Almost Immediate Impact of Chai

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On March 21, Steve blogged about the important decision of the 2nd Circuit in  Chai v. Commissioner on March 20, holding that the IRS most show, as required by IRC 6721(b), that the immediate manager approved the imposition of a penalty.  In a designated order enter on March 22, 2017, in Henderson v. Commissioner, Docket No. 14187-16L, Judge Cohen cites to the Chai decision in a ruling on the motion for summary judgment filed by the IRS in this Collection Due Process Case.  Like the order in Vigon v. Commissioner issued by Judge Gustafson which we blogged about here, Judge Cohen requires the IRS to address the requirement of IRC 6751(b).  Specifically, she orders “on or before April 10, 2017, respondent may supplement the motion for summary judgment with any additional affidavit or argument concerning compliance with the requirements of law and administrative procedures supporting the notice of determination in this case, specifically with respect to compliance with Internal Revenue Code Section 6751(b)(1)….”

The fact that she added the requirement to show appropriate approval and that she made this order a designated order, signals what may be an important shift on the Court regarding the practice it will now take regarding the IRS obligation to prove the appropriate approval of penalties.  We will continue to monitor this issue because it suggests a potentially huge shift in practice.  Kudos again to Frank Agostino and the attorneys in his office for identifying and pursuing the argument in a statute that lay forgotten for almost 20 years.

For those of you not familiar with designated orders, the Tax Court has a wonderful feature available on the front page of its web site in which it posts the orders entered each day and provides a feature making the orders are searchable.  The searchable feature of the orders makes the Tax Court’s treatment of them vastly superior to PACER.  The feature became available in 2011 limiting the lookback period but that limitation grows less important with each passing day.  As the orders get posted, the judge issuing the order has the opportunity to “designate” the order.  If the judge designates the order, the judge is signaling that the order is somewhat special – at least in the view of that judge.  Keep in mind that orders do not go through the review in the Chief Judge’s office prior to issuance as is required with opinions.  Matters decided by orders also do not have precedential value as we have discussed before.  Yet, a not insignificant percentage of Tax Court cases get resolved through dispositive orders rather than opinions.  Designated orders allow the judge to alert practitioners that something about the order deserves attention; however, the designation of the order does not require, or really provide for, the judge to state explicitly why the judge has labeled it as a designated order.  The reader must surmise from context why the judge has chosen to designate the order.  On any given day the Tax Court may post five orders and maybe one order will be designated.

In the case of the order in the Henderson I surmise that Judge Cohen designated it because of the citation to Chai and the requirement that the IRS put on its proof about the authorization of the penalty.  This blog has regularly mined orders, and especially designated orders, as a source of information about Tax Court procedure that often goes unnoticed.  As mentioned before, Carl Smith has generally served as our eyes and ears on the Court’s orders.  We have decided to begin regularly posting about designated orders from the prior week in order to alert readers to those orders the judges on the Court deem most important.

The Henderson order, citing to Chai in a case which appears appealable to the 9th Circuit and not the 2nd, suggests a new day has dawned for the IRS in meeting its obligation when it asserts a penalty.  We will be watching closely for other orders and opinions.


  1. Carl Smith says

    Readers should note that, even though the Second Circuit disagreed with the Tax Court holding in Graev that lack of 6751(b)(1) compliance could not be considered in a deficiency case, Grave implicitly held that lack of 6751(b)(1) compliance could properly be considered in CDP case, like Vigon. Henderson is a CDP case, so it is consistent with the Tax Court’s holding in Graev.

    Vigon and Henderson may be indications that the judges on their own (at least in CDP cases) are now going to ask IRS lawyers to put in evidence on 6751(b)(1) compliance in every case where a discretionary penalty is involved, even though there will never be a pro se taxpayer who is savvy enough to know that there is a possibility to challenge the penalty for lack of 6751(b)(1) compliance.

    But, it is not yet clear to me whether the judges will consider non-compliance with 6751(b)to be (1) part of a taxpayer’s challenge to the underlying liability (under 6330(c)(2)(B), which has limitations, including that the taxpayer had raised the issue at Appeals) or (2) a challenge that all required procedures were not followed (under 6330(c)(1), as to which the Tax Court in Hoyle said that a taxpayer could complain about lack of procedural compliance before the Tax Court, even if the taxpayer had not raised the issue before Appeals).

  2. Carl Smith says

    I just checked through the order search function and found another order in which a Tax Court judge refused to grant the IRS summary judgment in a CDP case and asked for the IRS to supplement the record with information and documentation on compliance with section 6751(b)(1). It is an order by Judge Lauber dated March 2, 2017 in Metzger, Docket No. 7473-16SL. So, that makes two judges beyond Judge Gustafson that are now requiring proof of compliance with section 6751(b)(1) sua sponte.

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