Tax Court Reverses Itself, But The Taxpayer Still Loses by Robert S. Horwitz
On November 20, 2017, the Tax Court issued its opinion in Graev v. Commissioner, 149 T.C. __, reversing a prior decision that sustained a 20% accuracy penalty. The issue before the Court was whether the IRS has to prove that it complied with Internal Revenue Code §6751(b)(1) in order to sustain a penalty in a deficiency proceeding. That section requires that certain penalty assessments have to be “personally” approved in writing by the “immediate supervisor” of the IRS employee who initially determines the penalty. In its earlier opinion, the Tax Court held that the question of compliance was not appropriate for review until after the IRS assessed the penalty, which occurs after deficiency proceedings. Graev v Commissioner, 147 T.C. __ (Nov. 20, 2016).
In March 2017, the Second Circuit in Chai v. Commissioner, 851 F. 3rd 190, held that the IRS, as part of its burden of proving that a taxpayer is liable for a penalty, must prove it complied with §6751(b)(1). Because Graev is appealable to the Second Circuit, the Tax Court vacated its earlier opinion. In its most recent opinion in Graev, the Tax Court a) adopted the reasoning of the Second Circuit in Chai and held that the IRS must prove compliance with §6751(b)(1) in a deficiency case, b) made the decision applicable to all cases, not just those appealable to the Second Circuit, and c) determined that the IRS complied since the supervisor of the IRS attorney who approved the notice of deficiency signed off on asserting the 20% accuracy penalty.
The ramifications of the latest opinion in Graev have already been felt. In four cases that were tried before Judge Holmes that are awaiting decision the IRS moved to reopen the record to present evidence of compliance. On the day the Graev opinion was issued, Judge Holmes entered orders in all four cases denying the motion. As he succinctly put it, “What happens if a party with the burden of production on an issue fails to introduce sufficient evidence at trial to meet that burden? Well, he loses.” So the penalty won’t be sustained in those four cases.
What does the decision mean for other taxpayers? If they have a case pending in Tax Court that has not yet gone to trial, the IRS will offer into evidence the form approving the penalty, which is easy enough if the IRS complied with the law. If it can’t produce the paper, the Court will not sustain the penalty. In cases awaiting decision, the IRS will seek to reopen the record to present evidence of compliance. It remains to be seen whether other Tax Court judges will follow Judge Holmes’ lead.
What about taxpayers who already lost a penalty issue in Tax Court? Following the Chai decision, a number of taxpayer started raising the issue of compliance with §6751(b)(1) in collection due process cases. They won’t be able to do so if the penalty was asserted in a notice of deficiency or the taxpayer had the chance to appeal the IRS’s proposed penalty before it was assessed.
So is it a win for taxpayers? Not really. In his concurring opinion in Graev, Judge Holmes said he’d prefer that the case was decided under the Golsen rule. Under Golsen, the Tax Court will follow an circuit court’s decision on a rule of law in cases appealable to that circuit, but is free to apply a different rule in cases appealable to other circuits. Thus, the IRS may raise the issue in cases appealable to other circuits.