Section 6751(b) requires supervisory approval before the IRS can assess certain penalties. The statute is untouched by the recently enacted BBBA. In late December Treasury published these final rules on how the IRS must comply with the statute. Professor Caleb Smith shared some good thoughts on them on this Procedurally Taxing post. This Lesson is an opportunity to see how they will work.
In one sense it is too early for the Tax Court to teach us a lesson on the new regulations because the regulations only apply to penalties assessed on or after December 23, 2024. Treas. Reg. 301.6751(b)-1(f).
But in Ivey Branch Holdings LLC v. Commissioner, T.C. Memo. 2025-63 (June 9, 2025), Judge Lauber gives us an opportunity to see how the new regulations will work in Tax Court, both as to issues about the timing of supervisory approval, and as to how the approval process works when the taxpayer is examined by a team of IRS employees and not just a single IRS employee.
The timing lesson is useful because the regulations adopt what I call the horse-and-barn rule and reject what I call the Tax Court’s consequential moment rule. Four Circuit Courts of Appeals have also adopted the horse-and-barn rule including the Circuit to which this taxpayer would take an appeal. So Judge Lauber evaluates the IRS compliance with §6751(b) under what will become the governing rule per the regulations.
The teams lesson is also useful to learn because the stereotype of a single gimlet-eyed auditor acting alone is a myth. The reality is that IRS employees will often seek advice and support from other employees on matters, especially now, as the IRS copes with incessant budget cuts by pooling resources. For example, an RA may seek support from other IRS employees who are designated to provide subject matter support on a particular issue…such as penalty application! Or the RA may seek support and direction from supervisors Or different RA’s may be assigned to work different issues on the same examination. The various back-and-forth communications between all these employees can sometimes make it difficult to see which “individual” IRS employee makes the “initial determination” that must then be approved. The new regulations deal with that problem and so does Judge Lauber in today’s case, giving us a lesson on how both the Tax Court and the regulations evaluate compliance with 6751(b) when the examination is conducted by a team.
Details below the fold.
The Nonsensical Text of §6751(b)
The text of §6751(b) is short, but not sweet: “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.”
Focus on the underlined text. As Judge Lauber himself noted, this language “is worse than ambiguous; it is an oxymoron, because while “one can determine a deficiency * * * and whether to make an assessment, * * * one cannot ‘determine’ an ‘assessment.’” Graev v. Commissioner, 149 T.C. 485, 500 (2017). That is because an assessment is a ministerial act of recording a taxpayer’s tax liability on the IRS official records. §6203. It is a culmination of a process. There simply is no “initial determination” of an “assessment.” Instead there are initial determinations of items to include in an assessment. Some of those items might be penalties. And, of course, before the IRS can assess any proposed deficiency, including proposed penalties, taxpayers have the opportunity for both administrative review by Appeals and judicial review by the Tax Court. All of that happens before an assessment.
Enacted as part of the IRS Restructuring and Reform Act of 1998, §6751(b) did not cause much litigation for its first 20 years. Courts, including Tax Court, routinely interpreted the statute as permitting supervisory approval at any time before the actual act of assessment. That meant that the supervisory approval could come (for deficiency cases) even while a case was being litigated in Tax Court and even after the Tax Court issued an opinion. It could come anytime before the act of assessment.
The Timing Problem: Consequential Moment v. Horse-And-Barn That all changed in 2017. In December 2017 the Tax Court issued its revisionist opinion in Grav, following what it thought was the direction given by the 2d Circuit Court of Appeals in a case called Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). Focusing on the “initial determination” text and on a scrap of legislative history, the Tax Court now interpreted §6751(b) as requiring supervisory approval at the first “consequential moment” in the pre-assessment process. Approval now had to come at some ill-defined point in time before an IRS employee first communicated that employee’s “decision” to propose a penalty. See Lesson From the Tax Court: A Practical Interpretation of the Penalty Approval Statute §6751, TaxProf Blog (Jan. 13, 2020).
Since 2017 the Tax Court has valiantly wrestled with the concept of the “consequential moment.” As predicted by Judge Holmes in his marvelous concurrence in Graev, this new approach to interpreting §6751(b) has spawned much litigation and has permitted many taxpayers to avoid penalties because the IRS penalty approval process was unable to predict consistently the point in time the Tax Court would later decide was the consequential moment. Thus the IRS did not always satisfy the retroactive application of the Tax Court’s refined interpretations.
Meanwhile, three Courts of Appeals have rejected the Tax Court’s approach and have instead adopted what I call a “horse-and-barn” rule, following the 2d Circuit’s basic idea that supervisory approval must be “obtained when the supervisor has the discretion to give or withhold it.” 851 F.3d at 220. While the 2d Circuit did use the term “consequential moment” it defined that term as being the moment the penalty determination is put into a document that closes the IRS administrative process and gives the taxpayer the right to go to Tax Court. The penalty horse has left the IRS barn. In the Chai case itself that document was the NOD.
A good example is from the Circuit where this taxpayer would take an appeal. In Kroner v. Commissioner, 48 F.4th 1271 (11th Cir. 2022), the Revenue Agent (RA) held a closing conference with Mr. Kroner and his representative in July 2012. The RA gave them a Letter 915 and Form 4549 proposing various changes and proposing §6662 accuracy-related penalties. The RA’s supervisor had not signed a penalty approval form before then. Mr. Kroner made various responses to the Letter but did not change the RA’s conclusion. In October 2012, the RA send a second Letter and another version of Form 4549 proposing the same changes and penalty. This time the supervisor signed off on the penalties before the Letter was sent. Mr. Kroner took the matter to Appeals but got nowhere. In July 2014 the IRS issued a Notice of Deficiency. It is not clear whether the NOD was issued by Exam or Appeals.
On these facts the Tax Court said that the “consequential” moment was when the RA gave Mr. Kroner the Letter 915 because that letter proposed penalties and gave Mr. Kroner the right to seek review in Appeals. And that scrap of legislative history suggested that Congress was concerned about unapproved penalties being asserted as “bargaining chips” in Appeals. It did not matter to the Tax Court that Mr. Kroner did not actually go to Appeals until after the second letter issued, in October.
The 11th Circuit reversed. It held that the supervisory approval was timely because, as in Chai, the approval came before the IRS sent the taxpayer the NOD, the document that officially closed the IRS administrative process and gave the taxpayer the NOD ticket to the Tax Court.
The 9th and 10th Circuits have also adopted a horse-and-barn rule. See Minemyer v. Commissioner, No. 21-9006 (10th Cir. 2023) (“We are persuaded by the Second Circuit’s reasoning and hold that with respect to civil penalties, the requirements of § 6751(b)(1) are met so long as written supervisory approval of an initial determination of an assessment is obtained on or before the date the IRS issues a notice of deficiency.”); Laidlaw Harley Davidson v. Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022) (upholding approval of proposed §6707A penalty after taxpayer protested proposed penalty and asked for review by Appeals but before Appeals received the case).
The Regulations Adopt Horse-and-Barn Approach In December 2024 the Treasury issued final regulations interpreting §6751(b). These regulations adopt the horse-and-barn rule. Specifically, the regulations recognize three different types of horses and focus on when they leave the IRS barn: (1) penalties assessed without pre-assessment judicial review; (2) penalties subject to pre-assessment judicial review; and (3) penalties proposed during Tax Court litigation.
First, penalties that are not subject to pre-assessment judicial review have left the barn only when the IRS makes the assessment. 26 CFR § 301.6751(b)-1(b)(approval must be made “before the penalty is assessed.”). This is the pre-2017 interpretation of the statute. It applies to penalties such as the Trust Fund Recovery Penalty in §6672. It will supplant the Tax Court’s interpretation that approval must come before the “consequential moment” when the IRS gives the taxpayer the opportunity for a pre-assessment administrative review in Appeals.
Second, penalties that are subject to pre-assessment review in Tax Court have left the barn only when the IRS issues the document that gives taxpayers the right to petition Tax Court. 26 CFR § 301.6751(b)-1(c)(approval must be made before “a pre-assessment notice that provides a basis for Tax Court jurisdiction upon timely petition” is mailed.”). Generally that will be NODs but also includes FPAAs and is written broadly enough to include any future procedural requirements, as Congress gives more and more opportunities for taxpayers to obtain Tax Court review. This part of the regulation is a change from the pre-2017 interpretation and follows the 2d Circuit’s interpretation in Chai.
Third, for penalties that are first proposed during Tax Court litigation, the horse is the relevant pleading that asserts a penalty. 26 CFR § 301.6751(b)-1(d)(approval must be made “no later than the date on which the Commissioner requests that the court determine the penalty.”). This is also the pre-2017 interpretation of the statute and is still the Tax Court’s interpretation. See Kelley v. Commissioner, T.C. Memo. 2023-126, discussed in Lesson From The Tax Court: §6662 Is Sometimes Multiple Penalties for Supervisory Approval Purposes But Sometimes Not, TaxProf Blog (Nov. 6, 2023).
The Regulations Address The Problem of Teams The statute rests on the myth that audits are always conducted by single IRS employees. That is, it assumes there is a single “individual” who makes the “initial determination” which must then be approved by that individual’s supervisor. The reality is more complex. The regulations deal with that complexity in section (a)(3)(ii) as follows.
First, the regulation creates a term of art to define the statutory “individual.” It says the statutory individual is “individual who first proposed the penalty.” (emphasis supplied). This changes the focus from figuring out who made the initial determination to figuring out which employee first proposed the penalty.
Second, the regulation then defines what it means to “propose” a penalty. It says that a penalty is proposed only when communicated “to either a taxpayer (or the taxpayer’s representative) or to the individual’s supervisor or designated higher level official.” Id. The regulation is careful to exclude “mere requests for information relating to a possible penalty or inquiries of whether a taxpayer wants to participate in a general settlement initiative for which the taxpayer may be eligible.” Id.
The regulation gives some very useful examples of how the penalty approval process should work. Example 3 deals with teams. It posits that Revenue Agent A is part of a team auditing the taxpayer. Supervisor B is an issue manager assigned to review any proposed penalties. Case Manager C is responsible for the overall management of the audit. The regulation says that in that case, A can propose the penalty to either B or C and either B or C can provide the required supervisory approval (so long as that is done before the NOD is sent to the taxpayer).
With that background, let’s look at the facts and lessons of today’s case.
Facts The taxpayer here is an LLC that claimed a $24 million deduction on its 2015 return for the donation of a conservation easement over land in Georgia. The IRS audited the 2015 return. As it typical in larger cases, the audit was performed by a team of employees, not just a single employee. The relevant employees here are as follows: (1) RA Maxim Naporko was formally assigned to the case; (2) RA Karen Carreiro was his team leader; (3) RA Susan Brown was a TEFRA Coordinator. Judge Lauber explains: “In that capacity she provided technical assistance to revenue agents handling examinations of TEFRA partnerships.”; and (4) Attorney James Fee worked in the Office of Chief Counsel’s technical office, providing legal support for passthrough entity issues.
As the audit progressed, all of these folks communicated with each other about a variety of issues, including penalties. One problem was that time was short; the ASED was in September 2019. In May RA Naporko sent several documents, including a draft penalty lead sheet proposing §6662 and §6662A penalties, to RA Brown for review. RA Brown reviewed the draft and changed some of the documents to be consistent with each other. In July RA Naporko sent a draft FPAA to Mr. Fee who reviewed and suggested some changes to the penalty determination language “to ensure that the written manager approval covers those penalties.” Op. at 3.
After receiving the above feedback, RA Naporko prepared an updated penalty lead sheet and Ms. Carreiro signed it (digitally) on August 12, 2019. The next day the IRS issued the FPAA, disallowing the entire claimed charitable donation deduction for the easement and asserting §6662 and §6662A penalties.
Ivey Branch Holdings petitioned the Tax Court. Since 2019 the case has slowly worked its way through various motions. It has not gone to trial. As per its usual strategy, the IRS asked for summary judgment on the issue of whether it complied with the §6751(b) supervisory approval requirement. In today’s opinion Judge Lauber grants the motion, giving us our two lessons.
Lesson 1: Timing Treas. Reg. 301.6751(b)-1(a)(1) provides that in situations where the taxpayer can get pre-assessment Tax Court review, the horse is the document that gives taxpayer the ticket to the Tax Court. Here that was the FPAA. So long as the supervisory approval is made before the FPAA is issued to the taxpayer, the approval is timely. This follows the interpretation of the Circuit Courts, including Kroner. As Judge Lauber notes: “As of…the date on which Ms. Carreiro supplied her approval, the IRS examination remained at a stage where she had discretion to approve or disapprove the penalty recommendations.” Op. at 6.
In this case, the taxpayer would have likely lost under the consequential moment rule anyway because the consequential moment here was also the issuance of the NOD. However, if RA Naporko had told the taxpayer he was considering asserting the penalty and made that communication in some way that that Tax Court thought was consequential, such as by offering the taxpayer the opportunity for a non-docketed Appeals conference, then the approvals would not have been timely under the Tax Court’s rule. But they would still be timely under the regulation’s horse-and-barn rule. In this sense the regulation gives a nice bright line that will help reduce litigation over the Tax Court’s much vaguer “consequential moment” rule.
Lesson 2: Teams Ivey Branch Holdings tried to argue that RA Naporko was not the statutory individual who made the “initial determination.” It argued that either RA Brown or Attorney Fee were the statutory individuals and thus it was their supervisors who needed to approve the penalties. The taxpayer asked Judge Lauber to permit discovery on just exactly what RA Brown and Attorney Fee said or did, on the theory that they might actually have been the ones who “first” suggested the penalties that were proposed in the FPAA. Maybe they just told RA Naporko to put those penalties in the FPAA!
Judge Lauber rejects those arguments as “frivolous” because here the attorneys representing the IRS did a great job in creating a record. He writes: “The record establishes that RA Naporko consulted with Ms. Brown and Mr. Fee about the FPAA package, including the penalty recommendations that RA Naporko had set forth on the penalty lead sheet.” Op. at 6. Further the record showed that RA Brown’s communications “were purely technical…designed to ensure that the FPAA package met all formal requirements and that the penalty language appearing in the various documents was consistent.” Op. at 6. He notes that Attorney Fee’s communications were similarly advisory in nature.
Judge Lauber explains why neither RA Brown nor Attorney Fee would be the statutory employees: “As we have repeatedly held, the “initial determination of [a penalty] assessment” is a formal action by the Examination Division directed to a particular taxpayer. It is the duty of the examining agent—here, RA Naporko—to determine penalties.” Op. at 7 (citations omitted, emphasis supplied).
The regulation takes these ideas—of formal action and the duty of the RA—and embed them into this term of art: “individual who first proposed the penalty.” That term of art builds on Judge Lauber’s observation about the duty of an RA because it provides that “a proposal of a penalty can be made only to either a taxpayer (or the taxpayer’s representative) or to the individual’s supervisor or designated higher level official.”
The regulation thus forecloses the type of argument that Ivey Branch was trying to make here. For example, assume that in this case RA Brown had said or emailed something like: “hey RA Naporko, I like what you put in here but you left out this other penalty that I think you should assert.” That communication arguably makes RA Brown the individual who made the “initial determination” under the statutory language. But the regulation foreclose that argument. RA Brown’s hypothetical communication would not meet the regulatory definition of “first proposed.” Only once RA Naporko actually sends the penalty proposal to his supervisor for approval is the penalty proposed and thus RA Naporko would still the “individual who first proposed the penalty” under the regulation.
Again, this is a bright line that will hopefully reduce litigation over penalties.
Bottom Line: The new supervisory approval regulation creates some bright line rules that will help reduce the kind of litigation that has plagued the Tax Court since the Graev case. Today’s case shows two of them: the timing rule and the teams rule.
Comment: Professor Caleb Smith titles his thoughtful Procedurally Taxing post about the new regulation this way: “Treasury Didn’t Start the Fire. It Also Didn’t Put the Fire Out.” His thesis is that the regulation could have done a better job helping “normal” taxpayers who get caught in the automated penalty processes. He is certainly correct that the worst abuse of taxpayers is the automation of various administrative functions, including penalty application, without enough human IRS employees to work the responses. But it is difficult to see how the regulation could work around that. The solution for that problem must come from reform of those automated processes. For example, the IRS could reprogram the systems to remove automatic penalties, or at least do so for some threshold so the removal only happens for normal taxpayers. The IRS does not need a regulation to do that! I believe the regulation actually does a very good job at putting out two litigation fires created by Graev: the litigation over timing and over who is deemed to make the “initial determination” of a penalty. Those fires have helped no one except bad-acting taxpayers who get lucky when the IRS messes up the approval process.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return on the first Monday of each month (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.
[Editor’s Note: If you would like to receive a daily email with links to each Lesson From The Tax Court and other tax posts on TaxProf Blog, email here.]
https://taxprof.typepad.com/taxprof_blog/2025/07/lesson-from-the-tax-court-the-new-regulation-on-supervisory-approval-of-penalties.html
Legal Education:
Stephen Akers (Bessemer Trust), 
Pundits these days often declare that wokeness has had its moment, that 2020 and 2021 were its peak and it’s now an increasingly distant memory. This is shortsighted. Wokeness is still with us, as livid as ever, and I suspect it always will be. The only question is where it will strike next?
This article asks seemingly simple questions about tax law scholarship: What is it? To what extent does it differ from legal scholarship in other fields? Who is targeted by it? What are the main objectives that guide the research agenda of tax law scholars? These are not the typical questions that tax law scholars write about but, as this article tries to demonstrate, answering them can shed light on some of the strengths, pitfalls and trends that characterise tax law scholarship today. This article has two parts. 
Josh Blackman (South Texas; 
Aside from hype artists and White House spokespeople, it’s hard to find true enthusiasm for the sweeping new policy law, even among Republicans who voted for its passage. But because almost all Republicans did vote for it, with even the supposed deficit hard-liners mostly falling into line, the strongest remaining critiques are coming from the center and the left, with a special focus on the legislation’s cuts to Medicaid. … [T]o highlight the law’s failure to address some of America’s most important problems, I want to imagine a different set of critiques, more associated with forms of conservatism than with liberalism or the left.
[936 Downloads] 
Every year, the Internal Revenue Service (IRS) issues hundreds of Private Letter Rulings (PLRs) responding to formal taxpayer inquiries about how tax law will apply to their proposed situations and transactions(which functionally bind the IRS with respect to the taxpayer). Although the Internal Revenue Code formally forbids relying on PLRs as precedent, taxpayers and practitioners closely monitor and structure their operations and advice around PLRs.
