On January 7, 2020, the Tax Court issued a TC opinion in Frost v. Commissioner, 154 T.C. No. 2 (2020). This case presents another permutation of the issues raised in Graev and is another case decided on this issue in which petitioner handled the case pro se, although Mr. Frost has been an enrolled agent for 25 years. The opinion says that before he became an enrolled agent he performed collections work as an IRS revenue agent. He would have been a most unusual revenue agent if he performed collection work, so I assume that he was a revenue officer. Whether he was a revenue officer or revenue agent, working five years or more for the IRS in either position can chart a path to receiving the enrolled agent designation without taking the difficult test to become an enrolled agent. This background indicates that he was not the usual pro se taxpayer though he may have lacked experience in the Tax Court. His knowledge of the tax system comes back to haunt him in the end.
The underlying issues in the case concern business expenses and a loss reported on an LLC in which he had a controlling interest. Though we do not care about his underlying tax issues, the court obviously must and it goes through the case and statutory law governing the proper deduction of business expenses, before arriving at the conclusion that, despite his extensive and long-standing experience preparing tax returns, petitioner failed to present any evidence in support of his expenses and failed to comply with the strict substantiation requirements of IRC 274(d). He sounds very much like many clients of the tax clinic.
Similarly, with respect to the loss claimed from his LLC, his failure to establish his adjusted basis torpedoed his chances of winning this issue. It’s hard to know with proof issues whether his failure was one of lack of understanding the necessary information he needed to place before the court (or the IRS during the administrative phase) or simply the claiming of tax benefits he was never entitled to in the first place.
He made arguments about the notice of deficiency and why he was selected for audit. I imagine he pointed out there were many taxpayers more deserving of being audited than him, etc., etc. The court disposed of this argument citing Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 (1974) and a few of the other from thousands of cases it could have chosen to knock down this cry for help based on perceived fairness issues.
Now, the court gets to the meat of the case for our purposes and looks at the penalties imposed upon him. It points out that the IRS bears the burden of production with respect to the penalties, which requires the IRS to come forward with sufficient evidence showing the appropriateness of imposing the penalties. This includes showing that IRC 6751(b) compliance occurred. The court walks through the various burdens on the IRS when taxpayer challenges penalties the IRS proposes to impose and discusses the requirements of IRC 7491(c). It then turns to 6751(b) and notes that here the IRS “produced no evidence of written supervisory approval of the initial determination of section 6662(a) accuracy-related penalties for 2010 and 2011.” I am a bit confused why the IRS did not concede this issue if it had nothing to show approval of the penalties for these two years.
It’s a different story for 2012. The IRS does have a signed penalty approval form signed by the revenue agent’s immediate supervisor over a year before the issuance of the notice of deficiency. The court finds that the introduction by the IRS of the approval form signed before the notice of deficiency satisfies the burden of production on the IRS. The burden then shifts to petitioner to show evidence suggesting that the approval was untimely. The court notes in footnote 6 that in Graev it reserved “the issue of whether the Commissioner bears the burden of proof in addition to the burden of production. We reserve that issue here as well because placement of the burden of proof here… would not change the outcome. Here, Mr. Frost came forward with no evidence to contradict the supervisory approval for 2012.
Mr. Frost did not claim or put on any evidence that the formal notice of the imposition of the penalty preceded the approval of the penalty. So, the court turned to the balance of the burden on the IRS as established in Higbee v. Commissioner, 116 T.C. 438 (2001). This burden requires showing that the penalty should apply in this situation. Here the IRS showed that the understatement of tax by Mr. Frost exceeded $5,000 and that the IRS correctly calculated the penalty based on the understatement. It was then up to Mr. Frost to show that he had reasonable cause for the underpayment. Mr. Frost put on evidence of his brother-in-law’s health issues during the year at issue, but he has the problem that he has lots of tax experience. The court expects more from him than it would expect from someone who had not been working in the tax system for 40 years and finds his excuses inadequate to meet his burden of showing reasonable cause and good faith.
Frost does not break as much new ground as some of the other recent TC opinions on 6751 but it does do a nice job of laying out what the court expects of each party when they engage in penalty litigation. I don’t know why the IRS was holding on to 2010 and 2011 as penalty years if it lacked the managerial approval. Surely, by this time it knew that it must have the approval or fail. The docket number is from 2015 so perhaps at the time this case was submitted a few years ago, the Graev case had not become clear. That’s my guess. When it takes close to five years between the time a case starts until it reaches opinion, intervening legal opinions can change what the IRS might have argued when the case started.