later than” when the notice of deficiency is issued, but sometimes — as in Clay and in this case must be obtained earlier.

We do not read Chai to suggest that the timeliness of written supervisory approval under section 6751(b)(1) hinges only upon the supervisor's authority to make decisions in the case and that any approval given when the supervisor has authority over the case must necessarily be timely. To so suggest would be to ignore the paramount role that the legislative history of section 6751(b)(1) played in Chai's analysis. The lesson of that history, the Court of Appeals explained, was that Congress believed “that penalties should only be imposed where appropriate and not as a bargaining chip”, and so Congress responded by enacting section 6751(b)(1) to curb perceived abuses arising out of the IRS's use of unjustified penalties to pressure taxpayers into settlement. Chai v. Commissioner, 851 F.3d at 219. Under the Commissioner's reading, by contrast, this congressional purpose of preventing “bargaining” by an aggressive agent is wholly eclipsed by consideration of the IRS supervisor's discretion. This interpretation plainly contradicts the congressional purpose behind the enactment of section 6751(b)(1) that informed the Court of Appeals' decision in Chai.

We accordingly reject the Commissioner's argument that the IRS is free to obtain written supervisory approval for assessable penalties at virtually any time before assessment.”

To be sure Section 6751(b)(1) “contains no express requirement that the written approval be obtained at any particular time prior to assessment.” Chai, 851 F.3d at 218, but it certainly does not say what the Commissioner wishes it would say.

2. The Tax Court's precedent effectuates Congressional intent.

Contrary to the IRS's assertion, there is nothing improper about the Tax Court's reliance on legislative history. Because the statutory language is ambiguous, legislative history acts as the polestar for application of Section 6751(b)(1). Chai, 851 F.3d at 219 (“[i]t is particularly useful to consider reliable legislative history in cases like this where the statute is susceptible to divergent understandings and, equally important, where there exists authoritative legislative history that assists in discerning what Congress actually meant.” (citation and internal quotation marks omitted)).

As the Second Circuit held in Chai, Section 6751(b)(1)'s legislative history, as set forth in Point A.1., supra, shows that the statute “was meant to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” 851 F.3d at 219. A construction that would allow such threats to go unreviewed until the moment that an assessment is made would completely contravene that legislative intent — because the IRS could use such threats to leverage settlement long before a notice issued. Thus, the focus is properly on when an “initial determination” is made, because that is the point at which leverage could be improperly applied against the taxpayer and at which supervisory review would serve as a check on such improper leverage, as Congress intended.

The question before the Second Circuit in Chai was whether Graev II had correctly held that “the written approval may be obtained at any time before the penalty is assessed, and any challenge thereto must be lodged in a post-assessment proceeding.” 851 F.3d at 216. The “initial determination” in that case was made in the notice of deficiency itself, and the IRS submitted no evidence of supervisory approval. Id. At 217, 223. The court thus had no occasion to address the consequences of pre-notice initial determinations; it was sufficient, in overruling Graev II and deciding Chai, to hold that Section 6751(b)(1) “requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.” 851 F.3d at 221 (emphasis added).

The Commissioner's suggestion that the Second Circuit understood the initial determination as not what mattered under the statue in determining the timeliness of approval is unsupportable. Chai did not establish the notice of deficiency as the deadline for supervisory approval of a pre-notice “initial determination.” As the Tax Court noted in Clay, that question was “left open” in Chai. 152 T.C, at 248. “The holdings of a prior decision can reach only as far as the facts and circumstances frame the precise issue presented in that case.” Chavers v. Sec'y, Fla Dep't of Corr., 468 F.3d 1273, 1275 (11^th Cir. 2006). A prior decision is not authority on an issue “not there raised in briefs or argument nor discussed in the opinion.” Bourdon v. United States Dep't of Homeland Sec. (DHS), 940 F.3d 537, 548-49 (11^th Cir. 2019) (quoting United States v. Tucker Truck Lines, Inc. 344 U.S. 33, 38 (1952))). In ascertaining when an “initial determination” — that is, one requiring supervisory approval before a subsequent assessment may be imposed — is made, the Tax Court was writing on a largely blank slate, albeit guided in that exercise by Congressional intent.

And the court's resolution is entirely consistent with Congressional intent. The Belair Woods bright-line rule accommodates both the IRS's asserted interest in “considering the taxpayer's side of the story” before initially determining to assess a proposed penalty (Commissioner's Brief at 49-50) and Congress's intent to prohibit threatened penalties as a “bargaining chip,” by ensuring that mere “exploratory steps to gather the pertinent facts do not trigger Section 6751(b)(1). 154 T.C. at 12.

Beginning on page 49 of his brief the Commissioner argues that the Tax Count's rule in this case and in Clay, supra requires supervisory approval too soon because approval must be secured before the taxpayer's response to a formal assertion can be considered. What this argument misses is that the supervisor is only approving the assertion of the penalty and the agent's initial determination can always be reversed after submission of the taxpayers response. As the Second Circuit and the Tax Court have consistently found, the supervisory approval required by Section 6751(b)(1) was enacted by Congress to prevent the use of penalties as a bargaining chip, and the only way to do that was to require approval before the penalty was formally communicated to the taxpayer.

3. The Tax Court's application of its precedent to this case should be upheld.

The Tax Court decisions in Clay and Belair Woods establish clear guideposts for the fair and evenhanded application of Section 6751(b)(1). In Clay, as here, the statute was triggered by a “30-day letter,” which provided the taxpayers with 30 days “to file a protest and request a conference before the IRS Office of Appeals.” 152 T.C. at 232, 249. Belair Woods, on the other hand, held that a Letter 1807, announcing that the IRS was “beginning [its] audit” and proposing a denial of a charitable deduction, did not require supervisory approval as an “initial determination,” because “it was not an unequivocal communication that advise[d] the taxpayer that penalties will be proposed.” 154 T.C. at 4, 9-11. In this case, the operative facts are identical to those in Clay. Section 6751(b)(1) so construed does no violence to the IRS's legitimate interests in communicating with taxpayers, while assuring that Congress's stated intention of protecting against abusive threats to impose penalties is effectuated.

CONCLUSION

Taxpayer requests that the Court affirm the Tax Court's decision.

Respectfully submitted

By: William J. Wise
175 W. Jackson, Suite 240
Chicago, IL 60604
Telephone
Facsimile

Counsel for Petitioner-Appellee