In Uncategorized on 01/06/2020 at 17:40

The Silt Becomes The Clay

Again the raspy nasal invitation from the late Joan Rivers rings out in Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 154 T. C. 1, filed 1/6/20, as Tax Court splits four ways over when an IRS Rivers-style invitation triggers Section 6751(b) Boss Hossery.

And once again I note, with dismay and perplexity, the absence of Judge Mark V. Holmes, the J. J. Watt of silt-stirring, from the line of scrimmage here. (Of course, being the Court’s Buffalo representative, he may still be in mourning; it is different here in the Bayou City).

Judge Albert G (“Scholar Al”) Lauber has this one. Of course, it’s a busted conservation easement with the usual negligence, five-and-ten substantial understatement, and alternative 40% overvaluation chops in play. The invite was the Letter 1807 audit closing invitation to discuss proposed FPAA adjustments. Belair showed up, but no deal was made.

Before sending the 60-day Letter advising of changes and right to appeal, the RA got the CPAF (Civil Penalty Approval Form) signed off. But the 60-day letter asserted the Section 6662(e)(2) 200% kicker, for which no CPAF was obtained.

Judge Lauber allows the Letter 1807 to pass muster. Our old pal “initial determination,” that hapax legomenon (that’s a one-time-only, for those of us who, unlike Judge Scholar Al, are without a Cambridge M. A. in Classics), takes center stage.

“The ‘initial determination’ of a penalty may occur earlier in the administrative process, but it still must be a formal act with features resembling those that a ‘determination’ itself displays. Like the 30-day letter involved in Clay, the ‘initial determination’ of a penalty assessment will be embodied in a formal written communication to the taxpayer, notifying him that the examination division has completed its work and has made a definite decision to assert penalties.” 154 T. C. 1, at pp. 15-16.

And remember Gwen Kestin, she of the multiple photocopies. No? Then see my blogpost “From the Serious to the Frivolous,” 8/29/19. Judge Gustafson, always ready to call IRS offside when determination of chop precedes Boss Hoss sign-off, said the fix-it-or-fight Letter 3176 IRS sent to Gwen wasn’t an “initial determination,” because Gwen could still correct her return. Chai teaches that there must be a “consequential moment” of IRS action.

What happened here was prologue. Belair had a chance to discuss, argue, or submit more information. In fact Belair met twice with IRS. The RA shouldn’t need Boss Hoss sign-off to attempt to elicit further facts.

And there’s the practical consideration: who can tell when the RA subjectively decided to go for chops? If no mention of penalties to taxpayer without Boss Hossery, “…a strategically minded taxpayer could seek to insulate himself from penalties by initiating a discussion of that subject at an early stage of the examination, conscious that the examining agent most likely would not have secured supervisory approval of any penalties by that time.” 154 T. C. 1, at p. 23.

There’s no magic in who the Boss Hoss doing the sign-off is, but only that the Boss Hoss was the RA’s Boss Hoss at the material time. And Tax Court isn’t going into the depth of the review the Boss Hoss gave the CPAF.

Yes, the statute is ambiguous, but Tax Court must do its best. Judges Thornton, Paris, Kerrigan, Buch, Nega, Pugh, and Ashford are down with this.

Judge Morrison concurs. “However, I do not agree with any suggestion in the opinion of the Court that the initial determination to impose the penalties may only be ‘a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties.’ See op. Ct. p. 16.” 154 T. C. 1, at p. 29.

And here’s where I wish Judge Holmes would weigh in. See my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17. He knew that the bludgeon of penalties gets shown to the hapless taxpayer long before formal notifications get sent, and what happens at examination is irrelevant at a deficiency trial, which is de novo. Except the bludgeoned, terrorized taxpayer never gets beyond examination, where s/he folds a meritorious case.

Ex Ch J L Paige (“Iron Fist”) Marvel dissents. “While the opinion of the Court does yeoman’s work in its attempt to identify the initial determination that requires written approval, the text of section 6751(b) simply cannot bear the weight. Instead, I contend that the Letter 1807, dated December 18, 2012, and the attached summary report on the examination (collectively, Letter 1807) set forth the initial determination in this case. In that letter, the Internal Revenue Service (IRS) informed petitioner in writing that it intended to impose a penalty in petitioner’s case. Because written supervisory approval was not obtained before the IRS mailed Letter 1807, I would hold that respondent has failed to meet his burden of production as to the penalties asserted.” 154 T. C.1, at pp. 30-31.

Tax Court has been going back to ever-earlier timeframes to find the magic moment. But one thing has consistently come out of these walks down memory lane: the first time the IRS puts the word “penalty” on a paper the taxpayer sees is when they need the Boss Hoss sign-off. That’s what Congress intended: to prevent the penalty bludgeon from being waved in taxpayers’ faces, to coerce premature and unjust settlements. Technical dissection of the word “determination” is beside the point.

Judges Gale, Copeland and Jones agree.

Judge Holmes may be sitting this one out, but Judge David Gustafson is vying for the title of Great Dissenter. The Letter 1807 had a Form 4605-A statement of proposed changes attached, which mentions “penalties.” Moreover, that form says the IRS has determined to apply them.

“In my judgment, that letter with its attachments embodied an ‘initial determination’ that required written supervisory approval. It is true that the letter did not reflect ‘the Examination Division’s definite decision to assert the penalties.’ But this will be true of many–perhaps all–initial penalty determinations by an agent who has failed to comply with section 6751(b)(1) by getting supervisory approval. That very failure makes it impossible to characterize the unapproved act as ‘the Examination Division’s definite decision’; but today the Court perversely relieves such an unapproved ‘initial determination’ of the consequence that Congress intended. The Court effectively holds that the letter did not require supervisory approval because the letter lacked supervisory approval.” 154 T. C. 1, at p. 36.

Section 6751(b) speaks of a determination by “an individual,” not by Exam Division.

“Section 6751(b)(1) was enacted to undo the determinations of individual agents who make unapproved assertions of penalty liability, but the opinion of the Court today seems to hold that these assertions may not need supervisory approval and may not be undone by section 6751(b)(1). I would hold otherwise.” 154 T. C. 1, at p. 37.

Judges Foley, Gale, Marvel, Urda, Copeland, and Jones agree with this dissent.

So does Lewis C. Taishoff. If ever an opinion needed reargument, this is it.





  1. I don’t have first-hand knowledge, so take this with a generous pinch of salt, but: I believe that Judge Holmes is in confirmation purgatory. His fifteen-year term expired, and though he wants to be reappointed, and the administration apparently intends to reappoint him, his renomination to the Tax Court is awaiting further action. In the meantime, he’s listed on the Tax Court’s website as a Senior Judge, and seniors don’t participate in full T.C. opinions – which is a shame, because I’d very much like to know what Judge Cohen makes of all this.


  2. Thank you for the explanation. I will not comment on the Senate’s confirmation procedures, as that would take me into the forbidden zone of politics. I too would wish to hear what Judge Cohen thinks.


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