152 T.C. 4
Tax Ct.2019Background
- Palmolive Building Investors, LLC (a partnership) claimed a $33.41 million charitable-contribution deduction in its 2004 Form 1065 for a façade conservation easement; the IRS disallowed the deduction (see prior opinion) and proposed penalties.
- Agent Wozek prepared a Form 5701 (July 2008) with two attached Forms 886A proposing a 40% gross-valuation-misstatement penalty under I.R.C. §6662(h) and, alternatively, a 20% negligence penalty under §6662(b)(1); Wozek gave these to his supervisor Michael Lynch, who signed the Form 5701.
- A 30-day letter (Oct. 2008) communicated only the gross-valuation penalty; a 60-day letter (May 2009) communicated gross-valuation and negligence penalties and attached the signed 5701 with both Forms 886A.
- Appeals Officer Trevor Holliday later proposed (June 2014) adding two alternative penalties (substantial understatement under §6662(b)(2) and substantial valuation misstatement under §6662(b)(3)); his supervisor Darren Lee signed the Form 5402-c approving the proposed FPAA, and the FPAA issued July 28, 2014, asserted all four penalties.
- Palmolive timely petitioned the Tax Court; the Court previously denied the substantive deduction and here addresses whether the IRS satisfied §6751(b)(1)’s written, supervisory-approval requirement for the initial determination of penalties.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §6751(b)(1) requires the initial determinations of all asserted penalties to be made at the same time or by the same individual | Palmolive: Multiple penalties must be initially determined contemporaneously/by same person; here approvals are from different times/people | Commissioner: §6751(b)(1) requires only that each initial determination be approved in writing by the immediate supervisor before notice; no single-time/same-person requirement | Held: No; statute does not require same time or same individual for multiple penalties—each penalty’s initial determination need only be approved in writing by the relevant supervisor before being communicated |
| Whether supervisory approval must appear on a particular form or in a particular document | Palmolive: IRS failed to follow Internal Revenue Manual procedures and did not document approvals in prescribed workpapers/forms, so §6751(b)(1) was not satisfied | Commissioner: §6751(b)(1) requires written supervisory approval but not a specific form; approvals on Form 5701 and Form 5402-c (with attached Forms 886A) suffice | Held: No particular form is required; the written approvals on Form 5701 and Form 5402-c, with attached 886As describing the penalties, satisfy §6751(b)(1) |
| Whether internal IRS procedures (IRM) create additional statutory requirements | Palmolive: Noncompliance with IRM (documenting approvals in workpapers) invalidates approvals | Commissioner: IRM is internal guidance not binding law; compliance with IRM is not required to satisfy §6751(b)(1) | Held: IRM is not law; failure to use a particular IRM form does not defeat written supervisory approval under §6751(b)(1) |
| Whether subdivisions of §6662(b) (e.g., negligence vs. disregard of rules) require separate initial determinations/approvals | Palmolive: Subparts (negligence versus disregard) are distinct and require separate initial determinations which were not made/approved | Commissioner: Even if distinct, the record shows each ground was initially determined and approved either in 2008 or in 2014 | Held: Court assumed either approach but concluded each alleged ground was initially determined and approved (some in 2008, others in 2014), so §6751(b)(1) was satisfied in any event |
Key Cases Cited
- Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (congressional purpose of §6751(b) and timing of supervisory approval)
- PBBM–Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018) (plain-language reading: §6751(b) requires written managerial approval but not a particular form)
- Thompson v. Commissioner, 140 T.C. 173 (Tax Ct. 2013) (Internal Revenue Manual not binding law on taxpayers)
- Deyo v. United States, [citation="296 F. App'x 157"] (2d Cir. 2008) (§6751(b) requires personal written approval but not any particular form or signature style)