Opinion
30791-21
02-22-2023
GREEN COVE ROCK, LLC, GH MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke, Judge
On January 4, 2023, respondent filed a Motion for Partial Summary Judgment that he complied with the written supervisory approval requirement of section 6751(b) for a section 6663 fraud penalty. On February 8, 2023, petitioner filed a Response to respondent's Motion objecting to summary judgment.
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.
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). Under Rule 121(b) the Court 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). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Id. However, the nonmoving party may not rest upon the mere allegations or denials of his pleadings 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 based on the parties' pleadings and motion papers including declarations and exhibits attached thereto and are not in dispute.
Revenue Agent (RA) Kline was assigned to the examination (exam) of the partnership and had a proposed Notice of Final Partnership Administrative Adjustment (FPAA) prepared. The proposed FPAA did not assert the fraud penalty as RA Kline had not determined that the fraud penalty applied at that stage of the exam. Senior Counsel Anita A. Gill, a Chief Counsel attorney, reviewed the proposed FPAA in accordance with IRS procedures set forth in the Internal Revenue Manual (IRM). See I.R.M. pt. 2.7.2.5.1(d) (May 10, 2019) (Chief Counsel is required to review all FPAAs before issuance). Her immediate supervisor was Associate Area Counsel Mark Miller. Ms. Gill concluded that the fraud penalty applied and recommended it be assessed. Mr. Miller agreed with Ms. Gill's recommendation in a signed document. Thereafter, by a signed memorandum to Ms. Gill, dated July 22, 2021, RA Kline and his immediate supervisor, Loretta Mills, stated that "we accept/concur with Senior Counsel's recommendation" to assess the fraud penalty.
On August 24, 2021, an FPAA was issued to petitioner that asserted the fraud penalty. The FPAA was the first communication of the fraud penalty determination to petitioner and the partnership.
Discussion
Section 6751(b)(1) provides that "No 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".
Respondent asserts that Ms. Gill made the initial determination of the fraud penalty and that she had the authority to do so as part of Chief Counsel's mandatory review of FPAAs. Alternatively, he argues that RA Kline made the initial determination on the basis of his agreement with Ms. Gill's recommendation. Petitioner disagrees with both arguments.
In Graev v. Commissioner, 149 T.C. 485, 494-98 (2017) (Graev III), the Court held that Chief Counsel attorneys have authority to make an initial determination of a penalty when reviewing proposed notices during the exam stage of a case. In Graev III, 149 T.C. at 495, we stated that "nothing in the text or legislative history of section 6751(b) suggests that the identification of the person who made the initial determination should turn upon the penalty's inclusion or non-inclusion in a notice of deficiency."
Section 7803(b)(2) provides that Chief Counsel shall perform the duties that the Secretary prescribes, including acting as legal adviser to the Commissioner and the Commissioner's officers and employees. The Secretary can assign to Chief Counsel the duty to review statutory notices and to recommend changes. See Graev III, 149 T.C. at 496. There is no basis in section 6751(b) to distinguish between advice and an initial determination as an initial determination is advice until it is approved by a supervisor. Id. The IRM clearly assigns to Counsel the authority to review all FPAAs and requires that Counsel approves all FPAAs before their issuance. IRM pt. 4.31.2.7.2.5(1)d (May 10, 2019). Accordingly, Ms. Gill had authority to make an initial determination of the fraud penalty, and her immediate supervisor approved the penalty determination in writing before it was first communicated to petitioner in the FPAA.
Moreover, RA Kline agreed with Ms. Gill's recommendation, and his immediate supervisor approved of the fraud penalty determination in writing before it was first communicated to petitioner. Field Examination Technical Services (Technical Services) is responsible for writing and issuing FPAAs and coordinating with Chief Counsel for Counsel's mandatory review of FPAAs before their issuance. IRM pt. 4.8.1.2.2(3)g (Nov. 25, 2015); pt. 4.31.2.7.1(n) (Apr. 20, 2017); see IRM pt. 4.21.3.6.6(1) (Apr. 10, 2019) (Technical Services is part of Examination Operations). The proposed FPAA with Ms. Gill's recommendation was returned to RA Kline in accordance with IRM procedure. The IRM requires Technical Services to return a case to exams for further development under certain circumstances including when Technical Services determines that there is taxpayer fraud. IRM pt. 4.8.2.9.1.2 (June 27. 2013). If Ms. Gill lacked authority to make an initial determination, RA Kline had authority to do so.
RA Kline's statement in his declaration, as supplemented, that he did not make the "initial determination" (a legal term of art) to assess the fraud penalty and agreed with Ms. Gill's recommendation does not create a genuine issue of material fact.
No provisions in the IRM expressly address how to resolve disagreements between Exams and Chief Counsel over changes to a proposed FPAA. See IRM pt. 4.8.9.9.2.2 (July 9, 2013) (Technical Services can override Chief Counsel's changes to a proposed notice of deficiency with written approval of the Area Director).
Whether Ms. Gill or RA Kline made the initial fraud penalty determination, respondent has established compliance with the written supervisory approval requirement of section 6571(b). Both Ms. Mills and Mr. Miller provided written supervisory approval before the fraud penalty determination was communicated to petitioner in the FPAA. See Belair Woods, LLC v. Commissioner, 154 T.C. 1 (2020); Palmolive Bldg. Inv'rs, LLC v. Commissioner, 152 T.C. 75, 83 (2019). Furthermore, written supervisory approval was obtained before assessment, the deadline for written supervisory approval set forth by the Court of Appeals for the Eleventh Circuit, to which this case may be appealable, in Kroner v. Commissioner, 48 F.4th 1272, 1274 (11th Cir. 2022), rev'g in part, T.C. Memo. 2020-73.
Upon due consideration, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed January 4, 2023, is granted.