Grajales v. Commissioner (156 T.C. No. 3)

Posted on January 25, 2021

On January 25, 2021, the Tax Court issued its opinion in Grajales v. Commissioner, 156 T.C. No. 3. The underlying issue presented in Grajales was whether prior written supervisory approval under IRC § 6751(b)(1) was required to assert the 10% IRC § 72(t) “exaction” for early distributions from a qualified retirement plan.

Labels are for Cans

Abraham Lincoln is credited for saying “How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn’t make it a leg.” Similarly, calling a tax a penalty or a penalty a tax does not make it so. We have seen the IRS argue in previous cases argue that the IRC § 6751(b)(1) approval requirement does not apply certain penalties, because even though it’s called a “penalty” it is collected like a tax. Circle back to Laidlaw’s Harley Davidson and Chadwick to name a few from last year. The shoe is on the other foot in Grajales, where it is the taxpayer asking the Tax Court to find that IRC § 6751(b)(1) applies because even though IRC § 72(t) is a tax, it acts like (and is even called, lazily) the “early withdrawal penalty.”

Background

There is not much to this case. The petitioner was 42 when she took a loan from her New York State Pension. She received a Form 1099-R reporting the distribution and failed to report the distribution as income. The IRS issued the petitioner a notice of deficiency determining that the retirement plan distribution reported on Form 1099-R should have been included in her income and were subject to a 10% additional tax on early distributions under IRC § 72(t). The petitioner timely petitioned the Tax Court for redetermination.

It should be noted, lest it go unnoticed, that this full tax court opinion—for which the petitioner is represented by THREE attorneys—was fought over $90.86.

Point

The petitioner argues that she is not liable for the IRC § 72(t) exaction, because its initial determination lacked the written supervisory approval required under IRC § 6751(b)(1). Petitioner contends that written supervisory approval was required because the IRC § 72(t) exaction is either a penalty or an “additional amount” within the meaning of IRC § 6751(c).

Counterpoint

The IRS admits that there was no such written supervisory approval but asserts that none was required because the IRC § 72(t) exaction is not a “penalty,” “addition to tax,” or “additional amount” within the meaning of IRC § 6751(b) and IRC § 6751(c) but rather a “tax.”

Analysis

The initial determination of an assessment of any penalty must be personally approved (in writing) by the immediate supervisor of the individual making such determination” as required by IRC § 6751(b)(1), unless a statutory exception applies. See Frost v. Commissioner, 154 T.C. 23, 34-35 (2020); Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). IRC § 6751(c) defines “penalties” to include “any addition to tax or any additional amount.” The question is whether the IRC § 72(t) exaction is a “penalty,” an “addition to tax,” or an “additional amount” within the meaning of IRC § 6751(c).

IRC § 72(t) is captioned “10-percent additional tax on early distributions from qualified retirement plans.” Indeed, IRC § 72(t)(1) is captioned “Imposition of additional tax” and provides that if any taxpayer receives any amount from a qualified retirement plan, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10% of the portion of such amount which is includible in gross income.

In contexts apart from the application of IRC § 6751(b)(1), The Tax Court has held repeatedly that the IRC § 72(t) exaction is a “tax” and not a penalty, addition to tax, or additional amount. See, e.g., Williams v. Commissioner, 151 T.C. 1, 4 (2018) (holding that the IRC § 72(t) exaction is not a “penalty, addition to tax, or additional amount” within the meaning of IRC § 7491(c) for purposes of placing the burden of production); El v. Commissioner, 144 T.C. 140, 148 (2015) (same); Dasent v. Commissioner, T.C. Memo. 2018-202, at *7 (same); Summers v. Commissioner, T.C. Memo. 2017-125, at *5 (same).

In Thompson v. Commissioner, T.C. Memo. 1996-266, *7, the Tax Court held that the IRC § 72(t) exaction is a “tax” rather than a “penalty” for purposes of the joint and several liability provision of IRC § 6013(d)(3). Accord Ross v. Commissioner, T.C. Memo. 1995-599, *6.

In El, the Tax Court noted three reasons that it was persuaded that the IRC § 72(t) additional tax is a tax and not a penalty, addition to tax, or additional amount:

First, IRC § 72(t) calls the exaction that it imposes a “tax” and not a penalty, addition to tax, or additional amount.

Second, several provisions in the Code expressly refer to the additional tax under IRC § 72(t) using the unmodified term “tax.” See IRC § 26(b)(2); IRC § 401(k)(8)(D); IRC § 401(m)(7)(A); IRC § 414(w)(1)(B); IRC § 877A(g)(6).

Third, IRC § 72(t) is in subtitle A, chapter 1 of the Code. Subtitle A bears the descriptive title “Income Taxes,” and chapter 1 bears the descriptive title “Normal Taxes and Surtaxes.” Chapter 1 provides for several income taxes, and additional income taxes are provided for elsewhere in subtitle A. By contrast, most penalties and additions to tax are in subtitle F, chapter 68 of the Code.

The Tax Court further rejected the petitioner’s argument that the IRC § 72(t) exaction is properly considered to be an “additional amount” within the meaning of IRC § 6751(c). In so finding the court noted that it has consistently held that additional amounts, particularly when it appears in a series that also includes tax and additions to tax, is a “term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A.” Whistleblower 22716-13W v. Commissioner, 146 T.C. 84, 95 (2016); see also Williams v. Commissioner, 131 T.C. 54, 59 n.6 (2008); Pen Coal Corp. v. Commissioner, 107 T.C. 249, 258 (1996); Bregin v. Commissioner, 74 T.C. 1097, 1102-1103 (1980).

Thus, because the term “additional amount” appears in IRC § 6751(c) in conjunction with the terms “penalty” and “addition to tax,” it is used as a term of art to refer to those penalties in chapter 68, subchapter A. Further, because the IRC § 72(t) exaction is not a civil penalty enumerated in chapter 68, it is not an “additional amount” within the meaning of IRC § 6751(c).