Court Opinion

ID: 9893382
Source: CourtListenerOpinion
Date Created: 2023-10-26 19:02:25.1244+00
Date Added: 2024-06-11T09:02:59.694065
License: Public Domain

United States Tax Court

                            161 T.C. No. 7

                WOLFGANG FREDERICK KRASKE,
                         Petitioner

                                   v.

           COMMISSIONER OF INTERNAL REVENUE,
                       Respondent

                              —————

Docket No. 27574-15.                            Filed October 26, 2023.

                              —————

              P’s 2011 and 2012 returns were examined by a tax
      compliance officer (TCO) with the IRS Small Business and
      Self-Employed Division who on June 2, 2014, issued P a
      Letter 692 (15-day letter) proposing deficiencies as well as
      penalties pursuant to I.R.C. § 6662(a) and (b)(2) for both
      years. The 15-day letter advised P that if he disagreed with
      the proposed adjustments, he could, within 15 days of the
      letter’s date, request a conference with the IRS Office of
      Appeals (Appeals) by providing the TCO with a list of
      disagreed items, upon receipt of which his case would be
      forwarded to Appeals.

            On July 16, 2014, P mailed a letter to the TCO
      requesting Appeals consideration, which was received by
      the TCO on July 24, 2014.

            On July 21, 2014, the TCO’s immediate supervisor
      gave written approval for the imposition of the I.R.C.
      § 6662(a) and (b)(2) penalties for both years. P’s case was
      thereafter forwarded to Appeals, which received it on
      August 12, 2014.

           P was unable to reach a settlement with Appeals,
      and on July 28, 2015, R issued P a notice of deficiency

                           Served 10/26/23
                                          2

       determining, inter alia, that he was liable for penalties
       pursuant to I.R.C. § 6662(a) for both years.

              Held: The holding of the Court of Appeals for the
       Ninth Circuit, where an appeal in this case would
       ordinarily lie, in Laidlaw’s Harley Davidson Sales, Inc. v.
       Commissioner, 29 F.4th 1066 (9th Cir. 2022), rev’g and
       remanding 154 T.C. 68 (2020), concerning the timeliness of
       the written supervisory approval of a penalty required by
       I.R.C. § 6751(b), is squarely on point, and, pursuant to
       Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970), aff’d,
       445 F.2d 985 (10th Cir. 1971), we will follow it.

             Held, further, the written supervisory approval for
       the penalties at issue, which were subject to deficiency
       procedures, was timely, as the TCO’s immediate supervisor
       gave approval before the case was transferred to Appeals,
       while she retained discretion to approve or to withhold
       approval of the penalties.

                                    —————

Wolfgang Frederick Kraske, pro se.

Alexander D. DeVitis and Christine A. Fukushima, for respondent.

       GALE, Judge: In a separate opinion in this case, Kraske v.
Commissioner, T.C. Memo. 2023-128, we sustained deficiencies of
$11,464 and $11,403 in petitioner’s federal income tax for taxable years
2011 and 2012, respectively. As petitioner reported income tax of
$10,719 and $12,716 for those years, respectively, respondent
determined that petitioner is liable for a penalty for each year pursuant
to section 6662(a) and (b)(2) 1 for an underpayment attributable to a
substantial understatement of income tax. In this opinion we decide
whether petitioner is so liable.

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times. We round all monetary amounts
to the nearest dollar.
                                            3

                               FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The First
Stipulation of Facts, First Supplemental Stipulation of Facts, and the
attached Exhibits are incorporated herein by this reference. Petitioner
resided in California when he timely filed his Petition.

       An examination of petitioner’s returns for the 2011 and 2012
taxable years was conducted by a tax compliance officer (TCO) with the
Internal Revenue Service (IRS) Small Business and Self-Employed
Division. On June 2, 2014, the TCO issued petitioner Letter 692 (15-day
letter) proposing adjustments resulting in (1) a deficiency in tax of
$11,464 and a penalty pursuant to section 6662(a) and (b)(2) of $2,293
for 2011; and (2) a deficiency of $11,403 and a penalty pursuant to
section 6662(a) and (b)(2) of $2,281 for 2012. The 15-day letter advised
petitioner that if he disagreed with the proposed adjustments, he could
request a conference with the IRS Office of Appeals (Appeals) by
providing the TCO with a list of the disagreed items, upon receipt of
which his case would be forwarded to Appeals. 2 The 15-day letter
further advised that if petitioner did not respond within 15 days, a notice
of deficiency would be issued.

      Almost a month after the deadline for responding, on July 16,
2014, petitioner mailed a letter to the TCO stating his disagreement
with the principal proposed adjustment, which was received by the TCO
on July 24, 2014. 3 Also on July 16, as recorded in the TCO’s activity
record for petitioner’s case, the TCO—not having received a response to
the 15-day letter from petitioner after having been promised it several
times—closed the case as unagreed and forwarded it to the group
manager, her immediate supervisor.

       On July 21, 2014, the group manager reviewed the case, signed
civil penalty approval forms approving the assertion of the section

        2 On July 1, 2019, the Office of Appeals was renamed the Independent Office

of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 983
(2019). We will use the name in effect at the times relevant to this case, i.e., the Office
of Appeals or Appeals.
        3 The parties stipulated that petitioner’s letter was “submitted” on July 16,

2014. The letter, a copy of which was also stipulated, is dated July 16, 2014, and bears
a “Received” stamp of the Small Business and Self-Employed Division dated July 24,
2014. On the basis of the foregoing evidence we find that the letter was mailed on
July 16, 2014, and received by the TCO on July 24, 2014.
                                     4

6662(a) substantial understatement penalty for 2011 and 2012, and
approved the case for closure.

       After receipt of petitioner’s response on July 24, 2014, his case
was forwarded to Appeals. Appeals’ case activity record states that the
case was received on August 12, 2014, and assigned to an Appeals officer
on August 28, 2014. Petitioner was unable to reach a settlement with
Appeals, and on July 28, 2015, a notice of deficiency was issued to
petitioner reflecting the same adjustments as in the 15-day letter.

                                 OPINION

I.    Timeliness of Penalty Approval

      The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for any penalty, requiring the
Commissioner to come forward with sufficient evidence indicating that
the imposition of the penalty is appropriate. See § 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446–47 (2001). As part of that burden, the
Commissioner must produce evidence of compliance with procedural
requirements of section 6751(b)(1). See Graev v. Commissioner, 149 T.C.
485, 492–93 (2017), supplementing and overruling in part 147 T.C. 460
(2016).

        Section 6751(b)(1) provides that “[n]o 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.” In the statute “assessed” refers
to a ministerial function, “the formal recording of a taxpayer’s tax
liability on the tax rolls,” which is “the last of a number of steps required
before the IRS can collect” a tax or penalty from a taxpayer. Laidlaw’s
Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th
Cir. 2022) (quoting Chai v. Commissioner, 851 F.3d 190, 218 (2d Cir.
2017), aff’g in part, rev’g in part T.C. Memo. 2015-42), rev’g and
remanding 154 T.C. 68 (2020).

      The written supervisory approval described in section 6751(b) is
not required to take any specific form. See Palmolive Bldg. Invs., LLC
v. Commissioner, 152 T.C. 75, 85–86 (2019). But we have held that it
generally must be obtained no later than (1) the date on which the
Commissioner issues the deficiency notice, or (2) the date, if earlier, on
which the Commissioner formally communicates to the taxpayer the
Examination Division’s determination to assert a penalty. See Belair
Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020); Clay v.
                                    5

Commissioner, 152 T.C. 223, 249–50 (2019), aff’d, 990 F.3d 1296 (11th
Cir. 2021).

       In Clay, 152 T.C. at 249–50, the Commissioner issued the
taxpayer a 30-day letter before the date on which the supervisory
approval was obtained via a civil penalty approval form. We held that
section 6751(b) was not satisfied because approval was not obtained
before “a communication that advise[d] the taxpayer that penalties
[would] be proposed and g[ave] the taxpayer the right to appeal them
with Appeals.” Clay, 152 T.C. at 249. Here, respondent concedes that
written approval of the initial penalty determinations was not obtained
until after a formal communication from the Commissioner—i.e., the
15-day letter—was sent to petitioner, which notified him of the proposed
penalties and offered him the right to have them considered by Appeals.
Therefore, the approval of the immediate supervisor was not timely
under Clay.

       However, an appeal in this case would ordinarily lie with the
Court of Appeals for the Ninth Circuit, and therefore its precedent
governs this case. See Golsen v. Commissioner, 54 T.C. 742, 756–57
(1970), aff’d, 445 F.2d 985 (10th Cir. 1971). In Laidlaw’s Harley
Davidson Sales, Inc. v. Commissioner, 29 F.4th at 1071, the Ninth
Circuit considered the timeliness of supervisory approval for “assessable
penalties,” which are not subject to deficiency procedures. The Ninth
Circuit’s holding concerning the timeliness of supervisory approval is
articulated in broad terms: “[W]e hold that § 6751(b) requires written
supervisory approval before the assessment of the penalty or, if earlier,
before the relevant supervisor loses discretion whether to approve the
penalty assessment.” Id. at 1074. Accordingly, the question arises
whether the holding should be read so as to encompass penalties subject
to deficiency procedures as well.

       In Golsen, 54 T.C. at 757, we noted 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.” This prescription arose from
the recognition that if we insisted on our view (as a court of national
jurisdiction) and held contrary to a squarely-on-point decision of a court
of appeals with jurisdiction over the appeal, the “virtual[ly] certain[]”
result would be the nonprevailing party’s appealing our decision and
securing a reversal—a scenario that would be a futile waste of taxpayer
and judicial resources. Lardas v. Commissioner, 99 T.C. 490, 494 (1992).
Thus, in Lardas we framed the test for applying the Golsen doctrine as
                                    6

whether the court of appeals decision at issue “is so clearly on point that
it would be futile” to issue a decision contrary to it. Id. at 498. We
cautioned, however, that given our obligation as a court of national
jurisdiction “to apply with uniformity its interpretation” of the taxing
statutes, Lawrence v. Commissioner, 27 T.C. 713, 719 (1957), rev’d,
258 F.2d 562 (9th Cir. 1958), “we should be careful to apply the Golsen
doctrine only under circumstances where the holding of the Court of
Appeals is squarely on point,” Lardas, 99 T.C. at 495.

        In Lardas, to determine whether the relevant court of appeals
decision was “so clearly on point” that a decision contrary to it would be
futile, we found it necessary to ascertain “the scope of [the decision’s]
rationale.” Id. at 498 (emphasis added). In Lardas the issue was
whether in the case of income source entities (such as S corporations,
partnerships, or trusts) the filing of the return of the source entity or,
instead, the return of the taxpayer receiving income from the source
entity, commenced the running of the limitations period on assessment
of tax. The Tax Court had uniformly held that the return of the taxpayer
receiving income from a source entity was the relevant return. But the
Ninth Circuit, where appeal would lie, had held to the contrary where
the source entity was an S corporation. See Kelley v. Commissioner,
877 F.2d 756 (9th Cir. 1989), rev’g and remanding T.C. Memo. 1986-405.
The source entity at issue in Lardas was a grantor trust.

       What is important to recognize is that in Lardas, when deciding
whether the Golsen doctrine should cause us to follow the Ninth Circuit,
we did not merely point to the fact that the case before us involved a
grantor trust whereas the Ninth Circuit decision involved an
S corporation. We instead undertook an analysis to determine the scope
of the Ninth Circuit’s rationale in its holding concerning an
S corporation so as to ascertain whether it clearly extended to grantor
trusts as well. Finding that the scope of the Ninth Circuit’s rationale
was unclear concerning grantor trusts, we concluded that the Golsen
doctrine was inapplicable. Lardas, 99 T.C. at 498.

       By contrast, as explained below, the rationale of the Ninth
Circuit’s holding in Laidlaw’s Harley Davidson is clear regarding the
timing of supervisory approval. The Ninth Circuit rejected outright our
position in Clay that the supervisory approval required by
section 6751(b)(1) is timely only if it is obtained before a formal
communication to the taxpayer that penalties would be proposed,
finding that our interpretation “has no basis in the text of the statute.”
Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th
                                            7

at 1072. Instead, the Ninth Circuit opined that approval is timely at
any time before assessment, provided the supervisor retains discretion
to give or withhold approval. As an example of this qualifier, the court
reasoned that, in the case of penalties subject to deficiency procedures,
a deadline earlier than just before assessment might be required
because a supervisor begins to lose discretion to approve once a notice of
deficiency is sent. 4

       As previously noted, the Ninth Circuit summarized its holding in
Laidlaw’s Harley Davidson in broad terms: “[W]e hold that § 6751(b)
requires written supervisory approval before the assessment of the
penalty or, if earlier, before the relevant supervisor loses discretion
whether to approve the penalty assessment.” Id. at 1074. By its terms,
the holding is not confined to assessable penalties, and the Ninth
Circuit’s discussion makes clear that it had in mind penalties subject to
deficiency procedures when it added the qualifier that a supervisor must
have had discretion to approve when acting to do so. Thus, nothing in
the Ninth Circuit’s holding or analysis suggests that it might think a
timing rule different from its “retention of discretion” rule would apply
in the case of penalties subject to deficiency procedures.

       Given the Ninth Circuit’s rejection of our section 6751(b)
interpretation in Clay that measures timeliness on the basis of formal
communications to the taxpayer, and its broadly phrased holding that
approval is timely at any time before assessment so long as the
supervisor retains discretion to approve, we conclude that its rationale
is clear and extends to penalties subject to deficiency procedures. If we
were to follow Clay and find the supervisory approval here untimely
because it did not occur before the proposed penalties were formally
communicated to the taxpayer, “a reversal would appear inevitable.”
See Lardas, 99 T.C. at 495. We accordingly hold that Laidlaw’s Harley

          4 As the Ninth Circuit explained, the supervisor loses discretion after a notice

of deficiency is sent because thereafter assessment of a penalty is governed by specific
statutory mandates: by section 6213(c) if the taxpayer fails to file a petition with the
Tax Court within 90 days, in which case the penalty “shall” be assessed; or, if a petition
is filed, by section 6213(a), prohibiting assessment “until the decision of the Tax Court
has become final,” and by section 6215(a), providing that when the decision of the Tax
Court has become final, the deficiency (which includes associated penalties) as
redetermined by the Tax Court “shall be assessed.” Laidlaw’s Harley Davidson Sales,
Inc. v. Commissioner, 29 F.4th at 1071 n.4.
                                         8

Davidson is squarely on point, and pursuant to the Golsen doctrine we
will follow it in this case. 5

       In applying the Laidlaw’s Harley Davidson holding here, the
question becomes whether the TCO’s immediate supervisor retained
discretion to approve the penalties when she did so. When the
supervisor approved the penalties on July 21, 2014, it was more than a
month past the deadline for petitioner to respond to the 15-day letter,
and the TCO had not received a written request for Appeals’
consideration from him. Although petitioner had mailed such a request
on July 16, 2014, it was not received by the TCO until July 24, 2014—
three days after written supervisory approval had been given. The case
was not received by Appeals until August 12, 2014—over three weeks
after supervisory approval had been given. Thus, the TCO’s immediate
supervisor retained discretion to approve or to withhold approval of the
penalties when she did so on July 21 because the case had not yet been
transferred to Appeals (at which time the Small Business and
Self-Employed Division’s jurisdiction over the case, and the supervisor’s
discretion, may have terminated).

       This timeline is well within the parameters for the supervisory
approval found timely by the Ninth Circuit in Laidlaw’s Harley
Davidson. In that case, the revenue agent’s immediate supervisor did
not give written approval of the penalty until more than a month after
the taxpayer’s request for Appeals consideration had been received. The
case was then transferred to Appeals the day after supervisory approval
was given. Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner,
29 F.4th at 1069. Accordingly, following Laidlaw’s Harley Davidson, we
hold that the approval was timely, and respondent has met his burden
of production to show that the requirements of section 6751(b)(1) have
been satisfied.

        5 We acknowledge that we have previously suggested otherwise in a

memorandum opinion. See Castro v. Commissioner, T.C. Memo. 2022-120, at *5 n.6.
But see Kamal v. Commissioner, T.C. Memo. 2023-80 (applying Laidlaw’s Harley
Davidson holding with respect to a penalty subject to deficiency procedures). In both
of these cases, however, the approval was timely under either the Clay holding or the
Laidlaw’s Harley Davidson standard. In any event, the better reading of Golsen, as
refined by Lardas, is that the rationale advanced in Laidlaw’s Harley Davidson is
squarely on point with respect to the timeliness of supervisory approval of penalties
subject to deficiency procedures.
                                    9

II.   Substantial Understatement of Income Tax

       Petitioner reported tax liabilities of $10,719 and $12,716 for 2011
and 2012, respectively. We are sustaining the determination in the
notice of deficiency that he owes increases in tax of $11,464 and $11,403
for 2011 and 2012, respectively. Petitioner has not raised reasonable
cause and good faith as an affirmative defense pursuant to section
6664(c)(1), and it is therefore deemed to be waived. See Gustafson v.
Commissioner, 97 T.C. 85, 90 (1991); see also ATL & Sons Holdings, Inc.
v. Commissioner, 152 T.C. 138, 154 (2019). Accordingly, respondent has
met his burden of producing evidence that petitioner’s underpayments
were attributable to substantial understatements of income tax, and
therefore petitioner is liable for the accuracy-related penalties as
determined by respondent. See § 6662(d)(1)(A).

      To reflect the foregoing,

      Decision will be entered for respondent as to the section 6662
penalties.