We welcome back frequent guest blogger Carl Smith who raises another Graev III question. The issues raised by that case will continue to present themselves for some time as the Tax Court continues to sort through different scenarios. Keith
There are a lot of questions now about how the Tax Court will administer its recent holding in Graev III (i.e., Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)). Graev is a deficiency case in which penalties were sought under section 6662 and where the taxpayer specifically raised the issue before trial that the IRS had not shown compliance with the written penalty supervisor approval requirement set forth in section 6751(b). In Graev III, the Tax Court overruled its immediately-prior opinion in the case and held that the IRS burden of production under section 7491(c) for certain penalties in a deficiency case included showing compliance with section 6751(b)’s approval rules.
In the days since Graev III, around 30 orders have been issued by various Tax Court judges in deficiency cases that have already been tried, but where the court has not yet ruled. In those orders, a number of judges have solicited the views of the parties as to how, if at all, Graev III applies to the case. The orders generally direct that any motions (presumably by the IRS to supplement the record to show section 6751(b) compliance) be filed very quickly. It is unclear whether such motions will be granted. And, it is unclear whether the taxpayers in some of those cases had raised section 6751(b) noncompliance as an issue earlier in the case. (In other cases, section 6751(b) noncompliance was definitely raised earlier.)
In Collection Due Process cases, Tax Court judges have recently differed as to whether the IRS must come forward to show section 6751(b) compliance where a taxpayer does not mention the section in his or her pleadings or filings. The same question will now be presented in deficiency cases: Will the Tax Court now insist that the IRS show compliance with the section 6751(b) approval requirement in deficiency cases where a taxpayer (unlike in Graev III) never mentions section 6751(b) in any pleadings or filings? This is of great importance to pro se taxpayers, who no doubt will be ignorant of section 6751(b)’s existence.
As of January 8, 2018, there have been two opinions issued by the Tax Court in deficiency cases involving penalties covered by section 6751(b):
In Roth v. Commissioner, T.C. Memo. 2017-248 (Dec. 28, 2017), the Tax Court made specific rulings on whether the IRS had complied with section 6751(b) in a case involving section 6662 penalties. This result was not surprising, however, since the taxpayers had raised possible noncompliance with section 6751(b)’s rules earlier in the case.
But, in Ankerberg v. Commissioner, T.C. Memo. 2018-1 (Jan. 8, 2018), the Tax Court did not discuss compliance with section 6751(b) before imposing a fraud penalty under section 6663. The taxpayer was pro se in this deficiency case and presumably did not mention section 6751(b) in his pleadings or other filings.
Ankerberg is a bad sign for pro se taxpayers. It is also, I would argue, inconsistent with what the Tax Court has understood to be the burden of production under section 7491(c) on other penalty sub-issues when a taxpayer has pleaded merely that he or she contests the penalties (but gives no more details).
Without any prompting, the Tax Court began enforcing 7491(c), starting with Higbee v. Commissioner, 116 T.C. 438 (2001), any time a taxpayer contested the penalties. But, in Swain v. Commissioner, 118 T.C. 358, 364-365 (2002), the court put in a caveat — that if the taxpayer never mentioned contesting penalties, the IRS had no burden of production under 7491(c). In Wheeler v. Commissioner, 127 T.C. 200 (2006), affd. 521 F.3d 1289 (10th Cir. 2008), when a taxpayer merely wrote in the petition: that “[t]he petitioner is not liable for a penalty”, the Tax Court held that this was sufficient to put the IRS to its burden of production on all penalty sub-issues other than reasonable cause. In Wheeler, the Tax Court refused to impose (1) a late-payment penalty because the IRS had failed to show that it had filed a substitute for return, and (2) an estimated tax penalty because the IRS had failed to show that the taxpayer had filed a return for the prior year (necessary to determine the required quarterly estimated tax payment for the current year).
To me, it seems clear that, under Wheeler, proof of compliance with the section 6751(b) approval requirement should be just another penalty sub-issue on which the IRS should have the burden of production, even in cases where a taxpayer does no more than state that he or she thinks the penalty doesn’t apply. I would hope any Tax Court judges reading this post would on their own seriously consider the import of Wheeler when they next face the issue of a penalty under section 6662 or 6663 in a case where the taxpayer is ignorant of section 6751(b), but has manifested an interest to contest the penalty.
UPDATE: After this post went up, Carl learned that, although the Ankerberg opinion does not discuss section 6751(b) compliance, the parties had stipulated to the signed penalty approval form. Knowledge of the form’s existence may have led the court into not discussing the section 6751(b) compliance issue.