On July 21, 2020, the Tax Court issued a Memorandum Opinion in the case of Oropeza v. Commissioner (T.C. Memo. 2020-111). The primary issue before the court in Oropeza was whether IRS secured timely written supervisory approval, as required by IRC § 6751(b)(1), for three penalties determined in the notice of deficiency for petitioners’ 2012 tax year.
The Initial Determination
In November 2015, the IRS sent petitioners a Letter 5153 with an attached Form 4549-A (Income Tax Discrepancy Adjustments or Revenue Agent’s Report (RAR)). The RAR proposed to increase by $1,070,200 petitioner husband’s distributive share of his company’s income. In a schedule captioned “Accuracy-Related Penalties under IRC § 6662(a),” the RAR asserted a 40% penalty attributable to one or more of the following: (1) a gross valuation misstatement, (2) a non-disclosed transaction lacking economic substance, and (3) undisclosed foreign financial assets. See IRC § 6662(h); IRC § 6662(i); IRC § 6662(j).
The Letter 5153 gave petitioners three options: (1) agree to the adjustments in the RAR, (2) execute a Form 872 (Consent to Extend the Time to Assess Tax) if they wished to have the IRS Office of Appeals (Appeals) review the case, or (3) decline the first two options, in which case the IRS would issue them a notice of deficiency reflecting the adjustments in the RAR, enabling them to petition this Court for redetermination of the deficiency and penalty.
No Supervisory Approval for Initial Determination
The IRS has the initial burden of production in any court proceeding with respect to the liability of any individual for any penalty. IRC § 7491(c). This burden requires the IRS to come forward with sufficient evidence indicating that imposition of a penalty is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The IRS’s burden of production under IRC § 7491(c) includes establishing compliance with IRC § 6751(b)(1). See Chai v. Commissioner, 851 F.3d 190, 217, 221-222 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42; Graev v. Commissioner, 149 T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460 (2016).
IRC § 6751(b)(1) provides that no penalty under this title (except computational penalties, failure to file, pay, or deposit estimated tax payments) shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination. In Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, *23 (Jan. 6, 2020), the Tax Court held that the “initial determination” of a penalty assessment is typically embodied in a letter by which the IRS formally notifies the taxpayer that Exam has completed its work and has made a definite decision to assert penalties.
Here, the IRS’ determination to assert the 40% penalty was first communicated to petitioners in the Letter 5153 and the accompanying RAR. The Letter 5153 gave petitioners three options: accept the adjustments set forth in the RAR, sign a Form 872 and go to Appeals, or receive a notice of deficiency. This letter made clear that Exam had concluded its work and “had made a definite decision to assert penalties.” Belair Woods, 154 T.C. No. 1 at *23.
The IRS sought to distinguish this case from Belair Woods, noting that the taxpayer there received a 60-day letter enabling it to go to Appeals, whereas petitioners did not receive a 30-day letter enabling them to do so. The Tax Court found this to be a distinction without a difference. A 30- or 60-day letter is one way of communicating to a taxpayer that Exam has concluded its work. But it is not the only way. The Letter 5153 clearly communicated the same message to petitioners: It told them that they could now go to Appeals, but only if they first executed a Form 872 that would give Appeals enough time to consider their case.
The Tax Court accordingly concluded that the IRS was required to secure supervisory approval pursuant to IRC § 6751(b)(1) for the 40% penalty prior to sending the Letter 5153.Add to favorites