As tax professionals, we understand the critical procedural requirement of I.R.C. § 6751(b)(1) regarding supervisory approval of penalties. The recent Tax Court opinion in Computer Sciences Corporation v. Commissioner, 165 T.C. No. 8 (Oct. 6, 2025) provides essential guidance on the procedural depth required for this approval, specifically addressing arguments that the Administrative Procedure Act (APA) mandates "reasoned decision making" beyond a timely written signature.

Factual Background of the Case

Computer Sciences Corporation (CSC or petitioner) is a U.S. corporation engaged in the information technology business. During its fiscal year ending March 29, 2013 (FY2013), CSC sold its credit services business, realizing a large capital gain. To offset this gain, CSC engaged in a structured financing transaction known as “Project Trinity”.

Project Trinity involved CSC contributing stock of a subsidiary, which had a large built-in loss, to another wholly owned subsidiary in exchange for three classes of securities: “senior participating preferred stock,” “junior preferred stock,” and a senior note. Applying section 358(b), CSC allocated the bulk of its basis in the contributed stock to the senior preferred stock. CSC then sold the senior preferred stock and the senior note for cash, allegedly recognizing a long-term capital loss of $651,200,000.

CSC timely filed Form 1120 for FY2013, reporting the loss. Crucially, CSC attached a Form 8886, Reportable Transaction Disclosure Statement, claiming it disclosed all relevant facts related to Project Trinity.

Upon examination, the IRS (respondent) proposed disallowing the capital loss deduction, leading to a determined deficiency of $276,535,161. The IRS also recommended the assertion of a 20% accuracy-related penalty for an underpayment due to a substantial understatement of income tax, pursuant to I.R.C. § 6662(a), (b)(2), (d)(1)(B).

Revenue Agent (RA) Steven Herrera made the “initial determination” to assert the penalty. His immediate supervisor, Supervisory RA Richard Guastello, approved the initial determination. The IRS first formally communicated its intention to assert the penalty on May 15, 2017, when it mailed Letter 950 (the “30-day letter”), which was signed by Mr. Guastello. The final Notice of Deficiency, determining the deficiency and a $45,584,000 substantial understatement penalty, was issued nearly four years later, on February 16, 2021.

Taxpayer’s Request for Relief

CSC timely petitioned the Tax Court, filing a Cross-Motion for Partial Summary Judgment seeking a ruling that the penalty approval was invalid. CSC conceded that its immediate supervisor, Mr. Guastello, timely provided written approval by signing four distinct documents over two months.

However, CSC argued that the supervisory approval must be set aside as “arbitrary, capricious, [or] an abuse of discretion” under the Administrative Procedure Act (APA), specifically 5 U.S.C. § 706(2)(A). CSC contended that the supervisor failed to engage in “reasoned decision making” because he did not consider whether the taxpayer had a “reasonable basis” defense to the penalty, predicated on the adequate disclosure made on Form 8886 (citing I.R.C. § 6662(d)(2)(B)(ii)).

CSC highlighted the “Substantial Understatement Penalty” worksheet that Mr. Guastello signed on April 1, 2017, as evidence of inadequate review. Because RA Herrera correctly answered “No” to Step 6, which asked whether Form 8275 or Form 8275–R was attached to the return, the worksheet directed the RA to skip Step 7, which concerned the reasonable basis defense, and "[g]o to step 8". CSC asserted that this structure failed to evaluate or even consider the disclosure made on Form 8886.

Court’s Analysis of Law

The Tax Court first confirmed the procedural requirements of I.R.C. § 6751(b)(1) and established four independent reasons for rejecting CSC’s argument that the APA applied to the supervisory approval process.

Requirements of I.R.C. § 6751(b)(1)

Section 6751(b)(1) states that no penalty shall be assessed unless the initial determination is “personally approved (in writing) by the immediate supervisor of the individual making such determination”.

The court noted that the "initial determination" is typically embodied in a formal communication, such as the 30-day letter, notifying the taxpayer of the definite decision to assert penalties (Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14–15 (2020)). Approval may be recorded on any document, including the 30-day letter (Tribune Media Co. v. Commissioner, T.C. Memo. 2020-2, 119 T.C.M. (CCH) 1006, 1010–11).

The court adopted the consensus view of several appellate courts regarding timing: supervisory approval is timely if secured "before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment". (Citing Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020); Swift v. Commissioner, 144 F.4th 756 (5th Cir. 2025); Chai v. Commissioner, 851 F.3d 190, 220 (2d Cir. 2017); and Kroner v. Commissioner, 48 F.4th 1272, 1278, 1279 n.1 (11th Cir. 2022)).

The Tax Court explicitly rejected CSC’s assertion that the signatures alone were insufficient, reiterating its consistent refusal "to read into section 6751(b)(1) the subtextual requirement that respondent demonstrate the depth or comprehensiveness of the supervisor’s review". (Citing Belair Woods, 154 T.C. at 17, quoting Raifman v. Commissioner, T.C. Memo. 2018-101, 116 T.C.M. (CCH) 13, 28). The requirement is simply "written supervisory approval" (Pickens Decorative Stone, LLC v. Commissioner, T.C. Memo. 2022-22, 123 T.C.M. (CCH) 1127, 1130).

Inapplicability of APA to Deficiency Proceedings

The court first held that the APA judicial review provisions do not apply to the review of the Commissioner’s compliance with Section 6751(b)(1) in deficiency cases, which are conducted under I.R.C. §§ 6213 and 6214(a). Judicial review procedures under the Code govern deficiency proceedings, not the APA (QinetiQ US Holdings, Inc. & Subs. v. Commissioner, 845 F.3d 555, 560 (4th Cir. 2017); O’Dwyer v. Commissioner, 266 F.2d 575, 580 (4th Cir. 1959)). Reviewing compliance with Section 6751(b)(1) is necessary for the court to redetermine penalties, and is therefore part of the deficiency case, not "separate from the deficiency proceeding" (Graev v. Commissioner (Graev III), 149 T.C. 485, 493 (2017)).

Supervisory Approval is Not "Final Agency Action"

Second, the court held that a supervisor’s approval of a penalty recommendation does not constitute “final agency action” reviewable under 5 U.S.C. § 704. Agency action is final if it marks the “consummation” of the decisionmaking process and if “rights or obligations have been determined” (Bennett v. Spear, 520 U.S. 154, 177–78 (1997)).

Supervisory approval failed both conditions. It is merely an interlocutory step; the “consummation of the agency’s decisionmaking process” regarding the penalty is reflected in the Notice of Deficiency, issued later by Appeals. Furthermore, approval does not determine any obligations. Had approval been withheld, the IRS could still assert the penalty later, potentially through Chief Counsel in the Answer, provided new supervisory approval was secured (Chai v. Commissioner, 851 F.3d 190, 220–21 (2d Cir. 2017)). Therefore, the approval did not have the “legal consequence[]” necessary for final agency action (Bennett, 520 U.S. at 178).

Availability of Adequate Remedy

Third, the court found that even if the approval were deemed "final agency action," APA review is disallowed under 5 U.S.C. § 704 if there is an “adequate remedy in a court”. The Tax Court’s current review of the IRS’s compliance with Section 6751(b)(1) in the deficiency proceeding affords CSC an adequate judicial remedy for the noncompliance it alleges.

Reasoned Decision Making (Analysis Arguendo)

Finally, assuming arguendo that the APA’s requirement of "reasoned decision making" applied, the court found that Mr. Guastello had satisfied this standard. Review would be based on the administrative record (Kasper v. Commissioner, 150 T.C. 8, 14–15 (2018)).

CSC’s argument centered on the worksheet directing the supervisor to skip the "reasonable basis" defense (Step 7) because CSC failed to use Form 8275 or Form 8275–R. The court pointed out that this instruction was dictated by Treasury Regulation § 1.6662-4(f)(1), which specifies that disclosure sufficient for the reasonable basis defense “must be made” on Form 8275 or Form 8275–R.

The supervisor, Mr. Guastello, was not required to pass judgment on the validity of Treasury Regulation § 1.6662-4(f)(1). IRS officers do not abuse their discretion by following Treasury Regulations. Furthermore, the examination file showed that Mr. Guastello had met with CSC representatives multiple times to discuss penalty defenses, including CSC’s argument that they had “flagged [the] issues” on Form 8886, indicating he did consider the availability of the defense.

Conclusion of the Court

The Tax Court concluded that the Commissioner had demonstrated compliance with I.R.C. § 6751(b)(1).

The court’s ultimate holdings were:

The IRS satisfied the requirements of I.R.C. § 6751(b)(1) because the 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 CSC.
The APA provisions cited by CSC do not apply to determinations made by the Tax Court in the exercise of its deficiency jurisdiction under I.R.C. §§ 6213 and 6214(a).
A supervisor’s approval of a penalty recommendation does not constitute “final agency action” subject to judicial review under 5 U.S.C. § 704.
Even if supervisory approval were deemed “final agency action,” it would not be subject to distinct judicial review under the APA because the court’s review of I.R.C. § 6751(b)(1) compliance in the deficiency case affords CSC an “adequate remedy in a court” within the meaning of 5 U.S.C. § 704.
Assuming arguendo that the APA requirement of “reasoned decision making” applies, the administrative record demonstrates that the agent’s supervisor engaged in “reasoned decision making”.

Accordingly, the court granted the Commissioner’s Motion for Partial Summary Judgment and denied CSC’s Cross-Motion. The case was resolved in favor of the Commissioner on the penalty procedure issue.

Prepared with assistance from NotebookLM.