Savannah Shoals, LLC v. Comm'r of Internal Revenue
| Docket Number | 3412-22 |
| Decision Date | 10 March 2023 |
| Parties | SAVANNAH SHOALS, LLC, GREEN CREEK RESOURCES, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
On January 25, 2023, respondent filed a Motion for Partial Summary Judgment that he complied with section 6751(b) for the penalties asserted in this case.[1] On February 17, 2023 respondent supplemented his motion with a Declaration. On March 6, 2023, petitioner filed an Opposition to the Motion.
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). We 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); Rule 121. We construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand, 98 T.C. at 520. The nonmoving party may not rest upon mere allegations or denials 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).
The following background is derived from pleadings, motion papers, exhibits, and declarations. It is stated solely for purposes of deciding respondent's motion in the light most favorable to petitioner, including inferences drawn therefrom, and is not stated as findings of fact in this case. See Sundstrand, 98 T.C. at 520.
Savannah Shoals, LLC (Shoals) is a Delaware limited liability company that elected to be treated as a TEFRA partnership for federal income tax purposes. Green Creek Resources, LLC, is its tax matters partner. Shoals had its principal place of business in Georgia when the Petition was timely filed. This case is appealable to the Court of Appeals for the Eleventh Circuit.
On December 21, 2021, respondent issued a Final Partnership Administrative Adjustment (FPAA) disallowing a $23 million deduction for Shoals' short year return for the taxable year ending December 31, 2017, (2017 tax year) and asserting the following penalties: a section 6662(h) penalty for gross valuation misstatement, alternatively, a section 6662A penalty for an understatement with respect to a reportable transaction, or alternatively, section 6662(a) accuracy-related penalties for negligence or intentional disregard of rules and regulations, a substantial understatement of income tax, or substantial valuation misstatement.
Revenue Agent (RA) Peter Kuczynski was assigned to the examination (exam) of Shoals' return. During the exam, he obtained assistance and advice from IRS employees including unidentified issue managers, Chief Counsel attorney Steven A. Sirotic, and other unnamed attorneys. In December 2019 RA Kuczynski reviewed a penalty presentation prepared by an unidentified IRS employee that we infer advised him to assert the penalties at issue. Chief Counsel attorneys became involved in the exam by April 22, 2020, and remained involved through the issuance of the FPAA. They provided significant review, oversight, and approval of RA Kuczynski's work. Mr. Sirotic prepared multiple memoranda to RA Kuczynski with advice on the exam including the assertion of penalties. In October 2020 RA Kuczynski began drafting a Notice of Proposed Adjustment and received advice from Chief Counsel attorneys.
Respondent has produced a penalty lead sheet and penalty consideration form dated September 14, 2021, that indicate that RA Kuczynski made the initial determination to assert each penalty at issue, and his immediate supervisor, Thomas Gardella, approved the penalty determinations in writing on that date.
On October 13 and/or 15, 2021, Mr. Sirotic provided legal advice to RA Kuczynski regarding the draft Notice of Proposed Adjustments and penalty approval workpaper. Later, RA Kuczynski sought Mr. Sirotic's approval of Form 866-A, Explanation of Items, which included an explanation of the penalties asserted. Mr. Sirotic approved Form 866-A. On December 13 and 15, 2021, Mr. Sirotic wrote memoranda to Passthrough Coordinator Boa Chang in Exams' Technical Services unit. On December 17, 2021, Mr. Chang sent an email to RA Kuczynski stating that he "got the approval from Counsel already." The FPAA was issued on December 21, 2021.
Respondent has withheld parts of RA Kuczynski's activity record and administrative file on the basis of attorney-client or "law enforcement" privilege, including the identity of IRS employees with whom RA Kuczynski discussed the exam and records relating to the contents of those discussions. On March 3, 2023, petitioner filed a Motion to Compel Discovery.
Section 6751(b) states 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 or such higher-level official as the Secretary may designate." Section 6751(b) compliance is determined at the partnership level for any penalty that relates to an adjustment of a partnership item. Ginsburg v. United States, 17 F.4th 78, 85 (11th Cir. 2021). Noncompliance is a partnership-level defense that must be raised at the partnership proceeding; a partner cannot raise it in a partner-level proceeding. Id.
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 section 6751(b) is satisfied "so long as a supervisor approves an initial determination of a penalty assessment before [the IRS] assesses those penalties." It interpreted an initial determination to refer to the "ministerial" process by which the IRS formally records a tax debt. Id. at 1278. Kroner was a notice of deficiency case. Petitioner argues that it is inapplicable to partnership cases because assessments occur at the partner level after section 6751(b) compliance has already been determined at the partnership level. Irrespective of Kroner, we hold that there is no genuine dispute of material fact that respondent has complied with section 6751(b) for each penalty because respondent obtained written supervisory approval before the IRS formally communicated the penalties to the partnership in the FPAA. See Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).
Petitioner argues that there is a genuine dispute of material fact regarding (1) whether RA Kuczynski and Mr. Gardella were the IRS employees who made the initial penalty determinations and provided supervisory approval, respectively, in the light of Mr. Sirotic's oversight of the exam as well as unnamed IRS employees' involvement in the exam and (2) whether RA Kuczynski and Mr. Gardella had independent discretion to refuse to assert the penalties because the IRS has a coordinated nationwide policy to assert the same penalties against any taxpayer engaged in a syndicated conservation easement transaction.
Petitioner argues that the facts and inferences when viewed in the light most favorable to it contradict respondent's assertions that RA Kuczynski made the initial penalty determinations and Mr. Gardella approved the penalties. It asserts the following inferences can be made from the record: (1) Mr. Sirotic and other Chief Counsel attorneys controlled the exam, (2) Mr. Sirotic controlled all decisions including the initial penalty determinations, and/or (3) Mr. Sirotic approved the penalties because he reviewed the determinations and approval forms after Mr. Gardella provided his purported approval. From these inferences, petitioner asserts that Mr. Sirotic made the penalty determinations. We disagree; even if these inferences can be made, they do not create a genuine dispute of material fact.
Irrespective of how involved Chief Counsel attorneys may have been in the exam, Exams retains the authority to make a penalty determination.[2] Thus, it is immaterial that Mr. Sirotic or other Chief Counsel attorney advised RA Kuczynski to assert the penalties or had to approve his work product. The Internal Revenue Manual establishes that RA Kuczynski is the IRS employee with authority to make an initial penalty determination before an FPAA is issued. IRS policy requires Chief Counsel to be involved in the exam before the FPAA is issued and must review and approve all FPAAs before they are issued. IRM pt. 4.8.1.2.2(3)g (Nov. 25, 2015); pt. 4.31.2.7.1(n) (Apr. 20, 2017). Exams' Technical Services unit is responsible for writing and issuing FPAAs and coordinating Chief Counsel's approval of the FPAA, as Mr. Chang has done in this case. Also it is immaterial that RA Kuczynski reviewed another RA's penalty presentation because a presentation is not an initial determination within the meaning of section 6751(b)(1). See Cattail, at 11.
During the exam, it is the RA's duty to determine penalties. We do not question the extent of the RA's deliberations or discretion over whether to impose penalties because section 6751(b) simply requires evidence of written supervisory approval. We limit our review to whether there is evidence of such approval. See Raifman v. Commissioner, T.C Memo. 2018-101. The undisputed facts clearly establish that RA Kuczynski made the penalty determinations when the case was under the authority of Exams and Mr. Gardella as his immediate supervisor approved the determinations in writing before the penalties were first formally communicated to the partnership in the FPAA. There is no evidence (or inferences) that...
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