Graev v. Comm'r
Opinion
Decision will be entered under.
Ps claimed on their 2004 income tax return a charitable contribution deduction for the donation of a facade easement to NAT and claimed on their 2005 return a carryover of a portion of that deduction. R's examining agent determined to disallow Ps' claimed charitable contribution deductions and also determined that Ps were liable for the 40% gross valuation misstatement penalty under
Ps contend that R failed to comply with the requirements of
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Decision will be entered under.
Ps claimed on their 2004 income tax return a charitable contribution deduction for the donation of a facade easement to NAT and claimed on their 2005 return a carryover of a portion of that deduction. R's examining agent determined to disallow Ps' claimed charitable contribution deductions and also determined that Ps were liable for the 40% gross valuation misstatement penalty under
Ps contend that R failed to comply with the requirements of
THORNTON,
Mr. and Mrs. Graev petitioned this Court, pursuant to
Now we must decide whether the Graevs are liable for the 20% penalty. This inquiry involves threshold issues as to whether respondent failed to include a computation of the 20% penalty in the notice of deficiency, as required by
The parties submitted the penalty issues fully stipulated pursuant to
In 1999 Mr. Graev purchased property in a historic preservation district in New York, New York, for $4.3 million. The property is listed on the National Register of Historic Places. On December 17, 2004, Mr. Graev executed documents donating a facade conservation easement to NAT. Petitioners received an extension of time to file their 2004 Federal income tax return until October 15, 2005; in their timely filed 2004 Form 1040, U.S. Individual Income Tax Return, petitioners claimed a charitable contribution deduction for this easement donation.
In the summer of 2004 a representative from NAT contacted Mr. Graev regarding a potential*36 easement donation to NAT. Mr. Graev became aware that he had a neighbor who had contributed a facade easement to NAT and who had received from NAT a "side letter" that promised return of contributions if deductions were disallowed. Mr. Graev evidently expressed to NAT an interest in making an easement contribution like his neighbor's, but on September 15, 2004, he sent an email to NAT explaining a concern that had arisen: My accountants have referred me to
In response to Mr. Graev's concerns, NAT sent him an email dated September 16, 2004, stating: The IRS notices to which you refer were prompted by recently exposed improprieties at the Nature Conservancy, the nation's largest land conservation easement holding organization. The practice the IRS is concerned with here is when a non-profit acquires property, puts an easement on it and sells it for a reduced price plus a tax deductible charitable contribution. * * * It is important to distinguish between these activities, which certainly warrant scrutiny, and those engaged in by the National Architectural Trust. * * * We have been in contact with the IRS since the notices were issued and, based upon our discussion with them, have no reason to expect that we or any of the donations we have received (easement*38 or cash) will be reviewed. Thus far not a single donation made to the Trust has been disallowed by the IRS (400 + in New York City alone). * * * Our attorneys at Venable in Washington DC have analyzed the form and substance of cash donations made to us in connection with facade conservation easement donations and have concluded that they met the tests that would qualify them as tax-deductible. * * * I would be glad to fax you a copy of this opinion letter should you wish to read it. With respect to the side letter, we don't believe they compromise the tax-deductibility of cash donations in the present tax year * * *. However, we do not believe this would be the case with a legal agreement that explicitly made the cash donation contingent on the survival of the deduction.
On September 20, 2004, Mr. Graev executed a facade conservation easement application to NAT, stating on its cover that "[he] will also be looking for the NAT to issue the 'side' letter we discussed (similar to the one being*39 issued to my neighbor across the street)". On the bottom of the first page of the application, NAT italicized the last sentence: "The National Architectural Trust recommends that you seek professional advice to assess the specific legal and tax considerations of making your easement donation."
An internal email message dated September 23, 2004, from a NAT representative to NAT's president, indicated that a representative had "discussed with * * * [Mr. Graev the] potential deductibility issues related to placing any contingencies on the cash donation. * * * [Mr. Graev] understands the risk and would like to receive the * * * [side letter]." The side letter was sent on September 24, 2004. In pertinent part, it read: 1. In the event the IRS challenges the appraisal of your facade conservation easement and the tax deductions derived therefrom are reduced as a result, we will make a proportionate reduction to your cash endowment contribution and promptly refund the difference to you. 2. In the event the IRS disallows the tax deductions in their entirety, we will promptly refund your entire cash endowment contribution and join with you to immediately remove the facade conservation*40 easement from the property's title.
On October 13, 2004, NAT sent to Mr. Graev a letter notifying him that his facade conservation easement application had been approved. It was accompanied by a draft deed of easement; NAT encouraged him to review it and "speak to * * * [his] tax and legal advisors * * * about * * * [his] facade conservation easement donation and the related tax advantages." The letter encouraged those tax and legal advisers to contact NAT if there were any questions or concerns. Nothing in the record indicates that, as a result of this letter, Mr. Graev sought advice regarding the "tax advantages" of the facade conservation easement donation.
Mr. Graev apparently sought legal counsel from Charles Weiss regarding the deed of easement. But the only communication in the record involving Mr. Weiss is a single fax on December 2, 2004, from Mr. Weiss to NAT. The fax asked that Mr. Weiss' suggested revisions to*41 the deed of easement be incorporated and that the resulting version be returned for his review. NAT accordingly incorporated those "changes desired by * * * [Mr. Graev] and worked out by * * * [Mr. Weiss and NAT]." The final version included a clause stating that "nothing herein contained shall be construed to limit * * * [NAT's] right to * * * abandon some or all of its rights hereunder".
On December 17, 2004, Mr. Graev sent to NAT the final documentation to complete his grant of a facade conservation easement to NAT. And on January 25, 2005, NAT sent Mr. Graev a letter thanking him for his conservation easement and cash contribution "made in 2004"; "certif[ying] that * * * [petitioners] have received no goods or services in return for * * * [their] gifts"; and purporting to attach a copy of the executed Form 8283, Noncash Charitable Contributions, to be included with petitioners' 2004 Form 1040.
On January 25, 2005, NAT sent Mr. Graev a second letter, again thanking him for his facade conservation easement. Substantively, however, the letter was cautionary: It was sent in response to a December 17, 2004, press release from the Senate Committee on Finance, indicating that the Internal Revenue Service*42 (IRS) Commissioner would be called upon "to make review of facade easements a priority for audit." The letter quoted the press release as stating: The public is on notice that those increased and additional penalties [for promoting, participating in, or appraising facade conservation easements that are found to be significantly overvalued], as well as the possible reforms [in the current law regarding donation of facade easements that would limit the amount that could be deducted], will be effective today.
On February 1, 2005, NAT sent its donors notice that on January 27, 2005, the Joint Committee on Taxation had issued a 435-page report titled "Options to Improve Tax Compliance and Reform Tax Expenditures", proposing to eliminate[] the charitable contribution deduction with respect to facade and conservation easements relating to personal residence properties, substantially reduce[] the deduction for all other*43 qualified conservation contributions, and impose[] new standards on appraisals and appraisers regarding the valuation of such contributions. * * * The proposal is effective for contributions made in taxable years beginning after the date of enactment. [Staff of J. Comm. on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures 281, 284 (J. Comm. Print 2005).]
On August 8, 2005, an internal email was sent to several NAT employees with respect to side letters such as the one provided to Mr. Graev. It stated: As you may be aware, our attorneys have informed us that by telling our donors*44 that their cash contributions would be refunded in whole or in part if their tax deduction for the easement were reduced or disallowed by the Internal Revenue Service and/or an act of Congress we may have inadvertently adversely impacted the tax deductibility of their cash contribution. We have made this statement to some donors in a comfort letter and/or in the 2005 expedited processing addendum. * * * [W]e would like to send all letters [to the affected donors discussing this issue] out by Federal Express before the end of this week. In connection with your donation of a facade conservation easement and cash contribution and per your request, we sent you a letter dated September 24, 2004, stating, among other things, that the cash contribution would be refunded in whole or in part if your tax deduction for the easement were reduced or disallowed by the Internal Revenue Service. It has recently been brought to our attention by our attorney that this*45 offer of a refund may adversely affect the deductibility of the cash contribution as a charitable gift. The attorney has also advised that the offer of a refund should not impact the deductibility of your facade conservation easement donation. We urge you to contact your professional tax advisor to determine the actual impact of the refund offer. * * * [I]f you * * * prefer that we withdraw the refund offer, which according to our attorney should restore the deductibility of your cash contribution, the Trust will promptly do so.
On October 15, 2004, Miller Samuel, Inc., issued its appraisal report. The report was completed by Dina Miller; Jonathan Miller signed it as supervisor and checked the box indicating that he did not inspect the property. The appraisal report states: "The discussion provided herein is for general background, and the client must not rely on this addendum without seeking legal counsel for advice and updated information*46 in these matters." It discusses generally
A certified public accountant (C.P.A.), Jerry Lerman, prepared petitioners' 2004 and 2005 joint tax returns. Petitioners had used Mr. Lerman's services since at least 1999, and he and Mr. Graev often spoke about tax matters. At some point, Mr. Graev had approached Mr. Lerman and asked generally about facade conservation contributions. After consulting the Code, the regulations, and various articles regarding the substantiation requirements for noncash charitable contributions over $5,000, Mr. Lerman "informed Mr. Graev that such donations were legitimate but were 'high visibility transactions' to the * * * [IRS]" and "provided Mr. Graev*47 with then-applicable case law."3
The parties have stipulated that, in connection with preparing petitioners' 2004 Form 1040, Mr. Graev provided Mr. Lerman the following documents, among other items: (1) a copy of the executed Conservation Deed of Easement; (2) an executed Form NYC RPT-Real Property Transfer Tax Return; (3) an executed Department of Environmental Protection Customer Registration Form for Water and Sewer Billing; (4) an executed Form TP-584, Combined Real Estate Transfer Tax Return; (5) an executed National Park Service Historic Preservation Certification Application; (6) a Residential Appraisal Report from Miller Samuel, Inc.; and (7) an executed Form 8283, Noncash Charitable Contributions, evidencing the contributions, signed by NAT and Miller Samuel, Inc.4*48
According to his declaration, Mr. Lerman reviewed the documents listed above (except for the water and sewer billing registration form) to "ensure they were complete and that they satisfied the substantiation requirements for claiming the charitable contribution deduction as * * * [he] understood them."5 And he "was comfortable that * * * [he] had the documentation necessary to substantiate Mr. Graev's charitable deduction for the cash and the facade conservation easement contributions. * * * [He] was also comfortable that the documentation with respect to each deduction met IRS requirements."6 Mr. Lerman "would not have prepared Mr. Graev's 2004 and 2005 Forms 1040 if * * * [he] did not believe Mr. Graev was entitled to claim the charitable contribution deduction * * * for his facade easement donation to the Trust."
Petitioners' 2004 Form 1040, which petitioners signed on October 10, 2005,*49 included charitable contribution deductions for the cash and the facade easement given to NAT. Because of the limitations on charitable contribution deductions in
According to Mr. Graev's declaration, petitioners "relied on Mr. Lerman's judgment as to the propriety of claiming charitable deductions for the contribution of the conservation easement and the cash donation".
Internal Revenue Agent Stephen Feld examined the Graevs' 2004 and 2005 tax returns, and sometime in 2008 he concluded that the charitable contribution deductions should be disallowed. He also concluded that the 40% penalty should be asserted. Agent Feld prepared the appropriate "Penalty Approval Form" for the proposed 40% gross valuation misstatement penalty of
Mr. Feld's immediate supervisor, John Post, approved the "Penalty Approval Form" as Mr. Feld had prepared it, in compliance with
Mr. Feld prepared a proposed notice of deficiency determining the 40% penalty under
Mr. Feld's proposed notice of deficiency was referred to the Office of Chief Counsel for review, pursuant to We have reviewed the proposed notice of deficiency*51 for the named taxpayer and approve it as drafted except as noted below. * * * Please You are liable for the accuracy-related penalty imposed under [Emphasis added.]
There is no indication that anyone in IRS Examination resisted the Office of Chief Counsel's advice to assert the alternative 20% accuracy-related penalties against the Graevs. Rather, Mr. Feld revised the notice of deficiency to include the alternative penalties. The parties stipulate, however, that*52 Mr. Post did not approve the alternative penalties in writing.
On September 22, 2008, respondent issued a statutory notice of deficiency, revised as proposed by Mr. Mackey, that disallowed the Graevs' cash and noncash charitable contribution deductions relating to their contributions to NAT and determined deficiencies in tax and penalties for both 2004 and 2005. The notice included a text sentence originally proposed by Mr. Mackey and approved by Mr. Baxer that stated: "Alternatively, you are liable for the 20 percent accuracy-related penalty imposed under
For each of the two years, the notice of deficiency included a page on which the
Mr. and Mrs. Graev timely filed their petition in this Court on December 19, 2008. At that time, they resided in the State of New York. The petition alleges that respondent erred in disallowing the charitable contribution deductions, "erred in determining that Petitioners are liable for the 40% accuracy-related penalty under
We resolved the charitable contribution deduction issue in
In their motion for partial summary judgment, filed April 14, 2014, the Graevs raised, for the first time, the issue of respondent's compliance with
Before considering the merits of the 20% accuracy-related penalties determined against the Graevs, we first address threshold issues they have raised involving*55 the procedural requirements of
The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty.
We disagree. The 20% and 40% penalties of
Moreover, even if petitioners were correct that the IRS failed to include a computation of a penalty as required by
Petitioners contend that the 20% penalty may not be assessed against them for either year at issue because respondent failed to comply with
Respondent makes four distinct and independent counterarguments. First: "
In
For the reasons discussed below, we agree with respondent that any argument that the IRS has failed to satisfy the requirements of
We start, as we must, with the language of the statute. (1) In general.--No penalty under this title shall be assessed unless the initial determination of such*61 assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.
An "assessment" is "the formal recording of a taxpayer's tax liability" on the IRS' records.12*63
Petitioners take a different view, asserting on brief: "The plain language of
Seeming to recognize that petitioners' statutory construction*64 is unsustainable, the dissent advances a possibly more elastic but no less problematic construction, concluding that "[s]upervisory approval must accompany the penalty determination."14*65 See dissenting op. p. 80. The only textual support in
In fact, the statute's provision for approval by a "higher level official" reinforces the conclusion that the statute imposes no deadline for the requisite approval before the date of assessment. Nothing in the statute requires the Secretary to make this designation at any particular time; it need occur only in time for the newly designated official to provide the requisite written approval before the assessment is made.17*69 And in allowing for the possibility of written approval by officials to be designated by the Secretary at some indefinite time in the future, the statute clearly contemplates that the written approval is not required "by the time of the initial determination", as petitioners contend, or at any other particular time before the assessment is made.
Petitioners point to the IRS' current administrative practice, which apparently requires the supervisor's approval to be noted on the form reflecting the agent's assertion,
We find further textual support for this conclusion in the effective date of
As it relates to
Consequently, under petitioners' and the dissent's reading of the statute, the IRS could have been subject, retroactively, to a requirement to obtain written approval as of a time before the requirement had even come into existence. And even in the case of an initial determination made after the date of enactment of
Under petitioners' and the dissent's reading of the statute, then, the IRS would have been effectively constrained to treat any "initial determination" after July 22, 1998, as being presumptively subject to the new requirements*75 of
Another anomalous result of petitioners' and the dissent's reading of the statute would be to render the six-month postponement of the effective date, as described
The sparse legislative history of
Having concluded that the notice of deficiency complied with
Given respondent's concession of the 40% valuation misstatement penalty under
In the notice of deficiency, respondent determined deficiencies of $237,481 and $412,620 for 2004 and 2005, respectively. In
The burden of proof is thus on petitioners to show that they are not liable for the penalty because of reasonable cause, substantial authority, or adequate disclosure grounded in a reasonable*80 basis.
Petitioners argue that they are not liable for the 20% accuracy-related penalty because they had reasonable cause for claiming the charitable contribution deductions and they acted in good faith.
In general the accuracy-related penalty does not apply to any portion of an underpayment of tax if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith.
In determining whether a taxpayer reasonably relied on professional advice for this purpose, we apply a three-prong test which asks whether: (1) the adviser was a competent professional who had sufficient experience to justify the reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser's judgment.
Petitioners argue that they reasonably relied on their C.P.A., Mr. Lerman, to prepare their returns for the years at issue and that this reliance constitutes reasonable cause and good faith. Their argument fails for two reasons. First, there is no credible evidence in the record that petitioners provided Mr. Lerman either the side letter or the information contained in the side letter. Second, the record provides no credible evidence of Mr. Lerman's advice to petitioners with respect to the side letter's effect on their claimed cash and conservation easement deductions.26 We discuss these conclusions in more detail below.*82
Although preparation of a taxpayer's return by a C.P.A. does not provide absolute protection against substantial understatement or negligence penalties, in some circumstances a taxpayer's reliance on a competent and experienced accountant in the preparation of the taxpayer's return may constitute reasonable cause and good faith. To show good faith reliance, however, "the taxpayer must establish that the return preparer was supplied with all necessary information and the incorrect return was a result of the preparer's mistakes."
The parties stipulated that in connection with preparing the Graevs' 2004 Form 1040, Mr. Graev provided to Mr. Lerman:
(1) a copy of the executed Conservation Deed of Easement;
(2) an executed Form NYC RPT-Real*83 Property Transfer Tax Return;
(3) an executed Department of Environmental Protection Customer Registration Form for Water and Sewer Billing;
(4) an executed Form TP-584, Combined Real Estate Transfer Tax Return;
(5) an executed National Park Service Historic Preservation Certification Application;
(6) a Residential Appraisal Report from Miller Samuel, Inc.; and
(7) an executed Form 8283 evidencing the contributions, signed by the Trust and Miller Samuel, Inc.
Mr. Graev and Mr. Lerman also submitted declarations listing these documents as having been provided to Mr. Lerman. None of these lists mentions the side letter or its contents.
As the Court held in
Petitioners ask us to infer that the document was provided or the information was conveyed because the evidence indicates that Mr. Graev and Mr. Lerman often spoke by telephone or in person and because, as stated in his declaration, Mr. Lerman "would not have prepared Mr. Graev's 2004 and 2005 Forms 1040 if * * * [he] did not believe Mr. Graev was entitled to claim the charitable contribution deduction * * * for his facade easement donation to the Trust"; Mr. Lerman "reviewed the[se] documents * * * to ensure they were complete and that they satisfied the substantiation requirements for claiming the charitable contribution deduction as * * * [he] understood them" and was "comfortable that * * * [he] had the documentation necessary to substantiate * * * [petitioners'] charitable deduction[s]".
We find petitioners' argument unpersuasive. The side letter was central to the Court's analysis and holding in
The record contains evidence of Mr. Graev's discussing the side letter with various NAT personnel. On September 15, 2004, Mr. Graev sent NAT an email27 asking about their "thoughts especially as it relates to the side letter". After he later communicated to NAT that he "underst[ood] the risk", NAT sent him a side letter agreeing to "refund your entire cash endowment contribution and join with you to immediately*86 remove the facade conservation easement from the property's title." And on August 8, 2005--a few weeks before petitioners filed their 2004 income tax return--NAT sent Mr. Graev a letter offering to withdraw the side letter, "which according to our attorney should restore the deductibility of your cash contribution". Mr. Graev did not, of course, take NAT up on its offer to withdraw the side letter.28
There is no evidence that Mr. Lerman, upon whose advice petitioners allegedly relied, ever discussed with them the side letter, its potential impact on the deductibility of petitioners' contribution, or NAT's offer to withdraw the letter. Petitioners have failed to establish*87 that they shared with Mr. Lerman either the side letter or its contents. We conclude that petitioners have failed to show that they provided him necessary and accurate information.
Even if we were to assume (as we do not) that petitioners provided Mr. Lerman the side letter or shared its contents with him, petitioners nevertheless have failed to establish that they relied on Mr. Lerman's advice in good faith when they reported the charitable contribution deductions.29*88
The regulations define advice as "any communication * * * setting forth the analysis or conclusion of a person, other than the taxpayer, provided to (or for the benefit of) the taxpayer and on which the taxpayer relies * * * with respect to the imposition of the
Petitioners suggest that Mr. Lerman rendered advice as evidenced by his statement that he "informed Mr. Graev that * * * [facade conservation] donations were legitimate but were 'high visibility transactions' to the Internal Revenue Service". Petitioners point to a September 15, 2004, email from Mr. Graev to NAT stating that his "accountants * * * have advised me to be very cautious" and asking NAT: "What are your thoughts especially as it relates to the side letter[?]". And Mr. Graev's declaration states that he "relied on Mr. Lerman's advice in determining the availability of the charitable contribution deduction".
Petitioners ask the Court to infer from these statements and circumstances that Mr. Graev discussed the side letter with Mr. Lerman; that Mr. Lerman's advice was a direct result of that conversation; and that Mr. Graev's email was referring to this advice.
We are unconvinced. When Mr. Graev sent his September 15, 2004, email to NAT, he had not yet submitted a facade conservation*90 easement application to NAT--he did that on September 20, 2004. And because he had not yet submitted the application, he had not received his side letter--which he received on September 24, 2004. With respect to the effect of the side letter, it is difficult to see how petitioners could have reasonably relied on a single conversation between Messrs. Graev and Lerman before the side letter came into existence. And there is no evidence of any subsequent discussion of the side letter between Mr. Graev and Mr. Lerman.
After Mr. Graev granted the facade conservation easement on December 17, 2004, and before petitioners filed their 2004 Federal income tax return, NAT sent Mr. Graev at least three letters urging him to seek professional tax advice, in response to pending legislative developments and in the light of the concerns of NAT's own lawyers about the effect of the side letter. As previously noted, in its August 8, 2005, letter NAT went so far as to offer to withdraw the refund offer to "restore the deductibility of your cash contribution." The record does not establish that petitioners sought advice from Mr. Lerman in response to any of these communications.
Petitioners have failed*91 to establish that they reasonably relied on Mr. Lerman's advice in claiming their cash and easement contribution deductions notwithstanding the side letter.
"[T]he most important factor" in determining whether taxpayers have reasonable cause for their tax treatment and whether they act in good faith "is the extent of the taxpayer[s'] effort to assess the taxpayer[s'] proper tax liability."
Although petitioners reported the charitable contributions on their 2004 and 2005 returns, they did not disclose the side letter or its contents.
Mr. Graev is an experienced attorney who has worked for prestigious law firms.31 Mr. Graev was encouraged several times to seek tax or legal counsel regarding the side letter. And it was he who insisted on the side letter. There is no evidence that he sought advice in response to NAT's encouragement.32 Mr. Graev states in his declaration that he "researched the tax consequences of side letters" and that he was aware of and relied upon the Court's holding in
Because petitioners have failed to establish that they reasonably relied on professional advice and because they have not otherwise shown that they acted in good faith to assess their proper tax liabilities, we reject their contention that they meet the reasonable cause and good faith exception under
Petitioners argue that they had substantial authority for claiming the charitable contribution deductions notwithstanding the existence of the side letter.
Only where the weight of the authorities supporting*94 the treatment is substantial in relation to the weight of the authorities supporting contrary positions does substantial authority exist for particular tax treatment.
"The standard of 'substantial authority' requires that, when the facts and authorities are analyzed with respect to the taxpayer[s'] case, the weight of the authorities that support the taxpayer[s'] position should be substantial when compared with those supporting the contrary position."
A taxpayer may have substantial authority for a position that is unlikely to prevail, as long as the weight of the authorities*95 in support of the taxpayer's position is substantial in relation to the weight of any contrary authorities. The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority. For example, a case or revenue ruling having some facts in common with the tax treatment at issue is not particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. * * *
Petitioners argue that
In on the undisputed facts of this case, it is self-evident that the risk of*96 IRS disallowance was not negligible. A substantial risk obviously arose from the IRS's then-announced intention to scrutinize charitable contribution deductions for facade easement contributions, and that risk is evident from Mr. Graev's insistence on NAT's issuing the side letter. We need not wonder how a donor or donee
In addition to this Court's Opinion in
Petitioners do not meaningfully explain why they believe this 30-year-old memorandum constitutes substantial authority for their claimed*100 charitable contribution deductions, and we do not view it as such.
Finally, petitioners cite as substantial authority
Like
Petitioners point to no other authorities upon which they relied in claiming the disputed deductions. We conclude that the authorities that support petitioners' deductions for the cash and conservation easement contributions are not substantial when weighed against the contrary authorities.
Petitioners argue in the alternative that any understatement should be reduced because they made adequate disclosure of the charitable contribution deductions and there was a reasonable basis for their tax treatment.
To satisfy the adequate disclosure standard of
Respondent asserts that petitioners failed to satisfy the adequate disclosure requirement because they did not disclose the side letter or its contents on their returns or on any other attached documents. We agree.
As discussed at length in
In suggesting that they made adequate disclosure, petitioners point to a provision of the deed of easement which states that "nothing herein contained shall be construed to limit * * * [NAT's] right to * * * abandon some or all of its rights hereunder." Petitioners suggest in their answering brief that the deed of easement was submitted with their returns but point us to nothing in the record to support this assertion; the deed of easement is*104 not included with the copies of petitioners' returns that are included in the record as stipulated exhibits. In any event, even if we were to assume for the sake of argument that the deed of easement was submitted with petitioners' returns, we disagree that it constituted adequate disclosure of the relevant facts regarding the side letter. And absent disclosure of the letter or its contents, respondent was not adequately apprised of the potential controversy regarding the tax-treatment contingency. Furthermore, even if the disclosure were adequate, petitioners could not avail themselves of this defense because, as explained below, they have failed to provide authority that could provide a reasonable basis for their return position.
Petitioners point to their interpretation of
Petitioners argue that they had a reasonable basis because on the undisputed facts of this case, it is self-evident that the risk of IRS disallowance was not negligible. A substantial risk obviously arose from the IRS's then-announced intention to scrutinize charitable contribution deductions for facade easement contributions, and that risk is evident from Mr. Graevs' insistence on NAT's issuing the side letter. We need not wonder how a donor or donee
Because we find that petitioners neither adequately disclosed the terms of the side letter nor based their return position upon a reasonable claim, petitioners cannot rely on
Ultimately, we find unpersuasive all petitioners' arguments against imposing the
To reflect the foregoing and the holding in
Reviewed by the Court.
MARVEL, FOLEY, GALE, HOLMES,*107PARIS, KERRIGAN, LAUBER, and ASHFORD,
NEGA,
I share the view that
Deciding this case on the basis that petitioners were not prejudiced allows us to leave to another case the more detailed statutory analysis performed by both the majority and the dissent. Our approach, like the majority opinion, also should not be construed as encouraging the IRS to retreat from its current administrative practices. The failure of the IRS to follow the statute or*108 its administrative practices may be challenged as an abuse of discretion in a collection action. That case is not before us.
For these reasons, I decline to join with the majority but concur in the result.
GOEKE and PUGH, JJ., agree with this concurring opinion.
GUSTAFSON, No penalty under this title 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 * * *.
The district director and the director of the regional service center shall appoint one or more assessment officers. * * * The assessment shall be made by an assessment officer
In the case of deficiencies,
Since
The IRS's notice of deficiency announces the agency's intention to
The fact that a rule is cast as a bar on "assessment" does not at all preclude pre-assessment consideration of compliance with that rule. The preeminent instance of this truism is the statute of limitation,
Notwithstanding any other provision of this title, the Secretary shall have the burden of production in Congress' intent as to the meaning of the burden of production is evident from the legislative history. The legislative history of in any court proceeding, the Secretary must initially come forward with evidence that it is appropriate to apply a particular penalty to the taxpayer before the court can impose the penalty. This provision is not intended to require the Secretary to introduce evidence of elements such as reasonable cause or substantial authority. Rather, the Secretary must come forward initially with evidence regarding the appropriateness of applying a particular penalty*115 to the taxpayer; if the taxpayer believes that, because of reasonable cause, substantial authority, or a similar provision, it is inappropriate to impose the penalty, it is the taxpayer's responsibility (and not the Secretary's obligation) to raise those issues. [H. Conf. Rept. 105-599, supra at 241, Therefore, with regard to
I would therefore hold that compliance with
In light of
The majority's holding that the
The statute can be construed only to require supervisory approval at a time when the supervisor has the ability to approve or disapprove the penalty--and no later. Although
And, of course, the supervisor lacks that authority not only when the Tax Court's decision has become final but much earlier--when the Tax Court petition is first filed. Pursuant to
An examination supervisor has authority to approve a penalty determination only when the case is under the authority of the IRS's examination function.
The language of the statute does No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual
By requiring written approval by the supervisor of the individual "making" the determination, the statute indicates that the supervisor must act when "the individual [is] making such determination." Thus, supervisory approval must accompany the "initial determination".
As originally enacted in July 1998,
The symmetry of the majority's construction of the effective date statute ("notices" for
I conclude that for a penalty determined in a notice of deficiency issued after June 2001, supervisory approval is required, and that if a penalty is not subject to deficiency procedures, then supervisory approval is required before any assessment after June 2001. Nothing in this regime suggests that supervisory approval under
As is discussed above in part I.C, the majority concludes,
If a statute is ambiguous, then we properly consult the legislative history to discern the statute's purpose.9*125 The phrase "initial
Because the statute is thus ambiguous, we may look to the legislative history to determine Congress's intent. Through its Conference Report, Congress made its intent clear: "The Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip." S. Rept. No. 105-174, at 65 (1998), No penalty under this title 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 * * *.
The majority's construction of the statute, however, would permit the examining agent to make an unapproved initial determination of the penalty, possibly to be followed (still without approval) by further administrative and even judicial proceedings, with the approval finally to be obtained only when all that is left is the ministerial act,
The majority concludes that the
There are three administrative acts related to the 20% penalty as to which we might identify a determining "individual" and a supervisor:
(1) the preparation of the Chief Counsel memorandum dated September 12, 2008, advising the 20% penalty as an alternative. The individual who drafted this advice was Attorney Mackey after his review of the proposed notice of deficiency, and it was initialed and thereby approved by his supervisor Mr. Baxer;
(2) the preparation by Revenue Agent*129 Feld of the revised notice of deficiency determining both the 40% penalty (as in the prior draft)
(3) the drafting of the amendment to answer in this case in October 2014, affirmatively pleading the alternative 20% penalty. The individual who drafted this amendment to answer was Chief Counsel Attorney Early, and her supervisor Ms. Branche initialed and approved a copy of the pleading.
Thus, two of these acts (i.e., (1) and (3)) were made by an individual (a Chief Counsel attorney) and were approved by the supervisor--and the IRS contends that one of these was the "initial determination of such [20% penalty] assessment" and that
The Commissioner's principal contention is that Chief Counsel's September 2008 memorandum (and its approval) fulfilled the requirements of
Against this contention, the Graevs argue that Agent Feld's previous
This argument has no support in the text of the statute and is rebutted by attention to the statutory phrase "of such assessment". What
However, the Graevs further contend that the Chief Counsel attorney's September 2008 memorandum advising the 20% penalty did not constitute an "initial determination" for purposes of
I disagree with this broad contention; and I note that the statute makes no requirement that the "initial determination" be made by an employee of the IRS, rather than an attorney under the Chief Counsel. Instead, the statute simply refers to "the
As the IRS has organized its functions, an audit or "examination" of a tax return is the task of examination personnel.
As described by the Department of the Treasury, the IRS is the "principal client" of the Chief Counse1.16*138 The Commissioner of Internal Revenue and the Chief Counsel are two of the few statutorily created offices "in the Department of the Treasury". (2) Duties.--The Chief Counsel shall be the chief law officer for the Internal Revenue Service and shall perform such duties as may be prescribed by the Secretary, including the duty-- (A) to be legal advisor to the Commissioner and the Commissioner's officers and employees; (B) to furnish legal opinions for the preparation and review of rulings and memoranda of technical advice; (C) to prepare, review, and assist in the preparation of proposed legislation, treaties, regulations, and Executive orders relating to laws which affect the Internal Revenue Service; (D) to represent the Commissioner in cases before the Tax Court; and (E) to determine which civil actions should be litigated under the laws relating to the Internal Revenue Service and prepare recommendations for the Department of Justice regarding the commencement of such actions.
In September 2008 the Office of Chief Counsel became involved in this case--and advised the assertion of the 20% penalty--when it was called on to review the proposed notice of deficiency, pursuant to IRS routine. [t]he authority to issue a notice of deficiency rests with those Service officials delegated the authority by Servicewide Delegation Order 4-8 * * *. The role of Area Counsel in this procedure is to
Thus, the IRM describes the examiner's and the Chief Counsel attorney's functions differently: The examiner's role is "[t]he determination whether to assert penalties",
Therefore, when a Chief Counsel attorney is reviewing a proposed notice of deficiency and is advising the inclusion of a penalty liability therein, the attorney is not making a "determination" ("initial" or otherwise), for purposes of
It may be admitted that, like the Chief Counsel attorney, the examining agent lacks final authority to actually issue the notice of deficiency. One could characterize the agent's action in preparing the proposed notice of deficiency as a mere recommendation, with no more inherent effect than the attorney's legal advice, since the agent, too, arguably makes an act that may or may not be finally approved and effectuated. But the "initial determination" that is the subject of
This difference between a determination, on the one hand, and legal advice about a determination, on the other hand, is borne out in the way the IRS does its business. For example, with respect to*142 a penalty determination, "the IRS may wish to provide the taxpayer with a courtesy copy of the document showing that a manager approved the penalties [such as Mr. Feld's and Mr. Post's "Penalty Approval Form"]. Taxpayers are entitled to request these documents under the
In this case, the first documented mention of the 20% penalty was advice in a memorandum by a Chief Counsel attorney (approved by his immediate supervisor), but that advice did not constitute a "determination" of a penalty under
The Commissioner's alternative contention is that Chief Counsel's attorney's pleading the 20% penalty in the amendment to answer filed in this case in October 2014 (and the supervisor's approval of it) fulfilled the requirements of
However, it still remains that, in order to comply with
The text of the statute requires supervisory approval of the
I would therefore reject the Commissioner's alternative position.
As to the [P]etitioners have * * * failed to demonstrate prejudice from any claimed noncompliance, as required for the noncompliance to have any effect. When reviewing an administrative act or proceeding (or lack thereof), this Court has utilized "the 'theory of detrimental reliance' and considered the 'rule of prejudicial error' (otherwise known as the doctrine of harmless error)."
The cases that the Commissioner cites involve procedural requirements--i.e., requirements that a notice "shall include * * * a computation of the interest" (
Where Congress has decreed that the consequence of*151 non-approval is that "[n]o penalty * * * shall be assessed", we cannot interpose our judgment that in a given instance the non-approval was harmless or non-prejudicial and that therefore the penalty
The "initial determination" of the 20% penalty was not "personally approved (in writing) by the immediate supervisor" as required by
COLVIN, VASQUEZ, MORRISON, and BUCH,
Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986 (Code), as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.
2. Mr. Graev is an experienced attorney who has worked for prestigious law firms.↩
3. Mr. Lerman's declaration, quoted above, does not otherwise identify the particular authorities or articles consulted or describe his ultimate advice. The parties stipulated that the matters asserted in Mr. Lerman's and Mr. Graev's declarations would have been their testimony at trial if there had been a trial.↩
4. Although Messrs. Graev and Lerman state in their declarations that this list is not exhaustive, neither list mentions the side letter or its contents.
5. The declaration does not specify whether Mr. Lerman reviewed the side letter or was made aware of its existence.↩
6. The declaration does not indicate whether Mr. Lerman was also comfortable that the side letter's existence would not defeat the deductions completely.↩
7. The "Penalty Approval Form" was used in compliance with
Internal Revenue Manual (IRM) pt. 20.1.5.1.6(4) (July 1, 2008) as then in effect ("[f]or SB/SE exam cases, written managerial approval should be documented on the Penalty Approval Form, workpaper 300"). The IRM does not have "the force or effect of law."Vallone v. Commissioner , 88 T.C. 794, 807↩ (1987)8. In
Legg v. Commissioner , 145 T.C. 344, 351↩ (2015)9. The Commissioner routinely asserts
sec. 6662(a) penalties in answers, and the Court has jurisdiction over them pursuant tosec. 6214(a) . In the case of a motion to assert penalties in an amended answer, the Court considers whether granting leave for the amendment would prejudice the taxpayer.See Estate of Quick v. Commissioner , 110 T.C. 172, 180 (1998)Phillips v. Commissioner , T.C. Memo. 2013-215↩, at *3-*410.
Sec. 6751(b)(2) provides for "Exceptions" that include "any other penalty automatically calculated through electronic means." The definition of asec. 6662(b)(2) "substantial understatement of income tax" goes beyond mere calculation,see sec. 6662(d)(1)(A) , and respondent does not contend that this exception applies,see also IRM pt. 20.1.5↩.1.6(8) (July 1, 2008) .11. Neither the Code nor the regulations define "initial determination of * * * assessment". The term apparently appears nowhere else in the Code. We find it unnecessary to define the term for purposes of our present analysis.↩
12. The regulations provide:
The district director and the director of the regional service center shall appoint one or more assessment officers. * * * The assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. The amount of the assessment shall, in the case of tax shown on a return by the taxpayer, be the amount so shown, and in all other cases the amount of the assessment shall be the amount shown on the supporting list or record. The date of the assessment is the date the summary record is signed by an assessment officer. * * *
[Sec. 301.6203-1↩ , Proced. & Admin. Regs.]13. Contrary to the dissent's suggestion,
see dissenting op. p. 74, our conclusion is not based on the "fact that a rule [i.e.,sec. 6751(b)(1) ] is cast as a bar on 'assessment' but rather on the fact that we cannot necessarily know, before the IRS assesses a penalty, whether the IRS will have failed to comply with thesec. 6751(b)(1)↩ requirement.14. The dissent cannot seem to settle on a single articulation of its position, for it also asserts: "For a penalty determined in a notice of deficiency, the supervisory approval required by
section 6751(b)(1) must be obtained before the Tax Court suit is filed."See dissenting op. p. 77. The seeming lack of fixity in the dissent's position highlights the problem of attempting to judicially legislate a deadline not found in the statute.15. As used in
sec. 6751(b)(1) , the participle "making" is a nonfinite verb form that is part of the reduced adjectival clause ("reduced" because it omits the relative pronoun "who" and any auxiliary verb) "making such determination". Such a nonfinite verb form does not indicate when the action occurs; rather the time of the action must be inferred from the context.See http:// dictionary.cambridge.org/us/grammar/british-grammar/clauses-finite-and-non-finite (last visited Oct. 18, 2016);see also I George 0. Curme, A Grammar of the English Language 242 (1977) ("The present participle, infinitive, and gerund are not confined to reference to present time."); Sidney Greenbaum, The Oxford English Grammar 277 (1996) ("The time reference of the participle clause is inferred from the host clause"). Insec. 6751(b)(1) , "making" functions without specific tense, much as it does in this statement: "We should respect the individual making such an argument". This statement obviously doesnot mean, as the dissent's analysis would suggest, that we should respect this type of individual only while such an argument is being made. Rather, in this example, as in the statute, "making" is part of a reduced adjectival clause modifying "individual"--it tells which "individual" without indicating when exactly the "making" occurred, occurs, or will occur.Furthermore, in
sec. 6751(b)(1) the "making" clause is itself part of a larger adjectival prepositional phrase, "of the individual making such determination" modifying "supervisor"--it tells which supervisor, without indicating when the supervisor's action of approving the initial determination occurs or will occur (although from the context we know that the supervisor's approval must follow the subordinate's determination, as explained in the text above). At most, the verb form "making" might suggest that the immediate supervisor giving the approval should be the same immediate supervisor who held that position at the time of the making of the initial determination, as opposed to someone who might have held that position at some other time. And although the dissent initially refers to "making" as an adjective, ultimately the dissent finds it necessary to assign it an adverbial function, paraphrasing the statute by using an adverbial "when" clause not found in the statute and then for good measure inserting into the statute an extra word, so as to state: "[T]he statute indicates that the supervisor must act when 'the individual [is] making such determination.'"See↩ dissenting op. p. 80. But that is not what the statute says, and that is not what it means.16. Presumably finding it inhospitable to its position, the dissent largely ignores--going so far as to elide from its quotation of the statute--the provision that permits the written approval to be given by a "higher lever official". See dissenting op. p. 70.
17. The parties do not point us to any designation of a "higher level official" that has been made to date.
See IRM pt. 20.1.1.2.3(1) (Feb. 22, 2008) ("At this time, the Secretary has not designated any higher level official to approve initial determinations."). But the Secretary retains his authority to make such a designation at some point in the future. For purposes of our analysis, it is immaterial whether the Secretary has in fact exercised this authority. The relevant point is that Congress has created a statutory regime under which supervisory approval of penalty assessment could well occur a substantial period after the "initial determination" was made.18. The effective date was later extended to June 30, 2001.
Consolidated Appropriations Act of 2001, Pub. L. No. 106-554, app'x G, sec. 302(b), 114 Stat. at 2763A-632 . The legislative history indicates that the effective date was extended "due to the need for substantial systems modifications, and Year 2000 programming priorities". H.R. Conf. Rpt. No. 106-1004, at 354 (2000),2000-3 C.B. 390↩, 420 .19. The dissent suggests that the effective-date phrase "notices issued, and penalties assessed" should apply without differentiation to both
subsecs. (a) and(b) of sec. 6751 , even thoughsubsec. (a) deals only with notices and even thoughsubsec. (b) deals only with assessments.See dissenting op. p. 81. In defense of this woodenly literal construction, the dissent speculates that Congress might have intended "notices issued" as the effective-date trigger for a penalty that is "subject to notice of deficiency procedures" and "penalties assessed" as the effective-date trigger for "assessable penalties".See id. p. 82. This analysis assumes that "notices" in the effective-date provision means "notices of deficiency", contrary to strong contextual evidence that this undefined term refers instead to "notice of penalty", as that term is used insubsec. (a) . Moreover, the dissent seems to assume that an assessable penalty would never be the subject of a "notice". That is incorrect.See, e.g. ,sec. 6672(b) (requiring a preliminary "notice" for the assessable penalty for failure to collect and pay over tax);see also sec. 7522 (describing required content of any "notice" relating to, among other things, "assessable penalties"). In any event, nothing in the statutory effective-date provision supports the notion that "notices issued, and penalties assessed"--if that phrase were thought to apply indiscriminately tosubsecs. (a) and(b) as the dissent contends--would apply discriminately to different types of penalties. Rather, the dissent's highly literal reading of the effective-date statutory provision would result, equally literally, in a binary effective date (the date of the notice of deficiencyand the date of the assessment) for any penalty properly considered in a deficiency case such as this. Apart from being illogical, such an effective date could give rise to internal inconsistency (for instance, in a situation where a notice of deficiency was issued before December 31, 2000, but the assessment was not made until after December 31, 2000).20. The dissent's unorthodox reading of the
sec. 6751(b)(1) effective-date provision (discussedsupra note 1921. For instance, a companion provision in the same act that added
sec. 6751 required the IRS to implement an enhanced supervisory review process for liens, levies, and seizures. That provision was made effective generally for collection actions commenced after the date of enactment. IRS Restructuring and Reform Act of 1998,Pub. L. No. 105-206, sec. 3421, 112 Stat. at 758↩ .22. We do not foreclose the possibility that a taxpayer who believes that a penalty has been assessed in violation of
sec. 6751(b)(1) might raise this issue in a postassessment collection due process (CDP) proceeding.See secs. 6320(c) ,6330(c)(1)↩ (requiring the Appeals officer in a CDP hearing to obtain verification that the requirements of any applicable law or administrative procedure have been met).23. Because we sustain the
sec. 6662(a) accuracy-related penalty on the ground of substantial understatement undersec. 6662(b)(2) , we need not decide whether the penalty should also be sustained on the ground of negligence undersec. 6662(b)(1)↩ .24. Petitioners contend that respondent bears the burden of proof as to the penalties under the burden-shifting rules of
sec. 7491(a) . We disagree.Sec. 7491(c) , rather thansec. 7491(a) , applies to penalties.See Higbee v. Commissioner , 116 T.C. 438, 447 n.6 (2001)sec. 6665(a)(2) , the reference insec. 7491(a) to tax liabilities imposed by subtitle A or B (whereas penalties are imposed by subtitle F), and the structure ofsec. 7491 as a whole, we believe that Congress intended forsec. 7491(c) (and notsec. 7491(a)↩ ) to apply to penalties.").25. Petitioners and the dissent argue that to satisfy his burden of production respondent must show compliance with
sec. 6751(b)(1) . We reject this argument for essentially the same reasons we previously discussed in holding that petitioners' argument with respect tosec. 6751(b)(1)↩ is premature.26. Because we find that petitioners fail to meet the second and third prongs of the test set out in
Neonatology Assocs., P.A. v. Commissioner , 115 T.C. 43, 99 (2000)aff'd ,299 F.3d 221↩ (3d Cir. 2001) , we need not address whether Mr. Lerman was a competent professional who had sufficient experience to justify petitioners' reliance.27. This communication mentions Mr. Graev's "accountants" but does not mention their names or qualifications or indicate that he had shared the side letter with them or received any advice from them about the side letter.↩
28. The record does not clearly indicate why NAT seemed to believe that the side letter endangered the deduction only for Mr. Graev's cash contribution. As discussed in
Graev v. Commissioner (Graev I ), 140 T.C. 377↩ (2013)29. Petitioners also argue that they relied on the advice of Mr. Miller in good faith. Mr. Miller did not conduct the appraisal; he was the supervisor of Dina Miller, who did. We did not address in
Graev I whether the valuation was correct, whether either Mr. or Ms. Miller was a "qualified appraiser", or whether the appraisal is a "qualified appraisal". Because respondent has conceded thesec. 6662(h) valuation misstatement penalty, neither the Millers' credentials nor the appraisal's valuation is relevant to our analysis. In any event, the appraisal does not allude to the side letter or its contents or their impact on the deductibility of the easement donation.30. As previously discussed, we find it unnecessary to decide whether Mr. or Ms. Miller was a "qualified appraiser" or whether this appraisal is a "qualified appraisal". Even if we were to decide both issues in the affirmative, the appraisal and Form 8283 would still be insufficient to show good faith and reasonable cause on account of the absence of credible evidence showing petitioners' efforts to determine the impact of the side letter on their charitable contribution deductions.
31. The record is silent as to Mr. Graev's area of expertise, but petitioners do not assert that it involved tax law.↩
32. The only advice in the record regarding the side letter was conveyed from NAT lawyers through NAT employees to Mr. Graev. Reliance on this advice would be unreasonable.
See Gerdau MacSteel, Inc. v. Commissioner , 139 T.C. 67, 192-195 (2012)Neonatology Assocs., P.A. v. Commissioner , 115 T.C. at 98↩33. We address the adequacy of these authorities and materials as "substantial authority" below.↩
34. There is no evidence that Mrs. Graev participated in this process other than by signing the 2004 and 2005 Forms 1040.↩
35. In its analysis, in
O'Brien v. Commissioner , 46 T.C. 583 (1966)Surface Combustion Corp. v. Commissioner , 9 T.C. 631 (1947)aff'd ,181 F.2d 444 (6th Cir. 1950) , as involving a type of contingency similar to that inO'Brien but involving a different type of trust. Presumably for that reason, in their answering brief petitioners also citeSurface Combustion Corp. as substantial authority, though without any separate discussion. For reasons similar to those that lead us to conclude thatO'Brien does not constitute substantial authority for petitioners' position, neither doesSurface Combustion Corp.↩ 36. In
Graev I we declined to consider the IRS private letter ruling in the light ofsec. 6110(k)(3) , which provides: "(3) Precedential status.--Unless the Secretary otherwise establishes by regulations, a written determination may not be used or cited as precedent." The same impediment does not arise in the context of evaluating substantial authority.Sec. 1.6662-4(d)(3)(iii), Income Tax Regs.↩ , lists authority that can be relied upon and includes both private letter rulings and general counsel memoranda.37. It appears that
sec. 1.6662-4(d)(3)(iii), Income Tax Regs.↩ , excludes this memorandum from those which are able to be part of substantial authority, stating: "[T]he following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: * * * general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin)". We need not decide whether the memorandum is excluded under this regulation because we conclude for other reasons that it does not constitute substantial authority for petitioners' position.38. Petitioners also raise this argument as a defense to the negligence penalty. As previously discussed, because we hold that petitioners are liable for the substantial understatement penalty, we do not consider whether the negligence penalty applies.↩
1. I do not disagree with the majority's treatment of
section 6751 in part I.(a) See op. Ct. pp. 22-24. And apart from the logically prior issue ofsection 6751(b)(1) , I do not disagree with its reasoning in part III about petitioners' liability for the penalty undersection 6662(a) .See↩ op. Ct. pp. 39-67.2.
Baltic v. Commissioner , 129 T.C. 178, 183 (2007)see also Hibbs v. Winn , 542 U.S. 88, 100, 124 S. Ct. 2276, 159 L. Ed. 2d 172↩ (2004)3. As of the time of the
Internal Revenue Service Restructuring and Reform Act of 1998 ("1998 Act"), Pub. L. No. 105-206, sec. 3301(a), 112 Stat. at 741, ,see infra p. 75, the assessments might number 100,000 per week in a given Internal Revenue Service Center. The summary record of assessment ("SRA") was signed by the assessment officer (and the assessments were thereby made) on each Monday, but "[t]he Monday assessment date * * * [was] prerecorded on each tax account included in the SRA before the SRA is signed."Tech. Adv. Mem. CC-TAM-PMTA-00207 (May 28, 1998) .4. The form language of the notice of deficiency issued to petitioners reflects this dynamic: "We have
determined that you owe additional tax or other amounts, or both, for the tax year(s) identified above. * * * The enclosed statement shows how we figured the deficiency. * * * If you decide not to sign and return the waiver, and you do not file a petition with the Tax Court within the time limit,the law requires us to assess↩ and bill you for the deficiency after 90 days from the date of this letter". (Emphasis added.)5. To the same ultimate effect,
section 6512(a) flatly provides (with exceptions not helpful here) that if the IRS issues a notice of deficiency and the taxpayer files a timely Tax Court petition, then "no credit or refund of income tax for the same taxable year * * * in respect of which the Secretary has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery of any part of the tax shall be instituted in any court". (For purposes ofsection 6512(a) , a "refund of tax" includes penalties.Sec. 6665(a)(2) ;Cheesecake Factory Inc. v. United States , 111 Fed. Cl. 686, 696↩ (2013)6.
Section 6212 (entitled "Notice of Deficiency") applies to "any tax imposed by subtitles A [income taxes] or B [estate and gift taxes] orchapter 41 ,42 ,43 , or44 [certain excise taxes in subtitle D]". The "assessable penalties" in subtitle F, chapter 68, subchapter B (secs. 6671-6725 ), are not determined in a notice of deficiency. The accuracy-related penalty ofsection 6662 at issue here, however, is subject to deficiency procedures, pursuant tosection 6665(a) .See United States v. Erie Forge Co. , 191 F.2d 627, 630-631 (3d Cir. 1951)quoted in Winter v. Commissioner , 135 T.C. 238, 273↩ (2010)7. See, e.g.,
1998 Act sec. 4401, 112 Stat. at 784 , which amended Codesection 8021 with the following effective dates:(b) Effective Dates.--
(1)
Subsection (e) of section 8021 of the Internal Revenue Code of 1986 , as added bysubsection (a) of this section, shall apply to requests made after the date of the enactment of this Act.(2)
Subsection (f) of such section shall take effect on the date of the enactment of this Act.8. In Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 63 (2012), Justice Scalia↩ and Professor Garner include as Number 4, among 57 canons of construction (called "Sound Principles of Interpretation"), the "Presumption Against Ineffectiveness": "A textually permissible interpretation that furthers rather than obstructs the * * * [statute's] purpose should be favored."
9.
See Caltex Oil Venture v. Commissioner , 138 T.C. 18, 34 (2012)Burlington N.R.R. v. Okla. Tax Comm'n , 481 U.S. 454, 461, 107 S. Ct. 1855, 95 L. Ed. 2d 404 (1987)))see also Palahnuk v. Commissioner , 544 F.3d 471, 474 (2d Cir. 2008)aff'g 127 T.C. 118↩ (2006) .10. In conventional tax parlance, one would usually speak of "determining" (or "redetermining") a "deficiency",
see secs. 6212(a) ,6213(a) , or perhaps "determining" a "liability",see secs. 1552(a)(3) ,3509 ; and one would usually speak of "making" an "assessment",see sec. 6203 , or perhaps "verifying" it undersection 6330(c)(1)↩ .11. Stefan Tucker, then chair-elect of the Section of Taxation of the American Bar Association, stated to Congress: "[T]he IRS will often say, if you don't settle, we are going to assert the penalties. If you do settle, we may not assert the penalties." IRS Restructuring: Hearings on
H.R. 2676 ↩ Before the S. Comm. on Finance, 105th Cong. 529 (1998).12. The instructions given to IRS personnel in the Internal Revenue Manual ("IRM") do not reflect this construction that would permit long-delayed supervisory approval. Rather, the supervisor's approval must be noted on the form reflecting the agent's determination,
see IRM pt. 20.1.5.1.6(4) (Jan. 24, 2012) (seeIRM pt. 20.1.5.1.6(4) (July 1, 2008) for IRM provision in effect in 2008), or otherwise be "documented in the workpapers",id. pt. 20.1.5.1.6(8) (Jan. 24, 2012 ) (no equivalent IRM provision found in 2008);see also id.pt. 20.1.1.2.3(6) (Aug. 5, 2014) ("The managerial review and approval must be documented in writing and retained in the case file");id. pt. 20.1.1.2.3(7) ("The IRS may wish to provide the taxpayer with a courtesy copy of the document showing that a manager approved the penalties") (seeIRM pt. 20.1.1.2.3(6) and(7) ↩ (Feb. 22, 2008) for IRM provisions in effect in 2008).13. I would not construe the parties' stipulation to reflect a supposed concession of this issue by petitioners--nor does the Commissioner argue that we should. The stipulation does say that the 20% penalties "were initially determined by Chief Counsel Attorney Gerard Mackey",
see "Second Supplemental Stipulation of Facts", para. 102 (Jan. 15, 2015); but the stipulation itself explains (at para. 118, emphasis added) that "[p]etitioners' position is that the 'initial determination' to assert thesection 6662(a) penalties pursuant tosection 6212 was not approved in writing by the immediate supervisor of the individual making theactual initial determination". This explanation of petitioners' position is borne out in "Petitioners' Opening Brief' (Apr. 1, 2015), which includes (at 40) a section with the caption "RA Feld Made the Initial Determination"; and the Commissioner does not object that this contention contradicts the stipulation. (Similarly, petitioners' answering brief filed May 15, 2015, repeatedly refers to Chief Counsel Attorney Mackey's purported initial determination as "invalid".) The actualfacts↩ about the administrative acts made, papers signed, and approvals obtained are not in dispute; and the question of which of these administrative acts was the "initial determination" is a question of law. I would therefore not treat the "initial determination" issue as having been stipulated.14.
Section 7805(a) empowers the Secretary to issue regulations to enforce this statute; andsection 6751(b)(1) itself authorizes the Secretary to "designate[]" a "higher level official" to approve an initial determination. In addition, the Commissioner has the power to delegate authority within the IRS.See secs. 7701(a)(12)(A)(i) ,7803(a)(2) ,7804(a) . I state no view as to whether a Chief Counsel attorney's advice might, under such regulations, designations, or delegations, be treated for purposes ofsection 6751(b)↩ as an "initial determination" in the examination process or as an approval of such a determination.15.
See also IRM pts.20.1.1.2.3 ,20.1.5.1.6 (requiring managerial approval for penalties determined by examination personnel). To this same effect, Mr. and Mrs. Graev also cite two (non-precedential) Chief Counsel documents: (1)Chief Counsel Memorandum No. 20125201F (Dec. 28, 2012) , a 27-page memorandum that begins at page 1 by stating: "This memo should not be cited as precedent"; that gives substantive advice about penalties to the Large Business & International Division of the IRS; and that concludes with a procedural point: "Note that the initial decision of whether to apply the penalty rests with the supervisor of the person proposing the penalty (e.g., the IRS case manager)"; and (2)Notice CC-2014-004 (May 20, 2014 ↩) (advising "that preassessment written supervisory approval is required when a Service employee makes an independent determination that the penalty should apply" and that "Chief Counsel attorneys should confirm that the initial determination" was approved). The notice simply refers to the approval that should be obtained "when" examination personnel make a determination. Neither of these documents states explicitly that a Chief Counsel attorney may never make such a determination.16.
See https://www.treasury.gov/about/organizational-structure/offices/General-Counsel/Pages/irs.aspx ("The principal client of the Office of the Chief Counsel is the Commissioner of the Internal Revenue Service")17.
See also H.R . Conf. Rept. No. 105-599, at 210 (1998),1998-3 C.B. 747↩, 964 ("The conference agreement provides that all personnel in the Office of the Chief Counsel are to report to the Chief Counsel (and not to any person at the IRS or elsewhere within the Treasury Department)").18.
See "Second Supplemental Stipulation of Facts" (Jan. 15, 2015), para. 106 ("Respondent's position is that, with respect to Area Counseladvisory memoranda, the docket attorney assigned to the case signs theadvice" (emphasis added)), para. 109 ("Respondent's position is that therecommendation or advice to pursue the assessment of a penalty" (emphasis added)); para. 111 ("The Office of Chief Counsel has the delegated authority toadvise Respondent as to the applicability of a penalty" (emphasis added)); para. 112 ("The role of [Chief] Counsel is toadvise whether a deficiency notice should be issued, and if so, to makerecommendations concerning the issues to be asserted" (emphasis added)); para. 113 ("Respondent's position is that Chief Counsel Attorney Gerard Mackey was assigned to review the SNOD issued to Petitioners in this case and was the first torecommend pursuit of the penalties byadvising Respondent to assert the accuracy-related penalties in the SNOD to be issued to Petitioners" (emphasis added)); para. 114 ("Respondent's position is that Attorney Mackey'srecommendation constituted the 'initial determination' (emphasis added)); para. 117 ("There is no evidence in the administrative file that the Service declined to follow the Office of Chief Counsel'sadvice↩ to assert the accuracy-related penalties" (emphasis added)).19. The Commissioner routinely asserts
section 6662(a) penalties in answers, and the Court has jurisdiction over them pursuant tosection 6214(a) . In the case of a motion to assert penalties in an amended answer, the Court considers whether granting leave for the amendment would prejudice the taxpayer.See Estate of Quick v. Commissioner , 110 T.C. 172, 180 (1998)Phillips v. Commissioner , T.C. Memo. 2013-215↩, at *3-*420. Mr. and Mrs. Graev acknowledge that "[n]either the Code nor the Treasury Regulations explicitly specify the individual who may make the initial determination for purposes of
section 6751 ".See↩ Petitioners' Opening Brief, at 42 (Apr. 1, 2015).21. Judge Nega's concurring opinion takes essentially the same tack. Because the concurrence seems to emphasize that the unapproved 20% penalty was less in amount than the approved 40% penalty, it should be noted that the IRS has not argued that the unapproved 20% penalty is somehow a "lesser included" component of the approved 40% penalty. The predicates for these two penalties are quite distinct: The
section 6662(h) penalty for which approval was obtained in this case turns on the presence of a "gross valuation misstatement" regarding the property for which a deduction is claimed on the return. Thesection 6662(a) penalty for which approval was not obtained turns on the negligence of the taxpayer (or on the amount of the understatement of income tax). Someone determining or approving the penalty for a gross valuation misstatement of contributed property would make a factual inquiry completely different from the inquiry appropriate for determining or approving a penalty for negligence or a substantial understatement of income tax. A given taxpayer whose return reflected a gross valuation misstatement might or might not be liable for the negligence penalty. The "Penalty Approval Form" that the IRS promulgated for the purpose (and which Revenue Agent Feld used) treats the 20% penalty and the 40% penalty as distinct penalties. Under the caption "Penalty", the form lists 16 lines that cite Code sections and name possible penalties. One line reads "6662(h) / Gross Valuation Misstatement", and Mr. Feld marked that line with an "X". Three other lines referred to "6662(b)(1) / Negligence", "6662(b)(2) / Substantial Understatement", and "6662(b)↩ / Other Accuracy Related"; and Mr. Feld marked none of those three. Under the caption "Other" there were two lines. One line read "Alternative Penalty Position", and the other read "Abatement of Assessed Penalties". Mr. Feld made no marks on these lines.22.
See sec. 6501(a)↩ ("the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed").
147 T.C. No. 16 (Graev v. Comm'r) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.