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Tax Court Reconsiders Accuracy-Related Penalty in Light of Chai Decision, Still Sides With IRS

(Parker Tax Publishing January 2018)

As a result of the Second Circuit's decision in Chai v. Comm'r, 2017 PTC 124 (2017), the Tax Court reconsidered its prior decision in Graev v. Comm'r, 147 T.C. No. 16 (2016), in which it upheld accuracy-related penalties against a couple whose charitable deductions had been denied and in which it held that the couple's argument that the IRS had failed to comply with Code Sec. 6751(b)(1) was premature. The court reexamined the couple's argument and found that the IRS had shown compliance with the written approval requirement of Code Sec. 6751(b) for the penalties at issue and thus upheld the penalties. Graev v. Comm'r, 149 T.C. No. 23 (2017).

In Graev v. Comm'r, 140 T.C. No. 17 (2013) (Graev I), the IRS disallowed certain charitable deductions for easements taken by Lawrence and Lorna Graev on their 2004 and 2005 tax returns. The IRS proposed 40 percent gross valuation misstatement penalties under Code Sec. 6662(h) with respect to the disallowance of the couple's noncash charitable contribution deduction and a carryover deduction they had taken. During mandatory review of the proposed notice, the IRS's counsel recommended, as an alternative position, that 20 percent accuracy-related penalties be determined under Code Sec. 6662(a) with respect to these same items. This recommendation was approved in writing by the IRS counsel's immediate supervisor and added to the notice of deficiency.

Subsequently, the IRS conceded the 40 percent gross valuation misstatement penalties and amended certain filings to reassert the 20 percent penalties with respect to the noncash charitable contribution deductions. Before the Tax Court, in a preassessment deficiency proceeding, the Graevs argued that the IRS was barred from assessing the penalties at issue because it failed to comply with Code Sec. 6751(b)(1), which requires that the initial determination of the assessment of the penalty be personally approved (in writing) by the immediate supervisor or such higher level official as the Secretary may designate.

In Graev v. Comm'rr (Graev II), 147 T.C. No. 16 (2016), the Tax Court sustained the 20 percent penalties at issue, holding in part that the couple's argument that the IRS failed to comply with Code Sec. 6751(b)(1) was premature in a preassessment deficiency proceeding. Subsequently, the Second Circuit, in Chai v. Comm'r, 851 F.3d 190 (2d Cir. 2017), aff'g in part, rev'g in part, T.C. Memo. 2015-42, held that the written approval requirement of Code Sec. 6751(b)(1) is appropriately viewed as an element of a penalty claim and that Code Sec. 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty. The Second Circuit essentially adopted the minority opinion in Graev II. Because the Graev's case is appealable to the Second Circuit, the Tax Court vacated its decision in Graev II and reconsidered its prior decision in light of the Second Circuit's decision in Chai.

Upon reconsideration, the Tax Court held that the Graev's argument that the IRS failed to comply with Code Sec. 6751(b)(1) was appropriately considered in the prior deficiency proceeding and that a showing that the written approval requirement of Code Sec. 6751(b) is satisfied is part of the IRS's burden of production under Code Sec. 7491(c). The court further held that the IRS had shown compliance with the written approval requirement of Code Sec. 6751(b) for the penalties at issue and that the Graevs were liable for the 20 percent accuracy-related penalties with respect to their disallowed deductions for both the cash and noncash charitable contributions.

For a discussion of the procedural requirements for computing penalties, including the requirements of Code Sec. 7491, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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