In Rajagopalan v. Commissioner, Judge Holmes confronted what he called the Chai ghoul. See Rajagopalan v. Commissioner, Docket No. 21394-11, Order, Dec. 20, 2017. In Chai v. Commissioner, the Second Circuit held that the section 6751(b)(1) written approval requirement “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 v. Commissioner, 851 F.3d 190 (2d Cir. 2017), aff’g in part, rev’g in part 109 T.C.M. 1206. The Tax Court agreed with the Second Circuit’s holding in Chai soon after it was released. See Graev v. Commissioner, 149 T.C. __ (Dec. 20, 2017).
These decisions prompted the Commissioner to ask the court to reopen the record in Rajagopalan (and in a number of other cases) so that he could introduce penalty-approval forms to show he complied with section 6751(b)(1) for the 20% accuracy-related penalties. Trial and briefing in Rajagopalan took place long before Chai and Graev, and the Commissioner did not introduce evidence that he complied with section 6751 at trial.
In support of his motion, the Commissioner submitted an IRS supervisor’s declaration to authenticate the penalty-approval forms and to show how the supervisor approved the penalty determination. The forms also listed the applicable IRS examiner. In her declaration, the supervisor stated that she was the examiner’s immediate supervisor and that she signed the forms approving the examiner’s penalty determination.
As a general rule, the Tax Court has broad discretion to reopen the record. But its discretion is not unlimited. The court will not reopen the record to admit evidence that is merely cumulative or impeaching. Instead, the evidence must be material and likely to change the outcome of the case. Butler v. Commissioner, 114 T.C. 276, 287 (2000), abrogated on other grounds by Porter v. Commissioner, 132 T.C. 203 (2009). The court must also weigh the Commissioner’s diligence against the possibility of prejudice to the petitioners. Prejudice here turns on whether the submission of evidence after trial prevents the petitioners from questioning the evidence as they could have during trial.
Judge Holmes found that the penalty-approval forms met the first requirement, and would have actually been admissible at trial under the business-records exception to the hearsay rule. Judge Holmes was also unconvinced that the petitioners would be prejudiced by the court’s decision to reopen the record. The petitioner’s main argument was that they should have been “entitled to question” the supervisor and examiner to confirm that the penalties “were properly asserted and whether [the Commissioner] complied with Code section 6751(b).” But it was unclear how the petitioners would have benefited from cross-examination. Judge Holmes pointed out that the penalty-approval forms either did or did not answer those questions, and would have been admitted under the business-records exception regardless.
As a result, Judge Holmes granted the Commissioner’s motion to reopen the record. Despite the court’s decision to admit the penalty-approval forms, Chai continues to present the Commissioner with major challenges as he seeks to assert penalties in cases tried before Chai.