Penalty Approval Not Required Before Proposed Adjustments Letter

Penalty Approval Not Required Before Proposed Adjustments Letter

U.S. Tax Court

The Tax Court held that supervisory penalty approval wasn’t required before the issuance of a Letter 1807 proposing partnership adjustments and inviting the partners to a conference, finding that it wasn’t an initial determination and that the IRS met the penalty approval requirement for three penalties asserted in a 60-day letter to the partnership. In October 2012, the IRS informed Belair Woods LLC, a partnership for tax purposes, that it was beginning an audit and later issued a Letter 1807 inviting the tax matters partner and other partners to discuss proposed adjustments, which included the disallowance of a charitable contribution deduction for a conservation easement donation and section 6662 penalties. After two conferences, the IRS and partnership were unable to reach an agreement. In 2015, the IRS issued a 60-day letter to the partnership that included penalties that had been approved in 2014 by the revenue agent’s supervisor on a Civil Penalty Approval Form. The partnership appealed unsuccessfully, and the IRS issued a notice of final partnership administrative adjustment, which included the three penalties and a fourth section 6662(e) penalty that the IRS conceded lacked approval. Judge Albert G. Lauber, writing for the Tax Court, explained that section 6751(b)(1) provides that "no 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.” Lauber noted that the phrase “initial determination of” doesn’t appear anywhere else in the code and is generally acknowledged as ambiguous. Based on a review of prior penalty approval decisions and the use of the term determination elsewhere in the code, the Tax Court concluded that the 60-day letter was the first formal communication that the IRS intended to assert penalties against the partnership and found that supervisory approval was obtained before issuance of that letter. The Tax Court held that penalty approval wasn’t required when the IRS issued the Letter 1807 inviting the tax matters partner and other partners to discuss proposed adjustments in an enclosed summary report, finding that the summary report didn’t notify the partnership of a definite decision to assert penalties. According to the court, “The statute requires approval for the initial determination of a penalty assessment, not for a tentative proposal or hypothesis.” Lauber pointed to a Second Circuit decision that found that a determination denotes a consequential moment of IRS action. The court found that its conclusion comports with the ambiguous statutory text and is consistent with case law and terminology used elsewhere in the code. The Tax Court declined to hold that a revenue agent’s reference to penalties at an early examination stage constitutes an initial determination. The court concluded that the "initial determination" of a penalty assessment "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.” Judge L. Paige Marvel, joined by three other judges, dissented from the majority opinion. Marvel found that the Letter 1807 and attached summary report set forth the initial determination because the IRS informed the partnership that it intended to impose a penalty. As a result, she would have held that the IRS failed to meet the section 6751(b)(1) penalty approval requirement. Judge David Gustafson, joined by several judges, also dissented, saying that the majority’s opinion “misconstrues the statute in a manner that frustrates and even contradicts its purpose.” Gustafson also found that the Letter 1807 was an initial determination and the penalty approval requirement was not met.

Related to <a href="/lr/resolve//28fxy" target="_blank">Belair Woods LLC v. Commissioner</a>, T.C. Memo. 2018-159 (2018).

The Tax Court held that supervisory penalty approval wasn’t required before the issuance of a Letter 1807 proposing partnership adjustments and inviting the partners to a conference, finding that it wasn’t an initial determination and that the IRS met the penalty approval requirement for three penalties asserted in a 60-day letter to the partnership.

The Tax Court held that supervisory penalty approval wasn’t required before the issuance of a Letter 1807 proposing partnership adjustments and inviting the partners to a conference, finding that it wasn’t an initial determination and that the IRS met the penalty approval requirement for three penalties asserted in a 60-day letter to the partnership. In October 2012, the IRS informed Belair Woods LLC, a partnership for tax purposes, that it was beginning an audit and later issued a Letter 1807 inviting the tax matters partner and other partners to discuss proposed adjustments, which included the disallowance of a charitable contribution deduction for a conservation easement donation and section 6662 penalties. After two conferences, the IRS and partnership were unable to reach an agreement. In 2015, the IRS issued a 60-day letter to the partnership that included penalties that had been approved in 2014 by the revenue agent’s supervisor on a Civil Penalty Approval Form. The partnership appealed unsuccessfully, and the IRS issued a notice of final partnership administrative adjustment, which included the three penalties and a fourth section 6662(e) penalty that the IRS conceded lacked approval. Judge Albert G. Lauber, writing for the Tax Court, explained that section 6751(b)(1) provides that "no 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.” Lauber noted that the phrase “initial determination of” doesn’t appear anywhere else in the code and is generally acknowledged as ambiguous. Based on a review of prior penalty approval decisions and the use of the term determination elsewhere in the code, the Tax Court concluded that the 60-day letter was the first formal communication that the IRS intended to assert penalties against the partnership and found that supervisory approval was obtained before issuance of that letter. The Tax Court held that penalty approval wasn’t required when the IRS issued the Letter 1807 inviting the tax matters partner and other partners to discuss proposed adjustments in an enclosed summary report, finding that the summary report didn’t notify the partnership of a definite decision to assert penalties. According to the court, “The statute requires approval for the initial determination of a penalty assessment, not for a tentative proposal or hypothesis.” Lauber pointed to a Second Circuit decision that found that a determination denotes a consequential moment of IRS action. The court found that its conclusion comports with the ambiguous statutory text and is consistent with case law and terminology used elsewhere in the code. The Tax Court declined to hold that a revenue agent’s reference to penalties at an early examination stage constitutes an initial determination. The court concluded that the "initial determination" of a penalty assessment "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.” Judge L. Paige Marvel, joined by three other judges, dissented from the majority opinion. Marvel found that the Letter 1807 and attached summary report set forth the initial determination because the IRS informed the partnership that it intended to impose a penalty. As a result, she would have held that the IRS failed to meet the section 6751(b)(1) penalty approval requirement. Judge David Gustafson, joined by several judges, also dissented, saying that the majority’s opinion “misconstrues the statute in a manner that frustrates and even contradicts its purpose.” Gustafson also found that the Letter 1807 was an initial determination and the penalty approval requirement was not met.

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Penalty Approval Not Required Before Proposed Adjustments Letter