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Minemyer v. Commissioner (T.C. Memo. 2020-99)

On July 1, 2020, the Tax Court issued a Memorandum Opinion in the case of Minemyer v. Commissioner (T.C. Memo. 2020-99). The basic, threshold issue before the court in Minemyer was whether petitioner is liable for a fraud penalty pursuant to IRC § 6663(a) for tax year 2001.

Petitioner is Not a Good Taxpayer

One week prior to Tax Day in 2008, the Government filed a two-count indictment against the petitioner in U.S. District Court related to “alleged” income tax evasion under IRC § 7201. The indictment accused the petitioner of filing “false” and “fraudulent” income tax returns for 2000 and 2001, and it alleged he had knowingly omitting passthrough income which created a substantial understatement of income. The petitioner eventually pleaded guilty to income tax evasion for 2000.

Pursuant to the plea agreement, the petitioner pleaded guilty to count 1 (2000) and count 2 (2001) was dismissed. Petitioner paid the IRS $200,918 in restitution and he was sentenced to prison. Whilst in the hoosegow, the petitioner received a friendly visit from a revenue agent who handed him a Form 4549 (Notice of Income Tax Changes) for 2000 and 2001. The petitioner signed the Form 4549 agreeing to the deficiencies and penalties, but he later requested that the agreement be withdrawn, which request the IRS granted.

Prior Written Supervisory Approval – the Sine Qua Non of Penalties

The IRS bears the burden of production under IRC § 7491(c) with respect to the civil fraud penalty. Critically, as to this burden, the IRS must introduce sufficient evidence to establish with the prior supervisory approval requirement of IRC § 6751(b)(1). See Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). No penalty contained in the Code (except computational penalties and failures to file, pay, or pay estimated tax) may be validly assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or a higher level official, like a manager. IRC § 6751(b)(1). This provision requires approval before the penalty determination is communicated to the taxpayer. Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 84, 89 (2019).

Let’s break this down a bit, because the small section is packed with meaning. An “initial determination” occurs no later than when the proposed adjustments are “communicated to the taxpayer formally.” Clay v. Commissioner, 152 T.C. 223, 249 (2019). As we’ll see, the key here is the word formally. The initial determination will generally be a part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals. Id.

In early January 2020, the Tax Court further concluded that the “initial determination” of the penalty assessment is embodied in the document by which Exam “formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.” Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, *25-*26 (Jan. 6, 2020). Again, the emphasis is on the nature of the communication (written, formal) and the content of the notice (clear, unambiguous language that penalties will unquestionably be assessed).

A day after Belair Woods, LLC was decided, the Tax Court issued another full opinion in the case of Frost v. Commissioner, 154 T.C. No. 2, *21-*22 (Jan. 7, 2020), which discussed the burden shifting mechanisms with regard to IRC § 6751(b)(1). If the IRS is able to produce evidence of written approval of a penalty before a formal communication of the penalty to the, then it has carried its initial burden of production under IRC § 7491(c). The Tax Court in Frost alluded to the very situation which is presented in the present case of Minemyer, that is, the potential argument by the petitioner that, although approval was received for a communication, there was a prior communication which was formal and set out the IRS’s penalty determination. See Frost, 154 T.C. No. 2 at *23.

In Minemyer, when the RA visited petitioner in prison, he gave petitioner a Form 4549, which petitioner signed, agreeing to the fraud penalty for 2001. The Tax Court found that this statement is an acknowledgment that the Form 4549 communicated an intention to impose a penalty. The IRS, however, failed to introduce Form 4549 into evidence. Whether this was intentional, because Counsel thought that it would scuttle their case or not, the Tax Court held that without the Form 4549, it could not determine whether that form clearly reflected the RA’s conclusion that petitioner should be subject to a penalty. See Carter v. Commissioner, T.C. Memo. 2020-21 at *30.

If the Form 4549 was the initial determination of the fraud penalty for 2001, the IRS offered no evidence of its timely written approval. Accordingly, the Tax Court concluded that the IRS failed to meet its burden of production for the determination of the IRC § 6663(a) fraud penalty for 2001.

(T.C. Memo. 2020-99) Minemyer v. Commissioner

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