Sand Investment Co. v. Commissioner
157 T.C. No. 11

On November 23, 2021, the Tax Court issued its opinion in Sand Investment Co. v. Commissioner, 157 T.C. No. 11. The primary issue presented in Sand Investment Co. was whether the IRS obtained prior written supervisory approval pursuant to IRC § 6751(b)(1) insofar as whether the individual who made the initial determination received approval from its immediate supervisor.

Held: Yeah…no dice, petitioner.

Dueling Determinations

Sand On TimeThe RA’s case and issue manager, Mr. Burris, signed the form on November 20, 2018, and the RA’s new team leader, Mr. Wilson, signed the form on November 23, 2018. The definite decision to assert penalties was communicated to Sand Investment Co. more than two months later, in the Final Partnership Audit Adjustment dated February 8, 2019. The IRS, thus, contends that timely approval of these penalties was secured.[1]

Sand Investment Co.
So sayeth the petitioners…

The petitioner contends that supervisory approval came too late, and its argument has two essential steps. First, the petitioner contends that the penalties were formally communicated to Sand Investment Co. on November 21, 2018, when RA Cooper transmitted a packet of documents that mentioned penalties, including a Letter 1807 and Form 5701. Second, the petitioner contends that the RA’s “immediate supervisor” at that moment was Mr. Wilson. Because Mr. Wilson did not sign the penalty approval form until November 23, 2018, the petitioner urges that his approval was untimely.

The Tax Court rejected the second step of petitioner’s argument, and as such, it did not address the merits of the first step.

Who is an “Immediate Supervisor”?

Under IRC § 6751(b)(1), the RA was required to secure timely approval of the penalties from her “immediate supervisor or such higher-level official as the Secretary may designate.” Congress did not define the term “immediate supervisor,” and that term elsewhere appears only once in the Code.[2] The IRS itself does not appear to employ the term “immediate supervisor” uniformly in its personnel practices.[3] In this respect as in others, IRC § 6751(b) is not a “paragon of statutory draftsmanship.”[4]

No truer words, Judge Lauber, no truer words…

At the relevant time the RA had two different supervisors, and they oversaw distinct aspects of her day-to-day work. Given the statutory context, which addresses approval of penalties, the relevant work is the project that generated the penalties, namely, the Sand Investment Co. examination. Because Mr. Burris supervised the RA’s work on that project, the Tax Court concluded that he was her “immediate supervisor.”

Sand Investment Co.

The legislative history confirms the Tax Court’s interpretation. Congress enacted IRC § 6751(b) “to prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.”[5] The Senate Finance Committee stated that the statute would ensure that IRS agents assert penalties “where appropriate” but “not as a bargaining chip” during settlement negotiations.[6] Congress evidently concluded that, in the absence of a higher level officer designated by the IRS, an IRS agent’s “immediate supervisor” was in the best position to review the appropriateness of a penalty.

Given this legislative purpose, an agent’s “immediate supervisor” is most logically viewed as the person who supervises the agent’s substantive work on an examination. That person (after the agent) presumably has the greatest familiarity with the facts and legal issues presented by the case. That person is thus in the best position to supply the approval that Congress believed desirable.

For this case Mr. Burris was best situated to carry out Congress’ mandate. He was the “case manager” and the “issue manager” for the Sand Investment Co. examination, and as such he supervised all aspects of the RA’s work on that case from beginning to end.[7] His supervisory role included overseeing “the development of all penalty issues.”[8] Indeed, the IRM provides that, “for LB&I cases, the issue manager must approve penalties in writing” because, “for purposes of IRC 6751(b)(1), he is the immediate supervisor.”[9]

(157 T.C. No. 11) Sand Investment Co. v. Commissioner


[1] See Frost v. Commissioner, 154 T.C. 23, 35 (2020); Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).

[2] See IRC § 7521(c).

[3] See, e.g., IRM pt. (referring to an examiner’s “issue manager” as the immediate supervisor); IRM pt. (referring to an examiner’s “team manager” as the immediate supervisor); IRM pt. (referring to an examiner’s “immediate manager”).

[4] Cf. Belair Woods, 154 T.C. at 7 (describing the phrase “initial determination of an assessment” as a “hapax legomenon”).

[5] Chai v. Commissioner, 851 F.3d 190, 219 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42.

[6] See S. Rept. No. 105-174, at 65 (1998).

[7] See IRM pt.; IRM pt.

[8] See IRM pt.

[9] IRM pt.; see IRM pt.; IRM pt. (providing that the “case manager and issue manager must be actively involved with the development of all penalty issues” and that the “case manager and the issue manager must approve any penalty asserted”).

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