TOT PROPERTY HOLDINGS, LLC, TOT LAND MANAGER, LLC, TAX MATTERS PARTNER v. COMMISSIONER OF INTERNAL REVENUE
No. 20-11050
United States Court of Appeals for the Eleventh Circuit
June 23, 2021
Agency No. 005600-17
[PUBLISH]
Petition for Review of a Decision of the United States Tax Court
(June 23, 2021)
Before LAGOA, ANDERSON, and MARCUS, Circuit Judges.
Whether the taxpayer in this case could properly claim a deduction turns on whether language in a deed was an unenforceable savings clause, dependent on a condition subsequent, or a valid interpretive clause. The deed at issue donated for conservation purposes an easement encumbering the taxpayer‘s property. The
We conclude that the Tax Court correctly determined that the taxpayer did not comply with the extinguishment proceeds requirement and that the deed was not saved by the disputed provisions because they constitute an unenforceable condition-subsequent savings clause. We also hold that the Tax Court did not commit reversible error in approving the penalties assessed. As explained below, we affirm.
I. FACTS AND PROCEDURAL HISTORY
Rural property in between Nashville, Knoxville, and Chattanooga and the transactions related to its ownership sit at the center of this case. We explain those transactions, the reasons for tax liability, and the underlying tax proceedings.
A. Property Transactions
In 2005, George R. Dixson purchased 2,602 acres of rural, undeveloped real estate in Van Buren County, Tennessee, for about $1.9 million. In 2008, Dixon transferred 652 acres, which accounted for about $486,000 of the original purchase price, to two limited liability companies that he wholly owned.1 These 652 acres
A taxable year for TOT Holdings came to an end on December 10, 2013, and a new one started the next day. On December 10, 2013, PES Fund VI, LLC (“PES Fund“)4 purchased almost the entirety of the ownership interest in TOT Holdings. For the TOT Holdings interest—which amounted to 98.99% of the company—PES Fund paid $717,200 in cash and assumed the sellers’ obligations to make $322,000 in capital contributions, a total consideration of $1,039,200.5 The record does not indicate that PES Fund‘s purchase was anything but an arm‘s-length transaction. When the dust settled, PES Fund owned nearly all of TOT Holdings, an entity that owned only the 652 acres of property and $100.6
B. Conveyance of the Easement and the Deed
On December 27, 2013, a few weeks after the PES Fund transaction, TOT Holdings executed a deed that donated to Foothills Land Conservancy (“Foothills“) a conservation easement encumbering nearly all its property.
Section 9 of the deed governs extinguishment and condemnation of the easement. Section 9.1, the extinguishment section, states:
If circumstances arise in the future that render the purpose of this Easement impossible to accomplish, the Easement can only be terminated or extinguished, whether in whole or in part, by judicial proceedings in a court of competent jurisdiction. The amount of the proceeds to which Grantee shall be entitled from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment, shall be the stipulated fair market value of this Easement, or proportionate part thereof, as determined in accordance with Section 9.2 or
26 C.F.R. Section 1.170A-14 , if different.
Section 9.2 of the deed is entitled “Valuation.” The easement is a real property interest immediately vested in Foothills. According to Sections 9.1 and 9.2, the stipulated fair market value of the easement at the time of such future extinguishment (which will determine the “amount of the proceeds to which Grantee shall be entitled“) shall be determined by (as stated in Section 9.2):
multiplying (a) the fair market value of the Property unencumbered by this Easement (minus any increase in value after the date of this grant attributable to improvements) by (b) a fraction, the numerator of which is the value of this Easement at the time of the grant and the denominator of which is the value of the Property without deduction of the value of this Easement at the time of this grant.
In other words, this Section 9.2 formula provides that, upon any such future extinguishment (e.g. condemnation), the proceeds (e.g. proceeds of the condemnation) shall be reduced by “any increase in value after the date of this grant attributable to improvements,” and then the charitable donee‘s share would be determined by multiplying that reduced amount times the defined fraction. And the numerator and denominator of the fraction are the value, respectively, of the easement and unencumbered property at the time of the grant. Section 9.2 then concludes as follows: “It is intended that this Section 9.2 be interpreted to adhere to and be consistent with
This language at the end of Section 9.2 regarding intent to adhere to
C. Tax Filings and IRS Decisions
TOT Holdings timely filed a Form 1065 partnership tax return for the period beginning December 11, 2013, and ending December 31, 2013, on which it reported a charitable contribution of a qualified conservation easement of $6.9 million.9 An IRS revenue agent examined the tax return and determined that the easement did not qualify for the claimed deduction and that accuracy-related penalties were applicable.
On May 10, 2016, the IRS sent Land Manager, as Tax Matters Partner for TOT Holdings, a copy of the revenue agent‘s report related to TOT Holdings‘s tax return for the period ending December 31, 2013. The report was transmitted with a Letter 1807 signed by the revenue agent‘s immediate supervisor, an IRS group manager. The transmittal letter stated, in part,
We enclosed a copy of our summary report on the examination of the partnership listed above for you as Tax Matters Partner (TMP). The report explains all proposed adjustments including facts, law, and conclusion. . . . We will discuss all proposed adjustments in the summary report at the closing conference.
About two months later, on July 8, 2016, the IRS group manager signed a civil penalty
On January 3, 2017, the IRS issued a notice of final partnership administrative adjustment (“FPAA“) to TOT Holdings disallowing the conservation easement deduction because TOT had not established that the deduction met the requirements of
D. Tax Court Proceedings
TOT filed a Tax Court petition against the Commissioner of the IRS (the “Commissioner“) to challenge the FPAA. After a bench trial, the Tax Court decided three main issues—all also at issue in this appeal—and held for the Commissioner.
First, the Tax Court held that the deed failed to protect the conservation purpose of the easement in perpetuity, a requirement for a deduction in
Second, accuracy-related penalties pursuant to
Third, and finally, the Tax Court determined that the IRS had complied with
Having resolved these three issues,11 the Tax Court concluded that the penalties applied to TOT were appropriate. TOT otherwise could not avoid the penalties because it failed to establish a defense of reasonable cause and good faith as to any portion of its underpayment.
TOT timely appealed the Tax Court‘s decision.
II. DISCUSSION
TOT appeals the Tax Court‘s decision upholding the IRS‘s disallowance of the deduction and the imposition of penalties. Appellants’ arguments on appeal track those presented to and decided by the Tax Court. They argue: (A) that the easement deed complies with the regulatory formula requirement because the Treasury Regulation Override is an interpretive guide that requires compliance with the regulation; (B) that the value of the easement should have been based on the property‘s highest and best before use as a residential development; and (C) that an IRS supervisor did not approve the penalties in writing until after the initial determination. We address each in turn and conclude the Tax Court did not err.
A. Whether The Treasury Regulation Override Establishes the Deed‘s Compliance with the Regulations for a Deduction for a Qualified Conservation Contribution
The dispositive question for whether the taxpayer may claim a deduction in this case is whether the Treasury Regulation Override provisions in Section 9 of the easement deed are impermissible savings clauses that are triggered by a condition subsequent, on the one hand, or valid interpretive provisions, on the other. If the former, the deed is not in compliance with
1. The statutes and regulations for conservation easements require a specific formula for the distribution of extinguishment proceeds, and the formula in the deed is different than the specific regulatory formula.
Federal tax deductions are generally not allowed for anything less than a full donation of real property, but an exception is made for a “qualified conservation contribution.”
statute does not define this “protected-in-perpetuity” requirement. Thus, we turn to the applicable regulations, which Appellants concede are valid.13
The regulations require, in relevant part, that to meet the protected-in-perpetuity requirement, the deed donating the property restriction, e.g. an easement, must account for the possibility of unexpected changes to the property that would undermine the continued use of the property for conservation purposes.
[F]or a deduction to be allowed . . . , at the time of the gift the donor must agree that the donation of the perpetual conservation restriction gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time. See § 1.170A–14(h)(3)(iii) relating to the allocation of basis. For purposes of this paragraph (g)(6)(ii), that proportionate value of the donee‘s property rights shall remain constant. Accordingly, when a change in conditions give rise to the extinguishment of a perpetual conservation restriction under paragraph (g)(6)(i) of this section, the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction . . . .
Our holding thus far is supported by the same holding of the Fifth Circuit in PBBM-Rose Hill, Ltd. v. Commissioner. That case also involved a taxpayer‘s challenge to the Tax Court‘s disallowance of a deduction for a similar conservation easement because the easement deed did not satisfy the “protected in perpetuity” requirement in
The Tax Court in Coal Property Holdings, LLC v. Commissioner also held that subtracting the value of improvements from the donee‘s share of condemnation proceeds is inconsistent with the regulation and similarly leads to a disallowance of the charitable deduction. 153 T.C. 126, 144 (2019). The Tax Court held: “Section 1.170A-14(g)(6)(ii) . . . plainly requires that the charitable grantee be guaranteed to receive, upon a sale following judicial extinguishment of the easement, its full proportionate share of the sale proceeds.” Id. The deed in Coal Property violated this requirement because the formula required by section 9.2 in that deed—which used the exact same language as the deed formula in Section 9.2 in this case—provided that the taxpayer “will receive all of the sale proceeds to the extent those proceeds are attributable to appreciation in the value of improvements.” Id.
Appellants attempt to circumvent the problem of inconsistency of Section 9.2 with the requirements of the regulation, and the resulting disallowance of their deduction, by relying on the Treasury Regulation Override provisions of Sections 9.1 and 9.2. They argue that, pursuant to those provisions, the amount of the proceeds to which Foothills is entitled shall be “determined in accordance with Section 9.2 or
TOT argues that the Tax Court erred in holding that the Treasury Regulation Override provisions were not interpretive and contained a “condition subsequent savings clause.” Whether the donation of the conservation easement is deductible, thus, turns on whether the Override provisions in the easement deed are unenforceable savings clauses, rather than valid interpretive provisions. We turn next to discuss the distinction between a condition subsequent savings clause, on the one hand, and a merely interpretive clause on the other hand.
2. The Treasury Regulation Override provisions are either valid interpretive provisions or invalid savings clauses.
For federal tax purposes, courts and the IRS have refused to enforce a clause that purports to save an instrument from being out of compliance with the tax laws if the clause is operative by way of a condition subsequent. “A condition subsequent rests on a future event, ‘the occurrence of which terminates or discharges an otherwise absolute contractual duty.‘” Belk v. Commissioner, 774 F.3d 221, 229 (4th Cir. 2014) (quoting 30 Richard A. Lord, Williston on Contracts § 77:5 (4th ed.)). Such “clauses that seek to ‘recharacterize the nature of the transaction in the event of a future’ occurrence ‘will be disregarded for federal tax purposes.‘” Id. (quoting I.R.S. Tech. Adv. Mem. 2002-45-053 (Nov. 8, 2002)). On the other hand, “[w]hen a clause has been recognized as an ‘interpretive’ tool“—and thus valid— “it is because it simply ‘help[s] illustrate . . . intent’ and [i]s not ‘dependent for [its] operation upon some subsequent adverse action by the Internal Revenue Service,‘” or a tribunal. Id. at 230 (quoting I.R.S. Tech. Adv. Mem. 79-16-006 (1979)) (citations omitted); e.g., PBBM-Rose Hill, 900 F.3d at 204 (“Unlike the savings clause in Belk, paragraph 6.2 imposes no condition subsequent, but is merely a clause concerning the interpretation of the deed.“).17 Interpretive
To determine whether the Treasury Regulation Override provisions in the deed here are interpretive provisions or condition-subsequent savings clauses, we are guided by two cases from the Fourth Circuit, both of which held that clauses that purported to save a claimed tax deduction were unenforceable savings clauses.
First, in Belk v. Commissioner—a case affirming the disallowance of a deduction for the donation of a conservation easement—the clause at issue stated the donee “shall have no right or power to agree to any amendments . . . that would result in this Conservation Easement failing to qualify . . . as a qualified conservation contribution under Section 170(h) of the Internal Revenue Code and applicable regulations.” 774 F.3d at 228. The taxpayers, the Belks, argued that this clause was an interpretive clause that ensured regulatory compliance for deduction purposes, despite any facial non-compliance with
Our second guiding case is Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944). In Procter, the taxpayer sought to avoid a gift tax by arguing that the following clause (in a trust indenture assigning to trustees interests in other trusts) avoided the possibility of a gift tax:
[I]n the event it should be determined by final judgment or order of a competent federal court of last resort that any part of the transfer in trust hereunder is subject to gift tax, it is agreed by all the parties hereto that in that event the excess property hereby transferred which is decreed by such court to be subject to gift tax, shall automatically be deemed not to be included in the conveyance in trust hereunder and shall remain the sole property of Frederic W. Procter free from the trust hereby created.
142 F.2d at 827. The Tax Court had held in favor of the taxpayer, but the Fourth Circuit reversed because the only way a gift tax could be assessed was by way of collection and court proceedings, and the above-quoted clause, if valid, would operate to nullify any such proceedings. Id. Such a condition subsequent was void as “contrary to public policy.” Id. “It is manifest,” explained the court, “that a condition which involves this sort of trifling with the judicial process cannot be sustained.” Id. Thus, the clause impermissibly contained a condition subsequent that attempted to save the assignment from taxation and was unenforceable.
Procter reasoned that the clause “ha[d] a tendency to discourage the collection of the tax by the public officials
The Tax Court has similarly refused to enforce such condition subsequent savings clauses. Indeed, it did so in a case construing language almost identical to the Treasury Regulation Override language in this case. Coal Prop., 153 T.C. at 140-44; see also Palmolive Bldg. Invs., LLC v. Comm‘r, 149 T.C. 380, 405 (2017) (holding a “saving clause [could not] retroactively modify the [conservation easement] [d]eed to comply with [I.R.C.] section 170 and its regulations,” in particular the protected-in-perpetuity requirement of
With these cases in mind, we analyze the Treasury Regulation Override in this case and find it similarly unenforceable.18
3. The Treasury Regulation Override provisions of the easement deed contain a condition subsequent that is unenforceable and cannot override the inconsistent formula in Section 9.2 and cannot save TOT‘s tax deduction.
Three primary features of the Treasury Regulation Override provisions convince us that, like the clauses in Belk and Procter, they are unenforceable savings clauses, not merely interpretive provisions. That is, TOT cannot use the Override to avoid taxation because the formula in Section 9.2 is unambiguous, the Override nullifies it, and it does so only in the event of some future occurrence.19
Second, the operation of the Treasury Regulation Override provisions in this case means that the preferred formula—expressly described in the easement deed in Section 9.2—is simply nullified. Again, Section 9.1 defines the fair market value of Foothills‘s proceeds “as determined in accordance with Section 9.2 or 26 C.F.R Section 1.170A-14, if different.” Thus, Section 9.1 clearly states that Section 9.2‘s formula applies; it is first in the provision and has no condition attached to it. Then, the provision continues to contemplate the regulation‘s application, but its application is conditional. That is, the application of the regulation is conditioned on whether it is “different” from the plain text of the express formula in the easement deed in Section 9.2. If it is “different,” the Override operates to simply rewrite the easement deed to eliminate the Section 9.2 formula, leaving operative only the regulatory formula. If enforced, then, the Override would then impermissibly “countermand the plain text of the [e]asement [d]eed.” Coal Prop., 153 T.C. at 141; e.g., Belk, 774 F.3d at 230 (“Thus, the Belks ask us to employ their savings clause not to aid in determining [their] intent, but to rewrite their Easement in response to our holding. This we will not do.” (internal quotation marks omitted) (citation omitted)).
Third, for the Override to be triggered and for the regulation to apply as the proper formula over Section 9.2‘s formula, a future event must occur, i.e. a determination that the proper interpretation of the regulation is “different” from the formula set forth in Section 9.2. And, in this sense, Foothills‘s property right to proceeds “equal to the [regulatory] proportionate value” is not “immediately vested,”
Appellants make a few other arguments that we reject as without merit. They argue that the Treasury Regulation Override provisions are not conditioned on any adverse action by the IRS or a court; they argue that this means the Override is an interpretive provision, and not a condition subsequent savings clause. But whether Section 9.2 is “different” from
Indeed, the “if different” Override language is the same sort of catch-22 situation that leads to the “trifling with the judicial process,” Procter, 142 F.2d at 827, that case law has held to be unenforceable.
For the foregoing reasons,20 the Treasury Regulation Override provisions in this easement deed cannot operate to have the regulatory formula apply instead of Section 9.2‘s formula. We summarize as follows. First, the unambiguous language of the formula set out in Section 9.2 is inconsistent with the formula required by
B. The Tax Court‘s Valuation of the Easement Was Not Clearly Erroneous
At trial before the Tax Court, TOT relied on the expert opinion of Mr. Wingard—that the easement was worth $2,732,000 based on a valuation of the property before donation of the easement at $3,913,000 and $1,181,000 after. The easement was donated on December 27, 2013, just about two weeks after 98.99% of TOT Holdings itself—which owned only the property and $100 cash—was purchased by PES Fund for $1,039,200. This sale price indicated that the property was worth about $1,049,70321 as of December 10, 2013, just a short time before the easement‘s donation. This market transaction indicates that Appellants’ assertions regarding the property and easement‘s values are dubious. What are clearly more accurate are the figures offered by the Commissioner‘s expert witness, Mr. Barber, who—without knowledge of the PES Fund transaction—calculated the property‘s before value to be $1,128,000. For this reason, and those explained below, we hold that the Tax Court did not clearly err in valuing the easement for purposes of assessing accuracy-related penalties.
- In assessing accuracy-related penalties, the tax laws required consideration of the easement‘s fair market value, partially based on the entire property‘s best and highest use before the easement‘s donation.
“Taxpayers who underpay their taxes due to a ‘valuation misstatement’ may incur an accuracy-related penalty.” United States v. Woods, 571 U.S. 31, 43, 134 S. Ct. 557, 565, 187 L. Ed. 2d 472 (2013). The degree of a misstatement determines the severity of the penalty. The IRS will assess a 20% penalty for a “substantial valuation misstatement,” which is a misstatement of 150% or more of the correct value, and a 40% penalty for a “gross valuation misstatement,” which is a misstatement of 200% or more of the correct value.
The correct value of a conservation easement is “the fair market value of [it] at the time of the contribution.”
The before-and-after method was used by the parties, their experts, and the Tax Court in this case. Appellants do not challenge the Tax Court‘s use of the method, the way any dollar figures were attached to the before and after uses, nor the “after” valuation in any way. Instead, Appellants challenge only the court‘s factual determinations related to the conclusion regarding the highest and best use of the property before the donation of the easement.
To determine the before value—that is, “the fair market value of the property before contribution of the conservation restriction“—the regulations require a determination of the property‘s highest and best use before donation. The before valuation
must take into account not only the current use of the property but also an objective assessment of how immediate or remote the likelihood is that the property, absent the restriction, would in fact be developed, as well as any effect from zoning, conservation, or historic preservation laws that already restrict the property‘s potential highest and best use.
The step after determining the highest-and-best use is to calculate a dollar value based on that use. PBBM-Rose Hill, 900 F.3d at 209. Appellants’ arguments, however, are limited to challenging the before value found by the Tax Court. And Appellants’ only challenge with respect to that relates to the factual
basis for the Tax Court‘s conclusion regarding the highest and best before use. Therefore, we review—for clear error only because no legal arguments are made—the Tax Court‘s conclusion regarding the property‘s highest and best before use and TOT‘s arguments. We find no clear error.
- The Tax Court did not clearly err in its conclusion regarding the highest and best before use and in rejecting the proposed residential development use.
The Tax Court in this case determined that, before the easement‘s donation, the property‘s highest and best use was as an investment property held for recreation and timber revenue and had a fair market value of $1,128,000, adopting the conclusions of the Commissioner‘s expert, Mr. Barber. The Tax Court found Mr. Barber and his conclusions to be credible in light of other evidence regarding the characteristics of the property and its surrounding area and that the PES Fund sale corroborated Mr. Barber‘s before number without Mr. Barber having been aware of the sale. Mr. Barber‘s unbiased valuation of the property was thus just $78,297 off from the actual market sale-based value, as opposed to $2,863,297 off, as Mr. Wingard was.
The Tax Court rejected Mr. Wingard‘s conclusion that the highest and best use before the donation was for residential development and, specifically, low density, destination mountain resort residential development. The Tax Court determined this was “highly unlikely” given the property‘s characteristics and the failures of other developments near the property.
The evidence presented regarding these characteristics and nearby developments supported the Tax Court‘s rejection of Mr. Wingard‘s proposed highest and best before use. The court explained that the evidence revealed the 652 acres of property in Van Buren County, Tennessee and the surrounding area were, and continued to be through 2013, generally rural and undeveloped. The property contained no mountains or large bodies of water. It had two small streams that were frequently dry. The nearest highway was about 32 miles away, and there was no hospital in the county. As of 2013, the property had telephone and electricity access but not public water. Hardwood trees like oaks and hickory had occupied the surrounding area but were clear cut and replaced with softwoods.
The evidence also showed that elsewhere in Van Buren County, there was some development but there was no indication that this development supported TOT‘s proposed highest and best use before the easement was donated in 2013. In particular, about five miles northwest of the property was a development called Overton Retreat, which was more or less a failure, in the Tax Court‘s words, because 62 lots had been sold from July 2002 through January 2013, yet sales slowed between 2009 and 2013 (as evidenced by only three of those sixty-two lots being sold during that time). As of 2013, only 11
In light of this evidence, Appellants’ arguments largely emphasize that they perceive a different view of the characteristics of the property and different conclusions to be gleaned from the various nearby properties. Of course, Appellants’ different inferences from the underlying facts implicate matters of pure fact and, as we explain below, we conclude that the inferences drawn by the Tax Court were eminently reasonable and far from clearly erroneous. We conclude that ample evidence supports the Tax Court‘s valuation findings, and that TOT fails woefully to demonstrate clear error.
As an initial matter, Appellants’ arguments ignore the overwhelmingly significant fact that a mere seventeen days before the conservation easement deed, an arm‘s-length sale of the property at issue occurred at a price that was slightly less than the valuation independently arrived at by Mr. Barber and adopted by the Tax Court. Appellants do not challenge the arm‘s-length nature of the sale. This sale provides overwhelming support for the Tax Court‘s finding of the before use value of the property—which, as noted above, is the only error with respect to valuation which Appellants challenge on appeal. The arm‘s-length sale supports not only the dollar valuation found by the Tax Court, but also its finding that the highest and best before use was as investment property held for recreation and timber revenue, as opined by Mr. Barber—not a low density, destination mountain resort residential development, as opined by Mr. Wingard.23
Ample additional evidence also supports the Tax Court‘s finding with respect to the highest and best use. The Tax Court found Mr. Barber‘s report and testimony credible and rejected the report and testimony of Mr. Wingard. As the Tax Court found, the surrounding area was generally rural and undeveloped. There also were no population centers within a distance that might suggest residential development. With respect to the kind of mountain residential development relied upon by Mr. Wingard, the only relevantly close examples—e.g. Overton Retreat—were reasonably found by the Tax Court to be “failed developments.” And the Tax Court found that those existing developments were in mountainous areas with scenic views or views of large bodies of water such as lakes. The Tax Court found that the property at issue lacked such physical features. The Tax Court could reasonably find that, even if such developments had been more successful, any foreseeable demand for the kind of mountain residential property relied upon by TOT and Mr. Wingard would be absorbed by the superior attributes and
We readily conclude that the Tax Court was not clearly erroneous in its findings with respect to the before value of the property at issue, or with respect to its finding that the highest and best use of the property was as investment property held for recreation and timber revenue. Indeed, we conclude that overwhelming evidence supports the Tax Court‘s findings in this regard. Because Appellants’ challenge to the penalties based on valuation errors focused solely on the Tax Court‘s before value and its reliance on the highest and best use indicated by Mr. Barber, we conclude that the Tax Court was not clearly erroneous in rejecting Appellants’ valuation-based challenge to the accuracy-related penalties.24
C. The Commissioner Established Compliance with the “In Writing” Supervisory-Approval Requirement for Penalty Assessment
Finally, Appellants argue that the penalties should not be assessed, regardless of the valuation contentions, because the IRS failed to comply with the supervisory-approval requirement for penalties in
Section 6751(b)(1) states that “[n]o penalty . . . 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.”
The Tax Court concluded that the transmittal letter signed by the revenue agent‘s immediate supervisor, an IRS group manager, satisfied
examination of” TOT and stated “[t]he report explains all proposed adjustments including facts, law, and conclusion.” “[A]ll proposed adjustments in the summary report” would be discussed “at the closing conference.” Those “proposed adjustments including facts, law, and conclusions” that accompanied the letter were therefore actually provided to the taxpayer in the report, including the penalties to be assessed. We conclude that the Tax Court was correct on this point. The reasonable inference to
TOT argues that this is not sufficient because the letter was nothing more than a transmittal letter given that there was no indication in the letter or the report that a supervisor approved the penalties. TOT highlights, instead, the civil penalty approval form signed by the group manager on July 8, 2016, well after the letter was sent. We reject TOT‘s argument.
TOT fails to explain why “proposed adjustments including facts, law, and conclusion” would not include penalties or why we would conclude that the group manager signed the letter without having approved part of those proposed adjustments, i.e. the penalties, or the report it accompanied. Furthermore, the statute does not indicate that the supervisor‘s approval in writing must be on a particular document. There is no regulation on point.
In addition, at the time of the mailing of the transmittal letter and report, the version of the Internal Revenue Manual—which in any event does not have the force of law, United States v. Rum, 995 F.3d 882, 893 (11th Cir. 2021)—did not require that a specific document embody the approval to satisfy
Appellants cite no case that supports their position, and our research has uncovered none. To the contrary, in a case appealed to the Fifth Circuit, the Tax Court had rejected the precise argument presented by Appellants in this case. The Fifth Circuit stated:
The tax court concluded that the managerial-approval requirement was fulfilled by a managerial signature on the cover letter of a summary report on the examination of PBBM that included the “Gross Valuation Overstatement Penalty Issue Lead Sheet.” The Lead Sheet showed that an IRS examiner had determined that the penalty was applicable to underpayments attributable to the claimed deduction for the conservation easement. The IRS sent the cover letter and summary report to PBBM in November 2011, prior to the issuance of the FPAA in August 2014. We agree with the tax court‘s conclusion.
PBBM-Rose Hill, 900 F.3d at 213 (footnote omitted). Thus, the Fifth Circuit decision supports the Commissioner‘s position in this case that the supervisor‘s cover letter transmitting the revenue agent‘s report of proposed adjustments satisfies the requirement of
We hold that the Tax Court was correct that the Commissioner established that a supervisor approved the penalties in writing by way of the transmittal letter sent with the revenue agent‘s report and that
CONCLUSION
For the foregoing reasons, we affirm the Tax Court‘s upholding of the IRS‘s disallowance of TOT‘s tax deduction and the assessment of accuracy-related penalties.
AFFIRMED.