Penalty defenses and the supervisory-approval requirement

Sec. 6751(b)(1) provides that the IRS may not assess certain penalties¹ “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Although the provision was added to the Internal Revenue Code in 1998,² few taxpayers asserted noncompliance with Sec. 6751(b)(1) as a penalty defense until nearly 20 years later, after the decisions in Graev II,³ Chai,⁴ and Graev III.⁵

In Graev II, the taxpayers argued that the imposition of an accuracy-related penalty was improper because the IRS had failed to obtain managerial approval of the penalty prior to issuance of the notice of deficiency. In a sharply divided reported opinion,⁶ the Tax Court disagreed and concluded that the taxpayers’ argument was “premature.” Specifically, the Tax Court held that Sec. 6751(b)(1) permitted the IRS to obtain written managerial approval at any time prior to the actual assessment of the penalty, which had not yet occurred as part of the deficiency proceeding. However, the dissenting opinion, authored by Judge David Gustafson, concluded otherwise, based on the ambiguity of the statutory term “initial determination of . . . [the penalty] assessment” and the relevant legislative history. According to Gustafson, the legislative history strongly supported a position that the IRS must obtain written managerial approval of the penalty prior to issuance of a notice of deficiency.

Shortly after Graev II, the Second Circuit was similarly confronted with whether the IRS was required to obtain written managerial approval of an accuracy-related penalty prior to issuance of a notice of deficiency. In Chai, the Second Circuit agreed with Gustafson’s dissent in Graev II and held that the IRS was required to obtain written managerial approval “no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.” The Chai court also concluded that compliance with Sec. 6751(b)(1) was part of the IRS’s burden of production in court proceedings under Sec. 7491(c).⁷ After Chai, the Tax Court vacated its decision in Graev II and concluded in Graev III that the IRS was required to provide evidence of compliance with Sec. 6751(b)(1) as part of its burden of production under Sec. 7491(c).

Chai and Graev III were decided in 2017. Since that time, the Tax Court and other federal courts have clarified the scope of Sec. 6751(b)(1) and its applicability to taxpayers in various factual contexts. These recent decisions and their significance to tax practitioners are discussed more fully below.

The ‘initial determination’

Perhaps no other statutory language has resulted in more interpretative headaches than the requirement under Sec. 6751(b)(1) that the IRS obtain written managerial approval of the “initial determination of . . . [the penalty] assessment.” Because the term is not found in any other part of the Code and, in fact, is anomalous when juxtaposed with other statutory provisions governing the assessment process, this is not surprising.⁸

The Code defines an “assessment” as the formal recording by the IRS of the taxpayer’s tax liability, which is “essentially a bookkeeping notation.”⁹ Generally, if the IRS asserts additional taxes are due, the Code requires it to “determine” the taxpayer’s “deficiency.”¹⁰ If the IRS determines a deficiency, it must then issue a notice of deficiency, which permits the taxpayer to file a petition with the Tax Court within 90 days.¹¹ Once a petition is timely filed, the IRS is precluded from assessing the deficiency “until the decision of the Tax Court has become final.”¹² Accordingly, the statutory scheme contemplates that “one can determine a deficiency . . . and whether to make an assessment, but one cannot ‘determine’ an ‘assessment.’ “¹³

Because of this ambiguity, federal courts have placed more reliance on the legislative history surrounding Sec. 6751(b)(1). Specifically, that legislative history indicates that Congress enacted Sec. 6751(b)(1) based on its belief that “penalties should only be imposed where appropriate and not as a bargaining chip.”¹⁴ Moreover, Congress believed written managerial approval would “prevent IRS employees from arbitrarily using penalties as leverage against taxpayers[.]”¹⁵ Thus, much of the federal courts’ recent jurisprudence in interpreting the term “initial determination” has focused on furthering these legislative goals.¹⁶

Deficiency procedure penalties

The Code generally divides penalties into two groups. Under the first group of penalties, located in Subchapter A of Chapter 68 of the Code,¹⁷ the IRS must follow the deficiency procedures prior to making a penalty assessment.¹⁸ That is, the IRS must issue a notice of deficiency to the taxpayer proposing the penalties before initiating a collection action. These penalties generally include the penalties for failure to file and failure to pay under Sec. 6651 in addition to those related to failure to pay estimated taxes under Secs. 6654 and 6665.¹⁹ In addition, such penalties include the accuracy-related and fraud penalties under Secs. 6662-6664.

As discussed previously, the Second Circuit in Chai held that the IRS is required to obtain written managerial approval of deficiency procedure penalties no later than the date the IRS issues the notice of deficiency or files an answer or amended answer asserting such penalties. But the decision in Chai left open the issue of whether the IRS must obtain written managerial approval at any time prior to the issuance of the notice of deficiency.

The Tax Court’s decision in Clay²⁰ answered this issue. Specifically, in Clay, the Tax Court held that an IRS Revenue Agent Report (RAR), coupled with a 30-day Appeals letter,²¹ constituted the “initial determination” under Sec. 6751(b)(1). The Tax Court reasoned that when the “proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals (via a 30-day letter), the issue of penalties is officially on the table.” Because the IRS penalty approval form had been signed by an IRS manager after the taxpayer received the RAR and 30-day letter, the Tax Court concluded that the IRS was prohibited from assessing the penalty.

In Belair Woods, LLC,²² the Tax Court similarly concluded that the “initial determination” of the penalty assessment at issue occurred when the IRS issued a “TMP 60-Day Letter”²³ to the tax matters partner of a TEFRA partnership. On the basis of Clay, the Tax Court reasoned that the 60-day letter was the “initial determination” because it provided Appeals rights and “formally notified [the taxpayer] that the Examination Division had completed its work and . . . had made a definite decision to assert penalties.”

The federal courts have also held that the “initial determination” of penalties can occur during a Tax Court proceeding.²⁴ For example, in Roth,²⁵ the Tenth Circuit held that the “initial determination” of a gross-valuation accuracy-related penalty was properly approved in writing when IRS counsel filed an answer asserting the penalty and that counsel’s immediate supervisor also signed the answer.

But the Tax Court has cautioned taxpayers that written managerial approval is not required prior to the first IRS informal communication of the penalties to the taxpayer. For example, in Tribune Media Co.,²⁶ the Tax Court concluded that written managerial approval of the penalties at issue was not required prior to the taxpayer’s first informal meeting with the IRS to discuss the penalties. Moreover, the Tax Court held in that decision that written managerial approval was not required prior to issuance of a Notice of Proposed Adjustment (NOPA). The Tax Court noted that neither the informal meeting nor the NOPA provided the taxpayer the opportunity for IRS Appeals rights, which the Tax Court determined was “one of the important indicia of formality.” The Tax Court further reasoned that the term “determination” in Sec. 6751(b)(1) implied more formality than “a mere suggestion, proposal, or initial informal mention of the possibility of the assertion of a penalty.”

Although the Tax Court has indicated that IRS Appeals rights denote an “indicia of formality,” evidencing the likelihood of an initial determination, the Tax Court has also reasoned that IRS Appeals rights are not determinative in all cases. In Carter,²⁷ the Tax Court held that IRS correspondence, which did not provide IRS Appeals rights, was nevertheless the initial determination because it clearly reflected the IRS’s determination that penalties should be imposed. In that case, the Tax Court attributed the lack of IRS Appeals rights to the taxpayers’ “unwillingness to provide Appeals sufficient time to consider their cases.”

Practice tip: The Tax Court’s current jurisprudence as it relates to deficiency procedure penalties suggests that the IRS must obtain written managerial approval prior to the first formal communication of penalties to the taxpayer. In many cases, the first formal communication of the penalties should be the IRS’s mailing of a 30-day or 60-day letter.

In Palmolive Building Investors, LLC,²⁸ the Tax Court held that the IRS may assert multiple penalties at various stages of the examination and that the “initial determination” of the penalties need not occur at the same time or even by the same individual. Moreover, federal courts, including the Tax Court, have recognized that penalties may be properly asserted and approved during the IRS Appeals process or by the IRS Chief Counsel, provided the IRS has not previously sent a formal communication to the taxpayer of its intent to assert the penalty at issue.²⁹

Accordingly, if the taxpayer intends to make an argument during an IRS Appeals hearing that the applicable penalty was not properly approved under Sec. 6751(b), the taxpayer should be cognizant that IRS Appeals or IRS Chief Counsel may assert an alternative penalty. For example, if the taxpayer contends that the IRS failed to obtain written managerial approval of an accuracy-related penalty for negligence, IRS Appeals or IRS Chief Counsel could propose the accuracy-related penalty on a different ground (e.g., for substantial understatement of tax), if not previously proposed and formally communicated to the taxpayer.

Assessable penalties

The Code also identifies a second group of penalties, which are referred to as “assessable penalties.” Assessable penalties are not subject to the deficiency procedures, and therefore the IRS may assess the penalties and proceed almost immediately to collection. These penalties are generally in Subchapter B of Chapter 68.³⁰

Because assessable penalties are not subject to the deficiency procedures, the IRS assessment and collection procedures related to these penalties differ.³¹ In many cases, an assessable penalty may be assessed with the IRS’s providing the taxpayer with “post-assessment pre-payment appeals rights.”³² Under these procedures, the IRS generally assesses the penalty and provides notice of the penalty to the taxpayer, with the notice providing IRS Appeals rights. However, other assessable penalties may be proposed by the IRS with the taxpayer’s receiving IRS Appeals rights prior to the assessment of the penalty.³³

In Kestin,³⁴ the Tax Court held that an IRS Letter 3176C did not constitute an “initial determination” by the IRS to impose the Sec. 6702(a) assessable penalty for a frivolous tax submission. Specifically, the Tax Court concluded that the purpose of the Letter 3176C “was actually to invite the taxpayer to make a correction that, if made, would have the result that the IRS ‘will . . . not assess the frivolous return penalty.’ ” Because of the purpose of the IRS Letter 3176C, the Tax Court reasoned that it could not be an “initial determination,” on the basis that imposition of the frivolous tax submission penalty depended largely on the taxpayer’s next actions.

On various occasions, the Tax Court has suggested that the IRS was required to obtain written managerial approval for imposition of certain assessable penalties. These included the assessable penalties for aiding and abetting understatement of tax liability under Sec. 6701,³⁵ failure to file an S corporation return under Sec. 6699,³⁶ and filing a frivolous return under Sec. 6702(a)(1).³⁷Relying on these prior decisions, the Tax Court held in Laidlaw’s Harley Davidson Sales, Inc.,³⁸ that the IRS was required to obtain written managerial approval for the assessable penalty under Sec. 6707A for failure to disclose a reportable transaction. In that case, the Tax Court held that the Sec. 6707A penalty could not be assessed against the taxpayer because the IRS had failed to obtain written managerial approval of the penalty prior to issuance of the 30-day Appeals letter proposing the penalty.

In Chadwick,³⁹ the Tax Court concluded that the trust fund recovery penalty (TFRP) under Sec. 6672 was an assessable penalty subject to Sec. 6751(b)(1). Although the IRS argued that the TFRP was not a “penalty” but rather a substitute for a tax liability,⁴⁰ the Tax Court concluded it was an assessable penalty because it was labeled a penalty in the statute and was located in Subchapter B of Chapter 68. But because the IRS had complied with Sec. 6751(b)(1) in obtaining written managerial approval prior to issuance of the Letter 1153 proposing the TFRP, the Tax Court held that the IRS had complied with the written managerial approval requirement.

Practice tip: Assessable penalties include penalties related to failure to file certain international information returns, such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships; and Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Under the IRM, the IRS does not issue 30-day letters prior to assessment of these penalties.⁴¹ Rather, the IRS provides taxpayers who have been assessed these penalties “prepayment, post assessment appeal[s].”⁴²

Generally, these penalties can be significant. Thus, taxpayers afforded post-assessment Appeals rights should obtain evidence of written managerial approval of the penalties under Sec. 6751(b). Although taxpayers may not challenge the assessment directly in the Tax Court under the deficiency procedures with respect to such penalties (and therefore have no judicial discovery rights to obtain proof of managerial approval), they can obtain their administrative case file by submitting an IRS Freedom of Information Act (FOIA) request. In addition, since passage of the Taxpayer First Act of 2019,⁴³ the IRS Independent Office of Appeals is required to make available to the taxpayer his or her administrative file during the IRS Appeals process in certain instances.⁴⁴

Foreign information reporting penalties also include penalties under Title 31 for failure to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because Sec. 6751(b)(1) applies to penalties under “this title,” i.e., Title 26, or the Code, the IRS is not statutorily required to obtain written managerial approval for imposition of FBAR penalties.

Whether other penalties in the Code are subject to written managerial approval is an open question. For example, Sec. 4980H, which is in Chapter 43 of the Code, imposes an “assessable payment” on certain employers who fail to provide affordable insurance to their employees, and under Sec. 4980H(d)(1), the assessable payment is treated similarly to an assessable penalty under Subchapter B of Chapter 68. Thus, one could argue that because Sec. 6751(b) applies to penalties under the Code, written managerial approval is required.

Penalties not subject to managerial approval

Sec. 6751(b)(1) does not apply to all penalties in the Code. Specifically, Sec. 6751(b)(2) statutorily exempts from the written managerial approval requirement penalties for the failure to timely file a return and timely pay tax under Sec. 6651 and failure of individuals or corporations to pay estimated taxes under Secs. 6654 and 6655, respectively.⁴⁵ In addition, Sec. 6751(b)(1) does not apply to “any other penalty automatically calculated through electronic means.”⁴⁶

In Walquist,⁴⁷ the Tax Court was called upon to determine the proper meaning of the phrase “any other penalty automatically calculated through electronic means.” In that case, the IRS had asserted penalties under its Automated Correspondence Exam system, which used its Correspondence Examination Automated Support (CEAS) software. The combined software processed taxpayer cases “with minimal to no tax examiner involvement until a taxpayer reply is received.” The CEAS program automatically issued the taxpayers an IRS Letter 525 proposing adjustments to the taxpayers’ return and determined that an accuracy-related penalty for substantial understatement of income tax was appropriate under Sec. 6662.

Although the Letter 525 instructed the taxpayers to respond by letter, phone, or fax if they disagreed with the proposed adjustments, the taxpayers failed to respond. Thus, the CEAS program automatically generated a notice of deficiency, which reasserted the accuracy-related penalty for substantial understatement of income tax. Because the notice of deficiency was electronically generated, the accuracy-related penalty was not approved by an IRS manager or supervisor.

On these facts, the Tax Court held that the penalty was not subject to written managerial approval because the “penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner” and was therefore “automatically calculated through electronic means” under Sec. 6751(b)(2)(B).

In ATL & Sons Holdings, Inc.,⁴⁸ the Tax Court further clarified the electronic-means exception under Sec. 6751(b)(2). There, the IRS had proposed a penalty against the taxpayer under Sec. 6699 for failure to timely file an S corporation return. The Tax Court noted that neither Sec. 6751(b)(2)(B) nor the regulations defined the term “automatically calculated” or “electronic means.” However, the Tax Court found the term “any other penalty” under Sec. 6751(b)(2)(B) significant in that it indirectly referenced the penalties under Sec. 6751(b)(2)(A), which include those under Secs. 6651, 6654, and 6655. Given the term’s placement in the statutory text, the Tax Court concluded that the Sec. 6699 penalty was analogous to the failure-to-file penalty under Sec. 6651(a)(1). Accordingly, the Tax Court held that the Sec. 6699 penalty was similarly calculated through electronic means under Sec. 6751(b)(2)(B).

In its own internal guidance, the IRS suggests that penalties are exempted from written managerial approval under Sec. 6751(b)(1) if “no Service human employee makes an independent judgment with respect to the applicability of the penalty.”⁴⁹ In addition, IRS guidance suggests that if a penalty is determined through electronic means and the determination is mailed to the taxpayer, the IRS is not required to comply with the written managerial approval requirement unless the taxpayer responds.⁵⁰ However, the IRS takes the position that written managerial approval is not required when: (1) the taxpayer responds and fully agrees with the proposed penalty; (2) the taxpayer responds and only requests additional time but does not thereafter respond; (3) the taxpayer does not respond; or (4) the assessment is based on an IRS notice that was returned as “undeliverable” when the IRS could not locate another address.⁵¹ IRS guidance also suggests that although the fraudulent failure-to-file penalty is under Sec. 6651, it should not be exempted as a penalty automatically calculated through electronic means.⁵²

Practice tip: In light of the above guidance, taxpayers would be wise to respond in writing to electronically generated correspondence from the IRS that asserts penalties. Failure to do so likely results in a waiver of the Sec. 6751(b) penalty defense.

Collection Due Process and Sec. 6751(b)

The Code provides administrative procedural rights for taxpayers who receive notices of proposed levy or notices of federal tax lien filings.⁵³ These safeguards are generally referred to as Collection Due Process (CDP) hearings.

If a taxpayer timely files for a CDP hearing, the IRS Independent Office of Appeals is tasked with determining whether the IRS complied with “any applicable law or administrative procedure” with respect to the levy and lien.⁵⁴ Moreover, the Appeals officer must consider collection alternatives proposed by the taxpayer and “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”⁵⁵

In very limited instances, the taxpayer can challenge the existence or amount of the tax liability during the CDP hearing. Specifically, Sec. 6330(c)(2)(B) provides that the taxpayer may challenge the existence or amount of the underlying tax liability only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. Under the regulations, the taxpayer is precluded from disputing the tax liabilities in a CDP hearing if the taxpayer had “a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability,” unless the proposed assessment falls under the deficiency procedures.⁵⁶ In many cases, this regulatory provision, in conjunction with the IRS’s collection procedures to offer administrative IRS Appeals rights prior to issuing CDP hearing notices, results in the taxpayer’s not being able to contest the existence or amount of assessable penalties at the hearing.⁵⁷

Because Sec. 6751(b)(1) arguments raised during a CDP hearing could arguably be construed as challenging the existence or amount of the penalty, the regulatory provision above could limit the taxpayer’s ability to raise Sec. 6751(b)(1) where the IRS has already provided the taxpayer with administrative IRS Appeals rights. But in Laidlaw’s Harley Davidson Sales, Inc.,⁵⁸ the Tax Court held that written managerial approval was required under Sec. 6751(b) to determine whether the IRS complied with “any applicable law and administrative procedure” under Sec. 6330(c)(1).

In Blackburn,⁵⁹ the taxpayer argued during a CDP hearing that the IRS Appeals officer was required to provide evidence that the IRS supervisor or manager who approved the penalty engaged in a “meaningful” review of the penalty determination. Specifically, the taxpayer contended that the verification requirement under Sec. 6330(c)(1) required the IRS Appeals officer to determine whether the managerial approval was more than simply a “rubber stamp.” However, the Tax Court concluded that Sec. 6330(c)(1) only required the IRS Appeals officer to review the penalty approval form and not engage in an analysis of the manager’s thought process in approving the penalty.

Practice tip: The decision in Laidlaw’s Harley Davidson Sales, Inc., is a welcome one for taxpayers. Although IRS Appeals officers are required to independently verify whether all applicable procedures and laws have been met, taxpayers should raise the Sec. 6751(b) issue during the CDP hearing.

The burden of production under Sec. 6751(b)

Generally, taxpayers bear the burden of proof in federal court cases.⁶⁰ However, Sec. 7491(c) shifts the burden of production to the IRS with respect to an individual taxpayer’s liability for any penalty, addition to tax, or additional amount. For penalties to be imposed, the IRS must come forward with evidence sufficient to show that imposition of the penalty is appropriate.

In Frost,⁶¹ the Tax Court held that if the taxpayer properly challenges the IRS’s penalty determinations, the IRS must come forward with evidence of written managerial approval as part of its burden of production under Sec. 7491(c). If the IRS meets this burden of production, the taxpayer must then come forward with contrary evidence. Under this shifting burden-of-production rule, the Tax Court held that the IRS had failed to offer sufficient evidence to meet its burden of production regarding accuracy-related penalties for 2010 and 2011 because the IRS penalty approval form made no mention of these tax years. The Tax Court also found that the IRS had not met its burden of production for an accuracy-related penalty for negligence for 2012 because its penalty approval form for 2012 did not mention that penalty. However, the Tax Court held that the IRS had met its burden of production for imposition of an accuracy-related penalty on the basis of a substantial understatement of tax because the 2012 penalty approval form indicated managerial approval for that penalty.

Thus, the burden of production shifted to the taxpayer to show that the IRS had improperly communicated the initial determination of the 2012 penalty for an underpayment due to a substantial understatement prior to the IRS penalty approval date. Because the taxpayer could offer no such evidence, the Tax Court determined that the IRS had complied with the requirements of Sec. 6751(b).

Sec. 7491(c) applies only to individuals. Accordingly, the Tax Court has held that the IRS does not have the burden of production under Sec. 6751(b) if the taxpayer is a partnership⁶² or a corporation.⁶³

Practice tip: When Graev III was issued, the Tax Court generally required the IRS to prove compliance with Sec. 6751(b) regardless of whether the taxpayer had raised the issue during the proceedings or in a pleading. In light of Frost, taxpayers should raise any dispute with the penalty determinations in their petition.⁶⁴ Failure to dispute the penalty determination may result in a waiver of the Sec. 6751(b) penalty defense.

IRS guidance governing Sec. 6751(b)

Predictably, the IRS has revised its procedures and guidance after Graev III. A few of the IRS’s pronouncements on Sec. 6751(b) follow.

IRS manager or supervisor

Sec. 6751(b)(1) provides that the IRS may not assess penalties unless the initial determination of the penalty assessment is approved in writing by the immediate supervisor of the person asserting the penalty or “such higher level official as the Secretary may designate.” Currently, Treasury has not designated any higher-level official to approve initial determinations.⁶⁵

Civil penalty form

IRS guidance instructs its personnel that the Service is not required to provide the taxpayer with a copy of the written managerial approval of the penalty.⁶⁶ However, the guidance suggests that the IRS may provide it to the taxpayer, particularly in light of the taxpayer’s ability to request the document through a FOIA request.⁶⁷

IRS Chief Counsel Notice 2018-006

On June 6, 2018, the IRS Office of Chief Counsel issued a notice to its attorneys advising them how to address compliance matters under Sec. 6751(b) when handling penalty issues in litigation.⁶⁸ The notice advises counsel attorneys not to dispute that compliance with Sec. 6751(b) is required under the IRS’s burden of production under Sec. 7491(c). Moreover, the notice instructs counsel to submit evidence of compliance with Sec. 6751(b) in Tax Court deficiency cases regardless of whether the taxpayer raised the issue. If counsel are unable to locate evidence establishing compliance with Sec. 6751(b)(1) and no exception applies under Sec. 6751(b)(2), they are advised to concede the penalty.

In addition, the notice instructs counsel that penalties not included in a notice of deficiency may be raised in the answer or amended answer during Tax Court proceedings. In the event the penalty is raised here, counsel are instructed to obtain their immediate supervisor’s signature on the answer or amended answer and to document the approval through a memorandum.

A potential penalty defense

Since Graev III, the federal courts have significantly clarified the scope of the written managerial approval requirement under Sec. 6751(b). Although the IRS has updated its internal procedures to ensure better compliance, Sec. 6751(b) will remain a potentially potent penalty defense where the IRS cannot prove it properly obtained written managerial approval of the penalty. Taxpayers and tax practitioners alike should stay tuned to more developments as the federal courts continue to address the issues related to Sec. 6751(b).  

Footnotes

¹The term “penalty” for purposes of Sec. 6751 includes “any addition to tax or any additional amount” (Sec. 6751(c)). As discussed here, the Sec. 6751(b)(1) requirement does not apply to certain penalties, as provided in Sec. 6751(b)(2).

²By the Internal Revenue Service Restructuring and Reform Act (RRA) of 1998, P.L. 105-206, §3306.

³Graev, 147 T.C. 460 (2016).

⁴Chai, 851 F.3d 190 (2d Cir. 2017), rev’g in part T.C. Memo. 2015-42.

⁵Graev, 149 T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460 (2016).

⁶In Graev II, nine judges were in the majority, and five judges were in the dissent.

⁷Sec. 7491 was also added to the Code as part of the RRA. SeeRRA §3001. Under Sec. 7491(c), the IRS has the burden of production in court proceedings regarding any penalty, addition to tax, or additional amount imposed under the Code.

⁸See Graev, 149 T.C. 485, 500 (2017) (Lauber, J., concurring).

⁹Sec. 6203; see also Chai, 851 F.3d at 218 (citing Laing, 423 U.S. 161, 170, n.13 (1976)), and Roth, 922 F.3d 1126, 1131 (10th Cir. 2019).

¹⁰Chai, 851 F.3d at 218.

¹¹Id.

¹²Id., quoting Sec. 6213(a).

¹³Id. at 218-19; see also Graev, 147 T.C. at 512 (Gustafson, J., dissenting).

¹⁴S. Rep’t No. 105-174, 105th Cong., 2d Sess., p. 65 (1998).

¹⁵144 Cong. Rec. 7627, 7873 (1998).

¹⁶See, e.g., Roth, 922 F.3d at 1133 (“[The taxpayers] can succeed on this appeal only if [Sec.] 6751(b), read in light of its legislative history and underlying public policy, restricts the IRS’s ‘initial determination’ in this case to the 20% penalty specified in the notice of deficiency.”); Chai, 851 F.3d at 219.

¹⁷Secs. 6651-6665.

¹⁸SeeSec. 6665(b).

¹⁹Under Sec. 6665(b), the deficiency procedures only apply: (1) to Sec. 6651 penalties if the penalties are attributable to a deficiency, and (2) to Sec. 6654 and 6655 penalties if no return is filed for the tax year.

²⁰Clay, 152 T.C. 223 (2019).

²¹After the IRS concludes an examination, it will generally issue a 30-day Appeals letter to the taxpayer if the taxpayer disagrees with the proposed adjustments. SeeRegs. Sec. 601.105(d); Internal Revenue Manual (IRM) §4.10.8.12.1 (9/13/19). The taxpayer can then file a protest and seek administrative appeals with the IRS Independent Office of Appeals (Regs. Sec. 601.105(d)(2)).

²²Belair Woods, LLC, 154 T.C. No. 1 (2020). The Tax Court has held that the Sec. 6751(b)(1) requirement applies in TEFRA (Tax Equity and Fiscal Responsibility Act, P.L. 97-348) proceedings premised on final partnership administrative adjustments. See Laidlaw’s Harley Davidson Sales, Inc., 154 T.C. No. 4 (2020) (citing Palmolive Bldg. Investors, LLC, 152 T.C. 75, 82-86 (2019)).

²³In TEFRA proceedings, the IRS procedures generally require the IRS to issue a 60-day Appeals letter, which is analogous to the 30-day Appeals letter for other cases. See IRM §4.31.2.3.19.9 (6/20/13).

²⁴Chai, 851 F.3d at 221; Roth, 922 F.3d 1126, 1134 (10th Cir. 2019).

²⁵Roth, 922 F.3d 1126, 1134 (10th Cir. 2019).

²⁶Tribune Media Co., T.C. Memo. 2020-2.

²⁷Carter, T.C. Memo. 2020-21.

²⁸Palmolive Bldg. Investors, LLC, 152 T.C. 75 (2019).

²⁹Roth, 922 F.3d 1126 (10th Cir. 2019); Chai, 851 F.3d at 221; Graev, 149 T.C. 485 (2017).

³⁰Secs. 6671-6725.

³¹Sec. 6671(a).

³²IRM §8.11.5.1 (12/18/15) (international reporting penalties).

³³See, e.g., Chadwick, 154 T.C. No. 5 (2020). Under current IRS procedures, IRS examiners are directed to obtain written managerial approval of assessable penalties prior to their assertion against the taxpayer, to comply with Sec. 6751(b)(1). See IRM §20.1.9.2(20) (11/30/15).

³⁴Kestin, 153 T.C. No. 2 (2019).

³⁵Kapp, T.C. Memo. 2019-84.

³⁶ATL & Sons Holdings, Inc., 152 T.C. 138, 154 (2019).

³⁷Kestin, 153 T.C. No. 2 (2019).

³⁸Laidlaw’s Harley Davidson Sales, Inc.,154 T.C. No. 4 (2020).

³⁹Chadwick, 154 T.C. No. 5 (2020).

⁴⁰See Rozbruch, 28 F. Supp. 3d 256, 264 (S.D.N.Y. 2014) (making same argument), aff’d on other issue, 621 Fed. App’x 77 (2d Cir. 2015); see alsoIRS Chief Counsel Notice 2018-006 (advising IRS Chief Counsel attorneys to take the position that Sec. 6751(b)(1) does not apply to TFRPs under Sec. 6672).

⁴¹IRM §20.1.9.1.1(2) (10/24/13).

⁴²IRM §20.1.9.1.1(5) (10/24/13).

⁴³Taxpayer First Act of 2019, P.L. 116-25.

⁴⁴Sec. 7803(e)(7).

⁴⁵Sec. 6751(b)(2)(A).

⁴⁶Sec. 6751(b)(2)(B).

⁴⁷Walquist, 152 T.C. 61 (2019).

⁴⁸ATL & Sons Holdings, Inc., 152 T.C. 138, 150-51 (2019).

⁴⁹IRM §20.1.1.2.3(5) (11/21/17).

⁵⁰IRM §4.19.25.5 (7/26/18) (applied to a Sec. 6721 penalty).

⁵¹Id.; see also IRS Chief Counsel Notice 2018-006 (noting that if a taxpayer submits a response, written or otherwise, to an automated notice proposing a penalty, then the immediate supervisor of the IRS employee considering the response should provide written supervisory approval prior to issuance of a statutory notice of deficiency).

⁵²IRM §20.1.1.2.3(2) (11/21/17).

⁵³Secs. 6320 and 6330.

⁵⁴Sec. 6330(c)(1).

⁵⁵Secs. 6330(c)(2) and (3).

⁵⁶Regs. Sec. 301.6330-1(e)(3), Q&A 2.

⁵⁷See, e.g., Lewis, 128 T.C. 48 (2007); McClure, T.C. Memo. 2008-136.

⁵⁸Laidlaw’s Harley Davidson Sales, Inc., 154 T.C. No. 4 (2020).

⁵⁹Blackburn, 150 T.C. 218 (2018).

⁶⁰Welch v. Helvering, 290 U.S. 111, 115 (1933).

⁶¹Frost, 154 T.C. No. 2 (2020).

⁶²Dynamo Holdings LP, 150 T.C. 224 (2018). However, if the small-partnership exception applies, the IRS continues to have the burden of production. See Carter, T.C. Memo. 2020-21.

⁶³NT, Inc., 126 T.C. 191 (2006); see also Povolny Group, Inc., T.C. Memo. 2018-37.

⁶⁴Tax Court Rule 34(b)(4) (“Any issue not raised in the assignments of error shall be deemed conceded.”); Funk, 123 T.C. 213 (2004) (holding that a failure to raise penalty issue in petition relieves IRS of its burden of production under Sec. 7491(c)).

⁶⁵IRM §20.1.1.2.3 (11/21/17).

⁶⁶Id.

⁶⁷Id.

⁶⁸IRS Chief Counsel Notice 2018-006.