In an order dated May 21, 2018 (brought to my attention by Bryan Camp) denying the IRS motion to reopen the record, in the case of Joseph C. Becker & Marcy Grace Castro, et al., v. Commissioner, Judge Holmes highlights another version of the impact of the Graev issue involving IRC 6751 that we have discussed so frequently in our blog. Judge Holmes calls these cases Chai ghouls after the Second Circuit decision that led the Tax Court to reverse its position in Graev and which put IRC 6751 in play in many cases pending in Tax Court after trial and awaiting decision at the time the Court reversed itself regarding its ability to enforce that provision in deficiency cases. (I will not link to all of the prior posts on this issue but put Chai or Graev into our search function and have at it if you are new to this topic.)
In Becker the Court encounters a new Chai ghoul because Becker involves a jeopardy assessment. Most of the Becker group of consolidated cases have docket numbers that go back to 2012 which means they rival in time the Fumo cases I describe below. In addition to the order linked above in which Judge Holmes refuses to reopen the record, he also issued a 52 page opinion on May 21 and an order for a Rule 155 computation meaning each party won and lost part of the case.
Before I discuss the treatment of the penalties in Becker, I commend you to read the posts in the case of Fumo v. Commissioner (there are two related dockets) if you need to know more about jeopardy cases or just look at the docket sheet if you are interested in a really slow moving jeopardy case with a Tax Court life similar to the Becker case. I started writing about the Fumo case, which originates in Philadelphia and features a former state senator whose story dominated the Philadelphia Inquirer for much of the time I was at Villanova, shortly after we began the blog almost five years ago. In the first year of the blog when we were sometimes searching for things to write I wrote five posts on this case: here, here, here (Note that if you go to the Tax Court docket room do not pull out your smart phone and start taking pictures of the file as I describe in this post. The Court now has signs up warning you not to do this. So much for the man from UNCLE.), here and here.
I looked up the Fumo cases as I wrote this post to see if anything had happened or if it continued on as one of the world’s slowest moving jeopardy cases. It continues on. There is an order from two years ago denying a motion for summary judgment filed by the IRS and there are regular status updates but Mr. Fumo still has his money (I assume he still has it and is carefully preserving it to pay to the IRS should he ultimately lose) and the IRS is still trying to get Tax Court approval of the assessment and file a notice of federal tax lien. Children are over half way through elementary school who were born when this matter started. Not all jeopardy cases move with alacrity. Because of its age, I wonder if the IRS obtained the proper approvals for the penalties it is asserting in this case and if it obtained them before making the jeopardy assessments (see discussion below.) Chai and Graev were not even a glimmer in Frank Agostino’s eye when the Fumo and Becker cases began.
So, in the Becker case the trial occurred prior to the Tax Court’s decision in Graev III and the IRS filed a motion to reopen the record to put on evidence that it obtained approvals appropriately, or not. The order denying the right to reopen the case lays out the events in chronological order and then works through the various penalties at issue in the case. The Court starts with the “or not” part of the IRS motion.
IRC 6662(c) Penalties for 2007, 2008 and 2009 and Section 6662(d) Penalty for 2010
The IRS conceded that it had no evidence of complying with IRC 6751. This made the Court’s work easy.
Fraud Penalties for 2007, 2008 and 2009
The IRS attached an affidavit from the immediate supervisor of the agent but here’s where the jeopardy assessment aspect of the case comes into play. Section 6751(b)(1) requires 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 or such higher level official as the Secretary may designate.
In jeopardy assessment cases the IRS makes the assessment first and provides the notice of deficiency later. The statute makes no mention of or exception for jeopardy. Even under Graev II the Tax Court would have acknowledged jurisdiction over the penalty provisions in a jeopardy case and the Court says the IRS should have known it had the burden at the time of trial to show it made the appropriate approvals in a jeopardy case; however, that proves not to be the biggest problem that the IRS faces. The penalty approval form it submitted to the Court showed that the approval occurred twelve days after the jeopardy assessment. The timing of the approval is fatal to the validity of the assessment and it would not matter if the Court reopened the record to allow in the evidence or not. Since the evidence regarding this part of the penalty approval could not change the outcome of the case, the Court said it could not justify the reopening of the case.
Section 6662(d) Penalties for 2007, 2008 and 2009 and Section 6663 Penalty (Fraud) for 2010
The penalty for 2009 was raised by Chief Counsel but no approval form by the Chief Counsel supervisor was submitted and that proves fatal to the penalty for that year to the Court. The penalty approval forms for the other penalties appeared to the Court to have been done in a timely and proper manner; however, the Court still declines to reopen the record to permit the IRS to submit those forms. It finds that the IRS should have submitted these forms at the time of trial.
The outcome with respect to the penalties for which the IRS could submit proper approval forms follows the outcome reached by Judge Holmes in four cases he decided immediately after the issuance of the opinion in Graev III and which we blogged alluding to happy holidays for the petitioners. The IRS cannot have been surprised with this result though it is no doubt disappointed. This will not be the last case involving an attempt to reopen the record of a case closed long ago. The jeopardy aspect of this case provides instruction in an area not explored by prior opinions.
Where is This Going
The IRS will continue to struggle with the Graev issue in cases before it began thinking carefully about how to timely approve penalties, how to preserve the record of the approval and how to present the record. The Court will continue to struggle as well. The decision not to allow reopening the record here seems at odds with a decision at almost the same time in Sarvak v. Commissioner, T.C. Memo 2018-68 and related order. It also stands in some contrast to the decision in Dynamo Holdings (brought to my attention by Les) where Judge Holmes discussed how the IRS does not bear the burden of production with respect to penalties in a partnership-level proceeding and how taxpayer failing to raise issue hurt it:
Our conclusion that the Commissioner does not bear the burden of production under section 7491(c) does not necessarily mean that the Commissioner’s motion to reopen the record should be denied. A taxpayer may raise the lack of supervisory approval as a defense to penalties, Graev III, 149 T.C. ___, and if that issue were validly raised, the Commissioner might want to supplement the record to respond. But Dynamo GP did not raise the lack of penalty approval in its petition, at trial, or on brief. It was not until the Court directed the parties’ attention to Graev III, after the record was closed and the case was fully submitted, that petitioners challenged the sufficiency of the written penalty approval in the record. And even then, Dynamo GP did not seek to reopen the record to dispute whether penalty approval occurred. Consequently, we consider the defense to have been waived. Rule 151; Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).