Opinion
10704-19
04-05-2022
Robertino Presta & Antonella Presta, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Mark V. Holmes Judge
This case and its companion were assigned to this division of the Court and are set for trial at a special session later in the spring. There are a large number of motions pending, some in only one of the cases and some in both.
This motion for partial summary judgment affects only one of these cases- the one brought by Robertino and Antonella Presta. The Prestas own a food business and are engaged in a microcaptive-insurance plan that the IRS has challenged. In the notice of deficiency that led to this case, the IRS determined that the Prestas should be penalized under several sections of the Code.
One of these is the penalty under IRC § 6662(b)(6) for engaging in a transaction that lacks economic substance. In their summary-judgment motion, the Prestas argue that the IRS failed to follow the rules of section 6751(b)(1) and so cannot win on this issue. This is, in other words, another Chaighoul argument. See Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff'g in part, rev'g in part 109 T.C.M. (CCH) 1206 (2015); Graev v. Commissioner, 149 T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460 (2016).
Section 6751(b)(1) prevents the Commissioner from assessing any penalty unless the initial determination to impose it was "personally approved (in writing) by the immediate supervisor of the individual making such determination . . . ." Sec. 6751(b)(1). Written approval can take many forms, Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C. 75, 85-86 (2019), but it must be given before the Commissioner first formally notifies the taxpayer that he has proposed a penalty, see Beland v. Commissioner, 156 T.C. 80, 84-85 (2021) (citing Clay v. Commissioner, 152 T.C. 223, 249 (2019), aff'd 990 F.3d 1296 (11th Cir. 2021)).
On this motion, we must first decide what the undisputed facts show about when he formally notified the Prestas of his decision to assert this penalty, and then we look to see if that decision had previously been approved in writing by the immediate supervisor of the individual who made the decision.
Timeline
There is no genuine dispute about the dates or contents of the communications from the IRS to the Prestas about this penalty. Here's the timeline:
• August 3, 2018-A supervisor at the IRS signed a form 300, Civil Penalty Approval Form, which listed in a box identified as "Reason(s) for Assertion of Penalty(s)" the handwritten phrase "See WP 502."
• August 6, 2018-The IRS sent the Prestas a 30-day letter (so-called because it gives taxpayers who receive one 30 days to ask for a conference with the IRS Appeals Office). This letter included:
• a Form 4549, Income Tax Examination Changes, one page of which included the sentence:
It has been determined that the underpayment of tax shown on line 5 below is attributable to one or more of the following:
(1) Negligence or disregard of rules or regulations
(2) Substantial understatement of income tax
(3) Substantial valuation misstatement (overstatement)
(4) Transaction lacking economic substance.
• a form called Workpaper 502, Substantial Understatement Penalty 6662(d), that shows why the IRS had concluded the Prestas had understated their tax and concluded "Accuracy relate[d] penalty-substantial understatement penalty applicable
per IRC 6662(d)," and states on the next page that "It is government position accuracy relate penalty - negligence penalty is applicable as an alternate position."
• a copy of the August 3 Civil Penalty Approval Form that referred to "WP 502".
• September 24, 2018-Revenue Agent Van Nguyen sent the Prestas a revised Form 4549, attached to which was a new Workpaper 502 that all agree did propose a penalty under section 6662(b)(6).
• November 25, 2018-RA Nguyen's supervisor initials and dates the September 24 workpaper 502.
Analysis
Once this chronology is laid out, our analysis can be brief. In Oropeza v. Commissioner, 155 T.C. 132, 139 (2020), we held that a 30-day letter "is one way of communicating to a taxpayer that the Examination Division has concluded its work." But what was communicated to the taxpayer about the penalties that the Commissioner was proposing in this letter?
The Commissioner argues that the fourth item on the list above - an underpayment attributable to a transaction lacking economic substance - is enough to communicate to a taxpayer that he's on the hook for a section 6662(b)(6) penalty. We have called this general list and description of penalties, one or more of which the IRS tells a taxpayer is the reason for the IRS's assertion of a penalty, a "boilerplate statement." Estate of Ronning v. Commissioner, 117 T.C.M. (CCH) 1206, 1217 (2019). This is apt, because one can find the same or very similar language in nearly every notice of deficiency or 30-day letter the IRS sends out.
In Oropeza we also held that, as a general rule, this standard language is good enough under section 6751 to be "an initial determination:"
[B]oilerplate text in an IRS communication, determining liability for an accuracy-related penalty "attributable to one or more of" specified grounds, will be interpreted to assert all of the specified grounds as alternative bases for the penalty, unless other portions of the
communication explicitly limit the penalty determination to a subset of those grounds.Oropeza, 155 T.C. at 141.
The Prestas argue that the workpaper and civil-penalty-approval form that the Commissioner attached to the 30-day letter are precisely such an explicit limit to a subset of the boilerplate grounds.
The Commissioner contends that there are distinctions between the Prestas' situation and what one can see in our caselaw. He notes that:
• in Estate of Ronning, the page with the more specific assertion of a penalty was right after the page with the boilerplate, while here it was almost a hundred pages later;
• the Workpaper 502 attached to the Prestas' 30-day letter was not generated by the same software that the IRS used to create the Form 4549; and that
• nothing in the Workpaper 502 sent to the Prestas "expressly" limited or disavowed the boilerplate's mention of a "transaction lacking economic substance."
We know from Oropeza, however, that we have to figure this problem out by focusing on the communication itself, "not on [the] subjective intentions of IRS personnel." Id. at 142. And we know that we should look at the documents sent to the Prestas all together to see what they can "logically [be] read to assert." Id.
Here's where the Prestas get the better of the argument. Yes, there is the boilerplate language that tells them the Commissioner has "one or more" reasons for deciding he wants a penalty under section 6662. But the attachments to the letter include one that has a supervisor's approval of penalties as shown on a "WP 502," and another that is the actual Workpaper 502 that specifically states that the grounds for the IRS's seeking a penalty are substantial understatement of tax and, as an alternative, negligence.
We don't think that the "logical reading" that Oropeza tells us to do can reasonably be affected by the number of pages between the boilerplate and the more specific description. And we don't see how the software that generated the forms would even be knowable to a taxpayer much less convey any information about which penalties the Commissioner is asserting. We are also guided by Oropeza to look at logical readings of these IRS forms, and not impose the sort of canons of construction that we might use to interpret statutes. And, even if we did use them, the boilerplate language of the Form 4549 is not like an earlier statute that one might say can be repealed not by implication, but only by express language; that Form is part of the same giant document the Prestas got all at once-so perhaps one might more realistically cite the canon that the specific governs the general.
But we don't think we need to fire any of these large-bore canons here. The Prestas have successfully shown that there is no genuine dispute that the revenue agent's supervisor approved the penalties as shown on a "WP 502," and that the only "Workpaper 502" in the record listed just the substantial-understatement and negligence penalties. We conclude from this failure of any explicit mention of section 6662(b)(6) or even a reference to something like "as a second alternative, because taxpayers engaged in a transaction lacking economic substance," that the Commissioner did not initially determine to assert a penalty under that subsection in his August 2018 30-day letter when he included in that letter what we term the boilerplate language of accuracy-related penalties.
Both parties agree that there is no doubt that the Commissioner did assert a section 6662(b)(6) penalty in a revised Form 4549 that he drafted and sent to the Prestas on September 24. But there is also no genuine dispute that his revenue agent failed to secure written supervisory approval of that penalty until November 25, which was well after September 24.
The Prestas have proved that the Commissioner did not meet the requirements of section 6751 as to the section 6662(b)(6) penalty, which means that it is
ORDERED that petitioners' unopposed January 24, 2022 motion for leave to file a reply to respondent's response is granted. It is also
ORDERED that petitioners' December 13, 2021 motion for partial summary judgment is granted.