When the IRS seeks to impose a penalty against a taxpayer in an income tax case in U.S. Tax Court, typically under section 6662 of the Internal Revenue Code, the asserted penalty must meet the conditions and criteria specified under that provision. However, before any such penalty can be asserted, there must be an internal "approval" of the penalty being asserted.
Section 6751(b) of the Internal Revenue Code specifies that NO tax penalty can be assessed unless the "initial determination of such assessment" is personally approved, in writing, by the immediate supervisor of the IRS individual making such determination or such higher level official as the Secretary may designate" The timing of the approval is not specified in that Code section. This has caused a lot of litigation.
In Graev v. Commissioner, 147 16 (2016) (known as "Graev II") the Tax Court held that a taxpayer's argument about the written approval before the fact of assessment (the mere computer entry on the IRS's ledger that the tax or penalty is owed as a fixed liability of the taxpayer, which can occur only after any tax deficiency proceedings such as U.S. Tax Court cases are final and concluded) was not ripe in the Tax Court and could not be raised in a Tax Court case. (Note: "Graev I", or Graev v. Commissioner, 140 T.C. 377 (2013) involved the Tax Court's determination of disallowed cash and non-cash charitable contribution deductions as a ruling in the Graev cases on the substantive tax merits).
Then, however, in Chai v. Commissioner, 851 F. 3d 190 (2d Cir. 2017), decided on March 20, 2017, the Second Circuit Court of Appeals reversed the Tax Court's ruling that the taxpayer's raising of the written approval requirement for tax penalties for the first time on post trial briefing was untimely, and held that the requirement under section 6751(b) for the IRS to obtain a written supervisory approval of the tax penalty kicks in NO LATER THAN the date the IRS issues a statutory notice of defeciency, or files an Answer or Amended Answer asserting the penalty in conjunction with the written approval. Essentially the Second Circuit held the Tax Court does have jurisdiction to review the written supervisory approval issue if made timely, being no later than the above "trigger" dates. The Court in Chai FURTHER held that the IRS bears the burden of production and proof to show the supervisory written approval was obtained timely pursuant to section 7491(c) of the Internal Revenue Code.
All of this has set the stage for last December's nationwide ruling in Graev v.Commissioner, ("Graev III"), 149 T.C.No. 23 (12-20-17). In an 81 page opinion, the Tax Court found the taxpayer's argument that the IRS failed to comply with Section 6751(b) was INDEED properly subject to the Tax Court's pre-assessment jurisdiction and subject to a hearing on the matter. Moreover, Graev III also held that the Commissioner had the burden of production under section 7491(c) of the Internal Revenue Code to show compliance. Under the specific facts of Graev III, the Tax Court found compliance because the penalty was tied to the IRS officer who "initially proposed" the penalty, being the IRS docket attorney who first proposed an alternative 20% penalty on non-cash charitable contributions as first raised in the statutory notice of deficiency, which had supervisory written approval, as well as a new 40% penalty first raised in the IRS's Amended Answer in that Tax Court case.
How about a penalty FIRST asserted by an examining revenue agent? The outside time limit of the Stat. Notice expressed by Chai does not seem to be enough. In his concurrence in Graev III. Judge Lauber stressed that while written supervisory approval could occur NOT LATER than the time of the statutory notice of deficiency or Tax Court Answer or Amended Answer, the supervisory written approval would be timely only if it were issued no later than the time the FIRST IRS officer FIRST asserts the penalty . Judge Lauber stated, ..."And by requiring [written] supervisory approval the first time an IRS official introduces the penalty into the conversation, the Court's interpretation is faithful to Congress's purpose by affording maximum protection to taxpayers against the improper wielding of penalties as a bargaining chip."
Since the Graev III decision, there have been numerous motions by the IRS to open the trial record post trial in some cases to introduce written penalty approvals, some of which have been granted and some of which have been denied. And post trial briefing on this issue has been intensive.
STAY TUNED!
