149 T.C. 23
Tax Ct.2017Background
- Petitioners Lawrence and Lorna Graev claimed large cash and noncash charitable deductions on their 2004 returns and carryovers to 2005; IRS disallowed both and issued a notice of deficiency for 2004 and 2005.
- Revenue Agent proposed disallowance and sought 40% gross valuation-misstatement penalties under I.R.C. §6662(h); his supervisor approved that proposal.
- Office of Chief Counsel attorney Gerard Mackey reviewed the proposed notice and recommended as an alternative that 20% accuracy-related penalties under §6662(a) be asserted; his immediate supervisor (Associate Area Counsel Baxer) initialed approval. Technical Services incorporated that recommendation into the notice.
- After litigation began, respondent conceded the 40% penalties, amended the answer to assert 20% accuracy-related penalties as to both the noncash and (for the first time) the cash contribution disallowances; the amended-answer penalties were approved in writing by the appropriate supervisor.
- The Tax Court (after vacating an earlier ruling in light of the Second Circuit’s Chai decision) held that compliance with §6751(b)(1) is properly considered in a deficiency proceeding, that compliance is part of the Commissioner’s burden of production under §7491(c), and that respondent satisfied §6751(b) for the 20% accuracy-related penalties at issue.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Is a taxpayer’s challenge to §6751(b)(1) compliance premature in a preassessment deficiency case? | Graev: Yes—§6751(b) focuses on "assessment" and is not ripe until assessment occurs. | IRS: No—Chai requires written approval by the time a penalty is asserted in a notice or in pleadings; Tax Court may review compliance. | Court: Consideration is proper in deficiency proceedings; Graev II reversed in part. |
| 2. Is proof of compliance with §6751(b)(1) part of the Commissioner’s burden of production under §7491(c)? | Graev: Commissioner need not prove preassessment approval in this forum. | IRS: Commissioner must produce evidence that supervisory written approval occurred. | Court: Compliance is part of Commissioner’s burden of production under §7491(c). |
| 3. Can an Office of Chief Counsel attorney’s recommendation constitute the "initial determination" requiring supervisory written approval under §6751(b)(1)? | Graev: No—Chief Counsel only advises; only an IRS official with authority to determine/issue notices can make the initial determination. | IRS: Yes—an initial determination is the first person who proposes asserting the penalty (including Counsel); that recommendation was approved in writing by his supervisor. | Court: An Area Counsel attorney’s recommendation that a penalty be asserted can be the initial determination; Mackey’s recommendation was the initial determination and was approved in writing. |
| 4. Did respondent satisfy §6751(b)(1) for the 20% accuracy-related penalties (noncash alternative and cash penalties)? | Graev: Approval of Counsel’s memorandum is insufficient because Counsel lacked authority to determine; amended answer penalties are invalid without proper approval. | IRS: Counsel (Mackey) made the initial determination for the alternative noncash penalties and was approved; Shawna Early made the initial determination for cash penalties and her supervisor approved the amendment. | Court: Respondent met §6751(b) for both the alternative noncash penalties and the cash-penalty theory; 20% accuracy-related penalties sustained. |
Key Cases Cited
- Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (held §6751(b)(1) written approval is an element of a penalty claim and must be in place by the time a penalty is asserted in a notice of deficiency or in pleadings)
- Graev v. Commissioner, 140 T.C. 377 (T.C. 2013) (Tax Court decision rejecting the Graevs’ substantive deduction claims; background on contributions)
- Higbee v. Commissioner, 116 T.C. 438 (T.C. 2001) (explains Commissioner’s burden of production for penalties under §7491(c))
- Golsen v. Commissioner, 54 T.C. 742 (T.C. 1970) (describes rule that Tax Court follows the controlling court of appeals for cases appealable to that circuit)