Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Procedure & Administration

Tax Court tackles supervisory approval of penalties

Under Sec. 6751(b)(1), the IRS cannot assess a penalty "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination," with exceptions for the penalties for failure to file, failure to pay, or failure to pay estimated tax and any other penalty that is automatically calculated electronically.

In Graev, 149 T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460 (2016), the Tax Court held that Sec. 6751(b)(1) requires written supervisory approval of a penalty "no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty." Since that case was decided, penalties have frequently been challenged in Tax Court over whether they were approved in writing by a supervisor, and many penalties have been overturned by the court because that requirement was not satisfied.

However, questions remain about the scope of the requirement, and the Tax Court recently issued opinions in three cases that address specific issues regarding the determination of whether a penalty satisfies Sec. 6751(b)(1). The issues resolved included whether the IRS has made an initial determination of a penalty; when the burden of production shifts to the taxpayer in a dispute over whether the IRS has satisfied the requirements of Sec. 6751(b)(1); and which supervisor must approve a penalty for Sec. 6751(b)(1) purposes.

Initial determination of a penalty

In the first case, the Tax Court held that the issuance of Letter 1807 and a summary report setting forth the IRS's tentative proposed adjustments resulting from an audit and inviting the taxpayer to a conference to discuss them was not an initial determination of a penalty for purposes of the written supervisory approval requirement in Sec. 6751(b)(1).

Background

Belair Woods LLC (Belair) claimed a charitable contribution deduction for a conservation easement on its 2019 return. The IRS audited the 2019 return, and the revenue agent (RA) assigned to the audit had an IRS engineer value the easement. The engineer found that Belair had substantially overvalued the easement.

Upon completing her examination, the RA sent Belair's tax matters partner (TMP) a Letter 1807 and summary report of her proposed adjustments. The letter invited the TMP to a closing conference to discuss the IRS's tentative proposed adjustments, which included disallowing the charitable contribution deduction and the imposition of alternative penalties under Secs. 6662(c), (d), and (h). The Letter 1807 explained that all the proposed adjustments would be discussed at the conference.

The IRS held two conferences with Belair representatives, but no agreement was reached. The RA then finalized a Civil Penalty Approval Form that stated the IRS intended to assert alternative penalties under Secs. 6662(c), (d), and (h). The RA's immethate supervisor signed that form, approving assertion of those three penalties.

The IRS subsequently issued a 60-day letter to Belair disallowing the charitable contribution deduction and asserting the three penalties set forth in the Civil Penalty Approval Form. The 60-day letter offered Belair's TMP the...