Opinion
12581-20
07-25-2023
RIPLEY PROPERTY, LLC, RIPLEY MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
ALBERT G. LAUBER JUDGE.
This case involves a charitable contribution deduction claimed by Ripley Property, LLC (Ripley), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued petitioner a notice of final partnership administrative adjustment (FPAA) disallowing Ripley's deduction and determining penalties.
On April 26, 2023, we consolidated this case with the cases at docket numbers 6441-20, 11598-20, and 11780-20 for purposes of trial, briefing and opinion. On May 2, 2023, respondent filed a Motion for Partial Summary Judgment in the four consolidated cases, contending that the IRS complied with the requirements of section 6751(b)(1) by securing timely supervisory approval of the penalties determined in each FPAA. On July 24, 2023, the Court filed a Memorandum Opinion granting respondent's Motion for Partial Summary Judgment in docket number 6441-20. See Dorchester Farms Prop., LLC v. Commissioner, T.C. Memo. 2023-92. For substantially the same reasons, we will grant respondent's Motion in the instant case.
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.
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 this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd, 17 F.3d 965 (7th Cir. 1994).
Ripley is a limited liability company (LLC) organized in April 2016. It is treated as a TEFRA partnership for Federal income tax purposes, and its tax matters partner is petitioner Ripley Manager, LLC, likewise a Georgia entity. Ripley had its principal place of business in Georgia when the Petition was timely filed. Absent stipulation to the contrary, appeal of this case would lie to the U.S. Court of Appeals for the Eleventh Circuit. See § 7482(b)(1)(E).
Before its repeal, TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71, governed the tax treatment and audit process for many partnerships, including Ripley.
In December 2016 Ripley donated to the Southern Conservation Trust a conservation easement over a 469-acre tract in Liberty County, Georgia. Ripley timely filed Form 1065, U.S. Return of Partnership Income, for its 2016 tax year. On that return it claimed a charitable contribution deduction of $16,602,062 for its donation of the easement.
The IRS selected Ripley's 2016 return for examination and assigned the case to Revenue Agent (RA) Leopoldo Garcia. In October 2019, as the examination neared completion, RA Garcia recommended assertion against Ripley of the 40% penalty for a gross valuation misstatement. See § 6662(h). In the alternative, he recommended assertion of a 20% penalty for a substantial valuation misstatement, a reportable transactions understatement, negligence, and/or a substantial understatement of income tax. See §§ 6662(b)(1)-(3), (c)-(e), 6662A(b).
RA Garcia's recommendations to this effect were set forth in a civil penalty approval form, a copy of which is included with respondent's Motion. RA Garcia is listed as the "Examiner" at the top of this form. His group manager, Margaret McCarter, digitally signed the penalty approval form on October 8, 2019. She verified that she was RA Garcia's "group manager" and that she "approve[d] the penalties identified" in that form.
On October 23, 2019, RA Garcia mailed petitioner a packet of documents, including a Letter 1807 and an attached Form 4605-A, Examination Changes, which set forth his proposed adjustments and penalty recommendations. This packet of documents constituted the first formal communication to petitioner that the IRS intended to assert the penalties discussed above, as recommended by RA Garcia and approved by Ms. McCarter. Nine months later, on July 23, 2020, the IRS issued petitioner an FPAA, including a Form 866-A, Explanation of Items, disallowing the $16,602,062 deduction Ripley claimed for the conservation easement and determining the aforementioned penalties. Petitioner timely petitioned this Court for readjustment of partnership items.
Discussion
I. Summary Judgment Standard
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 partial summary judgment regarding an issue as to which there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. See Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant summary judgment, 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. Where the moving party makes and properly supports a motion for summary judgment, "the nonmovant may not rest on the allegations or denials in that party's pleading" but must set forth specific facts, by affidavit or otherwise, showing that there is a genuine dispute for trial. Rule 121(d).
II. Analysis
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."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. Absent stipulation to the contrary, this case is appealable to the Eleventh Circuit, and we thus follow its precedent. See Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Although the Commissioner does not bear a burden of production with respect to penalties in a partnership-level proceeding, a partnership may raise section 6751(b) as an affirmative defense. See Dynamo Holdings Ltd. P'ship v. Commissioner, 150 T.C. 224, 236-37 (2018).
Under a literal application of the standard enunciated in Kroner, supervisory approval could seemingly be secured at any moment before actual assessment of the tax. 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 Kroner v. Commissioner, 48 F.4th at 1279 n.1; cf. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022) (treating supervisory approval as timely if secured before the penalty is assessed or "before the relevant supervisor loses discretion whether to approve the penalty assessment"), rev'g and remanding 154 T.C. 68 (2020); Chai v. Commissioner, 851 F.3d 190, 220 (2d Cir. 2017) (concluding that supervisory approval must be obtained at a time when "the supervisor has the discretion to give or withhold it"), aff'g in part, rev'g in part T.C. Memo. 2015-42.
Respondent has supplied a copy of the civil penalty approval form that lists all of the penalties at issue. RA Garcia was the examiner who recommended assertion of these penalties. His name appears as the "Examiner" at the top of the form, and his case activity record-a redacted version of which is included with respondent's Motion-shows that he was the lead "examiner" for the Ripley examination.
RA Garcia's case activity record, attached as Exhibit C to the Declaration accompanying respondent's Motion, redacts eleven lines of the document on pages 1 and 2 relating to entries made before March 1, 2019, and two lines on page 3 relating to an October 17, 2019, entry. Petitioner complains that it has "no way of knowing what information is redacted." But the Declaration, which was filed under penalties of perjury, avers that the information thus redacted was protected by the attorney-client privilege or was taxpayer privacy information protected from disclosure by section 6103. We find that these redactions were properly made in accordance with Rule 27, and they do not affect our disposition of the issue at hand.
Ms. McCarter digitally signed the penalty approval form as RA Garcia's "group manager" in the box captioned "Name and Title of Approver." We accordingly conclude that she was RA Garcia's "immediate supervisor" within the meaning of section 6751(b)(1). See Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021); see also Dorchester Farms Prop., T.C. Memo. 2023-92 at *4-5 (holding that Ms. McCarter's signature as "group manager" on a penalty approval form satisfied the statutory requirements); Salacoa Stone Quarry, LLC v. Commissioner, T.C. Memo. 2023-68, at *6 (holding that Ms. McCarter's signature as "team manager" on a penalty approval form satisfied the statutory requirements); Sparta Pink Prop., LLC v. Commissioner, T.C. Memo. 2022-88, 124 T.C.M. (CCH) 121, 124 (holding that Ms. McCarter's signature as "group manager" on a penalty approval form satisfied the statutory requirements).
All of the penalties at issue were approved by Ms. McCarter on October 8, 2019. The Letter 1807 and the Form 4605-A were mailed to petitioner on October 23, 2019, and the FPAA was issued on July 23, 2020. As of October 8, 2019, therefore, the IRS examination remained at a stage where Ms. McCarter had discretion to approve or disapprove the penalty recommendations. See Kroner v. Commissioner, 48 F.4th at 1279 n.1. Therefore, under a reading of Kroner most favorable to petitioner, the IRS complied with the requirements of section 6751(b)(1).
Petitioner advances essentially three arguments in support of a contrary conclusion. First, it surmises that RA Garcia recommended the "categorical assertion of penalties based on the type of transaction" rather than undertaking "a substantive determination" that penalties were appropriate in this particular case. Second, petitioner speculates that it was not RA Garcia, but "the IRS Office of Chief Counsel or [someone] at another level of [r]espondent" who made the "initial determination" to assert the penalties in question. Third, petitioner urges that summary judgment is inappropriate because "[r]espondent did not make any effort to authenticate" the documents discussed above, including the civil penalty approval form and the redacted copy of RA Garcia's case activity record.
We rejected each of these arguments in Dorchester Farms Property, LLC, which involved facts substantially identical to those here. See T.C. Memo. 2023-92, at *5 (finding immaterial petitioner's allegation that RA Garcia gave insufficient consideration to the matters before him); id. at *6 (finding that petitioner's speculation that RA Garcia, the lead examiner for the audit, did not make the "initial determination" to assert the penalties "is not enough to establish a genuine dispute of material fact"); id. at *7 (noting that we have "regularly decided section 6751(b)(1) questions on summary judgment on the basis of IRS forms and records, confirmed by declarations supplied by IRS officers"). For the same reasons we reject the arguments petitioner advances here.
It is accordingly
ORDERED that respondent's Motion for Partial Summary Judgment, filed May 2, 2023, in the above-docketed case, is granted.