Kroner v. Comm'r of Internal Revenue

• Decision Date: 13 September 2022
• Docket Number: 20-13902
• Citation: 48 F.4th 1272
• Parties: Burt KRONER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

48 F.4th 1272

Burt KRONER, Petitioner-Appellee,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 20-13902

United States Court of Appeals, Eleventh Circuit.

Filed: September 13, 2022

Elliot H. Scherker, Bethany Jane Matilda Pandher, Greenberg Traurig, PA, Miami, FL, Barbara Kaplan, Greenberg Traurig, PA, New York, NY, for Petitioner-Appellee.

Geoffrey Klimas, Jacob Earl Christensen, Francesca Ugolini, U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, Michael J. Desmond, Chief Counsel - IRS, Washington, DC, Adrienne E. Griffin, Internal Revenue Service, Acting Chief Counsel, Washington, DC, for Respondent-Appellant.

Before Newsom, Branch, and Brasher, Circuit Judges.

BRASHER, Circuit Judge:

This appeal is about the IRS's process for assessing tax penalties. By statute, the IRS cannot assess certain penalties against a delinquent taxpayer "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination ...." 26 U.S.C. § 6751(b). That statute tells us who must approve—the immediate supervisor—and how that approval must be made—in writing. This appeal presents the questions of what the supervisor must approve and when the supervisor must approve it. We have previously avoided deciding these questions, see TOT Prop. Holdings, LLC v. Comm'r , 1 F.4th 1354, 1372 n.25 (11th Cir. 2021), but must answer them now because they control the resolution of this appeal.

Burt Kroner failed to report millions of dollars in income. After an audit, an IRS examiner sent him a letter that said Kroner owed penalties on top of his back taxes. See 26 U.S.C. § 6662. Kroner tried to negotiate without success; the examiner's direct supervisor signed a second letter, which proposed the same penalties, as well as a form approving those penalties. Eventually, after more failed negotiation, the IRS issued Kroner a statutory notice of deficiency, which triggered his right to petition the Tax Court for review. The Tax Court disallowed the penalties, holding that the supervisor's approval came too late because she had not approved the penalties at the time of the first letter. The IRS appealed, arguing that the Tax Court misinterpreted Section 6751(b) ’s requirements.

We agree with the IRS. Section 6751(b) says that "[n]o penalty ... shall be assessed unless the initial determination of such assessment is personally approved. ..." The statute prohibits assessing a penalty unless a condition has been met—supervisory approval of the initial determination of assessment. But the statute regulates assessments; it does not regulate communications to the taxpayer. Because the IRS did not assess Kroner's penalties without a supervisor approving an "initial determination of such assessment," we hold that the IRS has not violated Section 6751(b). Thus, we reverse the Tax Court.

I.

In our system, the government does not send bills to taxpayers, instead relying on honest self-reports in the form of tax returns. When the IRS identifies a problem with respect to certain types of tax on a return, it must take several steps to convert that underreported liability into an "assessment of tax." The first of these is the "determination" of a "deficiency." A deficiency is the amount by which a taxpayer's liability exceeds the liability that he reports on his return, including any applicable penalties. 26 U.S.C. § 6211. Once the IRS "determines that there is a deficiency in respect of any [such] tax," it is "authorized to send notice of such deficiency to the taxpayer." 26 U.S.C. § 6212(a). A taxpayer served with such a notice may file a petition with the Tax Court for "redetermination of the deficiency." 26 U.S.C. § 6213(a). After a deficiency is determined, the next step is "assessment," which formally places the taxpayer's liability on the IRS's books. Assessment clears the way for a demand for payment and the eventual issuance of a lien on the taxpayer's property, or for collection via levy if he still refuses to pay. See 26 U.S.C. §§ 6303(a), 6321, 6331.

Between 2005 and 2007, Burt Kroner failed to report just under twenty-five million dollars in cash transfers from a former business partner. The IRS began to investigate Kroner's returns in 2008 and eventually concluded that the transfers should have been reported as taxable income, a finding neither party disputes on appeal.

On August 6, 2012, the tax examiner assigned to the case met with Kroner's representatives. At this meeting, the agent provided Kroner with a letter and examination report detailing the IRS's proposed changes to his tax bill and asserting just under two million dollars in Section 6662 penalties. The August 6 letter asked Kroner to tell the IRS whether he agreed or disagreed with the proposed changes. If Kroner disagreed, he could (1) provide the IRS with additional information, (2) discuss the report with the examiner, (3) discuss it instead with the examiner's supervisor, or (4) request a conference with the IRS's Appeals Office. If Kroner took none of those steps by August 16, the letter cautioned, the IRS would process his case based on the report and issue him a statutory notice of deficiency that would allow him to petition the Tax Court for review.

Kroner timely replied to the letter and continued to discuss his case with the government for several months. Eventually, the IRS sent Kroner a "30-day letter" and an updated examination report. The updated report contained the same tax changes and penalties as before, plus accrued interest. The new letter was signed by the examiner's immediate supervisor, Diane Acosta, and again explained Kroner's options for agreeing or disagreeing with the proposed changes to his taxes. If he disagreed, Kroner could either request a meeting with Acosta's supervisor or a conference with the Appeals Office. The new letter cautioned that if Kroner failed to either respond or reach a settlement, he would receive a statutory notice of deficiency detailing the process for obtaining Tax Court review. The same day Acosta signed the 30-day letter, she also signed a Civil Penalty Approval Form blessing the proposed penalties.

Kroner requested a conference with the Appeals Office and continued negotiating with the IRS. Despite his efforts, he never reached a settlement. Over a year after it mailed him the 30-day letter, the IRS finally issued Kroner a statutory notice of deficiency. The notice explained that he had ninety days to file a petition with the Tax Court challenging the alleged deficiency, including the proposed penalties. Kroner timely petitioned, and the Tax Court took up the dispute.

After a trial, the Tax Court sustained the IRS's conclusion that Kroner's cash transfers were taxable but disallowed the proposed penalties on procedural grounds. The court held that the IRS failed to show that it had obtained timely supervisory approval of the penalties under Section 6751(b). Relying on its prior decisions interpreting the supervisory approval requirement to impose a compliance deadline at the time of the "initial determination" of a penalty assessment, the Tax Court explained that this determination occurs "no later than when the Commissioner issues a revenue agent's report (RAR) to a taxpayer that proposes adjustments including penalties and gives the taxpayer the right to protest those proposed adjustments ... with the Appeals Office." Applying this interpretation, the Tax Court held that the IRS's August 6 letter and examination report was the "initial determination" of Kroner's penalty assessment. Because Acosta did not sign a penalty approval form until October 31, the Tax Court determined that the IRS had violated Section 6751(b) by failing to obtain supervisory approval in time. Thus, the court held that Kroner's penalties were procedurally disallowed, a ruling that means that they can never be assessed.

The IRS appealed, challenging the Tax Court's interpretation of the supervisory approval requirement.

II.

We review the legal conclusions of the Tax Court, including its interpretation of Section 6751(b), de novo . Kardash v. Comm'r , 866 F.3d 1249, 1252 (11th Cir. 2017). Although we generally give respectful consideration to the Tax Court's decisions, those decisions do not bind us. See Dobson v. Comm'r , 320 U.S. 489, 499, 502, 64 S.Ct. 239, 88 L.Ed. 248 (1943).

III.

This appeal presents a question of first impression about Section 6751(b). To answer these types of questions, we begin with the statute's text. That is often where we end as well. "[B]ecause where the statutory language is clear and unambiguous, we ‘presume that Congress said what it meant and meant what it said.’ " United States v. Chafin , 808 F.3d 1263, 1270 (11th Cir. 2015) (quoting United States v. Browne , 505 F.3d 1229, 1250 (11th Cir. 2007) ). "Indeed, ‘[o]ur inquiry must cease if the statutory language is unambiguous and the statutory scheme is coherent and consistent.’ " Id. (quoting Med. Transp. Mgmt. Corp. v. Comm'r , 506 F.3d 1364, 1368 (11th Cir. 2007) ).

Turning to the statute's text, we see that it regulates the process of assessing tax penalties. The title of subsection (b) is "[a]pproval of assessment." The text 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 ...." 26 U.S.C. § 6751(b) (emphasis added).

Kroner argues, citing a series of Tax Court decisions, that the statute restricts communications between the IRS and a taxpayer. The Tax Court has held that an initial determination of an assessment is any "communication that advises the taxpayer that penalties will be proposed ...." Clay v. Comm'r , 152 T.C. 223, 249 (2019), aff'd on other grounds , 990 F.3d 1296 (11th Cir. 2021). And the Tax Court has also held that a supervisor must approve the communication before it is...