The Tax Court in Brief – March 21st – March 25th, 2022
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
Tax Litigation: The Week of March 21, 2022, through March 25, 2022
Short Summary: This case involves a charitable contribution deduction claimed by Oxbow Bend, LLC (Oxbow) for a conservation easement. In 2014, Oxbow owned interests in 133 acres and from those, Oxbow granted a conservation easement to an organization. For tax year 2014, Oxbow claimed charitable contribution deductions of near $17,000,000 combined for the donated easement and fee simple interest. The IRS examined Oxbow’s 2014 Form 1065, U.S. Return of Partnership Income. During a call with Oxbow, the reviewing agent verbally explained the anticipated adjustments and penalties that were under consideration. Thereafter, the agent sent a her the notice of proposed adjustment (NOPA) to, and received signed approval from, her manager. The IRS issued the final partnership administrative adjustment (FPAA) disallowing the charitable contribution deduction for the easement (near $13 million), reducing the deduction for the fee simple donation, and determining penalties. Oxbow challenged that later determination, claiming it was untimely because it was not the “initial determination” of the assessed penalty.
- Section 6751(b) provides that no penalty under this title shall be assessed unless the “initial determination” of such assessment is personally approved by the immediate supervisor of the individual making such determination. The timeliness of an “initial determination” turns on the timing of the first “formal written communication” to the taxpayer against whom the penalties are asserted. While the examining agent mentioned the penalties during a phone conference, the first formal and concrete communication to the taxpayer of penalties did not occur until after the agent’s supervisor approved the agent’s recommendation to assert penalties against Oxbow. The approval was thus timely.
Key Points of Law:
- The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FLP Grp., Inc. & Subs. v. Comm’r, 116 T.C. 73, 74 (2001). The Tax Court may grant summary judgment regarding an issue if there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b).
- Section 6751(b) provides that no 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 individual making such determination. In a TEFRA case, supervisory approval generally must be obtained before the FPAA is issued to the partnership. See Palmolive Bldg. Inv’rs, LLC v. Comm’r, 152 T.C. 75, 83 (2019). If supervisory approval was obtained by that date, the partnership must establish that the approval was untimely, e., “that there was a formal communication of the penalty before the proffered approval” was secured. See Frost v. Comm’r, 154 T.C. 23, 35 (2020).
- Section 6751(b)(1) “requires approval for the initial determination of a penalty assessment, not for a tentative proposal or hypothesis.” The timeliness inquiry thus turns on the timing of the first “formal written communication” to the taxpayer against whom the penalties are asserted.
- The “initial determination” of a penalty assessment must be embodied in a formal written communication that notifies the taxpayer of the decision to assert penalties. Belair Woods, LLC v. Comm’r, 154 T.C. 1, 10 (2020).
- The word “determination,” as used in Section 6751(b), has “an established meaning and in the tax context and denotes a communication with a high degree of concreteness and formality.” Belair Woods, LLC, 154 T.C. at 15. An “initial determination” “signifies a consequential moment” of IRS action. A “mere suggestion, proposal, or initial informal mention” of penalties does not reflect an examining agent’s “initial determination” Tribune Media Co. v. Comm’r, T.C. Memo. 2020-2, T.C.M (CCH) 1006, 1010.
Insights: Conservation easements, especially syndicated conservation easements, are under scrutiny by the IRS. Taxpayers seeking to deduct noncash charitable contributions in the form of conservation easements should take due care to “cross the t’s and dot the i’s” in the conveyances themselves as well as in the tax returns in which the charitable deduction is requested. If a Form 1065 return is examined, and if penalties are assessed pursuant to Section 6662 and 6662A, the timeliness of the “initial determination” under Section 6751(b) is determined by the first “formal written communication” to the taxpayer against whom the penalties are being asserted. Fleeting or hypothetical mentions of penalties during a phone call with the reviewing agent will, more likely than not, be insufficient to constitute an “initial determination” under Section 6751.