North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner

United States Tax Court
T.C. Memo. 2023-50NORTH DONALD LA PROPERTY, LLC, NORTH DONALD LA
INVESTORS, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 24703-21. Filed April 18, 2023.
—————
John R. Davidson, Ronald A. Levitt, Gregory P. Rhodes, Michelle A.
Levin, Sarah E. Green, Sidney W. Jackson IV, and Logan C. Abernathy,
for petitioner.
Richard L. Wooldridge, Richard J. Hassebrock, Scott Lyons, Peter N.
Tran, Gary R. Shuler, Allison N. Kruschke, Lynn M. Barrett, and Alex-
andra E. Nicholaides, for respondent.
MEMORANDUM OPINION
LAUBER, Judge: This case involves a charitable contribution de-
duction claimed by North Donald LA Property, LLC (NDLA or partner-
ship), for the donation of a conservation easement. The Internal Reve-
nue Service (IRS or respondent) issued the partnership a notice of final
partnership administrative adjustment (FPAA) for 2017 disallowing
this and other deductions and determining fraud and accuracy-related
penalties. Petitioner timely petitioned this Court for readjustment of
partnership items.
Currently before the Court are respondent’s Motions for Partial
Summary Judgment. Respondent contends that the IRS properly disal-
lowed the charitable contribution deduction because the former owners
Served 04/18/23
2
[*2] of the land over which the easement was granted allegedly reserved
to themselves the right to mine subsurface clay. According to respond-
ent, this means that the conservation purpose is not “protected in per-
petuity.” See § 170(h)(5)(A). 1 Separately, respondent contends that the
IRS complied with the requirements of section 6751(b)(1) by securing
timely supervisory approval of all penalties at issue. We will deny the
Motion addressed to section 170(h)(5)(A) and grant the Motion ad-
dressed to section 6751(b)(1).
Background
The following facts are derived from the pleadings, the parties’
Motion papers, and the Exhibits and Declarations attached thereto. The
facts are stated solely for purposes of deciding respondent’s Motions and
are not 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).
A. Conservation Easement
NDLA is a Missouri limited liability company. It is treated as a
TEFRA partnership for Federal income tax purposes, and petitioner,
North Donald LA Investors, LLC, is its tax matters partner. 2 The part-
nership had its principal place of business in Missouri when the Petition
was timely filed.
In March 2016 David Brooks Donald and his family members
(Donald family) executed a Limited Warranty Deed in favor of the Re-
serve at Welsh, LLC (Welsh), a Missouri entity. Welsh thereby acquired
a 3,324-acre tract in Jefferson Davis Parish, Louisiana, in exchange for
$9,888,008. This translates to a price per acre of $2,975.
Welsh acknowledged that it was acquiring the tract “subject to
any prior mineral reservations or mineral deeds of record . . . which [the
Donald family’s] predecessors in title may have created and caused to be
duly and properly recorded.” In the Limited Warranty Deed the Donald
1 Unless otherwise indicated, all statutory references are to the Internal Reve-
nue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation refer-
ences 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 Pro-
cedure. We round all monetary amounts to the nearest dollar.
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 procedures for many partnerships, including NDLA.
3
[*3] family explicitly “reserve[d] 75% of all oil, gas, or other minerals of
any kind or character whatsoever.” But they “specifically exclude[d] sur-
face minerals from this reservation.”
On October 6, 2017, Welsh conveyed to NDLA, as a capital contri-
bution, a fee simple interest in a 260.48-acre tract that was carved from
the 3,324-acre tract described above. Welsh reserved no rights in the
260.48-acre tract. The conveyance document, captioned “Contribution
of Capital,” specifies no consideration for the transfer.
On October 12, 2017, NDLA obtained an opinion letter from Lou-
isiana attorney Kevin D. Millican addressing NDLA’s rights to clay de-
posits associated with the 260.48-acre tract. Mr. Millican stated that,
under Louisiana law, “[o]wnership of land includes all minerals natu-
rally occurring in a solid state,” so that “[s]olid minerals are insuscepti-
ble of ownership apart from the land until reduced to possession.” The
letter concluded that clay is a mineral “naturally occurring in a solid
state,” and hence that “the owner of the surface rights would be entitled
to . . . 100% of the production of any clay.” Because NDLA owned the
surface rights, and because the Donald family had “specifically ex-
clude[d] surface minerals from [their] reservation” of mineral rights, Mr.
Millican concluded that NDLA had acquired, by contribution to capital
from Welsh, any and all rights to mine clay on the 260.48-acre tract.
On November 1, 2017, the Donald family executed, in exchange
for $29,304, a Quit Claim and Amendment to Limited Warranty Deed
(Quitclaim Deed) in favor of Welsh and NDLA. The Quitclaim Deed ad-
dressed two points. First, the Donald family sold and relinquished to
NDLA any rights the Donald family “ha[d] or may have in any of the
surface minerals located on the 260.48-acre tract of land owned by
[NDLA].” The Quitclaim Deed defined “surface minerals” to include
“soil, coal, sand, rock, gravel, clay, and any other surface minerals.”
Besides relinquishing any rights to surface minerals, the Quit-
claim Deed amended the Limited Warranty Deed by restricting the Don-
ald family’s exploitation of their reserved rights to subsurface minerals,
such as oil and gas. The Quitclaim Deed provides that, “under no cir-
cumstances shall any portion of the surface of the [260.48-acre tract] be
used for the exploration, development or production of said minerals.”
Rather, “the subsurface minerals may be withdrawn or produced from
the [tract] only by means of unitization through unit wells located on
other lands or by directional drilling beneath the surface of the [tract]
by means of wells located on other lands.”
4
[*4] In December 2017 NDLA granted to the Atlantic Coast Conserv-
ancy, Inc. (ACC), a “qualified organization” under section 170(h)(3), a
conservation servitude (easement) over a 245-acre parcel (Property)
carved from the 260.48-acre tract discussed above. A deed of servitude
evidencing the transfer (Easement Deed) was recorded on December 29,
2017. The Easement Deed states that its interpretation is governed by
Louisiana law.
The Easement Deed grants ACC “a perpetual and irrevocable con-
servation servitude . . . upon, over and across the Property.” One stated
purpose of the easement is to “perpetually protect[] the Property from
any and all mining activities.” Specifically, the Easement Deed states
as a “priority objective” to “forever sterilize the subsurface clay reserves
to ensure that clay mining/extraction activities that are harmful to the
existing biota never occur.”
Consistent with these objectives, paragraph 5.7 of the Easement
Deed bars “the exploration for . . . or extraction of minerals, oil, gas, or
other hydrocarbons, soils, sands, clays, gravel, rock, or other materials
on or below the surface of the Property.” Paragraph 5.7 further bars
NDLA and its successors and assigns from “conduct[ing] any activity
that could conflict with or cause the violation of Treasury Regulation
Section 1.170A-14(g)(4)(i).” This regulation provides that “no deduction
shall be allowed [for donation of a conservation easement] when there is
a retention by any person of a qualified mineral interest . . . if at any
time there may be extractions or removal of minerals by any surface
mining method.”
Under Paragraph 6 of the Easement Deed, NDLA retained rights
“to engage in all uses of the Property that are not expressly prohibited
. . . and are not inconsistent with the Purpose of this Servitude.” These
rights include rights to engage in forestry and recreational activities
such as camping, hunting, and fishing. They also include rights to build
fences, bridges, and trails in connection with recreation and education.
B. Penalty Approval
NDLA timely filed Form 1065, U.S. Return of Partnership In-
come, for its 2017 tax year. On that return it claimed a charitable con-
tribution deduction of $115,391,000 for its donation of the easement.
This valuation presupposed that the 245 acres on which the easement
had been placed, acquired in March 2016 for $2,975 an acre, were worth
at yearend 2017 about $471,000 per acre. In support of this purported
5
[*5] value the partnership relied on an appraisal prepared by Claud
Clark III. His appraisal describes the “highest and best use” of the Prop-
erty before the easement as “mining production use, specifically clay re-
serves.” NDLA on this return also claimed $1,157,469 of “other deduc-
tions.”
The IRS selected the partnership’s 2017 return for examination
and assigned the case to Senior Revenue Agent (RA) Pamela V. Stafford,
a member of Team 1021 in the Large Business & International Division.
At that time Supervisory RA Benjamin M. Brantley served as the team
manager of Team 1021. He was thus RA Stafford’s immediate supervi-
sor.
RA Stafford determined that the partnership had significantly
overvalued the easement and proposed to disallow in full both the char-
itable contribution deduction and the other deductions claimed on its
return. In connection with the charitable contribution deduction
RA Stafford recommended assertion of the 40% penalty for a gross val-
uation misstatement, see § 6662(h), and (in the alternative) assertion of
a 20% penalty for a substantial valuation misstatement, a reportable
transactions understatement, negligence, and/or a substantial under-
statement of income tax, see §§ 6662(a), (b)(1)–(3), (c)–(e), 6662A(b). In
connection with the other deductions RA Stafford recommended asser-
tion of a 20% accuracy-related penalty for negligence or a substantial
understatement of income tax. See § 6662(a) and (b)(1) and (2), (c),
and (d).
RA Stafford’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. Mr. Brantley, her team
manager, digitally signed the penalty lead sheet on April 28, 2021. He
verified that he was the “immediate supervisor . . . of Pamela V. Stafford,
who made the initial determination to assert the penalties indicated on
this form,” and that he “approve[d] that initial determination.” RA Staf-
ford has submitted a Declaration under penalty of perjury averring that
these facts are true and accurate.
Anita A. Gill, senior counsel with the Office of Chief Counsel, was
assigned to provide legal advice to RA Stafford during the examination
of the partnership’s return. After reviewing the proposed examination
report and before the issuance of any NOPA, Ms. Gill concluded that the
75% civil fraud penalty should also be asserted. See § 6663(a).
6
[*6] Ms. Gill’s 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 August 2, 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 of the penalty set forth above in com-
pliance with section 6751(b)(1).”
That same day Ms. Gill sent an email to RA Stafford, copying Mr.
Miller and stating as follows: “Senior Counsel Anita Gill has determined
that fraud should be asserted in North Donald LA Property . . . Attached
are a copy of . . . the fraud language and the penalty approval form,
signed by her manager.” The email requested that, if RA Stafford ac-
cepted the fraud penalty recommendation and if her supervisor “ap-
prove[d] the acceptance of the recommendation,” they should “prepare a
short memorandum to that effect.” Ms. Gill and Mr. Miller have sub-
mitted Declarations under penalty of perjury averring that all of these
facts are true.
On August 3, 2021, RA Stafford and Mr. Brantley executed a doc-
ument captioned “Memorandum.” In this document RA Stafford and
Mr. Brantley memorialize their acceptance of Ms. Gill’s recommenda-
tion that a civil fraud penalty be asserted against NDLA. RA Stafford
and Mr. Brantley affixed at the bottom of this document their digital
signatures, both dated August 3, 2021.
Six days later, on August 9, 2021, the IRS issued the partnership
two NOPAs, one including the determination to impose penalties under
sections 6662 and 6662A, the other reflecting the determination to im-
pose the civil fraud penalty under section 6663. Each NOPA has at-
tached to it a corresponding Form 886–A supplying the rationale for im-
posing the penalties. Respondent contends (and petitioner does not dis-
pute) that each NOPA embodied the first formal communication to peti-
tioner of the IRS’s decision to assert the penalties described therein. On
August 26, 2021, the IRS issued the FPAA, which determined the same
penalties.
Petitioner timely petitioned this Court for readjustment of part-
nership items. On March 25, 2022, respondent filed a Motion for Partial
Summary Judgment, seeking a ruling that the conservation purpose un-
derlying the easement is not “protected in perpetuity.” On June 28,
7
[*7] 2022, respondent filed a second Motion for Partial Summary Judg-
ment, seeking a ruling that he has sufficiently complied with the section
6751(b) requirements for supervisory approval of all penalties at issue.
Petitioner opposed both Motions, and further briefing ensued.
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(a)(2); 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 (here, petitioner). Sundstrand Corp., 98
T.C. at 520. Where the moving party properly makes and supports a
motion for summary judgment, “the nonmovant may not rest on the al-
legations or denials in that 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
A. “Protected in Perpetuity”
The Code generally restricts a taxpayer’s charitable contribution
deduction for the donation of “an interest in property which consists of
less than the taxpayer’s entire interest in such property.” § 170(f)(3)(A).
There is an exception for a “qualified conservation contribution.”
§ 170(f)(3)(B)(iii), (h)(1). For an easement donation to be a qualified con-
servation contribution, the conservation purpose must be “protected in
perpetuity.” § 170(h)(1)(C), (5)(A); see PBBM-Rose Hill, Ltd. v. Commis-
sioner, 900 F.3d 193, 201 (5th Cir. 2018); RP Golf v. Commissioner, 860
F.3d 1096, 1099 (8th Cir. 2017).
Section 170(h)(5)(B)(i) provides that the conservation purpose will
not be treated as protected in perpetuity if “there is a retention of a qual-
ified mineral interest . . . [and] if at any time there may be extraction or
removal of minerals by any surface mining method.” Section 170(h)(6)
provides that “the term ‘qualified mineral interest’ means . . . subsurface
oil, gas, or other minerals, and . . . the right to access to such minerals.”
8
[*8] Respondent contends that the conservation purpose underlying the
easement is not protected “in perpetuity” because the Donald family re-
tained “the right to mine subsurface clay” in alleged violation of section
170(h)(5) and (6).
Paragraph 5.7 of the Easement Deed explicitly bars the explora-
tion for or extraction of minerals, defined to include “clays,” “on or below
the surface of the Property.” By cross-reference to Treasury Regulation
§ 1.170A-14(g)(4)(i), paragraph 5.7 further bars NDLA and its succes-
sors and assigns from conducting any activity that would involve “ex-
tractions or removal of minerals by any surface mining method.” The
Easement Deed thus explicitly bars the partnership from engaging in
surface or subsurface mining for any minerals, including clay.
In urging violation of the “perpetuity” requirement, respondent
necessarily focuses, not on any mineral rights reserved by the partner-
ship, but on rights allegedly reserved by the Donald family in the Lim-
ited Warranty Deed, which conveyed the 3,324-acre tract from which the
Property was ultimately carved. Respondent concedes (as he must) that
the Donald family reserved no surface mining rights of any kind. But
the Donald family did reserve subsurface rights with respect to “75% of
all oil, gas, or other minerals of any kind or character whatsoever.” Re-
spondent asserts that this reservation included the right to mine sub-
surface clay.
When determining a party’s rights to property for Federal tax
purposes, the Tax Court applies relevant state law. United States v.
Nat’l Bank of Com., 472 U.S. 713, 722 (1985); Woods v. Commissioner,
137 T.C. 159, 162 (2011). The Louisiana Supreme Court has ruled that
the phrase “all mineral rights” in the context of a mineral reservation
“is inherently ambiguous.” Cont’l Grp., Inc. v. Allison, 404 So. 2d 428,
435 (La. 1981). Thus, extrinsic evidence may be examined to determine
the parties’ intent when making such a mineral reservation. Ibid.The term “other minerals” is not defined in the Limited Warranty
Deed, and it is not self-evident that this term includes clay. Under Lou-
isiana law, extrinsic evidence may thus be relevant in determining the
scope of this term. Petitioner has submitted the sworn affidavit of Dan
Lavelle Donald, Jr., one of the grantor signatories to the Limited War-
ranty Deed. He avers that the Donald family thereby intended to trans-
fer all rights to access and exploit clay, reserving rights only to “75% of
sub-surface liquid and gaseous minerals.” Given this affidavit, we con-
clude that there is a genuine dispute of material fact as to
9
[*9] whether the Donald family reserved any rights to exploit subsur-
face clay.
Assuming arguendo that the Donald family initially reserved
some right to exploit subsurface clay, petitioner plausibly argues that
they relinquished this right by executing the Quitclaim Deed. This doc-
ument was executed two weeks after NDLA secured a legal opinion that,
under Louisiana law, “the owner of the surface rights [viz., NDLA]
would be entitled to . . . 100% of the production of any clay.” The Quit-
claim Deed defined “surface minerals” to include clay, and it relin-
quished to NDLA any rights the Donald family “ha[d] or may have in
any of the surface minerals located on” NDLA’s tract. This language is
hostile to the notion that the Donald family intended to reserve any right
to mine clay.
The balance of the Quitclaim Deed is equally hostile to that no-
tion. It provides that, “[u]nder no circumstances shall any portion of the
surface of the [260.48-acre tract] be used for the exploration, develop-
ment or production” of minerals. Rather, any subsurface minerals to
which the Donald family reserved rights “may be withdrawn or ex-
tracted . . . only by means of unitization through unit wells located on
other lands or by directional drilling beneath the surface of the [tract]
by means of wells located on other lands.”
The term “unitization” typically refers to oil and gas resources.
Amoco Prod. Co. v. Heimann, 904 F.2d 1405, 1410 (10th Cir. 1990)
(“Unitization refers to the consolidation of mineral or leasehold interests
in oil or gas . . . .”); see Nunez v. Wainoco Oil & Gas Co., 488 So. 2d 955(La. 1986); see also 1 Bruce M. Kramer & Patrick H. Martin, The Law of
Pooling and Unitization § 1.02 (3d ed. 2022). Oil and gas resources,
moreover, would appear to be the minerals most commonly exploited by
“unit wells located on other lands” or “by directional drilling beneath the
surface of the [tract] by means of wells located on other lands.” Respond-
ent offers no plausible explanation as to how this language could easily
embrace the mining of subsurface clay. It thus appears likely, as stated
in the Declaration referenced above, that the Donald family intended to
reserve rights only to “sub-surface liquid and gaseous minerals.”
For all these reasons, we conclude that the “protected in perpetu-
ity” question involves—at the very least—genuine disputes of material
10
[*10] fact. We will therefore deny respondent’s Motion for Partial Sum-
mary judgment on this point. 3
B. Penalty Approval
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.” 4 In TEFRA cases such as this,
supervisory approval is timely if it occurs before issuance of the FPAA.
See Palmolive Bldg. Invs., LLC v. Commissioner, 152 T.C. 75, 83 (2019).
If supervisory approval was obtained by that date, the partnership must
establish that the approval was untimely, i.e., “that there was a formal
communication of the penalty before the proffered approval” was se-
cured. See Frost v. Commissioner, 154 T.C. 23, 35 (2020). 5
Petitioner does not dispute that RA Stafford received from Mr.
Brantley, her immediate supervisor, timely written approval for all pen-
alties determined under sections 6662 and 6662A. Accordingly, no
3 Respondent appears also to contend that the Quitclaim Deed may have re-
conveyed to Welsh the right to mine subsurface clay. It seems obvious that Welsh is
mentioned in this document only because it preceded NDLA in the chain of title: Welsh
had already conveyed the entirety of the 260.48-acre tract to NDLA, reserving no rights
whatsoever. In a similar vein respondent contends that Mr. Clark’s appraisal was not
a “qualified appraisal,” see § 170(f)(11), because he ignored Welsh’s supposed rights to
mine subsurface clay. Because we find that the Quitclaim Deed conveyed no such
rights to Welsh, we reject this argument as well.
4 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).
5 Absent stipulation to the contrary, appeal of this case would lie to the U.S.
Court of Appeals for the Eighth Circuit. See § 7482(b)(1)(E). That court has not
squarely addressed the question of when supervisory approval must be secured. But
cf. Wells Fargo & Co. v. United States, 957 F.3d 840, 854 (8th Cir. 2020) (“By its terms,
[section 6751(b)(1)] requires prior written approval to be obtained when the govern-
ment ‘assesses’ a penalty against a taxpayer.”). The U.S. Court of Appeals for the
Eleventh Circuit has interpreted the term “assessment” to refer to the “ministerial”
process by which the IRS formally records the tax debt. See Kroner v. Commissioner,
48 F.4th 1272, 1278 (11th Cir. 2022), rev’g in part T.C. Memo. 2020-73. The supervi-
sory approvals in this case were secured long before “assessment” and were timely
under this Court’s standard, which requires that approval be secured before the first
“formal communication of the penalty” to the taxpayer. Frost, 154 T.C. at 35.
11
[*11] further analysis is required in order to grant respondent’s Motion
with respect to these accuracy-related penalties.
Petitioner advances a section 6751(b)(1) challenge only with re-
spect to the fraud penalty. The record establishes that Ms. Gill recom-
mended assertion of the fraud penalty and secured timely approval for
this penalty from her immediate supervisor, Mr. Miller. Ms. Gill then
forwarded her recommendation (thus approved) to RA Stafford and Mr.
Brantley. They likewise approved inclusion of the fraud penalty. All of
these approvals occurred before the NOPAs and FPAA were issued. The
IRS would thus seem to have complied with section 6751(b)(1) in all re-
spects.
Notwithstanding this record, petitioner contends that the IRS did
not meet its burden under section 6751(b)(1). Petitioner first asserts
that Mr. Miller approved assertion of the fraud penalty, not on August
2, 2021, as he averred, but rather on September 2, 2021, three weeks
after issuance of the NOPA. Petitioner points to what it views as an
irregularity in the handwritten “8” that forms the month of the date that
accompanies Mr. Miller’s signature. Petitioner’s allegation is that Mr.
Miller backdated his signature—by changing the number “9” to a num-
ber “8”—after the NOPA was issued, in order to create the impression
that he had timely approved Ms. Gill’s recommendation. It is on this
basis that petitioner concludes that the relevant supervisory approval
was untimely.
Mr. Miller has averred in a supplemental Declaration that he
“originally wrote in the number nine for the month” on the penalty rec-
ommendation memorandum. “After realizing that it was August, not
September, [he] immediately corrected it and wrote the number eight
over the nine.” He averred that he “corrected this number on that same
date, i.e., August 2, 2021.”
The email that Ms. Gill sent to RA Stafford, recommending asser-
tion of the fraud penalty, corroborates Mr. Miller’s attestation. That
email, on which Mr. Miller was copied, stated as follows: “Senior Counsel
Anita Gill has determined that fraud should be asserted in North Don-
ald LA Property. . . . Attached are a copy of . . . the fraud language and
the penalty approval form, signed by her manager.” That email is dated
August 2, 2021, the date on which Mr. Miller avers that he signed the
penalty recommendation memorandum.
12
[*12] Petitioner alternatively contends that Ms. Gill did not make the
“initial determination” to assert the fraud penalty because, as an attor-
ney in the Office of Chief Counsel, she supposedly “did not have author-
ity under the Code, or as delegated by the IRS, to make the fraud penalty
determination.” Petitioner asserts that “it is Chief Counsel’s duty to be
legal advisor to the Commissioner, not to determine penalties at the
exam level.” According to petitioner, “no court has found it acceptable
for IRS Counsel to make the initial determination of fraud at the exam-
ination level.”
We reject each of these assertions. We have previously held that
an “initial determination” of a penalty can be made by a Chief Counsel
attorney, and we have dismissed 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). Although Graev involved an ac-
curacy-related penalty under section 6662, not a fraud penalty under
section 6663, neither the plain text of section 6751(b)(1) nor judicial
precedent supports the view that a Chief Counsel attorney’s authority
to make the “initial determination” varies depending on the nature of
the penalty.
As the attorney assigned to review the draft NOPAs and FPAA,
Ms. Gill had the responsibility to determine whether those documents
were accurate. The Chief Counsel Directives Manual (CCDM) and the
Internal Revenue Manual (IRM) establish that it is within the duties
and authority of Chief Counsel attorneys to advise revenue agents and
review their work. See CCDM 33.1.2.7.4 (June 2, 2014) (dealing with
Chief Counsel’s authority 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 recom-
mendations concerning the issues to be asserted . . . .”); IRM
4.31.2.7.2.5(1)(d) (May 10, 2019) (“Area Counsel must approve all
FPAAs before issuance.”). Ms. Gill was the first IRS officer to recom-
mend the fraud penalty, so her determination on this point was the “in-
itial determination.”
In any event, granting for the sake of argument petitioner’s prem-
ise that an “examiner” had to make the initial determination to assert
the fraud penalty, RA Stafford, the examiner, did so. This is established
by the “Memorandum,” electronically signed by RA Stafford and Mr.
Brantley on August 3, 2021, in which RA Stafford adopted Ms. Gill’s
recommendation to impose the fraud penalty, stating that “I accept the
13
[*13] above recommendation.” RA Stafford’s immediate supervisor, Mr.
Brantley, then approved her action, stating that “I approve the above
recommendation.”
Supervisory approval need not be recorded on any particular form
or document. The only requirement is a writing that manifests the su-
pervisor’s intent to approve the penalty in question. 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 Stafford, the
penalty received the requisite approval from the appropriate supervi-
sor(s). See Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-
36, at *7–8 (rejecting arguments resembling those advanced by peti-
tioner here and holding that the IRS secured timely supervisory ap-
proval(s) for a fraud penalty).
Finally, petitioner contends that RA Stafford’s earlier decision
not to assert the fraud penalty—as shown by her checking the “NO” box
in April 2016 opposite “Civil Fraud” on the penalty lead sheet—
precluded Ms. Gill (or any IRS officer) from later determining that such
a penalty was appropriate. Petitioner misapprehends what section
6751(b)(1) requires. As we have held, the IRS need not determine all
possible penalties at the same time. See Palmolive Bldg. Invs., 152 T.C.
at 85; Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2021-125.
The IRS often asserts penalties for the first time in its answer or
amended answer. We have repeatedly held that we have jurisdiction to
redetermine such penalties pursuant to section 6214(a). See, e.g., Graev,
147 T.C. at 476 & n.9; Roth v. Commissioner, T.C. Memo. 2017-248, 114
T.C.M. (CCH) 649, 652, aff’d, 922 F.3d 1126 (10th Cir. 2019). Whenever
this occurs, it will invariably be true that the exam team did not assert
the penalty in question. We have never held that the exam team’s deci-
sion not to assert a penalty has any bearing on Chief Counsel’s ability
to assert that penalty later. To the contrary, we have held that section
6751(b)(1) is satisfied so long as the penalty asserted in the answer re-
ceives proper supervisory approval at that time. Roth, 114 T.C.M.
(CCH) at 652. The same reasoning applies here.
To defeat a motion for summary judgment, the opposing party
may not rely on mere “allegations or denials” but must “set[] forth spe-
cific facts,” including facts established by affidavits or declarations.
Rule 121(d) and (e). Petitioner has set forth no specific facts to dispute
the existence or timeliness of the written supervisory approvals in this
14
[*14] case. We hold that respondent has satisfied the requirements of
section 6751(b)(1) and is entitled to summary judgment on this issue.
To reflect the foregoing,
An order will be issued denying respondent’s Motion for Partial
Summary Judgment at docket entry #10 and granting respondent’s Mo-
tion for Partial Summary Judgment at docket entry #15.