Opinion
11794-21
10-17-2023
RANCH SPRINGS, LLC, RANCH SPRINGS INVESTORS, 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 Ranch Springs, LLC (Ranch Springs) for a conservation easement in the amount of $25,872,000 for the taxable year 2017. [Doc. 1 at 23.] The Internal Revenue Service (IRS) issued a notice of final partnership administrative adjustment (FPAA), which disallowed the deduction and determined penalties.
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. 56.] Petitioner, Ranch Springs' tax matters partner, opposes the motion on the ground that certain factual disputes and evidentiary barriers preclude summary adjudication. [Doc. 72.] We will grant the Commissioner's motion.
Unless otherwise indicated, 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, using .pdf pagination.
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 motion 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).
Ranch Springs is an Alabama-based limited liability company. [Doc. 57 at 4; Doc. 1 at 2-3.] For the tax period ending December 31, 2017, it elected to be classified as a TEFRA partnership for federal income tax purposes. [Doc. 57 at 4; see also Doc. 1 at 2-3.]
Before its repeal, TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), Pub. L. No. 97248, §§ 401-407, 96 Stat. 324, 648-71, governed the tax treatment and audit process for many partnerships, including Ranch Springs.
Ranch Springs owns 110 acres of land in Shelby County, Alabama. [Doc. 1 at 9.] On December 28, 2017, Ranch Springs granted the Heritage Preservation Trust, Inc. a conservation easement over the land. [Id.] On its 2017 partnership return, Ranch Springs claimed a charitable contribution deduction of $25,872,000 for this donation. [Id. at 13, 23.]
The IRS selected this return for examination, assigning the case to Revenue Agent Timothy Neighbors. [Doc. 57 at 24.] At the conclusion of his examination, Revenue Agent Neighbors recommended assertion of the 40% penalty for gross valuation misstatement, see I.R.C. § 6662(h), or in the alternative, 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). [Id. at 12-20, 24-25.]
At the time Revenue Agent Neighbors made his recommendation to assert penalties against Ranch Springs, Supervisory Revenue Agent Gregory Burris was tasked with overseeing the examination of Ranch Springs. [Doc. 57 at 21-22.] In this role, he "was directly responsible for supervising Revenue Agent Neighbors' substantive work during this examination." [Id. at 21.]
On March 2, 2021, Supervisory Revenue Agent Burris approved Revenue Agent Neighbors' recommendation for the assessment of penalties. [Doc. 57 at 22.] Supervisory Revenue Agent Burris digitally signed a penalty lead sheet, which included a statement declaring that Supervisory Revenue Agent Burris is "the immediate supervisor . . . of Timothy E. Neighbors who made the initial determination to assert the penalties indicated on this form for the [2017] year[] . . . . By my signature below, I approve that initial determination." [Id. at 12, 22.]
On March 22, 2021, the IRS sent petitioner an FPAA reducing the deduction claimed for the conversation easement by $25,814,000 and determining the penalties discussed above. [Doc. 1 at 18-38.] Petitioner then timely petitioned this Court for readjustment of the partnership items. [Doc. 1.]
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(a); 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. Evidentiary Objections
Before turning to the parties' substantive dispute, we briefly address petitioner's evidentiary objections to the declaration and exhibits the Commissioner introduced in support of his motion for partial summary judgment. Generally, a declaration supporting a summary judgment motion must be "made on personal knowledge," set forth "facts as would be admissible in evidence," and show the declarant is competent to testify on these matters. Rule 121(c)(4).
As an initial matter, petitioner argues that the agents' declarations and attached exhibits are irrelevant and inadmissible. [Doc. 72 at 12-14.] These declarations and exhibits are plainly relevant as they address the nature of the supervisory relationship between Revenue Agent Neighbors and Supervisory Revenue Agent Burris, the crux of the issue currently before us.
Petitioner also raises a hearsay objection to the agents' declarations and the attached exhibits. [Doc. 72 at 14-16.] This argument is premised on the notion that any identification of Revenue Agent Neighbors' supervisor would have stemmed from a hearsay statement, ostensibly from another IRS employee.
We will overrule that objection as well; Revenue Agent Neighbors had ample opportunity to learn who his supervisor was. Additionally, Revenue Agent Neighbors (and Supervisory Revenue Agent Burris) would be able to testify at trial as to the nature and scope of Supervisory Revenue Agent Burris' supervision. We accordingly do not believe that the identification of the immediate supervisor necessarily elicits, or relies on, hearsay statements. Cf. Jones v. UPS Ground Freight, 683 F.3d 1283, 1293-94 (11th Cir. 2012) ("[Courts] may consider a hearsay statement in passing on a motion for summary judgment if the statement could be reduced to admissible evidence at trial or reduced to an admissible form." (quoting Macuba v. Deboer, 193 F.3d 1316, 1323 (11th Cir. 1999))).
III. 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. 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 Id. at 1279 n.1. The Commissioner thus asserts in an abundance of caution that he has satisfied the requirements of section 6751 both with and without respect to the more generous time frame contemplated in Kroner.
In this case, Revenue Agent Neighbors conducted the examination and recommended the assertion of penalties against Ranch Springs [Doc. 57 at 12-20, 24- 25], which were formally communicated by means of FPAA dated March 22, 2021 [Doc. 1 at 18-38]. The parties ostensibly agree that this notice constituted the initial determination, but dispute whether written supervisory approval had been obtained before that communication. Specifically, petitioner argues that the record does not suffice to demonstrate that Supervisory Revenue Agent Burris was in fact Revenue Agent Neighbors' immediate supervisor at the time notice was sent, explaining that the Commissioner has not supplied any documentation describing the substantive relationship between the two agents.
The record establishes that Supervisory Revenue Agent Burris was Revenue Agent Neighbors' immediate supervisor at all times pertinent to the section 6751 inquiry. As an initial matter, Supervisory Revenue Agent Burris digitally signed a penalty lead sheet, in which he identified herself as "the immediate supervisor of . . . Timothy E. Neighbors who made the initial determination to assert the penalties indicated on this form for the year(s) indicated on this form" and "approve[d] that initial determination." [Docs. 57 at 12.] "We have repeatedly held that a manager's signature on a penalty approval form, without more, is sufficient to satisfy the statutory requirements [of section 6751]." Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *11.
To remove any doubt, the Commissioner also introduced declarations from both agents. These declarations [Docs. 57 at 21-26] confirm the explicit statement on the penalty lead sheet that Supervisory Revenue Agent Burris was Revenue Agent Neighbors' immediate supervisor at the time he approved the penalties. See e.g., Nassau River Stone, LLC, T.C. Memo. 2023-36, at *11("[W]e have regularly decided section 6571(b)(1) questions on summary judgment on the basis of IRS records and declarations from relevant IRS officers."); Sparta Pink Prop., LLC v. Commissioner, T.C. Memo. 2022-88, at *4-5 (concluding that the agents' declarations, combined with the penalty approval form, were sufficient to prove the penalties received the requisite supervisory approval).
In light of the foregoing, it is
ORDERED that the Commissioner's motion for partial summary judgment [Doc. 56] filed August 10, 2023, is granted.