T.C. Memo. 2020-2
UNITED STATES TAX COURT
TRIBUNE MEDIA COMPANY f.k.a. TRIBUNE COMPANY & AFFILIATES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CHICAGO BASEBALL HOLDINGS, LLC, NORTHSIDE ENTERTAINMENT HOLDINGS, LLC, f.k.a. RICKETTS ACQUISITION, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20940-16, 20941-16. Filed January 6, 2020.
R examined returns filed by Ps. During the examination, discussions were held regarding the potential assertion of penalties. Some of those discussions were within the IRS, and others included Ps. R provided documents to Ps proposing, but not determining, penalties. Penalties were determined in a notice of deficiency (NOD) and a notice of final partnership administrative adjustment (FPAA).
The parties filed cross-motions for partial summary judgment regarding whether the determination of penalties was properly approved under I.R.C. sec. 6751(b)(1). Ps argue that supervisory approval must occur before penalties are first proposed. R argues that approval in fact occurred when penalties were first set forth in a notice of proposed adjustment. R further argues that approval was -2-
[*2] timely because it occurred before the NOD and the FPAA were issued.
In Graev v. Commissioner, 149 T.C. 485 (2017), supplement- ing and overruling in part 147 T.C. 460 (2016), we followed the holding in Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42, that I.R.C. sec. 6751(b)(1) requires supervisory approval of a penalty “no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.” In Clay v. Commissioner, 152 T.C. 223, 249 (2019), we held that supervisory approval must occur no later than the first “communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal”.
Held: I.R.C. sec. 6751(b)(1) does not require written super- visory approval of penalties until the first formal communication to the taxpayer that the Commissioner has determined a penalty.
Held, further, on the facts of these cases, the first formal communications in which the Commissioner communicated his determination of penalties with regard to Ps were the NOD and the FPAA that concluded the examinations.
Held, further, R’s motion for partial summary judgment will be granted in part.
Held, further, Ps’ motion for partial summary judgment will be denied.
Joel V. Williamson, Thomas Lee Kittle-Kamp, Peter M. Price, Anthony D.
Pastore, and Daniel S. Emas, for petitioners.
Justin Scheid, for respondent. -3-
[*3] MEMORANDUM OPINION
BUCH, Judge: In 2009 Tribune Media Co. (Tribune) engaged in a
transaction that resulted in the formation of Chicago Baseball Holdings, LLC
(CBH). The Commissioner characterizes the transaction as a disguised sale and
determined a deficiency for Tribune and adjustments for CBH. Additionally, the
Commissioner determined that a 40% gross valuation misstatement penalty applies
under section 6662(a), (b)(3), (e), and (h), or in the alternative that one of the 20%
penalties applies for negligence, disregard of rules or regulations, a substantial
understatement of income tax, or a substantial valuation misstatement under
section 6662(a), (b)(1), (2), or (3), (c), (d), or (e) (20% penalties).1 Each party has
moved for partial summary judgment in each case on the question of whether the
Commissioner complied with the section 6751(b)(1) requirement to obtain written
supervisory approval of the initial determinations of the penalties and, more
specifically, whether that approval was timely. For the reasons set forth below, we
will grant the Commissioner’s motion as to the 40% gross valuation misstatement
1 All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All amounts are rounded to the nearest whole dollar. -4-
[*4] penalties and deny it as to the various 20% penalties. We will deny Tribune
and CBH’s motion in full.
Background
These cases arise from the Commissioner’s examinations of the returns filed
by Tribune and CBH for tax year 2009. Tribune filed a petition challenging the
Commissioner’s notice determining a deficiency of $181,661,831 and a gross
valuation misstatement penalty of $72,664,732. The tax matters partner of CBH
filed a timely petition challenging the Commissioner’s notice of final partnership
administrative adjustment (FPAA) regarding CBH, which also determined the
applicability of a 40% gross valuation misstatement penalty. Both notices
determined that the 20% penalties for negligence, disregard of rules or regulations,
substantial understatement of income tax, or substantial valuation misstatement
applied in the alternative. We consolidated the cases.
The Commissioner moved for partial summary judgment, asking the Court
to determine that he had complied with the supervisory approval requirement of
section 6751(b)(1). Tribune and CBH likewise filed a motion for partial summary
judgment, asking us to determine that the Commissioner did not comply with
section 6751(b)(1). The parties have stipulated many of the relevant facts, and
each argues that no material facts are in dispute. -5-
[*5] Various Internal Revenue Service (IRS) or IRS Office of Chief Counsel
employees were involved in the examination. The parties focused on four.
Revenue Agent H. Paul Unger was the examination team coordinator. His
immediate supervisor was Lisa Valdez, a supervisory revenue agent. They were
advised by Daniel Trevino, an attorney with the IRS Office of Chief Counsel, and
his immediate supervisor was Associate Area Counsel Naseem Khan.
I. Tribune
During the examination of Tribune’s return, Mr. Unger first recommended
determining a 20% penalty against Tribune alternatively for negligence, disregard
of rules or regulations, a substantial understatement of income tax, or a substantial
valuation misstatement. He made this recommendation orally to Ms. Valdez in
December 2014.
Tribune first became aware that the Commissioner was considering
imposing penalties during a meeting in January 2016. At this meeting the parties
discussed adjustments to Tribune’s return, and Mr. Trevino informed
representatives of Tribune that the Commissioner would apply a penalty to any
underpayment determined for 2009. Mr. Trevino’s notes about topics discussed at
the meeting state: “Applying penalties. Have not ruled any out.” -6-
[*6] Penalties were first proposed in writing in a draft Form 5701, Notice of
Proposed Adjustment (NOPA). In early 2016 Mr. Unger drafted a NOPA for
Tribune asserting in the alternative the various 20% penalties. He sent the draft to
IRS Counsel for review and advice. Upon reviewing the draft NOPA, Mr. Trevino
recommended also asserting as an additional alternative the gross valuation
misstatement penalty. He made this recommendation orally to his immediate
supervisor, Ms. Khan, in February 2016. Mr. Unger ultimately adopted this
recommendation when he prepared the final NOPA that was sent to Tribune.
The NOPA identifies the taxpayer, tax year, and date; contains the typed
text “Valdez, Liza F” in the box for Team Manager; and states: “See attached
886/Amount to be finalized on RAR after all adjustments.” Ms. Valdez’s name is
typewritten on the bottom of the Tribune NOPA. The NOPA states:
Based on the information we now have available and our discussions with you, we believe the proposed adjustment listed below should be included in the revenue agent’s report. However, if you have additional information that would alter or reverse this proposal, please furnish this information as soon as possible.
On March 31, 2016, the Commissioner sent that NOPA with an attached
Form 886-A, Explanations of Items, to Tribune proposing the 40% gross valuation
misstatement penalty or, alternatively, the various 20% penalties. The -7-
[*7] Commissioner did not send a 30-day letter granting Tribune the opportunity
to appeal the determinations in the NOPA.
Ms. Valdez signed a Form 3198, Special Handling Notice for Examination
Case Processing, on April 21, 2016, showing a section 6662(h) penalty (the 40%
gross valuation misstatement penalty). The form did not show any alternative
penalties but was accompanied by the case file. Ms. Valdez testified at deposition
that Mr. Unger prepared the Tribune Form 3198 and that she reviewed and signed
it.
The notice of deficiency was sent to IRS Counsel for review. On June 28,
2016, Ms. Khan electronically signed a memorandum approving the proposed
notice of deficiency for Tribune. The notice included the 40% penalty and,
alternatively, the various 20% penalties. The Commissioner sent the final notice
of deficiency to Tribune on June 28, 2016, the same day as Ms. Khan’s approval.
The notice of deficiency bears an unidentifiable signature with the notation that it
was made for Brian Atkinson. It attaches a Form 4549-A, Income Tax
Examination Changes (Unagreed and Excepted Agreed). That Form 4549-A
identifies the examiner as Keith Muldrow. -8-
[*8] II. CBH
Mr. Unger first recommended that a 20% penalty for negligence, disregard
of rules or regulations, a substantial understatement of income tax, or a substantial
valuation misstatement be applied to the adjustments for CBH. He made that
recommendation in writing in December 2015 to his immediate supervisor, Ms.
Valdez. CBH first became aware that the Commissioner intended to impose a
penalty during a conference call held in February 2016.
As with Tribune, Mr. Unger sent a draft NOPA asserting in the alternative
the various 20% penalties for CBH to Mr. Trevino for review in February of 2016.
Mr. Trevino recommended that a 40% gross valuation misstatement penalty also
be applied in the alternative to the CBH adjustments. He made that
recommendation orally to Ms. Khan.
Mr. Unger did not adopt Mr. Trevino’s suggestion when he prepared the
NOPA that would be provided to CBH. The Commissioner sent a NOPA to CBH
in March 2016. That notice proposed, in the alternative, a 20% penalty for
negligence, disregard of rules or regulations, a substantial understatement of
income tax, or a substantial valuation misstatement but did not mention the 40%
gross valuation misstatement penalty. As with the NOPA issued to Tribune, the
CBH NOPA stated: -9-
[*9] Based on the information we now have available and our discussions with you, we believe the proposed adjustment listed below should be included in the revenue agent’s report. However, if you have additional information that would alter or reverse this proposal, please furnish this information as soon as possible.
The Commissioner did not send CBH a letter granting the opportunity to appeal
the determinations in the NOPA.
Two NOPAs dated March 31, 2016, regarding CBH appear in the record.
On one, the handwritten notation “F5701 for Penalty” appears. On the other, it
does not. The version CBH received did not have the handwritten note. Both
versions of the NOPA were prepared by Mr. Unger and included Ms. Valdez’s
name in the box labeled “Team Manager”. In her deposition, Ms. Valdez testified
that this shows her approval. However, Ms. Valdez also testified that Mr. Unger
may have typed her name in that box and that it was not her electronic signature.
The FPAA was then prepared for issuance. Ms. Valdez signed a Form 3198
in June 2016 closing the case out to technical services. The form did not list any
penalties but was accompanied by the case file. Before the FPAA was issued to
CBH, a draft FPAA that included all of the alternative penalties at issue was
forwarded to the IRS Office of Chief Counsel for review. In a memorandum dated
June 28, 2016, Ms. Khan stated her approval of the proposed FPAA, which - 10 -
[*10] included the 40% gross valuation misstatement penalty in addition to the
various 20% penalties in the alternative.
Finally, the Letter 1830-F, TMP Notice of Final Partnership Administrative
Adjustment, also dated June 28, 2016, informed CBH that the Commissioner had
determined that a 40% gross valuation misstatement penalty applied to the
adjustments. The notice also determined the various 20% penalties in the
alternative. That notice purports to have been signed by Emil Pikul for Heather
Yocum. It attaches a Form 4605-A, Examination Changes - Partnerships,
Fiduciaries, S Corporations, and Interest Charge Domestic International Sales
Corporations (Unagreed and Excepted Agreed). That Form 4605-A is unsigned
and does not identify who prepared it.
Discussion
The question before the Court is whether the Commissioner’s penalty
determinations complied with section 6751(b)(1). That question requires us to
decide whether the initial determination of each penalty in each case was timely
approved in writing by the immediate supervisor of the person making the
determination. The parties agree as to who the immediate supervisors were. Who
made the initial determinations, when they were made, and whether certain - 11 -
[*11] documents are sufficient evidence of written approval are questions of fact.
When written approval was required is a question of law.
I. Jurisdiction and Burden of Proof
We have jurisdiction to redetermine a deficiency if a taxpayer files a timely
petition challenging a notice of deficiency. Sec. 6213(a). Our jurisdiction
includes the authority to redetermine any penalties or additions to tax. Sec.
6214(a). Similarly, we have jurisdiction to readjust the adjustments made in an
FPAA if a timely petition is filed. Sec. 6226(a). This jurisdiction includes the
authority to determine all partnership items and “the applicability of any penalty,
addition to tax, or additional amount which relates to an adjustment to a
partnership item.” Sec. 6226(f).
As part of our jurisdiction to redetermine whether a penalty applies, we have
jurisdiction to review whether the Commissioner complied with the supervisory
approval requirement of section 6751(b)(1). In Graev v. Commissioner (Graev
III), 149 T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460
(2016), we held that section 6751(b)(1) compliance is properly in issue in a
deficiency proceeding. We applied the same reasoning to a TEFRA partnership
proceeding and held that when penalties are asserted in an FPAA, section
6751(b)(1) compliance may be properly in issue in that proceeding. Endeavor - 12 -
[*12] Partners Fund, LLC v. Commissioner, T.C. Memo. 2018-96, at *63, aff’d,
943 F.3d 464 (D.C. Cir. 2019).
Generally, the Commissioner’s determinations in a notice of deficiency or in
an FPAA are afforded a presumption of correctness and the taxpayer bears the
burden of proving the determinations incorrect. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). In a proceeding regarding the liability of an individual
for a penalty, the Commissioner has the burden of production as to the penalty.
Sec. 7491(c). The Commissioner generally bears the burden of production as to
any penalty or addition to tax imposed on an individual but not as to one imposed
on a corporation. Sec. 7491(c); NT, Inc. v. Commissioner, 126 T.C. 191 (2006).
This burden of production requires the Commissioner to “come forward with
sufficient evidence indicating that it is appropriate to impose the relevant penalty.”
Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
But because the Commissioner does not bear the burden of production
under section 7491(c) as to penalties imposed on a corporation, he also does not
usually bear the burden of production as to section 6751(b)(1) approval for a
penalty determined against a corporation. Dynamo Holdings Ltd. P’ship v.
Commissioner, 150 T.C. 224, 231-232 (2018). Likewise, the Commissioner does
not usually bear the burden of production as to penalties, including as to section - 13 -
[*13] 6751(b)(1) approval, in a partnership-level proceeding. Dynamo Holdings
Ltd. P’ship v. Commissioner, 150 T.C. at 236.
II. Summary Judgment
Either party may move for summary judgment on any or all of the legal
issues in controversy. Rule 121(a). We may grant summary judgment only if
there is no genuine dispute as to any material fact. Rule 121(b); Naftel v.
Commissioner, 85 T.C. 527, 528-529 (1985). The moving party bears the burden
of proving that there is no genuine dispute and that it is entitled to judgment as a
matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d,
17 F.3d 965 (7th Cir. 1994). When deciding whether to grant summary judgment,
we consider the facts and the inferences drawn from them in the light most
favorable to the nonmoving party. FPL Grp., Inc. v. Commissioner, 115 T.C. 554,
559 (2000); Bond v. Commissioner, 100 T.C. 32, 36 (1993); Naftel v.
Commissioner, 85 T.C. at 529. However, the nonmoving party may not rest on
mere allegations or denials but must set forth specific facts showing that there is a
genuine dispute for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986);
Sundstrand Corp. v. Commissioner, 98 T.C. at 520; see also Rule 121(d).
III. Section 6751(b)(1)
Section 6751(b)(1) provides: - 14 -
[*14] 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.
Congress enacted section 6751(b)(1) because of concerns that the IRS used
penalties as mere leverage in negotiations. A Senate Finance Committee Report
explains Congress’ rationale in enacting this provision. “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), 1998-3 C.B. 537, 601. It was further
explained: “In order to prevent IRS employees from arbitrarily using penalties as
leverage against taxpayers, our legislation requires non-computer determined
penalties to be approved by management.” 144 Cong. Rec. 7627, 7873 (1998).
In Graev III we decided when the Commissioner must obtain approval of
the initial determination to impose a penalty. The Commissioner argued that
approval could occur at any time, even after a proceeding in this Court, and as a
result, it would be premature for us to consider section 6751(b)(1) in a deficiency
proceeding. We held that we have jurisdiction in a deficiency proceeding to
consider compliance with section 6751(b)(1). Graev III, 149 T.C. 485.
In deciding Graev III, we relied heavily on the Court of Appeals for the
Second Circuit’s opinion in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), - 15 -
[*15] aff’g in part, rev’g in part T.C. Memo. 2015-42. In that case, the Court of
Appeals held that section 6751(b)(1) “requires written approval of the initial
penalty determination no later than the date the IRS issues the notice of deficiency
(or files an answer or amended answer) asserting such penalty.” Chai v.
Commissioner, 851 F.3d at 221 (emphasis added); see also Endeavor Partners
Fund, LLC v. Commissioner, T.C. Memo. 2018-96, at *63 (applying the same
rationale to an FPAA). In reaching its conclusion, the Court of Appeals
considered the practicality of providing written approval. Approval is meaningful
only if obtained when the supervisor has the discretion to give or withhold it. See
Chai v. Commissioner, 851 F.3d at 220. The court identified the last moment
when approval might be required. In these cases, we are asked whether approval
might be required earlier.
A. Initial Determinations
On April 24, 2019, we issued our Opinion in Clay v. Commissioner, 152
T.C. 223 (2019). In Clay, we addressed the issue of whether section 6751(b)(1)
might require approval at a time before the Commissioner issues a notice of
deficiency. We held that it could: Section 6751(b)(1) requires written supervisory
approval of the initial determination no later than the earlier of (1) when it is
communicated to the taxpayer in the form of a notice of deficiency or (2) when - 16 -
[*16] another form of formal communication is sent to the taxpayer that both
advises it that penalties were determined and gives the taxpayer the opportunity to
appeal that determination. Clay v. Commissioner, 152 T.C. at 249. In Clay, the
Commissioner issued a notice of proposed adjustment including penalties along
with a 30-day letter granting the opportunity to appeal that determination with the
IRS Office of Appeals (Appeals). We held that the Commissioner made the initial
determination for purposes of section 6751(b)(1) no later than when he issued the
30-day letter and that written supervisory approval was therefore required before
the 30-day letter was sent to the taxpayer. Clay v. Commissioner, 152 T.C. at 249.
On April 25, 2019, we ordered the parties in these cases to address the effect
of Clay on the pending motions for partial summary judgment. Tribune and CBH
responded that under Clay written approval was required “before the first time the
Service communicates the penalties to the taxpayers.” Tribune and CBH argue
that the NOPA, the January 2016 meeting, and the February 2016 call were
communications of penalty determinations before which approval was required.
The Commissioner argues that “formal communication offering the opportunity
for administrative appeal with respect to the [penalties]” was not included with the
NOPAs and that therefore, under Clay, the notice of deficiency and the FPAA - 17 -
[*17] were the first formal communications of the penalty determinations to which
section 6751(b)(1) applied.
On the facts of these cases, we agree with the Commissioner. The first
formal communications of the initial determinations of the penalties to which
section 6751(b)(1) applied were the notice of deficiency (Tribune) and the FPAA
(CBH). The Commissioner did not send Tribune or CBH any document that
conferred the opportunity for an administrative appeal, which can be one of the
important indicia of formality. Nor did the Commissioner send any other written
communication purporting to determine a penalty with any sense of finality. As a
result, the notice of deficiency and the FPAA were the Commissioner’s first
formal written communications to Tribune and CBH, respectively, informing them
that the Commissioner had determined to assert penalties.
Tribune and CBH argue that supervisory approval is required by “the first
time an IRS official introduces the penalty into the conversation”. See Graev III,
149 T.C. at 501 (Lauber, J., concurring). They argue that section 6751(b)(1) and
Clay require that written approval occur “before communicating the initial
determination of a penalty to the taxpayer.” Then, building on that phrase, they
argue that the approval requirement “arises the moment when the employee first
proposes the imposition of penalties to the taxpayer.” Tribune and CBH argue that - 18 -
[*18] approval of the various 20% penalties is required to have occurred before
those were first mentioned in a January 2016 meeting during which Mr. Trevino
described the adjustments that might be forthcoming. They further argue that
approval of the gross valuation misstatement penalty is required to have occurred
before it was first suggested in the NOPA that was issued to Tribune on March 31,
2016.
Although the statute looks for approval of the “initial determination”,
Tribune and CBH look for approval of the “first propos[al]”. This approach
ignores the sense of formality implied by Congress’ use of the word
“determination” and would render the examination of penalty issues unworkable.
To make a determination is to establish something conclusive- ly. When ascertaining the plain meaning of words, it is appropriate to consult dictionaries. See Nat’l Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472, 480 n.10 (1979); Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704 (1991). Webster’s Collegiate Dictionary 315 (10th ed. 1996) defines “determine” as “to fix conclusively or authorita- tively”. The Random House College Dictionary 362 (rev. ed. 1980) defines it as “to settle or decide (a dispute, question, etc.) by an authoritative or conclusive decision”. These definitions are consistent; a determination is authoritative or conclusive.
Graev III, 149 T.C. at 533 (Buch, J., concurring as to Parts I and III and dissenting
as to Part II). A “‘determination’ is embodied in a written communication to the
taxpayer that notifies him of a final IRS decision”. Belair Woods, LLC v. - 19 -
[*19] Commissioner, 154 T.C. __, __ (slip op. at 15) (Jan. 6, 2020). Clearly
“determination” is not a synonym for a mere suggestion, proposal, or initial
informal mention of the possibility of the assertion of a penalty.
A background on basic IRS examination and appeal procedures is
instructive. In an IRS examination, the examination personnel are charged with
gathering information and determining a liability if appropriate. See secs. 7601-
7613. In doing so, they may request information by various means including the
issuance of Information Document Requests. Internal Revenue Manual pt.
4.46.4.2 (Dec. 13, 2018). If developing a penalty issue, the IRS may need to
request information related to whether imposing a particular penalty is justified.
This would necessarily involve communicating the possibility that a penalty is
being considered long before the Commissioner actually determines whether to
impose a penalty, let alone communicates that determination to the taxpayer. The
mere possibility that a penalty might be asserted is not a determination.
In their response to our April 25, 2019, order, Tribune and CBH argue that a
NOPA grants appeal rights. But they ignore the wording of the NOPA itself. The
heading of the form notes that it is a “proposed adjustment”, falling short of a
“determination” requiring approval. Moreover, the form states: - 20 -
[*20] Based on the information we now have available and our discussions with you, we believe the proposed adjustment listed below should be included in the revenue agent’s report. However, if you have additional information that would alter or reverse this proposal, please furnish this information as soon as possible.
This text makes clear that a NOPA, standing alone, is not a determination.
As for appeal rights, a NOPA, standing alone, grants no such thing. Tribune
and CBH cite the Appeals fast track settlement and early referral procedures as
examples of when a NOPA grants the opportunity for an appeal. It is true that a
taxpayer may request that any developed, unagreed issue under audit be referred to
Appeals, even while the remaining issues remain under audit. Rev. Proc. 99-28,
sec. 2.01, 1999-2 C.B. 109, 109. However, such a request to appeal an issue is not
a right. The request may be denied, and there is no right to appeal such a denial.
Id. sec. 2.09, 1999-2 C.B. at 110. We need not reach the question of whether
approval would be required if fast track settlement or early referral were granted,
because those facts are not before us. What is before us is a NOPA, standing
alone. And a NOPA standing alone is not a determination.
B. Approval in Writing
To satisfy the section 6751(b)(1) requirement of penalty approval in writing
by the immediate supervisor, the writing must manifest the supervisor’s intent to
approve the penalty. Although the IRS has various forms that can be used for - 21 -
[*21] approving penalties,2 courts have not restricted the Commissioner to using
only those forms in order to comply with the written approval requirement. See
Palmolive Bldg. Inv’rs v. Commissioner, 152 T.C. 75, 85-86 (2019).
Any written manifestation of the supervisor’s intent to approve the penalty
is sufficient. For example, in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d
193, 213 (5th Cir. 2018), aff’g T.C. Dkt. No. 26096-14 (Oct. 7, 2016) (bench
opinion), we had found that a signed 30-day letter sent by the supervisor of the
examining agent satisfied the requirement for written approval.3 But these cases
are not as straightforward as PBBM-Rose Hill. The notice of deficiency and the
FPAA in the cases before us were not signed by the immediate supervisor of the
examining agent. These cases are also not as straightforward as the many cases in
which we have accepted supervisory approval set forth in a Civil Penalty Approval
2 Recent guidance from Office of Chief Counsel provides a nonexclusive list of approval forms: “Form 300 (Civil Penalty Approval Form (Lead Sheet)); Form 8278 (Assessment and Abatement of Miscellaneous Civil Penalties); Form 4700 (for W&I/SBSE campus cases); Form 5772 (for TEGE cases); Form 5809 (for preparer penalty cases).” CC-2018-006 (June 6, 2018). 3 The Court of Appeals for the Fifth Circuit referred to “the cover letter of a summary report”. PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 213 (5th Cir. 2018). Our bench opinion, see sec. 7459(b); Rule 152, made clear that the cover letter was a 30-day letter that transmitted the examination report, PBBM- Rose Hill, Ltd. v. Commissioner, T.C. Dkt. No. 26096-14 (Oct. 7, 2016) (bench opinion at 25). - 22 -
[*22] Form. See, e.g., Brumbaugh v. Commissioner, T.C. Memo. 2018-140,
at *21. We have no such form here.
Although these are not straightforward cases, we are not without approvals.
The last step in the examinations of Tribune and CBH was to close the cases out to
technical services for preparation of the notices. To do that, Ms. Valdez signed
Forms 3198 transmitting the case files and all of the adjustments for inclusion in
the notices. Those Forms 3198 manifest her intent to approve the adjustments
included with those forms. But the papers included with the summary judgment
motions do not clearly indicate what was included with the Forms 3198. As a
result, there is a question of fact as to what Ms. Valdez approved.
Under our precedent in Graev III, however, we can conclude that the 40%
gross valuation misstatement penalties were approved. In Graev III we were also
confronted with a penalty determination made by a revenue agent followed by an
additional alternative penalty determination made by an attorney with the IRS
Office of Chief Counsel. We held that the attorney’s recommendation was the
initial determination of that penalty. In Graev III, the taxpayers argued that the
attorney served only in an advisory capacity and did not have authority to make an
initial determination of penalties. The Court was divided on this issue, with
several Judges dissenting as to the issue of whether counsel has authority to make - 23 -
[*23] penalty determinations such that approval of their determinations would be
relevant. Graev III, 149 T.C. at 529-532 (Buch, J., concurring as to Parts I and III
and dissenting as to Part II). In these cases the question of whether the initial
determination of penalties can be made by an attorney, Mr. Trevino, could affect
the outcome on the question of whether the Commissioner complied with section
6751(b)(1) as to the 40% gross valuation misstatement penalty. Both the facts of
these cases and the parties’ stipulations confirm that Mr. Trevino made the initial
determinations of the 40% gross valuation misstatement penalties. Ms. Kahn was
Mr. Trevino’s immediate supervisor. Under the holding of Graev III, Ms. Khan
satisfied section 6751(b)(1) when she approved in writing Mr. Trevino’s initial
determinations to assert the 40% gross valuation misstatement penalties by
electronically signing the June 28, 2018, memoranda approving the proposed
notice of deficiency for Tribune and the proposed FPAA for CBH. The notices
included the 40% penalty and, alternatively, the various 20% penalties. Ms. Khan
therefore also approved the various 20% penalties. However, her approval does
not satisfy section 6751(b)(1) because she was not the immediate supervisor of
Mr. Unger, the individual who made the initial determination to impose the
various 20% penalties. - 24 -
[*24] Conclusion
In these cases the initial determinations as to penalties were first
communicated in the notice of deficiency issued to Tribune and the FPAA issued
with respect to CBH. We must decide in the context of these cross-motions for
partial summary judgment whether the penalty determinations were approved in
writing before the Commissioner issued those notices. The Commissioner has
shown that Ms. Kahn approved Mr. Trevino’s initial determination of the 40%
gross valuation misstatement penalties as to each of Tribune and CBH.
Accordingly, we will grant the Commissioner’s motion in part, as to those
penalties. However, there is a question of fact as to whether Ms. Valdez approved
Mr. Unger’s initial determinations of the various 20% penalties before those
penalties were communicated to Tribune and CBH in the notice of deficiency and
the FPAA. As a result, we will deny both parties’ motions for partial summary
judgment as to the various 20% penalties.
An appropriate order will be issued.