Opinion
17784-12
03-29-2024
STANLEY BATTAT & ZMIRA BATTAT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge
Pending before the Court is the Commissioner's Motion to Vacate Order Served September 24, 2021, and the Commissioner's Motion for Leave to File Motion for Reconsideration of Findings and Opinion Out of Time. Along with the latter motion, the Commissioner lodged a Motion for Reconsideration of Findings and Opinion, asking us to reconsider T.C. Memo. 2021-57. All of these motions were filed well beyond the 30 days permitted by Rules 161 and 162. The Battats oppose the Motions as being untimely and on their merits.
It is within the Court's discretion to waive a nonjurisdictional deadline. And reconsideration is appropriate when there has been an intervening change in controlling law. Since we issued our opinion in 2021, there has been an intervening change in controlling law. Accordingly, we will grant the Commissioner's Motion for Leave, grant the Commissioner's Motion to Vacate, and file and grant the Commissioner's Motion for Reconsideration.
Background
This case involves the 2008 income tax liability of Stanley and Zmira Battat. In addition to determining a tax deficiency, the Commissioner asserted an addition to tax and accuracy related penalties.
I. Examination and Adjustments
On November 28, 2011, an Internal Revenue Agent sent the Battats a cover letter and a series of enclosures. The cover letter, Letter 4121, referred to "findings" in an "enclosed report" commonly referred to as a Revenue Agent's Report or RAR. The enclosures included a Form 4549, Income Tax Examination Changes, which detailed how the Commissioner recomputed the Battat's tax liabilities for 2008 and other years. Page 2 of that form included an addition to tax for failure to file under section 6651(a)(1) and an accuracy-related penalty under section 6662. The bottom of that page bears the typewritten "Examiner's Signature" of the Revenue Agent, also dated November 28, 2011. Other pages provide details regarding the computation of the penalties.
On December 8, 2011, the Commissioner sent the Battats what is often referred to as a 30-day letter. That letter provides the recipient an opportunity to seek an administrative appeal of the Commissioner's determinations. Like the previous letter, this letter "enclosed an examination report." This letter, however, was signed on behalf of a Supervisory Internal Revenue Agent. It was signed "on behalf of" a Supervisory Internal Revenue Agent because the "Group Manager" who serves in that role was on leave that day. In her absence, however, she had appointed an acting group manager. The acting group manager signed the 30-day letter in the name of the Supervisory Internal Revenue Agent and placed his initials next to that signature.
The acting group manager signed another document relating to this case on that same day. The Revenue Agent prepared a Civil Penalty Approval Form dated November 17, 2011. That form stated that the Revenue Agent "is assessing the Substantial Understatement Penalty." The acting group manager signed that form under the heading "Group Manager Approval to Assess Penalties identified Above IRM 20.1.5.1.6." His signature was dated December 8, 2011.
On April 23, 2012, the Commissioner issued a notice of deficiency to the Battats determining a deficiency in tax, an addition to tax for failure to file, and an accuracy-related penalty for 2008, the only year that is now before us. While residing in Florida, they filed a timely petition.
II. Prior Motions, Opinion, and Order
On May 8, 2019, the Battats filed a Motion for Partial Summary Judgment and a Memorandum in Support asking the Court to determine that the accuracy-related penalty was not properly approved under section 6751(b)(1), which provides,
No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.
In their Motion, the Battats made three separate arguments as to why the supervisory approval in this case was insufficient. First, they argue that approval was untimely because it occurred after the Commissioner sent the RAR to the Battats. They argue that the RAR was the "initial determination" under section 6751(b). Second, the Battats argue that, even if approval was timely, it was ineffective because it was done by an acting supervisor. And third, the Battats argue that, even if approval was timely and an acting supervisor is sufficient, that the approval did not undergo any meaningful review.
The Battats' motion was fully briefed by the parties. The Commissioner filed his Objection, and the Battats sought and were granted leave to file a Reply and Memorandum in Support of that Reply. The Battats also filed a Motion for Oral Argument.
On May 11, 2021, the Court issued a memorandum opinion deciding the Battats' Motion for Partial Summary Judgment in their favor. Battat v. Commissioner, T.C. Memo. 2021-57. In that opinion, we wrote
The RAR includes the [Revenue Agent]'s initial determination and, because no supervisor approval was provided before the RAR was issued to petitioners, the penalty did not meet the requirements of section 6751(b).On September 24, 2021, we entered our Order granting the Battats' Motion for Partial Summary Judgment.
III. Pending Motions
On June 27, 2023, the Commissioner filed and lodged a series of motions. He filed a Motion to Vacate Order Served September 24, 2021, which was the order granting the Battats' Motion for Partial Summary Judgment. He also filed a Motion for Leave to File Out of Time Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161. With that motion, the Commissioner lodged his Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161, which asked that we reconsider our opinion, T.C. Memo. 2021-57. The Commissioner's motions are predicated on recent developments in the caselaw interpreting section 6751(b).
The Battats oppose the Commissioner's motions on two grounds. First, the Battats observe that the Commissioner's motions are filed outside the time contemplated by this Court's rules governing vacatur and reconsideration. And second, the Battats argue that the recent caselaw interpreting section 6751(b) is wrongly decided.
Discussion
In T.C. Memo. 2021-57, we held that, because the penalty at issue in this case was not approved before the RAR was provided to the Battats, the penalty approval was not timely under section 6751(b). The Commissioner asks us to vacate our order giving effect to that opinion and to grant leave to file a motion for reconsideration. The Battats object. We will look first to our rules regarding vacatur and reconsideration before turning to the merits of the motion for reconsideration.
I. Vacatur
The Tax Court does not have a specific rule governing vacating an order. The closest rule we have is Rule 162, which provides
Any motion to vacate or revise a decision, with or without a new or further trial, shall be filed within 30 days after the decision has been entered, unless the Court shall otherwise permit.
In Tax Court parlance, a decision is typically viewed as the document that conclusively resolves a case, akin to a judgment in Federal District Court. A "report" includes the Court's findings of fact or opinion. I.R.C. § 7459(b). In contrast, a decision is entered giving effect to a report. I.R.C. § 7459(a). A decision in a deficiency case typically specifies the amount of the deficiency. I.R.C. § 7459(c). And an order dismissing a case is also considered a "decision" because it conclusively resolves a case. Id.; see also, Foley v. Commissioner, No. 23-1296, 2024 U.S. App. LEXIS 5993, at *4 (2d Cir. Mar. 13, 2024) ("'decision' as used in the Internal Revenue Code, including § 7463(b), encompasses jurisdictional dismissals…."). But the Commissioner isn't asking us to vacate a decision; he is asking us to vacate an order.
In the absence of a rule regarding vacating an order, we can look to the Federal Rules of Civil Procedure. Our Rule 1(b) provides,
If the Rules provide no governing procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.
The Federal Rules of Civil Procedure provides guidance by way of Rule 60, Relief from a Judgment or Order. That rule permits a court to grant relief from an order where there is a mistake or for any reason that justifies relief. Fed.R.Civ.P. 60(b)(1), (6). The Eleventh Circuit, the circuit to which this case is appealable, has held that mistake can include a mistake in the application of law. Parks v. U.S. Life & Credit Corp., 677 F.2d 838, 840 (11th Cir. 1982). It is also well recognized that a court may reconsider legal questions previously decided in the same case if controlling legal authority has changed significantly. Bryan A. Garner et al., The Law of Judicial Precedent 480 (2016). For reasons discussed more fully below, controlling legal authority has changed significantly thereby justifying relief from our September 24, 2021, Order.
II. Reconsideration
Tax Court Rule 161 governs reconsideration of findings or opinions. It provides,
Any motion for reconsideration of an opinion or findings of fact … must be filed within 30 days after a written opinion … [has] been served, unless the Court orders otherwise.
Although this Rule is found in title XVI, addressing posttrial proceedings, we have previously held that such motions may be filed with regard to interlocutory orders or opinions. Bedrosian v. Commissioner, 144 T.C. 152, 156 (2015), aff'd,940 F.3d 467 (9th Cir. 2019). We typically grant motions for reconsideration only if there is a substantial error or an unusual circumstance. Id. citing CWT Farms, Inc. v. Commissioner, 79 T.C. 1054, 1057 (1982), supplementing, 79 T.C. 86 (1982), aff'd, 755 F.2d 790 (11th Cir. 1985).
As for the timeliness, our Rule 161 gives the judge discretion whether to "order otherwise" as to the deadline for filing a motion for reconsideration. When considering whether to grant leave to file a motion out of time, we may consider the merits of the underlying motion for which leave is sought. Bedrosian, 144 T.C. at 155. To do so necessitates that we revisit the Battats' Motion for Partial Summary Judgment.
III. Motion for Partial Summary Judgment
The Battats' Motion for Partial Summary Judgment was directed solely at the question of whether the Commissioner properly approved the accuracy-related penalty for 2008. The Battats offered three reasons why the penalty determined in the Commissioner's notice of deficiency was not properly approved. We only reached the first of these three arguments, holding that the Commissioner did not approve the penalty in a timely manner. It is this holding at which the lodged Motion for Reconsideration is directed.
A. Timely Approval
A specific approval requirement for certain penalties has long existed in the Code, but it had not been addressed in litigation until Graev v. Commissioner, 147 T.C. 460 (2016). Since we issued that opinion, the caselaw has continually evolved. We will recount a bit of that history.
1. Section 6751(b)
Section 6751 was added to the Code by the IRS Restructuring and Reform Act of 1998. Pub. L. 105-206, 112 Stat. 744, § 3306(a) (July 22, 1998). That section added to the Code a new requirement that penalties be subject to supervisory approval. As in effect for the year in issue, that section 6751(b) provided:
No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.
More than a decade went by before section 6751(b) was so much as mentioned in an opinion of this Court. This changed with a series of cases decided over 2016 and 2017.
2. Graev, Chai, and Graev revisited
In 2016, we decided Graev v. Commissioner, 147 T.C. 460 (2016), in which we were presented with the question of whether the penalties asserted in that case were properly approved. We held that section 6751(b) requires supervisory approval before assessment is made and that any question about that approval was premature during the deficiency case. Id. at 480-81. Several judges dissented. Id. at 503-26.
A few months later, the United States Court of Appeals for the Second Circuit decided Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), aff'g in part, rev'g in part, T.C. Memo. 2015-42. The taxpayer in Chai first raised the penalty approval issue after the trial in his case. This Court declined to consider his argument because the issue was not raised in a timely manner. But on appeal, the Second Circuit cited to the dissenting opinion in Graev and concluded that approval must occur "before the Tax Court proceeding is even initiated." Chai, 851 F.3d at 220. The Second Circuit further held that the Commissioner bears the burden of production to show proper approval. Chai, 851 F.3d at 221.
Like Chai, Graev was appealable to the Second Circuit. We had entered our decision in Graev mere days before the Second Circuit decided Chai, so we vacated our decision in Graev and invited further briefing. Graev v. Commissioner, 149 T.C. 485, 487 (2017). In the light of the Second Circuit's opinion in Chai, we reversed ourselves and held that a challenge to the supervisory approval was not premature. Graev, 149 T.C. at 493. We then went on to conclude that the penalty at issue was timely approved. Graev, 149 T.C. at 493.
3. Tax Court Precedent Regarding Timeliness
In the aftermath of Graev, Chai, and Graev, this Court was called upon to define and refine precisely when supervisory approval needed to occur. In Clay v. Commissioner, 152 T.C. 223 (2019), aff'd, 990 F.3d 1296 (11th Cir. 2021) we held that the Commissioner "must show that written supervisory approval was obtained before the first formal communication to the taxpayer of the initial determination to assess penalties." In that case, the 30-day letter was the first formal communication. In Oropeza v. Commissioner, 155 T.C. 132 (2020), we held that a Letter 5153 coupled with an RAR constituted the initial determination that required supervisory approval. And in Beland v. Commissioner, 156 T.C. 80 (2021), we held that a Form 4549 presented at a closing conference constituted the initial determination that required supervisory approval. In each, Clay, Oropeza, and Beland, the Commissioner did not obtain written supervisory approval before presenting the initial determination to the taxpayer. In contrast, in Belair Woods LLC v. Commissioner, 154 T.C. 1 (2020), we held that a letter and report containing tentative, proposed adjustments and inviting the taxpayer to a conference to discuss those proposed adjustments was not definite enough to constitute a determination requiring supervisory approval.
When we issued our previous opinion in this case, T.C. Memo. 2021-57, we looked to Belair Woods, Oropeza, and Beland to help us decide whether the Commissioner timely obtained supervisory approval of the penalty at issue here. Like Oropeza and Beland, the Commissioner provided a signed RAR to the Battats. Unlike Belair Woods, the RAR was not "tentative" or "proposed." Following our existing precedent at the time, we concluded that the Commissioner did not obtain timely supervisory approval of the penalty determined against the Battats.
4. Eleventh Circuit Precedent Regarding Timeliness
As these cases were being decided, another consequential case was making its way through the system. In Kroner v. Commissioner, T.C. Memo. 2020-73, we followed our existing precedent in Clay. Like Clay, the Commissioner communicated his penalty determination to Mr. Kroner in a letter to the taxpayer that also enclosed an RAR. Like Clay, that letter invited Mr. Kroner to seek an administrative appeal, indicating that the Commissioner had made his final determination. Like Clay, the Commissioner did not obtain supervisory approval before sending the letter and RAR to Mr. Kroner. And following Clay, we held that the Commissioner did not obtain timely approval of the penalty. The Commissioner appealed.
Our previous opinion in this case, T.C. Memo. 2021-57, cited solely to opinions published in United States Tax Court Reports. Although it was extant at the time, we did not cite to Kroner, which was a memorandum opinion that is not published in United States Tax Court Reports.
On appeal, the United States Court of Appeals for the Eleventh Circuit reversed as to penalties. Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022). In reversing, the Eleventh Circuit concluded "that the IRS satisfies Section 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before it assesses those penalties." Kroner, 48 F.4th at 1276. In so holding, the Eleventh Circuit explicitly rejected Chai, which served as the predicate of our revisiting Graev and the line of cases that followed. That line of cases included Oropeza and Beland upon which we relied in previously deciding the Motion for Partial Summary Judgment in this case.
B. Golsen
The Eleventh Circuit's reversal of Kroner was consequential insofar as this case is concerned because, like Kroner, this case is appealable to the Eleventh Circuit. We are a court of national jurisdiction, and our cases are appealable to each of the twelve geographic circuits. I.R.C. § 7482(a), (b). In Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), we wrote that
better judicial administration requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.Golsen, 54 T.C. at 757. Golsen requires that we follow Kroner, regardless of whether this Court would reach the same conclusion. This requirement helps to foster "efficient and harmonious judicial administration." Id. It would be a waste of judicial resources to stand by a legal conclusion that will simply be reversed on appeal. Golsen requires that we follow the precedent of the Eleventh Circuit where it has a decision squarely on point. On the question of when a supervisor must approve the initial determination of a penalty, Kroner is squarely on point. And under that precedent, the Eleventh Circuit would hold that the penalty was timely approved in this case.
C. The Battats' Alternative Arguments
Having determined that supervisory approval was timely under Eleventh Circuit precedent, we turn to the alternative arguments posed in the Battats' Motion for Partial Summary Judgment. Those two arguments were that the supervisory approval was ineffective (1) because it was done by an acting supervisor, and (2) because the approval did not undergo any meaningful review. When we previously granted the Battats' Motion for Partial Summary Judgment, we did not need to reach those issues. Having determined that we cannot grant summary judgment as to their primary argument (that the supervisory approval was untimely) we now address those arguments.
Under Kroner, it is unclear whether these arguments are ripe. Kroner stands for the proposition that penalties may be approved at any time before assessment. To the extent there is or was some defect in the approval that occurred in 2011, Kroner would appear to permit the Commissioner to remedy that defect at any time before assessment.
Existing precedent requires that we reject both of the Battats' alternative arguments. In Belair Woods, we explicitly rejected reading a "meaningful review" standard into section 6751(b). As we wrote there, "We have held in numerous cases that the group manager's signature on the Civil Penalty Approval Form is sufficient to satisfy the statutory requirements." Belair Woods, 154 T.C. at 17. We also noted in Belair Woods that staff members, including supervisors who approve penalty determinations, might change jobs, be reassigned, or retire. Id. And in Thompson v. Commissioner, 155 T.C. 87 (2020), we found that someone acting as a supervisor may approve a penalty determination. Thompson, 155 T.C. 93-94.
Conclusion
In 2021, we decided as a matter of law that the Commissioner did not obtain timely supervisory approval of the penalty he had determined in connection with the Battats' 2008 income tax deficiency. In doing so, we relied on our existing precedent holding that the issuance of an RAR asserting penalties is an initial determination requiring supervisory approval under section 6751(b). Since then, the Eleventh Circuit, the circuit to which this case is appealable, decided Kroner, holding that a supervisor can approve the initial determination any time before those penalties are assessed. If applied to the facts of this case, Kroner requires that we reach a different result than we did in 2021. This change in controlling law is an unusual circumstance that justifies vacating our prior order, granting leave to file a motion for reconsideration out of time, granting reconsideration, and ultimately denying summary judgment. To give effect to the foregoing, it is
ORDERED that the Commissioner's Motion to Vacate Order Served September 24, 2021, (index 137) is granted and the Order served September 24, 2021, (index 95) is vacated. It is further
ORDERED that the Commissioner's Motion for Leave to File Out of Time Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161 (index 135) is granted, and the Clerk shall file the Commissioner's lodged Motion (index 136) as of June 27, 2023. It is further
ORDERED that the Commissioner's Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161 filed as of June 27, 2023, is granted. It is further
ORDERED that the Battats' Motion for Partial Summary Judgment filed May 8, 2019, (index 74) is denied. It is further
ORDERED that the Battats' Motion for Oral Argument filed June 23, 2020, is denied as moot.