Court Opinion

ID: 9957664
Source: CourtListenerOpinion
Date Created: 2024-04-04 19:02:01.503467+00
Date Added: 2024-06-11T08:18:33.944897
License: Public Domain

United States Tax Court

                                T.C. Memo. 2024-38

                       AMGEN INC. & SUBSIDIARIES,
                               Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                      __________

Docket Nos. 16017-21, 15631-22.                                  Filed April 4, 2024.

                                      __________

Andrew P. Crousore and Rajiv Madan, for petitioner.

Jill A. Frisch, Cathy A. Goodson, Usha Ravi, Julie P. Gasper, Kathryn
F. Patterson, John M. Altman, and Elizabeth P. Flores, for respondent.

                           MEMORANDUM OPINION

       GREAVES, Judge: The primary issue in these consolidated cases
is the Commissioner’s allocation of income under section 482 between
Amgen Inc. and Amgen Manufacturing Limited. 1 Currently before the
Court is respondent’s June 12, 2023, Motion for Partial Summary
Judgment contending that the Internal Revenue Service (IRS) complied
with the requirements of section 6751(b)(1) by securing timely
supervisory approval for all penalties included in the notice of
deficiency, dated April 15, 2022, related to tax years 2013 through 2015. 2
For the reasons set forth below, we will grant respondent’s motion.

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

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure.
        2 Respondent issued a prior notice of deficiency, dated June 29, 2021, to

petitioner relating to tax years 2010 through 2012 but did not determine penalties for

                                  Served 04/04/24
                                          2

[*2]                               Background

       The following facts are derived from the pleadings, the parties’
motion papers, and the exhibits and declarations attached thereto. They
are stated solely for purposes of deciding respondent’s motion and not
as findings of fact in these cases.         See Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).

       Petitioner is the parent corporation of a multinational group of
consolidated corporations and affiliated companies, specializing in
biologic therapeutics. Petitioner had its principal place of business in
California when it filed the petitions. Absent stipulation to the contrary,
appeal of these cases would lie to the U.S. Court of Appeals for the Ninth
Circuit. See § 7482(b)(1)(B).

       The IRS has routinely selected petitioner’s returns for
examination. As relevant to the pending motion, the IRS audited
petitioner’s 2010 through 2012 federal tax returns. On November 29,
2017, at the close of this audit, the IRS prepared and issued to petitioner
a memorandum entitled “Notice of Failure to Correctly Report Financial
Statements for Transfer Pricing Analysis” (exam memorandum). In
relevant part, the exam memorandum stated:

             The purpose of this memorandum is to inform the
       Taxpayer that the transfer pricing method for Amgen USA
       during the tax years ended December 31, 2010 to 2012 may
       preclude the Taxpayer from having a reasonable cause for
       an underpayment attributable to a net section 482
       [adjustment].

       The IRS began its examination of the returns for tax years 2013
through 2015 approximately four months after it issued the exam
memorandum. As relevant to this motion, the IRS had two teams
working on the issues of (1) increasing petitioner’s income to clearly
reflect income and prevent the evasion of taxes under section 482
(transfer pricing adjustments) and (2) increasing petitioner’s income on
account of payments received in connection with healthcare reform fees
imposed by section 9008 of the Patient Protection and Affordable Care
Act, Pub. L. No. 111-148, 124 Stat. 119, 859 (2010) (HCR fee

these years. On December 19, 2022, we granted a joint Motion to Consolidate Docket
No. 16017-21, related to tax years 2010 through 2012, with Docket No. 15631-22,
related to tax years 2013 through 2015. The motion at issue relates exclusively to the
case at Docket No. 15631-22.
                                     3

[*3] adjustments). The IRS Examination Division issue manager for the
transfer pricing adjustments was Supervisory Revenue Agent (SRA)
Andy Soemardi, and the IRS Examination Division issue manager for
the HCR fee adjustments was SRA Gregory Horwitz.

       During the examination revenue agents working on the transfer
pricing adjustments recommended the assertion of accuracy-related
penalties for gross valuation misstatements and substantial
understatements of income tax. See § 6662(a), (b)(2), (3), (d), (h). Both
penalties were approved in writing on February 27, 2020, by SRA
Soemardi. One of the revenue agents also recommended the assertion
of accuracy-related penalties for substantial valuation misstatements.
See § 6662(a), (b)(3), (e). This penalty was approved in writing by SRA
Soemardi on May 8, 2020. As for the team working on the HCR fee
adjustment issue, a revenue agent recommended the assertion of
accuracy-related penalties for substantial understatements of income
tax. See § 6662(a), (b)(2), (d). This penalty was approved in writing by
SRA Horwitz on March 10, 2020. Collectively, this Opinion will refer to
penalties determined during the examination as examination penalties.

       On May 8, 2020, the IRS issued the 30-day package to petitioner.
Petitioner requested that the case be transferred to the Independent
Office of Appeals (Appeals Office) for review. The Appeals Office
reviewed the file and sent a draft of the notice of deficiency to the Office
of Chief Counsel for review. An attorney with the Office of Chief Counsel
recommended alternative accuracy-related penalties for negligence or
disregard of rules or regulations regarding the transfer pricing
adjustment and HCR fee adjustments. See § 6662(a), (b)(1), (c). On
February 22, 2022, the attorney’s immediate supervisor, Associate Area
Counsel Shirley Mao, provided written approval for the alternative
penalties, and the recommendation was sent back to the Appeals Office.
Collectively, this Opinion will refer to penalties determined by the Office
of Chief Counsel as Chief Counsel penalties.

      The Appeals officer adopted this recommendation and asserted
the Chief Counsel penalties. On February 28, 2022, the Appeals officer’s
immediate supervisor approved the penalties in writing. After this
approval, the IRS issued the notice of deficiency on April 15, 2022. The
notice increased petitioner’s income related to the transfer pricing
adjustments and HCR fees adjustments. As a primary theory, the IRS
determined that petitioner was liable for accuracy-related penalties for
gross valuation misstatements related to the transfer pricing
adjustments and substantial understatements related to the HCR fee
                                   4

[*4] adjustments. The IRS made further alternative determinations
that petitioner was liable for the remaining examination and Chief
Counsel penalties.

       Petitioner timely filed petitions for redetermination of the
deficiencies. On June 12, 2023, respondent filed the motion now under
consideration. On July 14, 2023, petitioner filed an Opposition to
Motion for Partial Summary Judgment, arguing that the exam
memorandum was the first formal communication regarding the
penalties. Because the penalties were not approved in writing before
the IRS issued the exam memorandum, petitioner argues that under our
precedent the supervisory approval was not timely. On August 9, 2023,
with leave of the Court, respondent filed a Reply to Opposition to Motion
for Partial Summary Judgment.

                               Discussion

I.    Summary Judgment

       The purpose of summary judgment is to expedite litigation and
avoid costly, unnecessary, and time-consuming trials. See FPL Grp.,
Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant
summary judgment where there is no genuine dispute of material fact
and a decision may be rendered as a matter of law. See Rule 121(a)(2);
Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). Furthermore,
we construe the facts and draw all inferences in the light most favorable
to the nonmoving party to decide whether summary judgment is
appropriate. See Bond v. Commissioner, 100 T.C. 32, 36 (1993). The
nonmoving party may not rest upon the mere allegations or denials of
his pleading but must set forth specific facts showing that there is a
genuine dispute for trial. See Rule 121(d); Bond, 100 T.C. at 36.

II.   Supervisory Approval Under Section 6751(b)(1)

       For a corporate taxpayer, the burden of production as to penalties
remains with the taxpayer because section 7491(c) does not apply to
corporations. See NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006).
The Commissioner does not have the burden of production as to
supervisory approval under section 6751(b) for a penalty determined
against a corporation in a notice of deficiency. See Dynamo Holdings
Ltd. P’ship v. Commissioner, 150 T.C. 224, 232–33 (2018). Accordingly,
respondent does not bear the burden of production for the penalties
determined against petitioner. Petitioner raised as an affirmative
                                   5

[*5] defense to the penalties that respondent failed to comply with
section 6751(b)(1).

       Section 6751(b)(1) requires that the “initial determination” of a
penalty assessment be “personally approved (in writing) by the
immediate supervisor” of the person making that determination. In
Laidlaw’s Harley Davidson, the Ninth Circuit considered the timeline
for obtaining supervisory approval of “assessable penalties,” which are
not subject to deficiency procedures. Laidlaw’s Harley Davidson Sales,
Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022), rev’g and
remanding 154 T.C. 68 (2020). The Ninth Circuit held that, for an
assessable penalty, written supervisory approval must occur “before the
assessment of the penalty or, if earlier, before the relevant supervisor
loses discretion whether to approve the penalty assessment.” Id.
at 1074. Absent stipulation to the contrary, these cases are appealable
to the Ninth Circuit, and we thus follow its precedent. See Golsen v.
Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir.
1971).

       Petitioner argues that Laidlaw’s Harley Davidson is not
applicable in these cases because the penalties at issue are subject to
deficiency procedures. Therefore, petitioner asks that we delay ruling
on this issue to allow the Ninth Circuit to address the appropriate
timeline for supervisory approval for penalties subject to deficiency
procedures. While petitioner is correct in noting the distinction in the
type of penalties at issue, we recently held that for cases appealable to
the Ninth Circuit, the holding in Laidlaw’s Harley Davidson
encompasses penalties subject to deficiency procedures. See Kraske v.
Commissioner, No. 27574-15, 161 T.C., slip op. at 7–8 (Oct. 26, 2023).
Kraske directly resolves the issue, and therefore we see no reason to
delay ruling on it.

       A relevant supervisor could lose discretion when a notice of
deficiency is issued. See Laidlaw’s Harley Davidson Sales, Inc. v.
Commissioner, 29 F.4th at 1072. A supervisor may also lose jurisdiction
over a case and thus the discretion to approve penalties when a case is
transferred from the IRS Examination Division to the Appeals Office.
Kraske, 161 T.C., slip op. at 8.

        Because we follow the holding in Laidlaw’s Harley Davidson, we
reject petitioner’s argument that the supervisory approval was not
timely. Petitioner does not dispute respondent’s assertions pertaining
to the identity of each revenue agent who made the initial determination
                                   6

[*6] after the examination began, the identity of that revenue agent’s
immediate supervisor, and the date on which the written approval was
received. Thus, the relevant inquiry is whether the penalties were
approved when the relevant supervisor had discretion over the
penalties.

       There is no indication that a determination was made or that any
relevant supervisor lost discretion to approve either the examination
penalties or Chief Counsel penalties after respondent issued the exam
memorandum. In fact, respondent had not begun examinations for tax
years 2013 through 2015 until four months after the exam memorandum
was issued and the recommendations to assert the examination
penalties and the Chief Counsel penalties would not be made for years.
Thus, the issuance of the exam memorandum does not mark the point
at which the relevant supervisors lost discretion to approve either the
examination penalties or the Chief Counsel penalties.

       The examination penalties were determined by revenue agents
during the examination. SRA Soemardi and SRA Horwitz approved the
examination penalties recommended by their teams before issuing the
30-day package and transferring the cases to the Appeals Office.
Therefore, they retained discretion to approve the examination
penalties, and the approvals were timely. See Kraske, 161 T.C., slip op.
at 8. As for the Chief Counsel penalties, an attorney in the Office of
Chief Counsel initially determined these penalties. See Graev v.
Commissioner, 149 T.C. 485, 494–98 (2017) (holding that the initial
determination may take the form of a recommendation from an attorney
in the Office of Chief Counsel), supplementing and overruling in part
147 T.C. 460 (2016). Associate Area Counsel Shirley Mao approved the
Chief Counsel penalties before the recommendation was transmitted to
the Appeals Office. Therefore, Associate Area Counsel Shirley Mao had
discretion to approve the Chief Counsel penalties when she approved
them.

       We find that respondent secured the supervisory approvals
required under section 6751(b)(1) with respect to the penalties
determined in the notice of deficiency. Accordingly, respondent is
entitled to partial summary judgement on this issue.

      To reflect the foregoing,

    An order will be issued granting respondent’s Motion for Partial
Summary Judgment in Docket No. 15631-22.