Opinion
11780-20
07-25-2023
LODEBAR PROPERTY, LLC, LODEBAR 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 Lodebar Property, LLC (Lodebar), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued petitioner a notice of final partnership administrative adjustment (FPAA) disallowing Lodebar's deduction and determining penalties.
On April 26, 2023, we consolidated this case with the cases at docket numbers 6441-20, 11598-20, and 12581-20 for purposes of trial, briefing and opinion. On May 2, 2023, respondent filed a Motion for Partial Summary Judgment in the four consolidated cases, contending that the IRS complied with the requirements of section 6751(b)(1) by securing timely supervisory approval of the penalties determined in each FPAA[ On July 24, 2023, the Court filed a Memorandum Opinion granting respondent's Motion for Partial Summary Judgment in docket number 6441-20. See Dorchester Farms Prop., LLC v. Commissioner, T.C. Memo. 2023-92. For substantially the same reasons, we will grant respondent's Motion in the instant case.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and 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), affd, 17 F.3d 965 (7th Cir. 1994).
Lodebar is a limited liability company (LLC) organized in June 2016. It is treated as a TEFRA partnership for Federal income tax purposes,[ and its tax matters partner is petitioner Lodebar Manager, LLC, likewise a Georgia entity. Lodebar 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 § 7482(b)(1)(E).
Before its repeal, TEFRA (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 process for many partnerships, including Lodebar.
In December 2016 Lodebar donated to the Southern Conservation Trust a conservation easement over a roughly 391-acre tract in Liberty County, Georgia. Lode-bar 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 $14,486,927 for its donation of the easement.
The IRS selected Lodebar's 2016 return for examination and assigned the case to Revenue Agent (RA) Leroy Farquharson. In October 2019, as the examination neared completion, RA Farquharson recommended assertion against Lodebar of the 40% penalty for a gross valuation misstatement. See § 6662(h). In the alternative, he recommended assertion of a 20% penalty for a substantial valuation misstatement, a reportable transactions understatement, negligence, and/or a substantial understatement of income tax. See §§ 6662(b)(1)-(3), (c)-(e), 6662A(b).
RA Farquharson's recommendations to this effect were set forth in a civil penalty approval form, a copy of which is included with respondent's Motion. RA Far-quharson is listed as the "Examiner" at the top of this form. His supervisor, Margaret McCarter, digitally signed the penalty approval form on October 8, 2019. She verified that she was RA Farquharson's "Supervisory Internal Revenue Agent" and that she "approve[d] the penalties identified" in that form.
On November 13, 2019, RA Farquharson mailed petitioner a packet of documents, including a Letter 1807 and an attached Form 4605-A, Examination Changes, which set 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 Farquhar-son and approved by Ms. McCarter. More than seven months later, on June 22, 2020, the IRS issued petitioner an FPAA, including a Form 866-A, Explanation of Items, disallowing the $14,486,927 deduction Lodebar claimed for the conservation easement and determining the aforementioned penalties. Petitioner timely petitioned this Court for readjustment of 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 as to any material fact and a decision may be rendered as a matter of law. See Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520. 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. Sundstrand Corp., 98 T.C. at 520. Where the moving party makes and properly supports a motion for summary judgment, "the nonmovant may not rest on the allegations or denials in that 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 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).
Although the Commissioner does not bear a burden of production with respect to penalties in a partnership-level proceeding, a partnership may raise section 6751(b) as an affirmative defense. See Dynamo Holdings Ltd. P'ship v. Commissioner, 150 T.C. 224, 236-37 (2018).
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.
Respondent has supplied a copy of the civil penalty approval form that lists all of the penalties at issue. RA Farquharson was the examiner who recommended assertion of these penalties. His name appears as the "Examiner" at the top of the penalty approval form, and his case activity record also shows that he was the lead "examiner" for the Lodebar examination.
Ms. McCarter digitally signed the penalty approval form as RA Farquharson's "Supervisory Internal Revenue Agent" in the box captioned "Name and Title of Approver." We accordingly conclude that she was RA Farquharson'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"); Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *3, *5 (concluding that IRS officer who signed penalty approval form as "Supervisory Revenue Agent" was the examiner's "immediate supervisor"); see also Dorchester Farms Prop., T.C. Memo. 2023-92, at *4-5 (holding that Ms. McCarter's signature as "group manager" on a penalty approval form satisfied the statutory requirements); Salacoa Stone Quarry, LLC v. Commissioner, T.C. Memo. 2023-68, at *6 (holding that Ms. McCarter's signature as "team manager" on a penalty approval form satisfied the statutory requirements); Sparta Pink Prop., LLC v. Commissioner, T.C. Memo. 2022-88, 124 T.C.M. (CCH) 121, 124 (holding that Ms. McCarter's signature as "group manager" on a penalty approval form satisfied the statutory requirements).
All of the penalties at issue were approved by Ms. McCarter on October 8, 2019. The Letter 1807 and the Form 4605-A were mailed to petitioner on November 13, 2019, and the FPAA was issued on June 22, 2020. As of October 8, 2019, therefore, the IRS examination remained at a stage where Ms. McCarter had discretion to approve or disapprove the penalty recommendations. See Kroner v. Commissioner, 48 F.4th at 1279 n.1. Therefore, under a reading of Kroner most favorable to petitioner, the IRS complied with the requirements of section 6751(b)(1).
Petitioner advances essentially three arguments in support of a contrary conclusion. First, it surmises that RA Farquharson recommended the "categorical assertion of penalties based on the type of transaction" rather than undertaking "a substantive determination" that penalties were appropriate in this particular case. Second, petitioner speculates that it was not RA Farquharson, but "the IRS Office of Chief Counsel or [someone] at another level of [r]espondent" who made the "initial determination" to assert the penalties in question. Third, petitioner urges that summary judgment is inappropriate because "[r]espondent did not make any effort to authenticate" the documents discussed above, including the civil penalty approval form and the copy of RA Farquharson's case activity record.
We rejected each of these arguments in Dorchester Farms Property, LLC, which involved the same supervisor (Ms. McCarter), the same time frame, and facts substantially similar to those here. See T.C. Memo. 2023-92, at *5 (finding immaterial petitioner's allegation that the RA gave insufficient consideration to the matters before him); id. at *6 (finding that petitioner's speculation that the RA, the lead examiner for the audit, did not make the "initial determination" to assert the penalties "is not enough to establish a genuine dispute of material fact"); id. at *7 (noting that we have "regularly decided section 6751(b)(1) questions on summary judgment on the basis of IRS forms and records, confirmed by declarations supplied by IRS officers"). For the same reasons we reject the arguments petitioner advances here.[
Petitioner notes that RA Farquharson's "Case Activity Record does not make any mention of determining penalties or preparing a Penalty Approval Form," suggesting that RA Farquharson did not devote significant time or effort to this task. We have repeatedly rejected this line of argument. See, e.g., Dorchester Farms Property, LLC, T.C. Memo. 2023-92, at *5. Petitioner also notes that, "on December 15, 2019-a month after issuance of the Summary Report-Mr. Farquharson 'prepare[d] all closing documents to include lead sheets, etc.'" It is standard operating procedure for an RA to prepare closing documents before sending a case to IRS Technical Services for issuance of the FPAA. For section 6751(b) purposes, the important date is October 8, 2019-the date on which RA Farquharson prepared the Penalty Approval Form and the date on which his supervisor, Ms. McCarter, signed it.
It is accordingly, ORDERED that respondents' Motion for Partial Summary Judgment, filed May 2, 2023, in the above-docketed case, is granted.