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.