The Tax Court in Brief March 29 – April 2, 2021

The Tax Court in Brief March 29 – April 2, 2021

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

Tax Litigation: Tax Court Cases: The Week of March 29 – April 2, 2021

• Crandall v. Comm’r
• Rowen v. Comm’r 
• Purple Heart Patient Center, Inc. v. Comm’r
• Walton v. Comm’r| T.C. Memo. 2021-40
• Max v. Comm’r| T.C. Memo. 2021-37
• Rowen v. Comm’r| 156 T.C. No. 8

Crandall v. Comm’r | T.C. Memo 2021-39

March 29, 2021 | Vasquez, J. | Dkt. No. 9203-17 

Tax Disputes Short Summary:  The case discusses whether the IRS is allowed to determine a deficiency after entering into a closing agreement with a taxpayer for a certain period.

During 2003 through 2011 (the tax years), Mr. and Mrs. Crandall (the taxpayers) lived between the U.S. and Italy. Mrs. Crandall was also an Italian citizen and for some time was employed by the Italian Government, becoming eligible for a pension. They also paid Italian income tax on this income.

The taxpayers did not report their foreign income (pension income), interest and dividend income nor did they claim a foreign tax credit (FTC) for the taxes paid in Italy.

In 2012, the taxpayers entered into the Offshore Voluntary Disclosure Program (OVDP) and submitted 1040X for the tax years along with the appropriate payments. On the amended returns, they claimed FTCs in diverse amounts for the tax years. The OVDP submission was not accepted. The IRS then proposed adjustments to the 1040x basically reducing the amount of FTCs claimed. For 2011, a deficiency of $4,382 was proposed.

In 2015, the taxpayers and the IRS signed a Form 906, Closing Agreement on Final Determination Covering Specific Matters (the closing agreement). However, in the closing agreement, no reference was made to the amount of FTC to which the taxpayers were entitled in 2011.

In November 2015, the IRS assessed additional income tax for the 2011 taxable year, exceeding the amount originally proposed by the IRS. Although some part of this assessment was reduced, the IRS opened an examination for the 2011 tax return. As a result of the examination, the IRS issued a notice of deficiency for which the taxpayers filed a petition.

Tax Litigation Key Issues:

Whether the IRS is allowed to determine a deficiency for a period for which the taxpayer and the IRS had entered a closing agreement.

Primary Holdings: A closing agreement is a contract, consequently, the agreement must be construed in accordance with such intent. The IRS is not allowed to determine a deficiency for an item that was subject to a closing agreement and for which the parties intended to include within the agreement.

Key Points of Law:

• The IRS can settle tax liabilities with any person for any taxable period by means of a closing agreement. R.C. 7121(a). Closing agreements can be entered by using one of two forms, Form 866, used to determined conclusively a taxpayer’s total tax liability, or Form 906, used to agree on separate items affecting the tax liability of the taxpayer. See Urbano v. Comm’r, 122 T.C. at 393; Zaentz v. Commissioner, 90 T.C. 753 , 760-761 (1988).
• A closing agreement encompasses only the issues enumerated in the agreement itself. However, closing agreements are contracts. See Analog Devices, Inc. v. Commissioner, 147 T.C. at 446. As contracts, the closing agreements are subject to the Federal common law contract interpretation. And contracts are construed according to the intent of the parties. Based on these premises, the Court analyzed the agreement as a whole and in the context in which it was written.
• The Court analyzed that multiple paragraphs of the closing agreement established that the taxpayer had FTC for 2011, although the amount was undetermined. Based on the language of the closing agreement, the Court determined that the provisions “reflected an intention to accord finality to the tax consequences stemming from petitioners’ income items that they disclosed”.
• The Court also analyzed two additional arguments made by the IRS: First, that the FTC for 2011 was not included in the voluntary disclosure of the petitioners. Second, even if it was included, a subsequent adjustment to the item was permissible.
• As for the first argument, the Court determined that the FTC for 2011 was part of the closing agreement because the taxpayers disclosed that the FTC pertained to their foreign-source income, was addressed in the closing agreement, and affected the calculation of additional tax liabilities. This allowed the Court to conclude that the 2011 FTC was an item to which the parties intended to accord finality.
• In the analysis of the second argument, the Court determined that failure to specify an amount for the FTC did not mean there was no agreement about the FTC. Under three possible scenarios, the Court ruled that the FTC was in the amount shown in the original return, considering that the IRS had not accepted the amounts showed in the amended returns, nor had it argued that the FTC was the amount paid by the taxpayers as part of the closing agreement (waiving its right to make such claim).
• Based on the previous reasonings, the Court ruled that the closing agreement precluded the IRS from determining a deficiency.

Tax Litigation Insight:

This case represents a victory to the taxpayers and more importantly, reaffirms the importance of the language of the closing agreements entered with the IRS. As seen in the case, the IRS advances theories that intend to allow further assessments for periods that have been part of closing agreements. Careful detail must be given when framing the agreements between a taxpayer and the IRS.

Purple Heart Patient Center, Inc. v. Comm’r

March 29, 2021 | Pugh, J. | Dkt. No. 24994-15

Tax Dispute Short Summary: 

The Tax Court held the Taxpayer, who operated a medical cannabis retail dispensary under California law, underreported its gross income, was not entitled to offset its gross receipts with any cost of goods sold (COGS) because it failed to substantiate its COGS expenses, and was liable for the accuracy-related penalty under Sec. 6662(a). The court noted that the individual who organized the dispensary had destroyed the dispensary’s business records and thus the court was unable to estimate the dispensary’s COGS.

The Taxpayer did not cultivate its own cannabis plants.  The Taxpayer obtained its cannabis products from its members, then processed such products and dispensed the product to other members.

The Taxpayer purchased all of its inventory with cash and all of its sales were cash transactions.  The Taxpayer maintained a cash register and general ledger to record its purchases and sales.  The Taxpayer did not deposit all of its cash into its bank account.

The Taxpayer did not preserve the general ledger or any other documentation during the years in issue.  During the audit of the Taxpayer by the IRS, the Taxpayer was not able to provide the IRS any books or records.  The IRS then performed a bank deposit and cash expenditures analysis.  Since the Taxpayer did not deposit all of its cash it received into its bank account, therefore the IRS added the purchases the Taxpayer reported on its IRS Forms 1120 for computing COGS to its net deposits to determine yearly gross receipts.  Furthermore, the IRS disallowed any offset of COGS or other expenses because it failed to substantiate such COGS or expenses.

The IRS assessed underpayment penalties for negligence and/or a substantial understatement of income tax for the years in issue under section 6662(a) and (b)(1) and (2).

Tax Litigation Key Issues:

Whether the Taxpayer:  (1) was entitled to offset its gross receipts with any COGS; and (2) underreported its gross income and was liable for penalties under section 6662.

Primary Holdings: 

•   Because the Taxpayer was not able to substantiate its COGS or expenses that were taken on its Form 1120s.

• The Taxpayer underreported its gross receipts; therefore, it was subject to penalties under section 6662.

Key Points of Law:

• All businesses, including cannabis dispensaries, may offset their gross receipts with COGS to compute gross income. See, e.g., New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Olive v. Commissioner, 139 T.C. at 20 n.2; Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173, 178 n.4 (2007); see also sec. 1.61-3(a), Income Tax Regs.
• COGS is not a deduction within the meaning of section 162(a) but is subtracted from gross receipts to determine a taxpayer’s gross income. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987); secs. 1.61-3(a), 1.162- 1(a), Income Tax Regs.
• A taxpayer is required to maintain sufficient reliable records to substantiate its COGS. See sec. 6001; Newman v. Commissioner, T.C. Memo. 2000-345, 2000 WL 1675519, at *2; sec. 1.6001-1(a), Income Tax Regs.; see also King v. Commissioner, T.C. Memo. 1994-318, 1994 WL 330613, at *2 (“[A]ny amount allowed as cost of goods sold must be substantiated.”), aff’d without published opinion, 69 F.3d 544 (9^th Cir. 1995).
• If a taxpayer is able to demonstrate that he paid or incurred an expense but cannot substantiate the precise amount, we generally may estimate the amount of the expense while “bearing heavily * * * upon the taxpayer whose inexactitude is of his own making.” Cohan v. Commissioner, 39 F.2d at 543-544;
• Section 61(a) provides that gross income means “all income from whatever source derived”. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Taxpayers are responsible for maintaining adequate books and records sufficient to establish their income. See sec. 6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).
• When a taxpayer fails to maintain adequate books and records, the Commissioner is authorized to compute the taxpayer’s income by any method that, in the Commissioner’s opinion, clearly reflects income. Sec. 446(b); see also Choi v. Commissioner, 379 F.3d at 63
• Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of the portion of an underpayment of tax required to be shown on the return that is attributable to “[n]egligence or disregard of rules or regulations” or a “substantial understatement of income tax.” Negligence includes “any failure to make a reasonable attempt to comply with the provisions of this title”. Sec. 6662(c); see also Allen v. Commissioner, 92 T.C. 1, 12 (1989).
• A section 6662(b)(2) penalty may be reduced or eliminated if the taxpayer adequately disclosed the position attributable to a portion (or all) of the underpayment and had a reasonable basis for it. Sec. 6662(d)(2)(B)(ii); see Campbell v. Commissioner, 134 T.C. 20, 30 (2010), aff’d, 658 F.3d 1255 (11^th Cir. 2011).

Tax Litigation Insight: 

A significant majority of Tax Court decisions relate to substantiation or lack thereof.  The Purple Heart decision reminds taxpayers that they must keep good records to substantiate items on a tax return.

Max v. Comm’r| T.C. Memo. 2021-37

March 29, 2021 | Buch, J. | Dkt. No. 20237-16

Tax Dispute Short Summary:  Mr. Max was a designer and businessman.  He founded a company that produces and sells millions of garments a year.  Related to these activities, he claimed tax credits under Section 41 for research activities.

Tax Litigation Key Issues: Whether the activities Mr. Max engages in qualify for the Section 41 research credit.

Primary Holdings: No, because Mr. Max failed to establish that he met the Section 174 test, the technological information test, the business component test, or the process of experimentation test.

Key Points of Law:  

• Generally, the IRS’ determinations in a notice of deficiency are presumed correct and taxpayers bear the burden of proving otherwise.

• Section 41 permits taxpayers to claim a credit for increasing research activities. The credit is 20% of the excess of a taxpayer’s qualified research expenses for the tax year over the base amount.  41(a)(1)  Qualified research expenses are:  (1) in-house research expenses, including wages for employees working on qualified research and costs paid or incurred for supplies for qualified research; and (2) contract research expenses. Sec. 41(b)(1) and (2)(A).  

• To be qualified research, the research must relate to a new or improved function, performance, reliability, or quality of the product or process. But, qualified research does not include research after commercial production; adaptation or duplication of an existing business component; market research, testing, or development; or routine or ordinary testing or inspection for quality control.  41(d)(4).  

• To be qualified research under Section 41, activities or projects must meet four tests. These four tests are:  (1) the Section 174 test; (2) the technological information test; (3) the business component test; and (4) the process of experimentation test.  41(d); Siemer Milling Co. v. Comm’r, T.C. Memo. 2019-37.  

• Section 174 generally allows taxpayers to deduct research and experimental expenditures during the tax year in which they are paid or incurred. The regulations define research and experimental expenditures as “expenditures incurred in connection with the taxpayer’s trade or business which represent research and development costs in the experimental or laboratory sense.”  Reg. § 1.174-2(a)(1).  Research and development costs in the experimental or laboratory sense are “activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.  Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product.”  Treas. Reg. § 1.174-2(a)(1).

• Essentially, for there to be experimental expenditures, the taxpayer must show: (1) that it does not already have information that can address a capability or method for improving the product or design of the product and (2) its activities were meant to eliminate those uncertainties.  Union Carbide Corp. & Subs. v. Comm’r, T.C. Memo. 2009-50.

• Certain activities cannot qualify as research or experimental expenditures at all. Reg. § 1.174-2(a)(3).  That regulation provides that “[t]he term research or experimental expenditure does not include expenditures for . . . [t]he ordinary testing or inspection of materials or products for quality control (quality control testing).”  The regulations further define “quality control testing” as “testing or inspection to determine whether particular units of material or products conform to specified parameters.”  Treas. Reg. § 1.174-2(a)(4).

• To be “qualified research” an activity must be undertaken for purpose of discovering information that is “technological in nature”. 41(d)(1)(B)(i).  Information is technological in nature “if the process of experimentation used to discover such information fundamentally relies on principles of the physical or biological sciences, engineering, or computer science.”  Treas. Reg. § 1.41-4(a)(4).  A taxpayer may rely on existing principles of science and engineering to satisfy this requirement.  Treas. Reg. § 1.41-4(a)(4).

• The process of experimentation test requires that substantially all of the research activities constitute elements of a process of experimentation for a qualified purpose. 41(d)(1)(C); Union Carbide Corp. & Subs. v. Comm’r, 97 T.C.M. (CCH) at 1255.  This test consists of three elements:  (1) the “substantially all” element; (2) the “process of experimentation” element; and (3) the “qualified purpose” element.  Union Carbide Corp. & Subs v. Comm’r, 97 T.C.M (CCH) at 1255.  These elements are applied to each of the taxpayer’s business components.  Sec. 41(d)(2)(A); Treas. Reg. § 1.41-4(a)(6).

• The business component test requires that research undertaken to discover information must be intended to be used to develop “a new or improved business component of the taxpayer.” 41(d)(1)(B)(ii).  A business component is “any product, process, computer software, technique, formula, or invention which is . . . held for sale, lease, or license, or . . . used by the taxpayer in . . . [its] trade or business.”  Sec. 41(d)(2)(B).

Insight:  The Max decision shows the hoops a taxpayer must jump through in order to obtain the tax credit under Section 41.  Prior to claiming the tax credit, taxpayers should speak to a tax professional regarding their eligibility for the Section 41 credit.

Rowen v. Comm’r| 156 T.C. No. 8

March 30, 2021 | Toro, J. | Dkt. No. 18083-18P

Tax Dispute Short Summary:  The taxpayer did not pay assessed tax liabilities in excess of $474,846 relating to his 1994, 1996, 1997, and 2003 through 2007 tax years.  Accordingly, the IRS certified that he had a “seriously delinquent tax debt” within the meaning of Section 7345(b).  The taxpayer petitioned the Tax Court to determine whether the IRS’ certification was erroneous under Section 7345(e)(1).  During those proceedings, the taxpayer moved for summary judgment on the basis that Section 7345 violates the Due Process Clause of the Fifth Amendment to the Constitution because it infringes on the right to international travel.  The taxpayer further alleged that Section 7345 violates his human rights as expressed in the Universal Declaration of Human Rights.

Tax Litigation Key Issues: Whether Section 7345 violates the Due Process Clause and whether the Universal Declaration of Human rights provides a federal court remedy?

Primary Holdings: No, because Section 7345 does not authorize any passport-related decision and does not prohibit international travel—indeed, the IRS may well not know whether a particular taxpayer has a valid passport or intends to seek one when the passport certification is made.  Moreover, in this case, the taxpayer’s passport remains in effect.  In addition, because Section 7345 does not limit the right to travel (rather, other parts of the FAST Act do), the UDHR cannot provide any grounds for invalidating the IRS’ certification under Section 7345.

Key Points of Law:

• Enacted in 2015, Section 7345 authorizes the IRS to send to the Secretary of Treasury a certification that an individual has a “seriously delinquent tax debt.” The Secretary of the Treasury, in turn, must transmit the certification to the Secretary of State “for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the . . . [Fixing America’s Surface Transportation Act (FAST ACT), Pub. L. No. 114-94, 129 Stat. at 1729 (2015)]”. Sec. 7345(a).
• In cases that are decided on the administrative record (record rule cases), the Tax Court ordinarily decides the issues raised by the parties by reviewing the administrative record using a summary adjudication procedure. See Van Bemmelen v. Comm’r, 155 T.C. ___, 2020 U.S. Tax Ct. LEXIS 21 (Aug. 27, 2020).
• Section 7345(a) provides: If the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.
• Section 7345(b)(1) generally defines a “seriously delinquent tax debt” as an “unpaid, legally unenforceable Federal tax liability” that “has been assessed,” “is greater than” $51,000, for which “a notice of lien has been filed pursuant to section 6323 and the administrative rights under section 6320 . . . have been exhausted or have lapsed, or . . . levy is made pursuant to section 6331.” Section 7345(b)(2) excludes from the definition of a “seriously delinquent tax debt” any debt that is “being paid in a timely manner pursuant to an agreement . . . under section 6159 or 7122” and any debt for which “collection is suspended . . . because a due process hearing under section 6330 is requested or pending, or . . . because” relief under section 6015 is requested.  Section 7345(d) requires the IRS to contemporaneously notify a taxpayer of any certification under subsection (a).
• Section 7345(c) provides rules for reversing a certification. It requires the IRS to “notify the Secretary (and the Secretary shall subsequently notify the Secretary of State) if such certification is found to be erroneous [by a court under section 7345(e) as described below] or if the debt with respect to such certification is fully satisfied or ceases to be a seriously delinquent tax debt by reason of subsection (b)(2).”  As with a certification, the IRS must notify the taxpayer of a reversal or a certification.  7345(d).
• The Tax Court’s jurisdiction to consider passport revocation cases is in section 7345(e). Specifically, that section provides that after the IRS notifies an individual of an adverse passport determination, the taxpayer may bring a civil action against the United States in a district court of the United States, or against the IRS in Tax Court, to determine whether the certification was erroneous or whether the IRS has failed to reverse the certification.  If the court determines that such certification was erroneous, then the court may order the Secretary to notify the Secretary of State that such certification was erroneous.
• Section 7345(e) does not set any deadline for filing the civil action it authorizes. Once the IRS notifies a taxpayer that a certification under section 7345(a) has been made, the taxpayer may challenge that certification in a civil action filed either in the Tax Court or a federal district court.
• 22 U.S.C. section 2714a provides that upon receiving a certification from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt. However, the Secretary of State may issue a passport, in emergency circumstances or for humanitarian reasons, to an individual.  Thus, once the Secretary of State receives notification of the certification, the Secretary of State is required (absent emergency or humanitarian considerations) to deny a passport (or renewal of a passport) to a seriously delinquent taxpayer and is permitted to revoke any passport previously issued to such person.  84 Fed. Reg. 67184 (Dec. 9, 2019).
• Section 7345(e)(1) authorizes the Tax Court to “determine whether the certification was erroneous.” In general, an action is “erroneous” if it is “incorrect” or “inconsistent with the law or the facts.”  Black’s Law Dictionary 659 (10^th 2014).
• The Tax Court has authority under Section 7345(e) to determine whether the passport statute is constitutional. See Battat v. Comm’r, 148 T.C. 32, 46 (2017) (noting that the Tax Court, like all federal courts, may adjudicate constitutional questions that arise within its jurisdiction and collecting authorities).
• Under the UDHR, “(1) [e]veryone has the right to freedom of movement and residence within the borders of each state” and “(2) [e]veryone has the right to leave the country, including his own, and to return to his country.” However, the Supreme Court “has reasoned that . . . [the UDHR] does not of its own force impose obligations as a matter of international law nor does it create obligations enforceable in the federal courts.”  Sosa v. Alvarez-Machain, 542 U.S. 692, 734-35 (2004).

Tax Litigation Insight:  In a significant concurring opinion, Judge Marvel noted that the Rowen decision “does not foreclose a constitutional challenge, in a future case with appropriate facts and squarely presented arguments, to the entire tax collection mechanism created by the [FAST ACT].”  Expect to see more on this soon.

Walton v. Comm’r| T.C. Memo. 2021-40

March 30, 2021 | Urda, J. | Dkt. No. 6405-18

Tax Dispute Short Summary:  The taxpayer failed to include on her 2015 federal income tax return $169,425 in nonemployee compensation that she had earned that year.  The IRS’ Automated Underreporter Program (AUR) detected the omission of income and issued a notice of deficiency, asserting a deficiency of $62,514 and an accuracy-related penalty of $12,503.  The taxpayer filed a petition with the Tax Court conceding the omission of income but contending that the penalty was not appropriate.

Tax Litigation Key Issues: Whether the Section 6662(a) accuracy-related penalty should be imposed for the failure to report income?

Primary Holdings: Yes, because:  (1) Section 6751(b) managerial approval does not apply where the notice has been issued through electronic means; and (2) the taxpayer failed to show reasonable cause.

Key Points of Law: 

• Section 6662(a) and (b)(2) impose a 20% penalty on the portion of any underpayment of tax that is attributable to “any substantial understatement of income tax”.
• Section 6751(b) requires that penalties be “personally approved (in writing) by the immediate supervisor of the individual making such determination.” Chai v. Comm’r, 851 F.3d 190, 217 (2d Cir. 2017), aff’g in part, rev’g in part, T.C. Memo. 2015-42; see also Graev v. Comm’r, 149 T.C. 485 (2017), supplementing and overruling in part, 147 T.C. 460 (2016).
• Section 6751(b)(2)(B) carves out an exception to the supervisory approval requirement for “any . . . penalty automatically calculated through electronic means.” The Tax Court has recently explored the contours of this exception, explaining that it encompasses a penalty “determined mathematically by a computer software program without the involvement of a human IRS examiner.”  Walquist v. Comm’r, 152 T.C. 61, 70 (2019).
• Section 6664(c)(1) provides that the penalty under Section 6662(a) shall not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith and with respect to that portion. See Higbee v. Comm’r, 116 T.C. at 448.  The taxpayer bears the burden of proving reasonable cause and good faith.  See id. at 446-47.  “Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item.”  Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).  The decision as to whether the taxpayer acted with reasonable cause and in good faith “is made on a case-by-case basis, taking into account all pertinent facts and circumstances.”  See Reg. § 1.6664-4(b)(1).  Generally, the most important fact in determining the existence of reasonable cause is the taxpayer’s efforts to ascertain her proper tax liability.  Id. 
• Good-faith reliance on the advice of an independent, competent tax professional as to the tax treatment of an item may meet the reasonable cause requirement. Neonatology Assocs., 115 T.C. at 98.  For the reliance to be reasonable, a taxpayer must prove:  (1) the adviser was a competent professional who had sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser’s judgment.  at 99.
• Unconditional reliance on a tax return preparer or CPA does not by itself constitute reasonable reliance in good faith; taxpayers must also exercise “diligence and prudence.” Stough v. Comm’r, 144 T.C. 306, 323 (2015).  “Even if all data is furnished to the preparer, the taxpayer still has a duty to read the return and make sure all income items are included.” Magill v. Comm’r, 70 T.C. 465, 479-80 (1978), aff’d, 651 F.2d 1233 (6^th 1981).  “Reliance on a preparer with complete information regarding a taxpayer’s business activities does not constitute reasonable cause if the taxpayer’s cursory review of the return would have revealed errors.”  Stough v. Comm’r, 144 T.C. at 323.

Tax Litigation Insight:  Another Section 6751(b) case!  The Walton decision shows how important it is to respond to IRS notices in a timely manner, if possible.  If the IRS issues a computer-generated notice asserting penalties, and the taxpayer fails to respond, the taxpayer essentially waives the Section 6751(b) defense.

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