Opinion
3412-22
03-10-2023
SAVANNAH SHOALS, LLC, GREEN CREEK RESOURCES, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke, Judge
On January 25, 2023, respondent filed a Motion for Partial Summary Judgment that he complied with section 6751(b) for the penalties asserted in this case. On February 17, 2023, respondent supplemented his motion with a Declaration. On March 6, 2023, petitioner filed an Opposition to the Motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code (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.
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). We 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); Rule 121. We construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand, 98 T.C. at 520. The nonmoving party may not rest upon mere allegations or denials 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).
Background
The following background is derived from pleadings, motion papers, exhibits, and declarations. It is stated solely for purposes of deciding respondent's motion in the light most favorable to petitioner, including inferences drawn therefrom, and is not stated as findings of fact in this case. See Sundstrand, 98 T.C. at 520.
Savannah Shoals, LLC (Shoals) is a Delaware limited liability company that elected to be treated as a TEFRA partnership for federal income tax purposes. Green Creek Resources, LLC, is its tax matters partner. Shoals had its principal place of business in Georgia when the Petition was timely filed. This case is appealable to the Court of Appeals for the Eleventh Circuit.
On December 21, 2021, respondent issued a Final Partnership Administrative Adjustment (FPAA) disallowing a $23 million deduction for Shoals' short year return for the taxable year ending December 31, 2017, (2017 tax year) and asserting the following penalties: a section 6662(h) penalty for gross valuation misstatement, alternatively, a section 6662A penalty for an understatement with respect to a reportable transaction, or alternatively, section 6662(a) accuracy-related penalties for negligence or intentional disregard of rules and regulations, a substantial understatement of income tax, or substantial valuation misstatement.
Revenue Agent (RA) Peter Kuczynski was assigned to the examination (exam) of Shoals' return. During the exam, he obtained assistance and advice from IRS employees including unidentified issue managers, Chief Counsel attorney Steven A. Sirotic, and other unnamed attorneys. In December 2019 RA Kuczynski reviewed a penalty presentation prepared by an unidentified IRS employee that we infer advised him to assert the penalties at issue. Chief Counsel attorneys became involved in the exam by April 22, 2020, and remained involved through the issuance of the FPAA. They provided significant review, oversight, and approval of RA Kuczynski's work. Mr. Sirotic prepared multiple memoranda to RA Kuczynski with advice on the exam including the assertion of penalties. In October 2020 RA Kuczynski began drafting a Notice of Proposed Adjustment and received advice from Chief Counsel attorneys.
Respondent has produced a penalty lead sheet and penalty consideration form dated September 14, 2021, that indicate that RA Kuczynski made the initial determination to assert each penalty at issue, and his immediate supervisor, Thomas Gardella, approved the penalty determinations in writing on that date.
On October 13 and/or 15, 2021, Mr. Sirotic provided legal advice to RA Kuczynski regarding the draft Notice of Proposed Adjustments and penalty approval workpaper. Later, RA Kuczynski sought Mr. Sirotic's approval of Form 866-A, Explanation of Items, which included an explanation of the penalties asserted. Mr. Sirotic approved Form 866-A. On December 13 and 15, 2021, Mr. Sirotic wrote memoranda to Passthrough Coordinator Boa Chang in Exams' Technical Services unit. On December 17, 2021, Mr. Chang sent an email to RA Kuczynski stating that he "got the approval from Counsel already." The FPAA was issued on December 21, 2021.
Respondent has withheld parts of RA Kuczynski's activity record and administrative file on the basis of attorney-client or "law enforcement" privilege, including the identity of IRS employees with whom RA Kuczynski discussed the exam and records relating to the contents of those discussions. On March 3, 2023, petitioner filed a Motion to Compel Discovery.
Discussion
Section 6751(b) states 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 or such higher-level official as the Secretary may designate." Section 6751(b) compliance is determined at the partnership level for any penalty that relates to an adjustment of a partnership item. Ginsburg v. United States, 17 F.4th 78, 85 (11th Cir. 2021). Noncompliance is a partnership-level defense that must be raised at the partnership proceeding; a partner cannot raise it in a partner-level proceeding. Id.
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 section 6751(b) is satisfied "so long as a supervisor approves an initial determination of a penalty assessment before [the IRS] assesses those penalties." It interpreted an initial determination to refer to the "ministerial" process by which the IRS formally records a tax debt. Id. at 1278. Kroner was a notice of deficiency case. Petitioner argues that it is inapplicable to partnership cases because assessments occur at the partner level after section 6751(b) compliance has already been determined at the partnership level. Irrespective of Kroner, we hold that there is no genuine dispute of material fact that respondent has complied with section 6751(b) for each penalty because respondent obtained written supervisory approval before the IRS formally communicated the penalties to the partnership in the FPAA. See Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).
Petitioner's Arguments
Petitioner argues that there is a genuine dispute of material fact regarding (1) whether RA Kuczynski and Mr. Gardella were the IRS employees who made the initial penalty determinations and provided supervisory approval, respectively, in the light of Mr. Sirotic's oversight of the exam as well as unnamed IRS employees' involvement in the exam and (2) whether RA Kuczynski and Mr. Gardella had independent discretion to refuse to assert the penalties because the IRS has a coordinated nationwide policy to assert the same penalties against any taxpayer engaged in a syndicated conservation easement transaction.
1. Initial Determination and Approval
Petitioner argues that the facts and inferences when viewed in the light most favorable to it contradict respondent's assertions that RA Kuczynski made the initial penalty determinations and Mr. Gardella approved the penalties. It asserts the following inferences can be made from the record: (1) Mr. Sirotic and other Chief Counsel attorneys controlled the exam, (2) Mr. Sirotic controlled all decisions including the initial penalty determinations, and/or (3) Mr. Sirotic approved the penalties because he reviewed the determinations and approval forms after Mr. Gardella provided his purported approval. From these inferences, petitioner asserts that Mr. Sirotic made the penalty determinations. We disagree; even if these inferences can be made, they do not create a genuine dispute of material fact.
Irrespective of how involved Chief Counsel attorneys may have been in the exam, Exams retains the authority to make a penalty determination. Thus, it is immaterial that Mr. Sirotic or other Chief Counsel attorney advised RA Kuczynski to assert the penalties or had to approve his work product. The Internal Revenue Manual establishes that RA Kuczynski is the IRS employee with authority to make an initial penalty determination before an FPAA is issued. IRS policy requires Chief Counsel to be involved in the exam before the FPAA is issued and must review and approve all FPAAs before they are issued. IRM pt. 4.8.1.2.2(3)g (Nov. 25, 2015); pt. 4.31.2.7.1(n) (Apr. 20, 2017). Exams' Technical Services unit is responsible for writing and issuing FPAAs and coordinating Chief Counsel's approval of the FPAA, as Mr. Chang has done in this case. Also it is immaterial that RA Kuczynski reviewed another RA's penalty presentation because a presentation is not an initial determination within the meaning of section 6751(b)(1). See Cattail, at 11.
Even if we were to find that Mr. Sirotic made the initial penalty determination, both Mr. Sirotic and Associate Area counsel signed the Answer, which would satisfy the section 6751(b) supervisory approval requirements as interpreted by the Eleventh Circuit in Kroner, 48 F.4th 1272, because assessment has not yet occurred and the Associate Area Counsel had discretion to withhold her approval when the Answer was filed.
During the exam, it is the RA's duty to determine penalties. We do not question the extent of the RA's deliberations or discretion over whether to impose penalties because section 6751(b) simply requires evidence of written supervisory approval. We limit our review to whether there is evidence of such approval. See Raifman v. Commissioner, T.C. Memo. 2018-101. The undisputed facts clearly establish that RA Kuczynski made the penalty determinations when the case was under the authority of Exams and Mr. Gardella as his immediate supervisor approved the determinations in writing before the penalties were first formally communicated to the partnership in the FPAA. There is no evidence (or inferences) that contradicts these facts or call into question the credibility of declarants.
2. Discretion to Determine and Approve Penalty
Petitioner argues that the IRS policy and pattern of asserting the same penalties in hundreds of syndicated easement cases took away RA Kuczynski's and Mr. Gardella's independent discretion to refuse to assert the penalties and provide supervisory approval, respectively. It argues that some other IRS employee who instituted the IRS policy is the employee who made the initial determination and respondent must identify that person's immediate supervisor.
We have rejected this argument. See Cattail Holdings, LLC v. Commissioner, T.C. Memo. 2023-17, at 9. IRS announcements to the public, such as Notice 2017-10 and related news releases, cannot constitute "the initial determination of [a penalty] assessment" because they are not directed to a specific taxpayer whose return is under exam. Pickens Decorative Stone, LLC v. Commissioner, T.C. Memo. 2022-22. An IRS policy is not a determination of any penalties against a taxpayer within the meaning of section 6751(b)(1). Cattail Holdings, at 9. An initial determination is a formal action by Exams directed to a particular taxpayer. Belair Woods, 154 T.C. at 15. An initial determination occurs only after the work of Exams is completed. Thompson v. Commissioner, 155 T.C. 87 (2021); Kestin, 153 T.C. 14. The timeliness of supervisory approval is determined on the basis of "the taxpayer against whom the penalties are being asserted." Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125, at *16. Announced IRS policy is akin to a warning to taxpayers, not an initial determination. See Kestin, 153 T.C. 14 (2019).
Petitioner reads too much into comments about discretion in Chai v. Commissioner, 851 F.3d 190, 219-20 (2d Cir. 2017) aff'g in part, rev'g in part T.C. Memo. 2015-42, and other cases. See Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022) (supervisory approval must occur before the penalty is assessed or before the supervisor "loses discretion whether to approve the penalty assessment), rev'g and remanding 154 T.C. 68 (2022); see also Kroner, 48 F.4th at 1279 n.1 (supervisory approval must occur before assessment but left open the question of whether it may have to occur earlier in some cases before the supervisor "has lost the discretion to disapprove" the penalty). In Chai, 851 F.3d at 220, the Second Circuit explained that given the legislative purpose for section 6751(b), to ensure that penalties are not used as bargaining chips by the IRS, for supervisory approval to be meaningful, it must occur before the taxpayer's liability had been determined, commenting that "[i]f supervisory approval is to be required at all, it must be the case that the approval is obtained when the supervisor has the discretion to give or withhold it." Id. It interpreted section 6751(b)(1) to require written supervisory approval "no later than the date the IRS issues the notice of deficiency". Id. at 221.
Nothing in Chai or the other cases cited by petitioner suggests that we should examine IRS policy or the exam process to determine the RA's discretion. Rather, these cases considered the supervisor's discretion based on the stage of the exam process, i.e., has there been an assessment or some earlier action that caused the supervisor to lose discretion over the penalty approval.
Conclusion
There is no genuine dispute of material fact that RA Kuczynski made the initial penalty determinations and his immediate supervisor, Mr. Gardella, approved the penalty determinations in writing before issuance of the FPAA. There is no genuine dispute of material fact that respondent complied with section 6751(b). Accordingly, respondent is entitled to partial summary judgment.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment, as supplemented is granted.