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The “What” and “When” of IRC 6751(b)

Posted on Sep. 15, 2022

In Kroner v. Commissioner, No. 20-13902 (11th Cir. 2022) the court reverses the decision of the Tax Court concerning the timing of the supervisor’s approval of a penalty agreeing with the Ninth Circuit’s decision in Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 29 F.4th 1066, 1071 (9th Cir. 2022), blogged here, and setting up a direct conflict with the Second Circuit in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) initially blogged here.  Maybe 6751(b) has a ticket to the Supreme Court.  This is the second big victory for the IRS in a row at the circuit level after it has mostly struck out at the Tax Court on timing issues.

Mr. Kroner failed to report millions of dollars in income received during the years 2005, 2006 and 2007 and like the majority of taxpayers seeking penalty relief under 6751(b) does not present a very sympathetic figure. The revenue agent sent him a letter proposing to adjust his taxes to add in the millions of dollars he neglected to report. In that letter the RA proposed penalizing Mr. Kroner for the oversight. At the time of sending this letter, the supervisor had not approved the imposition of the penalty against Mr. Kroner though I doubt the RA was too worried about obtaining approval under these circumstances. The supervisor did approve the penalty prior to the issuance of the notice of deficiency and long before the assessment.

At the time of this audit Frank Agostino had not yet educated the IRS concerning IRC 6751(b) and the IRS was not paying careful attention to supervisory approval whatever the “what” and “when” of the statute meant. Mr. Kroner filed his petition in Tax Court in 2014 and not quite six years later in 2020 the Tax Court rendered its opinion in T.C. Memo 2020-73 upholding the tax deficiency and striking down the proposed IRC 6662 penalties for the years at issue due to the timing of the supervisory approval.

I do need to make brief mention that you know an opinion is well researched when it contains the citation “see also MICHAEL I. SALTZMAN & LESLIE BOOK, IRS PRACTICE & PROCEDURE § 10.01 (June 2022 ed.)” Citing to the treatise that caused the creation of this blog does not make the opinion automatically correct but does indicate the court was researching in the right places. The only thing better would have been a citation to the blog itself. The opinion cites to the treatise in determining the meaning of assessment and uses that meaning in the first prong of its reason for holding for the IRS.

In rejecting the decision of the Tax Court, the 11th Circuit directly takes on the decision of “when” the supervisory approval must occur:

Essentially, the Tax Court reads the statute as follows: “No penalty shall be communicated to a taxpayer until such communication has been approved by the communicator’s immediate supervisor.”

We disagree with Kroner and the Tax Court. We conclude that the IRS satisfies Section 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before it assesses those penalties. See Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 29 F.4th 1066, 1071 (9th Cir. 2022). Here, a supervisor approved Kroner’s penalties, and they have not yet been assessed. Accordingly, the IRS has not violated Section 6751(b).

The Court gives three reasons for its decision and then follows up the brief statement of reasons with a more detailed discussion of year. The brief statement is:

First, we think it is more consistent with the meaning of the phrase “initial determination of such assessment,” which is what must be approved. Second, we think it reflects the absence of any express timing requirement in the statute. And third, we think it is a workable reading in the light of the statute’s purpose.

Addressing the first of its reasons the Court states:

we are confident that the term “initial determination of such assessment” has nothing to do with communication and everything to do with the formal process of calculating and recording an obligation on the IRS’s books.

So, the Court takes a much different tack on the initial determination, the “what”, then taken by the Tax Court.  The Tax Court has focused on that phrase to determine that the first written communication to the taxpayer serves as the initial determination.  The 11th Circuit rejects that view giving the IRS much more time to get the supervisor on the scene but also giving the IRS much more time to use the penalty as a bargaining chip.  The concurrence comes in with a detailed explanation of why the Tax Court misses the right answer by focusing on what it thinks is the intent of the statute rather than on the language of the statute.

In describing its conclusion on the second point, the 11th Circuit states that the word “initial” describes “what must be approved and not when.”  The court applauds the IRS for now causing the approval to occur early in the process but says that the administrative position the IRS has adopted is not driven by the language of the statute because the word “initial” modifies ”determination of such assessment” and does not modify the phrase “no penalty under this title shall be assessed.”

The 11th Circuit then took on what it described as the “Tax Court’s communication-based pre-assessment deadline for supervisory approval.” The 11th Circuit attributed the Tax Court’s approach to the approach taken by the 2nd Circuit in Chai – the first circuit court to review an IRC 6751(b) approval issue. Because of the ambiguity in the phrase, “initial determination of assessment”, a phrase I think falls more into the meaningless or inexplicable category than the ambiguous category. In trying to determine what Congress meant, according to the 11th Circuit, the Tax Court fell into the trap of looking at some of the legislative history which suggested the purpose of the statute was to keep the IRS from using penalties as a bargaining chip in reaching a resolution more favorable to the IRS than it might have reached without the threat of penalties. The 11th Circuit explains why it doesn’t think this approach is correct.

The concurring opinion goes into even greater detail on why this approach by the Tax Court was a flawed approach.

As I have written before in describing this statute, I think any court will struggle to find the meaning of the statute in the words used by Congress since the words do not work. Judge Holmes, whose concurring opinion in Graev is mentioned by the 11th Circuit, warned of the myriad of problems the statute could cause. I sympathize with the IRS to a certain extent because it has lost a number of penalty cases against taxpayers who deserve the penalties from which they were relieved. My sympathy for the IRS is tempered by the fact it appears to have ignored the statute for the first 15 years of its life (causing cases like the Kroner case) and since being made aware of its responsibility by the litigation Frank Agostino initiated, the IRS has not written any regulations putting down a clear marker that could guide courts to a decision more favorable to the IRS.

With what appears to be a clear split in the circuits and a fair amount of money at issue, maybe Mr. Kroner will offer the Supreme Court the opportunity to parse the language of this statute. Maybe the IRS will try again to obtain a repeal of this provision or maybe we will still be litigating Graev cases into the next decade helping to provide a never-ending source of blog posts.


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