Jan 09, 2018
IRS escapes penalty over penalties
In a case of first impression, the Tax Court determined the meaning of Code Section 6751(b). Section 6751(b) mandates that no penalty shall be assessed unless the initial determination is personally approved (in writing) by the immediate supervisor of the individual making the determination. The primary issue was the interpretation of the phrase “initial determination.”
There, the taxpayer took a deduction for a donated façade easement and a cash contribution to a charity. On audit, the IRS examiner assessed a 40 percent gross misstatement penalty on the noncash contribution (i.e., the façade easement). This 40 percent penalty was approved by the examiner’s manager and was incorporated into a draft notice of deficiency. The notice of deficiency was then reviewed by an attorney from the chief counsel’s office who recommended an alternative theory of assessing a 20 percent penalty on the noncash contribution. This alternative theory was then approved by the manager of the attorney from the chief counsel’s office.
The taxpayer challenged the notice of deficiency and filed a petition to the Tax Court. While in Tax Court, a different attorney from the chief counsel’s office (with consent from her manager) filed an amendment to answer and assessed a 20 percent penalty on the cash contribution.
The IRS conceded the 40 percent penalty and determined that the issue before the court was whether an attorney from the chief counsel’s office was authorized to make the initial determination to assess the 20 percent penalty under the alternative theory. In a split decision, the court ultimately ruled that the initial determination could be made by an attorney from the chief counsel’s office and upheld the alternate penalty. This means the initial determination to assess a penalty does not have to originate from an IRS employee.
However, the court ruled that in a Tax Court proceeding, the IRS now has both the burden of proof and the burden of production to establish IRS compliance with Code Section 6751(b) when assessing penalties. Accordingly, this decision may open a new avenue to challenge penalties in Tax Court.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: David B. Shiner, Principal
This alert originally appeared in the January 2018 Shiner's Dollars with Sense newsletter.
 Graev v. Com’r, 149 T.C. No. 23 (December 20, 2017)