Sand Investment Co., LLC, Inland Capital Management, LLC, Tax Matters Partner

157 T.C. No. 11UNITED STATES TAX COURT
SAND INVESTMENT CO., LLC, INLAND CAPITAL MANAGEMENT, LLC,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7307-19. Filed November 23, 2021.
R opened an examination of P’s 2015 tax return and assigned
the case to a revenue agent (RA). During the examination the RA
was supervised by her team manager (TM1). TM1 oversaw all de-
cisions the RA made with respect to the examination. In September
2018, before the examination concluded, the RA was promoted and
transferred to a different team with a different team manager (TM2).
But because the examination was ongoing, R authorized the RA to
continue her examination under the supervision of TM1. Although
TM2 became responsible for approving the RA’s timesheets and
leave requests, TM1 continued to supervise her work on the exami-
nation.
On September 27, 2018, the RA made the decision to assert
accuracy-related penalties against P. She generated a penalty approv-
al form, which TM1 signed on November 20, 2018. On November
21, 2018, the RA sent P a packet of documents indicating (among
Served 11/23/21
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other things) that R might impose penalties. Two days later TM2 also
signed the RA’s penalty approval form.
I.R.C. sec. 6751(b)(1) requires that the initial determination of
a penalty assessment be approved by the “immediate supervisor” of
the person making that determination. P filed a motion for partial
summary judgment contending that TM2 was the RA’s “immediate
supervisor.” Because TM2 approved the penalties after the RA men-
tioned them to P, P urges that TM2’s approval was untimely. R filed
a cross-motion urging that TM1 was the RA’s “immediate supervi-
sor” and that his approval was timely because he approved the pen-
alties before the RA mentioned them to P. In any event R contends
that the RA secured timely approval because TM1 and TM2 both ap-
proved the penalties before R issued P a notice of final partnership
administrative adjustment.
Held: For purposes of I.R.C. sec. 6751(b)(1), the “immediate
supervisor” is the individual who directly supervises the examining
agent’s work in an examination. As the individual who oversaw the
RA’s work throughout the case, TM1 was the RA’s “immediate su-
pervisor.” Because TM1 timely approved the RA’s penalty determi-
nations, R satisfied the requirements of I.R.C. sec. 6751(b)(1).
Hale E. Sheppard, Jeffrey S. Luechtefeld, John W. Hackney, Brent N.
Bartlett, Samuel H. Grier, and Cassandra S. Bradford, for petitioner.
Timothy A. Sloane, Derek P. Richman, and Michelle M. Robles, for
respondent.
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OPINION
LAUBER, Judge: This case involves a charitable contribution deduction
claimed by Sand Investment Co., LLC (Sand), for a conservation easement. The
Internal Revenue Service (IRS or respondent) issued petitioner a notice of final
partnership administrative adjustment (FPAA) disallowing Sand’s deduction and
determining accuracy-related penalties against it under section 6662A and section
6662(a), (b)(1), (2), and (3), (d), (e), and (h).1 Currently before the Court are the
parties’ cross-motions for partial summary judgment addressing the question
whether the IRS complied with section 6751(b)(1) with respect to these penalties.
Section 6751(b)(1) requires that the initial determination of a penalty as-
sessment be personally approved (in writing) by the “immediate supervisor” of the
person making that determination. The parties’ dispute focuses chiefly on the
meaning of the term “immediate supervisor.” Agreeing with respondent’s inter-
pretation, we will grant his motion for partial summary judgment and deny peti-
tioner’s.
1
Unless otherwise indicated, all statutory references are to the Internal Rev-
enue Code (Code) in effect at all relevant times, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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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 the cross-motions and not as findings of fact in this case.
See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d
965 (7th Cir. 1994). Sand had its principal place of business in Georgia when the
petition was timely filed.
Sand is a South Carolina limited liability company. For its short tax year
beginning December 9, 2015, and ending December 31, 2015, it was treated as a
partnership for Federal income tax purposes. Sand is subject to the TEFRA
unified audit and litigation procedures,2 and petitioner Inland Capital Manage-
ment, LLC, is its tax matters partner.
In May 2014 Sand acquired roughly 1,000 acres of land in Jasper County,
South Carolina. On December 28, 2015, Sand granted to the Southeast Regional
Land Conservancy a conservation easement over a portion of that land. Sand
timely filed Form 1065, U.S. Return of Partnership Income, for its short 2015 tax
2
Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. No. 97-248, secs. 401-407, 96 Stat. at 648-671) governed the tax
treatment and audit procedures for many partnerships.
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year. On that return it claimed a charitable contribution deduction of $80,150,000
for the donation of the easement.
The IRS selected Sand’s return for examination and assigned the case to
Revenue Agent (RA) Adrienne Cooper, a member of Team 1124 in the IRS Large
Business & International Division (LB&I). Supervisory Revenue Agent Gregory
Burris supervised all cases assigned to Team 1124, and he served as both the “case
manager” and the “issue manager” for the examination of Sand’s return. As the
case and issue manager, he supervised all aspects of the examination. See Internal
Revenue Manual (IRM) pt. 4.46.1.1.3.1 and .2 (Dec. 13, 2018).
On September 2, 2018, as the examination neared completion, the IRS pro-
moted RA Cooper to “Senior Revenue Agent.” As a result of this promotion she
was transferred to a different team in LB&I, and William Wilson became her new
supervisor. But because the Sand examination was ongoing, the IRS authorized
RA Cooper to continue her work with Team 1124 until that examination con-
cluded. Although Mr. Wilson became responsible for approving RA Cooper’s
timesheets, leave requests, and other routine administrative matters, Mr. Burris
remained the case and issue manager of the Sand examination and continued to
oversee all of RA Cooper’s work on that examination.
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Following her promotion RA Cooper proceeded with her examination of
Sand’s return. On September 27, 2018, she made the decision to assert penalties
against Sand under section 6662A and section 6662(a), (b)(1), (2), and (3), (d), (e),
and (h). Her recommendations to this effect were set forth in a “Penalties Lead
Sheet.” Mr. Burris digitally signed this document on November 20, 2018, as the
“Case/Issue Manager.” RA Cooper concurrently prepared a Supplemental Civil
Penalty Approval Form, which states that she “made the initial determination to
assert * * * penalties.” RA Cooper signed that form on November 20, 2018, and
Mr. Burris digitally signed it the same day as the “Case & Issue Supervisor.” RA
Cooper also sent a copy of her penalty approval form to Mr. Wilson, who signed
on November 23 as the “Immediate Supervisor.”
On November 21, 2018, RA Cooper sent petitioner a packet of documents
including a Form 5701, Notice of Proposed Adjustment, and a Letter 1807,
TEFRA Partnership Cover Letter for Summary Report. These documents sum-
marized RA Cooper’s position on each issue in the case, including Sand’s possible
exposure to penalties. One month later RA Cooper held a closing conference with
petitioner’s representative, after which she proceeded to close the case. On Feb-
ruary 8, 2019, the IRS issued an FPAA to Sand, disallowing its charitable contri-
bution deduction and determining penalties.
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Discussion
A. 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. Commis-
sioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment regard-
ing an issue as to which there is no genuine dispute of material fact and a decision
may be rendered as a matter of law. Rule 121(b); Sundstrand Corp., 98 T.C.
at 520. The sole question presented at this juncture is whether the IRS complied
with the requirements of section 6751(b)(1). The parties have filed cross-motions
for partial summary judgment on this question, and we find that it may be adjudi-
cated summarily.
B. Analysis
Section 6751(b)(1) provides that “[n]o penalty under this title shall be as-
sessed unless the initial determination of such assessment is personally approved
(in writing) by the immediate supervisor of the individual making such determi-
nation.” In a TEFRA case such as this, supervisory approval generally must be
obtained before the FPAA is issued to the partnership. See Palmolive Bldg.
Inv’rs, 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
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untimely, i.e., “that there was a formal communication of the penalty before the
proffered approval” was secured. See Frost v. Commissioner, 154 T.C. 23, 35
(2020).
Respondent has supplied the Supplemental Civil Penalty Approval Form by
which RA Cooper recommended assertion of penalties against Sand. RA Coop-
er’s case and issue manager, Mr. Burris, signed the form on November 20, 2018,
and RA Cooper’s new team leader, Mr. Wilson, signed the form on November 23,
2018. The definite decision to assert penalties was communicated to Sand more
than two months later, in the FPAA dated February 8, 2019. Respondent thus con-
tends that timely approval of these penalties was secured. See Frost, 154 T.C.
at 35; Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).
Petitioner contends that supervisory approval came too late, and its argu-
ment has two essential steps. First, petitioner contends that the penalties were
formally communicated to Sand on November 21, 2018, when RA Cooper trans-
mitted a packet of documents that mentioned penalties, including a Letter 1807
and Form 5701. Second, petitioner contends that RA Cooper’s “immediate su-
pervisor” at that moment was Mr. Wilson. Because Mr. Wilson did not sign the
penalty approval form until November 23, 2018, petitioner urges that his approval
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was untimely. Because we reject the second step of petitioner’s argument, we
need not address in this case the merits of the first.3
As always, statutory interpretation begins with the text. Spencer v. Special-
ty Foundry Prods., Inc., 953 F.3d 735, 740 (11th Cir. 2020).4 Under section
6751(b)(1), RA Cooper was required to secure timely approval of the penalties
from her “immediate supervisor * * * or such higher level official as the Secretary
may designate.” Congress did not define the term “immediate supervisor,” and
that term elsewhere appears only once in the Code. See sec. 7521(c). The IRS
itself does not appear to employ the term “immediate supervisor” uniformly in its
personnel practices. See, e.g., IRM pt. 4.46.4.11.2(3) (Dec. 13, 2018) (referring to
an examiner’s “issue manager” as the immediate supervisor); id. pt. 20.1.4.1.3(3)
(Feb. 9, 2018) (referring to an examiner’s “team manager” as the immediate
3
Cf. Thompson v. Commissioner, 155 T.C. 87, 92-93 (2020) (holding that a
preliminary proposal of penalties in an offer letter was not an “initial determina-
tion” because the examination was not yet complete); Belair Woods, 154 T.C.
at 12 (holding that a preliminary proposal of penalties in a Letter 1807 was not an
“initial determination”); Tribune Media Co. v. Commissioner, T.C. Memo.
2020-2, 119 T.C.M. (CCH) 1006, 1010 (holding that a proposal of penalties in a
Form 5701 was not an “initial determination” where the form stated that “addition-
al information * * * [could] alter or reverse” the proposal).
4
Absent stipulation to the contrary, appeal of this case would apparently lie
to the U.S. Court of Appeals for the Eleventh Circuit. See sec. 7482(b)(1)(E);
Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir.
1971).
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supervisor); id. pt. 4.19.10.4.5.3(3) (Dec. 9, 2020) (referring to an examiner’s
“immediate manager”). In this respect as in others, section 6751(b) is not a para-
gon of statutory draftsmanship. Cf. Belair Woods, 154 T.C. at 7 (describing the
phrase “initial determination of * * * [an] assessment” as a “hapax legomenon”).
“It is a well-established rule of construction that if a statute does not define
a term, the term is given its ordinary meaning.” Gates v. Commissioner, 135 T.C.
1, 6 (2010); see Barton v. U.S. Att’y Gen., 904 F.3d 1294, 1298 (11th Cir. 2018)
(noting that statutory terms “are generally interpreted in accordance with their or-
dinary meaning” (quoting Sebelius v. Cloer, 569 U.S. 369, 376 (2013))). When
used in a non-temporal sense, “immediate” means “with no intermediary.” Web-
ster’s New World College Dictionary 713 (4th ed. 2010). And a “supervisor” is “a
person who supervises,” i.e., a person who “oversee[s], direct[s], or manage[s]
(work, workers, a project, etc.).” Id. at 1438.
At the relevant time RA Cooper had two different supervisors, and they
oversaw distinct aspects of her day-to-day work. Given the statutory context,
which addresses approval of penalties, the relevant work is the project that gener-
ated the penalties, namely, the Sand examination. Because Mr. Burris supervised
RA Cooper’s work on that project, we conclude that he was her “immediate super-
visor.”
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The legislative history confirms our interpretation. Congress enacted sec-
tion 6751(b) “to prevent IRS agents from threatening unjustified penalties to
encourage taxpayers to settle.” Chai v. Commissioner, 851 F.3d 190, 219 (2d Cir.
2017), aff’g in part, rev’g in part T.C. Memo. 2015-42. The Senate Finance Com-
mittee stated that the statute would ensure that IRS agents assert penalties “where
appropriate” but “not as a bargaining chip” during settlement negotiations. See
S. Rept. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601. Congress evidently
concluded that, in the absence of a higher level officer designated by the
Secretary, an IRS agent’s “immediate supervisor” was in the best position to
review the appropriateness of a penalty.
Given this legislative purpose, an agent’s “immediate supervisor” is most
logically viewed as the person who supervises the agent’s substantive work on an
examination. That person (after the agent) presumably has the greatest familiarity
with the facts and legal issues presented by the case. That person is thus in the
best position to supply the approval that Congress believed desirable.5
5
This analysis governs in cases where penalties are determined during the
examination. Somewhat different (though analogous) considerations may apply
where an IRS Chief Counsel attorney asserts a penalty for the first time in litiga-
tion. See Chai v. Commissioner, 851 F.3d at 221 n.24 (noting that IRS counsel
may assert penalties in an answer or amended answer); Roth v. Commissioner,
T.C. Memo. 2017-248, 114 T.C.M. (CCH) 649, 652 (noting that IRS counsel
(continued...)
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For this case Mr. Burris was best situated to carry out Congress’ mandate.
He was the “case manager” and the “issue manager” for the Sand examination, and
as such he supervised all aspects of RA Cooper’s work on that case from begin-
ning to end. See IRM pt. 4.46.1.1.3.1 and .2 (Dec. 13, 2018). His supervisory role
included overseeing “the development of all penalty issues.” See id. pt.
4.46.4.11.2(1). Indeed, the IRM provides that, “[f]or LB&I cases, the issue
manager must approve penalties in writing” because, “[f]or purposes of IRC
6751(b)(1), * * * [he] is the immediate supervisor.” Id. pt. 4.46.4.11.2(3); see id.pt. 4.46.4.10.2(1) and (2) (Mar. 9, 2016) (providing that the “case manager and
issue manager must be actively involved with the development of all penalty
issues” and that the “case manager and the issue manager must approve * * * [a]ny
penalty asserted”).
RA Cooper acquired a new supervisory revenue agent (Mr. Wilson) in Sep-
tember 2018, when she was promoted and transferred to a different LB&I team.
But the IRS authorized her to continue working with Team 1124 until the Sand
examination was finished, and her substantive work in that respect continued to be
supervised by Mr. Burris. There is no evidence that Mr. Wilson, as the manager of
5
(...continued)
“routinely asserts section 6662 penalties in answers”), aff’d, 922 F.3d 1126 (10th
Cir. 2019).
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a different team, had any authority to oversee her work on the Sand examination.
We accordingly conclude that RA Cooper had no obligation to obtain Mr. Wil-
son’s approval of the penalties she decided to assert.
Petitioner contends that an agent’s “immediate supervisor” for section
6751(b)(1) purposes is her direct superior in a hierarchical sense, as shown on an
organizational chart. According to petitioner, the “immediate supervisor” is “the
person who handles work assignments, performance reviews, leave requests, and
similar administrative tasks.” But such a formalistic interpretation does not align
with the statutory context (penalty approval) or with Congress’ intent. Put simply,
the person who approves time off is not necessarily the person who should be ap-
proving penalty determinations. The person who actually supervises the agent’s
work during the examination--including “the development of all penalty issues,”
IRM pt. 4.46.4.11.2(1)--is the person to whom Congress is most logically viewed
as having entrusted this responsibility.6
Petitioner urges that the statute’s “plain text” supports its position, asserting
that section 6751(b) “requires approval from the person who supervises the indi-
6
This is not to say that the supervisor, who is acting only in a reviewing ca-
pacity, must be as deeply engaged in the case as the agent. See Belair Woods, 154
T.C. at 17 (citing Raifman v. Commissioner, T.C. Memo. 2018-101, 116 T.C.M.
(CCH) 13, 28); see also Thompson v. Commissioner, 155 T.C. at 93; Patel v.
Commissioner, T.C. Memo. 2020-133.
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vidual making the determination, not the person who supervises the conduct of the
audit.” This argument misses the point. Mr. Burris supervised all of the work that
RA Cooper performed during the examination. Thus, he necessarily supervised
“the individual making the determination.”
Finally, petitioner suggests that Mr. Wilson must have been RA Cooper’s
immediate supervisor because she asked him to sign (and he did sign) the Sup-
plemental Civil Penalty Approval Form. We disagree. That form lists the “exam-
iner” as RA Cooper and the “examiner’s immediate supervisor” as “Gregory P.
Burris / William H. Wilson.” And the form includes three signature lines: one for
the “examiner” (where RA Cooper signed); one for the “case & issue supervisor”
(where Mr. Burris signed); and one for the “immediate supervisor” (where Mr.
Wilson signed). Because of the ever-changing landscape created by evolving
judicial interpretations of this ambiguous statute, RA Cooper evidently took a belt-
and-suspenders approach. We decline to penalize her for doing more than the
statute required.
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To reflect the foregoing,
An order will be issued denying
petitioner’s motion for partial summary
judgment and granting respondent’s cross-
motion.