Better yet, Judge Silt

All y’all will recall that Judge Mark V. Holmes called down the Rachegötter when ex-Ch J Michael B (“Iron Mike”) Thornton extended the reach of Chai to “every living heart and hearthstone, all over this broad land.” What, no? Then see my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17.

Today Judge Holmes is stirring that silt with a vim, in CFM Insurance, Inc., Docket No. 10703-19, filed 6/16/21*. Like today’s honoree Poldy Bloom, Judge Holmes is on a voyage through IRS’ multifarious papers. IRS is trying to pin chops on CFM, a micro-captive insurance dodger, via summary J.

Judge Holmes doesn’t even need to draw inferences in favor of the non-movant. IRS has an RA recommendation with Section 6751(b) Boss Hoss sign-off, which CFM got with the 30-day letter. Problem is, the recommendation and sign-off are for 40% chops, but the SNOD which followed the 30-day letter only mentions 20%.

OK, but the 30-day letter came first: what did that say?

“Ordinarily, an Examination Report and 30-day letter is sufficient to clear the 6751(b)(1) hurdle. But in this case, there was no mention of a 20% penalty’s being asserted in the 30-day letter or any of the documents listed as enclosures; the Examination Report and Agreement Form both mention 40% penalties for each year pursuant to section 6662, but section 6662 allows for 40% penalties in only three instances: when an underpayment is due to a ‘gross misvaluation misstatement,’ § 6662(h), a ‘nondisclosed noneconomic substance transaction,’ § 6662(i), or an ‘undisclosed foreign financial asset understatement,’ §6662(j). The 20% penalties under section 6662(b)(1) for negligence or disregard of rules or regulations (or substantial understatement) are distinct from each of these 40% penalties and must receive separate supervisory approval to cross over the section 6751(b) threshold. ‘Formal notice’ requires that the penalty be described with sufficient particularity so a taxpayer knows what he is accused of…. An Examination Report and 30-day letter that mention only a 40% penalty do not provide notice of a 20% penalty. As a matter of law, then, neither the 30-day letter nor any of the documents listed as enclosures provided CFM with formal notice of the 20% penalties under section 6662(b)(1).” Order, at p. 3. (Citations omitted).

So IRS loses, right?

Not yet. Judge Holmes delves into the murky depths of the enclosures with the 30-day letter, specifically the Form 886-A Explanation of Items, and it’s SOP for that form to accompany a 30-day letter.

Except.

“…the Form 886-A that CFM got was not standard. It first lists as an issue ‘[w]hether Taxpayer is liable for the [a]ccuracy[-]related penalty under IRC § 6662(a) and (b) for the taxable years 2012, 2013, 2014, and 2015 in an amount that is 40% of the amount of the underpayment.’ But it then asserts in its conclusion that ‘the Taxpayer is subject to the penalty under IRC §§ 6662(b)(1) and (2) for negligence, disregard of rules and regulations, and substantial understatement with the primary position being IRC [§] 6662(b)(1) and the secondary position IRC § 6662(b)(2).’ That is the only mention of the 20% penalty in the package CFM got.” Order, at pp. 3-4.

And the document itself looks like a draft. Judge Holmes points to the typographical discrepancies between the Form 886-A that CFM got, and the standard issue version, and concludes it’s only a draft.

So what? It was notice, wasn’t it?

“The form itself doesn’t have any names on it. We have the Examining Officer’s Activity Record, which shows that three separate revenue agents worked on it over the course of four years: RA F from August 2014 to November 2017, an unnamed RA from November 2017 to January 2018, and RA N from January 2018 to the examination’s completion. The parties agree that RA S, who signed the 30-day letter, was RA N’s immediate supervisor. There is nothing in the record on this motion to show who supervised RA F or the secret agent man. We also can’t tell from the Activity Record when the decision was made to impose the 20% penalties on CFM or who made that decision. But we can tell that RA F had begun working on the Form 886-A by October 2015, and it was ‘[a]lmost as complete as it will be’ by December 2017. And even if one assumes that RA N was the one who made the ‘initial determination’ to impose the penalty, the evidence does not definitively show that RA S approved that determination in writing. It is true that RA S signed the 30-day letter and that the Form 886-A was sent to CFM with that letter. But we must infer on this motion that the Form 886-A was in an incomplete state. That it was not mentioned as an enclosure on the 30-day letter also supports as a plausible inference at this point that RA S never saw the Form before signing the letter.” Order, at pp. 4-5. (Footnote omitted, but it quotes the P. F. Stone – Peter Barri 1966 theme song that Johnny Rivers made famous, to honor the “secret agent man.”)

OK, so now everybody is thoroughly confused, but Judge Holmes is only warmed up. If the 30-day letter is not the first notice CFM got, what was? Well, CFM’s trusty attorney called RA S and RA N when she got the 30-day letter, and they told her they didn’t know why the 40% chop; OCC told them just do it. So maybe the IRS counsel with whom RA N traded e-mails did the recommending.

But who was IRS counsel’s Boss Hoss, and did s/he sign off?

No summary J. Plenty of silt.

*CFM Insurance 10370-19 6 16 21