Opinion
12362-21
09-22-2023
BEAVERDAM CREEK HOLDINGS, LLC, BEAVERDAM CREEK INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda Judge
This case involves a charitable contribution deduction claimed by Beaverdam Creek Holdings, LLC, Beaverdam Creek Investors, LLC, Tax Matters Partner (Beaverdam) for a conservation easement in the amount of $22,007,000 for the taxable year 2017. The Internal Revenue Service (IRS) issued a notice of final partnership administrative adjustment (FPAA), which disallowed Beaverdam's deduction and determined penalties.
Before the Court is the Commissioner's motion for partial summary judgment contending that the IRS complied with the supervisory approval requirement of section 6751 by securing timely supervisory approval of the accuracy-related penalties determined in the FPAA. [Doc. 43.] Beaverdam opposes the Commissioner's motion on the ground that certain factual disputes and evidentiary barriers preclude summary adjudication. [Doc. 52.] We will grant the Commissioner's motion.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times and all Rule references are to the Tax Court Rules of Practice and Procedure. "Doc." references are to the documents in the record as compiled by the Clerk of this Court, using .pdf pagination.
Background
The following facts are derived from the parties' pleadings, motion papers, and declarations and exhibits attached thereto. They are stated solely for the purpose of deciding the motion before us and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Beaverdam is a Georgia-based limited liability company organized in June 2017. [Doc. 40 at 4.] It is treated as a TEFRA partnership for federal income tax purposes. [Id.]
Before its repeal, TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), Pub. L. No. 97248, §§ 401-407, 96 Stat. 324, 648-71, governed the tax treatment and audit process for many partnerships, including Beaverdam.
In November 2017, Beaverdam acquired approximately 85 acres of land in Oglethorpe County, Georgia. [Doc. 40 at 1056-60.] A month later, Beaverdam granted the Foothills Land Conservancy a conservation easement over the land. [Doc. 40 at 1520-64.] On its 2017 Form 1065, U.S. Return of Partnership Income, Beaverdam claimed a charitable contribution deduction of $22,007,000 for this donation. [Doc. 1 at 24.]
The IRS selected this return for examination, assigning the case to Revenue Agent (RA) Jeffrey Seay. [Doc. 45 at 2.] At the conclusion of his examination, RA Seay recommended assertion of the 40% penalty for gross valuation misstatement, see I.R.C. § 6662(h), or in the alternative, a 20% penalty for substantial valuation misstatement, reportable transaction understatement, negligence, or substantial understatement of income tax penalty, see I.R.C. § 6662(b)(1)-(3), (c)-(e), 6662A(b). [Doc. 45 at 6-8.]
At the time RA Seay made his recommendation to assert penalties on Beaverdam, Supervisory Revenue Agent (SRA) Sharon Pritchett was RA Seay's issue manager. [Doc. 56 at 3-4.] In her role as issue manager, SRA Pritchett "reviewed and approved technical documents on the case including, but not limited to, . . . penalty issues." [Id. at 3.]
An issue manager assumes a leadership role during the examination process and approves any penalties asserted by the examiner. See Internal Revenue Manual (IRM) 4.46.4.10.2 (Mar. 9, 2016).
On February 19, 2021, SRA Pritchett approved RA Seay's recommendation for the assessment of penalties. [Doc. 44 at 4.] SRA Pritchett digitally signed a penalty lead sheet, which included the statement: "I, Sharon Pritchett, am the immediate supervisor of Jeff L. Seay, who made the initial determination to assert the penalties indicated on this form for the year(s) indicated on this form. By my signature below, I approve that initial determination." [Docs. 45 at 7.]
On February 25, 2021, RA Seay issued to Beaverdam Creek Investors, LLC (as tax matters partner of Beaverdam) a Letter 1807-A, which enclosed a copy of the RA's summary report setting forth his proposed adjustments and penalty determinations. [Doc. 45 at 22, 26.]
Approximately one month later, on March 31, 2021, the IRS sent Beaverdam Creek Investors, LLC an FPAA reducing the deduction claimed for the conversation easement by $21,972,000 and determining the penalties discussed above. [Doc. 1 at 19-25.] Beaverdam timely petitioned this Court for readjustment of the partnership items.
Discussion I. Summary Judgment Standard
We may grant summary judgment (or partial summary judgment regarding an issue) if there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(a); see also Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). The moving party bears the burden of proving that there is no genuine issue of material fact, and we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. When a motion for summary judgment is made and properly supported, the adverse party may not rest upon mere allegations or denials of the pleadings but must set forth specific facts showing that there is a genuine issue for trial. Rule 121(d).
II. Evidentiary Objections
Before turning to the parties' substantive dispute, we briefly address Beaverdam's evidentiary objections to the declaration and exhibits the Commissioner introduced in support of his motion for partial summary judgment. Generally, a declaration supporting a summary judgment motion must be "made on personal knowledge," set forth "facts as would be admissible in evidence," and show the declarant is competent to testify on these matters. Rule 121(c)(4).
As an initial matter, Beaverdam argues that RA Seay's declaration and attached exhibits are inadmissible under the Federal Rules of Evidence because they are irrelevant. [Doc. 52.] RA Seay's declaration and exhibits are plainly relevant as they address the nature of the supervisory relationship between RA Seay and SRA Pritchett, the crux of the issue currently before us.
Beaverdam also raises a hearsay objection to RA Seay's declaration identifying SRA Pritchett as his immediate supervisor and the attached exhibits. We will overrule that objection as well; RA Seay had ample opportunity to learn who his supervisors were. Cf. Jones v. UPS Ground Freight, 683 F.3d 1283, 1293-94 (11th Cir. 2012) ("[Courts] may consider a hearsay statement in passing on a motion for summary judgment if the statement could be reduced to admissible evidence at trial or reduced to an admissible form." (quoting Macuba v. Deboer, 193 F.3d 1316, 1323 (11th Cir. 1999))).
Here, RA Seay (and SRA Pritchett) would be able to testify at trial as to the nature and scope of SRA Pritchett's supervision. That testimony would not be hearsay and would be admissible. RA Seay's declaration and exhibits thus may be used by the Commissioner to support his motion for partial summary judgment.
III. Supervisory Approval
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 individual making such determination." "[T]he 'initial determination' of a penalty assessment . . . is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties." Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020) (citation omitted); see also Belanger v. Commissioner, T.C. Memo. 2020-130, at *27-28; accord Clay v. Commissioner, 152 T.C. 223, 248-49 (2019). We have explicitly distinguished such "a communication with a high degree of concreteness and formality," Belair Woods, 154 T.C. at 15, from the "subjective" decision of the IRS officer that is ultimately embodied in the notice issued to the taxpayer, id. at 14.
Absent stipulation to the contrary, this case is appealable to the U.S. Court of Appeals for the Eleventh Circuit, and we follow its precedent. See Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). In Kroner v. Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022), rev'g in part T.C. Memo. 2020-73, the Eleventh Circuit held that "the IRS satisfies [s]ection 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before [the IRS] assesses those penalties." The court interpreted the phrase "initial determination of [the] assessment" to refer to the "ministerial" process by which the IRS formally records the tax debt. See id. at 1278. But the Eleventh Circuit left open the possibility that supervisory approval in some cases might need to be secured sooner, i.e., before the supervisor "has lost the discretion to disapprove" the penalty determination. See Id. at 1279 n.1. The Commissioner thus asserts in an abundance of caution that he has satisfied the requirements of section 6751 both with and without respect to the more generous time frame contemplated in Kroner.
In this case, RA Seay conducted the examination and recommended the assertion of penalties against Beaverdam, which were formally communicated by means of Letter 1807-A dated February 25, 2021. The parties ostensibly agree that this letter constituted the initial determination, but dispute whether written supervisory approval had been obtained before that communication. Specifically, Beaverdam argues that the record does not suffice to demonstrate that SRA Pritchett was in fact RA Seay's immediate supervisor at the time the Letter 1807-A was sent, drawing support from a case activity report suggesting that RA Seay had multiple supervisors.
The record establishes that SRA Pritchett was RA Seay's immediate supervisor at all times pertinent to the section 6751 inquiry. As an initial matter, SRA Pritchett digitally signed a penalty lead sheet, in which she identified herself as "the immediate supervisor of Jeff L. Seay, who made the initial determination to assert the penalties indicated on this form for the year(s) indicated on this form" and "approve[d] that initial determination." [Docs. 45 at 7 and 56 at 3-4.] "We have repeatedly held that a manager's signature on a penalty approval form, without more, is sufficient to satisfy the statutory requirements [of section 6751]." Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *11.
To remove any doubt on this point, the Commissioner also introduced supplemental declarations from SRA Pritchett and the other supervisory revenue agent (SRA Rachel Moore) referenced in RA Seay's case activity notes. These declarations establish that SRA Pritchett, not SRA Moore, was RA Seay's immediate supervisor and issue manager at the time that his initial penalty determinations received approval. [Docs. 55 and 56.]
These declarations, together with RA Seay's declaration, confirm SRA Pritchett's explicit statement on the penalty lead sheet that she was RA Seay's immediate supervisor at the time she approved the penalties. See e.g., Order, Elbow Creek Aggregates, LLC v. Commissioner, No. 14702-21 (T.C. Mar. 21, 2023) ("[a]ll three individuals ha[d] supplied Declarations confirming that Messrs. Vance and Shieldes supervised Ms. Giometti during the Elbow Creek assignment."); Order, Sunfish Cove, LLC v. Commissioner, No. 14163-21 (T.C. Mar. 23, 2023) ("RA Person and Mr. Glover ha[d] submitted Declarations . . . averring Mr. Grover was RA Person's immediate supervisor).
In light of the foregoing, it is
ORDERED that the Commissioner's motion for partial summary judgment [Doc. 43] filed June 7, 2023, is granted.