Opinion
13013-20
06-24-2024
DESOTO HOLDINGS LLC, DESOTO INVESTORS LLC, TAX MATTERS PARTNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth Crewson Paris Judge
This case involves a charitable contribution deduction that Desoto Holdings, LLC (Desoto) claimed for its 2016 donation of a conservation easement under section 170. The Internal Revenue Service (IRS) issued a notice of final partnership administrative adjustment (FPAA) disallowing the deduction and determining penalties. This Order addresses respondent's Motion for Partial Summary Judgment, filed April 26, 2023, docket entry 35. Respondent asserts that the IRS complied with the supervisory approval requirements of section 6751(b) with respect to the asserted penalties. The Court agrees and will grant respondent's Motion.
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.
On November 9, 2020, docket entry 1, petitioner filed a Petition for Readjustment of Partnership Items as set forth in the FPAA issued August 7, 2020. The FPAA asserted accuracy-related penalties for gross valuation misstatement under section 6662(a) and (h) and, in the alternative, substantial valuation misstatement under section 6662(a), (b)(3), and (e), reportable transaction understatement under section 6662A, substantial understatement of income tax under section 6662(a), (b)(2), and (d), and negligence or disregard of rules or regulations under section 6662(a), (b)(1), and (c).
On March 3, 2023, docket entries 30 and 31, the parties filed a First Stipulation of Facts consisting of paragraphs 1 through 42 and Exhibits 1-J through 24-J.
On April 26, 2023, docket entry 35, respondent filed a Motion for Partial Summary Judgment on the grounds that respondent complied with the supervisory approval requirement of section 6751(b)(1) as it applies to: (1) the gross valuation misstatement penalty under section 6662(a) and (h); (2) the reportable transaction understatement penalty under section 6662A, (3) the negligence penalty under section 6662(a), (b)(1), and (c); (4) the substantial understatement penalty under section 6662(a), (b)(2), and (d); and (5) the substantial valuation misstatement penalty under section 6662(a), (b)(3), and (e). Also on April 26, 2023, docket entry 36, respondent filed a Declaration of John B. Siegmund in Support of Motion for Partial Summary Judgment (with supporting Exhibit A).
On July 10, 2023, docket entry 41, petitioner filed an Objection to Respondent's Motion for Partial Summary Judgment (with supporting Exhibits 1 through 10). On March 22, 2024, respondent filed a Reply to Petitioner's Objection to Respondent's Motion for Partial Summary Judgment, docket entry 80, and Supplemental Declaration of John B. Siegmund, docket entry 81 (with supporting Exhibits A through K). On April 29, 2024, docket entry 93, petitioner responded with a Sur-Reply to Respondent's Reply to Petitioner's Objection to Respondent's Motion for Partial Summary Judgment (with supporting Exhibits A through D).
Subsequently, with leave of the Court, on May 28, 2024, docket entry 103, respondent filed a Response to Petitioner's Sur-Reply to Respondent's Reply to Petitioner's Objection to Respondent's Motion for Partial Summary Judgment (with supporting Exhibits A through E), and on May 28, 2024, docket entry 104, petitioner filed a Response to Respondent's Response to Petitioner's Sur-Reply to Reply to Objection to Motion for Partial Summary Judgment.
Background
The following facts are drawn from the parties' pleadings, motion papers, declarations, stipulations, and exhibits 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), aff'd, 17 F.3d 965 (7th Cir. 1994).
Desoto Holdings, LLC, is an Alabama limited liability company, which had an address in Birmingham, Alabama, when it filed its Petition. Its principal place of business during its tax year ending December 31, 2016, was Birmingham, Alabama.Desoto was classified as a partnership for federal income tax purposes subject to TEFRA for tax year 2016. Desoto Investors, LLC, is Desoto's tax matters partner.
Section 7482(b)(1)(E) provides that appellate venue in this case is the circuit in which the partnership's principal place of business is located as of the time the Petition is filed with this Court. For purposes of this Order, the Court assumes without deciding that an appeal in this case would lie in the U.S. Court of Appeals for the Eleventh Circuit. Therefore, the Court will follow that court's precedent. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71 (repealed by the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101(a), 129 Stat. 584, 625).
On September 7, 2017, Desoto timely filed its Form 1065, U.S. Return of Partnership Income, for the taxable year ending December 31, 2016, reporting a $25,341,000 deduction for the grant of a conservation easement on approximately 146.63 acres of real property in Shelby County, Alabama.
The IRS selected petitioner's 2016 return for examination and assigned Revenue Agent John Siegmund (RA Siegmund) as the examiner. In February 2020 RA Siegmund made the initial determination to assert the accuracy-related penalty for gross valuation misstatement under section 6662(a) and (h). In the alternative, RA Siegmund made the initial determination to assert the accuracy-related penalty for negligence under section 6662(a), (b)(1), and (c), or substantial valuation misstatement under section 6662(a), (b)(3), and (e). RA Siegmund's initial determination to assert penalties under section 6662(a), (b)(1) and (3), (c), (e), and (h) was set forth in a penalty lead sheet (February Penalty Lead Sheet). He provided a copy of the February Penalty Lead Sheet to his immediate supervisor, Supervisory Agent Lee Volkmann (SA Volkmann). SA Volkmann signed the February Penalty Lead Sheet on February 24, 2020.
In March 2020, RA Siegmund made the initial determination to assert two additional penalties in the alternative: the accuracy-related penalty for substantial understatement under section 6662(a), (b)(2), and (d), and the reportable transaction penalty under section 6662A. RA Siegmund's initial determination to assert these two additional penalties was set forth in a penalty lead sheet (March Penalty lead Sheet). The March Penalty Lead Sheet also confirmed and set forth RA Siegmund's determination to assert penalties under section 6662(a) and (h), and in the alternative, under section 6662(a), (b)(1) and (3), (c), and (e), as RA Siegmund initially determined in February 2020. RA Siegmund provided a copy of the March Penalty Lead Sheet to SA Volkmann, and SA Volkmann initialed it on March 9, 2020.
In June 2020, an updated penalty lead sheet (June Penalty Lead Sheet) was prepared on the IRS's latest version of the penalty lead sheet workpaper titled "Penalty Consideration." The June Penalty Lead Sheet set forth RA Siegmund's determination to assert the same penalties as set forth in the March Penalty Lead Sheet: the penalty for gross valuation misstatement under section 6662(a) and (h), and in the alternative, the penalties for negligence under section 6662(a), (b)(1), and (c), and substantial valuation misstatement under section 6662(a), (b)(3), and (e), as RA Siegmund initially determined in February 2020 and confirmed in March 2020; and also in the alternative, the penalty for substantial understatement under section 6662(a), (b)(2), and (d), and the reportable transaction penalty under section 6662A, as RA Siegmund initially determined in March 2020. RA Siegmund provided the June Penalty Lead Sheet to SA Volkmann, who digitally signed it on June 19, 2020. Respondent issued the FPAA to petitioner on August 7, 2020.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(a), the Court shall grant summary judgment when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. The Court may grant partial summary judgment if some but not all issues in a case can be disposed of summarily. Rule 121(a); Sundstrand Corp., 98 T.C. at 520. The moving party bears the burden of proving that no genuine dispute of fact exists. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party may not rest upon the allegations or denials in its pleadings but must set forth specific facts establishing that there is a genuine dispute of fact for trial. Rule 121(d); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant summary judgment, the Court views the facts and inferences drawn from them in the light most favorable to the nonmoving party (here petitioner). Sundstrand Corp., 98 T.C. at 520.
II. Analysis
Respondent avers that he has satisfied the requirements of section 6751(b)(1) with respect to penalties asserted for petitioner's tax year 2016 and that there is no genuine dispute of material fact on this issue.
Petitioner contends that respondent has not satisfied the requirements of section 6751(b)(1) because (1) the penalties in this case are the result of a categorical assertion in these types of cases, and therefore no determination was made in this case, (2) if an initial determination was made it is not clear who made that initial determination, (3) if RA Siegmund made the initial determination, then there is a question of why he requested approval from Benjamin Brantley, an IRS issue manager, if SA Volkmann was RA Siegmund's supervisor, and (4) if RA Siegmund made the initial determination, it is not clear when he made his initial determination.
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."The U.S. Court of Appeals for the Eleventh Circuit has held that if a supervisor approves the initial determination of a penalty before respondent assesses those penalties, then respondent has satisfied the requirements of section 6751(b)(1). Kroner v. Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022), rev'g in part T.C. Memo. 2020-73.
Although the Commissioner does not bear the 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 the IRS assesses the tax. Dorchester Farms Prop., LLC v. Commissioner, T.C. Memo. 2023-92, at *4. But the Eleventh Circuit left open the possibility that supervisory approval in some cases might need to be secured before the relevant supervisor loses the discretion to approve (or disapprove) a penalty. Id. (first citing Kroner, 48 F.4th at 1279 n.1; then comparing 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); and then comparing 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).
"During an IRS examination it is the duty of the examining agent to determine penalties, taking into account (among other things) the value of the property contributed and possible defenses the taxpayer may have." Cattail Holdings, LLC v. Commissioner, T.C. Memo. 2023-17, at *11; see also Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6. RA Siegmund has submitted a declaration under penalty of perjury that he was the examiner assigned to the Desoto audit, and that he made the initial determination to assert all penalties at issue in this case. Respondent has supplied a copy of the June Penalty Lead Sheet that lists all of the penalties at issue. RA Siegmund's name appears in the supervisory approval block as the person who made the initial determination. Petitioner does not dispute that RA Siegmund was the examiner assigned to the Desoto audit. Thus, RA Siegmund made the initial determination to assert penalties in this case.
This Court has previously held that a revenue agent's immediate supervisor is "the person who supervises the agent's substantive work on an examination." Long Branch Land, LLC v. Commissioner, T.C. Memo. 2022-2, at *6 (citing Sand Inv. Co., LLC v. Commissioner, 157 T.C. 136, 142 (2021)). Respondent provided a copy of the June Penalty Lead Sheet, which SA Volkmann digitally signed as "the immediate supervisor . . . of John Siegmund" in the box captioned "Supervisory Approval of Penalty." RA Siegmund has supplied a declaration confirming that SA Volkmann supervised him during the Desoto examination. The Court concludes that SA Volkmann was RA Siegmund's "immediate supervisor" within the meaning of section 6751(b)(1). See Cattail Holdings, LLC, T.C. Memo. 2023-17, at *8 (citing Sand Inv. Co., 157 T.C. at 142); see also Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *9.
All of the penalties whether primary or in the alternative were approved in writing by SA Volkmann by June 19, 2020, at the very latest. SA Volkmann also approved the penalties at earlier dates. First, RA Siegmund determined, and SA Volkmann approved, the following penalties not later than February 24, 2020: (1) negligence or disregard under section 6662(a), (b)(1) and (c); (2) substantial valuation misstatement under section 6662(a), (b)(3), and (e), and gross valuation misstatement under section 6662(a) and (h). Then, RA Siegmund determined, and SA Volkmann approved, the following penalties not later than March 9, 2020: (1) negligence or disregard under section 6662(a), (b)(1), and (c), (2) substantial understatement under section 6662(a), (b)(2), and (d), (3) substantial valuation misstatement under section 6662(a), (b)(3), and (e), (4) gross valuation misstatement under section 6662(a) and (h); and reportable transaction penalty under section 6662A.
SA Volkmann approved in writing RA Siegmund's determination of penalties under sections 6662(a), (b)(1), and (c); 6662(a), (b)(3), and (e); and 6662(a) and (h) three times before respondent issued the FPAA to petitioner: on February 24, 2020, March 9, 2020, and June 19, 2020. Similarly, SA Volkmann approved in writing RA Siegmund's determination of penalties under sections 6662(a), (b)(2), and (d) and 6662A twice before respondent issued the FPAA to petitioner: on March 9, 2020, and June 19, 2020.
This Court has repeatedly held that the immediate supervisor's signature on a penalty approval form (or similar document), without more, satisfies the statutory requirement of section 6751(b)(1). See, e.g., Salacoa Stone Quarry v. Commissioner, T.C. Memo. 2023-68, at *6; Nassau River Stone, LLC, T.C. Memo. 2023-36, at *11; Sparta Pink Prop. v. Commissioner, T.C. Memo. 2022-88, at *8; Belair Woods v. Commissioner, 154 T.C. 1, 17 (2020). And this Court has "regularly decided section 6751(b)(1) questions on summary judgment on the basis of IRS forms and records." Salacoa Stone Quarry, LLC, T.C. memo. 2023-68, at *6 (first citing Sand Inv. Co., 157 T.C. at 142; then Long Branch Land, LLC, T.C. Memo. 2022-2; and then Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125). Further, the statute does not require that all potential penalties be initially determined at the same time. Excelsior Aggregates, LLC, T.C. Memo. 2021-125, at 14* (citing Palmolive Building Investors, LLC v. Commissioner, 152 T.C. 75, 84 (2019)). As of February 24, 2020, March 9, 2020, and June 19, 2020, the dates on which SA Volkmann provided written approval for the penalties at issue in this case, the IRS examination remained at a stage where he had the discretion to approve or disapprove RA Siegmund's penalty determinations.
Therefore, under a reading of Kroner most favorable to the petitioner, respondent has satisfied the statutory requirement of section 6751(b)(1). See Kroner v. Commissioner, 48 F.4th at 1279 n.1.
Petitioner advances several arguments in its assertion that respondent did not comply with the requirements of section 6751(b), or at the very least, that there are material facts in dispute. While not necessary, the Court will analyze each argument in turn.
First petitioner argues that no determination was made because "the IRS has been disallowing essentially all charitable deductions tied to conservation easement donations and imposing the exact same penalties in each case." Therefore, petitioner asserts, an IRS employee other than the revenue agent in each case is making the penalty determinations in conservation easement cases.
This Court has previously rejected the argument that penalties recommended by examining agents were in substance determined by another IRS employee. See Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *5 (rejecting the taxpayer's assertion that the revenue agent did not initially determine the penalties but rather "recommended the 'categorical assertion of penalties based on the type of transaction' rather than undertaking a 'substantive determination' that penalties were appropriate in a particular case"); see also Cattail Holdings, LLC, T.C. Memo. 2023-17, at *9-10; Pickens Decorative Stone, LLC v. Commissioner, T.C. Memo. 2022-22, at *6-7. The "initial determination" of a penalty is a formal action by the Examination Division directed at a particular taxpayer. Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6 (first citing Frost v. Commissioner, 154 T.C. 23, 32 (2020), and then Belair Woods, LLC, 154 T.C. at 15). As discussed above, RA Siegmund made the "initial determination" to assert the penalties at issue in this case.
Second, petitioner argues that if an initial determination was made, then it is unclear who made the determination. Referencing emails between various IRS employees, including RA Siegmund, SA Volkmann, Mr. Brantley, and Tax Computation Specialist Angela Joseph, petitioner argues that whether RA Siegmund made the initial determination to assert penalties is a dispute of material fact. Petitioner infers that because various IRS managers and chief counsel employees reviewed RA Siegmund's work, and assisted him with developing the case and determining whether penalties were appropriate, the initial determination was made by some other IRS employee rather than by RA Siegmund. In particular, petitioner suggests that the initial determination was made by Mr. Brantley, an issue manager.
The Court has previously rejected similar arguments suggesting that penalties in fact recommended by an examining agent were in substance determined by another IRS employee. See Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6. "The word 'determination' has 'an established meaning in the tax context' and denotes an action 'with a high degree of concreteness and formality.'" Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6 (citing Nassau River Stone, LLC, T.C. Memo. 2023-36, at *6 (quoting Belair Woods, 154 T.C. at 15)). Further, as previously discussed, during an examination it is the examining agent's duty to determine penalties. Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6 (citing Cattail Holdings, LLC, T.C. Memo. 2023-17, at *11).
In Dorchester Farms Prop., LLC, the Court "accept[ed] arguendo . . . that [the revenue agent in that case] may have consulted with other IRS officers in connection with the recommendations he set forth on the penalty approval form." T.C. Memo. 2023-92, at *6. However, "an 'initial determination' signifies a 'consequential moment' of IRS action." Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6 (first citing Belair Woods, 154 T.C. at 15; and then quoting Chai v. Commissioner, 851 F.3d at 221); see also Kroner, 48 F.4th at 1278 (explaining that "the IRS makes a 'determination of such assessment' when it concludes that it has the authority and duty to assess penalties and resolves to do so"). "Preliminary discussion among IRS officials as to whether a penalty is appropriate does not constitute the 'initial determination of [a penalty] assessment' within the meaning of section 6751(b)(1)." Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6 (first citing Nassau River Stone, T.C. Memo. 2023-26, at *6-7; and then Belair Woods, 154 T.C. at 9).
The February Penalty Lead Sheet, the March Penalty Lead Sheet, the June Penalty Lead Sheet, and the supporting declaration of RA Siegmund establish that RA Siegmund, the agent assigned to the examination, made the "initial determination" to assert the penalties. RA Siegmund was the examiner for the Desoto audit, and his initial determination to assert penalties was set forth on those penalty lead sheets. He submitted the lead sheets to his immediate supervisor for approval. At that point, RA Siegmund had "conclude[d] that the IRS had the authority and duty to assess penalties and resolved to do so."
Additionally, petitioner argues that metadata indicates that someone other than RA Siegmund created the "penalty lead sheet purportedly signed by Mr. Volkmann." Petitioner misapprehends what the statute requires. The statute does not require the individual making the determination to create a document. The statute requires that the initial determination be approved in writing by the supervisor of the individual making the determination. It is the duty of the revenue agent to determine penalties. Dorchester Farms Prop., LLC, T.C. Memo. 2023-92, at *6. The penalties RA Siegmund determined were set forth on penalty lead sheets and submitted to his immediate supervisor for written approval. His immediate supervisor, SA Volkmann then approved those initial determinations in writing by signing the penalty lead sheets. RA Siegmund has submitted a declaration under penalty of perjury that he conducted the examination of Desoto for tax year ending December 31, 2016, he made the "initial determination" to assert penalties, and his initial determinations were set forth on the penalty lead sheets, all of which respondent has provided. It does not matter whether RA Siegmund created and drafted the penalty lead sheets himself, or someone else created or drafted them. As the revenue agent assigned to the examination, it was his duty to determine penalties. He has submitted declarations under penalty of perjury affirming that he did so.
There are three penalty lead sheets in this case: the February Penalty Lead Sheet, the March Penalty Lead Sheet, and the June Penalty Lead Sheet. Petitioner does not clarify which penalty lead sheet might have been created by someone other than RA Siegmund. Because the Court finds that this fact is not material to the disposition of this Motion, the Court does not further address the question of which penalty lead sheet may have been created by someone other than RA Siegmund.
Third, petitioner questions why RA Siegmund was seeking Mr. Brantley's written approval if SA Volkmann was in fact RA Siegmund's immediate supervisor at all times during the examination. As this court has said before: "The written supervisory approval requirement . . . requires just that: written supervisory approval." Salacoa Stone Quarry, LLC, T.C. Memo. 2023-68, at *5 (citing Pickens Decorative Stone, LLC, T.C. Memo. 2022-22, at *7). As discussed above, RA Siegmund obtained the written approval of SA Volkmann, his immediate supervisor. The fact that RA Siegmund also requested the approval of Mr. Brantley in addition to his immediate supervisor's approval is inapposite to the disposition of this Motion. Any suggestion that Mr. Brantley, rather than SA Volkmann, was RA Siegmund's supervisor is speculation.
Finally, Petitioner argues that if RA Siegmund did indeed make the initial determination, respondent has failed to establish when RA Siegmund made his initial determination. The Court disagrees. The "initial determination" of a penalty assessment is not a tentative proposal or hypothesis, but a "consequential moment of IRS action. Belair Woods, LLC, 154 T.C. at 9 (citing Chai v. Commissioner, 851 F.3d at 220-21). In a deficiency context, the "initial determination" for section 6751(b)(1) is made when the IRS has made "an unequivocal decision to assert penalties." Belair Woods, LLC, 154 T.C. at 15; see also Kroner, 48 F.4th at 1278 (explaining that "the IRS makes a 'determination of such assessment' when it concludes that it has the authority and duty to assess penalties and resolves to do so").
RA Siegmund set forth his "initial determination" to assert penalties under section 6662(a), (b)(1) and (3), (c), (e), and (h) in the February Penalty Lead Sheet, and his "initial determination" to assert penalties under sections 6662(a), (b)(2), and (d), and 6662A in the March Penalty Lead Sheet. He confirmed his penalty determinations as set forth in the June Penalty Lead Sheet. At the very latest, RA Siegmund made his "initial determination" on June 19, 2020, the same date SA Volkmann signed the June Penalty Lead Sheet. Because the facts show that RA Siegmund made his "initial determination" and SA Volkmann approved that initial determination in writing before the IRS issued the FPAA on August 7, 2020, the exact date and time that RA Siegmund made his initial determination is not a fact material to the disposition of this Motion.
Petitioner has not shown that there remains a genuine dispute of material fact regarding whether the IRS complied with section 6751(b). Therefore, the Court concludes that summary judgment is appropriate and will grant respondent's Motion.
The Court has considered all the arguments made by the parties, and to the extent they are not addressed herein they are considered unnecessary, moot, irrelevant, or otherwise without merit.
After due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed April 26, 2023, docket entry 35, is granted, in that the IRS complied with the supervisory approval requirements of section 6751(b), with respect to both the primary asserted penalties and to penalties asserted in the alterative.