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Longwood Pres. Holdings v. Comm'r of Internal Revenue

United States Tax Court
Aug 23, 2022
No. 12421-19 (U.S.T.C. Aug. 23, 2022)

Opinion

12421-19

08-23-2022

Longwood Preserve Holdings, LLC, Longwood Preserve Investors, LLC, Tax Patters Partner, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent


ORDER

Christian N. Weiler, Judge.

This case is before the Court on respondent's Motion for Partial Summary Judgment filed October 25, 2021. Respondent's Motion for Partial Summary Judgment seeks summary adjudication on the issue of whether respondent complied with the requirements of section 6751(b)(1) as they apply to the following asserted penalties: gross valuation misstatement penalty under section 6662(h), substantial understatement penalty under section 6662(b)(2) and (d), negligence penalty under section 6662(b)(1) and (c), and a penalty under section 6662A(a) for reportable transaction understatements at issue in this case. Respondent requests that the Court determine that, as a matter of law, he complied with the requirements of section 6751(b)(1) as they apply to the penalties.

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.

By Order dated December 23, 2021, the Court directed petitioner to file its response to respondent's Motion for Partial Summary Judgment. On June 10, 2022, petitioner filed its Objection to respondent's Motion for Partial Summary Judgment. Subsequently, on June 21, 2022, respondent filed his Reply to petitioner's Objection. On July 1, 2022, petitioner filed its Response to respondent's Reply.

The Court subsequently granted motions extending petitioner's deadline to file its response to respondent's Motion for Partial Summary Judgment.

Background

The following facts are derived from the parties' motion papers and the declarations and exhibits attached thereto. They are stated solely for purposes of deciding respondent's Motion for Partial Summary Judgment 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).

In 2015 Longwood Preserve Holdings, LLC (Longwood) donated a perpetual conservation easement on approximately 519 acres of real property in Glynn County, Georgia to Georgia Alabama Land Trust, Inc. In connection with the conservation easement donation, Van Sant & Wingard, LLC prepared an appraisal that established a fair market value for the easement. Longwood then claimed a deduction for a conversation easement donation on its Form 1065, U.S. Return of Partnership Income, for the 2015 tax year.

In March 2019 Revenue Agent Natasha Tehan (RA Tehan) made the initial determination to assert a gross valuation misstatement penalty under section 6662(h) and prepared a draft Form 886-A, Explanation of Items. On March 15, 2019, RA Tehan's then-immediate supervisor, Karen Carreiro-Smithson, signed and dated the bottom of Form 886-A under the caption "Review and approval of penalties." On March 18, 2019, RA Tehan emailed Ms. Carreiro-Smithson an Examination Plan Issue Lead Sheet (March lead sheet) reflecting RA Tehan's intention to assert the gross valuation misstatement penalty under section 6662(h).

At the time of the initial determination, Natasha Tehan was named Michael Tehan.

Respondent admits that Form 886-A was not issued to petitioner.

RA Tehan sought Internal Revenue Service (IRS) Counsel's review of a draft Notice of Final Partnership Administrative Adjustment (FPAA) to be issued to petitioner. In anticipation of IRS Counsel attorney James Fee, Jr.'s review, RA Tehan created a second lead sheet (April lead sheet) asserting the sections 6662(h), 6662(b)(2) and (d), and 6662(b)(1) and (c) penalties. On April 5, 2019, Ms. Carreiro-Smithson electronically signed the April lead sheet.

Mr. Fee sent an email dated April 5, 2019, to RA Tehan and Ms. Carreiro-Smithson, providing a memorandum and additional comments regarding the draft FPAA. In his memorandum, Mr. Fee recommended that RA Tehan also assert, in the alternative, the substantial understatement penalty under section 6662(b)(2) and (d) and the negligence penalty under section 6662(b)(1) and (c). In the memorandum, Mr. Fee advised and provided sample language for RA Tehan to include in the draft FPAA to support the assertion of these alternative penalties. In his email to RA Tehan and Ms. Carreiro-Smithson, Mr. Fee also noted the importance of securing written supervisory approval to comply with the requirements under section 6751(b)(1). On April 9, 2019, respondent issued the FPAA that disallowed the claimed deduction related to the conservation easement donation in its entirety and asserted the abovementioned penalties.

On July 8, 2019, petitioner timely filed its Petition in this Court. After receiving the Petition, respondent's lead counsel in this case, Benjamin Weaver, made the initial determination to assert the reportable transaction understatement penalty under section 6662A(a). Mr. Weaver's then-immediate supervisor was James G. Hartford. In an email from Mr. Weaver to Mr. Hartford on September 4, 2019, Mr. Weaver indicated that he determined the section 6662A penalty should apply in petitioner's case and Mr. Hartford replied stating that he concurred with the assertion of the penalty. On September 6, 2019, respondent filed his Answer, signed by Mr. Hartford, which asserted, in the alternative, the penalty under section 6662A(a).

Discussion

The purpose of summary judgment is to expedite litigation and avoid unnecessary and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). Full or partial summary judgment may be granted where the pleadings and other 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. Rule 121(b); Sundstrand Corp., 98 T.C. at 520. The burden is on the moving party (in this case, respondent) to demonstrate that there is no genuine dispute as to any material fact and that he or she is entitled to judgment as a matter of law. FPL Grp., Inc. & Subs., 116 T.C. at 74-75. When determining whether to grant summary judgment, we must view factual materials and inferences drawn therefrom in the light most favorable to the nonmoving party. See id. at 75; Bond v. Commissioner, 100 T.C. 32, 36 (1993). The nonmoving party may not rest upon mere allegations or denials in his or her pleadings but must set forth specific facts showing there is a genuine dispute for trial. Sundstrand Corp., 98 T.C. at 520.

I. Summary of the Parties' Arguments

Respondent is seeking summary adjudication, requesting that this Court, as a matter of law, find that the IRS complied with the requirements under section 6751(b)(1) with respect to the penalties at issue in this case. Respondent avers that the gross valuation misstatement penalty under section 6662(h), the substantial understatement penalty under section 6662(b)(2) and (d), and the negligence penalty under section 6662(b)(1) and (c) were personally approved, in writing, by RA Tehan's then-immediate supervisor, Ms. Carreiro-Smithson, when she signed the April lead sheet approving the assertion of the penalties. Respondent also avers that the reportable transaction understatement penalty under section 6662A was personally approved, in writing, by Mr. Hartford when he signed respondent's Answer. Additionally, respondent argues that if Mr. Hartford's signature on the Answer does not satisfy the requirements under section 6751(b)(1), the email exchange where Mr. Hartford concurs with the assertion of the section 6662A penalty does. In both instances, the FPAA and the Answer, respondent maintains that the penalties were approved, in writing, prior to the first formal communication of respondent's intention to assert the penalties.

Petitioner argues that respondent is not entitled to summary judgment regarding the IRS' purported compliance with section 6751(b)(1) because disputed issues of material fact exist. Petitioner contends that there is a factual dispute about who made the initial determination to assert the gross valuation misstatement penalty under section 6662(h), the substantial understatement penalty under section 6662(b)(2) and (d), and the negligence penalty under section 6662(b)(1) and (c). Petitioner disagrees with respondent's recitation of facts and argues that it is entitled to a fulsome exploration of the evidence and issues at hand, and therefore summary judgment would be premature and improper. Specifically, petitioner avers that respondent's own records contradict his assertions that RA Tehan initially determined the penalties in this case and that the RA Tehan's then-supervisor substantively reviewed the penalties.

II. Analysis

Section 6751(b)(1) provides that no penalty shall be assessed unless "the initial determination" of the assessment was "personally approved (in writing) by the immediate supervisor of the individual making such determination." In a TEFRA case such as this, supervisory approval generally must be obtained before the FPAA is issued to the partnership. See Palmolive Bldg. Inv'rs, LLC v. Commissioner, 152 T.C. 75, 83 (2019). If supervisory approval was obtained by that date, the partnership must establish that the approval was untimely, i.e., "that there was a formal communication of the penalty before the proffered approval" was secured. See Frost v. Commissioner, 154 T.C. 23, 35 (2020); see also Patel v. Commissioner, T.C. Memo. 2020-133.

As we previously determined, section 6751(b)(1) does not require approval by a specific person in a particular way. Belair Woods, LLC v. Commissioner, 154 T.C. 1, 16 (2020) (citing Palmolive Bldg. Inv'rs., LLC, 152 T.C. at 84-86). Rather, the statute "mandates only that the approval of the penalty assessment be 'in writing' and by a manager." Belair Woods, 154 T.C. at 16; see also PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 213 (5th Cir. 2018).

A. Assertion of the Penalties in the FPAA

Petitioner does not contend that the IRS formally communicated with itself, the LLC, or their representatives before April 9, 2019, the date the IRS made its decision to assert the gross valuation misstatement penalty under section 6662(h), the substantial understatement penalty under section 6662(b)(2) and (d), and the negligence penalty under section 6662(b)(1) and (c) found in the FPAA. Rather, petitioner contends that it was Mr. Fee (not RA Tehan) who initially decided to assert the substantial understatement penalty under section 6662(b)(2) and (d) and the negligence penalty under section 6662(b)(1) and (c) (and potentially other penalties); and therefore, there is no evidence regarding timely approval by Mr. Fee's then-immediate supervisor. In his Reply, respondent contends that the question of supervisory approval is an objective test based on the relevant documents which is ripe for decision, and directs us to Patel v. Commissioner, T.C. Memo. 2020-133 and Raifman v. Commissioner, T.C. Memo. 2018-101. We agree with respondent.

In this case, it is undisputed that the March lead sheet and April lead sheet were signed in a timely manner by RA Tehan's then-immediate supervisor, Ms. Carreiro-Smithson. Mr. Fee's role as IRS counsel in this matter was to review the draft FPAA and provide advice and recommendations to RA Tehan. After the Commissioner produces evidence of compliance with section 6571(b), the burden shifts and the taxpayer then must come forward with contrary evidence. See Frost, 154 T.C. at 35. In this case, petitioner's contentions as to whether Mr. Fee's then-immediate supervisor approved the initial determination are inconsequential since it has been established that RA Tehan prepared the FPAA and timely sought the requisite supervisory approval prior to the FPAA's issuance. See Palmolive Bldg. Inv'rs, LLC, 152 T.C. at 84-86. Accordingly, we determine that there are no material facts in dispute precluding summary judgment on this issue.

Therefore, we conclude that respondent has complied with the requirements of section 6751(b)(1) when asserting the penalties found in the FPAA.

B. Assertion of the Penalty in the Answer

Petitioner does not dispute that the IRS complied with section 6751(b)(1) with respect to the imposition of section 6662A penalties.

Before filing the Answer Mr. Weaver determined that respondent should assert an alternative penalty under section 6662A. Mr. Hartford signed the Answer as "Acting Associate Area Counsel (Large Business & International)."

Rule 142(a) specifically provides that the Commissioner bears the burden of proof on a "new matter" pleaded in his answer. We have held that section 6751(b)(1) "includes no requirement that all potential penalties be initially determined . . . at the same time." Palmolive Bldg. Inv'rs, 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 the Acting Associate Area Counsel at that time, Mr. Hartford was Mr. Weaver's then-immediate supervisor. See Internal Revenue Manual pt. 1.1.6.15.1(4) (June 18, 2015). Petitioner does not contend that the IRS formally communicated with itself, the LLC, or their representatives regarding the assertion of the section 6662A penalty before respondent filed his Answer-his initial determination to assert this penalty. Instead, petitioner objects to the assertion of the section 6662A penalty 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); Sundstrand Corp., 98 T.C. at 520. Petitioner's legal objections to the section 6662A penalty are misplaced, as they do not dispute the issue of whether respondent complied with section 6751(b)(1).

Based on our review of the parties' declarations and attached exhibits, there is no genuine dispute as to material facts. Consequently, we conclude that respondent has complied with the requirements under section 6751(b)(1) when asserting penalties in his Answer.

In consideration of the foregoing, it is hereby ORDERED that respondent's Motion for Partial Summary Judgment, filed October 25, 2021, is granted.


Summaries of

Longwood Pres. Holdings v. Comm'r of Internal Revenue

United States Tax Court
Aug 23, 2022
No. 12421-19 (U.S.T.C. Aug. 23, 2022)
Case details for

Longwood Pres. Holdings v. Comm'r of Internal Revenue

Case Details

Full title:Longwood Preserve Holdings, LLC, Longwood Preserve Investors, LLC, Tax…

Court:United States Tax Court

Date published: Aug 23, 2022

Citations

No. 12421-19 (U.S.T.C. Aug. 23, 2022)