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Battat v. Commissioner (T.C. Memo. 2021-57)

On May 11, 2021, the Tax Court issued a Memorandum Opinion in the case of Battat v. Commissioner (T.C. Memo. 2021-57). The primary issue presented in Battat was whether the IRS received prior supervisory approval of an initial determination of a penalty under IRC § 6751(b)(1).

Same Issue, New Wrinkle

The IRC § 6751(b)(1) prior supervisory approval rule has been litigated with substantial regularity over the last year and a half.  Some smart guy (your fearless editor) even wrote a great article on it in Tax Notes Today, if you care to check it out.  The discrete question in Battat was whether the Form 4549 (Income Tax Examination Changes), more commonly known as a revenue agent report (RAR), that the petitioner received with a Letter 4121 (Agreed Examination Report Transmittal), was an “initial determination” by an “individual” to impose a penalty for purposes of IRC § 6751(b)(1).

Not an Insignificant Cockup

Felicia screwed the administrative pooch on this one.

In November 2011, an IRS examining agent (EA) sent petitioners an RAR attached to a Letter 4121 regarding petitioners’ 2008 taxable year. The EA’s name appears in the signature box provided for the IRS agent who prepared the RAR. The RAR states the amount of petitioners’ “corrected” tax due and that petitioners are liable for an IRC § 6662 penalty of $345,143 for 2008. The RAR also includes a signature box that, if signed by petitioners, provides their “consent to the immediate assessment and collection” of said adjusted tax and penalties.

Needless to say, Felicia did not even give the Letter 4121, the RAR, or a Civil Penalty Approval Form to the EA’s immediate supervisor.  She was too busy re-inking her “REJECTED” stamp is my educated guess.  Forshame, Felicia.  Forshame.

IRC § 6751(b)(1) is not a Suggestion

IRC § 6751(b)(1) provides that no penalty may be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.  It’s that simple.

IRC § 6751(b)(1) requires approval for the “initial determination” of a penalty assessment. A signed, completed RAR sent with a Letter 4121 includes an “initial determination” for purposes of section 6751(b)(1). See Beland v. Commissioner, 156 T.C. No. 5, *9-*12 (Mar. 1, 2021); see also Oropeza v. Commissioner, 155 T.C. No. 9, *17 (Oct. 13, 2020).

The term “determination” has an established meaning in the tax context and “denotes a communication with a high degree of concreteness and formality,” Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020), and denotes a “consequential moment” of IRS action, Chai v. Commissioner, 851 F.3d 190, 220-221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42. The RAR states that it shows the “corrected” amount of petitioners’ tax and penalty liability. The RAR also includes a signature box for petitioners to consent to the assessment of those tax and penalty amounts.

Providing the opportunity to consent to assessment of tax and penalty is a “consequential moment” to a taxpayer and the Commissioner. See Beland, 156 T.C. No. 5, at *10; Belair Woods, 154 T.C. at 15. Needless to say, a signed, completed RAR sent with a Letter 4121 provides the requisite definiteness and formality to constitute an “initial determination” for purposes of IRC § 6751(b)(1). See Beland, 156 T.C. No. 5, at *13); Oropeza, 155 T.C. No. 9, at *17.

Dammit Felicia

The RAR includes the EA’s initial determination. Because no supervisor approval was provided before the RAR was issued to petitioners, the penalty did not meet the requirements of IRC § 6751(b)(1).

(T.C. Memo. 2021-57) Battat v. Commissioner

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