Can the IRS Approve a Penalty Too Soon?

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We have written many posts on the various issues raised by IRC 6751(b) regarding the requirement that the immediate supervisor of the agent proposing a penalty approve the penalty in writing.  For years the IRS did not pay attention to this provision which was added as part of the Restructuring and Reform Act of 1998.  Taxpayers have received relief from numerous penalties as the Tax Court has worked out the meaning of this statute including when and who must approve the penalty.

In Sparta Pink Property, LLC v Commissioner, T.C. Memo 2022-88, the Tax Court examines an unusual argument that the IRS approved the penalty too soon thereby rendering the approval ineffective.  The issue arises in the context of a conservation easement case.  The Court decides the issue in the context of the IRS motion for partial summary judgment.  In the summary judgment motion the IRS sought a ruling that the easement deduction should be disallowed because the easement’s purpose was not “protected in perpetuity.”  The Court declines to grant summary judgment on this issue and I will not discuss it further.  On the IRC 6751(a) issue the Court finds that the IRS properly obtained supervisory approval for imposing the penalty.  Let’s examine why petitioner raised the issue.


 The Revenue Agent (RA) determined that the easement petitioner sought to deduct had a value of about $45,000 while petitioner claimed a charitable contribution deduction of over $15 million.  Based on the significant valuation disparity, the RA proposed a penalty for gross valuation misstatement as well as some alternative penalties.  The RA prepared a civil penalty approval form which his manager signed on February 10, 2020.

On February 24, 2020, the RA sent petitioner a draft report setting forth his findings including the recommendation for the penalty.  On July 9, 2020, the IRS issued petitioner a notice of final partnership administrative adjustment (FPAA) reducing the deduction as described above and asserting the gross valuation penalty.  The Court finds that because the RA secured the approval of his immediate supervisor before sending the report and before sending the FPAA the approval was timely.  The Court noted in a footnote that the RA’s actions here secured the necessary approval before either possible deadline given that there is a split between the Tax Court’s view and that of the 9th Circuit:

Because RA Rikard secured supervisory approval on February 10, 2020, we need not decide whether the “initial determination” to assert penalties was embodied in the RAR (dated February 24, 2020) or in the FPAA (dated July 9, 2020). In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020), the U.S. Court of Appeals for the Ninth Circuit considered the timeline for obtaining supervisory approval of “assessable penalties,” which are not subject to deficiency or TEFRA procedures. The court held that, for an assessable penalty, supervisory approval is timely if secured before the penalty is assessed or “before the relevant supervisor loses discretion whether to approve the penalty assessment.” Id. at 1074. The court suggested that, in a deficiency or TEFRA case such as this, the deadline for securing supervisory approval would be the issuance of the notice of deficiency or the FPAA. See id. at 1071 n.4. If that analysis were adopted here, supervisory approval of the penalties was clearly timely: Approval was secured in February 2020, and the FPAA was not issued until July 2020.

We discussed the Laidlaw case here.

Petitioner does not argue that the supervisory approval came too late but rather argues that:

“[r]espondent did not make any effort to authenticate the documents attached to the declarations,” including the civil penalty approval form and the sworn declarations from Ms. McCarter [the supervisor] and RA Rikard. Petitioner asserts that the relevant facts must be established at trial.

The Court disagrees finding that the IRS supplied the signed approval form and an affidavit from the supervisor stating that she reviewed the RA’s work.  This is enough.  The RA and the supervisor need not be subjected to cross-examination.

Petitioner counters this by pointing out that the engineer’s report valuing the property did not reach the RA until February 24, 2020, two weeks after the signature of the supervisor.  Because the engineer’s report was not in the file reviewed by the supervisor, petitioner argues that the supervisor could not have undertaken an actual review of the RA’s substantive work.

The Court states that:

We have repeatedly rejected any suggestion that a penalty approval form or similar document must “demonstrate the depth or comprehensiveness of the supervisor’s review.” Belair Woods, 154 T.C. at 17. Faced with assertions that IRS officers gave insufficient consideration to the matters before them, we have ruled such lines of inquiry “immaterial and wholly irrelevant to ascertaining whether respondent complied with the written supervisory approval requirement.” [case cites omitted]

To the extent petitioner asks us 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.”

While this case is merely a memo opinion relying on earlier precedential opinions, it makes clear that petitioners cannot go behind the approval form with language similar to the language it uses to prevent petitioners from going behind the notice of deficiency.  Adopting this approach saves the Court from a host of litigation regarding the quality of the information available to the supervisor but does not prevent the petitioner from attacking the penalty on the merits. 

Petitioner in this case can still show that the penalty should not apply but petitioner cannot eliminate the penalty based on the quality of the decision of the supervisor to approve it as required by IRC 6751(b).  The outcome makes sense but does not preclude an inquiry regarding the supervisor’s approval if it were totally disconnected to the appropriate process, e.g., a supervisor signing a penalty approval at the outset of an examination might find that the Court would look behind that just as it looks behind the notice of deficiency in sufficient egregious circumstances.


  1. Cindy Macdonald says

    ” . . . the Court would look behind that just as it looks behind the notice of deficiency in sufficient egregious circumstances.”

    Who determines what is sufficiently egregious? Any American exercising their right to work being hit with a tax year assessment, while being denied necessary and normal business deductions, in addition to excessive back interest, late fees, fines, and penalties would be completely overwhelmed with that massive total.

    This egregious threshold makes one think, the IRS is creating requirements that the tax statute does not specifically allow for except the convenience of decreasing their work load.
    Seeing the Court finally holding the IRS accountable for their unprofessional fudging behavior is long over due. Equal treatment under the law, “as the law is written,” must absolutely demanded in a country run by law and order.

  2. Jack Townsend says


    You focus on the 6751(b) holding. Another aspect of the case that I also find interesting its disposition or nondisposition of taxpayer’s reliance on Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), which held that the in perpetuities regulation was procedurally invalid. As I understand it, the Hewitt court did not hold that the interpretation in the now invalid regulation (at least in the Eleventh Circuit) was not a controlling interpretation as the best interpretation of the statute under facts where the regulation’s interpretation would otherwise apply. See Sixth Circuit Creates Circuit Conflict with Eleventh Circuit on Conservation Easement Regulations (Federal Tax Procedure Blog 3/15/22), here

    I just wonder whether the IRS would argue best interpretation (employing as necessary Skidmore respect (not deference)) as fallback. (See Judge Guy’s concurring opinion in Oakbrook Land Holdings, LLC v. Commissioner, 28 F.4th 700 (6th Cir. 2022).

    I just checked on the docket entries in Hewitt which offer no help in finding out the status. The docket entries are here:
    The Court ordered (Dkt. # 71 dated 6/30/22) the parties to file supplemental briefs, but there is no indication that they did. The parties’ joint status report of 8/26/22 (Dkt. # 72) is not available for download and the Court’s subsequent order (Dkt. # 73 dated 8/30/22) gives until 9/28/22 to file a signed decision document or file a status report. I suppose that the extra reference in Dkt. #73 to a signed decision document (not present in earlier orders for status reports) may suggest that the parties are moving to settlement of some sort.

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