Dorchester Farms Property, LLC, Dorchester Farms Manager, LLC, Tax Matters Partner ( 2023 )

United States Tax Court
T.C. Memo. 2023-92DORCHESTER FARMS PROPERTY, LLC, DORCHESTER FARMS
MANAGER, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 6441-20. Filed July 24, 2023.
—————
Vivian D. Hoard and Meeren S. Amin, for petitioner.
Richard C. Mills III, Erin A. Schaffer-Williams, Peter T. McCary, John
W. Sheffield III, John T. Arthur, and A. Gary Begun, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: This case involves a charitable contribution de-
duction claimed for 2016 by Dorchester Farms Property, LLC (Dorches-
ter), for the donation of a conservation easement. The Internal Revenue
Service (IRS or respondent) issued a notice of final partnership admin-
istrative adjustment (FPAA) disallowing the deduction and determining
penalties. Currently before the Court is respondent’s Motion for Partial
Summary Judgment contending that the IRS complied with the require-
ments of section 6751(b)(1) by securing timely supervisory approval of
all penalties at issue. 1 We agree and will grant the Motion.
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure.
Served 07/24/23
2
[*2] 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).
Dorchester is a Georgia limited liability company (LLC) organized
in April 2016. It is treated as a TEFRA partnership for Federal income
tax purposes, 2 and its tax matters partner is petitioner Dorchester
Farms Manager, LLC, likewise a Georgia entity. Dorchester had its
principal place of business in Georgia when the Petition was timely 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).
In December 2016 Dorchester donated to the Southern Conserva-
tion Trust a conservation easement over a 625-acre tract in Liberty
County, Georgia. Dorchester timely filed Form 1065, U.S. Return of
Partnership Income, for its 2016 tax year. On that return it claimed a
charitable contribution deduction of $18,663,918 for its donation of the
easement.
The IRS selected Dorchester’s 2016 return for examination and
assigned the case to Revenue Agent (RA) Leopoldo Garcia. In October
2019, as the examination neared completion, RA Garcia recommended
assertion against Dorchester of the 40% penalty for a gross valuation
misstatement. See § 6662(h). In the alternative, he recommended as-
sertion of a 20% penalty for a substantial valuation misstatement, a re-
portable transactions understatement, negligence, and/or a substantial
understatement of income tax. See §§ 6662(b)(1)–(3), (c)–(e), 6662A(b).
RA Garcia’s recommendations to this effect were set forth in a
civil penalty approval form, a copy of which is included with respond-
ent’s Motion. RA Garcia is listed as the “Examiner” at the top of this
form. His group manager, Margaret McCarter, digitally signed the pen-
alty approval form on October 3, 2019. She verified that she was RA
Garcia’s “group manager” and that she “approve[d] the penalties identi-
fied” in that form.
2 Before its repeal, TEFRA (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 process for many partnerships, including Dorchester.
3
[*3] On October 22, 2019, RA Garcia mailed petitioner a packet of doc-
uments, including a Letter 1807 and an attached Form 4605–A, Exami-
nation Changes, which set 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 penal-
ties discussed above, as recommended by RA Garcia and approved by
Ms. McCarter. More than four months later, on March 12, 2020, the IRS
issued petitioner an FPAA, including a Form 866–A, Explanation of
Items, disallowing the $18,663,918 deduction Dorchester claimed for the
conservation easement and determining the aforementioned penalties.
Petitioner timely petitioned this Court for readjustment of partnership
items.
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 as to any material fact and a decision may be rendered
as a matter of law. See Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520.
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. Sundstrand Corp., 98 T.C. at 520. Where the
moving party makes and properly supports a motion for summary judg-
ment, “the nonmovant may not rest on the allegations or denials in that
party’s pleading” but must set forth specific facts, by affidavit or other-
wise, 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.” 3 In Kroner v. Commissioner, 48
F.4th 1272, 1276 (11th Cir. 2022), rev’g in part T.C. Memo. 2020-73, the
Eleventh Circuit held that “the IRS satisfies [s]ection 6751(b) so long as
3 Although the Commissioner does not bear a burden of production with respect
to penalties in a partnership-level proceeding, a partnership may raise section 6751(b)
as an affirmative defense. See Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C.
224, 236–37 (2018).
4
[*4] a supervisor approves an initial determination of a penalty assess-
ment 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 appeal-
able to the Eleventh Circuit, and we thus follow its precedent. See Gol-
sen 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 se-
cured sooner, i.e., before the supervisor “has lost the discretion to disap-
prove” 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.
Respondent has supplied a copy of the civil penalty approval form
that lists all of the penalties at issue. RA Garcia was the examiner who
recommended assertion of these penalties. His name appears as the
“Examiner” at the top of the form, and his case activity record—a re-
dacted version of which is included with respondent’s Motion—shows
that he was the lead “examiner” for the Dorchester examination. 4
Ms. McCarter digitally signed the penalty approval form as RA
Garcia’s “group manager” in the box captioned “Name and Title of Ap-
prover.” We accordingly conclude that she was RA Garcia’s “immediate
supervisor” within the meaning of section 6751(b)(1). See Sand Inv. Co.
4 RA Garcia’s case activity record, attached as Exhibit C to the Declaration
accompanying respondent’s Motion, redacts seven lines of the document on pages 1
and 2, all relating to entries made before March 1, 2019. Petitioner complains that it
has “no way of knowing what information is redacted.” But the Declaration, which
was filed under penalties of perjury, avers that the information thus redacted was pro-
tected by the attorney-client privilege or was taxpayer privacy information protected
from disclosure by section 6103. We find that these redactions were properly made in
accordance with Rule 27, and they do not affect our disposition of the issue at hand.
5
[*5] v. Commissioner, 157 T.C. 136, 142 (2021); see also Salacoa Stone
Quarry, LLC v. Commissioner, T.C. Memo. 2023-68, at *6 (holding that
Ms. McCarter’s signature as “team manager” on a penalty approval form
satisfied the statutory requirements); Sparta Pink Prop., LLC v. Com-
missioner, T.C. Memo. 2022-88, 124 T.C.M. (CCH) 121, 124 (holding that
Ms. McCarter’s signature as “group manager” on a penalty approval
form satisfied the statutory requirements).
All of the penalties at issue were approved by Ms. McCarter on
October 3, 2019. The Letter 1807 and the Form 4605–A were mailed to
petitioner on October 22, 2019, and the FPAA was issued on March 12,
2020. As of October 3, 2019, therefore, the IRS examination remained
at a stage where Ms. McCarter had discretion to approve or disapprove
the penalty recommendations. See Kroner v. Commissioner, 48 F.4th
at 1279 n.1. Therefore, under a reading of Kroner most favorable to pe-
titioner, the IRS complied with the requirements of section 6751(b)(1).
Petitioner advances essentially three arguments in support of a
contrary conclusion. First, while not disputing that RA Garcia prepared
the civil penalty approval form, petitioner surmises that RA Garcia rec-
ommended the “categorical assertion of penalties based on the type of
transaction” rather than undertaking “a substantive determination”
that penalties were appropriate in this particular case. Noting that RA
Garcia’s case activity record does not specifically mention “determining
penalties,” petitioner infers that he did not devote significant time or
effort to this task.
We have repeatedly rejected this line of argument. Faced with
assertions that IRS officers gave insufficient consideration to the mat-
ters before them, we have ruled such lines of inquiry “immaterial and
wholly irrelevant to ascertaining whether respondent complied with the
written supervisory approval requirement.” Patel v. Commissioner, T.C.
Memo. 2020-133, 120 T.C.M. (CCH) 211, 214 (quoting Raifman v. Com-
missioner, T.C. Memo. 2018-101, 116 T.C.M. (CCH) 13, 27–28); see Es-
tate of Morrissette v. Commissioner, T.C. Memo. 2021-60, 121 T.C.M.
(CCH) 1447, 1474. Section 6751(b)(1) does not inquire into the time or
effort the examiner and the supervisor devote to their respective tasks.
Rather, as we have said before: “The written supervisory approval re-
quirement . . . requires just that: written supervisory approval.” Pickens
Decorative Stone, LLC v. Commissioner, T.C. Memo. 2022-22, 123
T.C.M. (CCH) 1127, 1130 (quoting Raifman, 116 T.C.M. (CCH) at 28).
6
[*6] Second, while not disputing that RA Garcia was the “examiner”
for the Dorchester audit, petitioner questions whether RA Garcia made
the “initial determination” to assert the penalties in question. Petitioner
speculates that it was not RA Garcia, but “the IRS Office of Chief Coun-
sel or [someone] at another level of [r]espondent” who made that deci-
sion. Petitioner notes that, on October 7, 2019, RA Garcia recorded in
his activity record his receipt of a “[Form] 866–A draft” from IRS chief
counsel. This occurred four days after Ms. McCarter had signed the pen-
alty approval form. Surmising that RA Garcia may have had previous
consultations with other IRS officers before recommending the penalties
that he set forth on the penalty approval form, petitioner has issued in-
formal discovery seeking “any communications or guidance provided to
[RA] Garcia or Ms. McCarter regarding the imposition of penalties.”
We have previously rejected the argument that penalties in fact
recommended by an examining agent were in substance determined by
someone else, e.g., by higher level IRS officials or by an in-house IRS
appraiser. See Cattail Holdings, LLC v. Commissioner, T.C. Memo.
2023-17, at *9–11. The “initial determination of [a penalty] assessment”
is a formal action directed to a particular taxpayer by the Examination
Division. 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.” Nassau
River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *6 (quoting
Belair Woods, 154 T.C. at 15). It is the duty of the examining agent to
determine penalties, taking into account (among other things) the value
of the property contributed and possible defenses the taxpayer may
have. See Cattail Holdings, T.C. Memo. 2023-17, at *11.
Petitioner’s speculation that RA Garcia, the lead examiner for the
Dorchester audit, did not make the “initial determination” to assert the
penalties against Dorchester is not enough to establish a genuine dis-
pute of material fact. See Rule 121(d). We accept arguendo petitioner’s
premise that RA Garcia may have consulted with other IRS officers in
connection with the recommendations he set forth on the penalty ap-
proval form. But an “initial determination” signifies a “consequential
moment” of IRS action. Belair Woods, 154 T.C. at 15 (quoting Chai v.
Commissioner, 851 F.3d at 221). Preliminary discussion among IRS of-
ficials as to whether a penalty is appropriate does not constitute the “in-
itial determination of [a penalty] assessment” within the meaning of sec-
tion 6751(b)(1). See Nassau River Stone, T.C. Memo. 2023-36, at *6–7
(citing Belair Woods, 154 T.C. at 9). The penalty approval form
7
[*7] establishes that RA Garcia made the “initial determination” to as-
sert the penalties set forth on that form.
Finally, petitioner contends that “[r]espondent did not make any
effort to authenticate” the documents discussed above, including the
civil penalty approval form and the redacted copy of RA Garcia’s case
activity record. In petitioner’s view, “these documents are not sufficient
to warrant summary judgment as a matter of law.”
This line of argument is equally unpersuasive. We have regularly
decided section 6751(b)(1) questions on summary judgment on the basis
of IRS forms and records, confirmed by declarations supplied by IRS of-
ficers. See, e.g., Sand Inv., 157 T.C. at 142; Long Branch Land, LLC v.
Commissioner, T.C. Memo. 2022-2; Excelsior Aggregates, LLC v. Com-
missioner, T.C. Memo. 2021-125. Respondent has supplied documen-
tary evidence confirming that RA Garcia was the examiner for the Dor-
chester audit and that Ms. McCarter approved his penalty recommen-
dation in her capacity as his “group manager.” Respondent has submit-
ted a declaration under the penalties of perjury averring that all these
documents are “true and correct copies” from the IRS administrative
file. We have repeatedly held that a group manager’s signature on a
civil penalty approval form, without more, is sufficient to satisfy the
statutory requirements. Salacoa Stone Quarry, T.C. Memo. 2023-68,
at *6; Sparta Pink Prop., 124 T.C.M. (CCH) at 124 (citing Belair Woods,
154 T.C. at 17). The record establishes that these requirements were
met here.
We are mindful that “summary judgment should not be granted
until the party opposing the motion has had an adequate opportunity
for discovery.” Snook v. Tr. Co. of Ga. Bank of Savannah, N.A., 859 F.2d
865, 870 (11th Cir. 1988); see also Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 257 (1986) (noting that the nonmoving party must have had
“a full opportunity to conduct discovery”). But discovery must be rele-
vant to “the subject matter involved in the pending case.” Rule 70(b)(1);
see Hickman v. Taylor, 329 U.S. 495, 507–08 (1947); Caney v. Commis-
sioner, T.C. Memo. 2010-90, 99 T.C.M. (CCH) 1366, 1368.
The discovery petitioner seeks is irrelevant to resolution of the
question presented by respondent’s Motion. See Salacoa Stone Quarry,
T.C. Memo. 2023-68, at *5–6; Caney, 99 T.C.M. (CCH) at 1368 (consid-
ering whether “further discovery would likely yield any fact essential to
[the nonmoving party’s] opposition to the motion”). The record includes
documents demonstrating written supervisory approval of the
8
[*8] examining agent’s initial determination to assert the penalties in
question. By propounding discovery seeking communications among RA
Garcia, Ms. McCarter, and other IRS officials, petitioner seeks improp-
erly to look behind the information and signature appearing on the face
of the form. See Sparta Pink Prop., 124 T.C.M. (CCH) at 124; Patel, 120
T.C.M. (CCH) at 214; Raifman, 116 T.C.M. (CCH) at 28.
To reflect the foregoing,
An order will be issued granting respondent’s Motion for Partial
Summary Judgment.