Jesus R. Oropeza & Fabiola Anaya Oropeza v. Commissioner
2020 T.C. Memo. 111
Tax Ct.2020Background
- Petitioners are taxpayers whose husband was sole shareholder of FIRM, a micro-captive S-corporation; IRS examined their 2011 and 2012 returns.
- On Nov. 20, 2015 the revenue agent issued a Letter 5153 with an attached RAR proposing adjustments for 2012 and asserting a 40% accuracy-related penalty under I.R.C. §6662(i) (nondisclosed noneconomic substance transaction); the RAR did not assert any 20% alternative penalty there.
- Petitioners declined to sign Form 872 (no extension) and did not agree to the RAR; the RA closed the case on Dec. 4, 2015.
- Group Manager Pimentel signed a Civil Penalty Approval Form on Dec. 9, 2015 approving 20% penalties for negligence/substantial understatement but not approving any 40% penalty.
- A memorandum recommending assertion of the 40% penalty was digitally signed by Pimentel on Jan. 28, 2016; the IRS issued a notice of deficiency on Feb. 9, 2016 determining a deficiency and a 40% penalty and listing two alternative 20% penalties communicated to petitioners for the first time in that notice.
- Petitioners timely petitioned the Tax Court; parties cross-moved for partial summary judgment limited to whether supervisory written approval was timely under I.R.C. §6751(b)(1).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the IRS obtained timely written supervisory approval under §6751(b)(1) for the 40% penalty asserted in the RAR/Letter 5153 (Nov. 20, 2015) | Orozpeza: No written supervisory approval existed on or before Nov. 20, 2015, so the 40% penalty is invalid | Commissioner: Approval need not predate Letter 5153; approval signed Dec. 9, 2015 and Pimentel later recommended 40% | Court: Denied — approval for 40% was untimely because the Letter 5153/RAR constituted the initial determination and required supervisor approval by Nov. 20, 2015; approval came later and did not authorize 40% |
| Whether the IRS obtained timely written supervisory approval under §6751(b)(1) for the 20% alternative penalties first asserted in the notice of deficiency (Feb. 9, 2016) | Orozpeza: Approval was defective (signature placement, lack of meaningful review) so penalties are invalid | Commissioner: Civil Penalty Approval Form was signed Dec. 9, 2015 by the immediate supervisor; that timing satisfies §6751(b)(1) for penalties first asserted Feb. 9, 2016 | Court: Granted — approval for the 20% negligence/substantial-understatement penalties was timely and valid; signature on page one sufficed and §6751(b)(1) requires only written personal approval by the immediate supervisor |
Key Cases Cited
- Belair Woods, LLC v. Commissioner, 154 T.C. __ (Tax Ct. 2020) (initial penalty determination embodied in letter completing Examination Division work)
- FPL Group, Inc. & Subs. v. Commissioner, 116 T.C. 73 (Tax Ct. 2001) (purpose and standard for summary judgment in Tax Court)
- Sundstrand Corp. v. Commissioner, 98 T.C. 518 (Tax Ct. 1992) (summary judgment standard; construe facts for nonmovant)
- Higbee v. Commissioner, 116 T.C. 438 (Tax Ct. 2001) (Commissioner’s burden of production for penalties under I.R.C. §7491(c))
- Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (Commissioner must establish compliance with §6751(b)(1) as part of burden of production)
- Graev v. Commissioner, 149 T.C. 485 (Tax Ct. 2017) (section 6751(b)(1) enforcement and burden of production)