Laidlaw's Harley Davidson Sales, Inc. v. Comm'r
| Decision Date | 16 January 2020 |
| Docket Number | 154 T.C. No. 4,Docket No. 14616-14L. |
| Parties | LAIDLAW'S HARLEY DAVIDSON SALES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
The IRS determined that P, a C corporation, failed to timely disclose its participation in a listed transaction as required under I.R.C. sec. 6011 when it filed a Form 1120, "U.S. Corporation Income Tax Return", for the tax year ending May 31, 2008. The revenue agent responsible for examining P's May 2008 return issued a 30-day letter to P that proposed to assert a penalty under I.R.C. sec. 6707A against P for failing to disclose reportable transaction information with that return and that gave P the right to appeal that proposal to the IRS Office of Appeals ("Appeals"). That 30-day letter was the first formal communication to P of the determination to assess the I.R.C. sec. 6707A penalty. Roughly three months after the 30-day letter was issued, the agent's immediate supervisor approved the penalty assertion and signed a Form 300, "Civil Penalty Approval Form".
P requested a conference with Appeals to contest the revenue agent's I.R.C. sec. 6707A penalty proposal. Appeals sustained the penalty proposal, and the IRS assessed the penalty. After the IRS sent P a levy notice to collect the penalty liability, P requested a collection due process ("CDP") hearing before Appeals. Thereafter, Appeals issued a notice of determination sustaining the levy action.
P timely filed in the Tax Court a petition challenging the notice of determination. This Court issued an order on October 16, 2015, inter alia, remanding the case to Appeals for further development of certain arguments P raised. After a supplemental CDP hearing, Appeals once again sustained the levy notice. P then filed a motion for summary judgment asserting that the IRS failed to comply with I.R.C. sec. 6751(b)(1) in determining the I.R.C. sec. 6707A penalty.
Held: The written supervisory approval requirement of I.R.C. sec. 6751(b)(1) applies to the assessable penalty imposed by I.R.C. sec. 6707A for failure to disclose reportable transaction information.
Held, further, the proposal of an assessable penalty under I.R.C. sec. 6707A in the 30-day letter to P embodied, as in Clay v. Commissioner, 152 T.C. 223, 249 (2019), an "initial determination" for purposes of I.R.C. sec. 6751(b)(1), which required written supervisory approval.
Held, further, Appeals abused its discretion by summarily determining that the IRS had met "any applicable law or administrative procedure" for purposes of I.R.C. sec. 6330(c)(1), since the IRS had failed to comply with I.R.C. sec. 6751(b)(1) because it obtained written supervisory approval for the I.R.C. sec. 6707A penalty only after the revenue agent issued to P the 30-day letter proposing to assert the penalty.
Allen James White and William J. Wise, for petitioner.
Elizabeth S. McBrearty, Angela B. Reynolds, Elizabeth A. Carlson, Jay D. Adams, and Mayer Y. Silber, for respondent.
GUSTAFSON, Judge: In this collection due process ("CDP") case, petitioner, Laidlaw's Harley Davidson Sales, Inc. ("LHDS"), seeks review pursuant to section 6330(d)(1)1 of the determination by the Office of Appeals ("Appeals") of the Internal Revenue Service ("IRS") to sustain a notice of intent to levy. For LHDS's tax year ending May 31, 2008, the IRS assessed a penalty under section 6707A(a) for failure to disclose on its Federal income tax return its participation in a reportable transaction. LHDS has moved for summary judgment under Rule 121, contending that there are no disputed issues of material fact and that the section 6707A penalty assessment was invalid as a matter of law. Respondent, the Commissioner of the IRS, has abated all but $10,000 of the penalty, and the remaining issue for decision is whether the IRS complied with the written supervisory approval requirement of section 6751(b)(1) with respect to its assessment of the penalty against LHDS. We hold that the IRS did not comply with that approval requirement, and we will therefore grant LHDS's motion for summary judgment.
The following facts are not in dispute.2 See Rule 121(b). LHDS is a subchapter C corporation which maintained its principal place of business in California when the petition was filed.
In October 2002 Ronald H. Snyder established the Sterling Benefit Plan as a way for employers to fund and receive greater benefits (primarily death, medical, and disability benefits) than pension plans allowed. The IRS eventually determined that the Sterling Benefit Plan is substantially similar to the transactionsidentified as "listed transactions" in Notice 2007-83, 2007-2 C.B. 960, and that a taxpayer using the Sterling Benefit Plan is therefore subject to the penalty of section 6707A if it does not adequately disclose that participation on its tax return. See generally Our Country Home Enters., Inc. v. Commissioner, 145 T.C. 1 (2015).
LHDS's 2008 income tax return
LHDS participated in the Sterling Benefit Plan. LHDS timely filed a Form 1120, "U.S. Corporation Income Tax Return", for the tax year ending May 31, 2008. That return did not initially include a Form 8886, "Reportable Transaction Disclosure Statement", reporting its participation in the Sterling Benefit Plan. However, the IRS subsequently received from LHDS in December 2010 various Forms 8886 amending its corporate returns for multiple years, including the May 2008 tax year.
In the Form 8886 amending its May 2008 return, LHDS disclosed its participation in the Sterling Benefit Plan. LHDS indicated in the Form 8886 that the Sterling Benefit Plan was a "listed" transaction by checking the appropriate box provided on the form for identification of the type of reportable transaction being disclosed. LHDS further designated Notice 2007-83, supra, as the published IRS guidance relating to that classification. Proposal of the section 6707A penalty in the 30-day letter
Revenue Agent ("RA") Sandra Czora was the IRS employee assigned to examine LHDS's return for potential liability for a penalty under section 6707A because of the failure to include reportable transaction information with its original return. The parties have stipulated that she was the individual who "made the initial determination", for purposes of section 6751(b)(1), "to assert the I.R.C. § 6707A penalty" against LHDS for that year.
RA Czora first notified LHDS of the proposed section 6707A penalty by issuing a so-called "30-day letter", dated May 26, 2011, proposing to assert that penalty and providing LHDS with a 30-day period within which to respond. This 30-day letter contained the prefatory heading "Why We Are Sending You This Letter", beneath which the following explanation appeared:
We are notifying you of a proposed penalty under Internal Revenue Code (IRC) section 6707A. The section 6707A penalty is proposed for your failure to disclose a reportable transaction as required by IRC section 6011 and associated regulations and/or for failing to disclose in a periodic report required under section 13 or 15(d) of the Securities Exchange Act of 1934 any penalty described in IRC section 6707A(e)(2) that you were required to pay. The paragraph below describes the possible grounds for proposing this penalty. Please review this proposed assessment and let us know whether or not you agree by following the directions provided in this letter.
The letter further specified that the proposed section 6707A penalty related to LHDS's involvement in the Sterling Benefit Plan, and it outlined LHDS's options depending upon whether it agreed with the penalty proposal.
The 30-day letter explained that, in the event that LHDS wished to oppose the section 6707A penalty, it was entitled to request a conference with Appeals. The letter emphasized that if LHDS opted instead to take no action in response to the penalty proposal, the IRS would "assess the penalty and begin collection procedures." It further cautioned that "[i]f you fail to seek Appeals consideration of your case or fail to waive in writing such consideration or allow the 30-day response time to lapse without contact, the Commissioner will not consider a request to rescind the penalty."
Enclosed with the 30-day letter was a pair of documents constituting what is commonly called a "revenue agent's report" or "RAR":3 a Form 4549-A, "Income Tax Discrepancy Adjustments", along with a Form 886-A, "Explanation of Items",justifying the proposed imposition of the section 6707A penalty.4 Also attached was a document briefly detailing RA Czora's calculation of the proposed penalty.
The 30-day letter and its attachments were signed only by RA Czora and not by any supervisor.
LHDS responded to the 30-day letter by submitting a written protest to the IRS on July 21, 2011, requesting a conference with Appeals in order to dispute RA Czora's proposed assertion of the section 6707A penalty.5
Written supervisory approval
On August 23, 2011--more than a month after the submission of LHDS's written protest, and nearly three months after the date stamped on the 30-day letter--Group Manager ("GM") Virginia Korzec, RA Czora's immediate supervisor, approved RA Czora's assertion of the section 6707A penalty. To reflect this approval, GM Korzec signed a Form 300, "Civil Penalty ApprovalForm", as well as a Form 8278, "Assessment and Abatement of Miscellaneous Civil Penalties", which RA Czora had prepared with respect to the section 6707A penalty. The following day, GM Korzec approved the transfer of LHDS's case to Appeals.
The section 6707A penalty hearing
Appeals Officer ("AO") Roger Olson handled LHDS's penalty hearing. He reviewed RA Czora's report, the 30-day letter, and LHDS's written protest and supporting documentation; held a telephone conference with LHDS; and had follow-up telephone discussions with LHDS on four separate occasions. On August 21, 2013, roughly two years after the case had been transferred to Appeals, AO Olson closed the...
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