Chai v. Commissioner, No. 15-1653 (2d Cir. 2017)Annotate this Case
Petitioner and the Government cross-appealed the tax court's orders relating to petitioner's underreporting of income in his 2003 tax return, principally in connection with a $2 million payment he received from Delta Currency Trading for his role in a now-defunct tax shelter scheme. While petitioner's deficiency proceeding was pending losses reported by Mercato - a partnership of which petitioner was a member - were disallowed in a partnership tax proceeding. The tax court held that it lacked jurisdiction over the added income tax deficiency because I.R.C. 6230 required the Commissioner to apply the results of the Mercato proceeding to petitioner by computational adjustment, rather than in his deficiency proceeding. The tax court also held that petitioner owed the self-employment tax and corresponding penalty. The court held that the tax court erred in concluding that it lacked jurisdiction over the additional income‐tax deficiency attributable to the $2 million Delta payment; section 6751(b)(1) 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; and compliance with section 6751(b) is part of the Commissioner's burden of production and proof in a deficiency case in which a penalty is asserted. Therefore, the court vacated the tax court's jurisdictional ruling; remanded to the tax court to enter a revised decision upholding the additional income-tax deficiency, because petitioner concedes that the $2 million payment was fully taxable; affirmed the portion of the tax court's order upholding the self-employment tax deficiency; and reversed the portion of the tax court's order upholding the accuracy-related penalty.