Courts are likely to continue examining a requirement that IRS employees get their boss to OK penalty decisions before they are presented to taxpayers, even after the U.S. Tax Court issued a recent string of opinions addressing the issue.
The Tax Court’s 2017 ruling in Graev v. Commissioner interpreted tax code Section 6751(b) as requiring the IRS to obtain supervisory approval in a tax deficiency case by the time it imposes related tax penalties.
Since January, the Tax Court has grappled with multiple aspects of the requirement, trying to establish the exact point in the process when the requirement must be met and which penalties need approval. But recent wins for the agency on large penalty amounts are likely to be appealed and the approval issue is expected to continue to come up in new cases.
Frank Agostino, who represented the petitioners in Graev, told Bloomberg Tax his firm is working on more cases at the Tax Court tied to the approval requirement. Agostino mentioned three specific cases his firm is litigating before the Tax Court, including Grajales v. Commisoner, which questions whether the penalty for taking early withdrawals from qualified retirement plans is subject to Section 6751(b) approval requirements.
“Everyday we find another issue,” said Agostino, founder and president of Agostino & Associates P.C. in Hackensack, N.J.
The court’s interpretation of these issues is significant for the IRS because it can lose out on penalties if judges rule the agency failed to get approval when it should have or got approval too late in the process. The IRS collected billions in accuracy-related penalties from individuals, estates, and trusts in fiscal 2018, according to the IRS’s most recent databook.
Appeals on Divisive Issue
Potential appeals of two recent decisions involving the same legal question—what constitutes an “initial determination” when it comes to assessing whether the IRS got supervisory approval on time—may be the most closely watched going forward.
Eight Tax Court judges signed onto the lead opinion in January 6’s Belair Woods, LLC v. Commissioner, holding that the initial determination occurs when the IRS “formally” notifies a taxpayer of its decision to impose penalties.
But the remaining eight judges disagreed either with the concrete outcome in the case or on whether the initial determination is always the first formal communication of the penalty decision—in this case marked by a 60-day letter informing a partnership of its right to appeal the penalty decision.
The decision from the eight lead judges in Belair was also applied in Tribune Media Co. v. Commissioner to uphold penalties against the Chicago Cubs holding company and former Cubs part-owner Tribune Media Co. In that case, Tribune was hit with a nearly $72.7 million penalty.
“My odds are that both the taxpayers in Belair Woods and Tribune Media will appeal,” said Bryan Camp, a former IRS lawyer who is now a professor at the Texas Tech School of Law.
Waiting for More
In each case, the Tax Court has further issues to resolve before the parties could appeal a final judgment.
Belair Woods LLC unsuccessfully sought an interlocutory appeal, which would have paused the Tax Court’s consideration of the remaining issues to allow for an appeal.
“Given the divided decision of the Tax Court, we think it would be appropriate for an appellate court to review the Tax Court’s decision on the 6751(b) issue and determine whether the standard established by the majority opinion is consistent with the statute and Congress’s intent,” said Michelle Abroms Levin, a shareholder at Sirote & Permutt PC, which represents Belair Woods.
An attorney at Mayer Brown LLP, which represents Tribune Media Co. and the Chicago Cubs holding company, declined to comment when asked if an appeal is planned in that case.
If appealed, Belair Woods would go to the U.S. Court of Appeals for the Eleventh Circuit, while Tribune Media would head to the Seventh Circuit.
The fact that all the judges weighed in on the Belair decision increases the chances that it will get reversed, according to T. Keith Fogg, director of the Federal Tax Clinic at the Legal Services Center of Harvard Law School.
“When you look at fully reviewed opinions that get appealed, they get reversed more than other Tax Court opinions that have also been appealed because they’re controversial—they’re close questions,” Fogg told Bloomberg Tax.
“I expect appeals in every case the taxpayers have lost involving 6751(b) where the taxpayers are represented by counsel,” said Carlton M. Smith, who formerly directed the Carodozo School of Law’s tax clinic and now is a retired volunteer at Harvard Law School’s Federal Tax Clinic.