On January 16, 2020, the Tax Court issued its opinion in Laidlaw’s Harley Davidson Sales Inc. v. Commissioner (154 T.C. No. 4). The issue presented in Laidlaw’s Harley Davidson Sales Inc. v. Commissioner was whether the written supervisory approval requirement of IRC § 6751(b)(1) applied to the assessable penalty imposed by IRC § 6707A (failure to disclose a reportable transaction).
30-Day Letter Triggered IRC § 6751(b)(1) Supervisory Approval Requirement in Laidlaw’s Harley Davidson Sales Inc. v. Commissioner
The petitioner in Laidlaw’s Harley Davidson received a 30-day letter, which notified the petitioner of the IRS’s proposed penalties for failure to disclose a reportable transaction on its Form 1120 under IRC § 6707A. Importantly, the 30-day letter explained that, in the event that the petitioner wished to oppose the penalty, it was entitled to request a conference with Appeals. Thus, the letter indicated that the IRS’s Examination Division had concluded its work in the matter.
The letter emphasized that if the petitioner opted instead to take no action in response to the penalty proposal, the IRS would “assess the penalty and begin collection procedures.” The 30-day letter cautioned that if the petitioner failed to act, the IRS would not rescind the penalty. No takey-backeys, as my seven-year-old has been heard to say. Take the comparison for what it’s worth. A Revenue Agent’s Report (RAR), a Form 4549-A (Income Tax Discrepancy and Adjustments), and a Form 866-A (Explanation of Items) was enclosed with the 30-day letter. The letter did not contain written supervisory approval of the agent’s supervisor.
Collection Due Process (CDP) Principles
If a taxpayer fails to pay a Federal tax liability after notice and demand, IRC § 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer’s property. No need for notice (except for levying wages) – the IRS doesn’t even have to pass Go to collect their $200. That’s not how I was raised to play Monopoly, but there you go.
IRC § 6671 provides that the so-called “assessable penalties” imposed under subchapter B of chapter 68 (including the IRC § 6707A reportable transaction penalty here at issue) are assessed and collected like taxes. The key word here is like. They are like taxes; penalties, no matter how hard the IRS huffs and puffs are not taxes. Nevertheless, the IRS picked a straw house in Laidlaw’s Harley Davidson and tried their luck. Tsk. Tsk.
Unlike the collection of taxes (as penalties are not taxes, no matter how persuasive IRS Chief Counsel tries to be to the contrary, and they can be quite persuasive), to collect an assessable penalty the IRS must first issue a notice of intent to levy and notify the taxpayer of the right to an administrative hearing before the IRS’s Office of Appeals. IRC § 6330(a) and (b)(1). After notice, the IRS must wait for at least 30 days before the little piggy (the taxpayer in this extended metaphor) makes up its mind to let them in or tells the big bad wolf (the IRS) to shove it, because they’re going to the brick house (the Appeals office) for sanctuary. After receiving the notice of intent to levy, the little piggy…rather…the taxpayer may request a Collection Due Process (CDP) hearing. IRC § 6330(a)(3)(B) and (b)(1). At the CDP hearing, the task of the Appeals officer is to determine whether the proposed collection action may proceed.
The Appeals officer must receive proof from the IRS that all of the requirements of any applicable law and administrative procedure have been met by IRS personnel. See IRC § 6330(c)(1) and (3)(A). Where the supervisory approval requirement of IRC § 6751(b)(1) applies, the Appeals officer must receive verification that such approval was obtained. See ATL & Sons Holdings, Inc. v. Commissioner, 152 T.C. 138, 144 (2019); Rosendale v. Commissioner, T.C. Memo. 2018-99, at *14.
The Appeals’ officer must consider all relevant issued relating to the unpaid tax or the proposed levy pursuant to IRC § 6330(c)(2)(A) or any collection alternatives proposed by the taxpayer pursuant to IRC § 6330(c)(2)(A)(iii). See IRC § 6330(c)(3). Finally, the Appeals officer must determine whether the proposed collection action balances the need for the efficient collection of taxes with the legitimate concern that pursuing collection would be more intrusive than necessary. IRC § 6330(c)(3)(C).
Application of Written Supervisory Approval under IRC § 6751(b)(1) to “Assessable Penalties”
No penalty under the Code – and yes, dear reader, penalty means penalty, and Code means the entire Code, that is to say, all of Title 26…except when it doesn’t with respect to IRC § 6651 (failure to file), IRC § 6654 (failure to pay estimated tax), and IRC § 6655 (failure for corporation to pay estimated tax), and automatically calculated penalties (more on this in a moment) – 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 or another higher-level IRS official. IRC § 6751(b)(1); Graev v. Commissioner, 149 T.C. 485, 495, n. 17 (2017) (holding, and I’m paraphrasing here, penalties are penalties, Counsel). If the IRS fails to secure written supervisory approval, the Tax Court cannot sustain the penalty. Don’t pass go; don’t collect $200.
Although IRC § 6751(b)(2) provides for two exceptions, neither of which applied to Laidlaw’s Harley Davidson’s IRC § 6707A penalties. Written supervisory approval is not required for any addition to tax under IRC §§ 6651 (failure to file), 6654 (failure to pay estimated tax), or 6655 (failure by corporation to pay estimated tax) pursuant to IRC § 6751(b)(2)(A). Further, written supervisory approval is not required for any other penalty automatically calculated through electronic means pursuant to IRC § 6751(b)(2)(B).
Plaintively, Counsel sings its swan song – Your Honor, you know that IRC § 6751(b)(1) has historically only been used by taxpayers to challenge the assessment of penalties subject to deficiency procedures. However, penalties under the Code encompass not only penalties subject to deficiency procedures but a number of “assessable penalties” contained in subchapter B of chapter 68 (IRC §§ 6671-6725). See Graev, 149 T.C. at 495, n.17. These “assessable” penalties are generally not subject to deficiency procedures. Id.
Notwithstanding that the “assessable” penalties are not generally subject to deficiency procedures, the Tax Court in Graev held (and I’m paraphrasing here), “Penalties are as penalties do, and they do not do like taxes, on account of penalties being penalties and taxes being taxes.” Having cleared that up in 2017, we can move on, admit that Ross and Rachel were on a break, and just let it go. Enter Laidlaw’s Harley Davidson, and Judge Gustafson’s patient response.*
*Author’s Note: I can imagine Judge Gustafson’s law clerk at his or her computer angrily typing a two page diatribe, much like the one I have engaged in here throughout this post, that “$&@#%*!, penalty means penalty!” and then deleting it all, writing it more nicely but still in the heat of the moment, deleting it, repeating this process about four times, and then settling on “IRC § 6751(b)(2) does provide for two exceptions, but neither applies here.” I feel sorry for that clerk’s cat, because you know Mr. Whiskers got the brunt of that repressed anger. The clerk did get a bit of a dig in when it mentioned that the parties stipulated that the RA was not a computer (I laughed pretty hard at that one when I read it, but as you’ve seen, I have a low threshold for tax humor), and so the computational penalty exception didn’t apply either.
Post Update – Having since spoken to one of Judge Gustafson’s law clerks, I can confirm that Poor Mr. Whiskers is doing just fine now.
Bright Line Rule – Written Supervisory Approval Must Occur Prior to Formal Notification of Taxpayer that Penalty will be Imposed
The IRS argued, and kudos to them for their resolve, that pursuant to IRC § 6751(b)(1), it was required to secure supervisory approval for assessable penalties at any time before the actual time of assessment. In Clay v. Commissioner, 152 T.C. 223, 249 (2019), however, the Tax Court held that when the IRS formally communicates to the taxpayer that penalties will be imposed, IRC § 6751(b)(1) is implicated. In Laidlaw’s Harley Davidson, the issuance of a revenue agent’s report (RAR) and a 30-day letter embodied an “initial determination” for purposes of IRC § 6751(b)(1); therefore, the Tax Court held that the IRS had not complied with IRC § 6751(b)(1), on account of it not having penalty approval in hand before formally communicating the determination of those penalties to the taxpayers for the first time in the 30-day letter. Clay at 249-250. Thus, the Tax Court held that the IRS is not free to obtain written supervisory approval for assessable penalties at virtually any time before assessment, even if the IRS thought the “assessable” penalty wasn’t really a penalty, because – by the well-regarded, and oft-cited Cookie Monster Test* – if it looks like a tax, and acts like a tax, it must be a tax.
*Author’s Note: Said test is well regarded by my two-year-old daughter, and oft-cited by her in justification of her pernicious thievery of my baked goods, when I try to explain that what I am about to eat is by no means a cookie. And just as often, just like that, I am minus my erstwhile oatmeal raisin. Maybe if Counsel would have been an obscenely sweet, ginger toddler, it would have had more success; but alas, no. In fairness to Counsel, for whom one of my closest friends works, they tried to make lemonade, but they were given some bad lemons in this case.
Position Related to Prior Opinions
It should be noted that the Laidlaw’s Harley Davidson case rather directly rebuts (and rebuffs) the Second Circuit’s less restrictive holding in Chai v. Commissioner, 851 F.3d 190, 219 (2d Cir. 2017), which, itself, rebutted and rebuffed the Tax Court’s holding in Graev. (Interestingly, the dissent in Graev was written by Judge Gustafson. No comment. Just interesting.) The tone of Laidlaw’s Harley Davidson seems, therefore, to suggest a tipping of the scales ever so slightly towards the taxpayers with regard to the prior written approval requirement of IRC § 6751(b)(1). Time will tell.
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