Tuesday December 7, 2021
Conservation Easement Case Penalties Approved
Oconee Landing Property LLC et al. v. Commissioner; No. 11814-19
Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, Petitioner v.
Commissioner of Internal Revenue, Respondent
This case involves a charitable contribution deduction claimed by Oconee Landing Property, LLC (Oconee), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued petitioner a notice of final partnership administrative adjustment (FPAA) disallowing Oconee's deduction and determining penalties. Respondent asserted an additional penalty in his answer. Respondent has filed a motion for partial summary judgment addressed to the question whether the IRS secured timely supervisory approval for these penalties. See sec. 6751(b)(1).1
The following facts are drawn from the pleadings, the parties' motion papers, and the accompanying declarations and exhibits. See Rule 121(b). These facts are stated solely for the purpose of ruling on respondent's motion, not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Oconee is a Georgia LLC organized in November 2015. Its tax matters partner is Oconee Landing Investors, LLC (petitioner), likewise a Georgia LLC. Each is treated as a partnership for Federal income tax purposes, and each had its principal place of business in Georgia when the petition was filed.
Oconee timely filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it claimed a charitable contribution deduction of $20,670,000 for its donation of a conservation easement. The IRS selected Oconee's 2015 return for examination and assigned the case to revenue agent (RA) Tehan.
In March 2019, as the examination neared completion, RA Tehan made the decision to assert a gross valuation misstatement penalty against Oconee under section 6662(h). RA Tehan prepared Form 866, "Explanation of Items," outlining the justification for asserting that penalty. At the bottom of that form, under the caption "Review and Approval of Penalties," is the signature of RA Tehan's immediate supervisor, Karen Carreiro-Smithson. Ms. Carreiro-Smithson listed her title as "Team Manager" and dated her signature March 15, 2019.
On March 18, 2019, RA Tehan prepared an Examination Plan Issue Lead Sheet (lead sheet) addressing the issue of "penalty consideration." On line 21 of that form RA Tehan recommended assertion of the penalty for "gross valuation misstatement." At 9:55 a.m. that same day, RA Tehan emailed Ms. Carreiro-Smithson, asking that she sign the "penalty lead sheet" for Oconee. She did so and emailed the executed form back to RA Tehan at 11:05 that morning.
RA Tehan then prepared a draft FPAA and sent the draft to James Fee, an IRS attorney. On April 2, 2019, Mr. Fee completed his review and recommended that RA Tehan also assert penalties under section 6662(c) and (d). Mr. Fee reminded RA Tehan to secure "supervisory approval in writing for the penalties."
RA Tehan considered Mr. Fee's recommendation and agreed with it. On April 2, 2019, RA Tehan accordingly revised the lead sheet to assert, on line 16, a penalty under section 6662(c) for negligence or disregard of regulations, and to assert, on line 17, a penalty under section 6662(d) for substantial understatement of income tax. The lead sheet identifies RA Tehan as a "Team Member," and Ms. Carreiro-Smithson digitally signed the lead sheet as the "Team Manager." But the form does not show the date on which Ms. Carreiro-Smithson affixed her signature.
Respondent has produced internal IRS emails confirming that Ms. Carreiro-Smithson signed the lead sheet on April 3, 2019. At 2:04 p.m. that day RA Tehan emailed her noting that Mr. Fee had suggested asserting the two additional penalties. RA Tehan indicated agreement with that recommendation and asked Ms. Carreiro-Smithson to sign "the attached updated lead sheet." Three minutes later Ms. Carreiro-Smithson emailed back saying "I have signed the attached form." RA Tehan immediately emailed the executed form to another IRS officer with the comment, "My manager is the best."
On April 4, 2019, the IRS issued Oconee a timely FPAA disallowing the charitable contribution deduction in full and determining the three penalties discussed above. The IRS attached to the FPAA the lead sheet bearing Ms. Carreiro-Smithson's digital signature. Petitioner timely petitioned this Court for readjustment of the partnership items.
Before filing an answer, Benjamin Weaver, respondent's lead counsel in this case, determined that respondent should assert (as an alternative) a penalty under section 6662A for understatement of tax with respect to a reportable transaction. On September 4, 2019, he emailed this proposal to his supervising attorney, James Hartford, who has also entered an appearance in this case. Later that day Mr. Hartford replied saying: "I approve asserting the 6662A penalty in the alternative. Please put this email in the legal file as written managerial approval of penalties as required by section 6751(b)." On September 6, 2019, respondent filed his answer, which alleged that the section 6662A penalty "would apply * * * should the Court determine that the penalties asserted in respondent's FPAA do not apply."
A. Summary Judgment Standard
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. Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant partial summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the non-moving party. Sundstrand Corp., 98 T.C. at 520.
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." To impose penalties against Oconee, respondent must show that he complied with section 6751(b)(1). See Palmolive Bldg. Inv'rs, LLC v. Commissioner, 152 T.C. 75, 83 (2019).
In Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14-15 (2020), we explained that the "initial determination" of a penalty assessment is typically embodied in a letter "by which the IRS formally notifie[s] * * * [the taxpayer] that the Examination Division ha[s] completed its work and * * * ha[s] made a definite decision to assert penalties." In a TEFRA case such as this, the Commissioner generally must show that supervisory approval was obtained, for penalties determined in an FPAA, before the FPAA was issued to the partnership. Id. at 8. If the Commissioner shows that supervisory approval was obtained by that date, the partnership must establish that the approval was untimely, i.e., "that there was a formal communication of the penalty before the proffered approval" was secured. See Frost v. Commissioner, 154 T.C. 23, 35 (2020).
1. RA Tehan's Determinations
Respondent has produced both the Form 886 and the lead sheet on which RA Tehan recommended assertion of the gross valuation misstatement penalty against Oconee. RA Tehan's immediate supervisor, Ms. Carreiro-Smithson, approved assertion of that penalty by signing those documents as "Team Manager" on March 15 and March 18, respectively. Respondent has also produced RA Tehan's revised lead sheet that recommended assertion, not only of that penalty, but also of penalties for negligence and substantial understatement. Ms. Carreiro-Smithson approved assertion of all three penalties, again as "Team Manager," by signing the revised lead sheet on April 3, 2019. The definite decision to assert penalties was communicated to Oconee the next day, in the FPAA dated April 4, 2019, with an attached copy of the signed lead sheet listing the penalties. Respondent has thus shown that RA Tehan secured timely approval of these penalties. See Frost, 154 T.C. at 35; Belair Woods, 154 T.C. at 15.
Petitioner does not contend that the IRS formally communicated to Oconee, before April 4, 2019, its decision to assert these penalties. Rather, petitioner asserts that the penalty lead sheet "does not identify Ms. Smithson's role * * * or even a date of signature." Petitioner urges that the declarations and documents "attached to the brief are [not] sufficient to warrant judgment as a matter of law."
We disagree. The lead sheet identifies Ms. Carreiro-Smithson as the "Team Manager" and RA Tehan as a "Team Member." Ms. Carreiro-Smithson has supplied a declaration, under penalties of perjury, averring: "As part of my duties as a Supervisory Internal Revenue Agent, on April 3, 2019, I was Ms. Tehan's immediate supervisor." RA Tehan has supplied a declaration, also under penalties of perjury, averring that she prepared the penalty-approval forms "for signature by my immediate supervisor at the time, Karen Carreiro-Smithson." Internal IRS emails confirm that Ms. Carreiro-Smithson was RA Tehan's immediate supervisor, because she is the person to whom RA Tehan repeatedly submitted documents for approval, stating at one point: "My manager is the best."
Although Ms. Carreiro-Smithson did not affix a date next to her signature on the revised lead sheet, it is obvious that she signed the lead sheet before the FPAA was issued. Internal IRS emails confirm that the lead sheet was sent to her, and signed by her, on April 3, the day before the FPPA was mailed to Oconee. Indeed, the lead sheet bearing Ms. Carreiro-Smithson's signature was attached to the FPAA. Necessarily, therefore, it was signed before the FPAA went out the door.
Petitioner complains that the lead sheet did not include Ms. Carreiro-Smithson's "recommendation [or] her analysis of any penalties." Petitioner misapprehends the requirements of section 6751(b). That provision is captioned "Approval of Assessment," not "Explanation of Assessment." As we have said before, "The written supervisory approval requirement * * * requires just that: written supervisory approval." Raifman v. Commissioner, T.C. Memo. 2018-101, 116 T.C.M. (CCH) 13, 28. We have repeatedly rejected any suggestion that a penalty approval form must "demonstrate the depth or comprehensiveness of the supervisor's review." Belair Woods, 154 T.C. at 17.
Petitioner argues that summary judgment is inappropriate because respondent's "discovery responses include documents suggesting that other individuals * * * made the penalty determinations." Petitioner appears to suggest that Mr. Fee, an attorney in the IRS Office of Chief Counsel, was the person who was required to obtain supervisory approval. This is so, petitioner suggests, because Mr. Fee reviewed RA Tehan's draft FPAA and "suggested that [RA Tehan] assert 2 more penalty positions." But a "suggestion" is not an "initial determination." Mr. Fee was not assigned to the examination; as a Chief Counsel attorney he had no authority to include penalties in an FPAA. RA Tehan sought advice from Mr. Fee but was under no obligation to adopt that advice.
To defeat a motion for summary judgment, petitioner "must set forth specific facts showing that there is a genuine dispute for trial." Rule 121(d). Petitioner has not set forth any "specific facts" to dispute the timing of Ms. Carreiro-Smithson's approval. Both she and RA Tehan submitted declarations under penalty of perjury attesting to the timing of her signature. Internal IRS emails confirm that Ms. Carreiro-Smithson signed the lead sheet approving the three penalties on April 3, 2019. And petitioner cannot reasonably dispute that she did so because the signed lead sheet is attached to the FPAA that was mailed to Oconee on April 4.
2. Mr. Weaver's Determinations
Before filing the answer, Mr. Weaver, respondent's lead counsel in this case, determined that respondent should assert an alternative penalty under section 6662A. Mr. Weaver signed the answer as "Senior Attorney (Large Business & International)." Mr. Hartford also signed the answer as "Acting Associate Area Counsel (Large Business & International)." As the Associate Area Counsel at that time, Mr. Hartford was Mr. Weaver's "first-line manager." See Internal Revenue Manual pt. 22.214.171.124.2(3) (Dec. 16, 2020).
Petitioner does not contend that the IRS formally communicated to Oconee, before filing the answer, its decision to assert this alternative penalty. Instead petitioner asserts a supposed need to cross-examine Messrs. Weaver and Hartford regarding these matters. No cross-examination is necessary. In response to discovery requests, respondent produced internal IRS emails showing that Mr. Weaver made the initial determination on September 4, 2019, and that Mr. Hartford approved assertion of the section 6662A penalty later that day.
Petitioner has not set forth any facts "showing that there is a genuine dispute for trial" on this point. Rule 121(d). Instead petitioner appears to challenge the propriety of an IRS attorney's asserting a penalty for the first time in an answer. But it is common knowledge that this often occurs: Rule 142(a) specifically permits respondent to assert "new matter" in his answer, while requiring that he assume the burden of proof in that respect. We have consistently held that section 6751(b)(1) "includes no requirement that all potential penalties be initially determined * * * at the same time." Palmolive Bldg. Inv'rs, LLC, 152 T.C. at 85. IRS counsel "may, and often does, assert * * * [new] penalties in answers or amended answers." Chai v. Commissioner, 851 F.3d 190, 221 n.24 (2d Cir. 2017). "There [is] nothing improper in this." Roth v. Commissioner, T.C. Memo. 2017-248, 114 T.C.M. (CCH) 649, 652.
In conjunction with its opposition to respondent's motion for partial summary judgment, petitioner has filed a motion to disqualify respondent's counsel, urging that Messrs. Weaver and Hartford are "necessary witnesses" on "the issue of the adequacy of supervisory approval." Rule 24(g)(2)(A) provides that an attorney "may not represent a party at trial if * * * [he] is likely to be a necessary witness within the meaning of the ABA Model Rules of Professional Conduct unless * * * the testimony relates to an uncontested issue."
The threshold question is whether Messrs. Weaver and Hartford would likely be "necessary witnesses" at a trial of this case. This inquiry is "subject to particularly strict judicial scrutiny" because of "the[ ] potential for abuse." See Coutsoubelis v. Commissioner, T.C. Memo. 1993-457, 66 T.C.M. (CCH) 934, 944 (ruling that the model rules "were not designed to permit a lawyer to call opposing counsel as a witness and thereby disqualify him as counsel").
The answer to this threshold question is "no," because "the adequacy of supervisory approval" is not relevant to resolution of the section 6751(b) issue. As noted above, we have repeatedly held that a supervisor's "signature * * * is sufficient to satisfy the statutory requirements." Belair Woods, 154 T.C. at 17. Respondent has produced documentary evidence showing that Mr. Weaver made the initial determination to assert the section 6662A penalty; that Mr. Weaver's determination was timely approved in writing by Mr. Hartford; and that Mr. Hartford was Mr. Weaver's immediate supervisor at the relevant time. If called to testify, Messrs. Weaver and Hartford would confirm what we already know. See Duffey v. Commissioner, 91 T.C. 81, 83 (1988) (stating that an "attorney is not [a] necessary witness if his testimony would be merely cumulative"); Raifman, 116 T.C.M. (CCH) at 27 (stating that "further cross-examination is unnecessary" if the IRS has produced documentary evidence). In short, the line of questioning that petitioner proposes "would be immaterial and wholly irrelevant to ascertaining whether respondent complied with the written supervisory approval requirement." Id. at 27-28.
Accordingly, it is
ORDERED that petitioner's Motion to Disqualify Counsel, filed July 2, 2021, at docket entry #54, is denied. It is further
ORDERED that respondent's Motion for Partial Summary Judgment, filed July 8, 2021, at docket entry #59, is granted.
(Signed) Albert G. Lauber
1. All statutory references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
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