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N. By Nw. V v. Comm'r of Internal Revenue

United States Tax Court
Aug 4, 2022
No. 12103-19 (U.S.T.C. Aug. 4, 2022)

Opinion

12103-19

08-04-2022

NORTH BY NORTHWEST V, LLC, NOTTELY RIVER INVESTMENTS I, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent


ORDER

Elizabeth Crewson Paris Judge

This case involves respondent's disallowance of petitioner's 2014 conservation easement as not being a qualified conservation easement under section 170(h). This order addresses petitioner's second Motion for Partial Summary Judgment and respondent's Cross-Motion for Partial Summary Judgment. Currently at issue is whether respondent complied with the supervisory approval requirements of section 6751(b)(1) with respect to the penalties asserted.

Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Petitioner filed a first Motion for Partial Summary Judgment on January 7, 2022. Docket entry 73. The Motion was unopposed by respondent, and on June 1, 2022, the Court issued an Order granting petitioner's Motion. Docket entry 93.

On July 3, 2019, at docket entry 1, petitioner filed a Petition for Readjustment of Partnership Items set forth in a Notice of Final Partnership Administrative Adjustment ("FPAA") issued April 4, 2019. The FPAA asserted accuracy-related penalties under section 6662 for gross valuation misstatement (section 6662(h)) and, in the alternative, substantial valuation misstatement (section 6662(e)), substantial understatement of income tax (section 6662(b)(2)), negligence (section 6662(b)(1)), as well as under section 6662A for understatement with respect to a reportable transaction.

On February 2, 2022, at docket entry 79, petitioner filed a second Motion for Partial Summary Judgment on the grounds that respondent failed to comply with section 6751(b), which requires written supervisory approval of penalty assessments, in connection with respondent's examination of petitioner. Contemporaneous with the Motion, petitioner filed at docket entry 80 a Declaration of Michelle Levin in Support of Petitioner's Motion for Partial Summary Judgment. The Declaration contends that the administrative file produced by respondent in this case does not contain evidence of supervisory review or consideration of the proposed penalties and does not meet the "personal approval" requirement thereof.

On March 17, 2022, at docket entry 84, this Court ordered respondent to respond to petitioner's second Motion for Partial Summary Judgment.

On May 11, 2022, at docket entry 86, respondent filed an Objection to Petitioner's Motion for Partial Summary Judgment and Cross-Motion for Partial Summary Judgment showing, supported by declarations, that respondent complied with the supervisory approval requirements of section 6751(b)(1) as they apply to: (1) the gross valuation misstatement penalty under section 6662(h); (2) the substantial valuation misstatement penalty under section 6662(e); (3) the reportable transaction understatement penalty under section 6662A; (4) the substantial understatement penalty under section 6662(b)(2); and (5) the negligence penalty under section 6662(b)(1). In support of the Objection and Cross-Motion, respondent contemporaneously filed Declarations of Jennifer Lopez and Debra Craine, docket entries 87 and 88, respectively, and a Memorandum in Support of Respondent's Objection to Petitioner's Motion for Partial Summary Judgment and Cross-Motion for Partial Summary Judgment, docket entry 89.

On June 16, 2022, at docket entry 97, petitioner voluntarily filed a Reply to Respondent's Objection to Petitioner's Motion for Partial Summary Judgment, having not been ordered to do so by this Court.

Background

The following facts are drawn from petitioner's second Motion for Partial Summary Judgment, respondent's Cross-Motion for Partial Summary Judgment, supporting declarations, the exhibits attached to those declarations, and the parties' respective written objections. They are stated solely for purposes of deciding the parties' Motions 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). These facts are in addition to those included in the First Stipulation of Facts, filed February 4, 2020, docket entry 17.

In the First Stipulation of Facts, the parties have stipulated that North by Northwest V, LLC, is a Georgia limited liability company organized on December 27, 2012, whose principal place of business is in Georgia and which was classified as a partnership for federal income tax purposes subject to TEFRA for the tax year at issue. The parties also have stipulated that Nottely River Investments I, LLC ("Nottely River"), is the tax matters partner of North by Northwest V, LLC, having been designated as a successor tax matters partner after December 31, 2014.

Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71 (repealed by the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101(a), 129 Stat. 584, 625).

On June 21, 2017, Bryan Kelley, in his capacity as Manager of Webb Creek Mgmt Group, LLC, Manager of Nottely River, the tax matters partner of petitioner, signed a Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, which extended the assessment period for tax year 2014, at issue in this case, until April 17, 2019. Levin Decl. Ex. 2, at 9-10 (docket entry 80).

On June 24, 2018, during the course of petitioner's audit, the examiner's supervisor, Charles Daniel, Team Manager of Eastern Compliance Team 1204, designated Paul Bleak (the "Acting Team Manager") to act as the Team Manager from June 24, 2018, through October 24, 2018. Levin Decl. Ex. 2, at 8; id. Ex. 4.

On August 10, 2018, respondent's examiner first made an initial determination to assert a substantial understatement penalty under section 6662(b)(2), and as an alternative a negligence penalty under section 6662(b)(1). Mem. in Supp. of Resp't's Obj. & Cross-Mot. 4 (docket entry 89). This initial determination of the penalty assessment was memorialized in a Form 5701, Notice of Proposed Adjustment, and a Form 886-A, Explanation of Items. Craine Decl. Ex. A, at 14-20 (docket entry 88). Later that same day, the examiner's immediate supervisor, the Acting Team Manager, approved the first initial determination of the penalty assessment in writing by electronically signing a Civil Penalty Approval Form and a Supplemental Civil Penalty Approval Form. Mem. in Supp. of Resp't's Obj. & Cross-Mot. Ex. 1; Levin Decl. Exs. 6-7.

On August 13, 2018, at the conclusion of the examination, respondent's examiner revised the first initial determination of the penalties, determining instead to assert a gross valuation misstatement penalty under section 6662(h) as the primary penalty; and in the alternative, a substantial valuation misstatement penalty under section 6662(e), a reportable transaction understatement penalty under section 6662A, a substantial understatement penalty under section 6662(b)(2), and a negligence penalty under section 6662(b)(1). Craine Decl. ¶ 3. These revisions culminated in an additional Form 5701 and an additional Form 886-A. Id. Ex. A. The additional Form 886-A consisted of thirteen pages, roughly half of which had already been approved as part of the first initial determination of the penalty assessment. See id. The revised forms embodied more than 600 hours of work by the examiner, including fifteen hours of work on August 10 and 13, 2018, the dates of supervisory approval. See Levin Decl. Ex. 11, at 21. According to the examiner's activity record, the work on August 10, 2018, included sending multiple Forms 5701 for manager review and approval. Id.

Respondent's analyst determined that petitioner did not file a Form 8886, Reportable Transaction Disclosure Statement, in the tax year at issue. Lopez Decl. ¶ 5 (docket entry 87).

As before, when the examiner's immediate supervisor, the Acting Team Manager, approved the revised initial determination of the penalty assessment, he did so in writing by electronically signing an additional Civil Penalty Approval Form and an additional Supplemental Civil Penalty Approval Form. Craine Decl. ¶ 5; id. Ex. B; First Stipulation of Facts Ex. 15-J, at 9-11 (docket entry 17). Based on the timestamps, approximately three and a half hours separated the electronic signatures of the examiner and her immediate supervisor on the additional Supplemental Civil Penalty Approval Form. Craine Decl. Ex. B, at 2-3; First Stipulation of Facts Ex. 15-J, at 10-11.

Respondent did not formally communicate his intention to assert any penalties until after the requisite supervisory approval had been obtained. Craine Decl. ¶ 6; see also First Stipulation of Facts Ex. 15-J, at 1 (FPAA issued April 4, 2019, almost eight months after receipt of written supervisory approval).

Discussion

I. Summary Judgment Standard

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), we may grant summary judgment when there is no genuine dispute as to any material facts 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). A partial summary adjudication may be made which does not dispose of all the issues in the case. Id. However, the nonmoving party may not rest upon the allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine issue for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.

II. Analysis

A. Petitioner's Motion for Partial Summary Judgment

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 the instant case, it is not in dispute whether any statutory requirement of section 6751(b)(1) other than the "personal approval" requirement has been satisfied. Thus, to resolve the above-described Motions, this Court need only consider the issue of personal approval.

Petitioner contends in its second Motion for Partial Summary Judgment, filed February 2, 2022, docket entry 79, that, without further proof, respondent obtained mere "rubber stamp" approval of the penalties at issue, not the "personal" approval required by section 6751(b). However, this Court has explicitly refused "to read into section 6751(b)(1) the subtextual requirement that respondent demonstrate the depth or comprehensiveness of the supervisor's review." See Patel v. Commissioner, T.C. Memo. 2020-133, at *25-26 (quoting Belair Woods, LLC v. Commissioner, 154 T.C. 1, 17 (2020) (citation omitted) (internal quotations omitted)); Raifman v. Commissioner, T.C. Memo. 2018-101, at *60-61 (adequacy of manager's contemplation of a potential penalty defense irrelevant to whether respondent complied with the written supervisory approval requirement of section 6751(b)). Rather, we have repeatedly held that the relevant supervisor's signature on the Civil Penalty Approval Form is sufficient to satisfy the statutory requirements of section 6751(b)(1). Belair Woods, 154 T.C. at 17 (citing McNely v. Commissioner, T.C. Memo. 2019-39; Brown v. Commissioner, T.C. Memo. 2019-30; Dasent v. Commissioner, T.C. Memo. 2018-202; Giunta v. Commissioner, T.C. Memo. 2018-180; Berry v. Commissioner, T.C. Memo. 2018-143).

Based on the parties' pleadings and the evidence in the record, this Court is not persuaded. Both sets of penalty approval forms identify the examiner who made the initial determinations to assert the penalties and the Acting Team Manager, her immediate supervisor, who approved them. The examiner also declared under penalties of perjury that: "[Her] immediate supervisor . . . personally approved [her] initial determination of the penalties in writing on August 13, 2018 . . . as shown by his electronic signature on the Civil Penalty Approval Form and Supplemental Civil Penalty Approval Form . . . ." Craine Decl. ¶ 5 (emphasis added); see also Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021) (holding that "an agent's 'immediate supervisor' is most logically viewed as the person who supervises the agent's substantive work on an examination").

Petitioner goes too far in construing the supervisory approval requirements of section 6751(b)(1), turning an "approval" requirement into a "thorough review and approval" requirement. As this Court said in Thompson v. Commissioner, the subsection "is captioned 'Approval of Assessment,' not 'Explanation of Assessment.'" T.C. Memo. 2022-80, at *9 (citing Pickens Decorative Stone, LLC v. Commissioner, T.C. Memo. 2022-22, at *7). "The written supervisory approval requirement . . . requires just that: written supervisory approval." Id. (citations omitted) (internal quotations omitted).

Further, petitioner's interpretation of section 6751(b)(1) would require the Court to abandon its own precedent, which we are not prepared to do. We have repeatedly rejected any contention that written supervisory approval requires "respondent [to] demonstrate the depth or comprehensiveness of the supervisor's review." Belair Woods, 154 T.C. at 17; see also Thompson, T.C. Memo. 2022-80, at *9; Roth v. Commissioner, T.C. Memo. 2017-248 (holding that an associate area counsel's signature is sufficient to satisfy statutory requirements for penalties first asserted in the answer), aff'd, 922 F.3d 1126 (10th Cir. 2019).

For those reasons, we decline to adopt petitioner's interpretation of section 6751(b).

B. Respondent's Cross-Motion for Partial Summary Judgment

As a threshold matter, respondent must show that he complied with section 6751(b)(1). See Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017) (ruling that "compliance with § 6751(b) is part of the Commissioner's burden of production" under section 7491(c)), aff'g in part, rev'g in part T.C. Memo. 2015-42.

Respondent has provided sufficient evidence showing that he complied with the supervisory approval requirements of section 6751(b)(1). Respondent's examiner made the initial determination to assert each of the penalties at issue in this case. Her initial determination to assert the penalties encompassed both a first initial determination, which she made on August 10, 2018, and a revised initial determination, which she made on August 13, 2018, that incorporated and expanded upon the first initial determination. The Acting Team Manager, the examiner's immediate supervisor, reviewed these two initial determinations to assert penalties, effectively reviewing the overlapping work product twice, on August 10 and 13, 2018. Then, on each of those same dates, the immediate supervisor provided personal, written approval of the respective initial determination of penalties by electronically signing the requisite Civil Penalty Approval Form and Supplemental Civil Penalty Approval Form. Lastly, the definite decision to assert penalties was formally communicated to petitioner in the FPAA issued April 4, 2019, nearly eight months after the examiner secured supervisory approval from the Acting Team Manager and before the extended assessment date of April 17, 2019.

Petitioner has not set forth any "specific facts" to dispute the timeliness of the Acting Team Manager's signature. Therefore, we conclude that the penalties at issue in this case were personally approved, in writing, by the immediate supervisor in accordance with section 6751(b)(1).

On the basis of the foregoing, it is found that respondent has satisfied the supervisory approval requirements of section 6751(b)(1) as they apply to: (1) the gross valuation misstatement penalty under section 6662(h); (2) the substantial valuation misstatement penalty under section 6662(e); (3) the reportable transaction understatement penalty under section 6662A; (4) the substantial understatement penalty under section 6662(b)(2); and (5) the negligence penalty under section 6662(b)(1).

After due consideration, it is

ORDERED that petitioner's Motion for Partial Summary Judgment, filed February 2, 2022, docket entry 79, is denied without prejudice. It is further

ORDERED that respondent's Cross-Motion for Partial Summary Judgment, filed May 11, 2022, docket entry 86, is granted and that respondent has satisfied the supervisory approval requirements of section 6751(b)(1) as they apply to the penalties at issue on the tax matters partner's Notice of Final Partnership Administrative Adjustment, dated April 4, 2019, for the partnership tax year ending December 31, 2014, relevant to this case.


Summaries of

N. By Nw. V v. Comm'r of Internal Revenue

United States Tax Court
Aug 4, 2022
No. 12103-19 (U.S.T.C. Aug. 4, 2022)
Case details for

N. By Nw. V v. Comm'r of Internal Revenue

Case Details

Full title:NORTH BY NORTHWEST V, LLC, NOTTELY RIVER INVESTMENTS I, LLC, TAX MATTERS…

Court:United States Tax Court

Date published: Aug 4, 2022

Citations

No. 12103-19 (U.S.T.C. Aug. 4, 2022)