Opinion
16532-21
04-28-2023
LAKE JORDAN HOLDINGS, LLC, LAKE JORDAN PARTNERS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda, Judge
This case involves a charitable contribution deduction claimed by Lake Jordan Holdings, LLC (Lake Jordan) for a conservation easement. The Internal Revenue Service issued a notice of final partnership administrative adjustment (FPAA), which disallowed Lake Jordan's deduction and determined penalties.
Currently before the Court is the Commissioner's motion for partial summary judgment contending that the IRS complied with the supervisory approval requirement of section 6751 by securing timely supervisory approval of the accuracy-related penalties determined in the FPAA. [Doc. 25.] Lake Jordan resists the motion on the ground that additional discovery is necessary [Doc. 53] and, consistent with this position, it has filed two motions to compel. [Docs. 55-56.] We will grant the Commissioner's motion for partial summary judgment and deny Lake Jordan's motions to compel.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times and all Rule references are to the Tax Court Rules of Practice and Procedure. "Doc." references are to the documents in the record as compiled by the Clerk of this Court.
Background
The following facts are derived from the parties' pleadings, motion papers, and declarations and exhibits attached thereto. They are stated solely for the purpose of deciding the motions before us and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
In November 2017, Lake Jordan acquired approximately 165 acres of land in Elmore County, Alabama, by means of a capital contribution from its sole owner. The owner's wife thereafter was admitted as a one-percent partner in Lake Jordan, and on December 29, 2017, the couple sold a 96% stake in Lake Jordan to Lake Jordan Partners, LLC (Lake Jordan Partners) for $583,000. Later that same day, Lake Jordan granted the Foothills Land Conservancy a conservation easement over the land.
Lake Jordan filed two Forms 1065, U.S. Return of Partnership Income, one for the period from September 25, 2017 through December 28, 2017 and the other for the period from December 29, 2017 through December 31, 2017. On the latter return it claimed a charitable contribution deduction of $12,740,000 for its donation of the easement. The IRS selected this return for examination.
The case was assigned to Revenue Agent (RA) Dedriah A. Collins, whose immediate supervisor at the time was Supervisory Revenue Agent (SRA) John S. Blakley. At the conclusion of her examination, RA Collins recommended assertion of the 40% penalty for gross valuation misstatement. See I.R.C. § 6662(h). In the alternative, she recommended assertion of a 20% penalty for substantial valuation misstatement, reportable transaction understatement, negligence, or substantial understatement of income tax penalty. See I.R.C. § 6662(b)(1)-(3), (c)-(e), 6662A (b).
On March 12, 2021, RA Collins sent to SRA Blakley a memorandum requesting his approval for the assessment of the penalties she recommended. He digitally signed that memorandum the same day. SRA Blakley also digitally signed an exam workpaper for penalty consideration, which included the statement: "I, John S. Blakley, am the immediate supervisor of Dedriah A. Collins, who made the initial determination to assert the penalties indicated on this form for the year(s) indicated on this form. By my signature below, I approve that initial determination." SRA Blakley has submitted a declaration under the penalty of perjury averring that he "was the immediate supervisor of [RA] Dedriah A. Collins" and that his statements were true and correct.
On May 14, 2021, the IRS sent Lake Jordan Partners (as tax matters partner of Lake Jordan) an FPAA disallowing the $12,740,000 deduction claimed for the conservation easement and determining the penalties discussed above. Lake Jordan timely petitioned this Court for readjustment of the partnership items.
Discussion
I. Summary Judgment Standard
We may grant summary judgment (or partial summary judgment regarding an issue) if there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(b); see also Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002). The moving party bears the burden of proving that there is no genuine issue of material fact, and 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. When a motion for summary judgment is made and properly supported, the adverse party may not rest upon mere allegations or denials of the pleadings but must set forth specific facts showing that there is a genuine issue for trial. Rule 121(d).
II. 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." "[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 also 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, 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.
Absent stipulation to the contrary, this case is appealable to the U.S. Court of Appeals for the Eleventh Circuit, and we follow its precedent. See Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). 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. In his reply, the Commissioner states that he does not "rely on [the assessment] date to prove compliance with I.R.C. section 6751(b) for the penalties at issue in this case." [Doc. 63 at 2.] We will accordingly evaluate the Commissioner's assertion without respect to the more generous time frame contemplated in Kroner.
In this case, the initial determination was embodied in the FPAA, which asserted a 40% penalty for gross valuation misstatement and, in the alternative, a 20% penalty on several different grounds. The record establishes that RA Collins was responsible for conducting the examination and recommended the penalties later asserted against Lake Jordan. To comply with section 6751, she needed written approval of her immediate supervisor before the FPAA was issued. She obtained SRA Blakley's approval on March 12, 2021, well in advance of the transmission of the FPAA on May 14, 2021.
Lake Jordan questions whether RA Collins actually made the initial determination to assert penalties. In raising this issue, it points to the IRS's enforcement push in the conservation easement context and evidence that RA Collins was working hand-in-glove with lawyers from the IRS Office of Chief Counsel with respect to this case. Following Lake Jordan's line of thinking, if one of these lawyers (or higher-level officials) made the initial determination to assert penalties, that person's supervisor, not SRA Blakley, would have been the right person to consider penalty approval. Lake Jordan seeks additional discovery to prove its theories.
We are mindful that "summary judgment should not be granted until the party opposing the motion has had an adequate opportunity for discovery." Snook v. Tr. Co. of Ga. Bank of Savannah, N.A., 859 F.2d 865, 870 (11th Cir. 1988); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986) (noting that the nonmoving party must have had "a full opportunity to conduct discovery"). Of course, discovery must be relevant to "the subject matter involved in the pending case." See Rule 70(b); accord Hickman v. Taylor, 329 U.S. 495, 507-08 (1947); see also Caney v. Commissioner, T.C. Memo. 2010-90, 2010 WL 1687679, at *2.
The discovery sought by Lake Jordan is not relevant to the resolution of the motion, and we see no genuine dispute of material fact. See, e.g., Caney v. Commissioner, 2010 WL 1687679, at *2 (considering whether "further discovery would likely yield any fact essential to [the nonmoving party's] opposition to the motion" where it contended that discovery was necessary to evaluate summary judgment motion); Rule 121(e). Lake Jordan conflates direction or consultation from IRS higher-ups or lawyers with the initial determination described in section 6751. The "initial determination of [a penalty] assessment," however, is a formal action by the IRS Examination Division directed to a particular taxpayer. See Belair Woods, 154 T.C. at 15; Frost v. Commissioner, 154 T.C. 23, 32 (2020) (ruling that supervisory approval must be secured "before the first formal communication to the taxpayer of penalties"). "Our inquiry thus turns on the timeliness of penalty approval vis-a-vis 'the taxpayer against whom the penalties are being asserted.'" Cattail Holdings, LLC v. Commissioner, T.C. Memo. 2023-17, at *9 (quoting Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125, at *16).
Here, the consequential moment of IRS action took the form of an FPAA issued to Lake Jordan for its taxable year ending December 31, 2017. Whether RA Collins or SRA Blakley received direction or advice from IRS higher-ups or lawyers before the formal communication of penalties to Lake Jordan is of no moment. "We do not second-guess the extent of the RA's or the supervisor's deliberations about whether penalties should be imposed," but instead "confine our search to seeking evidence of written supervisory approval." Cattail Holdings, T.C. Memo. 2023-17, at *11; accord Raifman v. Commissioner, T.C. Memo. 2018-101, at *61; Belair Woods, 154 T.C. at 17. There is no dispute that RA Collins recommended the penalties asserted in the FPAA and that her immediate supervisor SRA Blakley approved them in writing. The Commissioner has established compliance with section 6751, and any further discovery on this general topic is unnecessary and irrelevant.
Accordingly it is, ORDERED that the Commissioner's motion for partial summary judgment, filed November 10, 2022, is granted. It is further
ORDERED that Lake Jordan's motion to compel responses to interrogatories, filed February 22, 2023 [Doc. 55], is denied. It is further
ORDERED that Lake Jordan's motion to compel production of documents, filed February 22, 2023 [Doc. 56], is denied.