BELAIR WOODS, LLC, EFFINGHAM MANAGERS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19493-17
UNITED STATES TAX COURT
Filed January 6, 2020
154 T.C. No. 1
P is the tax matters partner of LLC, which claimed on its 2009 return a charitable contribution deduction for a conservation easement. R commenced an examination of LLC‘s return and secured from an IRS engineer a report concluding that LLC had substantially overvalued the easement.
R‘s agent sent P a Letter 1807 inviting P to a closing conference to discuss R‘s tentative proposed adjustments. The proposed adjustments, set forth in an accompanying summary report, included disallowing the charitable contribution deduction and alternative penalties under
R‘s Examination Division held two conferences with LLC‘s representatives, but no agreement was reached. R‘s agent finalized a Civil Penalty Approval Form memorializing R‘s intention to assert alternative penalties under
R subsequently issued P a 60-day letter disallowing the charitable contribution deduction and asserting the three penalties set forth in the Civil Penalty Approval Form. The 60-day letter offered P the opportunity to appeal these determinations to R‘s Appeals Office, which P did unsuccessfully. R then issued P an FPAA asserting alternative penalties under
- Held: R‘s issuance to P of a Letter 1807 and summary report, setting forth the Examination Division‘s tentative proposed adjustments and inviting P to a conference to discuss them, did not constitute “the initial determination of * * * [a penalty] assessment” necessitating prior supervisory approval under
I.R.C. sec. 6751(b)(1) . - Held, further, R satisfied the requirements of
I.R.C. sec. 6751(b)(1) for the first three penalties because R‘s agent secured written supervisory approval on the Civil Penalty Approval Form before the 60-day letter was issued to P, formally communicating to P the Examination Division‘s definite determination to assert those penalties. - Held, further, R did not satisfy the requirements of
I.R.C. sec. 6751(b)(1) with respect to the fourth penalty because he did not show timely supervisory approval of that penalty.
David M. Wooldridge, Ronald Levitt, Gregory P. Rhodes, and Michelle A. Levin, for petitioner.
Christopher D. Bradley, Jason P. Oppenheim, John W. Sheffield III, and John T. Arthur, for respondent.
OPINION
LAUBER, Judge: This case involves a charitable contribution deduction claimed by Belair Woods, LLC (Belair), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued a timely notice of final partnership administrative adjustment (FPAA) disallowing that deduction in its entirety and determining four penalties. In an earlier report we addressed Belair‘s failure to attach to its 2009 tax return a fully completed appraisal summary on Form 8283, Noncash Charitable Contributions. We granted in part and denied in part respondent‘s motion for partial summary judgment on that point. See Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159.
Currently before the Court is a second round of cross-motions for partial summary judgment. These motions address the question whether timely written supervisory approval was secured for the four penalties at issue, as
Applying that analysis here, we hold that the transmission by the examining agent to Belair‘s tax matters partner (TMP or petitioner) of a “summary report” setting forth tentative proposed adjustments, and inviting petitioner to a conference to discuss them, did not constitute “the initial determination of * * * [a penalty] assessment” necessitating prior supervisory approval. See
after considering Belair‘s arguments, had made a definite decision to assert penalties. Because the examining agent secured supervisory approval of the three penalties listed on the Civil Penalty Approval Form before the Examination Division issued the 60-day letter, we hold that respondent complied with
Background
There is no dispute as to the following facts, which are drawn from the parties’ motion papers and the attached declarations
Belair was formed in late 2008 and has operated at all times as a partnership for Federal income tax purposes. Belair timely filed Form 1065, U.S. Return of Partnership Income, for its short taxable year beginning November 11 and ending December 31, 2009. On that return it claimed a charitable contribution deduction of $4,778,000 for the donation of a conservation easement to the Georgia Land Trust, a “qualified organization” for purposes of
On October 22, 2012, the IRS mailed to petitioner a Letter 1787, Notice of Beginning of Administrative Proceeding. This notice informed petitioner that “we‘re beginning our audit of your partnership‘s federal tax return.” The letter was signed by Ellie Pennington, the revenue agent (RA) assigned to conduct the examination.
RA Pennington‘s activity record indicates that the examination was conducted on a fast track because less than a year remained in the period of limitations when the examination began. On October 23, 2012, RA Pennington referred the case to an IRS engineer for preparation of an appraisal valuing the easement. On November 30, 2012, she received from the engineer a report concluding that Belair had substantially overvalued the easement. Between November 30 and December 17, 2012, she discussed the possible application of penalties with Carl Schneider, her then-supervisor.
On December 18, 2012, RA Pennington sent petitioner a Letter 1807 inviting the TMP (and other partners) to a closing conference to discuss the IRS’ proposed adjustments. (RA Pennington, not her immediate supervisor, signed the Letter 1807.) These proposals were detailed in an attached “summary report on the examination,” which “explain[ed] all proposed adjustments including facts, law and conclusion.” The Letter 1807 indicated that “[a]ll proposed adjustments in the summary report will be discussed at the closing conference” and asked petitioner to propose a date, time, and place for that meeting. The letter instructed the TMP to “send a copy of the summary report to each partner,” together with information concerning the conference.
The enclosed summary report proposed to deny the $4,778,000 charitable contribution deduction in its entirety, proposed a “gross overvaluation” penalty under
The IRS exam team attended an initial conference with Belair‘s representatives in Atlanta in February 2013. At that conference it was agreed that the IRS engineer would revise his report and that Belair would execute Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, which would enable discussions to continue. A second conference was held in May 2014, but no agreement was reached.
At a time not disclosed by the record, RA Pennington completed work on a Civil Penalty Approval Form, which she had initiated when commencing the audit on October 22, 2012. In the box captioned “Reason(s) for Assertion of Penalty(s)” she wrote: “The contribution deduction flowing through to the individuals is overvalued by over 8,000%. No reasonable cause was established. Discussed the assertion of penalties with the group manager. He concurred that penalties are applicable prior to the issuance of the summary report.”
The Civil Penalty Approval Form includes a section captioned “Penalties Requiring Group Manager Approval” and asks the examining agent to check the “Yes” or “No” box for various penalties. RA Pennington checked the “Yes” box for the
On August 27, 2014, RA Pennington forwarded the case file, including the Civil Penalty Approval Form, to Cheryl Mixon, her then-supervisor. On Septem-ber 2, 2014, Ms. Mixon, in her capacity as “Group Manager,” signed the Civil Penalty Approval Form, approving assertion of the three penalties listed on that form. There is no evidence that Carl Schneider, RA Pennington‘s original supervisor, approved in writing at any time—by signing a Civil Penalty Approval Form, a letter, or any other document—the assertion of these three penalties.
On March 9, 2015, the IRS issued petitioner a “TMP 60-Day Letter” (60-day letter). This letter formally communicated to petitioner the Examination Division‘s decision to assert the tax adjustments determined in the examination and the three penalties listed on the Civil Penalty Approval Form. The 60-day letter offered petitioner the options of accepting the adjustments or appealing them to the IRS Appeals Office (Appeals Office).
Petitioner sought review by the Appeals Office, but its appeal was unsuccessful. On June 19, 2017, the Appeals Office issued petitioner an FPAA disallowing the charitable contribution deduction in its entirety and determining a gross valuation misstatement penalty. In the alternative the FPAA determined penalties for negligence, substantial understatement of income tax, and substantial valuation misstatement under
Discussion
I. Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regarding an issue as to which there is no genuine dispute of material fact and a decision may be rendered as a matter of law.
II. Analysis
A. Timeliness of Penalty Approval
Confronted with this ambiguity, this Court and others have looked to the statute‘s legislative history as a possible guide to its interpretation. See id. at 219; Clay, 152 T.C. at 248; Williams v. Commissioner, 151 T.C. 1, 8-10 (2018). The Senate Finance Committee stated Congress’ belief that penalties should not be used to gain inappropriate leverage over taxpayers, but “should only be imposed where appropriate and not as a bargaining chip.” S. Rept. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601.
Given this legislative purpose, the Second Circuit reasoned in Chai that managerial approval would not be meaningful if deferred until after the taxpayer‘s liability had been determined, e.g., by a decision of this Court. To be meaningful, supervisory approval must be secured at a time “when the
In Clay, we considered whether the “initial determination” of a penalty assessment might occur at an earlier stage of the administrative process, and we held that it could. We interpreted
In Clay the penalties were formally communicated to the taxpayers in a revenue agent report (RAR) accompanied by a 30-day letter, which entitled them to appeal by filing a protest with the Appeals Office. We concluded that the “initial determination for purposes of
In the instant case the 60-day letter determining penalties under
Group Manager Mixon, RA Pennington‘s immediate supervisor, signed a Civil Penalty Approval Form approving assertion of the first three penalties on September 2, 2014. That date was more than six months before the 60-day letter was issued. The IRS thus secured supervisory approval for those penalties before formally communicating to Belair the Examination Division‘s definite decision to assert the penalties. Respondent accordingly contends that, with respect to those penalties, he has shown compliance with
Petitioner contends that supervisory approval was required almost two years before the IRS issued the 60-day letter, viz., on December 12, 2012. That was the date on which RA Pennington mailed the Letter 1807 inviting the TMP (and other partners) to a conference to discuss the exam team‘s proposed adjustments, as set forth in an enclosed summary report. But the summary report did not notify petitioner of a definite decision to assert penalties. Rather, it set forth the exam team‘s tentative proposals and invited Belair‘s partners to a conference to discuss them. See IRM pt. 8.19.1.6.8.4(2) (Dec. 1, 2006). The Letter 1807 launched a lengthy communication and fact-gathering process during which Belair had the opportunity to present its side of the story. Only after that process concluded did the Examination Division finalize its penalty determination by issuing the 60-day letter.
The statute requires approval for the initial determination of a penalty assessment, not for a tentative proposal or hypothesis. As the Second Circuit noted in Chai, a “determination” denotes a “consequential moment” of IRS action. See Chai, 851 F.3d at 220-221 (analogizing the “initial determination” of a penalty to the “first determination made by the Social Security Administration of a person‘s eligibility for benefits” (quoting Black‘s Law Dictionary 460 (7th ed. 1999))). The natural place to look for an initial “determination” of a penalty assessment is a document that formally communicates to the taxpayer a definite decision to assert penalties.
The “initial determination” of a penalty may occur earlier in the administrative process, but it still must be a formal act with features resembling those that a “determination” itself displays. Like the 30-day letter involved in Clay, the “ini-tial determination” of a penalty assessment will be embodied in a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties.
We confronted somewhat similar questions in Kestin v. Commissioner, 153 T.C. ___ (Aug. 29, 2019). Kestin involved penalties under
In reaching that conclusion, we considered whether the “initial determination” of a penalty should be deemed to have occurred earlier, on February 3, 2016, when the IRS sent the taxpayers a Letter 3176C. This letter advised the taxpayers that the IRS intended to impose a
We held that the Letter 3176C did not constitute an unapproved “initial determination.” Id. at ___ (slip op. at 26). “Although it
We noted in Kestin the ambiguity of the phrase “initial determination of such assessment.” But the statute instructs us “to look for a ‘determination’ of a penalty liability, not just an indication of a possibility that such a liability will be proposed.” Id. at ___ (slip op. at 27). We held that the Letter 3176C “by its nature * * * is not an ‘initial determination’ of a penalty assessment” because it “is not an unequivocal ‘communication that advises the taxpayer that penalties will be proposed.‘” Id. at ___ (slip op. at 27-28) (emphasis in Kestin) (quoting Clay, 152 T.C. at 249).
For similar reasons we reach the same conclusion here. The Letter 1807 informed Belair of the exam team‘s “proposed adjustments,” advising that “[a]ll proposed adjustments * * * will be discussed at the closing conference.” The summary report explained the penalties at issue and the defenses that might be available to Belair, including defenses based on “reasonable cause and good faith,” reliance on appraisals, and reliance on professional tax advice. This docu-ment surely advised Belair of the possibility that penalties might be proposed. But it was not “an unequivocal ‘communication that advise[d] the taxpayer that penalties will be proposed.‘” Kestin, 153 T.C. at ___ (slip op. at 27) (emphasis in Kestin) (quoting Clay, 152 T.C. at 249).
Although the statutory text is ambiguous, we must strive to give as much meaning as possible to the words Congress chose.
In any IRS examination the RA is charged with gathering information, including facts that may bear on whether assertion
In this case, the summary report was sent to petitioner less than two months after the examination began. It informed Belair of the penalties the IRS was considering imposing and of the defenses that might be available to Belair. Belair‘s entitlement to such defenses was presumably among the topics discussed during the parties’ conferences in February 2013 and May 2014. Here, as in Kestin, whether or not a penalty would actually be asserted depended on further input from petitioner.
Considerations of fairness and efficient tax administration dictate that the taxpayer be given an opportunity to submit information bearing on the appropriateness of penalties before the Examination Division finalizes its adjustments. In some circumstances, facts that bear on the appropriateness of penalties may be exclusively in the taxpayer‘s possession. See, e.g.,
For these reasons, we conclude that the summary report transmitting the exam team‘s tentative penalty proposals did not require prior supervisory approv-al.2 But the case law sheds little light on what specific action by the IRS affirmatively constitutes the “initial determination of * * * [a penalty] assessment” within the meaning of
In Palmolive, 152 T.C. at 88, we concluded that a subordinate IRS employee should be considered to have made his “initial determination” to assert penalties “at the time he solicited his supervisor‘s approval” on the Civil Penalty Approval Form or similar document. Palmolive involved four penalties. We held that all four had received the requisite supervisory approval because each “was initial[ly] determined’ and then approved in writing by a supervisor before being communicated to * * * [the taxpayer]” in the FPAA. Id. at 89.
Alternatively, we might treat the “initial determination” of a penalty as being made in the notice that embodies, and formally communicates to the taxpayer,
the Examination Division‘s unequivocal decision to assert a penalty. Under this approach,
This equation of a “determination” with the IRS notice that communicates the determination to the taxpayer is explicit elsewhere in our jurisprudence. In CDP cases
We have taken a similar approach in partnership cases.
We held in Bedrosian that “the FPAA is the IRS’ determination,” following authorities dating back “to the earliest days of TEFRA litigation.” Id. at 107. The taxpayers urged that earlier communications and actions by the IRS exam team amounted to determinations that TEFRA procedures did apply, but we rejected that argument. “These events,” we concluded, were “part of the give-and-take of an on-going examination,” and none of them “amount[ed] to a determination” that TEFRA procedures applied. Ibid. “To look to the actions within an ongoing exam to find a ‘determination’ would be an unworkable rule raising any number of problems.” Ibid.
Practical considerations support a similar conclusion here. It may be difficult or impossible to ascertain the precise point in time at which an IRS officer should be deemed to have made, in a subjective sense, the “initial determination” that is ultimately embodied in the notice issued to the taxpayer. An RA may have jotted down notes on a legal pad, or had a conversation with a supervisor, indicating that he intended to recommend penalties. An RA may have mentioned the possibility of penalties, with varying shades of conviction, during meetings or telephone calls. Or as here, the RA may have forwarded proposed adjustments to the taxpayer in anticipation of a conference.
If events transpiring during informal meetings were deemed critical in ascertaining whether an “initial determination” had been made, difficult evidentiary problems would arise in establishing who said what to whom. Cf. Palmolive, 152 T.C. at 88 (noting that inferences about the timing of an “initial determination” could amount to “mere speculation“). Indeed, a strategically minded taxpayer could seek to insulate himself from penalties by initiating a discussion of that subject at an early stage of the examination, conscious that the examining agent most likely would not have secured supervisory approval of any penalties by that time.
In the case at hand, we conclude that the “initial determination of * * * [the penalty] assessment” was embodied in the 60-day letter issued on March 9, 2015, by which the IRS formally notified Belair that the Examination Division had completed its work and, after considering Belair‘s arguments,
As we noted in Kestin, the ambiguity of the statute‘s operative phrase makes interpretation and application of
Petitioner directs two arguments toward the Civil Penalty Approval Form that Group Manager Mixon signed on September 2, 2014. Petitioner first contends that the penalties should have been approved by Mr. Schneider, RA Pennington‘s original supervisor, with whom she orally discussed the penalties at the outset of the examination. But as we held in Palmolive, 152 T.C. at 84-86,
Petitioner alternatively contends that Ms. Mixon‘s signature on the Civil Penalty Approval Form was a nominal act that did not reflect meaningful review, noting that her supervision of RA Pennington began somewhat late in the examination process. Petitioner filed a request for admissions asking respondent to “admit that Ms. Mixon had not discussed the Penalty Approval Form with the examiner prior to Ms. Mixon[‘s] signing such form.” Respondent declined to comply with that request on relevancy grounds, citing Raifman v. Commissioner, T.C. Memo. 2018-101.
In Raifman the record included a Civil Penalty Approval Form signed by the RA‘s immediate supervisor. Id. at *57. The taxpayers moved to reopen the record to enable them to cross-examine both IRS officials, urging that “the penalty approval form is insufficient to establish whether * * * [the RA and her supervisor] adequately considered the applicability of any reasonable cause penalty defense” that might be available to the taxpayers. Id. at *59-*60. We denied that motion, concluding that “such a line of questioning would be immaterial and wholly irrelevant to ascertaining whether * * * [the Commissioner] complied with the written supervisory
We reach a similar conclusion here.
In this case, the penalty approval form was signed in timely fashion by Group Manager Mixon, the then-immediate supervisor of RA Pennington. It is a fact of life in the IRS (as in any large organization) that staff members change jobs, are reassigned, or retire. The fact that RA Pennington had a different supervisor earlier in the examination is inconsequential. See Palmolive, 152 T.C. at 84-86. We accordingly hold that, with respect to the three penalties listed in the Civil Penalty Approval Form, the IRS satisfied all of the requirements imposed by
To implement the foregoing,
An order will be issued granting in part and denying in part each party‘s motion for partial summary judgment.
Reviewed by the Court.
THORNTON, PARIS, KERRIGAN, BUCH, NEGA, PUGH, and ASHFORD, JJ., agree with this opinion of the Court.
MORRISON, J., concurring: On the facts of this case, I agree with the opinion of the Court that the 60-day letter was the initial determination to impose the penalties. However, I do
MARVEL, J., dissenting: This case once again requires that we wade into the mire created by the imprecise text of
While the opinion of the Court does yeoman‘s work in its attempt to identify the initial determination that requires written approval, the text of
This reading is consistent with the underlying purpose of
Because the opinion of the Court concludes that Letter 1807 did not embody the initial determination of a penalty within the meaning of
GALE, COPELAND, and JONES, JJ., agree with this dissent.
GUSTAFSON, J., dissenting:
The operative term in
In this case the revenue agent signed a Letter 1807, on letterhead of the Internal Revenue Service Small Business/Self-Employed Division, that referred to “proposed adjustments” given in an attached summary report of the examination (Form 4605-A, “Examination Changes“), and it invited petitioner to attend a “closing conference“. Notably, the “Remarks” on the first page of the Form 4605-A state: “Accuracy Penalties under section 6662 are included as a partnership level determination. See Lead Sheet: Gross Overvaluation Penalty“. (Emphasis added.) That “Lead Sheet” states on its front page the “Conclusion” that “[t]he gross overvaluation penalty is applicable“, that in the alternative
In my judgment, that letter with its attachments embodied an “initial determination” that required written supervisory approval. It is true that the letter did not reflect “the Examination Division‘s definite decision to assert the penalties.” See op. Ct. p. 14. But this will be true of many--perhaps all--initial penalty determinations by an agent who has failed to comply with
The statute applies where there has been an “initial determination” by an “individual“. By contrast, the Court today looks to see whether there has been a “definite decision” by the “Examination Division“--a formulation that the majority opinion uses six times. See op. Ct. pp. 4-5, 13-14, 16, 23. The opinion of the Court seems to require approval not of an “initial determination” but only of a more final determination. And it seems to require approval not of a determination by an individual agent but only of a determination by the Examination Division. That approach will hereafter make it difficult to identify the individual who makes an initial determination and the supervisor who must approve it.
FOLEY, GALE, MARVEL, URDA, COPELAND, and JONES, JJ., agree with this dissent.