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Applying the Penalty Approval Provision to a Conservation Easement Case

Posted on Sep. 10, 2021

In Oconee Landing Property LLC et al v. Commissioner, Dk. No. 11814-19 the Tax Court entered a very substantive order granting partial summary judgment to the IRS on the issue of penalty approval.  If the Court still designated orders, I suspect it would have designated this one.

The IRS in this case uses a tactic that has become common in penalty approval cases – seeking partial summary judgment on the penalty issue before heading to trial.  The IRS seeks to lock down that it properly followed the procedures for penalty approval required by IRC 6751(b).  The order entered in this case allows it to do so.

The taxpayer does not argue in this case that the IRS did not obtain the penalty approvals prior to the communication with it that the IRS had asserted a penalty. Although the prior approval issue exists in most IRC 6751(b) cases, here the issue focuses on the form and manner of the approval, particularly as it relates to summary judgment. It asserts that the penalty lead sheet in the file “does not identify Ms. Smithson’s [the immediate supervisor] role … or even a date of signature.”

In this case, the approval occurred through email rather than by a signing of the same paper by the agent and the immediate supervisor. This type of approval has no doubt become quite common during the pandemic while many employees and managers have been working remotely. It could also be common in situations where the employee and the manager work out of different offices. Obtaining acceptance of this type of approval is important for the IRS. One hurdle it has here and in many other cases involves proving that the person signing the approval is, in fact, the immediate supervisor of the employee imposing the penalty.

To prove this relationship in the summary judgment setting, the IRS had both the supervisor and the agent produce affidavits attesting to their respective roles. The court finds this adequate.

To prove the date of the approval and, therefore, prove that the penalty received the appropriate approval before being formally communicated to the taxpayer, the IRS provided emails which documented the timing of the approval. The court finds that the emails provide sufficient corroboration of the timing.

The taxpayer also complained that the approval does not show any analysis of the penalties and, therefore, was inadequate. The court points to the statute and to earlier cases interpreting the statute, making clear that all that is required is written approval and not a demonstration of the “depth or comprehensiveness of the supervisor’s review.”

The taxpayer argues that the Chief Counsel attorney who reviewed the case and suggested additional penalties to the agent did not obtain supervisory approval to make the suggestion. That might seem like a wild argument but enough taxpayers have benefited from IRC 6751(b) arguments that no one thought would go anywhere that I applaud the effort. Unfortunately, the Tax Court does not buy this as a statutory requirement. The court finds that the additional penalties suggested by the Chief Counsel attorney were appropriate to apply in this case; however, the decision to assert these additional penalties, at least at the stage of the proceeding at which the suggestion occurred, was with the revenue agent and his manager. The revenue agent did not have an obligation to accept the advice. Having accepted it, he obtained the appropriate approval in a timely manner.

In addition to the questions raised about the penalties asserted by the revenue agent before the case arrived at the Tax Court, this case also involves a new penalty asserted by Chief Counsel in the answer.  The answer was signed by the line attorney and the acting manager.  Taxpayer argues that summary judgment is inappropriate because of a need to cross examine the attorney and the manager about the assertion of this penalty.  The court finds that cross examination is unnecessary because the answer clearly shows the appropriate approval.

In conjunction with this objection, taxpayer also sought to disqualify the attorney who prepared the answer and his supervisor as necessary witnesses.  The court finds disqualification unnecessary as the answer shows the appropriate approval.  I question what advantage disqualification would bring the taxpayer.  Perhaps it simply served as a part of the request to cross examine the Chief Counsel attorney.  The court notes that obtaining disqualification is “subject to particularly strict judicial scrutiny” because of the possibility of abuse.  I saw these motions a handful of times while working at Chief Counsel.  Almost always they fail.  Even if they succeed, the victory generally brings little or nothing for the taxpayer.  Making this particular motion can taint an otherwise good argument.  Use caution in trying to disqualify the IRS attorney.

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