Laidlaw's Harley Davidson Sale v. Cir

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LAIDLAW’S HARLEY DAVIDSON No. 20-73420
SALES, INC.,
Petitioner-Appellee, Tax Ct. No.
14616-14L
v.
COMMISSIONER OF INTERNAL OPINION
REVENUE,
Respondent-Appellant.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted December 6, 2021
Pasadena, California
Filed March 25, 2022
Before: Marsha S. Berzon, Carlos T. Bea, and
Jacqueline H. Nguyen, Circuit Judges.
Opinion by Judge Bea;
Dissent by Judge Berzon
2 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
SUMMARY *
Tax
The panel reversed a decision of the Tax Court granting
summary judgment to a taxpayer, in a case involving when
a supervisor must provide the written approval required by
26 U.S.C. § 6751(b) before the Internal Revenue Service
assesses certain penalties.
Taxpayer was required to disclose its participation in a
purported welfare benefit plan (“Plan”) as a “listed
transaction.” Taxpayer initially did not disclose its
participation in the Plan, but later acknowledged that the
Plan was a listed transaction. A Revenue Agent (RA) made
the initial determination to assert a penalty for failure to
disclose. The RA so notified taxpayer by issuing a “30-day
letter.” Although the letter stated that if the taxpayer took no
action by the 30-day response date, “we will assess the
penalty and begin collection procedures,” no supervisor had
yet provided the written approval for the penalty as required
by § 6751(b). The RA’s immediate supervisor provided the
written approval after the 30-day period had expired, and
after taxpayer had submitted a letter protesting the proposed
penalty.
Taxpayer’s administrative appeal was unsuccessful, the
IRS assessed the penalty, then issued a notice of intent to
levy. After a collection-due-process (CDP) hearing,
taxpayer filed a petition in the Tax Court challenging the
Appeals Office’s notice of determination from the CDP
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 3
hearing. Following a remand for the Appeals Office to
consider certain issues not raised in this appeal, and a
supplemental notice of determination, the Tax Court agreed
that the IRS had not complied with the written supervisory
requirement in § 6751(b), and granted summary judgment in
favor of taxpayer.
The panel held that § 6751(b) requires written
supervisory approval before assessment of the penalty or, if
earlier, before the relevant supervisor loses discretion
whether to approve the penalty assessment. Here, the
supervisor gave written approval of the initial penalty
determination before the penalty was assessed and while she
still had discretion to withhold approval. The panel
concluded that the IRS had satisfied § 6751(b). Accordingly,
the panel reversed the Tax Court’s grant of taxpayer’s
motion for summary judgment, and remanded for further
proceedings.
Judge Berzon dissented, and would have affirmed the
Tax Court’s judgment for different reasons. Judge Berzon
would read the statute to require that a supervisor personally
approve the “initial determination” of a penalty by a
subordinate, or else no penalty can be assessed based on that
determination, whether the proposed penalty is objected to
or not. Because the 30-day letter in this case made clear that
the initial determination would have operative effect unless
objected to, supervisory approval was required at a time
when it would be meaningful—before the letter was sent.
Judge Berzon explained that this reading of the statute is
consistent with Congress’s purpose of preventing threatened
penalties never approved by supervisory personnel from
being used as a “bargaining chip” by lower-level staff.
4 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
COUNSEL
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.
OPINION
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.
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 5
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.
6 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
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
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 7
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
8 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
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.
1
I.R.C. § 6330(c)(1) states: “[t]he appeals officer shall at the hearing
obtain verification from the Secretary that the requirements of any
applicable law or administrative procedure have been met.”
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 9
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 assessable penalty is required before the IRS “formally
communicates to the taxpayer its determination that the
taxpayer is liable for the penalty.” The Tax Court held that
RA Czora’s 30-day letter “embodied the initial
determination” to assert the § 6707A penalty because it was
“the first formal communication by the IRS of the
conclusion” that the § 6707A penalty applied to Taxpayer.
Accordingly, the court ruled that Supervisor Korzec’s
written approval of the penalty after that communication to
10 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
Taxpayer was untimely, thus invalidating the penalty
assessment. The Tax Court entered an order granting
Taxpayer’s motion for summary judgment and a decision
holding that the proposed levy was not sustained and that
Taxpayer is not liable for the § 6707A penalty. The
Commissioner now appeals.
II. STANDARD OF REVIEW
“We review the Tax Court’s decision ‘in the same
manner and to the same extent as decisions of the district
courts in civil actions tried without a jury.’” Mazzei v.
Comm’r, 998 F.3d 1041, 1054 (9th Cir. 2021) (quoting
I.R.C. § 7482(a)(1)). Accordingly, we review the Tax
Court’s conclusions of law, including interpretations of the
I.R.C., de novo. Knudsen v. Comm’r, 793 F.3d 1030, 1033
(9th Cir. 2015).
III. ANALYSIS
As Justice Kagan has stated, “we’re all textualists now.” 2
When interpreting a statute, “our inquiry begins with the
statutory text, and ends there as well if the [statute’s] text is
unambiguous.” United States ex rel. Hartpence v. Kinetic
Concepts, Inc., 792 F.3d 1121, 1128 (9th Cir. 2015) (en
banc) (alteration in original) (quoting BedRoc Ltd. v. United
States, 541 U.S. 176, 183 (2004)).
Section 6751 imposes notice and supervisory approval
requirements on the assessment of a host of tax penalties,
including a penalty for failure to report participation in a
2
Justice Elena Kagan, The Scalia Lecture: A Dialogue with Justice
Kagan on the Reading of Statutes at 8:28 (Nov. 17, 2015),
http://today.law.harvard.edu/in-scalia-lecture-kagan-discusses-statutory
-interpretation [http://perma.cc/3BCF-FEFR].
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 11
listed transaction under § 6707A. At issue here is the
supervisory approval requirement of § 6751(b)(1), which
provides:
No 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 or
such higher level official as the Secretary
may designate.
In this statute, “assessed” refers to a ministerial function:
“the formal recording of a taxpayer’s tax liability on the tax
rolls,” which is “the last of a number of steps required before
the IRS can collect” a tax or penalty from a taxpayer. Chai,
851 F.3d at 218; see also Roth v. Comm’r, 922 F.3d 1126,
1131 (10th Cir. 2019).
The Commissioner argues that in this case § 6751(b)(1)
permitted written supervisory approval at any time before
the assessment of the penalty. However, the Commissioner
acknowledges that because the initial determination must be
“approved” by a supervisor, a penalty cannot be assessed
unless supervisory approval occurs at a time when the
supervisor still has discretion whether to approve the
subordinate IRS official’s initial penalty determination. 3
We agree that a supervisor cannot truly approve of a
penalty determination without also possessing discretion to
withhold approval. Accordingly, a supervisor cannot always
satisfy § 6751(b)(1) by waiting to provide written approval
3
We use the term “discretion” here to mean a power or authority to
approve, which includes the power or authority not to approve.
12 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
until just before the moment of assessment. For example, an
earlier deadline for supervisory approval might be required
when the penalty at issue is subject to the I.R.C.’s deficiency
regime. 4 But the § 6707A penalty at issue in this case is not
subject to the I.R.C.’s deficiency procedures. And Taxpayer
does not argue that Supervisor Korzec lacked discretion to
give written approval for any other reason. Accordingly, we
conclude that Supervisor Korzec had discretion to approve
RA Czora’s initial determination when Supervisor Korzec
signed the Civil Penalty Approval Form on August 23,
2011. 5
4
If the Commissioner determines that a taxpayer owes more tax than
the taxpayer has paid, the Commissioner may send the taxpayer a notice
of deficiency. I.R.C. § 6212(a). But once the notice is sent, the
Commissioner begins to lose discretion over whether the penalty is
assessed. If the taxpayer does not file a petition with the Tax Court
within 90 days, the Code provides that “the deficiency . . . shall be
assessed.” I.R.C. § 6213(c). Alternatively, if the taxpayer files a timely
petition in the Tax Court, the IRS generally cannot assess the deficiency
“until the decision of the Tax Court has become final.” I.R.C. § 6213(a).
And, at the conclusion of the Tax Court proceedings, the Code provides
that “the entire amount redetermined as the deficiency by the decision of
the Tax Court which has become final shall be assessed.” I.R.C.
§ 6215(a). When the law provides that a penalty “shall be assessed,” an
IRS supervisor no longer has discretion to approve or disapprove of the
assessment.
5
The Tax Court stated that the Commissioner’s interpretation of
§ 6751(b)(1) is “contradict[ed]” by the Second Circuit’s opinion in Chai.
We disagree. The Chai court held that Ҥ 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.” Chai, 851 F.3d at 221. The court
reasoned that “[i]f supervisory approval is to be required at all, it must
be the case that the approval is obtained when the supervisor has the
discretion to give or withhold it.” Id. at 220. Because the penalty at
issue in Chai was subject to the Code’s deficiency regime, “the last
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 13
Taxpayer defends the Tax Court’s ruling that
§ 6751(b)(1) requires supervisory approval before the IRS
formally communicates a proposed penalty to a taxpayer.
The problem with Taxpayer’s and the Tax Court’s
interpretation is that it has no basis in the text of the statute.
Section 6751(b)(1) “contains no express requirement that
the written approval be obtained at any particular time prior
to assessment.” Chai, 851 F.3d at 218. The statute does not
make any reference to the communication of a proposed
penalty to the taxpayer, much less a “formal”
communication.
Taxpayer quotes a portion of the Tax Court’s opinion,
which may be construed as a textual argument relying on the
word “initial”:
[I]f the initial determination of penalty
liability is made and formally communicated
before the notice of deficiency, and if that
liability is ultimately included in the notice of
deficiency, then supervisory approval right
before issuance of the notice of deficiency
may be too late . . . because at that point [the
supervisor] is approving not the ‘initial
moment the approval of the initial determination actually matters is
immediately before the taxpayer files suit (or penalties are asserted in a
Tax Court proceeding),” id. at 221, because, as discussed in footnote 4,
supra, after that point the IRS loses discretion whether to assess a
penalty. The court ultimately concluded that “because a taxpayer can
file a tax court petition at any time after receiving a notice of deficiency,
the truly consequential moment of approval is the IRS’s issuance of the
notice of deficiency (or the filing of an answer or amended answer
asserting penalties).” Id. But the § 6707A penalty at issue here is not
subject to the I.R.C.’s deficiency regime.
14 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
determination’ but something more like a
final determination.
However, the language of the statute provides no reason
to conclude that an “initial determination” is transformed
into “something more like a final determination” simply
because the revenue agent who made the initial
determination subsequently mailed a letter to the taxpayer
describing it. We think “initial,” as used in § 6751(b)(1)’s
phrase “initial determination,” more naturally indicates that
a subordinate’s determination to assert a penalty lacks the
imprimatur of having received supervisory approval, rather
than that the determination has not yet been formally
communicated to the taxpayer. Moreover, Taxpayer does
not argue that the “determination” that Supervisor Korzec
approved differed in any way from RA Czora’s initial
determination to assert the § 6707A penalty. Finally, this
case does not involve a notice of deficiency, which, as
discussed above, could limit a supervisor’s discretion to
prevent the assessment of a penalty. 6
6
Ordinarily, when we interpret a statute as imposing a particular
rule, we locate the key terms of that rule in the statute’s text. The
dissenting opinion interprets § 6751(b)(1) as imposing a rule that
supervisory approval must precede the first communication made to a
taxpayer that “purport[s] to impose a penalty unless objected to.”
Dissent op. 21, 23 n.3. But this rule is made up of key terms or
requirements that cannot be found anywhere in the language of the
statute: (1) a communication to a taxpayer, (2) the content of that
communication that a penalty “will go into effect unless objected to,”
and (3) the requirement that approval must come before the
communication is made. At best, the dissent appears to treat the phrase
“initial determination of [an] assessment” as though it simply means the
government’s “opening bid” to a taxpayer that an “assessment [is] to go
into effect automatically . . . unless contested by the taxpayer.” See
Dissent op. 21. But a determination that a penalty should be assessed
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 15
Taxpayer also argues that the legislative history of
§ 6751(b)(1) supports its interpretation because the Chai
court found that “[t]he statute was meant to prevent IRS
agents from threatening unjustified penalties to encourage
taxpayers to settle.” 851 F.3d at 219; see also S. Rep.
No. 105-174, at 65 (1998) (“The Committee believes that
penalties should only be imposed where appropriate and not
as a bargaining chip.”).
We are troubled by the language of the letter and the
attachments Taxpayer received, which include the
statements that (1) if Taxpayer took no action by the 30-day
response date “we will assess the penalty and begin
collection procedures,” (2) that it is the “government’s
position” that “[t]he Taxpayer is subject to the penalty under
section 6707A,” and (3) that the “Taxpayer is liable for the
penalty under section 6707A in the amount of $96,900.00.” 7
A natural interpretation of the letter is that, in absence of
action from Taxpayer, “we [the IRS] will [ineluctably]
assess the penalty.” As it turns out, the letter’s threat was
premature because a supervisor had not yet approved the
initial determination. 8 But the recipient would not know this
and a communication to a taxpayer threatening the automatic assessment
of a penalty are two different things, and the statute addresses only the
former.
7
We note that the IRS’s “30-day letter is a form letter,” 26 C.F.R.
§ 601.105(d)(1)(iv), and therefore that the threatening language in the
letter Taxpayer received was probably standardized and not initially
authored by the revenue agent in this case.
8
The dissent misstates the majority’s position as requiring that the
30-day letter “essentially . . . lied to the taxpayer” on the grounds that
“despite, what the letter said, the subordinate who signed the letter had
no authority to make a tentative determination that would become
effective unless objected to by the taxpayer, whether the determination
16 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
from what was written in the letter. And a taxpayer in a
similar position that received such a letter might be misled
about the probability of the assessment of the penalty as
calculated in the letter and, for this reason, more inclined to
settle. We agree with Taxpayer that a law that prevented a
non-supervisor revenue agent from formally communicating
a proposed penalty to a taxpayer without first receiving
supervisory approval would probably reduce the likelihood
of a revenue agent threatening an unjustified penalty to
secure a settlement.
However, we “undertake to apply the law as it is written,
not to devise alternative language that might accomplish
Congress’s asserted purpose more effectively. ‘Our task is
to apply the text, not to improve upon it.’” Salisbury v. City
of Santa Monica, 998 F.3d 852, 859 (9th Cir. 2021) (quoting
Pavelic & LeFlore v. Marvel Ent. Grp., 493 U.S. 120, 126
was in fact approved by a supervisor or not.” Dissent op. 19. We agree
with the dissent that if the supervisor had approved the initial
determination before the letter was sent, the letter would not have made
a threat that was premature in light of § 6751(b)(1).
The dissent relies upon the terms of the 30-day letter as “indicative”
of “the agency’s actual practice.” Dissent op. 20, 24. But, like the
majority, the dissent is committed to the view that the letter was incorrect
because it stated that absent action from Taxpayer the penalty would be
validly assessed. At any rate, the best indication of the agency’s actual
practice is what the agency did, not what it said in a recycled form letter.
And, here, the supervisor approved the penalty determination and then
forwarded the case to the Appeals Office while noting the receipt of the
Taxpayer’s “written protest” in response to the 30-day letter, all without
any indication that it would be unusual for the supervisor’s approval to
come about a month after a written protest challenging a 30-day letter.
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 17
(1989)). And, here, the language of § 6751(b)(1) does not
support Taxpayer’s interpretation of the statute. 9
Accordingly, we hold that § 6751(b)(1) requires written
supervisory approval before the assessment of the penalty or,
if earlier, before the relevant supervisor loses discretion
whether to approve the penalty assessment. Since, here,
Supervisor Korzec gave written approval of the initial
penalty determination before the penalty was assessed and
while she had discretion to withhold approval, the IRS
satisfied § 6751(b)(1).
IV. CONCLUSION
For the reasons stated above, the Tax Court’s grant of
Taxpayer’s motion for summary judgment is REVERSED
9
Moreover, the Commissioner’s interpretation appears to be at least
consistent with the legislative history of this statute because ensuring that
no penalties determined by a subordinate official can be assessed without
the supervisor’s approval—not even as part of an administrative
settlement—furthers to some extent the purpose Taxpayer attributes to
the law: that penalties not be used improperly as leverage for settlement.
The dissent raises further questions about why Congress would
“invoke the concept of approval,” rather than simply providing that only
a supervisor may make a determination to assess a penalty. Dissent
op. 22. The Civil Penalty Approval Form in the record provides some
answers. This document reveals that, before approving the penalty
determination, the supervisor reviewed the revenue agent’s calculations
of the amount of the penalty and attested in a written document to the
reasons and statutory basis for asserting the penalty. It may be a virtue
of the supervisory approval requirement, and not a vice of our
interpretation as the dissent suggests (see Dissent op. at 21), that a
revenue agent is tasked with building a case for asserting a penalty,
which a supervisor only approves or disapproves.
18 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
and REMANDED for proceedings consistent with this
opinion.
BERZON, Circuit Judge, dissenting:
I respectfully dissent. I would affirm the judgment of the
Tax Court, although my reasoning is somewhat different
from that of the Tax Court.
The factual context here is informative regarding what
the statute we must interpret means. The taxpayer in this case
received a letter signed by a subordinate Internal Revenue
Agent, presenting the “government’s position” that the
“Taxpayer is subject to the penalty under section 6707A,”
and stating that the “Taxpayer is liable for the penalty under
section 6707A in the amount of $96,900.” The letter
presented the taxpayer with three options: (1) “agree to the
assessment” and pay the penalty, (2) “request a conference
with our Appeals Office” by forwarding a “written protest,”
or (3) “do nothing” by the 30-day response date, in which
case “we will assess the penalty and begin collection
procedures.”
The penalty determination was, according to the letter, a
conditionally operative one that, the letter reported, would
become automatically effective unless the taxpayer objected
to it. The letter presented the taxpayer with options carrying
potentially irreversible consequences: if the taxpayer
acceded to the penalty or did nothing, any right to challenge
the penalty would be lost.
The statutory provision at issue in this case, section
6751(b)(1), instructs that “[n]o penalty . . . shall be assessed
unless the initial determination of such assessment is
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 19
personally approved (in writing) by the immediate
supervisor of the individual making such determination
. . . .” 26 U.S.C. § 6751(b)(1). Here, although the penalty
determination of $96,900 was announced in the letter to be
operative in the sense I have described, it is undisputed that
the subordinate agent’s supervisor had not approved the
determination before the subordinate sent the 30-day letter
to the taxpayer.
The majority and the government read section
6751(b)(1) as unambiguously allowing this gap, by
permitting the required supervisory approval of an initial
penalty determination to come after the taxpayer is told that
the determination has become conditionally operative. To
accommodate this view, the majority treats the 30-day letter
sent in this case as essentially having lied to the taxpayer. On
the majority’s view, despite what the letter said, the
subordinate who signed the letter had no authority to make a
tentative determination that would become effective unless
objected to by the taxpayer, whether the determination was
in fact approved by a supervisor or not. 1 Majority op. 15–16,
17.
1
The majority notes that it “agree[s] with the dissent that if the
supervisor had approved the initial determination before the letter was
sent, the letter would not have made a threat that was premature in light
of § 6751(b)(1).” Majority op. 15 n.8. But the majority’s position is that,
in the circumstances of this case, the supervisor had the authority to
approve or disapprove of the penalty determination until the “moment of
assessment.” Id. at 11–12, 17. Under that view, the determination
conveyed in the letter could not have been operative—even if approved
by a supervisor—because the supervisor retained the authority to change
the determination until the penalty was formally assessed by recording it
on the tax rolls. See n.2, infra.
20 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
It is to me substantially more likely that the form letter
used in this case is indicative of how the Internal Revenue
Service actually operates. That is, the agency does treat
initial determinations such as the one presented in the 30-day
letter as automatically effective unless objected to. The
agency’s practice thus informs the meaning of the statute,
which, carefully read, does not clearly have the unlikely
meaning the majority adopts.
In my view, there are several reasons the majority’s
reading of the statute must be incorrect and why, properly
read, the statute requires supervisory approval before an
initial determination can be communicated to the taxpayer as
operative in the sense I have described. I begin with what the
statute does not say. It does not say that no penalty shall be
assessed until the initial determination of such assessment is
personally approved by a supervisor. It says “[n]o penalty
. . . shall be assessed unless the initial determination of such
assessment is personally approved (in writing)” by a
supervisor. 26 U.S.C. § 6751(b)(1) (emphasis added).
Unlike the word “until,” the word “unless” is not a temporal
limitation but a substantive one; it tells us that A may not
happen “unless” B happens. Here A is the assessment of
penalties and B is personal approval by a supervisor of an
initial determination by a subordinate. So section 6751(b)(1)
provides a remedy for the taxpayer if the rule requiring
approval as a condition of an enforceable initial
determination is not followed, even if the supervisory
approval of a later, final determination (e.g., pursuant to the
letter received by the taxpayer in this case, a determination
following an objection by the taxpayer to the initial
determination) occurs at a time when approval can still be
withheld. That is, absent such approval of the initial
determination, “[n]o penalty . . . shall be assessed.”
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 21
Nor does the statute say that the assessment must be
personally approved 2 or even that the determination of the
assessment must be personally approved. It says the “initial
determination” of such assessment by “the individual
making such determination” must be personally approved in
writing by a supervisor. Id. (emphasis added). “Such
determination” refers back to the “initial determination.” So
that determination, not the final determination, is what must
be approved by a supervisor. The letter sent to the taxpayer
in this case is illustrative of a “determination of [an]
assessment” made by a subordinate, who signed the
determination. And the determination was “initial” in the
sense that it operated as an opening bid by the government;
the assessment was to go into effect automatically—that is,
be formally recorded on the tax rolls, see n.2, supra—unless
contested by the taxpayer.
Congress must have used the phrase “initial
determination” for a reason. (Emphasis added.) The “canon
against surplusage . . . requires a court, if possible, to give
effect to each word and clause in a statute.” United States v.
Lopez, 998 F.3d 431, 440 (9th Cir. 2021) (citing Chickasaw
Nation v. United States, 534 U.S. 84, 94 (2001)). The
majority proposes that the word “initial” “indicates that a
subordinate’s determination to assert a penalty lacks the
imprimatur of having received supervisory approval.”
Majority op. 14. With respect, reading “initial” to mean “not
yet approved” raises more questions than it answers.
According to the majority’s reading of the statute,
approval is not required until the moment before the penalty
2
As the majority explains, a penalty is “assessed” when it is
formally recorded on the tax rolls. Majority op. 11 (citing Chai v.
Commissioner, 851 F.3d 190, 218 (2d Cir. 2017)).
22 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
is finally assessed. In other words, the supervisor must
approve the final penalty determination, here, one made after
the taxpayer has had an opportunity to contest the initial
determination. But why, then, does the statute refer to the
“initial determination”? Why would Congress refer to “the
individual making such determination,” if that individual
was only making recommendations to a superior, not
interacting with the taxpayer in a manner meant to have
determinative consequences for the taxpayer? And why
would Congress invoke the concept of approval? Surely it
would be much simpler to say that an official in a
supervisory role (or at a particular level) must make the
determination to assess penalties—that is, to record the
penalties on the tax rolls.
Moreover, if Congress’s concern really were that only a
supervisor should make a final assessment determination,
then why would Congress care whether that final
determination took the form of an approval of a
subordinate’s initial determination? What if the supervisor
disagreed with the initial determination and wanted to
impose a different penalty? Why would Congress have
specified how a supervisor ought to reach such a final
determination? The reason for these provisions is opaque
under the majority’s reading of the statute but evident once
it is understood that an “initial determination” may be
communicated to the taxpayer as generating an obligation to
pay the penalty absent objection—as the 30-day letter in this
case made quite explicit.
In my view, then, the statute means what it says: a
supervisor must personally approve the “initial
determination” of a penalty by a subordinate, or else no
penalty can be assessed based on that determination, whether
the proposed penalty is objected to or not. 26 U.S.C.
LAIDLAW’S HARLEY DAVIDSON SALES V. CIR 23
§ 6751(b)(1). That meaning is consistent with Congress’s
purpose of preventing threatened penalties never approved
by supervisory personnel from being used as a “bargaining
chip” by lower-level staff, S. Rep. No. 105-174, at 65
(1998); see Chai v. Commissioner, 851 F.3d 190, 219 (2d
Cir. 2017), which is exactly what happened here.
Here, the initial determination conveyed in the 30-day
letter was meant to be an operative one for the several
reasons explained by the majority: the letter said “that (1) if
Taxpayer took no action by the 30-day response date ‘we
will assess the penalty and begin collection procedures,’
(2) that it is the ‘government’s position’ that ‘[t]he Taxpayer
is subject to the penalty under section 6707A,’ and (3) that
the ‘Taxpayer is liable for the penalty under section 6707A
in the amount of $96,900.00.’” Majority op. 15. Because the
letter made clear that the initial determination would have
operative effect unless objected to, supervisory approval was
required at a time when it would be meaningful—before the
letter was sent. 3
In contrast, the reading of the statute advanced by the
government and adopted by the majority would in many
instances make the approval requirement a mere formality.
That interpretation would, in normal circumstances, allow
the penalty determination to be approved or disapproved
until the moment it was assessed (i.e., recorded on the tax
3
I note that, in this respect, my interpretation differs from the Tax
Court’s understanding. In my view, approval is not required before there
is any communication to the taxpayer but before there is an operative
decision—one that will go into effect unless objected to. So, for example,
were a letter sent to a taxpayer that set out a proposed assessment but did
not purport to impose a penalty unless objected to, there would not, in
my view, be the sort of “initial determination” of a penalty requiring
prior supervisory approval.
24 LAIDLAW’S HARLEY DAVIDSON SALES V. CIR
rolls), 4 even after the Appeals Office had held a conference
to resolve any protest—and perhaps even if the Appeals
Office disagreed with the initial determination, as the
government acknowledged at oral argument. If the approval
requirement for the “initial determination” really could be
satisfied so late in the game, it would be either a pointless
requirement or a perverse one. Rather than interpret the
statute as senseless, I would interpret it in the way that
accords with its language, the agency’s actual practice, as
described above, and Congress’s purpose in enacting the
requirement. I therefore respectfully dissent.
4
The majority acknowledges that “an earlier deadline for
supervisory approval might be required when the penalty at issue is
subject to the [Internal Revenue Code]’s deficiency regime,” apparently
because under that regime the Code prescribes that a proposed
“deficiency . . . shall be assessed” if the taxpayer does not timely object
to it, relieving “an IRS supervisor [of] discretion to approve or
disapprove of the assessment.” Majority op. 12 & n.4 (quoting 26 U.S.C.
§ 6213(c)). But the “penalty at issue in this case is not subject to the
[Code]’s deficiency procedures.” Id. at 12.