On January 21, 2020, the Tax Court issued its opinion in Chadwick v. Commissioner (154 T.C. No. 5). The issue presented in Chadwick v. Commissioner was whether the penalty assessable pursuant to IRC § 6672(a) (the Trust Fund Recovery Penalty or TFRP) was subject to the requirement that written supervisory approval be secured at the initial determination of such assessment pursuant to IRC § 6751(b)(1).
The IRC § 6672(a) Trust Fund Recovery Penalty is…Wait for It…a Penalty
No penalty under the Code may be assessed unless the initial determination of that assessment is personally approved (in writing) by the immediate supervisor of the individual/agent making such determination (or someone higher on the IRS food chain). IRC § 6751(b)(1). The IRS argued that the approval requirements of IRC § 6751(b)(1) do not apply to the TFRP because IRC § 6672, in substance, imposes a tax rather than a penalty.
For my feelings on the IRS’s reliance on the Cookie Monster Test of a penalty being, technically, a tax because if it looked like a tax, and acted like a tax, it must be a tax, please see the comments (read: diatribes) in the related post in Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. No. 4 (Jan. 8, 2020).
To the IRS’s credit, the Tax Court had not previously resolved this issue (whether IRC § 6751(b)(1) applied to the TFRP, not whether a cookie is a cookie if it looks like a cookie and tastes like a cookie). See, e.g., Blackburn v. Commissioner, 150 T.C. 218, 219-220 (2018).
A responsible person who fails to collect or pay over any tax under the Code, in addition to other penalties provided by law, will be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over pursuant to IRC § 6672(a). The Tax Court was not persuaded by the IRS’s Cookie Monster Test argument, and instead the Tax Court found that the plain text of IRC § 6672(a) indicates that a TFRP is a penalty. The Tax Court held (paraphrasing) that “A penalty, is a penalty, is a penalty, and the TFRP is a penalty.” In point of fact, Judge Lauber’s opinion used the word “penalty” exactly eight times in the one short paragraph (*16); so, my paraphrase is only half as insistent.
Application of IRC § 6751(b)(1) to “Assessable Penalties” in Chadwick v. Commissioner
IRC § 6672 is located in subtitle F, chapter 68, subchapter B of the Code. Subchapter B is captioned “Assessable Penalties.” Comprising IRC § 6671 through IRC § 6725, subchapter B includes more than 50 penalties for such infractions as failing to file information returns, failing to make certain disclosures, aiding and abetting the understatement of tax, promoting abusive tax shelters, and making frivolous tax submissions, and white shoes after Labor Day (just checking to see if you’re awake).
These penalties are denominated “assessable penalties,” because the IRS may assess them without regard to deficiency procedures. See IRC § 6672(b) (60-day notice requirement before imposition of TFRP penalty); see also Smith v. Commissioner, 133 T.C. 424, 428-429 (2009); see also Shaw v. United States, 331 F.2d 493, 494-495 (9th Cir. 1964). As the Tax Court held previously, IRC § 6751(b)(1), by its terms, applies to the assessment of all penalties under the Code. Graev v. Commissioner, 149 T.C. 485, 495 n.17 (2017); see also Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. No. 4 (decided six days prior to the Chadwick case). Thus, IRC § 6672(a) encompasses not only penalties subject to deficiency procedures but also “a great many so-called assessable penalties” contained in the recesses of subchapter B of chapter 68. Id.
Takeaway – IRC § 6751(b)(1) Applies to Trust Fund Recovery Penalties
Chapter 68, subchapter A, comprising IRC § 6651 through IRC § 6665, covers additions to tax, additional amounts, accuracy-related penalties, and fraud penalties. Subchapter B covers assessable penalties. Subchapter C, consisting solely of IRC § 6751, sets forth “Procedural Requirements” applicable to all of the foregoing. IRC § 6751(a) requires the IRS to provide taxpayers with specified information in each “notice of penalty” under the Code, with “penalty” specifically defined broadly for this purpose to include any addition to tax or any additional amount imposed under the Code, except when any penalty doesn’t mean any penalty (like IRC §§ 6651, 6654, and 6655, as well as computational penalties). See IRC § 6751(c) (any penalty); IRC § 6751(b)(2)(A)-(B) (carveouts).
Before issuing this notice of penalty, however, the individual/agent at the IRS must secure written supervisory approval. IRC § 6751(b)(1). IRC § 6751, in short, provides comprehensive procedural requirements for all of the penalties and other items included in both subchapters A and B.
To recap: cookies are cookies, penalties are penalties, and arguments otherwise (mine or Counsel’s) are not persuasive to two-year-olds or Tax Court judges, respectively.
Timing of Written Supervisory Approval for TFRPs
In Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, at *23 (Jan. 6, 2020) (decided 15 days prior to Chadwick) the Tax Court held that the initial determination of the penalty assessment was embodied in the letter in which the IRS formally notified the taxpayer that the IRS’s Examination Division had completed its work and had made a definitive decision to assert penalties against the taxpayer, as in Chadwick a type of 60-day letter.
In Chadwick, the initial determination of each penalty assessment was embodied in the Letters 1153 that the IRS mailed to the petitioner. The Letters 1153 (“60-day letters”) were the documents in which the IRS first formally communicated to petitioner its definite decision to assert the TFRPs. It should be noted, as well, that the Internal Revenue Manual (IRM) requires supervisory approval of TFRPs always to precede issuance of the Letter 1153. See IRM § 220.127.116.11, 18.104.22.168 (Nov. 12, 2015).
Chadwick, therefore, follows in line with Belair Woods, and suggests that the Tax Court is drawing a line in the sand with regard to strict compliance with the letter of IRC § 6751(b)(1).
Position Related to Prior Opinions
Note that the Tax Court took a bit of a shot-across-the-bow at the Southern District of New York (and the Second Circuit, as they did just days prior in the Laidlaw’s Harley Davidson case). The Chadwick decision is in contrast with United States v. Rozbruch, 28 F.Supp.3d 256 (S.D.N.Y. 2014), aff’d on other grounds, 621 F. App’x 77 (2d Cir. 2015).Add to favorites