Opinion
17379-19 17380-19 17381-19 17382-19
11-16-2022
GREEN VALLEY INVESTORS, LLC, BOBBY A. BRANCH, TAX MATTERS PARTNER, ET. AL.,[1] Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler, Judge
Petitioner timely petitioned this Court challenging the Internal Revenue Service's (IRS) notice of final partnership administrative adjustment (FPAA) determinations regarding charitable deductions related to syndicated conservation easement transactions listed under I.R.S. Notice 2017-10, 2017-4 I.R.B. 544.
In these consolidated cases Bobby A. Branch is the petitioner and tax matters partner for four entities: Green Valley, Vista Hill, Big Hill, and Tick Creek. We refer to these entities individually as "LLC" and collectively as "the LLCs." Since Mr. Branch is the tax matters partner in each of these consolidated cases, we will collectively refer to the tax matters partner for the LLCs in the singular and as "petitioner" throughout this Order.
On December 3, 2021, the Commissioner of Internal Revenue (respondent) filed his third Motions for Partial Summary Judgment (third Motions for Partial Summary Judgment), seeking summary adjudication in each of these consolidated cases on the issue of whether the IRS complied with the requirements of section 6751(b)(1) as applied to the gross valuation misstatement penalty under section 6662(h), the substantial valuation misstatement penalty under section 6662(c), the negligence penalty under section 6662(b)(1) and (c), and the reportable transaction penalty under section 6662A.
In each of these consolidated cases respondent has twice before moved for partial summary judgment.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar.
The tax year at issue for Green Valley Investors, LLC (Green Valley), Big Hill Partners, LLC (Big Hill), and Tick Creek Holdings, LLC (Tick Creek), is 2014, while the tax year at issue for Vista Hill Investments, LLC (Vista Hill), is 2015.
Then on December 14, 2021, petitioner in these consolidated cases filed Motions for Summary Judgment Regarding Penalties Under Sections 6662(h) and 6662A (Cross-Motions for Summary Judgment).
In the Cross-Motions for Summary Judgment, petitioner first argues the gross valuation misstatement penalties under section 6662(h) may not be assessed in these cases because the IRS did not comply with section 6751(b)(1) when it determined the penalty. Second, petitioner contends that penalties under section 6662A may not be asserted in these cases, since any assessment of them would be made retroactively after the issuance of Notice 2017-10, and furthermore, the issuance of Notice 2017-10 fails to comply with the notice-and-comment provisions of the Administrative Procedure Act (APA). Respondent contends that Notice 2017-10 was properly issued without notice-and-comment rulemaking, and consequently respondent is entitled to partial summary judgment since he has demonstrated the IRS's compliance with the requirements of section 6751(b) in assertion of penalties in these cases.
In this Court's separate Opinion entitled Green Valley Invs., LLC v. Commissioner, Nos. 17379-19, 17380-19, 17381-19, 17382-19, 159 T.C. (Nov. 9, 2022), we considered and decided, in part, petitioner's Cross-Motions for Partial Summary Judgment, and in part, respondent's third Motions for Partial Summary Judgment. We are now prepared to rule on the remaining portions of the parties' pending Motions.
The remaining issues to be decided in this Order, based on the parties' Motions, are whether (i) the IRS complied with section 6751 when asserting penalties found in the FPAAs and (ii) respondent complied with section 6751(b) when asserting penalties in his Answers.
Background
The following facts are drawn from respondent's third Motions for Partial Summary Judgment, petitioner's Cross-Motions for Summary Judgment, declarations and exhibits thereto, and the parties' respective written objections. These facts are stated solely for the purpose of ruling on the parties' Motions herein.
By deed recorded on December 31, 2014, Green Valley, Big Hill, and Tick Creek each granted a conservation easement to Triangle Land Conservancy (TLC). On December 3, 2015, Vista Hill did the same. Green Valley, Big Hill, and Tick Creek each timely filed Forms 1065, U.S. Return of Partnership Income, for tax year 2014, and Vista Hill timely filed Form 1065 for tax year 2015. On its Form 1065 Green Valley deducted $22,559,000 for its charitable easement contribution to TLC for the tax year 2014. Similarly, Big Hill and Tick Creek deducted contributions of charitable easements of $22,626,000 and $22,605,000, respectively. Vista Hill deducted $22,498,000 on its Form 1065 for its charitable easement contribution for tax year 2015.
The IRS conducted examinations of Green Valley's, Vista Hill's, Big Hill's, and Tick Creek's respective Forms 1065. Pursuant to Supervisory Internal Revenue Agent Charles S. Philipp's declaration, it was Revenue Agent (RA) Joy Bradley who made the initial determinations that the gross valuation misstatement penalty under section 6662(h), and in the alternative, the accuracy-related penalties for negligence and substantial valuation misstatement penalties under section 6662(c) and (e), respectively, are applicable to the LLCs' respective Forms 1065. Also, according to the declaration, Mr. Philipp approved RA Bradley's initial determination in writing on April 4, 2017, when he signed Forms 5701, Notice of Proposed Adjustments, with attached Forms 886-A, Explanation of Items. The IRS avers the LLCs were first informed of the IRS's initial determination to assert the gross valuation misstatement penalty under section 6662(h), and in the alternative, the accuracy-related penalties for negligence and substantial valuation misstatement penalties under section 6662(c) and (e), respectively, on April 19, 2017.
On October 16, 2018, the LLCs held a conference with the IRS Independent Office of Appeals. At this conference, and according to Mr. Gregory Rhodes's declaration (a representative of the LLCs), counsel for the LLCs questioned Mr. Philipp as to who made the initial determination to assert the gross valuation misstatement penalty under section 6662(h). According to Mr. Rhodes, Mr. Philipp indicated that he (rather than RA Bradley) made the initial determination.
In FPAAs issued to the LLCs on June 24, 2019, the IRS disallowed the noncash charitable contribution deductions because the LLCs (a) did not establish that the deductions met all the requirements of section 170, and (b) failed to establish that the value of the property interest contributed exceeded zero. In addition, each FPAA determined the gross valuation misstatement penalty under section 6662(h), the substantial valuation misstatement penalty under section 6662(e), the negligence penalty under section 6662(b)(1) and (c), and the substantial understatement penalty under section 6662(b)(2) and (d). Respondent's Answers asserted the additional reportable transaction penalty under section 6662A.
On September 20, 2019, petitioner timely petitioned this Court challenging the FPAA determinations. At the time the petitions were filed, the LLCs' principal places of business were located in North Carolina.
Pursuant to Mary Helen Weber's and Emily J. Giometti's declarations, both with the IRS Office of Chief Counsel it was Ms. Giometti who made the initial determination on November 20, 2019, to assert penalties in these consolidated cases under section 6662A in respondent's Answers. Ms. Giometti's initial determination was approved by Ms. Weber on November 21, 2019, by her signature of respondent's Answers, which assert the respective penalties against the LLCs, and in the alternative seeks the penalties under section 6662(h) included in the FPAAs. According to Ms. Giometti's declaration, prior to the filings of respondent's Answers, respondent had not communicated any intention to assert penalties under section 6662A to petitioner, the LLCs, or their representatives.
Discussion
I. Summary Judgment
A party may move for summary judgment regarding all or any part of the legal issues in controversy. See Rule 121(a); Wachter v. Commissioner, 142 T.C. 140, 145 (2014). We may grant summary judgment if the pleadings, stipulations and exhibits, and any other acceptable materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law. See Rule 121(a) and (b); see also CGG Americas, Inc. v. Commissioner, 147 T.C. 78, 82 (2016); Elec. Arts, Inc. & Subs. v. Commissioner, 118 T.C. 226, 238 (2002). We construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). The moving party has the burden of proving that there is no genuine issue of material fact. Naftel v. Commissioner, 85 T.C. 527, 529 (1985). However, the nonmoving party may not rest upon the mere allegations or denials in its pleadings but instead must "set forth specific facts showing that there is a genuine dispute for trial." Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
II. Evidentiary Objections
Before turning to the parties' substantive arguments, we address petitioner's hearsay objection to a portion of Mr. Philipp's declaration which respondent introduced in support of his third Motions for Partial Summary Judgment. More specifically, petitioner objects to respondent's reliance on paragraph 4 of Mr. Philipp's declaration asserting that RA Bradley made the initial determination to assert penalties in these consolidated cases. 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(d).
We will overrule petitioner's hearsay objection. In his declaration, Mr. Philipp established his personal involvement in the LLCs' audits, and therefore, we find his statement in question to be based on his own personal knowledge. See Rule 143(a); I.R.C. § 7453.
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."
This Court has found: "[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 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, LLC, 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.
In Kroner v. Commissioner of Internal Revenue, 49 F. 4th 1272 (11th Cir. 2022) rev'g and remanding, T.C. Memo 2020-73 (2020) and Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), rev'g and remanding, 154 T.C. 68 (2020), both the U.S. Courts of Appeals for the Eleventh and Ninth Circuits have overruled our interpretation of section 6751(b)(1), at least with respect to so-called assessable penalties, determining it "has no basis in the text of the statute," id. at 1072, and ultimately held "that § 6751(b)(1) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment." Id. at 1074. Here, however, appeal of these cases would most likely be to the U.S. Court of Appeals for the Fourth Circuit and petitioner does not contend the section 6662(h) penalties were conveyed by the IRS before they were personally approved (in writing) by the revenue agent's immediate supervisor. Accordingly, we need not, and do not, decide whether the decisions in Kroner and Laidlaw's impacts our interpretation of section 6751(b)(1) in future FPAA cases such as this, leaving the issue for another day.
A. Assertion of Penalties in the FPAAs
Petitioner does not contend that the IRS formally communicated with himself, the LLCs, or their representatives before April 19, 2017, the date the IRS made its decision to assert the penalties found in the FPAAs. Rather, petitioner contends that it was Mr. Philipp (not RA Bradley) who initially decided to assert the gross valuation misstatement penalty (and potentially other penalties); and therefore, there is no evidence regarding timely approval by Mr. Philipp's immediate supervisor. Respondent contends the question of supervisory approval is purely an objective test based on the relevant documents which can be now decided, and cites to Patel v. Commissioner, T.C. Memo. 2020-133 at *9 and Raifman v. Commissioner, T.C. Memo. 2018-101 at *21.
Based on our review of the declarations submitted by the parties, it seems apparent that there are genuine disputes as to material facts; therefore, it would be inappropriate for us to decide by summary adjudication the issue of whether the IRS complied with section 6751 when asserting penalties found in the FPAAs. Accordingly, we will deny respondent's third Motions for Partial Summary Judgment and petitioner's Cross-Motions for Summary Judgment as to this issue.
At trial, respondent may be able to establish that Mr. Philipp did in fact misspeak at the Appeals conference; however, for purposes of summary judgment, we are not able to weigh countervailing evidence, nor can we rely on respondent's declaration (by Mr. Tyson) vouching for the real meaning of a declarant's admission.
B. Assertion of Penalties in the Answers
Petitioner does not dispute that the IRS complied with section 6751(b)(1) with respect to the imposition of section 6662A penalties. However, petitioner contends respondent cannot retroactively impose section 6662A penalties and respondent has failed to comply with the APA when issuing Notice 2017-10.
Before respondent filed his Answers, Ms. Giometti, respondent's lead counsel in these cases, determined that respondent should assert an alternative penalty under section 6662A. Ms. Giometti signed the Answers filed in each of these consolidated cases as "Special Trial Attorney (Large Business & International)." Ms. Weber also signed the Answers as "Senior Level Counsel (Chief Counsel)."
Rule 142(a) specifically provides that respondent bears the burden of proof on a "new matter" pled in his Answers. We have held that section 6751(b)(1) "includes no requirement that all potential penalties be initially determined . . . at the same time." Palmolive Bldg. Invs., LLC, 152 T.C. at 85. IRS counsel "may, and often does, assert . . . [new] penalties in answers or amended answers." Chai v. Commissioner, 851 F.3d 190, 221 n.24 (2d Cir. 2017). "There [is] nothing improper in this." Roth v. Commissioner, T.C. Memo. 2017-248 at *10.
As a Senior Level Counsel at that time, Ms. Weber was Ms. Giometti's immediate supervisor. See Internal Revenue Manual pt. 1.1.6.15.1(4) (June 18, 2015). Petitioner does not contend that the IRS or respondent formally communicated with the LLCs or their representatives regarding section 6662A penalties, before filing respondent's Answers-which was its initial determination to assert this alternative penalty. Instead, petitioner objects to the assertion of section 6662A penalties on other grounds. Accordingly, petitioner has not set forth any facts "showing that there is a genuine dispute for trial" on this point. Rule 121(d). Petitioner's legal objections to section 6662A penalties do not go to the issue of whether the IRS complied with section 6751.
Based on our review of the declarations submitted by the parties, there is no genuine dispute as to material facts; accordingly, it is appropriate for us to decide by summary adjudication the issue of whether respondent complied with section 6751(b), when asserting penalties in his Answers. Accordingly, we determine so.
This Order concludes that respondent has met the requirements of section 6751(b)(1) as to the 6662A penalties; it does not, however, conclude that the LLCs are liable for those penalties. In fact, in Green Valley Invs., 159 T.C., we granted petitioner's Cross-Motions for Summary Judgment, in part, setting aside Notice 2017-10 and precluding the imposition of section 6662A penalties in this case. Accordingly, we find it to be inappropriate (or moot) to grant respondent's third Motions for Partial Summary Judgment, regarding compliance with section 6751(b)(1) with respect to the imposition of section 6662A penalties.
Upon due consideration of the foregoing, it is
ORDERED that respondent's third Motions for Partial Summary Judgment dated December 3, 2021, are denied. It is further
ORDERED that petitioner's Cross-Motions for Partial Summary Judgment dated December 14, 2021, are denied, in part, as to the issue of whether the IRS has complied with section 6751(b)(1) related to section 6662(h) penalties in these cases. It is further
ORDERED that petitioner's Cross-Motions for Partial Summary Judgment dated December 14, 2021, are granted, in part, setting aside Notice 2017-10 and prohibiting the imposition of section 6662A penalties in these cases.