In Uncategorized on 10/13/2020 at 17:41

No, this is not a reference to those spam e-mails, promising improvements not to be discussed in a blog meant for family reading, but with which we are bombarded. Rather, Judge Albert G (“Scholar Al”) Lauber, master textualist (hi, Mr Reilly), leads a full-dress T. C. to establish that the Section 6662(b)(6) nondisclosure-of-non-economic-substance transaction, as enhanced by the Section 6662(i) 40% chop, isn’t really a chop, but an enhancement.

The opinion is Jesus R. Oropeza, 155 T. C. 9, filed 10/13/20. For the backstory on JR and his microcaptivity, see my blogpost “Forty’ll Get Ya Twenty,” 7/21/20\, which dealt with the year after the year at issue here. But while in that case the 20% chop was sustained, here no chop survives.

Again we have as Revenue Agent Report (RAR) where the 40% amount is shown as zero, and a mix-and-match of 20% chops.  But as 3SOL was about to run, JR got Letter 5153, offering Form 872 SOL waiver and go to Appeals, or pay up. JR said “no,” so the RA, CPAF in hand, closed the case and got his boss’ sign-off on the CPAF. SNOD followed.

Summary J for JR.

IRS claims the SNOD was the kick-off for chops, and they had the Section 6751 Boss Hoss sign-off in hand. JR’s trusty attorneys say “no, the Letter 5153 and RAR said ‘penalties’, and that’s enough.” Judge Scholar Al goes with Belair (see my blogpost “Can We Talk – Part Deux,” 1/6/20).

“Respondent seeks to distinguish this case from Belair Woods, noting that the taxpayer there received a 60-day letter enabling it to go to Appeals, whereas petitioner did not receive a 30-day letter enabling him to do so. We find this to be a distinction without a difference. A 30- or 60-day letter is one way of communicating to a taxpayer that the Examination Division has concluded its work. But it is not the only way. The Letter 5153 clearly communicated the same message to petitioner: It told him that he could now go to Appeals, but only if he first executed a Form 872 that would give Appeals enough time to consider his case.” 155 T. C. 9, at p. 11.

OK, says IRS, the 20% chops are off the table, but the 40% chop is still in play, because that was only communicated to JR in the SNOD, not in the RAR or the Letter 5153.

Wrong, says Judge Scholar Al.

“Section 6662(a), captioned ‘Imposition of Penalty,’ provides that, ‘[i]f this section applies to any portion of an underpayment * * * , there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.’ Section 6662(b) provides that the penalty applies to the portion of any underpayment attributable to one or more of eight specified grounds. The sixth specified ground is ‘[a]ny disallowance of claimed tax benefits by reason of a transaction lacking economic substance.’ Sec. 6662(b)(6).

“Section 6662(i) is captioned ‘Increase in Penalty in Case of Nondisclosed Noneconomic Substance Transactions.’ It provides: ‘In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.’ Sec. 6662(i)(1). Litigants sometimes refer to section 6662(i)–like section 6662(h), applicable in the case of a ‘gross valuation misstatement’–as imposing a ‘40% penalty.’ As the statute’s text makes clear, however, section 6662(i) does not impose a distinct penalty. It simply increases the rate of the penalty imposed by section 6662(a) and (b)(6) for engaging in a transaction lacking economic substance.” 155 T. C. 9, at p. 13.

Judge Scholar Al paints the picture.

“The rule we extract from these cases is that boilerplate text in an IRS communication, determining liability for an accuracy-related penalty ‘attributable to one or more of’ specified grounds, will be interpreted to assert all of the specified grounds as alternative bases for the penalty, unless other portions of the communication explicitly limit the penalty determination to a subset of those grounds. Here, the Letter 5153 and the RAR determined that petitioner was liable for a 20% penalty ‘attributable to one or more of’ four specified grounds, including ‘a transaction lacking economic substance.’ Nothing in either document disavowed any of the four grounds as a justification for the penalty. We accordingly conclude that the IRS asserted in the RAR, but did not secure timely supervisory approval for, a penalty under section 6662(a) and (b)(6).” 155 T. C. 9, at pp. 15-16.

As in Belair, the subjective thought processes of the RA are irrelevant. What was communicated to the taxpayer is the key.

Finally, “…failure to disclose the transaction on the return is not a separate penalizable offense. Rather, it is analogous to an ‘aggravating factor’ in criminal law that justifies a harsher penalty for the basic offense. Under 18 U.S.C. sec. 111 (2018), for example, a defendant who assaults or forcibly interferes with a Federal officer engaged in official duties faces a possible prison term of 8 years. But if the defendant uses a deadly weapon while committing that offense, the maximum term of imprisonment is extended to 20 years. See id. subsec. (b). In this scenario, using a deadly weapon is not a separate Federal crime. It is an aggravating factor that authorizes an enhanced penalty for the underlying crime.” 155 T. C. 9, at p. 19.

IRS can’t double-dip; having failed to get Boss Hoss sign-off for 20%, IRS can’t cover up its error and seek 40%.

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