Warner Enterprises, Inc.

United States Tax Court
T.C. Memo. 2022-85WARNER ENTERPRISES, INC.,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 17163-19L. Filed August 22, 2022.
—————
Richard L. Hunn and Jasper G. Taylor III, for petitioner.
Brooke N. Stan, for respondent.
MEMORANDUM OPINION
BUCH, Judge: This collection case is before the Court on the
Commissioner’s Motion for Partial Summary Judgment. In that motion,
the Commissioner seeks to preclude Warner Enterprises, Inc. (Warner),
from raising the question of whether the Commissioner complied with
section 6751(b)(1) as a potential defense to Warner’s liability for
penalties arising out of a now-final partnership proceeding. 1 Because
compliance with section 6751(b) must be raised in a partnership-level
proceeding, not in a partner’s subsequent collection proceeding, we will
grant the Commissioner’s motion.
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
Served 08/22/22
2
[*2] Background
Warner, a Delaware corporation with its principal office in New
York, was a partner in AD Investment 2000 Fund, LLC (AD Investment
Fund or partnership). The Commissioner issued a Notice of Final
Partnership Administrative Adjustment for the partnership’s 2000 tax
year. 2 That notice included various partnership-level determinations,
including determinations as to penalties. Those determinations were
litigated in this Court at Docket No. 9177-08. In that proceeding, no
partner raised the issue of whether the Commissioner had complied
with the requirement under section 6751(b) to obtain supervisory
approval of a penalty.
Our 2016 decision in AD Investment Fund’s partnership-level
case disregarded the partnership for federal income tax purposes. We
deemed its activities to have been conducted directly by the partners
and disregarded the partners’ contributions, including those made
specifically by Warner. AD Inv. 2000 Fund LLC v. Commissioner, T.C.
Memo. 2016-226, vacating and superseding T.C. Memo. 2015-223. Our
decision determined that a gross valuation misstatement penalty and
several other accuracy-related penalties applied. AD Inv. 2000 Fund
LLC, T.C. Memo. 2015-223, at *34–38. No one appealed.
The Commissioner assessed and began collection of the tax and
penalties that resulted from the partnership-level proceeding. Warner
eventually received a notice of federal tax lien filing and a notice of
intent to levy from which it requested a collection hearing with the IRS
Office of Appeals. Warner contested its liability, alleging that it had not
received an affected items notice of deficiency. Warner also alleged that
the IRS had not complied with the supervisory approval requirement of
section 6751(b) 3 and requested proof of compliance; but the settlement
officer did not provide any documents showing approval.
The Commissioner mailed Warner a notice of determination
sustaining the lien filing and proposed levy. In that notice, the
settlement officer stated “the penalty issue was decided by the Tax Court
2 The Commissioner followed the partnership unified audit and litigation
procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, codified at sections 6221 through
6234 and repealed for returns filed for partnership tax years beginning after December
31, 2017.
3 Warner raised other issues that are not presented in the Motion before us
and thus not addressed in this Opinion.
3
[*3] in the AD Investment 2000 Fund LLC litigation, a proceeding with
collateral estoppel and/or res judicata effect. As a result, the Service is
not required to verify compliance with IRC § 6751.”
Warner timely petitioned the Tax Court alleging that the
Commissioner erred by precluding Warner from “rais[ing]
noncompliance with section 6751(b) as an issue.” Warner argues that
the settlement officer was required to verify that the IRS had complied
with section 6751(b). The Commissioner filed a Motion for Partial
Summary Judgment on these two section 6751(b) issues.
Discussion
Under Rule 121(a), either party may move for summary judgment
regarding all or any part of the legal issues in a controversy. Summary
judgment is appropriate when there is no genuine dispute of material
fact and a decision may be rendered as a matter of law. Rule 121(b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). When a motion for summary judgment is
properly made and supported, the nonmoving party may not rest upon
mere allegations or denials in the pleadings but must set forth specific
facts showing a genuine dispute. Rule 121(d). No material facts are in
dispute with respect to the issues before us.
Section 6751(b)(1) provides that the Commissioner may not
assess a penalty “unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination.” In his motion for partial
summary judgment, the Commissioner argues that TEFRA and res
judicata prevent Warner from raising the Commissioner’s compliance
with section 6751(b) in this collection proceeding. Specifically, he
contends that compliance with section 6751(b) is an issue that can be
raised only in a partnership-level proceeding. The Commissioner further
contends that, on the facts of this case, compliance with section 6751(b)
is not part of the verification requirements of section 6330(c)(1) because
this Court had already conclusively determined the applicability of
penalties.
Warner disagrees. It asserts that section 6330(c)(4) applies and
does not preclude it from raising supervisory penalty approval as a
defense during its collection proceeding. It further asserts that
verification of section 6751(b) compliance is required in any collection
proceeding, even one at the partner level.
4
[*4] I. TEFRA Proceedings
Partnerships do not pay income taxes; partners do. See § 701;
United States v. Woods, 571 U.S. 31, 38 (2013). Before the enactment of
TEFRA, each partner’s income tax liability was determined
independently, even when an item flowed from a partnership. TEFRA
was enacted to alleviate the administrative burden caused by
duplicative audits and piecemeal partner-level litigation. Instead of
determining each partner’s income tax liability independently,
“Congress decided that . . . ‘the tax treatment of any partnership item
[would] be determined at the partnership level.’” Maxwell v.
Commissioner, 87 T.C. 783, 787 (1988) (alteration in original) (quoting
§ 6221). All partners are deemed to be parties to a partnership-level
proceeding and bound by its outcome. §§ 6226(c), 6228(a)(4)(A)(i).
The parties agree that TEFRA applied to AD Investment Fund,
of which Warner was a partner. Warner did not challenge its status as
a party to the partnership-level proceeding.
TEFRA governs the adjustment of any partnership item and the
applicability of any penalty that relates to the adjustment of a
partnership item. § 6221. Partnership-level determinations of penalties
“include all the legal and factual determinations that underlie the
determination of any penalty, addition to tax, or additional amount,
other than partner-level defenses.” Treas. Reg. § 301.6221-1(c). The
Commissioner’s compliance with section 6751(b) is a partnership-level
matter, and the burden to raise it falls on the participating partners, not
the Commissioner. Dynamo Holdings Ltd. P’ship v. Commissioner, 150
T.C. 224, 234–36 (2018). Partners may only raise partner-level defenses
to penalties in a subsequent partner-level proceeding. Treas. Reg.
§ 301.6221-1(d); see Woods, 571 U.S. at 41–42.
Warner asserts that partners can raise compliance with section
6751(b) as a defense to penalties at any time, at both the partnership
level and the partner level. But Warner’s assertion ignores the very
specific TEFRA framework requiring that items affecting all partners
equally be determined at the partnership level. See § 6221. “[T]he
hallmark of a partnership item is that it” is common to all partners.
Grigoraci v. Commissioner, T.C. Memo 2002-202, 84 T.C.M. (CCH) 186,
189. Like other legal and factual matters that must be raised and
determined at the partnership level, the IRS’s compliance with section
6751(b) is not a matter “personal to the partner or . . . dependent upon
the partner’s separate return.” Treas. Reg. § 301.6221-1(d). Allowing a
5
[*5] review for compliance at the partner level would defeat TEFRA’s
very aim of avoiding duplicative proceedings on a question that applies
equally to all partners. The proper place to raise compliance with section
6751(b) is in a partnership-level proceeding. See, e.g., Ginsberg v. United
States, 17 F.4th 78, 85 (11th Cir. 2021); Rogers v. Commissioner, T.C.
Memo 2019-61, at *22–23, aff’d, 9 F.4th 576 (7th Cir. 2021); Nix v.
United States, 339 F. Supp. 3d 580, 588 (E.D. Tex. 2018).
Warner’s argument also ignores the reasoning behind the
enactment of section 6751(b). As has been well explained, the
Congressional intent behind section 6751 was to ensure that “penalties
should only be imposed where appropriate and not as a bargaining chip.”
S. Rep. No. 105-174, at 65 (1998), reprinted in 1998-3 C.B. 557, 601.
Congress enacted section 6751(b)(1) to “curb perceived abuses arising
out of the IRS’s use of unjustified penalties to pressure taxpayers into
settlement.” Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner,
154 T.C. 68, 83 (2020), rev’d and remanded, 29 F.4th 1066 (9th Cir.
2022). In the instant case, there is no threat or bargaining chip the
government can hold over Warner with respect to penalties because this
Court already determined them.
II. Res Judicata
The Commissioner contends that the doctrine of res judicata also
bars Warner from raising compliance with section 6751(b) after the
conclusion of a partnership-level proceeding. Under that doctrine, a
taxpayer would be barred from relitigating its underlying liability
during a collection proceeding after a court has entered a final decision
for the relevant tax year: “[I]f a claim of liability or non-liability relating
to a particular tax year is litigated, a judgement on the merits is res
judicata as to any subsequent proceeding involving the same claim and
the same tax year.” Newstat v. Commissioner, T.C. Memo. 2004-208, 88
T.C.M. (CCH) 254, 260 (quoting Commissioner v. Sunnen, 333 U.S. 591,
598 (1948)), supplemented by T.C. Memo 2005-262.
Warner asserts that section 6330(c)(4)(A) supplants the common
law doctrine of res judicata in collection cases. That provision precludes
taxpayers from raising issues at a collection hearing if “(i) the issue was
raised and considered at a previous hearing under section 6320 or in any
other previous administrative or judicial proceeding; and (ii) the person
seeking to raise the issue participated meaningfully in such hearing or
proceeding.” § 6330(c)(4)(A).
6
[*6] In making its argument, Warner overlooks section 6330(c)(2)(B),
which, like section 6330(c)(4), limits the issues taxpayers may raise at a
collection hearing. Section 6330(c)(2)(B) precludes a taxpayer from
challenging the underlying liability if the person received a notice of
deficiency for, or otherwise had a prior opportunity to dispute, such
liability. Warner had just such an opportunity in AD Investment Fund’s
partnership-level TEFRA proceeding to which it was a party and in
which it had a right to participate. See § 6226(c).
III. Verification Requirement
The Commissioner contends that the settlement officer was not
required to verify compliance with the supervisory approval
requirement of section 6751(b) as part of Warner’s collection hearing.
Warner, however, asserts that the settlement officer was required to
verify compliance with that requirement, even at the partner level. We
agree with the Commissioner.
The settlement officer conducting a collection hearing must verify
“that the requirements of any applicable law or administrative
procedure have been met.” § 6330(c)(1). Those requirements are those
things that the Code, applicable Treasury regulations, and
administrative procedures require the Commissioner to do before taking
collection action. See Dinino v. Commissioner, T.C. Memo. 2009-284, 98
T.C.M. (CCH) 559, 563–64. In a case such as this, where the Court
previously adjudicated and entered a decision determining the
applicability of penalties, the settlement officer merely needs to
determine that the penalty was properly assessed but need not revisit
the Court’s underlying determination. To permit otherwise would place
the administrative agency in review of the Court.
Warner points to cases in support of its argument that the
verification requirement under section 6330(c)(1) includes confirmation
of whether the supervisory approval requirement of section 6751(b) has
been met. Warner misreads the caselaw.
In Laidlaw’s Harley Davidson, the Commissioner determined a
section 6707A penalty against the taxpayer for failure to properly
disclose a reportable transaction. With respect to that penalty, we
discussed the things that the Commissioner had to consider in the
subsequent collection hearing to verify whether the requirements of
applicable law or administrative procedure had been met. Laidlaw’s
Harley Davidson, 154 T.C. at 81. But in Laidlaw’s Harley Davidson
7
[*7] there had not been a prior court decision. Indeed, Warner does not
direct the Court to any case in which verification was required for a
penalty that had already been determined by a court. In Warner’s case,
there is a binding decision from the prior partnership-level proceeding
as to the applicability of penalties. A partnership-level defense to the
penalties must have been raised or waived in that proceeding. 4
The Court has identified a collection case in which the
supervisory approval requirement was raised with respect to a penalty
that had previously been determined in court. See Rockafellor v.
Commissioner, T.C. Memo. 2019-160. In that collection case, the
taxpayer had previously filed a Tax Court petition contesting a notice of
deficiency and entered into a stipulated decision with the Commissioner
before trial. Id. at *2–3. That decision was “final and conclusive” as to
her penalties except “in the event of fraud, malfeasance, or
misrepresentation of fact.” Id. at *3. However, when challenging
subsequent collection action for those agreed-upon penalties, the
taxpayer raised the issue of whether the Commissioner had proven
compliance with section 6751(b)(1). Id. at *4–7, *10–11. We declined to
remand the case to Appeals for verification of compliance with that
requirement, holding that the taxpayer consented to the assessment of
penalties and waived the section 6751(b) issue. Id. at *10–11.
Accordingly, we explained that “if there was any error relating to
verification of compliance with section 6751(b)(1), it was a harmless
error.” Id. at *11.
A case more aligned with Warner’s is Elkins v. Commissioner,
T.C. Memo. 2020-110. In Elkins, the Commissioner made a
computational adjustment to a partner’s returns consistent with a Tax
Court decision from a previous partnership-level proceeding. Id.
at *2, *5, *7. That decision determined that accuracy-related penalties
applied. Id. at *6. In a subsequent collection proceeding, Elkins argued
that the settlement officer should have “[dug] deeper” to confirm
compliance with section 6751(b) as part of her verification process. Id.
at *20. We explained: “This Court entered a final decision resolving [the
partnership-level case], and [the taxpayer], as a partner, is therefore
bound by it. . . . [The taxpayer] points to no authority that would allow
us to set aside that binding decision or the assessments made in its
wake.” Id. at *21. Similarly, Warner has pointed to no authority that
4 This contrasts with McNeill v. Commissioner, 148 T.C. 481 (2017), which
permitted a partner in a TEFRA partnership to raise partner-level defenses to a
penalty in a collection proceeding.
8
[*8] would permit the Court to set aside the prior—and now final—
decision in the partnership case. Clearly, verification of IRS compliance
with section 6751(b) at this stage would serve no purpose.
IV. Conclusion
Warner seeks to challenge a penalty that was determined with
finality in a prior Court proceeding. This is an item that is required to
have been raised in the prior proceeding; Warner may not raise it now.
To reflect the foregoing,
An appropriate order will be issued granting the Commissioner’s
Motion for Partial Summary Judgment.