In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. No. 4 (2020) the Tax Court addresses the need for supervisory approval and the necessary timing of supervisory approval when the IRS imposes the reportable transaction penalty under IRC 6707A. We will discuss the mechanics of the penalty below, but this is a really harsh penalty and setting the scene deserves some attention. When I say harsh, I do not mean to imply that the penalty should not exist or that the IRS improperly imposed it here or elsewhere. The harshness of this penalty derives from the amount of the possible penalty. We discussed this penalty in the context of the Flora rule in the case of Larson v. United States where the IRS assessed a penalty of about $163 million against Mr. Larson and others for failing to disclose a reportable transaction. See the discussion of Larson here and here. So, the ability of 6751(b) to provide a basis for removing this penalty if the IRS failed to follow the proper procedures for supervisory approval could make a huge dollar difference to certain taxpayers.
The Laidlaw case also deserves attention for the procedural posture of the case at the time the Court makes its decision here. Note that petitioner filed this case in the Tax Court in 2014 and that the tax year at issue is fiscal year 2008. Remember that in 2008 no one paid attention to IRC 6751(b). The issue comes up here in the context of Collection Due Process (CDP) many years after the IRS made the assessment. The IRS must verify the correctness of its assessment in the CDP process. Here, the CDP process offers the taxpayer the opportunity to raise an issue and obtain court review it otherwise would not have. How many other penalties assessed long ago before anyone paid attention to IRC 6751(b) might CDP prove as the place where penalties go to die? Since Graev brought 6751 to everyone’s attention, the number of times the IRS will fail to get the appropriate supervisory approval will be quite low; however, many penalties exist on the books of the IRS from 10 years ago that were imposed at a time when the IRS did not pay careful attention to the supervisory approval rule or have court guidance on when the approval must occur. Taxpayers with old penalties who might pay those penalties should make certain to raise the supervisory approval issue through CDP, audit reconsideration or whatever procedural avenues remain open.
Laidlaw participated in a listed transaction and did not disclose that participation on its tax return. Subsequent to filing its return for fiscal year 2008, Laidlaw did send to the IRS Form 8886 amending its return and reporting the participation. A revenue agent examined Laidlaw’s 2008 return and concluded that because it did not include the reportable transaction on the original return, the 6707A penalty applied. The revenue agent made the initial determination as that phrase is used in 6751 by sending a 30-day letter. This letter did not contain the approval of the revenue agent’s supervisor. A month after sending the 30-day letter the revenue agent’s supervisor did approve the assertion of the 6707A penalty.
Laidlaw appealed the assertion of the penalty. After only two years, Appeals sustained the decision to impose the penalty leading to an assessment of the penalty in 2013. The penalty was assessed in mid-September, and the notice of intent to levy was sent in mid-November. The short period of time between the assessment and the notice of intent to levy shows the difference in the way the IRS treats assessments against entities compared to individuals, where the time period between assessment and the notice of intent to levy would have been two or three months longer, because the notice stream for individuals is four letters instead of two.
Upon receiving the notice of intent to levy, the IRC 6330 notice, Laidlaw timely requested a CDP hearing. In the CDP hearing the Appeals employee notified Laidlaw that it could not challenge the merits of the 6707A penalty because it had an opportunity to do so administratively by going to Appeals before the assessment of the penalty. (Read the Larson case above or the discussion of CDP cases tried by Lavar Taylor if you want to know more about the inability to litigate the large penalties imposed under 6707A.) The Appeals employee did not verify that the supervisor had properly approved the penalty. Of course, at the time of the verification process in this case, the timing of the supervisory approval did not enter the minds of many people inside or outside of Appeals. What’s important here is that, even though the right to a merits review of the 6707A did not exist, that right exists separately from the obligation under IRC 6330(c)(1) of the Appeals employee to verify the correctness of the assessment. The verification requirement serves here as a powerful remedy for the taxpayer.
The IRS argued in this case that the supervisory approval did not need to come before the issuance of the 30-day notice but only before the making of the assessment. No need to go into the tortured language of 6751 and why the IRS or anyone might question the timing of the assessment for those who regularly read this blog. For anyone wondering why the IRS would not immediately concede the issue, put Graev into the search box of the blog and read the myriad opinions on 6751 trying to parse its meaning.
While the IRS argument might have merit, the Laidlaw case follows the decisions in Clay and in Belair (see discussion of that case here) in which the Tax Court seeks to finally create a bright line for when approval must occur. Laidlaw seeks to apply that same bright line test to 6707A. In applying that bright line, Laidlaw looks to the first formal pronunciation by the IRS of the desire to impose the penalty. That bright line occurs with the sending of the 30-day letter. At the time the IRS sent that letter it lacked the approval of the revenue agent’s immediate supervisor. Therefore, the penalty here fails.