United States Tax Court

United States Tax Court

T.C. Memo. 2024-38

AMGEN INC. & SUBSIDIARIES,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 16017-21, 15631-22.

Filed April 4, 2024.

__________

Andrew P. Crousore and Rajiv Madan, for petitioner.

Jill A. Frisch, Cathy A. Goodson, Usha Ravi, Julie P. Gasper, Kathryn

F. Patterson, John M. Altman, and Elizabeth P. Flores, for respondent.

MEMORANDUM OPINION

GREAVES, Judge: The primary issue in these consolidated cases

is the Commissioner’s allocation of income under section 482 between

Amgen Inc. and Amgen Manufacturing Limited. 1 Currently before the

Court is respondent’s June 12, 2023, Motion for Partial Summary

Judgment contending that the Internal Revenue Service (IRS) complied

with the requirements of section 6751(b)(1) by securing timely

supervisory approval for all penalties included in the notice of

deficiency, dated April 15, 2022, related to tax years 2013 through 2015. 2

For the reasons set forth below, we will grant respondent’s motion.

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

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax

Court Rules of Practice and Procedure.

2 Respondent issued a prior notice of deficiency, dated June 29, 2021, to

petitioner relating to tax years 2010 through 2012 but did not determine penalties for

Served 04/04/24

2

[*2]

Background

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

motion papers, and the exhibits and declarations attached thereto. They

are stated solely for purposes of deciding respondent’s motion and not

as findings of fact in these cases.

See Sundstrand Corp. v.

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

Petitioner is the parent corporation of a multinational group of

consolidated corporations and affiliated companies, specializing in

biologic therapeutics. Petitioner had its principal place of business in

California when it filed the petitions. Absent stipulation to the contrary,

appeal of these cases would lie to the U.S. Court of Appeals for the Ninth

Circuit. See § 7482(b)(1)(B).

The IRS has routinely selected petitioner’s returns for

examination. As relevant to the pending motion, the IRS audited

petitioner’s 2010 through 2012 federal tax returns. On November 29,

2017, at the close of this audit, the IRS prepared and issued to petitioner

a memorandum entitled “Notice of Failure to Correctly Report Financial

Statements for Transfer Pricing Analysis” (exam memorandum). In

relevant part, the exam memorandum stated:

The purpose of this memorandum is to inform the

Taxpayer that the transfer pricing method for Amgen USA

during the tax years ended December 31, 2010 to 2012 may

preclude the Taxpayer from having a reasonable cause for

an underpayment attributable to a net section 482

[adjustment].

The IRS began its examination of the returns for tax years 2013

through 2015 approximately four months after it issued the exam

memorandum. As relevant to this motion, the IRS had two teams

working on the issues of (1) increasing petitioner’s income to clearly

reflect income and prevent the evasion of taxes under section 482

(transfer pricing adjustments) and (2) increasing petitioner’s income on

account of payments received in connection with healthcare reform fees

imposed by section 9008 of the Patient Protection and Affordable Care

Act, Pub. L. No. 111-148, 124 Stat. 119, 859 (2010) (HCR fee

these years. On December 19, 2022, we granted a joint Motion to Consolidate Docket

No. 16017-21, related to tax years 2010 through 2012, with Docket No. 15631-22,

related to tax years 2013 through 2015. The motion at issue relates exclusively to the

case at Docket No. 15631-22.

3

[*3] adjustments). The IRS Examination Division issue manager for the

transfer pricing adjustments was Supervisory Revenue Agent (SRA)

Andy Soemardi, and the IRS Examination Division issue manager for

the HCR fee adjustments was SRA Gregory Horwitz.

During the examination revenue agents working on the transfer

pricing adjustments recommended the assertion of accuracy-related

penalties for gross valuation misstatements and substantial

understatements of income tax. See § 6662(a), (b)(2), (3), (d), (h). Both

penalties were approved in writing on February 27, 2020, by SRA

Soemardi. One of the revenue agents also recommended the assertion

of accuracy-related penalties for substantial valuation misstatements.

See § 6662(a), (b)(3), (e). This penalty was approved in writing by SRA

Soemardi on May 8, 2020. As for the team working on the HCR fee

adjustment issue, a revenue agent recommended the assertion of

accuracy-related penalties for substantial understatements of income

tax. See § 6662(a), (b)(2), (d). This penalty was approved in writing by

SRA Horwitz on March 10, 2020. Collectively, this Opinion will refer to

penalties determined during the examination as examination penalties.

On May 8, 2020, the IRS issued the 30-day package to petitioner.

Petitioner requested that the case be transferred to the Independent

Office of Appeals (Appeals Office) for review. The Appeals Office

reviewed the file and sent a draft of the notice of deficiency to the Office

of Chief Counsel for review. An attorney with the Office of Chief Counsel

recommended alternative accuracy-related penalties for negligence or

disregard of rules or regulations regarding the transfer pricing

adjustment and HCR fee adjustments. See § 6662(a), (b)(1), (c). On

February 22, 2022, the attorney’s immediate supervisor, Associate Area

Counsel Shirley Mao, provided written approval for the alternative

penalties, and the recommendation was sent back to the Appeals Office.

Collectively, this Opinion will refer to penalties determined by the Office

of Chief Counsel as Chief Counsel penalties.

The Appeals officer adopted this recommendation and asserted

the Chief Counsel penalties. On February 28, 2022, the Appeals officer’s

immediate supervisor approved the penalties in writing. After this

approval, the IRS issued the notice of deficiency on April 15, 2022. The

notice increased petitioner’s income related to the transfer pricing

adjustments and HCR fees adjustments. As a primary theory, the IRS

determined that petitioner was liable for accuracy-related penalties for

gross valuation misstatements related to the transfer pricing

adjustments and substantial understatements related to the HCR fee

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[*4] adjustments. The IRS made further alternative determinations

that petitioner was liable for the remaining examination and Chief

Counsel penalties.

Petitioner timely filed petitions for redetermination of the

deficiencies. On June 12, 2023, respondent filed the motion now under

consideration. On July 14, 2023, petitioner filed an Opposition to

Motion for Partial Summary Judgment, arguing that the exam

memorandum was the first formal communication regarding the

penalties. Because the penalties were not approved in writing before

the IRS issued the exam memorandum, petitioner argues that under our

precedent the supervisory approval was not timely. On August 9, 2023,

with leave of the Court, respondent filed a Reply to Opposition to Motion

for Partial Summary Judgment.

Discussion

I.

Summary Judgment

The purpose of summary judgment is to expedite litigation and

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

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

summary judgment where there is no genuine dispute of material fact

and a decision may be rendered as a matter of law. See Rule 121(a)(2);

Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). Furthermore,

we construe the facts and draw all inferences in the light most favorable

to the nonmoving party to decide whether summary judgment is

appropriate. See Bond v. Commissioner, 100 T.C. 32, 36 (1993). The

nonmoving party may not rest upon the mere allegations or denials of

his pleading but must set forth specific facts showing that there is a

genuine dispute for trial. See Rule 121(d); Bond, 100 T.C. at 36.

II.

Supervisory Approval Under Section 6751(b)(1)

For a corporate taxpayer, the burden of production as to penalties

remains with the taxpayer because section 7491(c) does not apply to

corporations. See NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006).

The Commissioner does not have the burden of production as to

supervisory approval under section 6751(b) for a penalty determined

against a corporation in a notice of deficiency. See Dynamo Holdings

Ltd. P’ship v. Commissioner, 150 T.C. 224, 232–33 (2018). Accordingly,

respondent does not bear the burden of production for the penalties

determined against petitioner. Petitioner raised as an affirmative

5

[*5] defense to the penalties that respondent failed to comply with

section 6751(b)(1).

Section 6751(b)(1) requires that the “initial determination” of a

penalty assessment be “personally approved (in writing) by the

immediate supervisor” of the person making that determination. In

Laidlaw’s Harley Davidson, the Ninth Circuit considered the timeline

for obtaining supervisory approval of “assessable penalties,” which are

not subject to deficiency procedures. Laidlaw’s Harley Davidson Sales,

Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022), rev’g and

remanding 154 T.C. 68 (2020). The Ninth Circuit held that, for an

assessable penalty, written supervisory approval must occur “before the

assessment of the penalty or, if earlier, before the relevant supervisor

loses discretion whether to approve the penalty assessment.” Id.

at 1074. Absent stipulation to the contrary, these cases are appealable

to the Ninth Circuit, and we thus follow its precedent. See Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir.

1971).

Petitioner argues that Laidlaw’s Harley Davidson is not

applicable in these cases because the penalties at issue are subject to

deficiency procedures. Therefore, petitioner asks that we delay ruling

on this issue to allow the Ninth Circuit to address the appropriate

timeline for supervisory approval for penalties subject to deficiency

procedures. While petitioner is correct in noting the distinction in the

type of penalties at issue, we recently held that for cases appealable to

the Ninth Circuit, the holding in Laidlaw’s Harley Davidson

encompasses penalties subject to deficiency procedures. See Kraske v.

Commissioner, No. 27574-15, 161 T.C., slip op. at 7–8 (Oct. 26, 2023).

Kraske directly resolves the issue, and therefore we see no reason to

delay ruling on it.

A relevant supervisor could lose discretion when a notice of

deficiency is issued. See Laidlaw’s Harley Davidson Sales, Inc. v.

Commissioner, 29 F.4th at 1072. A supervisor may also lose jurisdiction

over a case and thus the discretion to approve penalties when a case is

transferred from the IRS Examination Division to the Appeals Office.

Kraske, 161 T.C., slip op. at 8.

Because we follow the holding in Laidlaw’s Harley Davidson, we

reject petitioner’s argument that the supervisory approval was not

timely. Petitioner does not dispute respondent’s assertions pertaining

to the identity of each revenue agent who made the initial determination

6

[*6] after the examination began, the identity of that revenue agent’s

immediate supervisor, and the date on which the written approval was

received. Thus, the relevant inquiry is whether the penalties were

approved when the relevant supervisor had discretion over the

penalties.

There is no indication that a determination was made or that any

relevant supervisor lost discretion to approve either the examination

penalties or Chief Counsel penalties after respondent issued the exam

memorandum. In fact, respondent had not begun examinations for tax

years 2013 through 2015 until four months after the exam memorandum

was issued and the recommendations to assert the examination

penalties and the Chief Counsel penalties would not be made for years.

Thus, the issuance of the exam memorandum does not mark the point

at which the relevant supervisors lost discretion to approve either the

examination penalties or the Chief Counsel penalties.

The examination penalties were determined by revenue agents

during the examination. SRA Soemardi and SRA Horwitz approved the

examination penalties recommended by their teams before issuing the

30-day package and transferring the cases to the Appeals Office.

Therefore, they retained discretion to approve the examination

penalties, and the approvals were timely. See Kraske, 161 T.C., slip op.

at 8. As for the Chief Counsel penalties, an attorney in the Office of

Chief Counsel initially determined these penalties. See Graev v.

Commissioner, 149 T.C. 485, 494–98 (2017) (holding that the initial

determination may take the form of a recommendation from an attorney

in the Office of Chief Counsel), supplementing and overruling in part

147 T.C. 460 (2016). Associate Area Counsel Shirley Mao approved the

Chief Counsel penalties before the recommendation was transmitted to

the Appeals Office. Therefore, Associate Area Counsel Shirley Mao had

discretion to approve the Chief Counsel penalties when she approved

them.

We find that respondent secured the supervisory approvals

required under section 6751(b)(1) with respect to the penalties

determined in the notice of deficiency. Accordingly, respondent is

entitled to partial summary judgement on this issue.

To reflect the foregoing,

An order will be issued granting respondent’s Motion for Partial

Summary Judgment in Docket No. 15631-22.