The Second Circuit reversed the Tax Court’s decision in Chai v. Commissioner and made clear that the IRS had a duty to show it complied with the managerial approval process required by IRC 6751 prior to issuing a notice of deficiency. Steve blogged on that decision last week. We also posted last week on a designated order issued by Judge Cohen requiring compliance with IRC 6751 and citing Chai. Judge Lauber issued a similar order.
On Friday the IRS took the very unusual step of filing a motion for reconsideration of the Graev v. Commissioner decision. We reported on Graev here. The Second Circuit largely adopted the view of the dissent in Chai. Because the appeal in Graev would go to the Second Circuit, it was clear that the opinion would not stand. Potentially preempting an appeal, the IRS has asked the Tax Court to reconsider its opinion in Graev. Here is the relevant language of the motion, which can be found here:
- Relief is justified here because a recent decision by the United States Court of Appeals for the Second Circuit created “exceptional circumstances” for this case.
- On March 20, 2017, the United States Court of Appeals for the Second Circuit released an opinion in Chai v. Commissioner, No. 15-1653 (2d Cir. Mar. 20, 2017).
- The Second Circuit’s opinion in Chai specifically disagreed with the majority opinion in this case. Chai, slip op. at *57, 59.
- The court in Chai held that compliance with section 6751(b) is an issue in deficiency cases because it is part of Docket No. 30638-08 – 3 – respondent’s burden of production for penalties under section 7491(c). Chai, slip op, at *67.
- Because an appeal in this case would be heard by the Second Circuit, the majority’s opinion in this case cannot be upheld under the precedent established by Chai.
- Respondent requests that the Court vacate its decision in this case and order additional briefing on what steps the Court should take in this case in light of the Chai opinion. Respondent has views which it believes will benefit the Court to consider in the changed circumstances of this case.
It will be interesting to learn the views of the IRS on how Chai will impact its operation. The IRS did not suggest what “views it believes will benefit the Court.”
We will keep you posted. If you are contesting a case in Tax Court in which the IRS asserted a penalty, expect the IRS to begin a search of its records to determine if the required approval of the penalty occurred. If the IRS does not come forward with the information proving the correct approval occurred prior to the issuance of the notice of deficiency, you may have a clear path to victory on the penalty.