Castro v. Commissioner, T.C. Memo. 2022-120: Tax Court Finds IRC Sec. 6751(b)(1) Penalty Approval While Signaling the 9th Circuit’s Laidlaw Opinion May Not Be Followed

Click here for a PDF copy of the U.S. Tax Court’s original opinion in Castro v. Commissioner, T.C. Memo. 2022-120.

In this case, the Tax Court declined to consider whether or not a manager believed that signing a 30-day letter was a memorialization of his IRC Sec. 6662 penalty approval and found IRC Sec. 6751(b)(1)’s requirements met. The taxpayer argued vehemently against the IRS’s rewriting of history to include the fiction that an IRS supervisor, who knew and followed the IRS’s then-existing guidelines for statutory approval, had inadvertently and unconsciously approved of penalties by signing a 30-day letter, even though his own case record explicitly said he reviewed the penalties at a later date (at which time he made adjustments). The Tax Court effectively accepted a de facto rule that the signature on a 30-day letter is approval (though leaving open factual exploration in each case as to whether it was timely) and would not look behind the 30-day letter.

The holding of Clay v. Commissioner, 152 T.C. No. 13 (2019), aff’d. on other grounds, 990 F.3d 1296 (3rd Cir. 2021), was that the relevant time frame for determining whether the IRS has complied with this written-approval requirement is no later than the date of the issuance of a 30-Day Letter.

Perhaps more interesting to the development of case law in this area, the Tax Court in a footnote that is arguably dicta, stated that the Ninth Circuit’s holding in Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022) was not squarely on point for deficiency tax cases and it was questionable whether it needed to be followed under the holding of Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971) (the Golsen doctrine). The Tax Court had requested the parties file supplemental briefing on the Laidlaw case. Respondent argued that the Laidlaw opinion should be followed per the Golsen doctrine and the taxpayer (through his counsel, Daniel W. Layton, the author of this page) argued the Golsen doctrine did not apply. The Tax Court agreed with the taxpayer on this issue but stated that it needed not rule on it because the first holding controlled the case.

This opinion was also recently cited among other IRS-adverse authority in an IRS Notice of Proposed Rulemaking (88 FR 21564). In that notice, the IRS is seeking to expand Laidlaw’s reasoning to remove all gains made by taxpayers in the penalty-approval line of cases.

The time to appeal this ruling to the Ninth Circuit has not lapsed as of the time this webpage is posted.

Posted on 04/13/2023 by Daniel W. Layton. Mr. Layton is the principle of DWL Tax Law in Newport Beach, California, and is a former IRS trial attorney and ex-prosecutor in the Tax Division of the U.S. Attorney’s Office in Los Angeles. He is serving his third term as the Chair of the Tax Section of the Orange County Bar Association.

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