Nassau River Stone, LLC, GH Manager, LLC, Tax Matters Partner ( 2023 )

United States Tax Court
T.C. Memo. 2023-36NASSAU RIVER STONE, LLC,
GH MANAGER, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 28853-21. Filed March 16, 2023.
—————
Michael Todd Welty, Lyle B. Press, Macdonald A. Norman, Michael B.
Coverstone, Andrew W. Steigleder, Danial A. Rosen, and Kevin M. John-
son, for petitioner.
Emily J. Giometti, Melissa L. Hilty, Mistala M. Cullen, Olga Y. Bykov,
Russell Scott Shieldes, and Alexander D. DeVitis, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: This case involves a charitable contribution de-
duction claimed for 2015 by Nassau River Stone, LLC (Nassau River),
for the donation of a conservation easement. The Internal Revenue Ser-
vice (IRS or respondent) issued a notice of final partnership administra-
tive adjustment (FPAA) disallowing the deduction and determining pen-
alties. Currently before the Court is respondent’s Motion for Partial
Summary Judgment contending that the IRS complied with the
Served 03/16/23
2
[*2] requirements of section 6751(b)(1) by securing timely supervisory
approval of all penalties at issue. 1 We agree and will grant the Motion.
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. Commis-
sioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
Nassau River is a limited liability company (LLC) organized in
October 2015. It is treated as a TEFRA partnership for Federal income
tax purposes, and petitioner GH Manager, LLC, is its tax matters part-
ner. 2 GH Manager is a Georgia LLC, and its principal place of business
was in Atlanta, Georgia, when the Petition was timely filed. Nassau
River is a Florida LLC, the property on which the easement was placed
is in Florida, and Nassau River 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 Elev-
enth Circuit. See § 7482(b)(1)(E).
On December 3, 2015, after a series of transactions over the prior
few months, Nassau River acquired roughly 193 acres of land (Property)
in Polk County, Florida. Nassau River’s acquisition of the Property re-
sulted mainly from a capital contribution from its sole member, Imperial
Aggregates, LLC (Imperial). Imperial then sold interests in Nassau
River to investors desirous of large tax deductions.
On December 22, 2015, Nassau River granted an open-space con-
servation easement over the Property to the Atlantic Coast Conserv-
ancy, Inc. (ACC), a “qualified organization” for purposes of section
170(h)(3). The deed of easement was recorded on December 29, 2015.
One week later, Nassau River donated a fee simple interest in the land
to a passthrough entity wholly owned by ACC.
1Unless otherwise indicated, all statutory references are to the Internal Reve-
nue 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.
2 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 Nassau River.
3
[*3] Nassau River 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 $17,270,000 for its donation of the easement.
The IRS selected this return for examination.
The case was assigned to Revenue Agent (RA) Kenneth Kline, a
member of Team 1257 in the IRS Large Business & International Divi-
sion. At that time Supervisory Revenue Agent Loretta Mills served as
the acting team manager of Team 1257 and was RA Kline’s immediate
supervisor. In June 2019, as the examination neared completion, RA
Kline recommended assertion against Nassau River of the 40% penalty
for gross valuation misstatement. See § 6662(h). In the alternative, he
recommended assertion of a 20% penalty for substantial valuation mis-
statement, reportable transactions understatement, negligence, and/or
substantial understatement of income tax. See §§ 6662(b)(1)–(3), (c)–(e),
6662A(b).
RA Kline’s recommendations to this effect were set forth in three
documents: Form 5701, Notice of Proposed Adjustment (NOPA); Form
886–A, Explanation of Items; and a penalty lead sheet. Copies of all
three documents are included in the record. On June 6, 2019, RA Kline
communicated his recommendations by email to Ms. Mills, asking that
she “sign off on” the penalty lead sheet and the NOPA. On June 20,
2019, Ms. Mills digitally signed the NOPA as “Supervisory Internal Rev-
enue Agent Group 1257” and the penalty lead sheet in the box captioned
“Team Manager Initials.”
The next day Ms. Mills replied by email to RA Kline’s June 6
email, confirming that his recommendations had been “[a]pproved and
signed.” Ms. Mills’ email included at the bottom her name and her title,
“Team Manager, LB&I, PTE, GHW Team 1257.” RA Kline has submit-
ted declarations under penalty of perjury averring that “Ms. Mills was
[his] immediate supervisor” and that these statements are true and ac-
curate.
On June 24, 2019, RA Kline mailed petitioner a packet of docu-
ments, including Letter 1807 and attached Form 4549–A, Income Tax
Discrepancy Adjustments, commonly known as a revenue agent report
(RAR), setting forth his proposed adjustments and penalty recommen-
dations. This packet of documents constituted the first formal commu-
nication to petitioner that the IRS intended to assert the penalties dis-
cussed above, as recommended by RA Kline and approved by Ms. Mills.
4
[*4] Anita Gill, senior counsel with the Office of Chief Counsel, was
assigned to review a draft FPAA setting forth these adjustments. After
reviewing the draft FPAA and the administrative file, Ms. Gill con-
cluded that the 75% civil fraud penalty should also be asserted. See
§ 6663(a). Her recommendation to this effect was set forth in a penalty
recommendation memorandum. Associate area counsel Mark Miller
hand-signed and hand-dated this memorandum on July 18, 2021, stat-
ing that he was thus supplying “managerial approval of [the fraud] pen-
alty.” Mr. Miller confirmed that Ms. Gill “made the initial determina-
tion that the Fraud penalty . . . should apply in this case,” that he was
“the immediate supervisor of Anita Gill,” and that he “personally ap-
prove[d] the initial determination set forth above in compliance with
section 6751(b)(1).” Ms. Gill and Mr. Miller have submitted declarations
under penalty of perjury averring that all of these statements are true.
After receiving written approval from Mr. Miller, Ms. Gill com-
municated to RA Kline her recommendation that the civil fraud penalty
be included in the FPAA. On July 21, 2021, RA Kline and Ms. Mills
executed a document captioned “Civil Fraud Penalty Memorandum re-
garding Nassau River.” In this document they stated: “By our signa-
tures below, we accept/concur with Senior Counsel’s recommendation
that the section 6663(a) civil fraud penalty be assessed on Nassau
River.” RA Kline and Ms. Mills affixed at the bottom of the memoran-
dum their digital signatures, both dated July 21, 2021.
Two weeks later, on August 6, 2021, the IRS issued petitioner an
FPAA, including Form 886–A, disallowing (among other things) the
$17,270,000 deduction claimed for the conservation easement and deter-
mining the penalties discussed above. The FPAA constituted the first
formal communication to petitioner that the IRS intended to assert the
civil fraud penalty.
Petitioner timely petitioned this Court for readjustment of part-
nership items. On June 16, 2022, respondent filed a Motion for Partial
Summary Judgment, seeking a ruling that the IRS has sufficiently com-
plied with the section 6751(b) requirements for timely supervisory ap-
proval of the penalties determined in the FPAA. Petitioner opposed that
Motion, and further briefing ensued.
5
[*5] 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 fac-
tual materials and inferences drawn from them in the light most favor-
able 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 af-
fidavit 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 in-
dividual 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 satis-
fies [s]ection 6751(b) so long as a supervisor approves an initial deter-
mination of a penalty assessment before [the IRS] assesses those penal-
ties.” The court interpreted the phrase “initial determination of [the]
assessment” to refer to the “ministerial” process by which the IRS for-
mally 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).
A. “Initial Determination”
The record establishes that RA Kline recommended assertion of
the section 6662 and 6662A penalties and secured timely approval for
these penalties from his immediate supervisor, Ms. Mills. And the rec-
ord establishes that Ms. Gill recommended assertion of the civil fraud
penalty and secured timely approval for this penalty from her immedi-
ate supervisor, Mr. Miller. Ms. Gill then forwarded her recommendation
6
[*6] (thus approved) to RA Kline and Ms. Mills. They likewise approved
inclusion of the fraud penalty in the FPAA. It thus seems obvious that
the IRS has complied with section 6751(b)(1) in all respects—indeed,
with belt and suspenders.
Petitioner struggles mightily, but in vain, to gin up a dispute of
material fact. Petitioner first challenges the status of RA Kline and Ms.
Gill as the officers who made the “initial determination” of the penalties.
If they did not make the “initial determination,” petitioner urges, their
immediate supervisors were not the right people to approve the penal-
ties.
In support of its argument that RA Kline “did not make the initial
determination of the exam penalties,” petitioner relies on a June 18,
2019, entry in the case activity record of Jon Fender, another exam team
member, stating: “TC noted that the 40% A/R Penalty for Gross Valua-
tion Misstatement . . . is applicable and should be included on each
RAR.” Petitioner speculates that “TC” may have been someone other
than RA Kline, and that the immediate supervisor of “TC,” as opposed
to Ms. Mills, was the proper person to supply penalty approval.
Respondent has established that “TC” is the abbreviation for
“Team Coordinator” and that RA Kline was the “Team Coordinator” for
the Nassau River examination. RA Kline and “TC” are thus the same
person. Respondent communicated this information to petitioner in dis-
covery several times. RA Kline has averred in a declaration under pen-
alty of perjury that he was indeed the “TC” for this examination. Peti-
tioner’s speculations to the contrary are not enough to establish a genu-
ine dispute of material fact. See Rule 121(d).
In any event, the “initial determination of [a penalty] assessment”
is a formal action by the Examination Division directed to a particular
taxpayer. See Frost v. Commissioner, 154 T.C. 23, 32 (2020); Belair
Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020). The word “deter-
mination” has “an established meaning in the tax context” and denotes
an action “with a high degree of concreteness and formality.” See Belair
Woods, 154 T.C. at 15. An “initial determination” signifies a “consequen-
tial moment” of IRS action. Ibid. (quoting Chai v. Commissioner, 851
F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo.
2015-42). The notation by one exam team member, in his case activity
record, that another team member believes a penalty appropriate, evi-
dences at most preliminary deliberation among IRS officers. Such de-
liberation cannot possibly constitute the “initial determination of [a
7
[*7] penalty] assessment” within the meaning of section 6751(b)(1). See
id. at 9 (ruling that the statute “requires approval for the initial deter-
mination of penalty assessment, not for a tentative proposal or hypoth-
esis”). 3
Petitioner next contends that Ms. Gill did not make the “initial
determination” to assert the fraud penalty because, “[a]s an employee of
the Office of Chief Counsel, [she] could not legally determine a penalty.”
Petitioner asserts that Chief Counsel attorneys may serve only as “ad-
visors, not examiners,” and that they “cannot be presumed to enjoy au-
thority to determine penalties at the examination stage.”
Again we disagree. We have previously held that an “initial de-
termination” can be made by a Chief Counsel attorney, and we have re-
jected petitioner’s suggestion that an “initial determination” cannot take
the form of a recommendation or advice. See Graev v. Commissioner,
149 T.C. 485, 494–98 (2017), supplementing and overruling in part 147
T.C. 460 (2016). The distinction petitioner seeks to draw between “ad-
visors” and “examiners” is misplaced because “[a]ny ‘initial determina-
tion’ governed by section 6751(b), whether made by an examining agent
or a chief counsel attorney, is mere advice until it receives the requisite
supervisory approval and is finalized by the Commissioner or one of his
agents.” Id. at 496 (citing sections 7803(b)(2) and 7701(c)).
As the attorney assigned to review the draft FPAA, Ms. Gill had
the responsibility to determine whether that document was accurate.
She made the determination, within the scope of her official duties, that
the fraud penalty applied. Respondent has shown, by citation of the
Chief Counsel Directives Manual (CCDM) and other parts of the Inter-
nal Revenue Manual (IRM), that Ms. Gill as senior counsel had the
3 Petitioner alternatively contends that RA Kline should not be regarded as
having made the “initial determination” because his case activity record “shows that
he spent only 64 hours on [p]etitioner’s [a]udit.” But section 6751(b)(1) does not inquire
into the depth or comprehensiveness of IRS officers’ review; it simply requires super-
visory approval of the penalty recommendation. See Pickens Decorative Stone, LLC v.
Commissioner, T.C. Memo. 2022-22, 123 T.C.M. (CCH) 1127, 1130. As we have said
before: “The written supervisory approval requirement . . . requires just that: written
supervisory approval.” Ibid. (quoting 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 or other document must “demonstrate the depth or comprehensiveness
of the supervisor’s review.” Belair Woods, 154 T.C. at 17. We do not second-guess the
extent of the RA’s or the supervisor’s deliberations about whether penalties should be
imposed. We confine our search to seeking evidence of written supervisory approval.
See Raifman, 116 T.C.M. (CCH) at 27–28.
8
[*8] authority to make the initial determination of the fraud penalty.
See CCDM 33.1.2.7.4 (June 2, 2014) (dealing with Chief Counsel’s au-
thority in reviewing notices of deficiency); see also id. 33.1.2.8(1) (Oct.
17, 2016) (“The role of the Field Counsel is to advise whether a deficiency
notice should be issued, and if so, to make recommendations concerning
the issues to be asserted . . . . The criteria for submitting a Notice of
Deficiency to Field Counsel for review are in IRM 4.8.9.9 . . . .”) She was
the first IRS officer to recommend the fraud penalty, so her determina-
tion on this point was the “initial determination.”
In any event, granting for the sake of argument petitioner’s prem-
ise that an “examiner” had to make the initial determination, RA Kline,
an examiner, did so. This fact is established by the penalty recommen-
dation concurrence memorandum, electronically signed by RA Kline and
Ms. Mills on July 21, 2021. RA Kline and his immediate supervisor
there stated: “By our signatures below, we accept/concur with Senior
Counsel’s recommendation that the Section 6663(a) civil fraud penalty
be assessed on Nassau River.”
Supervisory approval need not be recorded on any particular form
or document. The only requirement is a writing that manifests the im-
mediate supervisor’s intent to approve the penalty at issue. See Tribune
Media Co. v. Commissioner, T.C. Memo. 2020-2, 119 T.C.M. (CCH) 1006,
1010–11. Regardless of whether the “initial determination” of the fraud
penalty is thought to have been made by Ms. Gill or RA Kline, the pen-
alty received the requisite approval from the appropriate supervisor(s).
B. Timely Approval in Writing
Under a literal application of the standard enunciated by the
Eleventh Circuit in Kroner, supervisory approval could seemingly be se-
cured at any moment before actual assessment of the tax, which has not
yet occurred. See Kroner v. Commissioner, 48 F.4th at 1279–81. But the
Eleventh Circuit left open the possibility that supervisory approval in
some cases might need to be secured sooner—before the supervisor “has
lost the discretion to disapprove” assertion of the penalty. See id.
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
at 220 (concluding that supervisory approval must be obtained at a time
when “the supervisor has the discretion to give or withhold it”).
9
[*9] The penalties other than the fraud penalty were approved by Ms.
Mills on June 20, 2019. She digitally signed the NOPA and the penalty
lead sheet as RA Kline’s “Team Manager.” RA Kline has supplied a dec-
laration confirming that Ms. Mills supervised him during the Nassau
River examination. We conclude that Ms. Mills was RA Kline’s “imme-
diate supervisor” within the meaning of section 6751(b)(1). See Sand
Inv. Co. v. Commissioner, 157 T.C. 136, 142 (2021) (holding that the “im-
mediate supervisor” is the person who supervises the agent’s substan-
tive work on an examination).
The fraud penalty was approved by Mr. Miller on July 18, 2021.
He hand-signed the penalty recommendation as Ms. Gill’s “immediate
supervisor.” Both individuals have supplied declarations confirming
that Mr. Miller supervised Ms. Gill during the Nassau River assign-
ment. We conclude that Mr. Miller was Ms. Gill’s “immediate supervi-
sor” within the meaning of section 6751(b)(1). See Sand Inv., 157 T.C.
at 142.
The FPAA was issued on August 6, 2021. As of June 20, 2019,
and July 18, 2021, the dates on which Ms. Mills and Mr. Miller supplied
their respective approvals, the IRS examination remained at a stage
where they had discretion to approve or disapprove the penalty recom-
mendations. See Kroner v. Commissioner, 48 F.4th at 1279 n.1. There-
fore, under the reading of Kroner most favorable to petitioner, the IRS
complied with section 6751(b)(1) in this case because Ms. Mills and Mr.
Miller timely approved the relevant penalties and did so in writing.
Tilting at windmills, petitioner vainly probes for a dispute of ma-
terial fact. Petitioner first asserts that Ms. Mills may not have been the
“immediate supervisor” of RA Kline because “[r]espondent has failed to
produce any written Designation to Act (Form 10247) or other documen-
tary evidence to establish Agent Mills’ supervisory authority.” But Pe-
titioner cites no authority—and there is none—remotely suggesting that
respondent must supply a Form 10247 to meet his burden in showing
timely supervisory approval was obtained under section 6751(b).
The evidence conclusively establishes that Ms. Mills was RA
Kline’s immediate supervisor at all relevant times. RA Kline submitted
his penalty recommendations to her in that capacity. Ms. Mills agreed
with his recommendations and digitally signed two penalty approval
forms as his “Team Manager.” Ms. Mills then replied to RA Kline’s
email, in which he had asked her to “sign off” on the penalties, by con-
firming that she had “[a]pproved and signed” his penalty
10
[*10] recommendations as his “Team Manager.” At no point did RA
Kline or any other member of Team 1257 question Ms. Mills’ supervisory
authority. To the contrary, RA Kline has submitted declarations under
penalty of perjury averring that “Ms. Mills was [his] immediate super-
visor” and that these statements are true and accurate. Petitioner offers
nothing but speculation to the contrary.
The “presumption of regularity” likewise supports the actions of
the IRS officers here. “The presumption of regularity supports the offi-
cial acts of public officers and, in the absence of clear evidence to the
contrary, courts presume that they have properly discharged their offi-
cial duties.” Long Branch Land, LLC v. Commissioner, T.C. Memo.
2022-2, at *5 (quoting Pietanza v. Commissioner, 92 T.C. 729, 739
(1989), aff’d, 935 F.2d 1282 (3d Cir. 1991)). It remains a well-settled
rule that “all necessary prerequisites to the validity of official action are
presumed to be complied with.” Ibid. (quoting Lewis v. United States,
279 U.S. 63, 73 (1929)); see Mecom v. Commissioner, 101 T.C. 374, 388
(1993) (holding that IRS officials “are presumed to have properly dis-
charged their official duties”), aff’d, 40 F.3d 385 (5th Cir. 1994). Peti-
tioner offers no evidence, much less “clear evidence,” to overcome this
presumption.
Petitioner next contends that “a question of fact exists as to the
accuracy” of the electronic signatures that RA Kline and Ms. Mills af-
fixed to the various documents. Petitioner complains that RA Kline’s
case activity record “does not show any activity on the dates he purport-
edly signed the documents.” Petitioner asserts that this supposed un-
certainty “require[s] the Court to take testimony and make credibility
determinations” at trial.
Again we disagree. Section 6751(b)(1) does not require that su-
pervisory approval be documented in any particular way, so long as it
takes the form of a writing. See Tribune Media, 119 T.C.M. (CCH) at
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 F. App’x 157, 159 (2d Cir. 2008); see Belair Woods,
154 T.C. at 16 (holding that the statute “mandates only that the ap-
proval of the penalty assessment be ‘in writing’ and by a manager” (quot-
ing PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 213 (5th Cir.
2018))); Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C 75, 86
(2019).
11
[*11] We have repeatedly held that a manager’s signature on a penalty
approval form, without more, is sufficient to satisfy the statutory re-
quirements. See Sparta Pink Prop., LLC v. Commissioner, T.C. Memo.
2022-88, at *8 (citing Belair Woods, 154 T.C. at 17); see, e.g., Thompson
v. Commissioner, 155 T.C. 87, 93–94 (2020); Goddard v. Commissioner,
T.C. Memo. 2022-96; Excelsior Aggregates, LLC v. Commissioner, T.C.
Memo. 2021-125. And we have regularly decided section 6751(b)(1)
questions on summary judgment on the basis of IRS records and decla-
rations from relevant IRS officers. See, e.g., Sand Inv., 157 T.C. at 142;
Long Branch Land, T.C. Memo. 2022-2; Excelsior Aggregates, T.C.
Memo. 2021-125. In so doing, we have rejected the notion that examin-
ing agents and their supervisors must be subjected to cross-examina-
tion. See Thompson v. Commissioner, T.C. Memo. 2022-80, at *8; Raif-
man, 116 T.C.M. (CCH) at 27–28 (holding that cross-examination
“would be immaterial and wholly irrelevant to ascertaining whether [the
IRS] complied with the written supervisory approval requirement”).
To reflect the foregoing,
An order will be issued granting respondent’s Motion for Partial
Summary Judgment.