Opinion
14702-21
03-21-2023
ELBOW CREEK AGGREGATES, LLC, SCHULER INVESTMENTS, LLC, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This case involves a charitable contribution deduction claimed by Elbow Creek Aggregates, LLC (Elbow Creek), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued a notice of final partnership administrative adjustment (FPAA) disallowing Elbow Creek's deduction and determining penalties. On July 29, 2022, the case was assigned to the undersigned for trial or other disposition.
Currently before the Court is respondent's Motion for Partial Summary Judgment contending that the IRS complied with the requirements of section 6751(b)(1) by securing timely supervisory approval of the accuracy-related penalties determined in the FPAA and of the fraud penalty asserted in the Answer. We agree and will grant the Motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all 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), aff'd, 17 F.3d 965 (7th Cir. 1994).
Elbow Creek is a limited liability company (LLC) whose initial operating agreement is dated May 2016. It is treated as a partnership for Federal income tax purposes, and petitioner Schuler Investments, LLC, is a notice partner as defined in former section 6231(a)(8). Schuler Investments is a Georgia LLC, and its principal place of business was in Atlanta, Georgia, when the Petition was timely filed. Elbow Creek is a Florida LLC, the property on which the easement was placed is in Florida, and Elbow Creek had its principal place of business in Florida 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).
In April 2016, after a series of transactions between November 2015 and March 2016, Elbow Creek acquired roughly 111 acres of land in Polk County, Florida (Property). Elbow Creek's acquisition of the Property resulted mainly from a capital contribution from its sole member, Wahoo River, LLC (Wahoo). Wahoo then sold its interests in Elbow Creek to investors desirous of large tax deductions. On October 24, 2016, Elbow Creek granted the Atlantic Coast Conservancy, Inc. (ACC) an open-space conservation easement over the land. One week later, Elbow Creek donated a fee simple interest in the land to a passthrough entity wholly owned by ACC.
Elbow Creek 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 $40,800,000 for its donation of the easement. The IRS selected this return for examination.
The case was assigned to Revenue Agent (RA) John A. Martin, a member of Team 1257 in the IRS Large Business and International Division. At that time Loretta G. Mills was a Supervisory Revenue Agent for Team 1257 and was RA Martin's immediate supervisor. In March 2020 RA Martin neared completion of his examination and recommended assertion against Elbow Creek of the 40% penalty for gross valuation misstatement. See § 6662(h). In the alternative, he recommended assertion of a 20% penalty for substantial valuation misstatement, reportable transactions understatement, negligence, and/or substantial understatement of income tax. See §§ 6662(b)(1)-(3), (c)-(e), 6662A(b).
RA Martin's recommendations to this effect were set forth in two documents: Form 5701, Notice of Proposed Adjustment (NOPA), and Form 866-A, Explanation of Items. On March 24, 2020, Ms. Mills digitally signed the NOPA as "Supervisory Internal Revenue Agent Group 1257." RA Martin has submitted a Declaration under the penalty of perjury averring that "Ms. Mills was [his] immediate supervisor" and that these statements are true and accurate.
On April 9, 2020, RA Martin mailed petitioner a packet of documents, including Letter 1807 and attached Form 4549-A, Income Tax Discrepancy Adjustments, setting 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 Martin and approved by Ms. Mills.
On February 17, 2021, the IRS sent petitioner an FPAA, including Form 866-A, disallowing (among other things) the $40,800,000 deduction claimed for the conservation easement and determining the penalties discussed above. Petitioner timely petitioned this Court for readjustment of the partnership items.
Emily Giometti, Special Trial Attorney with the Office of Chief Counsel, was assigned to represent respondent in this case. While conducting her duties for the Office of Chief Counsel, she reviewed the administrative and legal files in preparation for submitting respondent's Answer. After reviewing the files and gathering further documentation, Ms. Giometti concluded that the 75% civil fraud penalty should also be asserted against Elbow Creek. See § 6663(a).
Ms. Giometti's recommendation to this effect was set forth in a penalty recommendation memorandum. Her immediate supervisors, Travis Vance, Strategic Litigation Counsel, and R. Scott Shieldes, Senior Level Strategic Litigation Counsel, digitally signed and dated this memorandum on November 9, 2021. Messrs. Vance and Shieldes thereby confirmed that they were Ms. Giometti's "immediate supervisor[s]" and that they approved Ms. Giometti's "initial penalty recommendation" to assert the fraud penalty. Ms. Giometti and Messrs. Vance and Shieldes have submitted Declarations under the penalty of perjury averring that all these statements are true and accurate.
On November 9, 2021, after receiving written approval from Messrs. Vance and Shieldes, Ms. Giometti filed respondent's Answer in this case, alleging the fraud penalty discussed above. Messrs. Shieldes and Vance again indicated their approval for asserting the fraud penalty by affixing their signatures below Ms. Giometti's on the Answer. The Answer constituted the first formal communication to petitioner that the IRS intended to assert the fraud penalty.
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 of material fact and a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant partial 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 properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such 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 U.S. Court of Appeals for 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).
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.
The penalties other than the fraud penalty were approved by Ms. Mills on March 24, 2020. Respondent has supplied a copy of the NOPA, which Ms. Mills digitally signed as "Supervisory Internal Revenue Agent" for Team 1257, of which RA Martin was a member. RA Martin has supplied a Declaration confirming that Ms. Mills supervised his work during the Elbow Creek examination. We accordingly conclude that Ms. Mills was RA Martin's "immediate supervisor" within the meaning of section 6751(b)(1). See Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021) (holding that the "immediate supervisor" is the person who supervises the agent's substantive work on an examination).
The fraud penalty was approved by Messrs. Vance and Shieldes on November 9, 2022. They digitally signed the penalty recommendation as Ms. Giometti's "immediate supervisor[s]" and they likewise signed the Answer. All three individuals have supplied Declarations confirming that Messrs. Vance and Shieldes supervised Ms. Giometti during the Elbow Creek assignment. We conclude that Messrs. Vance and Shieldes were Ms. Gill's immediate supervisors within the meaning of section 6751(b)(1). See Sand Inv. Co., 157 T.C. at 142.
The FPAA was issued on February 17, 2021, and the Answer was filed on November 9, 2021. As of March 24, 2020, and November 9, 2021, the dates on which Ms. Mills and Messrs. Vance and Shieldes supplied their respective approvals, the IRS examination remained at a stage where they had discretion to approve or disapprove the penalty recommendations. See Kroner v. Commissioner, 48 F.4th at 1279 n.1. Therefore, under the reading of Kroner most favorable to petitioner, the IRS complied with section 6751(b)(1) in this case because Ms. Mills and Messrs. Vance and Shieldes timely approved the relevant penalties and did so in writing.
Petitioner contends that summary judgment is inappropriate. It asserts that disputes of material fact exist as to: (1) whether Ms. Mills "possessed supervisory authority" over RA Martin; (2) whether Messrs. Vance and Shields "possessed supervisory authority" over Ms. Giometti; (3) whether Ms. Mills' electronic signature on the NOPA is what it purports to be; and (4) whether the respective supervisors conducted their supervisory review "employ[ing] the requisite depth and comprehensiveness."
We recently granted an IRS motion for partial summary judgment on the "penalty approval" question in another syndicated conservation case, which involved some of the same IRS officials, a similar time frame, and facts resembling those here. See Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36. In so doing we rejected the first, third, and fourth arguments that petitioner advances in this case. See Nassau River, T.C. Memo. 2023-36, at *9-10 (ruling that Ms. Mills, who digitally signed a NOPA as "Supervisory Internal Revenue Agent Group 1257," was the "immediate supervisor" of the examining agent in Team 1257); id. at *9-10 (rejecting the argument that the IRS must produce a "Designation to Act" on Form 10247 in order to establish supervisory authority); id. at *10-11 (rejecting the assertion that "a ques-tion of fact exists as to the accuracy" of Ms. Mills' electronic signatures on the NOPA and other documents); id. at *7 n. 3 ("We have repeatedly rejected any suggestion that a penalty approval form or other document must 'demonstrate the depth or com-prehensiveness of the supervisor's review.'").
Petitioner's second argument is cast in a slightly different form in this case, because the fraud penalty in Nassau River was asserted on Chief Counsel's recommendation in the notice of deficiency, whereas here it was asserted directly by Chief Counsel in the Answer. But in principle the analysis remains the same. Messrs. Vance and Shields have submitted Declarations under penalty of perjury averring that they supervised Ms. Giometti's work at all relevant times. Messrs. Vance and Shields have entered appearances as counsel for respondent in this case, and their signatures and official titles appear on the Answer directly below Ms. Giometti's. A supervising attorney's signature on an answer-by itself-is sufficient to demonstrate the requisite approval for a penalty first asserted in the answer. See Roth v. Commissioner, T.C. Memo. 2017-248, 114 T.C.M. (CCH) 649, 652 (finding an associate area counsel's signature on an answer sufficient), aff'd, 922 F.3d 1126 (10th Cir. 2019); see also Pietanza v. Commissioner, 92 T.C. 729, 739 (1989), aff'd, 935 F.2d 1282 (3d Cir. 1991) ("The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties."); Long Branch Land, LLC v. Commissioner, 92 T.C. Memo. 2022-2, at *5 (holding that it remains a well settled rule that "all necessary prerequisites to the validity of official action are presumed to be complied with") (quoting Lewis v. United States, 279 U.S. 63, 73 (1929)).
We have regularly decided section 6751(b)(1) questions on summary judgment on the basis of IRS records and declarations from relevant IRS officers. See, e.g., Sand Inv. Co., 157 T.C. at 142; Long Branch Land, T.C. Memo. 2022-2; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125. Petitioner has offered no evidence to controvert the facts thus established. See Rule 121(d) (providing that a party opposing summary judgment may not rely on "mere allegations or denials" but "must set forth specific facts," including facts established "by affidavits or declarations"); Frost v. Commissioner, 154 T.C. 23, 35 (2020). There being no genuine dispute of material fact on these points, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed June 16, 2022, is granted. It is further
ORDERED that the parties shall file with the Court, on or before May 5, 2023, a status report (jointly if possible, otherwise separately) expressing their views about the conduct of further proceedings in this case. In that report, the parties should, if possible, propose a plan for trying the five cases involving conservation easements in Polk County, Florida, now pending before this division of the Court, including whether consolidation or a test case procedure would be desirable. The Court invites the parties' views as to whether there are cases, now pending before other divisions of the Court or in the general docket, that also involve conservation easements in Polk County, Florida, and (if so) whether any of them could conveniently be tried together with the cases over which the undersigned now has jurisdiction.