Courts divided on supervisory approval requirement for tax penalties – Tax authorities

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Since Chai c. Commissioner, an opinion of the United States Court of Appeals for the Second Circuit subsequently followed by the United States Tax Court in several opinions, there have been a significant number of cases arguing issues involving the approval by controlling federal civil tax penalties. Two recent additions to this list include rulings from the Ninth and Eleventh Circuits, where both courts departed from the Tax Court’s analysis and decision on the matter. The disagreement is about whenapproval must take place. (Some of our past discussions on this topic are linked below.)


In Laidlaw’s Harley-Davidson Sales, Inc. v. Commissioner, the Ninth Circuit, reversing the Tax Court’s decision, applied a text-based approach and held that approval is only required before the imposition of a tax penalty and not before the Internal Revenue Service (IRS) communicates a penalty proposal to the taxpayer. The Court held that the “language of [Internal Revenue Code (Code) section 6571(b)]provides no reason to conclude that an “original determination” is transformed into “something more like a final decision” simply because the revenue officer who made the original decision then sent a letter to the taxpayer describing it . While the Court was “troubled” by the manner in which the IRS communicated the potential imposition of the penalty, he explained that the role of a court is “to apply the law as it is written, and not to conceive an alternative language”. position developed by the Tax Court in recent years.


In Kroner v. Commissionerthe eleventh circuit followed Laidlaw Harley Davidson Sales and similarly concluded that the IRS satisfies Code section 6751(b) as long as a supervisor approves the penalty before it is imposed. The Court explained that this is the best interpretation of the law because (1) it is more consistent with the meaning of the phrase “initial determination of such an assessment”, (2) it reflects the absence of any express time requirement in the statute, and (3) it is a usable reading in light of the purpose of the statute. The Court suggested that the IRS might be advised “to have a supervisor to approve proposed tax penalties at an early stage…but the text of the statute does not impose an earlier deadline.”

The Eleventh Homer was explicit in its departure from
Chai and Tax Court precedent, stating that “the
Chai The court missed an important aspect of the law’s purpose: it’s not just about negotiating, it’s also about checking the imposition of erroneous penalties. The Court also explained that “appropriate penalties must be imposed and collected.
ChaiThe analysis of these competing interests relied heavily on the first to the detriment of the second to justify its derogation from the statutory text.

Practical point: It remains to be seen whether this issue will make it all the way to the U.S. Supreme Court, given the circuit’s apparent split on the question of when oversight approval is required. Since Chai, the IRS has been more aware of the surveillance approval requirement, and regardless of the division of powers, the IRS may continue to seek approval prior to the initial determination (as opposed to the evaluation) of a sanction. Obtaining approval early in the process is consistent with the US Congress’ intent not to use civil tax penalties as “bargaining chips” in an audit. If, during a review, civil tax penalties are invoked, determine if – and when – their imposition has been approved by a supervisor. We will continue to provide updates on this issue as they develop.

Please see the links to our previous comment on section 6751 of the code below:

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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