T.C. Memo. 2020-133
UNITED STATES TAX COURT
SUNIL S. PATEL AND LAURIE MCANALLY PATEL, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 24344-17, 11352-18, Filed September 22, 2020. 25268-18.
David D. Aughtry and Patrick J. McCann, Jr., for petitioners.
Sebastian Voth, Sheri S. Wilder, Emerald G. Smith, and Kevin R. Oveisi,
for respondent.
1 Cases of the following petitioners are consolidated herewith: Sunil S. Patel and Laurie M. McAnally-Patel, docket No. 11352-18; and Sunil S. Patel and Laurie M. McAnally-Patel, docket No. 25268-18. -2-
[*2] MEMORANDUM OPINION
JONES, Judge: By notices of deficiency dated August 25, 2017, March 15,
2018, and September 25, 2018, respondent determined deficiencies in the Federal
income tax of petitioners, Sunil S. Patel and Laurie McAnally Patel, for the 2013,
2014, 2015, and 2016 taxable years2 and accuracy-related penalties under section
6662 as follows:3
Year Deficiency Penalty
2013 $247,892 $99,157 2014 484,420 96,884 2015 475,186 95,037 2016 529,949 105,990
Currently before the Court are cross-motions for partial summary judgment
under Rule 121 as to whether respondent secured timely written supervisory
approval for the penalties at issue as required by section 6751(b)(1). As explained
2 By order dated October 17, 2019, we consolidated the cases for briefing and opinion. 3 All section references are to the Internal Revenue Code in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. -3-
[*3] below we will grant in part and deny in part each motion for partial summary
judgment.
Background
There is no dispute as to the following facts, which are drawn from the
parties’ filings and the attached declarations and exhibits.
I. Petitioners
Petitioners are married. Dr. Patel is an ophthalmologist who was the sole
shareholder of Ophthalmology Specialists of Texas, PLLC (OST). He engaged in
a purported microcaptive insurance arrangement for this business. In the process
he formed several related entities through which petitioners deducted purported
insurance premiums as business expenses during the years at issue.
II. Administrative Proceedings
A. 2013 Tax Year
1. Letter 5153 and Examination Report
In February 2016, respondent opened an examination into petitioners’ 2013
tax return. Respondent assigned Revenue Agent David Snow (RA Snow) to
conduct the examination.4 On May 8, 2017, RA Snow sent petitioners a Letter
4 Respondent examined returns for additional tax years during this examination, as discussed in further detail below. -4-
[*4] 5153 and an accompanying examination report or Revenue Agent’s Report
(RAR). The RAR proposed changes in petitioners’ income tax for the 2013 tax
year, including an adjustment to the amount of income they reported for that year
and the imposition of accuracy-related penalties under section 6662(a), (b)(2) and
(6), and (i).
The Letter 5153 instructed petitioners to respond in one of four ways. If
petitioners agreed with the changes proposed in the RAR, the first two options
were to either submit payment for the full amount of tax owed or call RA Snow to
discuss payment options. If petitioners did not agree with the changes proposed in
the RAR, the third option was to agree to extend the period for assessment to
allow for their case to be considered by the Internal Revenue Service (IRS) Office
of Appeals (Appeals Office). The fourth and final option advised petitioners that
if they failed to respond by the “response due date”, their case would be processed
on the basis of the proposed changes in the RAR and they would be sent a notice
of deficiency. In response to the Letter 5153 petitioners did not to agree to extend
the period of limitations on assessment.
2. Civil Penalty Approval Form
On May 25, 2017--17 days after he mailed Letter 5153 and the RAR to
petitioners--RA Snow completed work on a civil penalty approval form (first civil -5-
[*5] penalty approval form) seeking approval to impose accuracy-related penalties
for the 2013, 2014, and 2015 tax years. In the box captioned “Reason(s) for
Assertion of Penalty(s)” RA Snow wrote, in part:
Section 6662(b)(6) imposes a penalty on any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)). * * * Section 6662(i) increases the accuracy-related penalty from 20% to 40% for any portion of an underpayment that is attributable to a ‘nondisclosed noneconomic substance transaction’ if the relevant facts affecting the tax treatment are not adequately disclosed in the return or a statement attached to the return.
* * * * * * *
Here, the taxpayer did not file Forms 8275 or 8275-R, and did not make any other attempt to disclose the relevant facts affecting the items’ tax treatment. Accordingly, a 40% penalty is appropriate for any portion of the underpayment attributable to the abusive captive insurance company transactions.
On May 25, 2017, RA Snow submitted the first civil penalty approval form
to his then-immediate supervisor, Acting Group Manager Richard Keker (AGM
Keker). AGM Keker signed it that day. His signature approved the assertion of
penalties under section 6662(a), (b), (c), (d), and (i).5
5 Though the civil penalty approval form used by respondent does not explicitly refer to sec. 6662(a), we construe the approval of a penalty under sec. 6662(b) on the form to constitute approval of a penalty under sec. 6662(a) by operation of the statute. See sec. 6662. -6-
[*6] 3. Notice of Deficiency
On August 25, 2017, respondent issued a notice of deficiency to petitioners
for the 2013 tax year. As respondent’s primary position, the notice determined
accuracy-related penalties under section 6662(b)(6) and (i).6 As alternative
positions, respondent determined accuracy-related penalties under section
6662(b)(1) and (2).
B. 2014 Tax Year
In March 2017, RA Snow expanded the examination to include petitioners’
2014 tax year. RA Snow’s activity record shows that he entered the information
for Dr. Patel’s business, OST, into the Report Generation Software (RGS) on June
22, 2017.
1. First Civil Penalty Approval Form
As discussed above, the first civil penalty approval form was prepared by
RA Snow and signed by his then-immediate supervisor, AGM Keker, on May 25,
2017. In addition to the 2013 tax year AGM Keker’s signature approved the
6 The Letter 5153, which was issued on May 8, 2017, asserted an accuracy- related penalty of $100,688 under sec. 6662 for the 2013 tax year. The corresponding notice of deficiency, which was issued on August 25, 2017, determined an accuracy-related penalty under sec. 6662 in the lesser amount of $99,156.80. The difference appears to be due to the fact that in Letter 5153 respondent calculated the total amount of the underpayment to be $251,719, but in the notice of deficiency he calculated a lesser underpayment of $247,892. -7-
[*7] assertion of penalties for the 2014 and 2015 tax years under section 6662(a),
(b), (c), (d), and (i).
2. Letter 5153 and RAR
On January 30, 2018, RA Snow sent petitioners a Letter 5153 and an
accompanying RAR for the 2014 tax year. The Letter 5153 was, in almost all
material respects, identical to the Letter 5153 for 2013 that RA Snow sent to
petitioners on May 8, 2017; it gave petitioners the same four options for 2014
using the same structure and text. The RAR proposed changes to petitioners’
return for the 2014 tax year, including an adjustment to the amount of income they
reported for that year and the imposition of accuracy-related penalties under
section 6662(a), (b)(2), and (6), and (i).
3. Second Civil Penalty Approval Form
At a time not disclosed by the record RA Snow completed work on a second
civil penalty approval form, on which he sought approval to impose penalties for
the 2014, 2015, and 2016 tax years (second civil penalty approval form).7 RA
Snow used the same text in the second civil penalty approval form that he used in
the first civil penalty approval form to explain the assertion of penalties, including
a discussion of section 6662(i) and an explanation of its application to petitioners.
7 The 2015 and 2016 tax years are discussed below. -8-
[*8] On January 31, 2018, RA Snow’s then-immediate supervisor, Group
Manager Stephen Earley (GM Earley), signed the second civil penalty approval
form. GM Earley’s signature approved the assertion of penalties under section
6662(a), (b), (c), (d), and (i) for the 2014 tax year (as well as 2015 and 2016,
discussed below).
4. Notice of Deficiency
On March 15, 2018, respondent issued to petitioners the notice of deficiency
for the 2014 tax year. The notice determined accuracy-related penalties under
section 6662(a) and (b)(1), (2), and (6). The notice did not determine a penalty
under section 6662(i).
5. First Amendment to Answer
Petitioners filed a petition on June 8, 2018, asking the Court to redetermine
respondent’s determination regarding the 2014 tax year, and respondent answered
on August 3, 2018. About eight months later, on March 8, 2019, we filed
respondent’s first amendment to answer in which he asserted an accuracy-related
penalty of $193,768 under section 6662(i).
In his first amendment to answer, respondent represented that the initial
determination to assert the penalty under section 6662(i) was made by Special
Trial Attorney Sebastian Voth (STA Voth). Area Counsel Sherri S. Wilder (AC -9-
[*9] Wilder), STA Voth’s immediate supervisor, electronically signed the first
amendment to answer on February 25, 2019, thereby approving the assertion of
the penalty under section 6662(i).
6. Summary of Respondent’s Assertion of Penalties for the 2014 Tax Year
To summarize: For the 2014 tax year respondent asserted penalties under
section 6662(a), (b)(2) and (6), and (i) in Letter 5153 and the accompanying RAR,
which RA Snow mailed to petitioners on January 30, 2018. In the notice of
deficiency dated March 15, 2018, respondent determined accuracy-related
penalties under section 6662(a) and (b)(1), (2), and (6), but did not determine the
penalty under subsection (i). Rather, respondent asserted the penalty under section
6662(i) in his first amendment to answer filed March 8, 2019.
C. 2015 and 2016 Tax Years
We will address tax years 2015 and 2016 together because they have similar
fact patterns and respondent covered both years in the same civil penalty approval
form and communications to petitioners.
1. Second Civil Penalty Approval Form
As discussed above, the second civil penalty approval form was prepared by
RA Snow and signed by his then-immediate supervisor, GM Earley, on January - 10 -
[*10] 31, 2018. GM Earley’s signature approved the assertion of penalties for the
2015 and 2016 tax years under section 6662(a), (b), (c), (d), and (i).8
2. The Letter 950 and RAR
On April 10, 2018, respondent sent petitioners a Letter 950, also referred to
as a 30-day letter, and an accompanying RAR. The RAR proposed changes in
petitioners’ income tax for the 2015 and 2016 tax years, including an adjustment
to the amount of income they claimed for each year and the imposition of
accuracy-related penalties under section 6662(a), (b)(1), (2), and (6), and (i) for
each year.
The Letter 950 instructed petitioners to respond in one of three ways by a
“response due date” and provided a fourth option in the event that they did not
respond. If petitioners agreed with the changes proposed in the RAR, the first two
options were to either submit payment for the full amount of tax owed or to
consult respondent’s publications regarding payment options. If petitioners did
not agree with the proposed changes, the third option instructed them to contact
RA Snow to request a meeting or telephone conference with him. If the proffered
8 The record shows that there was a third civil penalty approval form, which RA Snow prepared on May 28, 2018, and which was signed by his then-immediate supervisor, a group manager, on the same day. Because the form is not necessary to our analysis, it is not addressed. - 11 -
[*11] meeting with RA Snow did not produce agreement, petitioners could request
a conference with the Appeals Office. Letter 950 advised petitioners that if they
failed to respond by the “response due date”, their case would be processed on the
basis of the proposed changes in the RAR. If petitioners chose this fourth and
final option, they would be sent a notice of deficiency. Letter 950 bears the
signature of Acting Group Manager Rafaela Mendez (AGM Mendez), who was
serving as RA Snow’s immediate supervisor when the letter was mailed.
3. Notice of Deficiency
On September 25, 2018, respondent issued the notice of deficiency for the
2015 and 2016 tax years. The notice determined accuracy-related penalties under
section 6662(a) and (b)(1), (2), and (6). The notice did not determine penalties
4. Answer
Petitioners filed a petition on December 20, 2018, in which they asked the
Court to redetermine respondent’s determination regarding the 2015 and 2016 tax
years. In respondent’s answer, which was filed with the Court on March 19, 2019,
he asserted accuracy-related penalties under section 6662(i) of $190,074 and
$211,980 for the 2015 and 2016 tax years, respectively. - 12 -
[*12] In his answer respondent represented that the initial determination to assert
the penalties under section 6662(i) was made by STA Voth. STA Voth’s
immediate supervisor, AC Wilder, electronically signed the answer on March 19,
2019, thereby approving the assertion of the penalties under section 6662(i).
5. Summary of Respondent’s Assertion of Penalties for the 2015 and 2016 Tax Years
To summarize: For tax years 2015 and 2016, respondent asserted penalties
under section 6662(a), (b)(1), (2), and (6), and (i) in Letter 950 and the
accompanying RAR, which RA Snow mailed to petitioners on April 10, 2018.
Respondent did not determine the penalty under section 6662(i) in the September
25, 2018, notice of deficiency but did assert it in his March 19, 2019, answer.
We will discuss the significance of respondent’s communications and the
timing of these penalty approvals below.
Discussion
I. Law
A. Summary Judgment
Summary judgment serves to “expedite litigation and avoid unnecessary and
expensive trials.” Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).
The Court may grant summary judgment when there is no genuine dispute as to - 13 -
[*13] any material fact and a decision may be rendered as a matter of law. Rule
121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). Both parties have moved for partial summary judgment,
and they agree that no genuine dispute of material fact exists regarding the
question they have asked the Court to decide. After reviewing the parties’ filings
and the attached declarations and exhibits, we conclude that a decision may be
rendered as a matter of law.
B. Accuracy-Related Penalties and Requirements of Penalty Approval
1. Generally
Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty
equal to 20% of the portion of an underpayment of tax required to be shown on a
return that is attributable to “[n]egligence or disregard of rules or regulations” or
“[a]ny substantial understatement of income tax”, or both. An understatement of
income tax is a “substantial understatement” if it exceeds the greater of 10% of the
tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).
Section 6662(a) and (b)(6) imposes an accuracy-related penalty equal to
20% of the portion of an underpayment that is attributable to “[a]ny disallowance
of claimed tax benefits by reason of a transaction lacking economic substance
(within the meaning of section 7701(o)) or failing to meet the requirements of any - 14 -
[*14] similar rule of law.” Section 6662(i) increases the accuracy-related penalty
imposed under section 6662(a) to 40% of an underpayment which is attributable to
one or more “nondisclosed noneconomic substance transactions”.
2. Timeliness of Penalty Approval
Section 6751(b)(1) provides: “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
or such higher level official as the Secretary may designate.” Although section
6751(b)(1) does not explicitly prescribe the timing of the written supervisory
approval, we have interpreted the provision to require such approval before the
first formal communication to the taxpayer that demonstrates that an initial
determination has been made. See, e.g., Belair Woods, LLC v. Commissioner, 154
T.C. ___, ___ (slip op. at 24-25) (Jan. 6, 2020); Clay v. Commissioner, 152 T.C.
223, 249 (2019); Carter v. Commissioner, T.C. Memo. 2020-21, at *27.
When asked to conduct inquiries into whether the Commissioner’s
employees gave sufficient consideration to the penalties they proposed and
approved, we have determined that such lines of questioning are “immaterial and
wholly irrelevant to ascertaining whether respondent complied with the written
supervisory approval requirement of section 6751(b)(1)”. Raifman v. - 15 -
[*15] Commissioner, T.C. Memo. 2018-101, at *61. In sum, the “written
supervisory approval requirement of section 6751(b)(1) requires just that: written
supervisory approval.” Id.
3. Initial Determination
We recently held that the “initial determination” of a penalty, for purposes
of section 6751(b)(1), must be a “formal act” that resembles a determination.
Belair Woods, LLC v. Commissioner, 154 T.C. at ___ (slip op. at 15). We went
on to conclude that in a deficiency context “the document by which the
Examination Division formally notifies the taxpayer, in writing, that it has
completed its work and made an unequivocal decision to assert penalties” would
embody the initial determination of those penalties. Id. at ___ (slip op. at 24-25);
see Clay v. Commissioner, 152 T.C. at 249.
In Carter v. Commissioner, at *6, a deduction for a charitable contribution
was at issue, and the IRS sent the taxpayers a Letter 5153 and accompanying
RAR. The Commissioner argued that because the agent’s communication to the
taxpayers did not contain a 30-day letter and therefore did not communicate appeal
rights, their case could be meaningfully distinguished from Clay. Id. at *28-*29.
In Clay v. Commissioner, 152 T.C. at 249, the IRS sent the taxpayers the RAR and
a 30-day letter that “propos[ed] adjustments including penalties and gave * * * - 16 -
[*16] [the taxpayers] the right to protest those proposed adjustments.” In Carter v.
Commissioner, at *30, we rejected the IRS’ argument, holding that the Letter 5153
and RAR sent to the taxpayers “clearly reflected * * * [the agent’s] conclusion that
* * * [the taxpayers] should be subject to gross valuation misstatement penalties
for each of the years in issue.” See also Belair Woods, LLC v. Commissioner, 154
T.C. at __ (slip op. at 24-25).
We concluded that the absence of 30-day letters did not indicate a lack of
formality about the IRS agent’s determination to assert penalties. Carter v.
Commissioner, at *30. Rather, the RAR was sent with Letter 5153 because of the
Carters’ unwillingness to provide the Appeals Office sufficient time to consider
their cases. Id. at *30-*31. We also rejected the argument that a communication
cannot be an initial determination unless it provides appeal rights. Id. at *29. We
noted that “any ‘document by which the Examination Division formally notifies
the taxpayer, in writing, that it has completed its work and made an unequivocal
decision to assert penalties’ would necessarily embody the initial determination of
those penalties.” Id. (quoting Belair Woods, LLC v. Commissioner, 154 T.C.
at __ (slip op. at 24-25)).
We have previously acknowledged that the Commissioner can make more
than one initial determination of a penalty under section 6662 (with written - 17 -
[*17] supervisory approval, of course), Roth v. Commissioner, T.C. Memo. 2017-
248, aff’d, 922 F.3d 1126 (10th Cir. 2019), and that an initial determination can be
made by an IRS attorney, see Graev v. Commissioner, 149 T.C. 485, 494-498
(2017), supplementing and overruling in part 147 T.C. 460 (2016).
II. Analysis
We will determine whether respondent complied with the procedural
requirements of section 6751(b)(1) by identifying the communication that formally
notified petitioners, in writing, that respondent’s Examination Division had
completed its work and made an unequivocal decision to assert penalties. See
Belair Woods, LLC v. Commissioner, 154 T.C. at __ (slip op. at 23-25). Then, we
will ascertain whether the individual who made the initial determination to assert
such penalties obtained the required written supervisory approval before
petitioners were formally notified. See id. at __ (slip op. at 27).
Respondent argues that the notice of deficiency dated August 25, 2017,
embodied his formal communication to petitioners of his initial determination to
assert penalties. Petitioners disagree. They point to Letter 5153, dated May 8,
2017, as respondent’s formal communication of penalties. Respondent argues that
Letter 5153 and the RAR do not embody his “initial determination” with respect to - 18 -
[*18] the penalties proposed therein (section 6662(a), (b)(2) and (6), and (i))
because the letter did not grant petitioners the opportunity to go to the Appeals
Office, which would have been included in a 30-day letter.
In Carter v. Commissioner, at *31, we found that the absence of a 30-day
letter did not indicate a lack of formality about the IRS agent’s determination to
assert penalties. Rather, we observed that the fact that an RAR was sent with
Letter 5153 rather than a 30-day letter appeared to have been attributable solely to
the taxpayers’ unwillingness to provide the Appeals Office sufficient time to
consider their cases. Id. at *30-*31. We concluded that the granting of appeal
rights is not a necessary element of an initial determination of penalties. Id.
In these cases, Letter 5153 and the accompanying RAR clearly reflected
respondent’s conclusion that petitioners should be subject to the accuracy-related
penalties under section 6662(a), (b)(2) and (6), and (i). See Carter v.
Commissioner, at *30.9 It appears that RA Snow mailed Letter 5153 and the RAR
to petitioners because they were unwilling to extend the period of limitations on
assessment. We, therefore, agree with petitioners that Letter 5153 and the
9 Respondent filed his response to petitioners’ motion for partial summary judgment and his own motion for the same before we issued our opinion in Carter v. Commissioner, T.C. Memo. 2020-21, on February 3, 2020. As a result, respondent did not address Carter in his filings. - 19 -
[*19] accompanying RAR embodied the “initial determination” of the penalties
under section 6662(a), (b)(2) and (6), and (i) for the 2013 tax year. See Belair
Woods, LLC v. Commissioner, 154 T.C. at ___ (slip op. at 24-25). Respondent
does not dispute that RA Snow did not obtain written approval of those penalties
before he sent Letter 5153 and the accompanying RAR on May 8, 2017.
The record establishes that the notice of deficiency embodied respondent’s
formal communication of his unequivocal decision to assert the penalty under
section 6662(b)(1). See Belair Woods, LLC v. Commissioner, 154 T.C. at ___
(slip op. at 24-25). Because RA Snow secured supervisory approval of the section
6662(b)(1) penalty through AGM Keker’s signing of the first civil penalty
approval form before respondent issued the notice of deficiency, we hold that
respondent complied with section 6751(b)(1) with respect to that penalty.
On the basis of the record, we conclude that respondent did not satisfy the
requirements of section 6751(b)(1) with respect to the penalties asserted under
section 6662(a), (b)(2) and (6), and (i), but did satisfy such requirements with
respect to the penalty asserted under section 6662(b)(1) for the 2013 tax year.
Letter 5153 and the accompanying RAR, dated January 30, 2018, reflected
respondent’s conclusion that petitioners should be subject to accuracy-related - 20 -
[*20] penalties under section 6662(a), (b)(2) and (6), and (i). We therefore hold
that Letter 5153 and the accompanying RAR embodied the “initial determination”
of penalties under section 6662(a), (b)(2) and (6), and (i) for the 2014 tax year.
See Belair Woods, LLC v. Commissioner, 154 T.C. at __ (slip op. at 24-25). The
penalty under section 6662(b)(1) was first determined in the notice of deficiency,
dated March 15, 2018, and we hold that the notice embodied the “initial
determination” of that penalty for tax year 2014.
We will first address whether the approval of penalties asserted under
section 6662(a) and (b) was timely and will then turn to the timeliness of the
approval for the penalty asserted under section 6662(i).
1. Timeliness of Approval of Penalties Asserted Under Section 6662(a) and (b) for 2014
Because AGM Keker signed the first civil penalty approval form on May
25, 2017, he approved the section 6662(a) and (b)(2) and (6) penalties in writing
before respondent asserted them on January 30, 2018, in Letter 5153 and the RAR.
Likewise, AGM Keker approved the section 6662(b)(1) penalty--and GM Earley
approved that penalty on the second civil penalty approval form--before
respondent asserted it on March 15, 2018, in the notice of deficiency. - 21 -
[*21] Petitioners argue that the first civil penalty approval form is meaningless
with respect to the 2014 tax year because, according to them, respondent had not
performed sufficient work in his review of petitioners’ return to assert a penalty
for that period. Petitioners read RA Snow’s examination activity record to mean
that he did not enter the information into the RGS for tax year 2014 until June
2017. They also argue that RA Snow’s case records reflect that he did not begin
analyzing some of the expenses petitioners reported for the 2014 tax year until
October 2017.
Respondent counters by showing that he expanded the examination to the
2014 tax year in March 2017 and that RA Snow performed sufficient work on the
2014 tax year before preparing the first civil penalty approval form. Before
preparing the form, RA Snow reviewed case information. On the basis of this
review, he believed that it was appropriate to assert a penalty for the 2014 tax year
based on all of the information that was available to him at the time, including his
knowledge of petitioners’ microcaptive insurance arrangement.
With respect to this part of the dispute, we repeat our observation that the
“written supervisory approval requirement of section 6751(b)(1) requires just that:
written supervisory approval.” Raifman v. Commissioner, at *61. The record
includes the required written approval: the first civil penalty approval form. To - 22 -
[*22] the extent that petitioners ask the Court to look behind the civil penalty
approval form, “it would be imprudent for this Court to now begin examining the
propriety of the Commissioner’s administrative policy or procedure underlying his
penalty determinations.” See id. at *61 (citing Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. 324, 328-329 (1974)). Moreover, petitioners have not
demonstrated “substantial evidence of unconstitutional conduct on respondent’s
part and [that] the integrity of our judicial process would be impugned if we were
to let respondent benefit from such conduct.” Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. at 328.
To the contrary, the record establishes that respondent’s agent prepared the
civil penalty approval form after reviewing case information, including his
knowledge of petitioners’ microcaptive insurance arrangement. We conclude that
respondent satisfied the requirements of section 6751(b)(1) with respect to the
penalties asserted under section 6662(a) and (b)(1), (2), and (6) for the 2014 tax
year. - 23 -
[*23] 2. Timeliness of Approval of Penalty Asserted Under Section 6662(i) for 2014
Because AGM Keker signed the first civil penalty approval form on May
25, 2017, he approved the section 6662(i) penalty in writing before respondent
asserted it on January 30, 2018, in Letter 5153 and the RAR. Although Letter
5153 and the accompanying RAR reflected respondent’s conclusion that for 2014
petitioners should be subject to the penalty under section 6662(i), that penalty was
not included in the notice of deficiency dated March 15, 2018. When STA Voth
realized that the notice of deficiency neglected to include that penalty, he decided
to assert the penalty in a first amendment to answer, which was filed (without
objection) on March 8, 2019.10
10 These facts are similar to the ones we faced in Roth v. Commissioner, T.C. Memo. 2017-248, aff’d, 922 F.3d 1126 (10th Cir. 2019). In that case a revenue agent received supervisory approval to assert a 20% penalty under sec. 6662(a) and a 40% penalty under sec. 6662(h), both of which were communicated to the taxpayers in a proposed report. Id. at *4. The taxpayers submitted a protest to the Appeals Office. The Appeals Office issued a closing memorandum which fully sustained the proposed penalties but sent the taxpayers a notice of deficiency which included only the 20% penalty under sec. 6662(a) and omitted the 40% penalty under sec. 6662(h). Id. at *5. In response to the taxpayers’ petition, IRS counsel filed an answer reasserting the taxpayers’ liability for the 40% penalty under sec. 6662(h). Id. We concluded that the initial determination of the 40% penalty could be said to rest with the revenue agent, the Appeals officer, or IRS counsel because in all three instances the individual proposing the penalties received personal approval, in writing, from his or her immediate supervisor. Accordingly, sec. 6751(b) was satisfied in each instance. Id. at *9-*10. - 24 -
[*24] STA Voth’s immediate supervisor, AC Wilder, signed--and thereby
approved--the pleading on February 25, 2019, before STA Voth lodged it with the
Court when he filed the motion for leave to file first amendment to answer, but AC
Wilder’s written approval was not necessary for compliance with section
6751(b)(1). Rather, respondent previously satisfied the requirements of section
6751(b)(1) with respect to the penalty asserted under section 6662(i) for the 2014
tax year when AGM Keker signed RA Snow’s civil penalty approval form.
The record establishes that Letter 950 and the accompanying RAR, each
dated April 10, 2018, were formal written communications to petitioners. These
communications notified petitioners that the Examination Division had completed
its work and made an unequivocal decision to assert penalties under section
6662(a), (b)(1), (2), and (6), and (i) for each year. Accordingly, we hold that
Letter 950 and the accompanying RAR embodied the “initial determination” for
the 2015 and 2016 tax years. See Belair Woods, LLC v. Commissioner, 154 T.C.
at __ (slip op. at 24-25). We will first address the approval of penalties asserted
under section 6662(a) and (b) and will then turn to section 6662(i). - 25 -
[*25] 1. Timeliness of Approval of Penalties Asserted Under Section 6662(a) and (b) for 2015 and 2016
The record establishes two acts by which respondent arguably satisfied the
requirements of section 6751(b)(1). GM Earley signed the second civil penalty
approval form on January 31, 2018--approving RA Snow’s initial determination of
penalties under section 6662(a) and (b)--before Letter 950 and the RAR were
issued on April 10, 2018. If GM Earley had not made such an approval, then
AGM Mendez’ signature on Letter 950 would have constituted a valid approval.
See Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 85 (2019); Flume
v. Commissioner, T.C. Memo. 2020-80, at *34.
Petitioners argue that the second civil penalty approval form is deficient
with respect to the 2015 and 2016 tax years because it repeats the text in the
“Reason(s) for Assertion of Penalty(s)” portion of the first civil penalty approval
form, which they interpret to relate solely to the 2013 tax year. In addition, they
attack AGM Mendez’ signature on Letter 950 as insufficient to satisfy the
requirement under section 6751(b)(1) that an initial determination must be
approved in writing by the immediate supervisor of the individual making the
determination. According to petitioners, AGM Mendez’ signature was a nominal - 26 -
[*26] act that did not reflect meaningful review, noting that the letter itself does
not mention the penalty or the approval.
In arguing that the text on the second civil penalty approval form is
inapplicable for the 2015 and 2016 tax years and that AGM Mendez’ signature on
Letter 950 is insufficient, petitioners again ask the Court to look behind the
documents. See Belair Woods, LLC v. Commissioner, 154 T.C. at ___ (slip op.
at 26). But with respect to each of these contentions we “‘decline to read into
section 6751(b)(1) the subtextual requirement’ that respondent demonstrate the
depth or comprehensiveness of the supervisor’s review.” Id. at ___ (slip op. at 27)
(quoting Raifman v. Commissioner, at *61). On that basis we hold that
respondent satisfied the requirements of section 6751(b)(1) with respect to the
penalties asserted under section 6662(a) and (b)(1), (2), and (6) for the 2015 and
2016 tax years.
2. Timeliness of Approval of Penalty Asserted Under Section 6662(i) for 2015 and 2016
The section 6662(i) penalties were included by RA Snow in his second civil
penalty approval form, which was signed by GM Earley. The section 6662(i)
penalties were not thereafter included in the notice of deficiency dated September
25, 2018. When STA Voth realized that the notice of deficiency neglected to - 27 -
[*27] include the penalties, he decided to assert them in the answer, which was
filed on March 19, 2019. STA Voth’s immediate supervisor, AC Wilder, signed
the pleading on March 19, 2019, before STA Voth filed it later that same day. But
AC Wilder’s approval was not necessary under section 6751(b)(1), because the
“initial determination” of the penalties--made by RA Snow--had already been
timely approved by his immediate supervisor, GM Earley. Thus, the record
establishes that respondent satisfied the requirements of section 6751(b)(1) with
respect to the penalties under section 6662(i) for the 2015 and 2016 tax years.
III. Conclusion
We hold that, with respect to the penalties asserted under section 6662 for
the 2013 tax year, respondent did not satisfy the requirements of section
6751(b)(1) with respect to the penalties asserted under section 6662(a), (b)(2)
and (6), and (i) but did satisfy such requirements with respect to the penalty
asserted under section 6662(b)(1). We further hold that respondent satisfied all of
the requirements of section 6751(b)(1) regarding the penalties asserted under
section 6662(a), (b)(1), (2), and (6), and (i) with respect to the 2014, 2015, and
2016 tax years. - 28 -
[*28] We have considered all of the arguments made by the parties and, to the
extent they are not addressed herein, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
An appropriate order will be issued.