NEO – A Series of Reflections

Nina Elizabeth Olson has served as the National Taxpayer Advocate (NTA) since March 1, 2001.  She burst into the limelight of the national tax scene shortly after the film, The Matrix, made a splash with its protagonist, Neo.  Of course the word neo has Greek roots much older than the film and serves as a combining form meaning “new,” “recent,” “revived,” “modified.”  It’s safe to say that Nina brought something new to the tax world and that she modified tax procedure with her work over the past 18 years. 

To provide a tribute to her impact on tax procedure and to her overall body of work as the NTA we have invited, and continue the invitation to any of our readers, tax practitioners to comment on her impact.  We will run those comments during the month of July.  I am sure this will not be the only tribute to Nina as she moves to the next phase of her career.  Les and I are writing articles, along with several others, for a special edition of the Pittsburgh Tax Review that will be published next year.

I have begun work on my article for the law review.  My sabbatical this semester has me living in my home town of Richmond when not traveling.  This has provided me with the opportunity to go to the Community Tax Law Project which Nina founded in 1992 and review the records they maintain from her time there as founder and director.  Because I was the district counsel for the IRS in Richmond at the time she started the clinic, I have a fair amount of familiarity with the early years of CTLP but the records provide an astounding picture of her passion, energy and vision.  She carried those qualities into the NTA position making us forget that she was not the first NTA and that she was not an obvious choice for NTA based on her background. 

Commissioner Rossotti plucked her from relative obscurity to fill this position.  Yes, she testified before Congress leading up to the 1998 Restructuring and Reform Act, and she had been recognized by the Virginia State Bar and Richmond Bar Association for her work in starting the first non-academic low income taxpayer clinic, but she did not have a huge profile.  I doubt he expected that this selection would overshadow and outlast almost any other personnel decision that he made while commissioner.

As others will discuss in their reflections, Nina has made a significant impact on tax procedure in ways both visible and invisible.  Her work with the low income tax clinics and the Tax Court has created a situation in which almost everyone who files a Tax Court petition pro se receives correspondence offering the possibility of representation and also finds assistance at calendar call.  This has made a significant difference on the disposition of Tax Court cases though I lack empirical data to prove this at present.  She championed the Taxpayer Bill of Rights (TBOR) and we are still learning what TBOR might mean to tax procedure as it plays out over time.  Even if TBOR does not mean that taxpayers will win court cases citing to the provision, it could easily mean changes in manual provisions, regulations and sub-regulatory guidance that have an even greater impact than court decisions.  She fought from the inside for many positions that have changed tax procedure in ways favorable to taxpayers and to the system as a whole.

As we celebrate her legacy, let’s look forward to the new NTA with the hope and expectation that the new NTA will carry on the fight to improve the system for taxpayers and create tax procedures that work better for taxpayers and the IRS.

Taxpayer Bill of Rights Does not Confer Tax Court with Jurisdiction in Collection Due Process

In the case of Atlantic Pacific Management Group LLC v. Commissioner, 152 T.C. No. 17 (June 20, 2019) the Tax Court in a precedential opinion determines, inter alia, that the Taxpayer Bill of Rights (TBOR) does not provide a basis for jurisdiction for a taxpayer to come into the court seeking Collection Due Process (CDP) relief. The case involves more than just the TBOR argument, but I think the TBOR aspect of the case may have driven the case to precedential status. The case is one of several in which Frank Agostino has raised TBOR as a basis for relief. I discuss this case and the others in an article on TBOR forthcoming in the Temple Law Review.


The IRS assessed penalties against the taxpayer under IRC 6698(a) for late partnership information returns and IRC 6038(b) for failing to file information returns with respect to foreign corporations and partnerships. After sending the requisite notice demanding payment and not receiving payment, the IRS eventually filed a notice of federal tax lien and sent a CDP notice to petitioner at its New York address. The court finds that the CDP notice was sent on June 13, 2017, delivered and signed for on June 16, 2017. In a footnote it notes that petitioner disputes delivery and further notes that this fact does not matter. Petitioner’s tax matters partner was not in the United States at the time of delivery and did not sign for the delivery. Petitioner requested a CDP hearing on July 28, 2017 more than 30 days after the mailing of the CDP notice. The address used by petitioner in requesting the CDP hearing matched the address to which the IRS sent the CDP notice.

The IRS responded to the CDP request by notifying petitioner that its request failed to meet the timeliness requirements for a CDP hearing. The IRS offered petitioner an equivalent hearing if it requested one by September 1, 2017. It did this in a letter dated August 28, 2017. Petitioner did not reply to this letter by September 1 and one wonders how it could do so within such a short time frame. This puzzles me as I thought the untimely CDP request submitted within one year of the CDP notice would automatically trigger an equivalent hearing but apparently the taxpayer must make a second request affirming the desire for an equivalent hearing. The IRS automated collection site closed the case without offering an equivalent hearing on September 7, 2017. Because the Tax Court does not have jurisdiction over equivalent hearings, it does not provide a further discussion of this troubling truncation of the equivalent hearing.

Petitioner sent another request for a CDP or equivalent hearing on December 19, 2017, but the court noted that the record contained no indication of a response to this letter from the IRS. Apparently having heard nothing since sending the December letter, petitioner filed its petition on May 2, 2018, requesting review of its case even though it did not have a determination or a decision letter. Petitioner attached to its petition the letter from the IRS dated August 28, 2017.

The Tax Court started its discussion with a general statement of the prerequisite for obtaining jurisdiction to obtain a collection due process review:

Our jurisdiction under section 6330(d)(1) requires a written notice embodying a determination to proceed with the collection of taxes in issue, and a timely petition. Lunsford v. Commissioner, 117 T.C. 159, 164 (2001). The determination does not have to follow any particular format. LG Kendrick, LLC v. Commissioner, 146 T.C. 17, 28 (2016), aff’d, 684 F. App’x 744 (10th Cir. 2017). However, if no written determination is issued, the absence of such a determination is grounds for dismissal of the petition. Id. (citing Offiler v. Commissioner, 114 T.C. 492, 498 (2000)). In deciding whether we have jurisdiction we will not look behind a notice of determination, or lack of notice, to determine whether a hearing was fair or even whether the taxpayer was given an appropriate hearing opportunity. Id. at 31; cf. Lunsford v. Commissioner, 117 T.C. at 164-165.

Since the court decided off the bat it lacked jurisdiction, it next looked to explain why it had no jurisdiction to hear the case. It basically discussed two cases in which it noted the difficulty to reconcile the outcomes in the Tax Court. First, it discussed Buffano v. Commissioner, T.C. Memo. 2007-32. In Buffano, the Tax Court determined that the IRS sent the CDP notice to the wrong address. Because of the error in mailing the CDP notice, the Tax Court invalidated the levy notice as it dismissed the case. Petitioner argued that the court should issue a similar order here. Second, the court discussed Adolphson v. Commissioner, 842 F.3d 478, 484 (7th Cir. 2016) where the Seventh Circuit, in a case with similar facts to Buffano held that “[a] decision invalidating administrative action for not following statutory procedures is a quintessential merits analysis, not a jurisdictional ruling.” The IRS asked the Tax Court to adopt the holding in Adolphson and decline to rule on the administrative action as it dismissed the case. The court declined both invitations and distinguished this case from Buffano because it found that the IRS in this case mailed the CDP notice to the correct last known address.

Since the CDP notice went to petitioner’s last known address and since petitioner failed to make a timely CDP request, the court held that the IRS did not need to issue a notice of determination. Without the notice of determination, the court lacked jurisdiction over petitioner’s collection complaints.

Petitioner did not stop at this point but argued in the alternative that IRC 7803, home to TBOR, offered another path by which the court could obtain jurisdiction. The court declined the invitation to find jurisdiction through TBOR stating:

… section 7803(a)(3) itself does not confer any new rights on taxpayers; it merely lists “taxpayer rights as afforded by other provisions of” the Code. Further, section 7803(a)(3) imposes an obligation on the Commissioner to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with” such rights. It does not independently establish a basis for jurisdiction in this Court.

In a footnote the court cites to the case of Moya v. Commissioner, 152 T.C. __, __ (slip op. at 16-17) (Apr. 17, 2019), where the court held, in the context of a deficiency case, that TBOR provided no new rights and no independent rights on which the taxpayer could rely. We discussed the Moya case here.

The court concludes by noting, as it frequently does, that petitioner still has the remedy of paying the tax and filing a refund claim. No facts were offered on the practicality of this remedy for this taxpayer. I know for the taxpayers I represent, this is not a practical remedy.

The decision here does not come as a surprise to me. Had the court ruled that it had jurisdiction based on TBOR I would have been shocked. The refusal to use TBOR as a basis for jurisdiction does not mean that a violation of taxpayer rights could never play a role in the outcome of a CDP case in Tax Court but conclusively provides, at least at the Tax Court, that TBOR will not open the door of the Tax Court no matter how egregious the violation of taxpayer rights and that the taxpayer must find some other means to obtain jurisdiction.

Here, the taxpayer did not argue that the 30 day period for making a CDP request is not a jurisdictional time period and that its failure to meet the 30 day period resulted from some factor(s) that could form the basis for equitable tolling. The facts do not necessarily support such an argument, but the taxpayer did make some arguments about the absence of the principal of the business at the time of the delivery of the CDP notice. Judge Gustafson recently issued an interesting order raising questions regarding the jurisdiction of the Tax Court based on a failure of the “right” part of the IRS to receive the CDP notice within 30 days. If TBOR does not open the court’s door in the situation presented by Atlantic Management, be sure to look at whether a CDP request submitted to the IRS after the 30 day period might warrant a different type of argument regarding jurisdiction that does not rely on TBOR.

Who Owes the Tax – Blue Lake Rancheria

In the case of Blue Lake Rancheria Economic Development Corp. v. Commissioner, 152 T.C. No. 5 (2019) the Tax Court determined that only one of the two corporations against whom the IRS was pursuing collection owed the tax. I hope that we will one day receive a guest post from petitioner’s counsel, Bob Rubin, who started two weeks before me at Chief Counsel’s office in March of 1977 and occupied the office adjacent to mine, but in the meantime I want to write a short post to provide the facts and outcome on a case featuring the unique legal issues presented by tribal entities.


The primary issue in this case focused on tribal law and the powers granted to corporations chartered under the federal statutes governing these entities. Blue Lake Rancheria Economic Development Corporation (BLREDC) is the real petitioner in this Collection Due Process (CDP) case and the parent corporation in the structure created by the tribe. The second corporation, Mainstay Business Solutions (MBS), presents as a subsidiary of BLREDC.

MBS ran an employment and temp agency. During and after the recession, it experienced significant business challenges and ultimately closed its doors. Before it closed up, it incurred huge 941 liabilities for failure to pay over employment taxes for numerous quarters. MBS agrees that it owes the money but that does the IRS little good since it has no assets. The IRS seeks to also hold BLREDC liable for the unpaid taxes and BLREDC has assets.

The IRS argues for the application of state law and under state law it would have a relatively easy time tagging BLREDC with the liability. BLREDC argues that state law does not apply. The court recites the relevant statutes and notes that although MBS is structured as a division of BLREDC the form of a division is a creature of federal, and not state law, created as a result of the issuance of a federal charter to the tribe by a federal agency in a dispute over federal taxes. Under the circumstances the court states that it fails to see why state law matters.

Next, the IRS argued that the power to create legally distinct corporate divisions is not an ordinary corporate power and, therefore, it follows that the granting of such a power is outside the scope of the federal statute. As with the first argument, the court disposes of this one noting that the federal statute at issue here grants broad authority. It rejects the narrow interpretation of the scope of authority available under the statute.

Additionally, the court notes that the canons of construction at play in this this situation favor the tribe. It cites to a couple of canons it deems applicable and points out that they call for interpreting statutes in a manor favorable to the interests of the tribe.

The court closes with the following quote:

The plain terms of IRA [the federal statute at issue here] sec. 17 clearly bestow broad discretionary power on DOI to issue Federal charters of incorporation to Indian Tribes. The powers that may be conferred on a tribal corporation under IRA sec. 17 are not limited to those held by State corporations nor are they limited by State law.

As a result the Tax Court determines that BLREDC does not share the employment tax liability with its former division. On the way to this result the court had also determined that BLREDC did not have a prior opportunity to contest the merits of the employment tax liability. The court also distinguished the case of First Rock Baptist Church Child Dev. v. Commissioner, 148 T.C. 380, 387 (2017), discussed in a prior post here, as it went through its analysis concerning its jurisdiction. The court also pointed out that this case involved employment taxes and not income taxes stating that a different analysis applied in the case of employment taxes.

The tribal law that underpins the court’s decision here will not come into play in most of the cases litigated regarding related corporations and their common liabilities for tax. For that reason this taxpayer favorable opinion here will not easily translate to more common situations. Tax practitioners who do represent tribal interests will find the opinion useful not only in the way the court approached its analysis of the statute but also because of the canons it applied. Congratulations to my friend Bob Rubin for winning an unusual case and providing PT with the opportunity to explore the intersection of tribal law and tax procedure.

Petitioners Cannot Raise New Issues at Rule 155 Stage of Tax Court Case

In Vento, et al, v. Commissioner, 152 T.C. No. 1 (2019) the Tax Court determined that petitioners could not raise a new substantive issue during the computational phase of the case. During the trial of the Tax Court case the court concluded that petitioners, three sisters who resided in the United States during the year at issue, could not get credit for foreign taxes paid when they attempted unsuccessfully to receive tax treatment as residents of the Virgin Islands. At the conclusion of the Tax Court case and the issuance of the opinion, the court ordered the parties to calculate the tax resulting from its opinion based on the provisions of Tax Court Rule 155.

The parties complied with the court order to calculate the taxes resulting from the opinion; however, they did not agree on the amount of taxes due. When this happens, the Tax Court usually schedules a hearing so that the parties can argue (explain) the basis for their computations. The purpose of the hearing is to determine which of the parties, if either, has properly calculated the tax so that the court can enter a decision upon which the IRS can base an assessment of additional taxes due. In some cases the court can decide the correct computation based on the explanations submitted with the conflicting computations.


In their Rule 155 computation petitioners determined liabilities about 60% less than the liability determined by the IRS. Petitioners’ computation acknowledged that they could not obtain a foreign taxes paid reduction of their taxes under IRC 901 as determined by the court’s opinion but argued instead that they were entitled to a reduction for state and local taxes paid. Petitioners argued that the court could consider the reduction of their taxes on this basis because the parties tried this issue by mutual consent even though petitioners did not place it into their pleadings, citing Tax Court Rule 41(b)(1). This rule allows a party to conform the pleadings to the proof essentially allowing the consideration of an argument not raised in the pleadings if the information came out during trial without an objection.

Petitioners subsequently amended their Rule 155 argument to add a request for a deduction under IRC 31. The court noted that it had not mentioned this section at any point in the litigation prior to the Rule 155 computation phase. The IRS responded to petitioners’ request to make either of these two new arguments with an objection, saying that it had not consented to the arguments during the trial and did not consent at this point. The court denied petitioners’ motion to raise either of these new arguments noting, among other reasons, that raising these arguments would be futile and would not result in the relief requested.

The Tax Court issued a fully reviewed opinion meaning that essentially all of the presidentially appointed active judges sat in the court’s conference room, discussed the case, and worked out how they should decide it. This type of opinion usually happens 5 or 6 times a year. We have written about this type of opinion before and particularly in a guest post by Kandyce Korotky. After the discussion the Chief Judge would have appointed someone in the majority to write the opinion and usually that would be the judge who handled the case prior to the conference. Here, the judge who had the case prior to the court conference, Judge Halpern, did not end up in the majority and could not write the majority opinion. The case has a majority opinion, a concurrence and a concurrence in result only. Judge Halpern writes the concurrence in result only.

The majority opinion, written by Judge Lauber and joined by 9 of the 12 judges who participated in decision in the case approaches the case in the matter of fact, “it’s too late” fashion that I expected. (The opinion says that Judge Gustafson did not participate. Although the Tax Court is missing some judges who have not cleared the appointment process to reach its statutory maximum level of 19, I might have expected a couple of other judges who I thought were still on the court to be mentioned either as joining in one of the opinions or as not participating. It does not matter but the numbers here do not quite add up for me.)

Writing in a separate concurrence and joined by 5 judges, Judge Thornton opened my eyes to why this case is precedential because he spends the majority of his concurrence explaining why the separate concurring opinion in result only of Judge Halpern is incorrect. Judge Halpern was joined by one other judge in his concurrence in result only.

The majority opinion cites a litany of cases holding that parties cannot raise new issues during the Rule 155 phase of a case. This issue is so well settled I struggled to determine why the court issued a precedential opinion in this case. Many prior parties have tried to make new arguments at this phase of the case and a relatively full body of case precedent exists on the subject. Petitioners’ position was even more difficult because the parties submitted the case under Rule 122 – a process for submitting Tax Court cases on the written stipulations of the parties. In such a situation neither party has much room to argue that an issue arose tangentially since they stipulate the issues the court will decide as well as all of the facts. While facts not covered by a stipulation and not raised in the pleadings regularly come out during a trial, the Rule 122 process usually keeps the parties focused on the issues raised in the pleadings. Finding extra arguments in the stipulation of a Rule 122 case presents significant challenges unless the IRS attorney handling the case paid no attention to the issues raised in the pleadings. The majority opinion covers all of the points I would have expected in a case with this issue.

Judge Halpern does not join in the majority because he believes that petitioners have the right to raise overpayment claims citing to the court’s decision in Hulett v. Commissioner, 150 T.C. _ (2018). He explains why petitioners will lose their arguments for a different outcome than the one computed by the IRS in its Rule 155 computation, but he gets to the end result through a different analytical process than the one employed by the majority. He states:

Thus, the majority appears to announce a new dictum: “Thou shalt not, ever, under any circumstances raise a new issue during a Rule 155 proceeding.” That dictum, however, is untenable; It contravenes the plain text of the relevant provisions of our Rules and cannot be reconciled with our prior case law – including that on which the majority purports to rely.

He is particularly concerned about the interplay of Rule 155 with Rule 41. It seems from the concurring opinion written by Judge Thornton that the other members of the court came to an understanding of Judge Halpern’s concern but simply disagreed with it. One of the biggest concerns expressed by Judge Halpern is that the majority’s opinion will prevent consideration of potentially important facts or law that impacts the computation of an opinion because it will prevent the party from raising it. The concurring opinion by Judge Thornton disagrees with this conclusion. Note that even though the petitioners seek to raise something new in this case, the possibility exists that in another case it might be the IRS trying to do so.

Generally, raising a new issue at the Rule 155 stage of a case will prove very difficult. This case provides an internal look at the court’s thinking on when it might occur. For someone seeking to use factors not contained in the court’s opinion ordering the computation, reading and understanding the discussion here could be very useful.

Count Days BEFORE Filing for Bankruptcy

The case of Anthony Hugger v. Lawrence J. Warfield et al.; No. AZ-18-1003 (April 5, 2019) shows the danger of not carefully counting days before filing for bankruptcy if you seek to discharge taxes. Mr. Hugger filed a chapter 7 bankruptcy case and received his discharge in May of 2017 before coming to the realization that he had filed too early to obtain a discharge of his tax debts. After the epiphany in September of 2017, he requested that the bankruptcy court vacate his discharge and dismiss the chapter 7 case. Essentially, he requested a do over because it was understood that if the court granted his request he would file another chapter 7 case, but this one after the time passed to allow the tax debts to age into discharge status. The decision linked above is the 9th Circuit Bankruptcy Appellate Panel (BAP) affirming the decision of the bankruptcy court denying the request for vacature and dismissal.


The bankruptcy court denied Mr. Hugger’s request because:

(1) Debtor lacked standing under § 727(d) and (e) to revoke his discharge, and the bankruptcy court could not use its § 105 equitable powers to circumvent the Bankruptcy Code (citing Law v. Siegel, 571 U.S. 415 (2014)); (2) Debtor had not established any grounds for relief under Civil Rule 60 because all of the relevant information was known before the bankruptcy case was filed, and Debtor had proffered no excuse why his or his counsel’s error had not been addressed earlier; (3) the cases cited to the court were distinguishable; and (4) the tax creditors would be harmed if the court were to grant the requested relief.

After the denial, he filed a request for a new trial and alleged that extraordinary circumstances existed. Specifically, he argued that:

(1) Debtor’s counsel had given him inaccurate or incomplete advice regarding the deadlines for filing; (2) no creditors had participated in the case before the motion to vacate discharge was filed; and (3) there would be no prejudice to creditors because the IRS and ADOR could continue to collect, while Debtor would be prejudiced by having to wait to file a new bankruptcy case.

It’s easy to believe that Mr. Hugger’s bankruptcy attorney may have failed to appreciate the need to count and therefore failed to alert him to the bad timing of the filing of the petition. It’s also possible that other issues caused him to file bankruptcy and that taxes did not drive the filing of his petition. The fact that no creditors participated probably results from the fact that he filed a no asset chapter 7 and creditors would have received notice not to bother filing a claim. Just because the creditors did not file a claim does not mean that the bankruptcy did not have an impact on their actions.

The BAP determined that it should review some of the bankruptcy court’s actions for abuse of discretion and other aspects of the case it would review de novo. With respect to abuse of discretion, the BAP determined that the decision of the bankruptcy court properly found that all of the facts were known by the debtor and his attorney at the time of the filing of the bankruptcy petition. This was not a case of fraud on the debtor or later discovered facts. The facts were there. Just because debtor and his attorney did not appreciate the importance of the facts does not form a basis for equitable relief.

The debtor argued that granting his request would not harm the creditors of the estate but the court did not agree:

… a chapter 7 debtor seeking to dismiss his case has the burden to show that doing so would not result in “legal prejudice” to creditors. Hickman v. Hana (In re Hickman), 384 B.R. 832, 841 (9th Cir. BAP 2008); Leach v. United States (In re Leach), 130 B.R. 855, 857 (9th Cir. BAP 1991) (citing Schroeder v. Int’l Airport Inn P’ship (In re Int’l Airport Inn P’ship), 517 F.2d 510, 512 (9th Cir. 1975)). Debtor contends that there would be no prejudice to the taxing authorities in permitting the relief requested because those creditors would be able to collect until such time as Debtor files a new chapter 7 case after enough time has elapsed for him to discharge the older taxes.5 Debtor’s argument ignores the fact that, as things stand, the taxing authorities would have much more time to collect than they would have had the bankruptcy court granted the requested relief. Debtor has not shown that the bankruptcy court abused its discretion in denying the motion.

The BAP found that the debtor had no arguments that established the bankruptcy court abused its discretion in denying him the relief he requested. He offered no good equitable reasons for revoking the discharge and dismissing the original case. Although the court did not fashion its discussion in this manner, the situation in this case reminds me of certain tax cases in which the debtors seek relief from penalties. If the court grants the relief, it essentially lets the attorney off the hook for malpractice. The same circumstances appear present here. If the court allowed Mr. Hugger a do-over, and if his attorney did drop the ball on noticing the dates the taxes would become dischargeable, the bankruptcy court would essentially be allowing Mr. Hugger’s attorney to avoid the malpractice claim that otherwise seems almost certain to follow from these facts. The fact that granting the relief would relieve the bankruptcy attorney from liability is not a reason to deny Mr. Hugger relief but neither is the bad advice a reason to grant the relief under these circumstances.

The case points to the critical importance of understanding tax transcripts and properly counting days in order to maximize the benefits of a bankruptcy filing. Since Mr. Hugger must now wait for years before he can file another chapter 7, the missed date means that it’s open season for the IRS and the state and local taxing authorities on his income and assets. Nothing prevents him from making an offer in compromise or otherwise trying to deal with his liability and the ability of the IRS to collect from him does not mean that it will succeed. Still, he lost the chance to rid himself of the tax liability and the loss has significance.

Prior Supervisory Approval Not Necessary for Late Filing Penalty Imposed Under IRC 6699

In ATL & Sons Holding LLC v. Commissioner, 152 T.C. No. 8 (March 13, 2019) the Tax Court determined that the IRS could impose the penalty for filing a late return by a flow through entity, here an LLC, without obtaining supervisory approval. No big surprise here but now the Tax Court has a precedential opinion on the subject. Petitioner was represented by an officer and not a law firm. The lack of professional representation probably did not impact the outcome in this case. The issue arises in the context of a Collection Due Process (CDP) case.


Petitioner filed its LLC return late for the 2012 tax year without requesting permission to file late even though the individual owners did request an extension of time to file. Although petitioners initially seemed to dispute the filing of a request for extension by the LLC, in the end the parties did not dispute the fact that the return was filed late without an extension request. The IRS imposed the IRC 6699 penalty for late filing applicable to the situation of a late filed LLC return (also known as the delinquency penalty) and did not obtain written supervisory approval before doing so. The computer code on the transcript of account indicated that the IRC computer automatically imposed the penalty. As you probably know, the taxes reported on the return flowed through to the owners and the LLC had no taxes to pay on the return it late filed.

Petitioner argued that the request for extension filed by the individual members of the LLC should suffice because it was really the tax returns of the members of the LLC where the taxes would show up after flowing through the LLC. Petitioner also argued that for 2013 the individuals filed an extension and the LLC did not. Even though the LLC also filed late in 2013 under precisely the same circumstances that existed in 2012, the IRS abated the penalty for 2013 while refusing to do so for 2012. Petitioner argues that the IRS should similarly abate the penalty for 2012 based on its actions in 2013. The court explains why both of these arguments are losers. Since these arguments do not impact the IRC 6751 issue, I will not go into the reasons the court did not accept these arguments except to say the failure to accept these arguments came as no surprise to me.

As we have discussed before in many posts, IRC 6751(b) generally requires that the IRS obtain the approval of the immediate supervisor of the employee proposing the imposition of a penalty; however, IRC 6751(b)(2) contains two exceptions to this general rule. First, the IRS need not obtain prior approval if the liability imposed is an addition to tax under IRC 6651, 6654 or 6655. Second, prior approval is not needed for “any other penalty automatically calculated through electronic means.” The exceptions mesh with the statutory purpose of stopping the IRS from using penalties as a bargaining chip. In situations in which the IRC computer imposes penalties without anyone thinking about it, it becomes difficult to think that the penalty served as a bargaining chip.

The issue of the application of the exception to these facts is squarely teed up here because the IRS argued the exception applied and petitioner argued that it did not. So, the court set out to resolve this clear dispute.

First, the court notes that the penalty imposed in this case, the IRC 6699 penalty, is not one of the three additions to tax excepted from prior supervisory approval in IRC 6751(b)(2)(A). So, it moves on to the issue of whether the penalty imposed here fits into the exception in IRC 6751(b)(2)(B) as a penalty calculated through electronic means. The court notes that neither the statute nor the regulations define the terms “automatically calculated” or “electronic means.” It goes on to fill in that gap – one of many in this statute.

The court explains that the calculation of the IRC 6699 penalty occurs based on a simple formula designed around the number of shareholders and the number of months late, times $195. The calculation of the penalty requires no thought concerning the appropriate amount for the circumstances. The court stated: “if one knows the number of shareholders, the date the return was due, and the date it was filed, then the amount of the penalty is a simple and automatic computation.”

The court then notes that the IRS calculates the penalty automatically using its computer program. It states in a footnote that it could imagine possible circumstances in which IRC 6699 penalties might occur outside of the computer program; however, in this case that did not occur. As a result of its reasoning, the court concludes that the IRC 6699 meets the requirement of the exception to IRC 6751(b)(2)(B). The result here seems so straightforward that the court engages in little analysis at the end of this discussion having methodically walked through the applicable provisions.

The case had two small procedural issues in addition to the IRC 6751(b)(2)(B) issue. First, petitioner argued that the IRS should not have offset a 2013 overpayment to partially satisfy the 2012 liability prior to the conclusion of this case. The court pointed out that IRC 6330 prevents the IRS from collection by means of levy but does not stop the IRS from using its offset powers. Second, petitioner received its day in court despite the fact that the IRS treated the CDP hearing as an equivalent hearing. It did so because it demonstrated the timely mailing of its CDP request although the court does not spend time on this issue during the opinion.

The opinion covers the application of IRC 6751 to one of the many penalties imposed by the Code. This particular penalty had not been the subject of a prior precedential opinion. The result should surprise no one. As we forecast when IRC 6751 burst into full blossom and as Judge Holmes has eloquently pointed out on a number of occasions, the many permutations of IRC 6751 will continue to keep the court busy for some time to come.

An IRC 6751 Decision Regarding the Initial Penalty Determination

In Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4 (2019) the Tax Court addressed one of the issues presented by the language of IRC 6751 regarding the initial determination of a penalty. Unlike the Walquist case involving IRC 6751 discussed here, the petitioner in the Palmolive case had excellent counsel and pursued the case without the distractions present in Walquist. Still, the taxpayer lost in is effort to knock out the penalty for IRS’s failing to follow the statute.


The petitioner in Palmolive filed a partnership return claiming a huge charitable contribution for a façade easement. In an earlier decision the Tax Court sustained the IRS determination disallowing the deduction. At issue in this opinion is the correctness of the related penalty determination. The IRS not only disallowed the claimed contribution deduction, but the revenue agent (RA) examining the case asserted two penalties in the alternative – a 40% penalty for gross valuation misstatement and a 20% negligence penalty. The RA obtained the approval of the immediate supervisor on a Form 5701 attached to the Notice of Proposed Adjustments.

Petitioner requested an Appeals conference. The Appeals Officer (AO) proposed issuing an FPAA asserting four alternative penalties: the two proposed by the RA plus penalties for substantial understatement and substantial valuation misstatement. The AO’s immediate supervisor signed Form 5402-c on the approval line and an FPAA was eventually issued determining the imposition of all four penalties in the alternative.

An issue that the court does not decide concerns whether the 40% gross valuation misstatement also includes the 20% penalty. The IRS position was that approval of the 40% penalty necessarily included the lesser penalty if the valuation ultimately supported the lower penalty amount. Taxpayer contested this assertion. The court found that since the notice issued by Appeals included both and since the court found the additional penalties added by Appeals met the requirements of IRC 6751, deciding the issue of whether the 40% penalty necessarily included the lower penalty was unnecessary here.

The Tax Court begins its analysis by noting the statutory language.

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 * * * .

At issue here is whether there can be more than one initial determination. The court noted that Congress sought to keep the IRS from using penalties as a bargaining chip in passing IRC 6751. The court finds:

on the undisputed facts, we hold that the “initial determinations” are those by Agent Wozek on or before July 2008 and by Appeals Officer Holliday in June 2014.

Petitioner argued that the RA did not propose and his supervisor did not approve all of the penalties. Therefore, because the RA’s determination was the initial determination, the subsequent determination by the AO does not meet the requirement of the statute. The court dismisses this argument stating:

Section 6751(b)(1) includes no requirement that all potential penalties be initially determined by the same individual nor at the same time.

Petitioner also argued that the IRS failed to follow its Internal Revenue Manual provisions which require that the case history reflect the decision to impose the penalty. The court replied that the IRM

does not have the force of law, is not binding on the IRS, and confers no rights on taxpayers.’” Thompson v. Commissioner, 140 T.C. 173, 190 n.16 (2013) (quoting McGaughy v. Commissioner, T.C. Memo. 2010-183, slip op. at 20).

The court found that the supervisory approval need not occur on a specific form and that the form used need not reference the employee recommending the imposition of a penalty.

This decision gives the IRS much more flexibility in meeting the requirement of IRC 6751 than the taxpayer’s arguments would have permitted. The IRS still must show supervisory approval at each level at which a new penalty is imposed, but the decision provides it with much latitude in how to accomplish the approval. The term “initial” in the statute does not limit the IRS to getting it right at the first step or else forgoing a penalty. The decision lines up with the purpose of the statute. Since the statute provides a difficult procedural roadmap for the court to follow, perhaps having the decision line up with the purpose is the primary goal to seek when writing an opinion on this topic.

Automatically Generated Penalties Do not Require Managerial Approval

This is the first of several posts on precedential cases decided by the Tax Court earlier this year regarding the IRC 6751 provision requiring preapproval by a manager before the assertion of certain penalties. The case of Walquist v. Commissioner, 152 T.C. No. 3 (February 25, 2019) represents the type of case that one might wish had been litigated by a petitioner other than a pro se petitioner that did not engage in the process; however, the outcome would almost certainly have been the same with a more robust litigation participant. In the Walquist case the Tax Court addresses the imposition of a penalty in a setting in which the IRS argues that automation removes the need for prior managerial approval. The court agreed.


The IRS sent the Walquists a statutory notice of deficiency for 2014 determining a liability over $13,000 and a related accuracy penalty. Although petitioners earned almost $100,000 in 2014, on their return they claimed a deduction for almost the same amount based upon a “Remand for Lawful Money Reduction,” a tax protestor type claim. The IRS disallowed this claimed deduction resulting in the deficiency determined. The IRS handled the case through its Automated Exam Correspondence Unit designed to minimize the amount of human involvement in the audit.

The Automated Exam process generated a 30-day letter to petitioners. Because the amount of the liability determined through the process exceeded $5,000, the program automatically placed on the notice an accuracy related penalty of 20% of the liability. Petitioners did not respond to the 30-day letter, resulting in the issuance of the SNOD. Petitioners timely filed a petition with the Tax Court in which they continued to assert tax protestor type arguments. The tax protestor activity did not stop and the court gives a detailed accounting of the time wasting efforts of petitioners before it ultimately imposes the IRC 6673 penalty because of their post-petition actions. I will not describe this aspect of the case as it is relatively boring.

The ultimate finding of the court with respect to the requirement for managerial approval is that:

Because the penalty was determined mathematically by a computer software program without the involvement of a human IRS examiner, we conclude that the penalty was ‘automatically calculated through electronic means,’ sec. 6751(b)(2)(B), as the plain text of the statutory exception requires.

The court goes on to say that this conclusion is consistent with the description of the imposition of a penalty in this situation as described in the Internal Revenue Manual and the context in which the statutory exception appears in IRC 6751. Computer generated penalties do not raise the concerns that caused Congress to enact IRC 6751 because no one is imposing them in order to influence to taxpayer to accept the liability or otherwise to coerce an outcome. The court stated that if the penalty imposed under these circumstances fails to meet the statutory exception it is difficult to imagine a penalty that would meet the exception.

The court noted that its conclusion in this precedential opinion was consistent with unpublished orders that it had issued in recent years. Another reason for paying attention to those orders.

The result here makes perfect sense. The IRS did not impose this penalty as a bargaining chip. The court provides a detailed analysis for its decision. Perhaps the only thing surprising about the opinion is that a precedential opinion on this issue did not previously exist. Although petitioners did nothing to advance their argument that the exception should not apply, their failure did not create the result in this case.

The decision here was the first of several precedential IRC 6751 opinions issues in the first few months of the year as the court continues to answer the questions raised by this unusual statute. We will cover all of the opinions in the coming days.