The case of Roth v. Commissioner raises again the issue of whether the IRS can raise a penalty once the case arrives in Tax Court. In certain cases the IRS attorney assigned to a case once the taxpayer files a Tax Court petition sees a penalty issue that the examination division did not. In the Roth case, the IRS attorney raised an additional penalty in answering the petition. Because the answer will always receive a review from the docket attorney’s supervisor, the raising of the penalty in the answer does receive supervisory approval in the Office of Chief Counsel. At issue is whether IRC 6751 permits the raising of the penalty at that stage of the case.
The Roths donated land to a conservation easement and valued the contribution at almost $1 million. The Tenth Circuit characterized their case as follows:
The Roths’ case is one of the so-called “gravel-pit cases” in which Colorado taxpayers claimed large deductions based on the appraisal and donation of conservation easements prohibiting the mining of gravel on what had historically been farmland. The IRS later determined these easements to be effectively worthless (or worth drastically less than the taxpayers claimed) because the subject farmland was more valuable as farmland than it would be if mined for gravel. Esgar Corp. v.Comm’r, 744 F.3d 648, 658 (10th Cir. 2014).
The revenue agent who audited the case disallowed the easement deduction almost in its entirety and imposed the 40% gross overvaluation penalty after obtaining the appropriate managerial approval. The Roths went to Appeals where the appeals officer made what the IRS characterized as a clerical error by reducing the penalty from 40% to 20%. The manager in the Appeals Office approved the report of the appeals officer and the notice of deficiency contained the 20% penalty. The Roths then filed a Tax Court petition. In answering the petition, the IRS attorney, and her supervisor, responded by asserting the 40% penalty. While appeals officers almost never raise new issues in a case, Chief Counsel attorneys regularly raise new issues that they spot when working a case. The ability and the willingness of Chief Counsel attorneys to raise new issues should cause taxpayers to think about potential issues in their cases before filing a Tax Court petition in knee jerk fashion. As happened here, filing the petition can result in more taxes than the IRS asserted in the notice of deficiency.
The Tax Court sustained the penalty, noting that the IRS had obtained the appropriate approvals at every step and that the IRS can change the penalty at the Tax Court stage if it acts appropriately in obtaining the penalty approval.
On appeal, the Roths acknowledged that the IRS obtained supervisory approval at every step but argued that the notice of deficiency contains the initial determination of the penalty locking the IRS into the amount of penalty in the notice. While the Tax Court and the Second Circuit had approved the initial raising of a penalty by a Chief Counsel attorney at the Tax Court stage, the issue was one of first impression in the Tenth Circuit and only the second time this issue has reached a circuit court. The Roths also framed the issue in a slightly different way than prior cases. The Tenth Circuit described the issue before it as follows:
In short, the Roths raise a narrow question of statutory construction: whether the statutory notice of deficiency constitutes the IRS’s § 6751(b) initial determination. To answer this question, after stating the standard for our review, we consider the meaning of § 6751(b) generally before applying that meaning to the facts before us.
The Tenth Circuit noted that the Roths raised a legal question which required it to give a de novo review. So, like other courts before it the Tenth Circuit began to try to interpret the puzzling language of IRC 6751 in order to determine if the word “initial” in the statute had the meaning offered in the taxpayer’s arguments. Because of prior cases seeking to make this same determination, the Tenth Circuit did not operate without the guidance of the prior judges who had struggled to fit the language of the statute into the norms of tax procedure. It stated:
Given these accepted definitions, § 6751(b)’s phrase “the initial determination of such assessment” poses an obstacle to plain-language interpretation. The Code does not require, or even contemplate, that “assessments” will be “determined.” See Chai, 851 F.3d at 218–19 (“[O]ne can determine a deficiency, and whether to make an assessment, but one cannot ‘determine’ an ‘assessment.’” (quoting Graev v. Commissioner (Graev II), 147 T.C. 16, No. 30638-08, 2016 WL 6996650 (2016) at *31 (Gustafson, J., dissenting) (internal citations omitted))). Indeed, the IRS has seemingly little discretion to make any determination with respect to the assessment of a liability.
The Tenth Circuit agreed with the Second Circuit that the language of IRC 6751 is ambiguous. So, it began to look at legislative history in order to find an answer to the meaning of the language. It found that the purpose of IRC 6751 was to prevent “rogue” IRS agents from proposing penalties in order to get taxpayers to agree to their adjustments. Having determined why Congress enacted the provision, the Tenth Circuit then set off to determine how it should apply the language of the statute given the facts in the Roths’ case.
According to the Tenth Circuit, nothing in the statute requires that the IRS include its initial determination in the notice of deficiency. It finds that the determination of the revenue agent could be viewed as the initial determination but also that the determination of the IRS attorney could be viewed as the initial determination as well. The court noted that the statutory scheme for the Tax Court clearly contemplates that the IRS can add additional liabilities and that adopting the position of the Roths would undermine that statutory context in which this question arose.
As its final reason for rejecting the argument of the Roths, the Tenth Circuit mentions that to accept their argument would upset Tax Court jurisprudence and it does not want to lightly do that. It cites to the Supreme Court case of Dobson v. Commissioner, 320 U.S. 489, 502 (1943). In the Dobson case the Supreme Court briefly flirted with the notion that Tax Court decisions should be given special deference because of the expertise of the Tax Court. Justice Jackson, a former Chief Counsel, IRS, argued for such a result but I had thought the case had very little viability at this point.
The decision here follows the decisions in the Second Circuit and the Tax Court. It adds little to the jurisprudence other than adding another circuit to those interpreting IRC 6751 to allow Chief Counsel attorneys to add penalties. Since the statute makes little internal sense, the court’s decision to pursue legislative history in trying to find an answer makes sense and fits with the approach of earlier courts that have wrestled with the provision. Still, it’s possible that other taxpayers will continue to attack this position in hopes that a court will back another interpretation of a confusing statute.