Rehearing Sought in Conservation Easement Deduction Case
TOT Property Holding LLC et al. v. Commissioner
- Case NameTOT Property Holding LLC et al. v. Commissioner
- CourtUnited States Court of Appeals for the Eleventh Circuit
- DocketNo. 20-11050
- Institutional AuthorsBryan Cave Leighton Paisner LLP
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2021-31142
- Tax Analysts Electronic Citation2021 TNTF 152-282021 EOR 9-33
- Magazine CitationThe Exempt Organization Tax Review, Sept. 2021, p. 20788 Exempt Org. Tax Rev. 207 (2021)
TOT Property Holding LLC et al. v. Commissioner
TOT PROPERTY HOLDINGS, LLC, TOT LAND MANAGER, LLC, TAX MATTERS PARTNER,
Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Appellee.
United States Court of Appeals for the Eleventh Circuit
On Appeal for the United States Tax Court
Hon. David Gustafson, No. 56-1700
PETITION FOR PANEL REHEARING OR REHEARING EN BANC
John P. Barrie
BRYAN CAVE LEIGHTON PAISNER LLP
1290 Avenue of the Americas
New York, NY 10104
K. Lee Marshall
BRYAN CAVE LEIGHTON PAISNER
LLP Three Embarcadero Center,
7th Floor
San Francisco, CA 94111
Eric Brian M. Underwood, Jr.
BRYAN CAVE LEIGHTON PAISNER LLP
One Atlantic Center, 14th Floor
1201 W. Peachtree Street, NW
Atlanta, GA 30309
Barbara A. Smith
BRYAN CAVE LEIGHTON PAISNER LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102
Attorneys for Appellant
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
Pursuant to Rules 26.1 and 40 of the Federal Rules of Appellate Procedure and 11th Circuit Rules 26.1-1, 26.1-2, 26.1-3, and 35-5, TOT Property Holdings, LLC (“TOT Property Holdings”) hereby certifies that the following is a full and complete list of the trial judges and all attorneys, persons, associations of persons, firms, partnerships, or corporations that have an interest in the outcome of this appeal.
1. Arthur, John T., Esq.
2. Barrie, John P, Esq.
3. Bradley, Christopher D., Esq.
4. Breed, Jerome A., Esq.
5. Bryan Cave Leighton Paisner, LLP
6. Cline, Brandon S., Esq.
7. Commissioner of Internal Revenue
8. Craft, Shannon E., Esq.
9. Daigle, Kimberly A., Esq.
10. Delduco, David, Esq.
11. Desmond, Michael J., Esq.
12. Dillard, Robert W., Esq.
13. Driggers, William G., Esq.
14. Foley, Hon. Maurice, B., Chief Judge, United States Tax Court
15. Gustafson, Hon. David, Judge, United States Tax Court
16. Lauber, Hon. Albert G., Judge, United States Tax Court
17. Marvel, Hon. L. Paige, Judge, United States Tax Court
18. Marshall, K. Lee, Esq.
19. Meneeley, Bruce K., Esq.
20. Paul, William M., Esq.
21. PES Fund VI, LLC
22. Schroeder, Eric P., Esq.
23. Sheehan, Anthony T., Esq.
24. Smith, Barbara A., Esq.
25. TOT Land Manager, LLC (Tax Matters Partner)
26. TOT Property Manager, LLC
27. TOT Property Holdings, LLC
28. Ugolini, Francesca, Esq.
29. Underwood, Brian M., Esq.
30. Wells, Hon. Thomas B., Esq.
31. Yeboah, Kwabena A., Esq.
Appellant, through the undersigned counsel, and pursuant to 11th Cir. R. 26.1-3(b), certifies that no publicly traded company or corporation has an interest in the outcome of this case.
STATEMENT OF COUNSEL
I express a belief, based on a reasoned and studied professional judgment, that this appeal involves one or more questions of exceptional importance:
1. Whether the panel's holding that the extinguishment provision in the easement at issue is noncompliant with the “in perpetuity” requirements of 26 U.S.C. § 170(h)(2)(C) and 26 U.S.C. § 170(h)(5) creates new law in this Circuit, reflects an incorrect reading of the easement, and ultimately jeopardizes Congress's conservation goals by threatening the deductibility of hundreds of similar easement arrangements, while disincentivizing future easement grants.
2. Whether the panel's holding that the IRS satisfied 26 U.S.C. § 6751(b)'s written-approval requirements for overvaluation penalties by transmitting a revenue agent's report (“RAR”) without any showing of the required approval ignores the Internal Revenue Manual's instructions, undermines Congressional protections for taxpayers, and creates unnecessary conflicts with recent Tax Court decisions interpreting the statute.
Barbara A. Smith
ATTORNEY OF RECORD FOR
Appellant
TABLE OF CONTENTS
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
STATEMENT OF COUNSEL
TABLE OF CONTENTS
TABLE OF AUTHORITIES
STATEMENT OF THE ISSUES
STATEMENT OF THE FACTS, PROCEEDINGS, AND DISPOSITION BELOW
ARGUMENT
I. THE COURT SHOULD GRANT PANEL OR EN BANC REHEARING ON THE QUESTION WHETHER THE CONSERVATION DEED OF EASEMENT SATISFIES THE “IN PERPETUITY” REQUIREMENTS OF 26 U.S.C. § 170.
II. REHEARING IS WARRANTED BECAUSE THE GOVERNMENT FAILED TO COMPLY WITH STATUORY REQUIREMENTS FOR IMPOSING AN OVERVAULATION PENALTY AND THEREBY UNDERMINED CONGRESSIONAL PROTECTIONS FOR TAXPAYERS, AND THE PANEL'S CONTRARY DECISION CONFLICTS WITH RECENT TAX COURT DECISIONS
CONCLUSION
CERTIFICATE OF COMPLIANCE
CERTIFICATE OF SERVICE
COPY OF THE OPINION SOUGHT TO BE REHEARD
TABLE OF AUTHORITIES
Cases
Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, 2020 WL 58313 (U.S. Tax. Ct. Jan. 6, 2020)
Belk v. Commissioner, 774 F.3d 221 (4th Cir. 2014)
Clay v. Commissioner, 152 T.C. 223 (U.S. Tax Ct. Apr. 24, 2019)
Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944)
Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. 68 (U.S. Tax Ct. Jan. 16, 2020)
Oropeza v. Commissioner, 155 T.C. No. 9, 2020 WL 6041923 (U.S. Tax Ct. Oct. 13, 2020)
PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018)
Roth v. Commissioner, 922 F.3d 1126 (10th Cir. 2019)
Sarkin v. Commissioner, T.C. Memo. 2019-131, 2019 WL 4849272 (U.S. Tax. Ct. Oct. 1, 2019)
Statutes
26 U.S.C. § 170
26 U.S.C. § 170(h)
26 U.S.C. § 6751(b)(1)
Regulations
26 C.F.R. § 1.170A-14
26 C.F.R. § 1.170A-14(g)(6)(ii)
Other Authorities
I.R.M. 4.63.4.13.3
S. Rep. No. 105-174 (1998)
STATEMENT OF THE ISSUES
Congress favors the donation of conservation easements to land conservation organizations by permitting donors to receive tax deductions for those donations. Section 170(h) of the Internal Revenue Code requires such easements to be granted “in perpetuity.” The IRS's implementing regulations, the meaning of which has shifted over time, provide various methods by which, in the unlikely event that an easement is extinguished, proceeds from the extinguishment are calculated and distributed to the donee to guarantee the donee receives the full benefit of the donation (“in perpetuity,” notwithstanding the extinguishment).
Two provisions of the easement here specify a method of calculating extinguishment proceeds and expressly call for the IRS regulations to control if the contractual formulae differ from the IRS's view of what is proper (e.g., if the IRS further interpreted its regulations). Nonetheless, the IRS disallowed the deduction, claiming the easement's provisions failed to appropriately vindicate Section 170(h)'s in-perpetuity requirement and sought to impose a 40% overvaluation penalty on TOT.
When the IRS seeks to impose such a penalty, § 6751(b)(1) of the Code (and the IRS Manual) requires personal, written, supervisorial approval of the proposed penalty when the penalty is initially proposed. In notifying TOT of the proposed overvaluation penalty here, the IRS did not comply with § 6751(b)(1), but instead sent a revenue agent's report including the proposed penalty via a generic transmittal letter.
The Tax Court agreed with the IRS's determination with respect to the easement's involuntary extinguishment provisions and excused the IRS's non-compliance with § 6751(b)(1). On both issues, the panel affirmed. The issues are:
1. Whether the panel decision erred in extending a judge-made Fourth Circuit doctrine — never before applied in this Circuit and which is plainly distinguishable on its face — that serves to invalidate this deduction from the grant of a conservation easement on the basis that the deed of easement contained vague language regarding the outcome of a hypothetical future extinguishment proceeding, when such a holding not only invalidates this deduction but also threatens hundreds of other deductions arising from conservation easements containing similar language drafted by the beneficiary conservation organization.
2. Whether the panel erred in holding that the IRS may skirt a statutory mandate requiring an IRS supervisor to approve in writing the decision to impose crippling overvaluation penalties by allowing the IRS to send a generic cover letter (that itself says nothing about penalties or approval) merely because the letter appends a staff-level assessment, and then allowing the IRS to defend its compliance with that statute on the basis of no more than a government lawyer's post hoc say-so, absent any approval evidence from the IRS itself in a hearing on the penalty's validity.
STATEMENT OF THE FACTS, PROCEEDINGS, AND DISPOSITION BELOW
The predicate for this case arose when TOT Property Holdings, LLC (“TOT”) donated certain land to a non-party conservation organization, Foothills Land Conservancy, pursuant to a conservation deed of easement drafted by Foothills. See Vol. 6, Doc. 49, p. 332; Vol. 7, Doc. 53, ap. 455-56. Foothills is a well-respected land conservation organization in Tennessee that, according to its annual reports, entered numerous such easements for various donors over time. See Foothills Land Conservancy, The View: Foothills Land Conservancy's 2020 Spring Newsletter & 2019 Annual Report, at 3 (2020) (“Conservancy Report”), availableathttp://foothillsland.org/wp-content/uploads/2020/04/2020-Spring-Newsletter-2019-Annual-Report.pdf.In this case and many others, Foothills drafted these conservation easement deeds. See Vol. 4.1, Doc. 46, p. 262 (noting that Mark Jendrek, Foothills' lawyer, prepared the easement).
Relevant here, the conservation easement includes a provision, Section 9, establishing procedures for determining the proceeds that Foothills would receive in the unlikely event the easement was involuntarily extinguished (e.g., through eminent domain). Vol. 4.2, Doc. 46, pp. 8-9. Section 9 includes two parts: Section 9.1 explains how such proceeds would be distributed, and Section 9.2 specifies two alternative methods for calculating such proceeds (i.e., via a contractual formula drafted by Foothills or a regulatory provision).The deed's language provides that the regulatory formula would control in the event of a conflict. In relevant part, Section 9 provides:
9.1 Extinguishment. . . .The amount of the proceeds to which Grantee shall be entitled from any sale, exchange, or involuntary conversion of all or any portion of the Property subsequent to such termination or extinguishment, shall be the stipulated fair market value of this Easement, or the proportionate part thereof, as determined in accordance with Section 9.2 or 26 C.F.R. Section 1.170A-14, if different.
9.2 Valuation. This Easement constitutes a real property interest immediately vested in the Grantee, which, for the purposes of Section 9.1, the parties stipulate to have a fair market value determined by multiplying (a) the fair market value of the Property unencumbered by this Easement (minus any increase in value after the date of this grant attributable to improvements) by (b) a fraction, the numerator of which is the value of the Easement at the time of the grant and the denominator of which is the value of the Property without deduction of the value of the Easement at the time of this grant. . . .It is intended that this Section 9.2 be interpreted to adhere to and be consistent with 26 C.F.R. Section 1.170A-14(g)(6)(ii).
Vol. 4.2, Doc. 46, pp. 8-9 (emphasis added).
The conservation easement's donation to Foothills entitled the donor, TOT, to a tax deduction, and TOT took a deduction. See Vol. 7, Doc. 53, p. 451.
The IRS examined the return and, through a May 2016 Revenue Agent's Report (the “RAR”), proposed disallowing the deduction for the conservation easement in full and imposing a 40% gross overvaluation penalty. Vol. 2, Doc. 31, pp. 6, 8-15. Some two months later, in July 2016, expressly provided “Group Manager Approval to Assess Penalties Identified Above[.]” Vol. 2, Doc. 31, pp. 6-7, 23.
The basis for the disallowance was Section 9. See Vol. 7, Doc. 53, ap. 461-462. In the IRS's view (which, with respect to such provisions, has shifted over time and solidified only after this easement was drafted), the extinguishment provision in the deed renders the tax deduction for the underlying donation invalid. See id.
TOT Property Holdings and its tax matters partner petitioned the Tax Court for review of the IRS's decision. The Tax Court upheld it. Vol. 7, Doc. 53, pp. 450-486. In the Tax Court's view, Section 9 of the Easement violated the “in perpetuity” requirements for deductions arising from the gift of a conservation easement. See 26 U.S.C. § 170(h). Additionally, the Tax Court rejected TOT's argument that the May 2016 transmittal letter was insufficient to demonstrate supervisory approval of the tax penalty, as statutorily required before the agency may impose such penalties.
TOT appealed the Tax Court's decision to a panel of this Court, and the panel affirmed. Two principal holdings are at issue here. First, the panel concluded that the relevant statutes and regulations provide a specific regulatory formula that must be used to satisfy the “in perpetuity” requirements; that the formula in the Conservation Deed of Easement impermissibly differed from the regulatory formula; and that Section 9's language requiring compliance with Treasury Regulations constituted an impermissible condition subsequent savings clause. Op. at 11-26. As a result of that decision, hundreds of similarly-worded conservation easements are in jeopardy.
Second, the panel held — in agreement with the Tax Court below, but contrary to numerous other Tax Court decisions directly on point — that the IRS may impose a 40% overvaluation penalty on the basis of a transmittal letter without any evidence of supervisor approval of the penalty. Congress mandated that the IRS may impose such penalties only when an IRS supervisor specifically reviews, signs off on, and transmits notice of the penalties to the taxpayer in the first instance. Congress required such preliminary supervisory approval to ensure cowboy IRS agents would not strong-arm taxpayers into unfavorable settlements. Here, the panel credited the IRS's claim that it complied with the requirement for supervisory approval when the supervisor signed a generic cover letter transmitting the RAR (and then, two months later, complied with the IRS's own internal rules by reviewing and approving the appropriate paperwork). Op. at 36-39. The IRS made no attempt to call the supervisor to provide testimony on the meaning of her signing of the cover letter before the Tax Court (even though compliance with the statute is the IRS's burden to satisfy), but the panel accepted the IRS's argument anyway. See id.
ARGUMENT
I. THE COURT SHOULD GRANT PANEL OR EN BANC REHEARING ON THE QUESTION WHETHER THE CONSERVATION DEED OF EASEMENT SATISFIES THE “IN PERPETUITY” REQUIREMENTS OF 26 U.S.C. § 170.
The decision below regarding the scope of Section 9 in the conservation deed is wrong and is based on a judge-made Fourth Circuit doctrine that does not apply here. Moreover, the consequences of the decision — which threatens tax benefits flowing from hundreds of similarly worded conservation easement deeds — is far-reaching. Panel rehearing or rehearing en
First, the decision below is wrong. The decision's crux is that Section 9 violates IRS regulations because the deed improperly distributes proceeds from a hypothetical future extinguishment proceeding. But the decision is grounded not in the plain text of the easement (which mandates compliance with IRS regulations) but in a judge-made Fourth Circuit doctrine that, even if it should be extended to this Circuit, plainly does not apply to the text in this deed.
The plain text of the deed expressly states that the IRS regulations control any extinguishment proceeding and proceeds. See Vol. 4.2, Doc. 46, pp. 8-9. IRS regulations require that “the donee organization, on a subsequent sale, exchange, or involuntary conversion of the subject property, must be entitled to a portion of the proceeds at least equal to that proportionate value of the perpetual conservation restriction[.]” 26 C.F.R. § 1.170A-14(g)(6)(ii) (emphasis added).
Thus, the plain language of the deed “entitled” Foothills to exactly what the regulations require. Either the extinguishment formula set forth in Section 9.2 complies with the Treasury Regulations or it does not (in which case, the regulations control). These terms are straightforward and plain, and would be easily invoked by Foothills (and, presumably, applied by a judge reading the deed) in any extinguishment proceeding. Section 9 is automatic and self-operating, ensuring that Foothills would receive all extinguishment proceeds to which it would be entitled under the Treasury Regulations because the deed directly cites to and incorporates those regulations — not because, as the panel held, any condition subsequent springs forth to trigger the regulation's operation.
That is why Foothills drafted the language in the way it did: to ensure tax compliance, not facilitate tax avoidance.
But the panel's decision reads these provisions out of the deed entirely (calling them unenforceable, see Op. at 22-26), thus washing away TOT's entire charitable tax deduction and nullifying Foothills' ability to enforce Section 9 (and reap its extinguishment benefits) in any future proceeding. The basis for that decision was a warped application of other language in the deed that proposed a separate formula for extinguishment proceeds — a formula which, by the deed's own language, would not apply if it contradicted the regulations.
Foothills' inclusion of these two formulas made sense at the time the deed was drafted given the IRS's shifting view of the operative regulation over time. See PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 207 (5th Cir. 2018) (noting the IRS argues a prior “private letter ruling does not reflect the Commissioner's current position”). In these circumstances, when a taxpayer or beneficiary organization is required to draft around exceedingly complex and ever-shifting tax regulations, and seeks to protect itself by asserting the primacy of the complex regulation in all cases, the Court's decision holds the taxpayer to an impossible standard: any noncompliant provision taints the validity of the compliant provision, and the compliant provision cannot redeem the noncompliant one, despite the taxpayer's expressed intention that in all cases the IRS regulations control.
Worse still, the panel's reason for invaliding the deduction twists an already atextual doctrine past its breaking point. Specifically, the panel held that the language in the deed was an impermissible “savings clause” rather than a (permissible) “interpretive provision.” But resting this holding on a thin read of two Fourth Circuit cases — and, in doing so, extending that doctrine to this Court — was wrong.
The two Fourth Circuit cases that explain this doctrine are plainly distinguishable. Specifically, the rule in Commissioner v. Procter prohibits “savings clauses” that fundamentally change the substance of the underlying transaction to avoid and undermine a subsequent, post-transaction judicial determination. See 142 F.2d 824, 827 (4th Cir. 1944). In that case, the taxpayer wanted to invalidate a gift entirely if it were found non-complaint. No such post-hoc re-writing of the deed is happening in this case. And in Belk v. Commissioner (the only Fourth Circuit case to apply Procter's rule to nullify a savings clause), the operative language in the easement allowed the taxpayer to “swap land in and out of the easement,” thus fundamentally changing the nature of the underlying donation, and the savings clause operated only after an adverse court determination. 774 F.3d 221, 223-24, 228-29 (4th Cir. 2014).
Section 9 is not a “savings clause” in the way these cases describe. Unlike in those cases, Section 9 necessarily complies with the Treasury Regulations because Foothills can always avail itself of those regulations to calculate the proceeds owed to it in the event of the easement's extinguishment. The panel suggested that the language is effective only after an adverse determination by the IRS or a court, see Op. at 24-26; but no adverse determination by anyone is necessary for the Treasury Regulations to become effective in the deed. Instead, if the easement is extinguished, Foothills independently may invoke the regulations to calculate and demand the amounts owed it, if it believes the formula in the easement is insufficient. If, alternatively, Section 9.2's formula satisfies the regulations' obligations, then the outcome is the same: the Conservancy receives what is owed to it under the Treasury Regulations.
Although the practical outcome to the Conservancy is the same in either case, the panel's decision imposes starkly different tax consequences on TOT in the former. This Court should not adopt as law of this Circuit an inapplicable judge-made gloss on the Revenue Code and IRS regulations that would undercut the plain text of this conservation deed, which was specifically designed to vindicate Congress's goal of encouraging perpetual conservation land grants and to comply with whatever the IRS's flavor-of-the-month regulations may provide at any given time.
Rehearing is also warranted not only because the panel decision is wrong, but because it poses dangerous and far-reaching consequences. By affirming the Tax Court's decision regarding the impermissibility of the deduction at issue, the panel's decision threatens hundreds of similar easement deeds which, in a good faith attempt to comply with shifting and uncertain IRS regulations, Foothills drafted with similar language. Indeed, Foothills drafted hundreds of similar conservation easement deeds over many years. See Conservancy Report, at 3 (“To date, [the Conservancy]. . . has over 300 land preservation partnerships and has assisted in over 130,000 regional acres being preserved. This cumulative number includes conservation easement partnerships, fee simple properties, additional land projects that FLC was involved in since . . . 1985.”). See also Vol. 4.1, Doc. 46, p. 262 (noting Mark Jendrek, Foothills' lawyer, prepared the easement). Such an outcome disproportionately punishes easement donors, while the donees would enjoy all the protections mandated by the Treasury Regulations in any extinguishment proceeding (including Foothills, notwithstanding the total disallowance of all tax benefits for TOT).
In effect, the panel ruling punishes and discourages the very activity Congress sought to encourage, threatening existing easement deductions and disincentivizing future conservation easements.
II. REHEARING IS WARRANTED BECAUSE THE GOVERNMENT FAILED TO COMPLY WITH STATUORY REQUIREMENTS FOR IMPOSING AN OVERVAULATION PENALTY AND THEREBY UNDERMINED CONGRESSIONAL PROTECTIONS FOR TAXPAYERS, AND THE PANEL'S CONTRARY DECISION CONFLICTS WITH RECENT TAX COURT DECISIONS.
The panel's decision merits rehearing or rehearing en banc for a second reason: the IRS imposed a significant monetary penalty without complying with mandatory statutory taxpayer protection provisions. Congress empowered the IRS to impose substantial overvaluation penalties — such as the 40% penalty here — only subject to strict penalty-approval provisions designed to protect taxpayers from overzealous IRS revenue agents, placing the burden on the IRS to demonstrate compliance with those requirements. The panel's decision — that the IRS complied with the statute on these facts — conflicts with Tax Court decisions addressing this same issue and inverts the burden of persuasion (which falls on the IRS) to demonstrate compliance. That decision is wrong and warrants rehearing.
Congress made plain in 26 U.S.C. § 6751(b)(1) that when the IRS makes an “initial determination” of an overvaluation penalty, that determination must be “personally approved (in writing) by the immediate supervisor of the individual making such determination[.]” In other words, the plain text of the statute mandates that (1) an IRS supervisor (2) must approve an overvaluation penalty in writing (3) at the start of the penalty process.
The IRS argued it complied with the statute because a supervisor signed a cover letter attaching a staffer's proposed alternative penalties. Vol. 2, Doc. 31, pp. 6, 8-15. This cover letter nowhere indicated that the penalties had been approved by the supervisor; instead, the letter stated the staffer's RAR and “proposed adjustments” would be discussed “at the closing conference.” Id. Among those “proposed adjustments” within the RAR was a variety of proposed penalties, some of which were presented as an “Alternative Position.” Id. The RAR itself — that is, the staffer's document actually laying out possible penalties — is not signed by a supervisor, but was instead prepared by the examining agent whose name was typed under “examiner's signature” and dated May 10, 2016. Id.
Worse still, months after this initial communication with the taxpayer, the IRS supervisor signed a “Penalty Approval Form” — the form by which the IRS itself attests compliance with the statutory approval requirements. Although “the statute does not indicate that the supervisor's approval in writing must be on a particular document,” Op. at 37, the IRS has indicated that it complies with the statute through its Civil Penalty Approval Form. See I.R.M. 4.63.4.13.3 (the form is generally applicable to all income tax cases).
Thus, by the Agency's own understanding of the statute, the IRS did not convey any express approval of any of the “proposed” penalties until two months after transmitting the RAR when, on July 8, 2016, the IRS issued a Civil Penalty Approval Form adopting the penalties identified in the RAR. Vol. 2, Doc. 31, pp. 6-7, 23. That form expressly provides the following language about the group manager's signature: “Group Manager Approval to Assess Penalties Identified Above[.]” Id.
The Tax Court has thrice considered and rejected precisely this type of after-the-fact approval, (correctly) holding instead that written supervisory approval must accompany the initial determination of penalties — in this case, the RAR. See Oropeza v. Commissioner, 155 T.C. No. 9, 2020 WL 6041923, at *4 (U.S. Tax Ct. Oct. 13, 2020) (holding January 14, 2015 letter and RAR constituted the “initial determination,” but untimely “supervisory approval for the penalty was not secured until January 29, 2015””); Clay v. Commissioner, 152 T.C. 223, 249-50 (U.S. Tax Ct. Apr. 24, 2019) (holding RAR issued to a taxpayer constitutes the “initial determination”; month delay between an RAR and a supervisor's signing a Civil Penalty Approval Form meant approval was untimely). See also Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 154 T.C. 68, 81 (U.S. Tax Ct. Jan. 16, 2020) (three month delay between the first formal communication regarding a penalty and the supervisor's signing of a Civil Penalty Approval Form did not satisfy Section 6751(b)(1)).
Nonetheless, and in conflict with these Tax Court decisions, the panel excused that non-compliance. The panel's contrary decision sets up a conflict with the Tax Court that is unwarranted and wrong, because it flies in the face of the statute's plain text and Congress's intention in adopting these taxpayer protection devices. Congress required written supervisory approval at the initial stages of an IRS penalty process in order to curb coercive IRS settlement tactics. Id. at 83. Accord Roth v. Commissioner, 922 F.3d 1126, 1133 (10th Cir. 2019) (Supervisory approval “could conceivably 'prevent the IRS from improperly using penalties . . . to coerce settlements.'”). See also Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, 2020 WL 58313, at *20 (U.S. Tax. Ct. Jan. 6, 2020) (Marvel, J., dissenting) (Section 6751(b)(1) requires “the IRS agent obtain written penalty approval before putting a penalty into play”); S. Rep. No. 105-174, at 65 (1998) (“[T]axpayers are entitled to an explanation of the penalties imposed upon them . . .[and] penalties should only be imposed where appropriate and not as a bargaining chip.”).
In excusing the IRS's non-compliance based on the panel's “common sense interpretation of the . . . transmittal letter,” Op. 39, the panel not only denigrated Congress's mandate and the IRS's own manual, and created an unwarrantd conflict with the tax court, but also impermissibly inverted the parties' respective burdens when it held:
TOT fails to explain why “proposed adjustments, including facts, law, and conclusion” would not include penalties or why we would conclude that the group manager signed the letter without having approved part of those proposed adjustments, i.e., the penalties, or the report it accompanied.
Op. at 37 (emphasis added).
This logic inverts the burden of persuasion. The IRS bears the burden of demonstrating timely compliance with Section 6751(b)(1). See, e.g., Sarkin v. Commissioner, T.C. Memo. 2019-131, 2019 WL 4849272, at *9 (U.S. Tax. Ct. Oct. 1, 2019). During the Tax Court proceedings, however, the IRS did not present evidence indicating written supervisor approval had been obtained as of the May 2016 RAR's issuance. Instead, the IRS merely relied on the fact that the transmittal letter to which the RAR was attached bore the signature of a group manager.
Thus, given the chance to make its case, the IRS declined to do so before the Tax Court. Nevertheless, the panel gave the IRS the benefit of a very large doubt. At best, the supervisor's signature on the cover letter is equivocal. The letter itself does not expressly approve any of the “proposed adjustments” in the RAR, and the panel's decision to infer what is not explicitly stated provides the IRS with a free pass on appeal despite not adequately carrying its burdens below.
In short, the panel's decision conflicts with the plain text of a statutory provision designed to protect taxpayers, inverts the burden for demonstrating compliance with that statute to place it on the taxpayer and not the IRS, and sets up a direct conflict with the specialized Tax Court in holding the IRS's actions here comply with what the statute requires.
CONCLUSION
Panel rehearing or rehearing en banc is warranted. The decision below should be reconsidered so that the Court may hold that (i) the conservation deed of easement satisfied the in perpetuity requirements; and (ii) the Government failed to comply with the statutory written penalty approval requirements in 26 U.S.C. § 6751(b)(1) and, thus, the penalties must be abated.
Respectfully submitted,
Dated: August 9, 2021
Barbara A. Smith
K. Lee Marshall
BRYAN CAVE LEIGHTON PAISNER LLP
Three Embarcadero Center, 7th Floor
San Francisco, CA 94111
Barbara A. Smith
BRYAN CAVE LEIGHTON PAISNER LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102
John P. Barrie
BRYAN CAVE LEIGHTON PAISNER LLP
1290 Avenue of the Americas
New York, New York 10104
Telephone: (212) 541-1184
Email: JPBarrie@bclplaw.com
Eric P. Schroeder
Brian M. Underwood, Jr.
BRYAN CAVE LEIGHTON PAISNER LLP
One Atlantic Center, 14th Floor
1201 W. Peachtree Street, NW
Atlanta, Georgia 30309
Telephone: (404) 572-6600
Email: Eric.Schroeder@bclplaw.com
E-mail: Brian.Underwood@bclplaw.com
Attorneys for Appellant
- Case NameTOT Property Holding LLC et al. v. Commissioner
- CourtUnited States Court of Appeals for the Eleventh Circuit
- DocketNo. 20-11050
- Institutional AuthorsBryan Cave Leighton Paisner LLP
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2021-31142
- Tax Analysts Electronic Citation2021 TNTF 152-282021 EOR 9-33
- Magazine CitationThe Exempt Organization Tax Review, Sept. 2021, p. 20788 Exempt Org. Tax Rev. 207 (2021)