The supervisory approval rule did not apply to the Tax Court’s imposition of a delay penalty. The delay penalty can be imposed at the court’s discretion for misbehavior in court. It is not a penalty determined by the IRS. Thus, the supervisory approval rule does not apply to the Tax Court.
The delay penalty and the supervisory approval rule are not in irreconcilable conflict. Moreover, Congress did not express a manifest intent to change long-standing court rules when it enacted the approval rule.
Thus, the delay penalty and the supervisory approval rule can coexist. And, it was the court’s duty to give effect to both.
Supervisory Approval Rule Protects Taxpayers
The supervisory approval rule is meant to prevent IRS agents from threatening taxpayers with unjustified penalties. It requires IRS management to approve most noncomputer generated penalties.
Only two individuals may approve these penalties
– – the immediate supervisor of the individual making the penalty determination or
– – a higher level official designated by the Treasury Secretary.
Thus, the rule only applies to penalties assessed by the IRS.
Tax Court Authority
Congress had different priorities when it increased the delay penalty in 1989. Congress found the prior penalty did not deter taxpayers from taking frivolous positions. So, Congress increased the penalty from $5,000 to $25,000.
Also, Congress called the new award a “penalty”” instead of “damages.” Thus, the IRS no longer needed to prove specific damages. Moreover, the court could impose the delay penalty without such evidence because
– – dealing with frivolous lawsuits wastes judicial resources, and
– – delays the resolution of legitimate disputes.
Thus, the delay penalty is a tool the court can use to combat frivolous litigation and reduce congested dockets. It is not meant to prevent IRS agents from imposing unjustified penalties. Accordingly, the approval rule does not apply to the Tax Court when it imposes delay penalties.
The taxpayer was liable for the delay penalty. IRS counsel told him his arguments were frivolous. Also, the court told him his arguments were frivolous. Yet, his brief contained only shopworn tax-protestor type arguments. Thus, the court imposed a $2,000 penalty to deter similar behavior.
In addition, the taxpayer was liable for a deficiency for unreported
– – wages,
– – unemployment compensation, and
– – a retirement account distribution.
Also, he was liable for the 10 percent early distribution tax and late filing and payment penalties.
B. Williams, Jr., Dec. 61,211