Clay v. Commissioner: Section 6751(b) Approval Required before 30-Day Letter

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Oh boy, another section 6751(b) issue and it’s the storm Judge Holmes foresaw coming. It has arrived, in the Graev of Thrones, winter is here.

The only designated order during the week of May 6 was in Docket No: 427-17, Michael K. Simpson & Cynthia R. Simpson v. CIR (order here). The order itself was not very substantive and only one page long. The case was already tried on April 18, 2019 in Salt Lake City, but on April 24, 2019 the Court issued its opinion in Clay v. Commissioner so it orders the parties to file responses addressing the effect of Clay as it relates to section 6751(b).

So, what happened in Clay?

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Clay’s trial was held before the Court’s opinion in Graev III was issued, so in due course the Court ordered the IRS to address the effect of section 6751(b) and show any evidence of supervisory approval in the record. The IRS couldn’t produce any evidence in the record that satisfied the burden for section 6751(b)(1), but moved to reopen the record and admit two Civil Penalty Approval Forms accompanied by declarations for two of the years at issue.

Petitioners did not oppose the motion but raised issues with the documents the IRS produced in support of 6751(b) compliance. The Court permitted petitioner to conduct additional discovery and granted petitioner’s motion to reopen the record to include documents relating to the review of the penalties to support petitioner’s argument that the supervisory approval was not timely.

Section 6751(b) requires that no penalty be assessed, “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” Graev III held that the initial determination is no later than the date the IRS issues the notice of deficiency (although the IRS can still assert penalties in an answer or amended answer in Tax Court). Clay takes this a step further, and asks, should the initial determination occur earlier than the notice of deficiency?

In other words, is penalty approval required before an agent sends a taxpayer a 30-day letter with a Revenue Agent Report (RAR) attached which proposes adjustments and includes penalties?

The petitioner thinks so and argues that the initial determination of a penalty is “the first time an IRS official introduced the penalty into the conversation.” Graev III, 149 T.C. at 500, 501. In Clay, the RAR was the first correspondence that introduced penalties into the conversation and so it should be considered the initial determination under section 6751(b).

The Court agrees and points out that the determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR. In situations where an agent sends a taxpayer a formal communication proposing adjustments which advises the taxpayer that penalties will be proposed and advises the taxpayer of the right to appeal them (via a 30-day letter to which the RAR is attached), then the issue of penalties is officially on the table. In other words, Clay requires the IRS to get written supervisory approval before it issues a 30-day letter with an RAR, if the RAR proposes penalties (and most, if not all, of the RARs that I have seen do).

Luckily for the petitioners in Clay, although the Civil Penalty Approval form was initialed before the NOD, it was after the 30-day letter and RAR were issued, and therefore, the Court held supervisory approval was not timely under 6751(b).

Returning to the week of May 6th’s only designated order, the Court orders the parties to identify whether any notice conferring the opportunity for administrative appeal was issued to petitioner, and if so, the parties should direct the Court’s attention to any such notice in evidence. Presumably this is so that the parties can demonstrate whether written supervisory approval was timely obtained under the new standard established by Clay.

Samantha Galvin About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the Assistant Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues.

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