Laidlaw's Harley Davidson Sales, Inc. v. Comm'r of Internal Revenue

• Decision Date: 25 March 2022
• Docket Number: No. 20-73420,20-73420
• Parties: LAIDLAW'S HARLEY DAVIDSON SALES, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

29 F.4th 1066

LAIDLAW'S HARLEY DAVIDSON SALES, INC., Petitioner-Appellee,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 20-73420

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2021 Pasadena, California

Filed March 25, 2022

Jacob Earl Christensen (argued), Francesca Ugolini, and Kathleen E. Lyon, Attorneys, Tax Division; David A. Hubbert, Acting Assistant Attorney General; United States Department of Justice, Washington, D.C.; for Respondent-Appellant.

William J. Wise (argued), Chicago, Illinois, for Petitioner-Appellee.

Before: Marsha S. Berzon, Carlos T. Bea, and Jacqueline H. Nguyen, Circuit Judges.

Dissent by Judge Berzon

BEA, Circuit Judge:

Section 6751(b)(1) of the Internal Revenue Code ("I.R.C.") (26 U.S.C.), states that "[n]o penalty ... shall be assessed unless the initial determination of such assessment is personally approved (in writing)" by a supervisor. At issue in this case is exactly when the supervisor must provide the approval. The Tax Court granted Laidlaw's Harley Davidson Sales, Inc. ("Taxpayer") summary judgment because it held that § 6751(b)(1) "requires the [Internal Revenue Service ("IRS")] to obtain written supervisory approval before it formally communicates to the taxpayer its determination that the taxpayer is liable for the penalty." On appeal, the Commissioner of Internal Revenue ("Commissioner") argues that § 6751(b)(1) requires supervisory approval only before a penalty is assessed and while the supervisor retains discretion whether to approve of the penalty determination, which in this case the supervisor retained even after the IRS formally communicated its determination of liability to Taxpayer. We have jurisdiction under I.R.C. § 7482(a)(1) and reverse.

I. BACKGROUND

The facts of this case are not in dispute. Taxpayers must disclose participation in transactions designated by the IRS as "listed transactions" by attaching a disclosure statement to their return for each taxable year in which they participate in such a transaction. I.R.C. § 6011(a) ; 26 C.F.R. § 1.6011-4(a), (b)(2), (e). The penalty for a corporation's failure to disclose a reportable transaction is generally 75% of the decrease in tax shown on the return as a result of the transaction, but must be at least $10,000 and at most $200,000. I.R.C. § 6707A(a) – (b).

In 1999, Taxpayer became a participating employer in a purported welfare benefit plan called the Sterling Benefit Plan ("Plan"). The IRS later determined that the Plan was the same as, or substantially similar to, the tax avoidance transactions designated as "listed transactions" in the IRS's Notice 2007-83 and that a taxpayer participating in the Plan would be subject to a penalty under § 6707A if it did not disclose its participation on its tax return. See Our Country Home Enters., Inc. v. Comm'r , 145 T.C. 1, 57, 64 (2015) (holding that the Plan was "substantially similar to the transaction described in Notice 2007-83").

The IRS issued Notice 2007-83 on November 5, 2007. Taxpayer filed its return for the 2007–2008 fiscal year on February 16, 2009, without disclosing its participation in the Plan. In December 2010, Taxpayer filed several Reportable Transaction Disclosure Statements (IRS Form 8886), in which Taxpayer first disclosed to the IRS its participation in the Plan during the fiscal years ending in 1999 and 2005–2008. Taxpayer then acknowledged that the Plan was a listed transaction.

Revenue Agent Czora ("RA Czora") examined Taxpayer's return for potential liability for a penalty under § 6707A due to the failure to include reportable transaction information with its original 2007–2008 fiscal year return, filed in 2009. She made the initial determination for purposes of § 6751(b)(1) to assert the § 6707A penalty against Taxpayer for $ 96,900. RA Czora notified Taxpayer of the proposed penalty by issuing a so-called "30-day letter," dated May 26, 2011.

The letter included threatening language that, it turns out, overstated the IRS's position. The letter stated: "We are proposing the assessment of a penalty under IRC section 6707A (a) for failing to disclose [a] reportable transaction." If Taxpayer agreed with the penalty, the letter instructed Taxpayer to sign and return a form waiver of restrictions on assessment and collection and send payment to the United States Treasury. If Taxpayer did not agree with the penalty, the letter stated Taxpayer could request a conference with the IRS Appeals Office by filing a written protest of the penalty. Alternatively, Taxpayer could seek review in either a U.S. District Court or the U.S. Court of Federal Claims by fully paying the penalty and filing a claim for a refund. However, the letter also stated that if Taxpayer took no action by the 30-day response date (June 27, 2011), "we will assess the penalty and begin collection procedures."

RA Czora enclosed an examination report with the 30-day letter, which included (1) a Form 4549-A, Income Tax Discrepancy Adjustments, showing her computation of the proposed penalty based on the claimed income tax benefit resulting from Taxpayer's participation in the Plan, and (2) a Form 886-A, Explanation of Items, explaining the basis for the proposed penalty. The Form 886-A attached to RA Czora's 30-day letter identifies as the "government's position" that "[t]he Taxpayer is subject to the penalty under section 6707A" and concludes that the "Taxpayer is liable for the penalty under section 6707A in the amount of $96,900.00."

But, at the time RA Czora sent the letter, it could not have been guaranteed that, as the letter stated, if Taxpayer took no action by the June 27, 2011, deadline, "we will assess the penalty and begin collection procedures." This is because I.R.C. § 6751(b)(1) provides that certain penalties, including penalties under § 6707A, cannot be assessed without written supervisory approval. And, as it turns out, no supervisor had yet provided written approval of the § 6707A penalty that the letter represented would be assessed against Taxpayer.

On July 21, 2011, and after the 30-day period had expired, Taxpayer submitted a letter protesting the proposed penalty and requesting a conference with the Appeals Office. On August 23, 2011, about a month after Taxpayer wrote to protest the proposed penalty, RA Czora's immediate supervisor ("Supervisor Korzec"), signed a Form 300, Civil Penalty Approval Form, providing written approval of the proposed penalty. The next day, Supervisor Korzec transferred the case to the Appeals Office. Taxpayer's administrative appeal was unsuccessful, and, in August 2013, the Appeals Office recommended assessment of the § 6707A penalty. The IRS assessed the penalty in the amount of $96,900 on September 16, 2013.

Taxpayer did not pay the penalty after notice and demand, and the IRS issued a notice of intent to levy and notice of Taxpayer's right to a collection-due-process ("CDP") hearing before the Appeals Office. Taxpayer timely requested a CDP hearing, which was held on May 9, 2014. On May 21, 2014, the Appeals Office sustained the proposed levy, and stated that the Appeals Office "obtained verification from the IRS office collecting the tax that the requirements of any applicable law, regulation or administrative procedure with respect to the proposed levy ... have been met," in accordance with I.R.C. § 6330(c)(1).¹

In June 2014, Taxpayer timely filed a petition in the Tax Court challenging the Appeals Office's notice of determination from the CDP hearing. The Tax Court remanded the matter to the Appeals Office to consider certain statute-of-limitations and penalty-rescission arguments raised by Taxpayer. On remand, the Appeals Office again sustained the proposed levy in a supplemental notice of determination. The supplemental notice of determination expressly determined that the § 6707A penalty was validly assessed after being approved in writing by RA Czora's immediate supervisor in accordance with § 6751(b)(1). Following the supplemental notice of determination, the parties stipulated in the Tax Court to a reduction in the amount of the penalty at issue to $10,000—the minimum amount imposed by § 6707A. The Tax Court thereafter permitted Taxpayer to file an amended petition. In the amended petition, Taxpayer argued that the IRS had not complied with the written supervisory approval requirement in § 6751(b)(1) and that the Appeals Office had, therefore, abused its discretion in sustaining the proposed levy.

Taxpayer moved for summary judgment on that ground.

The Tax Court granted summary judgment to Taxpayer, holding that the Appeals Office abused its discretion in sustaining the collection action, and disallowed the penalty. The Tax Court held that the Appeals Office erred in verifying that all applicable laws and administrative procedures had been followed for collection of the penalty in accordance with § 6330(c)(1), because the supervisory approval of the penalty was untimely under § 6751(b)(1).

The Tax Court rejected the Commissioner's argument that § 6751(b)(1) requires that the IRS secure supervisory approval only before the assessment of a penalty. The Tax Court reasoned that the statute's legislative history, as analyzed in Chai v. Commissioner , 851 F.3d 190 (2d Cir. 2017), "strongly rebuts" the Commissioner's argument because the statute "would make little sense if it permitted approval of an ‘initial’ penalty determination up until and even contemporaneously with the IRS's final determination." The Tax Court also rejected the Commissioner's argument that under Chai the timeliness of written supervisory approval hinges on whether the supervisor retained authority to give approval because "[t]o so suggest would be to ignore the paramount role that the legislative history of section 6751(b)(1) played in Chai 's analysis."

Relying on its previous decision in Clay v. Commissioner , 152 T.C. 223 (2019), and other Tax Court precedent, the Tax Court ruled that supervisory approval of an...