Opinion
14163-21
03-23-2023
SUNFISH COVE, LLC, MARLIN WOODS CAPITAL LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This case involves a charitable contribution deduction claimed by Sunfish Cove, LLC (Sunfish Cove), for a conservation easement. The Internal Revenue Service (IRS or respondent) issued a notice of final partnership administrative adjustment (FPAA) disallowing Sunfish Cove's deduction and determining penalties. On August 1, 2022, the case was assigned to the undersigned for trial or other disposition.
Currently before the Court is respondent's Motion for Partial Summary Judgment contending that the IRS complied with the requirements of section 6751(b)(1) by securing timely supervisory approval of the accuracy-related penalties determined in the FPAA and of the fraud penalty asserted in the Answer. We agree and will grant the Motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following facts are derived from the pleadings, the parties' Motion papers, and the Exhibits and Declarations attached thereto. They are stated solely for purposes of deciding respondent's Motion and 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).
Sunfish Cove is a limited liability company (LLC) organized in May 2016. It is treated as a TEFRA partnership for Federal income tax purposes, and petitioner Marlin Woods Capital, LLC, is its tax matters partner. The latter is a Florida LLC, and its principal place of business was in Florida when the Petition was timely filed. Sunfish Cove is a Florida LLC, the property on which the easement was placed is in Florida, and Sunfish Cove had its principal place of business in Florida when the Petition was filed. Absent stipulation to the contrary, appeal of this case would lie to the U.S. Court of Appeals for the Eleventh Circuit. See § 7482(b)(1)(E).
Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71) governed the tax treatment and audit procedures for many partnerships, including Sunfish Cove.
In May 2016, after a series of transactions between November 2015 and May 2016, Sunfish Cove acquired roughly 111 acres of land in Polk County, Florida (Property). Sunfish Cove's acquisition of the Property resulted mainly from a capital contribution from its sole member, Elbow Creek, LLC (Elbow Creek). Elbow Creek then sold its interests in Sunfish Cove to investors desirous of large tax deductions. On December 27, 2017, Sunfish Cove granted the Atlantic Coast Conservancy, Inc. (ACC) an open-space conservation easement over the land. One day later, Sunfish Cove donated a fee simple interest in the land to a passthrough entity wholly owned by ACC.
Sunfish Cove timely filed Form 1065, U.S. Return of Partnership Income, for its 2017 tax year. On that return it claimed a charitable contribution deduction of $12,545,000 for its donation of the easement. The IRS selected this return for examination.
The case was assigned to Revenue Agent (RA) James L. Person. At that time Kenneth Glover, Supervisory Revenue Agent, was RA Person's Team Manager and immediate supervisor. On the basis of his examination RA Person recommended assertion against Sunfish Cove of the 40% penalty for gross valuation misstatement. See § 6662(h). In the alternative, he recommended assertion of a 20% penalty for substantial valuation misstatement, reportable transactions understatement, negligence, and/or substantial understatement of income tax. See §§ 6662(b)(1)-(3), (c)-(e), 6662A(b).
RA Person's recommendations to this effect were set forth in an "Examination Plan Issue Lead Sheet," which he initiated in March 2020, and then in a Form 5701, Notice of Proposed Adjustment (NOPA), with an attached Form 866-A, Explanation of Items. On March 11, 2021, RA Person transmitted the NOPA to Mr. Glover for approval. That same day Mr. Glover digitally signed the NOPA in the box labeled "Team Manager," affixing a digital image of his handwritten signature, "Ken Glover," and the date, March 11, 2021. RA Person and Mr. Glover have submitted Declarations under the penalty of perjury averring that Mr. Glover was RA Person's immediate supervisor and that these statements are true and accurate.
On April 25, 2021, RA Person mailed petitioner a packet of documents, including Letter 1807 and attached Form 4549-A, Income Tax Discrepancy Adjustments, setting forth his proposed adjustments and penalty recommendations. This packet of documents constituted the first formal communication to petitioner that the IRS intended to assert the penalties discussed above, as recommended by RA Person and approved by Mr. Glover.
On April 15, 2021, the IRS sent petitioner an FPAA, including Form 866-A, disallowing (among other things) the $12,545,000 deduction claimed for the conservation easement and determining the penalties discussed above. Petitioner timely petitioned this Court for readjustment of the partnership items.
Emily Giometti, Special Trial Attorney with the Office of Chief Counsel, was assigned to represent respondent in this case. While conducting her duties for the Office of Chief Counsel, she reviewed the administrative and legal files in preparation for submitting respondent's Answer. After reviewing the files and gathering further documentation, Ms. Giometti concluded that the 75% civil fraud penalty should also be asserted against Sunfish Cove. See § 6663(a).
Ms. Giometti's recommendation to this effect was set forth in a penalty recommendation memorandum. Her immediate supervisors, Travis Vance, Strategic Litigation Counsel, and R. Scott Shieldes, Senior Level Strategic Litigation Counsel, digitally signed and dated this memorandum on November 7 and November 8, 2021, respectively. Messrs. Vance and Shieldes thereby confirmed that they were Ms. Gi-ometti's "immediate supervisor[s]" and that they approved Ms. Giometti's "initial penalty recommendation" to assert the fraud penalty. Ms. Giometti and Messrs. Vance and Shieldes have submitted Declarations under the penalty of perjury averring that all these statements are true and accurate.
On November 9, 2021, after receiving written approval from Messrs. Vance and Shieldes, Ms. Giometti filed respondent's Answer in this case, alleging the fraud penalty discussed above. Messrs. Shieldes and Vance again indicated their approval for asserting the fraud penalty by affixing their signatures below Ms. Giometti's on the Answer. The Answer constituted the first formal communication to petitioner that the IRS intended to assert the fraud penalty.
Discussion
I. 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. See 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 nonmoving party. Sundstrand Corp., 98 T.C. at 520. Where the moving party properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such party's pleading" but must set forth specific facts, by affidavit or otherwise, showing that there is a genuine dispute for trial. Rule 121(d).
II. Analysis
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." In Kroner v. Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022), rev'g in part T.C. Memo. 2020-73, the U.S. Court of Appeals for the Eleventh Circuit held that "the IRS satisfies [s]ection 6751(b) so long as a supervisor approves an initial determination of a penalty assessment before [the IRS] assesses those penalties." The court interpreted the phrase "initial determination of [the] assessment" to refer to the "ministerial" process by which the IRS formally records the tax debt. See id. at 1278. Absent stipulation to the contrary this case is appealable to the Eleventh Circuit, and we thus follow its precedent. See Golsen v. Commissioner, 54 T.C. 742, 756-57 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Under a literal application of the standard enunciated in Kroner, supervisory approval could seemingly be secured at any moment before actual assessment of the tax. But the Eleventh Circuit left open the possibility that supervisory approval in some cases might need to be secured sooner, i.e., before the supervisor "has lost the discretion to disapprove" the penalty determination. See Kroner v. Commissioner, 48 F.4th at 1279 n.1; cf. Laidlaw's Harley Davidson Sales Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022) (treating supervisory approval as timely if secured before the penalty is assessed or "before the relevant supervisor loses discretion whether to approve the penalty assessment"), rev'g and remanding 154 T.C. 68 (2020); Chai v. Commissioner, 851 F.3d 190, 220 (2d Cir. 2017) (concluding that supervisory approval must be obtained at a time when "the supervisor has the discretion to give or withhold it"), aff'g in part, rev'g in part T.C. Memo. 2015-42.
The penalties other than the fraud penalty were approved by Mr. Glover on March 11, 2021. Respondent has supplied a copy of the NOPA, to which Mr. Glover affixed a digital copy of his handwritten signature in the box captioned "Team Manager," with the date affixed next to it. RA Person and Mr. Glover have supplied Declarations confirming that Mr. Glover supervised RA Person's work during the Sunfish Cove examination. We accordingly conclude that Mr. Glover was RA Person's "immediate supervisor" within the meaning of section 6751(b)(1). See Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021) (holding that the "immediate supervisor" is the person who supervises the agent's substantive work on an examination).
The fraud penalty was approved by Messrs. Vance and Shieldes on November 7 and November 8, 2022, respectively. They digitally signed the penalty recommendation as Ms. Giometti's "immediate supervisor[s]" and they likewise signed the Answer. All three individuals have supplied Declarations confirming that Messrs. Vance and Shieldes supervised Ms. Giometti during the Sunfish Cove assignment. We conclude that Messrs. Vance and Shieldes were Ms. Gill's immediate supervisors within the meaning of section 6751(b)(1). See Sand Inv. Co., 157 T.C. at 142.
The FPAA was issued on April 15, 2021, and the Answer was filed on November 9, 2021. As of March 11, 2021, and November 7 and 8, 2021, the dates on which the supervisors supplied their respective approvals, the IRS examination remained at a stage where they had discretion to approve or disapprove the penalty recommendations. See Kroner v. Commissioner, 48 F.4th at 1279 n.1. Therefore, under the reading of Kroner most favorable to petitioner, the IRS complied with section 6751(b)(1) in this case because Mr. Glover and Messrs. Vance and Shieldes timely approved the relevant penalties and did so in writing.
Petitioner contends that summary judgment is inappropriate. It asserts that disputes of material fact exist as to: (1) whether Mr. Glover "possessed supervisory authority" over RA Person; (2) whether Messrs. Vance and Shields "possessed supervisory authority" over Ms. Giometti; (3) whether Mr. Glover' electronic signature on the NOPA is what it purports to be; and (4) whether the respective supervisors conducted their supervisory review "employ[ing] the requisite depth and comprehensiveness."
We recently granted an IRS motion for partial summary judgment on the "penalty approval" question in another syndicated conservation case, which involved facts resembling those here. See Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36. In so doing we rejected the fourth argument that petitioner advances in this case. See Nassau River, T.C. Memo. 2023-36, at *7 n. 3 ("We have repeatedly rejected any suggestion that a penalty approval form or other document must 'demonstrate the depth or comprehensiveness of the supervisor's review.'") (quoting Belair Woods, LLC v. Commissioner, 154 T.C. 1, 17 (2020)). We likewise ruled in Nassau River that a Team Manager, who digitally signed a NOPA in that capacity, was the "immediate supervisor" of the examining agent, rejecting the argument that the IRS must produce a "Designation to Act" on Form 10247 in order to establish supervisory authority. See id. at *9-10. We rule similarly here, finding no genuine dispute of material fact as to whether Mr. Glover possessed "supervisory authority" over RA Person. See id. at *10.
In Elbow Creek, LLC v. Commissioner, Docket No. 14702-21, a conservation case related to this one, we rejected the second argument that petitioner advances here. See Elbow Creek (Order served Mar. 21, 2023) (concluding that Messrs. Vance and Shields "possessed supervisory authority" over Ms. Giometti for purposes of approving a fraud penalty asserted in the answer); see also Roth v. Commissioner, T.C. Memo. 2017-248, 114 T.C.M. (CCH) 649, 652 (finding an associate area counsel's signature on an answer sufficient), aff'd, 922 F.3d 1126 (10th Cir. 2019).
Petitioner's third argument is directed to Mr. Glover's signature on the NOPA. In Nassau River, the supervisor affixed a digital signature block that itself included the time and date. See Nassau River, T.C. Memo. 2023-36, at *10-11 (finding no genuine dispute of material fact about the signature's authenticity). Here Mr. Glover affixed a digital copy of his signature and separately included, in the box captioned "date," March 11, 2021.
This is a distinction without a difference. There are many ways of signing a document. Section 6751(b)(1) does not require that supervisory approval be documented in any particular way, so long as it takes the form of a writing. See Tribune Media Co. v. Commissioner, T.C. Memo. 2020-2, 119 T.C.M. (CCH) 1006, 1010-11. The statute "requires only personal approval in writing, not any particular form of signature or even any signature at all." Deyo v. United States, 296 Fed.Appx. 157, 159 (2d Cir. 2008); see Belair Woods, 154 T.C. at 16 (holding that the statute "mandate[s] only the approval of the penalty assessment be 'in writing' and by a manager") (quoting PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 215 (5th Cir. 2018)); Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C. 75, 86 (2019). The "presumption of regularity" firmly supports the conclusion that the date appearing next to Mr. Glover's signature is the date on which he affixed it. See Pietanza v. Commissioner, 92 T.C. 729, 739 (1989), aff'd, 935 F.2d 1282 (3d Cir. 1991) ("The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties."); Long Branch Land, LLC v. Commissioner, 92 T.C. Memo. 2022-2, at *5 (holding that it remains a well settled rule that "all necessary prerequisites to the validity of official action are presumed to be complied with") (quoting Lewis v. United States, 279 U.S. 63, 73 (1929)).
We have repeatedly held that a manager's signature on a penalty approval form, without more, is sufficient to satisfy the statutory requirements. See Sparta Pink Prop., LLC v. Commissioner, T.C. Memo. 2022-88, at *8 (citing Belair Woods, 154 T.C. at 17). And we have regularly decided section 6751(b)(1) questions on summary judgment on the basis of IRS records and declarations from relevant IRS officers. See, e.g., Sand Inv. Co., 157 T.C. at 142; Long Branch Land, T.C. Memo. 2022-2; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125. Petitioner has offered no evidence to controvert the facts thus established. See Rule 121(d) (providing that a party opposing summary judgment may not rely on "mere allegations or denials" but "must set forth specific facts," including facts established "by affidavits or declarations"); Frost v. Commissioner, 154 T.C. 23, 35 (2020). There being no genuine dispute of material fact on these points, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed June 16, 2022, is granted. It is further
ORDERED that the parties shall file with the Court, on or before May 5, 2023, a status report (jointly if possible, otherwise separately) expressing their views about the conduct of further proceedings in this case. In that report, the parties should, if possible, propose a plan for trying the five cases involving conservation easements in Polk County, Florida, now pending before this division of the Court, including whether consolidation or a test case procedure would be desirable. The Court invites the parties' views as to whether there are cases, now pending before other divisions of the Court or in the general docket, that also involve conservation easements in Polk County, Florida, and (if so) whether any of them could conveniently be tried together with the cases over which the undersigned now has jurisdiction.