Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r

April 7, 2021Case Summary, Civil Tax Penalties, Collections Due Process, IRS Examinations, Penalty Procedures, US Tax Court, off
2021 Harley-Davidson Street Bob® 114 Source: https://www.laidlawsharley.com/

Abstract

Case Name: Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. 68 (Jan. 16, 2020).
Jurisdiction: U.S.T.C.
Petitioner: Laidlaw’s Harley Davidson Sales, Inc.
Respondent: Commissioner of the Internal Revenue Service.
Concepts: IRS Examinations; Civil Tax Penalties; Penalty Procedures; Collections Due Process.
Nature of Case: Whether an IRS agent proposing a penalty under I.R.C. § 6707A for failure to disclose participation in a reportable transaction must obtain written supervisory approval before first communicating the penalty proposal to the taxpayer?

Introduction

Section 67511 imposes procedural requirements the IRS must satisfy before it assesses penalties against a taxpayer. Among them is the requirement that a supervisor approves, in writing, any agent’s initial determination to assert penalties against a taxpayer. In a string of recent cases, taxpayers have successfully challenged the timeliness of such supervisory approval.

In the instant case, the Tax Court ruled in favor of the taxpayer, Laidlaw’s Harley Davidson Sales, Inc., finding that a supervisor must approve the initial determination of a § 6707A penalty in writing before it is first formally communicated to the taxpayer, even if the penalty is not actually assessed until much later.

Background

Laidlaw’s Harley Davidson Sales, Inc. (Laidlaw) is a C corporation operating principally in California.2 During 2008, Laidlaw participated in the Sterling Benefit Plan, which was a “Section 419(e) welfare benefit fund” that purported to allow for employers to provide a wider range of deductible benefits than allowed by traditional pension plans.3

Laidlaw timely filed Form 1120 for its 2018 tax year but did not disclose its participation in the Sterling Benefit Plan.4 In December 2010, Laidlaw filed Form 8886, Reportable Transaction Disclosure Statement, amending its return for several years including 2008.5 On Form 8886, Laidlaw identified its participation in the Sterling Benefit Plan as a “listed transaction” substantially similar to those described in Notice 2007-83.6

The IRS Revenue Agent examining Laidlaw’s return determined that the Sterling Benefit Plan was an abusive transaction substantially similar to a Notice 2007-83 listed transaction and decided to assert the § 6707A penalty against Laidlaw for failure to disclose its participation.7 The Revenue Agent issued Laidlaw a 30-day letter proposing the § 6707A penalty,8 which Laidlaw timely protested in writing.9

Over three months after the Revenue Agent issued Laidlaw the 30-day letter (and over a month after Laidlaw submitted its written protest), the Revenue Agent’s direct supervisor signed Forms 300, Civil Penalty Approval Form, and 8278, Assessment and Abatement of Miscellaneous Civil Penalties.10 The day after signing those forms the supervisor transferred Laidlaw’s case to Appeals.11

Appeals recommended assessing the penalty and the IRS did so.12 Upon receiving IRS’s notice of intent to levy, Laidlaw requested a collections due process (CDP) hearing with Appeals.13 Appeals sustained the levy notice after finding the IRS complied with all procedural requirements for assessing the penalty.14

Laidlaw then timely petitioned the Tax Court challenging the notice of determination.15 The Tax Court granted partial summary judgment in favor of the IRS, finding that Laidlaw was not allowed to challenge the underlying liability during CDP proceedings and remanded to Appeals to explore certain other issues.16

On remand, the parties stipulated to an abatement of all but $10,000 of the § 6707A penalty.17 Laidlaw then filed a second amended petition and motion for summary judgment with the Tax Court alleging that Appeals erred in the CDP proceedings by not invaliding the § 6707A penalty assessment due to the IRS’s untimely compliance with the written supervisory approval requirement of § 6751(b).18

Section 6707A imposes a penalty on any person who fails to disclose participation in a reportable transaction.19 The penalty for a corporation that fails to disclose participation in a listed transaction is generally 75 percent of the tax benefit of the transaction,20 subject to a $10,000 minimum21 and $200,000 maximum.22

The IRS may not assess a penalty under the Internal Revenue Code unless the initial penalty determination is approved, in writing, by the immediate supervisor of the person making the determination.23 Congress enacted this requirement in 199824 because it felt that penalties “should only be imposed where appropriate and not as a bargaining chip.”25

In Chai v. Commissioner,26 the Second Circuit modified the statutory deadline for supervisory approval in a deficiency case. Because a notice of deficiency allows the taxpayer to remove jurisdiction to the Tax Court, the Second Circuit found that an Examinations supervisor effectively loses her discretion to approve a penalty determination when the IRS issues a 90-day letter.27 Therefore, her approval is timely only if granted before the IRS issues a notice of deficiency.

In Clay v. Commissioner,28 the Tax Court found that pre-deficiency-notice communications with the taxpayer could trigger the supervisory approval deadline even sooner: a 30-day letter and attached Revenue Agent’s Report that proposed penalties implicated § 6751(b)29 because the abuse that it targets can arise “the first time an IRS official introduce[s] the penalty into the conversation.”30

Case Description

As a threshold matter, the Tax Court straightforwardly determined the § 6707A penalty is a Title 26 penalty that is not covered by either of the § 6751(b)(2) exceptions,31 so the § 6751(b) written supervisory approval requirement clearly applies.32

Next the court turned to the Commissioner’s argument that a supervisor’s written approval is timely under § 6751(b) as long as she grants it before the penalty is assessed.33 The Commissioner reasoned that under Chai, since § 6751(b) does not provide any express pre-assessment deadline, that a supervisor can timely approve a penalty determination any time before she loses jurisdiction over the case.34 Because Examinations’ jurisdiction over assessable penalty cases cannot be interrupted by Appeals or Tax Court proceedings as deficiency cases can, the Commissioner suggested that any pre-assessment approval was timely with respect to an assessable penalty.35

The Tax Court disagreed, following Clay’s reliance on the legislative intent of § 6751(b) and observing that Chai hurt, rather than helped, the government’s case.36 Congress expressly intended for § 6751(b) to prevent the IRS from inappropriately using penalty assessments as a “bargaining chip.” Chai acknowledged that the IRS can wield leverage by merely communicating a preliminary penalty determination to the taxpayer.37 In fact, the goal of such a bargaining strategy would often be a settlement that could obviate the IRS’s need to assess the penalty at all.

Therefore, the Tax Court holds in Laidlaw, for § 6751(b) to have any teeth, a supervisor must grant written approval before an assessable penalty determination is first formally communicated to the taxpayer.38

Conclusion

Textualists might bristle at the Tax Court’s Laidlaw opinion. It relies on legislative intent to import a deadline—the first formal communication of proposed penalties to the taxpayer—that plainly does not exist in the statute’s text. Nevertheless, Laidlaw vindicates a commonsense interpretation of Congress’s intent in enacting § 6751(b) that is procedurally favorable for taxpayers facing a range of assessable penalties under chapter 68.

  1. All “section” references are to the Internal Revenue Code unless otherwise specified.
  2. Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 154 T.C. 68, 69–70 (Jan. 16, 2020).
  3. Id. at 70.
  4. Id.
  5. Id.
  6. Id. at 70–71.
  7. Id. at 71.
  8. Id. at 71–72.
  9. Id. at 72.
  10. Id. at 72–73.
  11. Id. at 73.
  12. Id.
  13. Id.
  14. Id. at 74.
  15. Id.
  16. Id.
  17. Id.
  18. Id. at 74–75.
  19. I.R.C. § 6707A(a).
  20. I.R.C. § 6707A(b)(1).
  21. I.R.C. § 6707A(b)(3).
  22. I.R.C. § 6707A(b)(2)(A).
  23. I.R.C. § 6751(b)(1).
  24. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3306, 112 Stat. 685, 744 (codified at I.R.C. § 6751 (2018)).
  25. S. Rep. No. 105-704, at 65 (1998).
  26. Chai v. Comm’r, 851 F.3d 190 (2d Cir. 2017).
  27. Id. at 220–21.
  28. Clay v. Comm’r, 152 T.C. 223 (Apr. 24, 2019).
  29. Id. at 249.
  30. Id. at 248–49 (quoting Graev v. Comm’r, 149 T.C. 485, 500–01 (Dec. 20, 2017)).
  31. Laidlaw’s Harley Davidson Sales, Inc. v. Comm’r, 154 T.C. 68, 79 (Jan. 16, 2020).
  32. Id. at 80.
  33. Id. at 81.
  34. Id.
  35. Id. at 81–82.
  36. Id. at 83.
  37. Chai v. Comm’r, 851 F.3d 190, 219–20 (2d Cir. 2017).
  38. Laidlaw’s Harley Davidson, 154 T.C. at 83.