Maybe it’s too much to devote one year in review post to a single issue, but Graev has dominated case decisions the past few years and maybe, maybe not, is on its way out. As we reported and blogged about here, the now stalled Build Back Better legislation has a provision that will eliminate Graev, not just going forward, but going back over 20 years. Not since the retroactive elimination of the telephone excise tax has Congress tried to undo itself in such a grand way. Since this may be the last hurrah for Graev, why not send it out in style or, if it remains, why not remind ourselves how a poorly worded piece of legislation can cause so much havoc.
Since the IRS has noticed the existence of IRC 6751(b), it seems now to have procedures in place to ensure that the immediate supervisor of the employee imposing the penalty actually approves the penalty imposition. If the IRS has finally figured this out, why then repeal the legislation now and why does it receive a relatively high score from Congress for repealing it? One suggestion concerns a whole bunch of old shelter cases that exist out there in pre-notice of deficiency status in which the IRS failed to follow the now more clearly defined rules of IRC 6751(b). If true, it becomes easier to see why the administration would push for retroactive repeal and why certain groups of taxpayers would push back. While we contemplate what might happen in the future, let’s look at the more important Graev decisions of 2021.
Graev and the Fraud Penalty
I posted on a decision that troubled me because when the IRS pursues a taxpayer criminally, the case goes through a myriad set of approvals. Yet in Minemyer v. Commissioner, T.C. Memo 2020-99 – a case that took 10 years to decide – the Court found that the IRS did not follow IRC 6751(b) and stripped off the civil fraud penalty following a criminal tax case. I wrote about the Minemyer case here and expressed surprise that IRC 6751(b) would stop the application of the fraud penalty in a case that involved a prior prosecution of the taxpayer, since the assertion of the fraud penalty following prosecution occurred automatically, with the hands of the agent and the agent’s supervisor essentially tied. Of course, the statute does not specifically address prior criminal cases or create any special exception for them.
The Tax Court followed up the Minemyer case with a precedential decision in Beland v. Commissioner, 156 T.C. No. 5 (2021), where the Tax Court determined that the fraud penalty the IRS sought to assert failed the requirements of IRC 6751(b) allowing the taxpayers to avoid the 75% penalty proposed by the IRS without getting to the merits. The Court issued this opinion granting partial summary judgment on the fraud issue five years after the case was filed.
When a revenue agent seeks to impose the fraud penalty, the agent must send the case from exam over to obtain approval from the fraud technical advisor (FTA). The FTA is a Small Business/Self Employed revenue agent specially trained on tax fraud issues. The IRS set up the system of having agents refer cases to FTAs so that an investigator trained specifically in fraud detection could determine if the revenue agent had gathered enough information to support the fraud penalty and to allow the FTA to determine if this case should chart a path toward criminal prosecution prior to imposition of the civil fraud penalty. See IRM 184.108.40.206 (08-12-2016).
Requiring that the imposition of the fraud penalty first go through an FTA seems to provide even better protection against the use of the fraud penalty as a bargaining chip than having the immediate supervisor sign off on the penalty, but the statute has a specific structure applicable to all penalties. Striking the fraud penalty in this situation may be part of what’s causing Congress to rethink its passage of IRC 6751(b), but for the reasons discussed in a post by Nina Olson, that seems too radical a fix to a problem that it could resolve with better statutory language.
Graev and the Early Withdrawal Excise Tax
Pulling money out of a retirement account before reaching 59 and ½ and without meeting one of the statutory exceptions in IRC 72(t) triggers a 10% excise tax usually referred to as a penalty and determined by bankruptcy courts to be a penalty for purposes of priority classification. In Grajales v. Commissioner, 156 T.C. No. 3 (2021), the Tax Court determined that the 10% exaction imposed under IRC 72(t) is not a penalty for purposes of whether the IRS must obtain supervisory approval prior to its imposition. The amount at issue in this precedential opinion was $90.86 and the case was litigated by Frank Agostino, the godfather of IRC 6751(b) litigation. See Frank’s brief here, and the government’s here. Frank lost this one but given the way that most people look at this exaction, his arguments were not illogical.
Conservation Easement Cases
In Oconee Landing Property LLC et al v. Commissioner, Dk. No. 11814-19, the Tax Court entered a very substantive order granting partial summary judgment to the IRS on the issue of penalty approval. If the Court still designated orders, I suspect it would have designated this one.
The taxpayer does not argue in this case that the IRS did not obtain the penalty approvals prior to the communication with it that the IRS had asserted a penalty. Although the prior approval issue exists in most IRC 6751(b) cases, here the issue focuses on the form and manner of the approval, particularly as it relates to summary judgment. It asserts that the penalty lead sheet in the file “does not identify Ms. Smithson’s [the immediate supervisor] role … or even a date of signature.”
In this case, the approval occurred through email rather than by a signing of the same paper by the agent and the immediate supervisor. This type of approval has no doubt become quite common during the pandemic while many employees and managers have been working remotely. It could also be common in situations where the employee and the manager work out of different offices. Obtaining acceptance of this type of approval is important for the IRS. One hurdle it has here and in many other cases involves proving that the person signing the approval is, in fact, the immediate supervisor of the employee imposing the penalty.
When is Supervisory Approval Necessary
In Walquist v. Commissioner, 152 T.C. No. 3 (2021), the issue focused on the IRS’s Automated Correspondence Exam (ACE) software. ACE automatically processes taxpayer returns. In many cases, ACE handles returns from receipt to closing with “minimal to no tax examiner involvement.” In Walquist, ACE processed the taxpayer’s 2014 tax return, assessed a §6662 penalty, and issued the notice of deficiency automatically and without any human interaction. The Tax Court found that because the penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner, the penalty was “automatically calculated through electronic means.”
This decision creates a dichotomy between low-income taxpayers whose cases are regularly handled by somewhat automated processes and higher income taxpayers whose cases are not. The Court did not need to issue a precedential opinion in a case in which the taxpayers were unrepresented tax protestors, yet decided to do so despite the inability of the adversarial process to work effectively. The Court heard only from the government and clearly expressed displeasure at the unfounded arguments advanced by these taxpayers. The decision leaves a bad taste in my mouth for the way it casually treats an issue involving many low-income taxpayers without giving lawyers for low-income taxpayers the opportunity to present arguments explaining why this result should not attach. I have a working paper on the topic of precedential opinions in pro se cases and possible solutions to the creation of precedent where only the government has a real voice.