Telephone call not "initial determination to assess penalties" under Code Section 6751

Internal Revenue Code Section 6751(b)(1) provides that no penalties may be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such assessment.” The Tax Court observed that the phrase “initial determination” is not defined anywhere in the Treasury Regulations and that Congress has never defined “initial determination” in the Code. The meaning of “initial determination” has recently become one of the hottest issues litigated in Tax Court. The meaning of “initial determination” in the context of Section 6751 was the subject of the case, Oxbow Bend, LLC v. Commissioner, T.C. Memo 2022-33 (March 21, 2022).

In Oxbow Bend, LLC, on Nov. 1, 2018, the IRS Revenue Agent (RA) held a telephone conference call with the taxpayer’s representative. During the call, the RA informed the taxpayer of what the income adjustments would be and that penalties were under consideration. On Feb. 11, 2019, the RA’s immediate supervisor signed off on the penalty lead sheet and on April 10, 2019, the IRS issued a Final Partnership Administrative Adjustment (FPAA) to the taxpayer. An FPAA is the partnership equivalent to a Notice of Deficiency – the formal determination of a taxpayer’s deficiency.

The taxpayer asserted that the penalties assessed were invalid under Section 6751 because the telephone conference was the initial determination to assess penalties and that the telephone conference occurred prior to supervisory approval. The taxpayer further asserted that the telephone call was a formal communication because an IRS attorney participated on the call.

The Tax Court disagreed. The Tax Court ruled that initial determination of a penalty means a formal written communication that notifies the taxpayer of the decision to assess penalties. Neither a telephone conference, even with an IRS attorney, nor a faxed meeting agenda that lists penalties, is a formal written communication and is not an initial determination for purposes of Section 6751. In contrast, an FPAA, a Notice of Deficiency and a revenue agent report can each be considered a formal written communication that may be an initial determination for purposes of Section 6751.

Failure of the IRS to meet the requirements of Section 6751 may serve as a valid defense to IRS penalties. Taxpayers under audit should seek competent tax counsel who can raise Section 6751 and other defenses to IRS penalties and income adjustments.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: David B. Shiner (312 444 9027), Principal and Leader of the Tax & Employee Benefits Practice.