Opinion
13925-17
03-24-2023
LAKEPOINT LAND II, LLC, LAKEPOINT LAND GROUP, LLC, TAX MATTERS PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
ORDER
Christian N. Weiler, Judge
On August 11, 2022, respondent filed a Motion for Partial Summary Judgment seeking favorable adjudication on the issue of whether respondent complied with the written supervisory approval requirement of section 6751(b)(1) as respondent applies penalties at issue in this case under section 6662(c), (d), (e), and (h). On January 27, 2023, petitioner filed an opposition to respondent's Motion objecting to 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, 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).
LakePoint Land II, LLC (LakePoint) is a limited liability company (LLC) treated as a Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, §§ 401-407, 96 Stat 324, 648-71 (TEFRA) partnership for federal income tax purposes, and petitioner LakePoint Land Group, LLC, is its tax matters partner. LakePoint had its principal place of business in Georgia 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 I.R.C. § 7482(b)(1)(E).
Before its repeal TEFRA governed the tax treatment and audit procedures for many partnerships, including LakePoint.
The Internal Revenue Service (IRS) assigned Revenue Agent (RA) Pamela Stafford to examine LakePoint's partnership tax returns for the tax periods ending November 15, 2013, December 31, 2013, and December 31, 2014, Forms 1065, U.S. Return of Partnership Income. RA Catherine C. Brooks was the immediate supervisor to RA Stafford in connection with the examination.
Between May 9, 2016, and May 20, 2016, RA Stafford corresponded with a representative of LakePoint. The objective of the correspondence between the two parties was to review proposed adjustments and penalties and to potentially reach a resolution of the audit. In the correspondence, LakePoint's representative requested RA Stafford to provide respondent's "determination" of penalties. RA Stafford responded by providing a list of "proposed adjustments," including penalties, to LakePoint's representative. The record does not indicate that a settlement was ever reached.
On July 15, 2016, RA Stafford prepared a penalty consideration lead sheet (July Lead Sheet). On July 16, 2016, RA Brooks personally approved RA Stafford's initial determination of penalties in writing by electronically signing the July Lead Sheet. The July Lead Sheet asserted all of the penalties that were eventually determined in LakePoint's final partnership administrative adjustment (FPAA). Then on July 17, 2016, RA Brooks delegated her authority to act as Team Manager to Benjamin Brantley between July 18, 2016, through July 22, 2016.
On March 27, 2017, respondent issued the FPAA to LakePoint.. The FPAA determined the following penalties for the 2013 tax year:
(1) section 6662(c) penalty for negligence or disregard of rules or regulations;
(2) section 6662(d) penalty for substantial understatement of income tax;
(3) section 6662(e) penalty for substantial valuation misstatement; and
(4) section 6662(h) penalty for gross valuation misstatement.
The following penalties were included for the 2014 tax year:
(1) section 6662(c) penalty for negligence or disregard of rules or regulations; and
(2) section 6662(d) penalty for substantial understatement of income tax.
In its opposition to respondent's motion for partial summary judgment petitioner avers that the U.S. Court of Appeals for the Eleventh Circuit's decision in Kroner v. Commissioner, 48 F. 4th 1272 (11th Cir. 2022) is not on point since this case is a TEFRA proceeding. Petitioner contends RA Stafford's correspondence on May 20, 2016, is respondent's initial determination, and RA Brooks did not approve in writing the initial determination to assert any penalty. Petitioner also contends RA Brooks' method of approval of penalties, the timeline of those approvals, and RA Brooks' discretion to withhold approval, among other contentions, raises genuine disputes of material facts precluding summary judgment. Finally, petitioner contends it has not had the opportunity to conduct depositions of RA Stafford and RA Brooks, and therefore, the Court should not rule on the relief sought.
Discussion
I. Standards for Summary Judgment
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(b) the Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Id. However, the nonmoving party may not rest upon the mere allegations or denials of his pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
II. Legal Background
Section 6751(b)(1) provides that "[n]o penalty . . . 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." An "immediate supervisor" is the person who supervises the agent's substantive work on examination. See Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021). We have previously ruled an "initial determination" signifies a "consequential moment" of IRS action. See Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020) (quoting Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff'g in part, rev'g in part T.C. Memo. 2015-42).
In Kroner, the Eleventh Circuit held that "the IRS satisfies [s]ection 6751(b) so long as a supervisor approves an initial determination of 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 Kroner, 48 F. 4th at 1278. While communications about proposed penalties cannot be equated to an "initial determination of such assessment." Id. at 1277.
Furthermore, section 6751(b)(1) does not require approval to be indicated by a wet signature, nor any particular form of signature, rather, respondent need only show written evidence that timely supervisory approval was obtained prior to the first formal communication to the taxpayer demonstrating that an initial determination of the penalties had been made. See Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C 75, 86 (2019); Belair Woods, 154 T.C. at 16 (holding that the statute "mandate[s] only that the approval of the penalty assessment be 'in writing' and by a manager"); Chadwick v. Commissioner, 154 T.C. 84, 94 (2020) (citing Blackburn v. Commissioner, 150 T.C. 218, 223 (2018)).
III. Analysis
On November 30, 2022, respondent filed a Notice of Supplemental Authority with respect to his pending Motion for Partial Summary Judgment contending Kroner to be controlling in this case. We agree.
Under a literal application of the standard enunciated by the Eleventh Circuit in Kroner, supervisory approval could seemingly be secured at any moment before actual assessment of the tax, which has not yet occurred. See Kroner, 48 F.4th at 1279-81. Nevertheless, the Eleventh Circuit left open the possibility that supervisory approval in some cases might need to be secured sooner-before the supervisor "has lost the discretion to disapprove" assertion of the penalty. See id. 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 at 220 (concluding that supervisory approval must be obtained at a time when "the supervisor has the discretion to give or withhold it").
This Court has 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., 157 T.C. at 142; Long Branch Land, LLC v. Commissioner, T.C. Memo. 2022-2; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125. In so doing, we have rejected the notion that examining agents and their supervisors must be subjected to cross-examination. See Thompson v. Commissioner, T.C. Memo. 2022-80, at *8; Raifman v. Commissioner, T.C. Memo. 2018-101, 116 T.C.M. (CCH) 27-28 (holding that cross-examination "would be immaterial and wholly irrelevant to ascertaining whether [the IRS] complied with the written supervisory approval requirement").
RA Stafford's communication with LakePoint's representative between May 9, 2016, and May 20, 2016, concerned proposed penalties and the possibility of resolutions prior to letting this matter go before the Court. We find these communications to be informal discussions regarding potential applicable penalties and not an "initial determination." See Kroner, 48 F. 4th at 1277. Instead, the July Lead Sheet indicates that RA Stafford made the initial determination of penalties on July 15, 2016. All of the penalties at issue in this case were then approved by RA Brooks on July 16, 2016. Respondent supplied a Declaration confirming that RA Brooks was RA Stafford's immediate supervisor as part of his Motion for Partial Summary Judgment. Respondent supplied a copy of the July Lead Sheet, which was digitally signed by RA Brooks, as RA Stafford's manager. The subsequent actions of RA Brooks' on July 18, 2016, are inconsequential.
We acknowledge petitioner's arguments concerning (1) a second lead sheet signed on November 29, 2016, by RA Brooks which did not include a section 6662(e) penalty for substantial valuation misstatement or section 6662(h) penalty for gross valuation misstatement, and (2) an email correspondence from RA Stafford and the TEFRA coordinator to RA Brooks concerning a missing signature on a lead sheet; however, we conclude these arguments do not change our analysis under the circumstances.
We find that respondent has complied with the requirements of section 6751(b)(1) and will therefore grant respondent's Motion for Partial Summary Judgment.
Upon due consideration of the foregoing, it is
ORDERED that respondent's Motion for Partial Summary Judgment filed on August 11, 2022, as supplemented, is granted.