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Belair Woods LLC v. Commissioner (154 T.C. No. 1)

On January 6, 2020, the Tax Court issued its opinion in Belair Woods, LLC v. Commissioner, 154 T.C. No. 1. The issue presented in Belair Woods was when, precisely, was written supervisory approval required pursuant to IRC § 6751(b)(1) (initial determination of penalty assessment). The penalties at issue in Belair Woods were gross overvaluation (IRC § 6662(h)), negligence (IRC § 6662(c)), and substantial understatement (IRC § 6662(d)).

Written Supervisory Approval (IRC § 6751(b)(1)

No penalty under Title 26 (the Internal Revenue Code) may be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual/agent making such determination (or another higher-level official). IRC § 6751(b)(1).

In Clay v. Commissioner, 152 T.C. 223, 249 (2019), the Tax Court interpreted IRC § 6751(b)(1) to require supervisory approval to be secured by the earlier of (1) the date the IRS issues a notice of deficiency, or (2) the date on which the IRS formally communicates to the taxpayer the IRS’s initial determination of a penalty assessment and notifies the taxpayer of his right to appeal that determination.

So, what exactly is an initial determination, and what constitutes formal communication?

The Belair Woods opinion begins by providing an example of what is not an initial determination. To wit, a summary report setting out tentative proposed adjustments, and cordially inviting petitioner to a conference to discuss the proposal, does not constitute an initial determination of a penalty assessment pursuant to IRC § 6751(b)(1), because the report did not indicate that this was the end of the examination tracks for the petitioner. There was still light at the end of the tunnel. The negotiation train could keep rollin’ on.

Unlike the Letter 1807, which invited the petitioner to not one, but two closing conferences (hats were doffed; tea and finger sandwiches were served; jocund discussions were had by all), when the IRS sent the petitioner a Letter 1829 (a “60-day letter”) all niceties were abandoned, because the IRS now meant business.

With the 60-day letter, the revenue agent formally indicated that, having considered the petitioner’s arguments, she had rejected the arguments and her work was concluded. Further, the 60-day letter indicated that the petitioner’s only recourse to challenge the penalties was to file a protest with Appeals. The Tax Court in Belair Woods found that the 60-day letter was a definite decision to assert penalties, and such letter was formal and in writing. The 60-day letter was, therefore, an initial determination under IRC § 6751(b)(1).

Having ticked all of the IRC § 6751(b)(1) boxes, all that was left for the Tax Court to determine was the rather ministerial question of whether the revenue agent had secured written supervisory approval of her definite decision to assert penalties. The Tax Court, indeed, found that the revenue agent had secured approval of the penalties from her group manager (her supervisor’s supervisor) before the revenue agent issued the 60-day letter; therefore, the IRS complied with the letter of IRC § 6751(b)(1).

Takeaway – Formal, Consequential, Written Notification of Assessment of Penalty Triggers Need for Supervisory Approval Pursuant to IRC § 6751(b)(1)

So, what does Belair Woods teach us?

A letter inviting a taxpayer, at the taxpayer’s earliest convenience, to discuss penalties that perhaps would be assessed in the future if the discussions did not lead to resolution of the underlying issues was not the shot-across-the-bow envisaged by Congress when it enacted IRC § 6571(b)(1). The IRS’s cordiality in providing the petitioner notice of a preliminary penalty proposal was the factor that drew the Tax Court away from the conclusion that the Letter 1807 was not an initial determination, an unequivocal decision to assert penalties. When, however, the IRS sent the petitioner a formal 60-day letter – a communication with a high degree of concreteness and formality – the die was cast, the Rubicon crossed, and only Appeals could offer relief.

Thus, the Tax Court concluded in Belair Woods that the initial determination of a penalty assessment is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties. This was the consequential moment of IRS action, as the Second Circuit noted in Chai v. Commissioner, 851 F.3d 190, 220-21 (2d Cir. 2017). Because the revenue agent obtained prior supervisory approval before issuing the 60-day letter, the IRS was successful in challenging

IRC § 6751(b)(1) requires supervisory approval, not for a preliminary proposal, but for the initial “determination” of a penalty. That term has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality. In a deficiency context such as in the present case, the Tax Court won the day.

(154 T.C. No. 1) Belair Woods, LLC v. Commissioner

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