Computer Sciences Corporation

United States Tax Court

165 T.C. No. 8

COMPUTER SCIENCES CORPORATION,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 4823-21. Filed October 6, 2025.

—————

P is a U.S. corporation engaged in the information

technology business. During 2012 and 2013 P imple-

mented a series of restructuring steps that allegedly gen-

erated a capital loss of $651,200,000. P reported that loss

on its 2013 Federal income tax return.

R commenced an examination of P’s return. R’s

agent recommended disallowance of the capital loss deduc-

tion and assertion of a 20% penalty for an underpayment

due to a substantial understatement of income tax. See

I.R.C. § 6662(a), (b)(2), (d)(1)(B). The agent’s immediate

supervisor approved the initial determination to assert this

penalty. R subsequently issued P a 30-day letter and a No-

tice of Deficiency disallowing the capital loss deduction and

determining a 20% penalty with respect to that adjust-

ment.

P timely petitioned this Court. The parties have

filed Cross-Motions for Partial Summary Judgment seek-

ing a ruling as to whether R complied with the require-

ments of I.R.C. § 6751(b)(1) by securing timely supervisory

approval of the penalty. P contends that R did not engage

in “reasoned decision making” under the Administrative

Procedure Act (APA) because the agent’s supervisor failed

to consider whether P had a “reasonable basis” defense

Served 10/06/25

2

available to it, based on adequate disclosure of the relevant

facts. See I.R.C. § 6662(d)(2)(B)(ii). P accordingly urges

that the supervisor’s approval of the penalty should be set

aside as agency action that is “arbitrary, capricious, [or] an

abuse of discretion” under 5 U.S.C. § 706(2)(A).

Held: R satisfied the requirements of I.R.C.

§ 6751(b)(1) because R’s agent secured written supervisory

approval of the initial determination to assert the penalty

before the 30-day letter and the Notice of Deficiency were

issued to P.

Held, further, the APA provisions P cites do not ap-

ply to determinations made by this Court in the exercise of

its deficiency jurisdiction under I.R.C. §§ 6213 and 6214(a),

including determinations regarding R’s compliance with

I.R.C. § 6751(b)(1).

Held, further, if the APA provisions P cites were

deemed relevant here, a supervisor’s approval of a penalty

recommendation does not constitute “final agency action”

subject to judicial review under 5 U.S.C. § 704.

Held, further, if the supervisor’s approval of a pen-

alty were thought to constitute “final agency action,” that

action would not be subject to distinct judicial review under

the APA because our review of R’s compliance with I.R.C.

§ 6751(b)(1) in this deficiency case affords P an “adequate

remedy in a court” within the meaning of 5 U.S.C. § 704.

Held, further, assuming arguendo that the APA re-

quirement of “reasoned decision making” applies to a su-

pervisor’s approval of a penalty under I.R.C. § 6751(b)(1),

review of that question would be on the administrative rec-

ord, and the examination case file shows that the agent’s

supervisor engaged in “reasoned decision making.”

—————

Vivek A. Patel, Allen Duane Webber, Courtland L. Roberts, Eric M.

Aberg, Joseph B. Judkins, Meerah Kim, Varuni Balasubramaniam, Jo-

seph B. Ward, and Nicholas M. O’Brien, for petitioner.

3

Emily J. Giometti, Kaitlyn N. Griffith, Archana Ravindranath,

M. Jeanne Peterson, Robert T. Bennett, Charles E. Buxbaum, Travis

Vance, Angela B. Reynolds, and Christine S. Irwin, for respondent.

OPINION

LAUBER, Judge: Computer Sciences Corp. (CSC or petitioner)

timely filed a Federal income tax return for its fiscal year ending March

29, 2013 (FY2013). Upon examination of that return the Internal Rev-

enue Service (IRS or respondent) determined a deficiency of

$276,535,161 and an accuracy-related penalty of $45,584,000 for an un-

derpayment due to a substantial understatement of income tax. The

adjustment giving rise to the bulk of this deficiency was the disallow-

ance of a $651,200,000 capital loss.

Currently before the Court are the parties’ Cross-Motions for Par-

tial Summary Judgment addressing the question whether the IRS com-

plied with section 6751(b)(1) 1 by securing timely supervisory approval

of the penalty. Petitioner concedes that the examining agent’s immedi-

ate supervisor timely signified his approval to assert the penalty by plac-

ing his signature on four distinct documents over a period of two months.

But CSC insists that the supervisor did not engage in “reasoned decision

making” under the Administrative Procedure Act (APA) because he

failed to consider that petitioner might have a “reasonable basis” de-

fense to the penalty, predicated on adequate disclosure. See

§ 6662(d)(2)(B)(ii). Petitioner urges that the supervisor’s approval of the

penalty should therefore be set aside as agency action that is “arbitrary,

capricious, [or] an abuse of discretion” under 5 U.S.C. § 706(2). Conclud-

ing that respondent has the better side of this argument, we will grant

his Motion for Partial Summary Judgment and deny petitioner’s.

Background

The following facts are derived from the Pleadings, the parties’

Motion papers, and the Declarations and Exhibits attached thereto.

They are stated solely for the purpose of deciding the Cross-Motions and

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure.

4

not as findings of fact in this case. See Sundstrand Corp. v. Commis-

sioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).

At all relevant times CSC was the U.S. parent of a group of cor-

porations that joined in the filing of a consolidated Federal income tax

return. See § 1501. CSC and its subsidiaries engaged in various aspects

of the information technology business. CSC had its principal place of

business in Virginia when the Petition was timely filed. Absent stipu-

lation to the contrary, this case is appealable to the U.S. Court of Ap-

peals for the Fourth Circuit. See § 7482(b)(1)(B).

During FY2013 CSC sold its credit services business and realized

a large capital gain. With a view to offsetting this gain CSC engaged in

“Project Trinity,” a structured financing transaction. It involved two

principal steps. First, CSC contributed stock of one wholly owned sub-

sidiary—on which it had a large built-in loss—to another wholly owned

subsidiary in exchange for three classes of securities, which CSC char-

acterized as “senior participating preferred stock,” “junior preferred

stock,” and a senior note. Applying section 358(b), CSC allocated to the

senior preferred stock the bulk of its basis in the stock thus contributed.

Several days later, CSC sold the senior preferred stock and the note to

the Bank of Tokyo-Mitsubishi UFJ for cash. When the dust settled, CSC

allegedly recognized, on this sale of securities, a long-term capital loss

of $651,200,000.

CSC timely filed Form 1120, U.S. Corporation Income Tax Re-

turn, for FY2013, reporting the capital loss. It attached to its return a

Form 8886, Reportable Transaction Disclosure Statement, in which it

allegedly disclosed all relevant facts affecting Project Trinity and the

capital loss deduction.

The IRS selected CSC’s FY2013 return for examination and as-

signed the case to Revenue Agent (RA) Steven Herrera in the Large

Business & International Division. At that time Supervisory RA Rich-

ard Guastello served as Mr. Herrera’s acting team manager and thus as

his immediate supervisor. Mr. Guastello’s immediate supervisor was

Renee Bowers, the acting territory manager.

In March 2017, as the examination neared completion, RA Her-

rera proposed to disallow petitioner’s capital loss deduction and to as-

sert, with respect to that disallowance, a 20% penalty for an underpay-

ment due to a substantial understatement of income tax. See § 6662(a),

(b)(2), (d)(1)(B). His recommendation to this effect was set forth in a

5

Form 5701, Notice of Proposed Adjustment (NOPA). RA Herrera has

averred under penalties of perjury that he conducted the examination of

petitioner’s return and that he “made the initial determination” to as-

sert this penalty.

On March 22, 2017, RA Herrera sent the draft NOPA to Mr. Guas-

tello, his immediate supervisor. The NOPA proposed to assert, with re-

spect to disallowance of the capital loss, a 20% accuracy-related penalty

for an underpayment due to a substantial understatement of income tax.

That same day, Mr. Guastello approved RA Herrera’s recommendation

to assert this penalty by affixing his digital signature on the NOPA us-

ing Adobe software.

RA Herrera promptly notified CSC that the IRS was considering

the assertion of this penalty. On March 23, 2017, CSC representatives

met with the examination team to express their view that CSC had ad-

equately disclosed the pertinent tax treatment and that there was a

“reasonable basis” for such treatment. That same day RA Herrera pre-

pared and sent to CSC a draft Information Document Request (IDR)

seeking the company’s position as to why this penalty should not be as-

serted. Rather than respond to this request, CSC asked that the draft

IDR be withdrawn. On March 27, 2017, Ms. Bowers—Mr. Guastello’s

supervisor—affixed her signature to the NOPA, signifying her approval

to assert the substantial understatement penalty.

On April 1, 2017, Mr. Guastello again approved RA Herrera’s rec-

ommendation to assert this penalty by affixing his signature on a “Sub-

stantial Understatement Penalty” worksheet. This worksheet, which

RA Herrera had filled out, sets forth a series of instructions to guide the

RA through the penalty determination process. A signed copy of that

worksheet is attached to Mr. Guastello’s Declaration.

Step 6 of the worksheet asks whether Form 8275, Disclosure

Statement, or Form 8275–R, Regulation Disclosure Statement, was at-

tached to petitioner’s FY2013 return. Having examined CSC’s return,

RA Herrera correctly answered “No” to that question. The worksheet

accordingly directed him to skip Step 7—which asked, “Does the tax-

payer have a reasonable basis for the tax treatment of the item?”—and

“[g]o to step 8.”

Step 8 asks: “Does the taxpayer meet the reasonable cause excep-

tion?” To answer that question RA Herrera was directed to “[c]omplete

the [attached] reasonable cause worksheet,” which he did. On that

6

worksheet he indicated that CSC had “claimed privilege on the tax opin-

ion” it had received regarding Project Trinity, so that the tax opinion

“cannot be relied upon in claiming the reasonable cause exception.” RA

Herrera accordingly marked the “No” box at Step 8, leading to the con-

clusion that “[t]he penalty applies.”

Mr. Guastello signed this worksheet as “Team Manager” on April

1, 2017. He placed his signature in the section captioned “Managerial

approval is required.” He thereby indicated that he had “reviewed and

approved” the substantial understatement penalty as set forth on the

worksheet.

RA Herrera’s case activity record recites that he and Mr. Guas-

tello met again with petitioner’s representatives on April 7, 2017, “to

discuss assessment of the IRC 6662(d) . . . penalty.” During this meeting

they appear to have addressed (among other things) the potential ap-

plicability of the penalty and the penalty defense CSC advanced. Mr.

Guastello’s handwritten notes from the meeting record CSC’s argument

that no penalty should apply because it had “flagged [the] issues,” an

apparent reference to the Form 8886 attached to its FY2013 return. On

April 12, 2017, CSC made an additional submission to the examination

team, arguing that no penalty should be asserted in the light of its tax

return disclosures and IDR responses. On April 21, 2017, Mr. Guastello

nevertheless approved—for a third time—RA Herrera’s determination

to assert the substantial understatement penalty by initialing his ap-

proval on a civil penalty leadsheet.

On May 15, 2017, the IRS sent petitioner Letter 950 (commonly

called a “30-day letter”), signed by Mr. Guastello, RA Herrera’s immedi-

ate supervisor. He attached to that letter Form 4549–A, Income Tax

Examination Changes, which included the substantial understatement

penalty. This document constituted the first formal communication to

CSC that the IRS intended to assert this penalty.

Petitioner filed a Protest to the 30-day letter, seeking review by

the IRS Independent Office of Appeals (Appeals). RA Herrera’s case ac-

tivity record shows that he spent dozens of hours between October 2017

and May 2018 working on a rebuttal to the penalty-related arguments

petitioner advanced in its Protest. Appeals was ultimately unpersuaded

by petitioner’s arguments.

On February 16, 2021—almost four years after Mr. Guastello first

approved the penalty—Appeals issued petitioner a Notice of Deficiency

7

that determined a deficiency of $276,535,161 and a substantial under-

statement penalty of $45,584,000. Petitioner timely petitioned this

Court seeking a redetermination of the deficiency and the penalty. 2

On April 25, 2025, respondent filed a Motion for Partial Summary

Judgment seeking a ruling that the IRS complied with the requirements

of section 6571(b)(1) by securing timely supervisory approval for the

penalty. Petitioner filed a Response to the Motion on May 28, 2025, and

the next day filed a Cross-Motion for Partial Summary Judgment. In

these filings petitioner contends that the APA “applies to the prerequi-

site under section 6751(b) for supervisory approval and requires rea-

soned decisionmaking by the IRS supervisor in approving the determi-

nation of a penalty.” Petitioner asserts that Mr. Guastello, RA Herrera’s

immediate supervisor, did not “meaningfully review” the penalty recom-

mendation because he did not consider whether CSC might have a “rea-

sonable basis” defense to the penalty. Petitioner urges that Mr. Guas-

tello’s approval should therefore be set aside under 5 U.S.C. § 706(2)(A)

as agency action that is “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law.”

Discussion

I. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and

avoid costly, unnecessary, and time-consuming trials. FPL Grp., Inc. &

Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant partial

summary judgment regarding an issue as to which there is no genuine

dispute of material fact and the movant is entitled to judgment as a mat-

ter of law. See Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520. In

deciding whether to grant summary judgment, we construe factual ma-

terials and inferences drawn from them in the light most favorable to

the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However,

where the moving party properly makes and supports a motion for sum-

mary judgment, “the nonmovant may not rest on the allegations or de-

nials in that party’s pleading” but must set forth specific facts, by affi-

davit or otherwise, showing that there is a genuine dispute for trial.

Rule 121(d). We find no genuine dispute of material fact on the question

2 In the Notice of Deficiency the IRS also determined a 20% penalty for negli-

gence or disregard of rules or regulations and/or valuation misstatement. See

§ 6662(b)(1), (3). In September 2023 respondent notified petitioner that he was con-

ceding those penalties. We accordingly need not consider whether supervisory ap-

proval was secured for them.

8

addressed in this Opinion—whether the penalty, though timely ap-

proved by the RA’s immediate supervisor, should be set aside because of

alleged noncompliance with the APA. 3

II. Analysis

A. The Statutory Requirements

Section 6751(b)(1) provides that “[n]o 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 in-

dividual making such determination.” In Belair Woods, LLC v. Commis-

sioner, 154 T.C. 1, 14–15 (2020), we ruled that the “initial determina-

tion” of a penalty assessment is typically embodied in a letter by which

the IRS formally notifies the taxpayer that it has made a definite deci-

sion to assert penalties. Supervisory approval need not be recorded on

any particular form or document; the only requirement is a writing that

manifests the immediate supervisor’s intent to approve the penalty.

Tribune Media Co. v. Commissioner, T.C. Memo. 2020-2, 119 T.C.M.

(CCH) 1006, 1010–11. 4

As previously stated, this case is presumptively appealable to the

Fourth Circuit. That court has not squarely addressed the question of

when supervisory approval must be secured. 5 Other appellate courts

3 Petitioner contends in the alternative that it has established a “reasonable

basis” defense to the penalty as a matter of law. See § 6662(d)(2)(B)(ii) (providing that

no penalty applies if “the relevant facts affecting [an] item’s tax treatment are ade-

quately disclosed” and “there is a reasonable basis for the tax treatment of such item”).

Finding a genuine dispute of material fact on this point, we will deny petitioner’s

Cross-Motion to the extent predicated on this alternative ground, but without preju-

dice to its ability to advance this defense at trial.

4 Because CSC is a corporation, respondent has no burden of production to

show compliance with section 6751(b)(1). See Dynamo Holdings Ltd. P’ship v. Com-

missioner, 150 T.C. 224, 231–32 (2018) (citing NT, Inc. v. Commissioner, 126 T.C. 191

(2006)). Petitioner is nevertheless entitled to assert noncompliance with the statute

as a defense to the penalty. See Dynamo Holdings, 150 T.C. at 237.

5 In Brooks v. Commissioner, 109 F.4th 205, 221 (4th Cir. 2024), aff’g T.C.

Memo. 2022-122, the Fourth Circuit affirmed our Court’s holding that the IRS had

established compliance with section 6751(b)(1) by producing a “Civil Penalty Approval

Form, which documented that an IRS manager had approved the [initial determina-

tion] of a penalty” against the taxpayers. But the Fourth Circuit in that case did not

address in detail the statute’s substantive requirements; it simply held that our Court

did not abuse its discretion by admitting the Civil Penalty Approval Form into evi-

dence. See Brooks v. Commissioner, 109 F.4th at 221–22.

9

have ruled that supervisory approval is timely if secured “before the as-

sessment of the penalty or, if earlier, before the relevant supervisor loses

discretion whether to approve the penalty assessment.” Laidlaw’s Har-

ley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir.

2022), rev’g and remanding 154 T.C. 68 (2020); accord Swift v. Commis-

sioner, 144 F.4th 756 (5th Cir. 2025) (adopting formulation set forth in

Laidlaw’s), aff’g T.C. Memo. 2024-13; Minemyer v. Commissioner, Nos.

21-9006, et al., 2023 WL 314832, at *5 (10th Cir. Jan. 19, 2023), aff’g in

part, rev’g in part and remanding T.C. Memo. 2020-99; Chai v. Commis-

sioner, 851 F.3d 190, 220 (2d Cir. 2017) (concluding that supervisory ap-

proval must be obtained at a time when “the supervisor has the discre-

tion to give or withhold it”), aff’g in part, rev’g in part T.C. Memo. 2015-

42; cf. Kroner v. Commissioner, 48 F.4th 1272, 1278, 1279 n.1 (11th Cir.

2022) (treating supervisory approval as timely if secured before the pen-

alty is assessed or before the relevant supervisor loses discretion

whether to approve the penalty assessment), rev’g in part T.C. Memo.

2020-73. 6

The record establishes that RA Herrera, who conducted the CSC

return examination, made the “initial determination” to assert the sec-

tion 6662 penalty. The record also establishes that Mr. Guastello was

RA Herrera’s “immediate supervisor” at all relevant times. Petitioner

does not dispute either of these facts.

The record further establishes that Mr. Guastello approved, on

four separate occasions, RA Herrera’s initial determination to assert the

penalty. He did so: (1) by affixing his electronic signature to the NOPA

on March 22, 2017, using Adobe software, (2) by placing his signature

on the “Substantial Understatement Penalty” worksheet on April 1,

2017, (3) by initialing his approval on the civil penalty leadsheet on April

21, 2017, and (4) by signing the 30-day letter dated May 15, 2017. As

noted above, supervisory approval may be shown by the signature of the

revenue agent’s manager on any form or document, including a 30-day

letter. See Belair Woods, 154 T.C. at 14–15; Tribune Media Co., 119

T.C.M. (CCH) at 1010–11.

6 The Treasury Department recently issued regulations that are consistent

with the consensus of the appellate courts discussed in the text. These regulations

provide that, for penalties included in a notice of deficiency, section 6751(b)(1) is satis-

fied “if the immediate supervisor of the individual who first proposed the penalty per-

sonally approves the penalty in writing on or before the date the notice is mailed.”

Treas. Reg. § 301.6751(b)-1(c). This regulation is effective for all penalties assessed on

or after December 23, 2024. Id. para. (f).

10

The IRS first communicated to petitioner its intention to assert

the penalty on May 15, 2017, when it mailed the 30-day letter with the

enclosed examination report. As of that date—and as of the later date

when the Notice of Deficiency was mailed—the IRS examination re-

mained at a stage where Mr. Guastello had discretion to approve or dis-

approve the penalty recommendation. Therefore, under a reading of the

appellate case law most favorable to petitioner, the IRS complied with

section 6751(b)(1) because Mr. Guastello timely approved the substan-

tial understatement penalty and did so in writing.

While not disputing the timeliness of Mr. Guastello’s approval,

petitioner contends that the “bare signatures of IRS employees” are in-

sufficient to satisfy the statute’s requirements. Although Mr. Guastello

supplied written approval for RA Herrera’s penalty recommendation

four times—on four distinct documents—petitioner insists that Mr.

Guastello did not conduct a “meaningful review.” That is because Mr.

Guastello assertedly failed “to evaluate, or even consider,” the availabil-

ity of a reasonable basis defense to CSC.

One definition of the verb “approve,” petitioner says, is “to sanc-

tion officially” or “to give formal or official sanction.” “In order to offi-

cially sanction the penalty determination,” petitioner urges, “a supervi-

sor’s personal written approval . . . requires a reasoned decision regard-

ing the facts of a particular taxpayer.” And that supposedly requires the

supervisor to provide a “narrative explanation” for his action.

Petitioner concedes that Tax Court precedent supplies no support

for its argument. We have repeatedly “‘decline[d] to read into section

6751(b)(1) the subtextual requirement’ that respondent demonstrate the

depth or comprehensiveness of the supervisor’s review.” Belair Woods,

154 T.C. at 17 (quoting Raifman v. Commissioner, T.C. Memo. 2018-101,

116 T.C.M. (CCH) 13, 28). Faced with assertions that IRS officers gave

insufficient consideration to the matters before them, we have ruled

such lines of inquiry “immaterial and wholly irrelevant to ascertaining

whether respondent complied with the written supervisory approval re-

quirement.” Patel v. Commissioner, T.C. Memo. 2020-133, 120 T.C.M.

(CCH) 211, 214 (quoting Raifman, 116 T.C.M. (CCH) at 27–28); see Es-

tate of Morrissette v. Commissioner, T.C. Memo. 2021-60, 121 T.C.M.

(CCH) 1447, 1474.

Section 6751(b)(1) does not inquire into the time or effort the su-

pervisor devotes to his task. Rather, as we have said before: “The writ-

ten supervisory approval requirement . . . requires just that: written

11

supervisory approval.” Pickens Decorative Stone, LLC v. Commissioner,

T.C. Memo. 2022-22, 123 T.C.M. (CCH) 1127, 1130 (quoting Raifman,

116 T.C.M. (CCH) at 28). We have consistently held that a manager’s

signature on a NOPA or penalty approval form—without more—is suf-

ficient to satisfy the statutory requirements. See Palmolive Bldg. Invs.,

LLC v. Commissioner, 152 T.C. 75 (2019); Green Valley Invs., LLC v.

Commissioner, T.C. Memo. 2025-15, at *35. And we have regularly de-

cided section 6751(b)(1) questions on summary judgment on the basis of

IRS records and declarations from relevant IRS officers. See, e.g., Sand

Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021); Long Branch Land,

LLC v. Commissioner, T.C. Memo. 2022-2, 123 T.C.M. (CCH) 1008, 1009.

We find nothing in the statute to support petitioner’s position.

Section 6751 is captioned “Procedural requirements.” Subsection (a) re-

quires that notices sent to taxpayers include a computation of any pen-

alty asserted. Subsection (b), captioned “Approval of assessment,” re-

quires that the initial determination of a penalty be “personally ap-

proved (in writing) by the immediate supervisor of the individual mak-

ing such determination,” unless the penalty is “automatically calculated

through electronic means.” See § 6751(b)(1), (2)(B).

Contrary to petitioner’s view, we find no suggestion in this statute

that the supervisor, when supplying his approval, must provide “a rea-

soned decision regarding the facts of [the] particular taxpayer.” The

statute requires only that the penalty be “personally approved” by the

supervisor and that his approval be manifested “in writing.” Petitioner

itself defines “approve” as meaning “to give formal or official sanction.”

By affixing his signature on an official IRS document, accompanied by a

representation that he reviewed and approved RA Herrera’s recommen-

dation, Mr. Guastello “gave formal or official sanction” to the initial de-

termination to assert the penalty. We thus reject today, as we have con-

sistently rejected before, the argument that “signatures on a NOPA do

not constitute supervisory approval within the meaning of section

6751(b).”

The current consensus of the appellate courts is that the statute

also contains an implicit timing requirement: Supervisory approval

must be secured “before the relevant supervisor loses discretion whether

to approve” or disapprove the penalty. Laidlaw’s Harley Davidson

Sales, Inc. v. Commissioner, 29 F.4th at 1074; see supra pp. 8–9. Once

a supervisor has lost such discretion—e.g., after the taxpayer has been

held liable for a penalty in a final judicial decision—the supervisor’s “ap-

proval” of the penalty would be meaningless. The courts have

12

accordingly held that supervisory approval must be meaningful from a

temporal standpoint—i.e., that it not come so late as to be a vain act.

No court has ever held that section 6751(b)(1) requires a supervisor to

supply—in addition to timely written approval—any particular level of

substantive review. See Thompson v. Commissioner, 155 T.C. 87, 93

(2020) (rejecting argument that penalty should not apply because an

acting supervisor was supposedly incapable of engaging in “meaningful

review”).

B. Petitioner’s Arguments

Petitioner invokes the APA in an effort to sidestep the judicial

precedents discussed above. Specifically, it relies on 5 U.S.C.

§ 706(2)(A), which directs a reviewing court to “hold unlawful and set

aside agency action, findings, and conclusions found to be . . . arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with

law.” CSC contends that the APA “applies to the prerequisite under

section 6751(b) for supervisory approval and requires reasoned deci-

sionmaking by the IRS supervisor in approving the determination of a

penalty.”

In advancing this argument petitioner focuses chiefly on one of

the four approvals Mr. Guastello supplied for the penalty—namely his

signature, dated April 1, 2017, on the “Substantial Understatement

Penalty” worksheet. According to petitioner, this document shows the

inadequacy of Mr. Guastello’s review by demonstrating that he paid in-

sufficient attention to the possible availability of a reasonable basis de-

fense.

Petitioner characterizes the worksheet (unflatteringly) as a

“check-the-box exercise.” As noted above, Step 6 of the worksheet asks

whether one of two disclosure forms—Form 8275 or Form 8275–R—was

attached to CSC’s FY2013 return. Having examined that return, RA

Herrera correctly answered “No” to that question. The worksheet ac-

cordingly directed him to skip Step 7, which concerned the reasonable

basis defense, and “[g]o to step 8.”

In petitioner’s view, this worksheet was “designed to categorically

ignore any disclosure other than a disclosure made on Form 8275 or

8275–R.” CSC contends that it can qualify for the reasonable basis de-

fense because it disclosed its treatment of the Project Trinity transaction

on Form 8886, which was attached to its return. Because the worksheet

directed RA Herrera to skip Step 7—and thus to bypass the reasonable

13

basis defense—petitioner urges that “IRS management failed to evalu-

ate, or even consider, the adequacy of [CSC’s] disclosure [on Form 8886]

in determining whether a reasonable basis defense could preclude the

application of the . . . penalty.”

We reject petitioner’s line of argument for four independently suf-

ficient reasons. First, we are reviewing the propriety of the penalty in a

deficiency case, and the APA’s judicial review provisions do not apply to

Tax Court deficiency proceedings. Second, a supervisor’s approval to

assert a penalty does not constitute “final agency action” reviewable un-

der 5 U.S.C. §§ 704 and 706(2)(A). Third, if Mr. Guastello’s approval

were thought to constitute final agency action, it would not be subject to

distinct judicial review under 5 U.S.C. § 704 because our review in this

deficiency case affords petitioner an “adequate remedy in a court.” Fi-

nally, if the APA’s requirement of “reasoned decision making” were

deemed to apply, review of that question would be on the administrative

record, and the examination case file shows that Mr. Guastello satisfied

this requirement.

1. Inapplicability of APA to Deficiency Proceedings

The APA’s judicial review provisions do not apply to our review of

the Commissioner’s compliance with section 6751(b)(1). We undertake

that review in the exercise of the jurisdiction granted us by sections 6213

and 6214(a) to “redetermine the correct amount of [a taxpayer’s] defi-

ciency.” Although petitioner characterizes section 6751(b)(1) as “a

standalone basis to invalidate penalties,” no provision of the Code—or

of any other statute—grants us jurisdiction to determine respondent’s

compliance with section 6751(b)(1) as an abstract, stand-alone, matter.

It is well established that the APA’s judicial review provisions do

not apply to deficiency proceedings in this Court. “Congress did not in-

tend the general grant of review in the APA to duplicate existing proce-

dures for review of agency action.” Bowen v. Massachusetts, 487 U.S.

879, 903 (1988). The deficiency procedures now set forth in chapter 63,

subchapter B of the Code long predated the APA’s enactment. See

QinetiQ US Holdings, Inc. & Subs. v. Commissioner, 845 F.3d 555, 560

(4th Cir. 2017), aff’g T.C. Memo. 2015-123; Ax v. Commissioner, 146 T.C.

153, 162–63 (2016). As a result, “the de novo review procedures provided

by the Internal Revenue Code, rather than the judicial review proce-

dures under the APA, govern judicial review of deficiency proceedings.”

QinetiQ US Holdings, Inc. & Subs. v. Commissioner, 845 F.3d at 560

n.3; see O’Dwyer v. Commissioner, 266 F.2d 575, 580 (4th Cir. 1959)

14

(“[T]he Tax Court is not subject to the Administrative Procedure Act.”),

aff’g 28 T.C. 698 (1957).

Petitioner dismisses these judicial precedents as “stand[ing] for

the unremarkable proposition that the APA’s judicial review provisions

do not replace the system for judicial review in a deficiency proceeding.”

CSC acknowledges that “[t]he deficiency itself is subject to de novo re-

view.” But it insists that “the APA still applies to judicial review of final

agency action that is separate from the deficiency proceeding.”

Contrary to petitioner’s assertion, our review of respondent’s com-

pliance with section 6751(b)(1) is not “separate from the deficiency pro-

ceeding.” Because penalties must be “assessed, collected, and paid in

the same manner of taxes,” § 6665, our jurisdiction to redetermine a de-

ficiency requires us to determine the appropriateness of any penalty de-

termined in the deficiency notice. In Graev v. Commissioner (Graev III),

149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C.

460 (2016), we held that the Commissioner generally bears the burden

of production regarding penalty approval because “compliance with sec-

tion 6751(b) is properly at issue in [a] deficiency case.”

Since Graev III we have consistently considered the Commis-

sioner’s compliance with section 6751(b)(1) in exercising our deficiency

jurisdiction. We do so because the statute precludes “assessment” of a

penalty absent supervisory approval, and no purpose would be served

by upholding a penalty the Commissioner could not assess. The reason

we are evaluating the IRS’s compliance with section 6751(b)(1) in this

case is that our deficiency jurisdiction requires us to redetermine penal-

ties. Given petitioner’s assignment of error to the IRS’s determination

of a substantial understatement penalty, satisfaction of the supervisory

approval requirement is a necessary consideration in our decision

whether to uphold that penalty. Simply put, our consideration of re-

spondent’s compliance with section 6751(b)(1) is a part of—not separate

from—this deficiency case.

As petitioner observes, Congress enacted section 6751(b)(1) in

1998, more than 50 years after the APA was enacted. See Internal Rev-

enue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-

206, § 3306(a), 112 Stat. 685, 744. But this is of no moment: Section

6751(b)(1) did not establish a new procedure for our review of IRS action

in a deficiency case, but simply added a novel requirement for the as-

sessment of some penalties. The fact that a requirement relevant in

redetermining a deficiency or penalty was enacted after the APA does

15

not bring that portion of a deficiency case within the ambit of the APA’s

judicial review provisions. Nowadays many (if not most) of the Code

provisions relevant to our redetermination of deficiencies and penalties

were enacted after the APA became law. The important point is that

the procedures under which we exercise our deficiency jurisdiction were

established long before the APA was enacted.

Petitioner argues that “approval under section 6751(b) is a dis-

tinct statutory requirement—a fundamental prerequisite for the appli-

cation of the penalty—that the Commissioner must satisfy irrespective

of this Court’s review of a notice of deficiency under section 6213.” But

petitioner is asking us to review respondent’s compliance with that “dis-

tinct statutory requirement” in the exercise of our jurisdiction under sec-

tions 6213 and 6214(a). Even if the APA allowed stand-alone judicial

review of the Commissioner’s compliance with section 6751(b)(1)—

which, for the reasons explained below, it does not—we would have no

jurisdiction to conduct that species of APA judicial review in a deficiency

proceeding such as this. 7

2. “Final Agency Action”

Even if our review of respondent’s compliance with section

6751(b)(1) could somehow be separated from our exercise of the defi-

ciency jurisdiction petitioner has invoked, we would nonetheless con-

clude that the APA’s judicial review provisions, including 5 U.S.C.

§ 706(2)(A), would not apply to that review. Those provisions apply to

“[a]gency action made reviewable by statute and final agency action for

which there is no other adequate remedy in a court.” 5 U.S.C. § 704.

Petitioner cites no statute that specifically provides for review of a su-

pervisor’s grant of approval under section 6751(b)(1). And 5 U.S.C. § 704

does not itself provide for such review for two reasons, the first of which

is that a supervisor’s approval of a penalty is not “final agency action.”

7 The question whether the IRS complied with section 6751(b)(1) can of course

arise in other litigation scenarios. If a taxpayer challenged its underlying liability in

a collection due process (CDP) case, and if it urged noncompliance with the supervisory

approval requirement as a defense to a penalty, we would review that question in the

exercise of our CDP jurisdiction under section 6330(c)(2)(B) and (d)(1). Or if a taxpayer

urged noncompliance with the supervisory approval requirement as a defense to a pen-

alty in a tax refund suit, the district court would review that question in the exercise

of its refund jurisdiction under 28 U.S.C. § 1346(a)(1). In neither case would judicial

review be exercised under the APA.

16

Petitioner contends that supervisory approval constitutes “final

agency action” because it is “specific and discrete and therefore review-

able under the APA.” As petitioner observes, a party challenging agency

action “must . . . identify specific and discrete governmental conduct.”

City of New York v. U.S. Dep’t of Def., 913 F.3d 423, 431 (4th Cir. 2019);

see Norton v. S. Utah Wilderness All. (SUWA), 542 U.S. 55, 64 (2004)

(ruling that the “limitation to discrete agency action precludes . . . broad

programmatic attack” on an agency’s operations). We will assume that

Mr. Guastello’s approvals of RA Herrera’s penalty recommendation

could be characterized as “specific and discrete governmental conduct.”

For the APA to govern our review of that conduct, however, the action

would have to be, not only specific and discrete, but also “final.” 5 U.S.C.

§ 704; SUWA, 542 U.S. at 61–62 (“Where no other statute provides a

private right of action, the ‘agency action’ complained of must be ‘final

agency action.’”).

Agency action is generally considered “final” if two conditions are

met. Bennett v. Spear, 520 U.S. 154, 177 (1997). “First, the action must

mark the ‘consummation’ of the agency’s decisionmaking process.” Id.

at 177–78 (quoting Chi. & S. Air Lines, Inc. v. Waterman S.S. Corp., 333

U.S. 103, 113 (1948)). In other words, the action “must not be of a merely

tentative or interlocutory nature.” Id. at 178. “And second, the action

must be one by which ‘rights or obligations have been determined,’ or

from which ‘legal consequences will flow.’” Id. (quoting Port of Bos. Ma-

rine Terminal Ass’n v. Rederiaktiebolaget Transatlantic, 400 U.S. 62, 71

(1970)). The Supreme Court suggested that legal consequences might

flow from agency action if it “alter[s] the legal regime to which the

agency action is subject.” Id.

A supervisor’s approval of a penalty recommendation satisfies

neither of the Bennett conditions. First, the supervisor’s placement of a

signature on a penalty approval form does not represent the “consum-

mation of the [IRS’s] decisionmaking process” in any sense of the word.

Cf. id. Following supervisory approval of a penalty, the examination

team may offer the taxpayer the opportunity to provide additional infor-

mation regarding penalty defenses. After receiving that information,

the examination team may elect to drop or reduce the penalty, or it may

decide to assert alternative penalties for which it has stronger support.

If the examination team adheres to a particular penalty in the 30-day

letter, the taxpayer may seek review by Appeals. After evaluating the

hazards of litigation, Appeals may drop or reduce the penalty as part of

an overall settlement. In short, following an IRS examination of a tax-

payer’s return, the “consummation of the agency’s decisionmaking

17

process” is reflected in the notice of deficiency. That notice sets forth the

penalty the IRS has finally determined to be applicable. Supervisory

approval is just one step along the way: While it is a necessary condition

for the ultimate determination of a penalty, it is by no means sufficient.

The facts of this case illustrate the “interlocutory nature” of su-

pervisory approval. See id. Mr. Guastello first approved assertion of

the substantial understatement penalty on March 22, 2017. The follow-

ing day, CSC representatives met with the examination team to express

their view that CSC had adequately disclosed the relevant facts and that

there was “a reasonable basis” for its treatment. RA Herrera then sent

petitioner a draft IDR seeking the company’s position as to why the pen-

alty should not be asserted.

After CSC asked that the IDR be withdrawn, Mr. Guastello ap-

proved the penalty a second time on April 1, 2017, by signing the “Sub-

stantial Understatement Penalty” worksheet. Notwithstanding that ap-

proval, RA Herrera and Mr. Guastello met with petitioner’s representa-

tives again on April 7, 2017, “to discuss assessment of the IRC 6662(d)

. . . penalty.” On April 12, 2017, CSC made an additional submission to

the examination team, arguing that no penalty should be asserted in the

light of its tax return disclosures and IDR responses. Having reviewed

that submission, Mr. Guastello nevertheless approved assertion of the

penalty for a third time on April 21, 2017, by initialing his approval on

a civil penalty leadsheet.

On May 15, 2017, the IRS sent CSC a 30-day letter (signed by Mr.

Guastello) that included the penalty. It filed a Protest seeking review

by Appeals. RA Herrera’s case activity record shows that he spent doz-

ens of hours between October 2017 and May 2018 working on a rebuttal

to the penalty-related arguments petitioner advanced in its Protest.

Appeals was ultimately unconvinced by petitioner’s arguments.

On February 16, 2021—almost four years after Mr. Guastello first ap-

proved the penalty—Appeals issued petitioner a Notice of Deficiency de-

termining various deficiencies and (for FY2013) a substantial under-

statement penalty of $45,584,000. The decision by Appeals to include

the penalty in the Notice of Deficiency was the “consummation of the

agency’s decision making process” with respect to the penalty. Bennett,

520 U.S. at 178. That action necessarily reflected a decision that was

separate from—and subsequent to—Mr. Guastello’s decision to approve

the penalty in March 2017.

18

Our conclusion that supervisory approval of a penalty does not

meet the first Bennett condition suffices to establish that it is not “final

agency action” within the meaning of 5 U.S.C. § 704. But supervisory

approval also fails the second Bennett condition because it is not an act

“by which rights or obligations have been determined, or from which le-

gal consequences will flow.” Bennett, 520 U.S. at 178 (original quotation

marks omitted).

Petitioner contends that “section 6751(b) approval directly affects

a taxpayer’s liabilities and obligations.” That is supposedly so because

“[a] proper approval permits the formal assessment of penalties,”

whereas “the lack of proper approval prevents” assessment. Petitioner’s

argument on the latter point appears to be that Mr. Guastello’s approval

had “legal consequences” because it denied petitioner the safe harbor it

would supposedly have enjoyed if Mr. Guastello had not approved the

penalty.

We are not persuaded. First, a supervisor’s approval of a penalty,

by itself, does not determine any obligations of the taxpayer because it

does not make assessment of the penalty a foregone conclusion. It is not

enough that supervisory approval might (in petitioner’s words) “affect”

a taxpayer’s obligations. To satisfy the second Bennett condition, the

agency action must determine liabilities or obligations. Bennett, 520

U.S. at 178. The challenged act must have “an immediate and practical

impact.” City of New York, 913 F.3d at 431 (quoting Golden & Zimmer-

man LLC v. Domenech, 599 F.3d 426, 433 (4th Cir. 2010)).

Mr. Guastello’s approval of the penalty had no immediate and

practical impact and did not determine any obligation of CSC. Between

the supervisor’s action and the ultimate issuance of a deficiency notice,

many events may occur that will result in a penalty’s being eliminated

or reduced. See supra pp. 16–17. A supervisor’s approval of an initial

determination to assess a penalty does not establish the taxpayer’s lia-

bility for the penalty. Supervisory approval is but a step in a larger

process that may or may not result in a penalty determination. Nor did

Mr. Guastello’s approval “alter the legal regime to which the agency ac-

tion is subject.” Bennett, 520 U.S. at 178. His approval was a routine

action involving penalties specific to this particular taxpayer, and it had

no effect on the “legal regime” governing penalties.

Second, the absence of supervisory approval does not determine

any rights of the taxpayer because it does not insulate the taxpayer from

a possible future penalty assessment. Had Mr. Guastello declined RA

19

Herrera’s initial request for approval, petitioner would not have had im-

munity from the penalty for any period. An initial refusal by Mr. Guas-

tello to approve the penalty might have indicated that RA Herrera had

not yet done enough to develop his case. After further development of

the issue, Mr. Guastello might have granted his approval. An initial

withholding of approval would not have foreclosed that possibility.

Even if Mr. Guastello had not signified his approval—and if the

IRS in consequence had not determined a penalty in the Notice of Defi-

ciency—petitioner would still have had no immunity from the penalty.

An IRS Chief Counsel attorney could assert the very same penalty in

the Answer to the Petition (or by way of amendment to Answer) so long

as that attorney secured approval from his or her immediate supervisor.

See Chai v. Commissioner, 851 F.3d at 220–21; Koh v. Commissioner,

T.C. Memo. 2020-77; see also Treas. Reg. § 301.6751(b)-1(e)(4) (exam-

ple 4). The fact that the Examination Division had not secured approval

to assert the penalty would not foreclose that possibility.

In sum, Mr. Guastello’s approval did not determine any rights or

obligations of CSC. His approval did not dictate that a penalty would

ultimately be asserted, nor would his failure to grant approval have pre-

vented assertion of a penalty. If Mr. Guastello had withheld his ap-

proval, the IRS could have asserted the same penalty later in appropri-

ate circumstances. His approval did not have the “legal consequence[]”

of denying a safe harbor that would otherwise have been available to

CSC or of “alter[ing] the legal regime to which [the IRS] is subject.” Ben-

nett, 520 U.S. at 178. For these reasons, and because supervisory ap-

proval of a penalty does not constitute the “consummation of the

agency’s decision making process,” ibid., Mr. Guastello’s action did not

constitute “final agency action” under 5 U.S.C. § 704.

3. “Adequate Remedy” in Court

Even if we regarded Mr. Guastello’s approval of the penalty as

“final agency action,” that action would not be subject to APA judicial

review because petitioner has an “adequate remedy” in this Court for

any noncompliance with section 6751(b)(1). See 5 U.S.C. § 704 (author-

izing judicial review of final agency action “for which there is no other

adequate remedy in a court”). If we were to accept petitioner’s argu-

ment—contrary to our precedents—that the “bare signatures of IRS em-

ployees” do not meet the requirements of section 6751(b)(1), we would

likely hold that the IRS had failed to secure proper supervisory approval

for the penalty and thus decline to sustain it. Because this deficiency

20

proceeding affords CSC an adequate judicial remedy for the noncompli-

ance it alleges, 5 U.S.C. § 704 would not authorize separate judicial re-

view even if Mr. Guastello were thought to have engaged in “final agency

action.”

If petitioner were correct that Mr. Guastello’s approval consti-

tuted “final agency action for which there [was] no other adequate rem-

edy in a court,” petitioner could have brought a separate lawsuit under

the APA (necessarily in another court) to challenge Mr. Guastello’s ac-

tion. That petitioner did not do so suggests that it shares our view that

this deficiency proceeding affords it an adequate judicial remedy for the

noncompliance it alleges. It follows that 5 U.S.C. § 704 does not author-

ize judicial review—separate and apart from our deficiency jurisdic-

tion—of respondent’s compliance with the statute. 8

4. “Reasoned Decision Making”

Petitioner contends that Mr. Guastello’s approval of the penalty

must be set aside under 5 U.S.C. § 706(2)(A) as agency action that is

“arbitrary, capricious, an abuse of discretion, or otherwise not in accord-

ance with law.” Although Mr. Guastello supplied his approval on four

distinct documents over a period of two months, petitioner insists that

his action did not satisfy the APA’s requirement of “reasoned decision

8 Petitioner errs by citing in support of its position the Second Circuit’s opinion

in Chai v. Commissioner, 851 F.3d 190. That case had nothing to do with the APA:

The Second Circuit did not discuss any provision of 5 U.S.C., much less the circum-

stances in which a party would be deemed to have an “adequate remedy in a court”

within the meaning of 5 U.S.C. § 704. The Second Circuit in Chai focused on the proper

interpretation of section 6751(b)(1)—specifically, the time when supervisory approval

must be secured and the obligation of our Court in a deficiency case to decide whether

approval was timely secured. Reasoning that supervisory approval would be meaning-

ful only if obtained at a time when “the supervisor has the discretion to give or withhold

it,” the Second Circuit held that section 6751(b)(1) requires written supervisory ap-

proval “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 at 220–

21. As a corollary of that holding, the Second Circuit ruled that establishing compli-

ance with section 6751(b)(1) is generally part of the Commissioner’s burden of produc-

tion in a deficiency case. Chai v. Commissioner, 851 F.3d at 221. Because the “written-

approval requirement of § 6751(b)(1) is appropriately viewed as an element of a penalty

claim,” id. at 222, our Court in a deficiency case must consider—with respect to any

penalty asserted—whether the IRS complied with the supervisory approval require-

ment. That is precisely what we are doing in this Opinion. The Second Circuit’s anal-

ysis is perfectly consistent with our conclusion that this deficiency proceeding—if one

were to adopt APA terminology—affords petitioner an “adequate remedy in a court.”

21

making.” Cf. Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto.

Ins. Co., 463 U.S. 29, 52 (1983).

Petitioner acknowledges our precedents holding that the IRS

need not “demonstrate the depth or comprehensiveness of the supervi-

sor’s review.” See Belair Woods, 154 T.C. at 17. But CSC contends that

Mr. Guastello’s action “did not simply lack ‘depth.’” In so contending it

focuses on the approval he granted on April 1, 2017, when he affixed his

signature on the “Substantial Understatement Penalty” worksheet. In

petitioner’s view, that action was “fundamentally defective because the

[worksheet] prevented Exam (and, concomitantly, the relevant supervi-

sor) from considering to any extent—in depth or otherwise—the ade-

quacy of CSC’s disclosure on the . . . Form 8886 and whether there was

a reasonable basis” for its position.

Were we to conclude that the APA governed our review of Mr.

Guastello’s approval, that review would be predicated on the adminis-

trative record. See Kasper v. Commissioner, 150 T.C. 8, 14–15 (2018)

(“The general rule under the Administrative Procedure Act . . . is that

‘review of an agency decision is limited to the administrative record.’”

(quoting Wilson v. Commissioner, 705 F.3d 980, 991 (9th Cir. 2013), aff’g

T.C. Memo. 2010-134)). Because this is a deficiency case, there is of

course no “administrative record” in a literal sense. But the parties have

attached to their Motion papers the documents from the IRS examina-

tion file they believe relevant in deciding the section 6751(b)(1) question.

Our review of these documents convinces us that Mr. Guastello did en-

gage in reasoned decision making because they show that he did con-

sider the availability vel non of a reasonable basis defense.

To establish a reasonable basis defense, the taxpayer must

demonstrate (among other things) that “the relevant facts affecting the

item’s tax treatment [were] adequately disclosed in the return or in a

statement attached to the return.” § 6662(d)(2)(B)(ii)(I). Treasury Reg-

ulation § 1.6662-4(f)(1) provides that “[d]isclosure is adequate with re-

spect to an item . . . or a position on a return if the disclosure is made on

a properly completed form attached to the return.” The regulation spec-

ifies that this disclosure “must be made” on one of two Disclosure State-

ments: Form 8275 (“[i]n the case of an item or position other than one

that is contrary to a regulation”) or Form 8275–R (“in the case of a posi-

tion contrary to a regulation”). Id.

Petitioner’s FY2013 return did not include Form 8275 or Form

8275–R. Step 6 of the Substantial Understatement Penalty worksheet

22

asked RA Herrera whether either of these Forms was attached to the

return, and he correctly answered “No.” The worksheet accordingly di-

rected him to skip Step 7, which concerned the “reasonable basis” de-

fense, and “[g]o to Step 8.” This was not, as petitioner would have it, a

mindless directive. It was a directive dictated by Treasury Regulation

§ 1.6662-4(f)(1), which specifies that a disclosure sufficient to qualify for

the reasonable basis defense “must be made” on Form 8275 or Form

8275–R.

RA Herrera had no need to consider whether there was a reason-

able basis for CSC’s position because CSC did not disclose the relevant

facts on Form 8275 or Form 8275–R, as the regulation requires. The

regulation on its face foreclosed CSC’s ability to urge a reasonable basis

defense to the penalty. In considering whether that defense might be

available to CSC, Mr. Guastello, like RA Herrera, needed to do no more

than ascertain whether CSC’s return included one of the Disclosure

Forms specified in the regulation. Mr. Gaustello had no reason to sec-

ond-guess RA Herrera’s representation that the answer to that question

was “No.”

Petitioner asks us to hold that Treasury Regulation § 1.6662-4(f),

which undergirds the instructions on the worksheet, “is contrary to law

and invalid.” Petitioner contends that the regulation “attempts to re-

write section 6662(d)(2)(B)(ii)(I)” by requiring that disclosure be made

on Form 8275 or Form 8275–R, whereas the statute provides that dis-

closure may be made “in the return or in a statement attached to the

return.”

Petitioner is perfectly free to advance this argument at trial or in

posttrial briefs. But the argument has no relevance in deciding the ques-

tion we face now. Whether or not petitioner is correct, it was not incum-

bent on Mr. Guastello to judge the validity of Treasury Regulation

§ 1.6662-4(f)(1). We have repeatedly held that IRS officers do not abuse

their discretion by following guidance set forth in the Internal Revenue

Manual and other IRS pronouncements. See Burl v. Commissioner, T.C.

Memo. 2025-40, at *4; Zienkowski v. Commissioner, T.C. Memo. 2024-

39, at *9; Mack v. Commissioner, T.C. Memo. 2018-54, 115 T.C.M. (CCH)

23

1264, 1266. It follows a fortiori that they do not abuse their discretion

by following a Treasury regulation. 9

In sum, Mr. Guastello could properly accept the regulation as

valid authority when approving RA Herrera’s penalty recommendation.

Assuming arguendo that APA principles were deemed relevant here, we

would accordingly find that Mr. Guastello engaged in “reasoned decision

making” when he concluded that the reasonable basis defense was not

available to CSC. 10

9 Wholly apart from the worksheet discussed in the text, the examination file

as a whole shows that Mr. Guastello considered CSC’s possible penalty defenses. As

explained in the NOPA proposing the penalty, CSC representatives met with the exam

team on March 23, 2017, to express their view that CSC had adequately disclosed the

pertinent tax treatment and that there was “a reasonable basis” for such treatment.

Mr. Guastello’s handwritten notes from the meeting record CSC’s argument that no

penalty should apply because it had “flagged [the] issues,” an apparent reference to

the Form 8886 attached to its FY2013 return. Mr. Guastello and RA Herrera met

again with CSC’s representatives on April 7, 2017, “to discuss assessment of the IRC

6662(d) . . . penalty.” During this meeting they appear to have addressed once again

the potential applicability of the penalty defenses CSC advanced. On April 12, 2017,

CSC made an additional submission to the examination team, arguing that no penalty

should be asserted in the light of its tax return disclosures and IDR responses. Having

received all this information, Mr. Guastello nevertheless signified his approval of the

penalty for a third time on April 21, 2017, by initialing the civil penalty leadsheet.

10 Even if petitioner could prevail on all the arguments discussed in the text, it

is not obvious that we would be required to set aside Mr. Guastello’s approval of the

penalty as “not in accordance with law.” See 5 U.S.C. § 706(2)(A). By electronically

signing the NOPA, signing the penalty worksheet, initialing the civil penalty lead-

sheet, and signing the 30-day letter, Mr. Guastello did what section 6751(b)(1) (as we

have interpreted it) required him to do. We have consistently held that a manager’s

signature on a NOPA or penalty approval form—without more—is sufficient to satisfy

the statutory requirements. See Palmolive Bldg. Invs., 152 T.C. at 86; Estate of Glass-

man v. Commissioner, T.C. Memo. 2024-51, at *6; Green Valley Invs., T.C. Memo. 2025-

15, at *35. No court has ever interpreted section 6571(b)(1) to require the supervisor

to produce what petitioner calls a “narrative explanation” of his approval. In short,

even if the APA’s judicial review provisions applied to our review, Mr. Guastello signi-

fied his approval “in accordance with” section 6751(b)(1) as the courts have uniformly

construed that provision.

24

C. Conclusion

Because respondent has demonstrated compliance with section

6751(b)(1), we will grant his Motion for Partial Summary Judgment and

deny petitioner’s.

To implement the foregoing,

An appropriate order will be issued.