Opinion
30798-21
03-21-2023
HUSTON MINERALS, LLC, GH 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 Huston Minerals, LLC (Huston), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued petitioner a notice of final partnership administrative adjustment (FPAA) disallowing Huston's deduction and determining penalties. On August 2, 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 penalties determined in the FPAA.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).
Huston is a limited liability company (LLC) organized in October 2015. It is treated as a TEFRA partnership for Federal income tax purposes, and petitioner GH Manager, LLC, is its tax matters partner. GH Manager is a Georgia LLC, and its principal place of business was in Atlanta, Georgia, when the Petition was timely filed. Huston is a Florida LLC, the property on which the easement was placed is in Florida, and Huston 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).
Before its repeal, TEFRA (the 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 procedures for many partnerships, including Huston.
In December 2015, after a series of transactions over the prior few months, Huston acquired roughly 126 acres of land in Polk County, Florida (Property). Huston's acquisition of the Property resulted mainly from a capital contribution from its sole member, Imperial Aggregates, LLC (Imperial). Imperial then sold its interests in Huston to investors desirous of large tax deductions. On December 22, 2015, Huston granted the Atlantic Coast Conservancy, Inc. (ACC) an open-space conservation easement over the land. About one week later, Huston donated a fee simple interest in the land to a passthrough entity wholly owned by ACC.
Huston timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $17,360,000 for its donation of the easement. The IRS selected this return for examination.
The case was assigned to Revenue Agent (RA) Kenneth Kline, 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 Kline's immediate supervisor. In June 2019 RA Kline neared completion of his examination and recommended assertion against Huston 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 Kline's recommendations to this effect were set forth in three documents: Form 5701, Notice of Proposed Adjustment (NOPA); Form 866-A, Explanation of Items; and a penalty lead sheet. On June 6, 2019, RA Kline emailed Ms. Mills and requested that she "sign off on" the NOPA and the penalty lead sheet. On June 20, 2019, Ms. Mills digitally signed the NOPA as "Supervisory Internal Revenue Agent Group 1257" and the penalty lead sheet in the box captioned "Team Manager Initials." She replied to RA Kline by email the same day, in her capacity as "Team Manager, Team 1257," confirming that his recommendations had been "[a]pproved and signed." RA Kline 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 June 24, 2019, RA Kline 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 Kline and approved by Ms. Mills.
Anita Gill, Senior Counsel with the Office of Chief Counsel, was assigned to review a draft FPAA setting forth these adjustments. After reviewing the draft FPAA and the administrative file, Ms. Gill concluded that the 75% civil fraud penalty should also be asserted. See § 6663(a). Her recommendation to this effect was set forth in a penalty recommendation memorandum, which her immediate supervisor, Associate Area Counsel Mark Miller, hand-signed and dated on July 18, 2021. Mr. Miller thereby confirmed that he was Ms. Gill's "immediate supervisor" and that he "personally approve[d]" assertion of the fraud penalty.
After receiving written approval from Mr. Miller, Ms. Gill communicated to RA Kline her recommendation that the fraud penalty be included in the FPAA. On July 22, 2021, RA Kline and Ms. Mills executed and sent to Ms. Gill a civil fraud penalty memorandum, with their digital signatures affixed, in which they "accept[ed]/con-cur[red] with Senior Counsel's recommendation" that the fraud penalty should be asserted.
One month later, on August 24, 2021, the IRS sent petitioner an FPAA, including Form 866-A, disallowing (among other things) the $17,360,000 deduction claimed for the conservation easement and determining the penalties discussed above. The FPAA constituted the first formal communication to petitioner that the IRS intended to assert the civil fraud penalty. Petitioner timely petitioned this Court for readjustment of the 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 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 penalties were approved by Ms. Mills on June 20, 2019. Respondent has supplied a copy of the penalty lead sheet and the NOPA, which Ms. Mills digitally signed as RA Kline's "Team Manager." RA Kline has supplied a Declaration confirming that Ms. Mills supervised him during the Huston examination. We accordingly conclude that Ms. Mills was RA Kline'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 Mr. Miller on July 18, 2021. He hand-signed the penalty recommendation as Ms. Gill's "immediate supervisor." Both individuals have supplied Declarations confirming that Mr. Miller supervised Ms. Gill during the Huston assignment. We conclude that Mr. Miller was Ms. Gill's "immediate supervisor" within the meaning of section 6751(b)(1). See Sand Inv., 157 T.C. at 142.
The FPAA was issued on August 24, 2021. As of June 20, 2019, and July 18, 2021, the dates on which Ms. Mills and Mr. Miller 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 Mr. Miller 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 RA Kline made the "initial determination" to assert the section 6662 and 6222A penalties; (2) whether Ms. Mills was actually RA Kline's "immediate supervisor"; (3) whether the electronic signatures of Ms. Mills and RA Kline are what they purport to be; (4) whether Ms. Gill, as a Chief Counsel attorney, was "authorized to make the initial determination" to assess the fraud penalty; and (5) whether Ms. Mills and Mr. Miller conducted their supervisory review "employ[ing] the requisite depth and comprehensiveness."
We recently granted the IRS's motion for partial summary judgment on the "penalty approval" question in another syndicated conservation case, which involved the same IRS officials, the same time frame, and substantially the same facts as the instant case. See Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36. In so doing we rejected each of the arguments that petitioner advances here. See Nassau River, T.C. Memo. 2023-36, at *5-6 (holding that RA Kline made the "initial determination of the section 6662 and 6222A penalties); id. at *9-10 (ruling that Ms. Mills was RA Kline's "immediate supervisor at all relevant times"); id. at *10-11 (rejecting the assertion that "a question of fact exists as to the accuracy" of the electronic signatures that RA Kline and Ms. Mills affixed to various documents); id. at *7 ("We have previously held that an 'initial determination' can be made by a Chief Counsel attorney [i.e., Ms. Gill], and we have rejected petitioner's suggestion that an 'initial determination' cannot take the form of a recommendation or advice."); id. at *7 n. 3 ("We have repeatedly rejected any suggestion that a penalty approval form or other document must 'demonstrate the depth or comprehensiveness of the supervisor's review.'") For the same reasons we reject the arguments that petitioner advances now. It is accordingly
ORDERED that respondent's Motion for Partial Summary Judgment, filed June 15, 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.