Tax Court in Brief | Warner Enters., Inc. v. Comm’r | TEFRA and Partner’s Belated Objection to Penalty Determination

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The Tax Court in Brief – August 22nd – August 26th, 2022

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Tax Litigation:  The Week of August 22nd, 2022, through August 26th, 2022

Warner Enterprises, Inc. v. Comm’r, T.C. Memo. 2022-85 | August 22, 2022 | Buch, J. | Dkt. No. 17163-19L.

Short Summary: This collection case addresses issues presented on motion for summary judgment by the IRS, mainly asserting that taxpayer Warner Enterprises, Inc. (Warner) was precluded from challenging the IRS’s compliance with statutory collection procedures in a final partnership proceeding. Warner was a partner in AD Investment 2000 Fund, LLC (the Partnership). The IRS issued a Notice of Final Partnership Administrative Adjustment for the Partnership’s 2000 tax year; partnership-level determinations, including penalties. Those determinations were litigated in the Tax Court, and no partner raised the issue of whether the IRS had complied with the requirement to obtain supervisory approval of a penalty. See AD Inv. 2000 Fund LLC v. Commissioner, T.C. Memo. 2016-226, vacating and superseding T.C. Memo. 2015-223. So, the IRS assessed and began collection of the tax and penalties that resulted from the partnership-level proceeding. Warner received a notice of federal tax lien filing and a notice of intent to levy from which it requested a collection hearing with the IRS Office of Appeals. Warner contested its liability, alleging that it had not received an affected items notice of deficiency. Warner also alleged that the IRS had not complied with the supervisory approval requirement and requested proof of compliance. But, the settlement officer did not provide any documents showing approval. The IRS mailed Warner a notice of determination sustaining the lien filing and proposed levy. Warner timely petitioned the Tax Court alleging that the IRS erred by precluding Warner from raising noncompliance with assessment procedures as an issue.

Key Issues:

Whether the IRS showed, as a matter of law, that the settlement officer was not required to prove compliance with assessment determination and supervisory-approval matters because the Tax Court had already conclusively determined the applicability of penalties?

Primary Holdings:

Yes, the IRS proved its right to judgment on the issue. Warner did not challenge its status as a party to the partnership-level proceeding. Because compliance with section 6751(b) (the then-applicable collection procedure in TEFRA proceedings) must be raised in a partnership-level proceeding, not in a partner’s subsequent collection proceeding, summary judgment for the IRS was in order.

Key Points of Law:

Summary Judgment. A party may move for summary judgment regarding all or any part of the legal issues in a controversy. Summary judgment is appropriate when there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(a)-(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The nonmoving party may not rest upon mere allegations or denials in the pleadings but must set forth specific facts showing a genuine dispute. Rule 121(d).

Note regarding TEFRA Repeal. The IRS followed the partnership unified audit and litigation procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), codified at sections 6221 through 6234 and repealed for returns filed for partnership tax years beginning after December 31, 2017.

TEFRA Proceedings. TEFRA governs the adjustment of any partnership item and the applicability of any penalty that relates to the adjustment of a partnership item. See 26 U.S.C. § 6221. Partnership-level determinations of penalties “include all the legal and factual determinations that underlie the determination of any penalty, addition to tax, or additional amount, other than partner-level defenses.” Treas. Reg. § 301.6221-1(c).Partnerships do not pay income taxes; partners do. See 26 U.S.C. § 701. All partners are deemed to be parties to a partnership-level proceeding and bound by its outcome. See id. at §§ 6226(c). “[T]he hallmark of a partnership item is that it” is common to all partners. Grigoraci v. Commissioner, T.C. Memo 2002-202, 84 T.C.M. (CCH) 186, 189.

Partnership-level determinations of penalties “include all the legal and factual determinations that underlie the determination of any penalty, addition to tax, or additional amount, other than partner-level defenses.” Reg. § 301.6221-1(c). Section 6751(b)(1) provides that the IRS Commissioner may not assess a penalty “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.”

The IRS’s compliance with section 6751(b) is a partnership-level matter, and the burden to raise it falls on the participating partners, not the IRS. Partners may only raise partner-level defenses to penalties in a subsequent partner-level proceeding. Treas. Reg. § 301.6221-1(d).

Res Judicata. Under this doctrine, a taxpayer is barred from relitigating its underlying liability during a collection proceeding after a court has entered a final decision for the relevant tax year: “[I]f a claim of liability or non-liability relating to a particular tax year is litigated, a judgement on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year.” Newstat v. Commissioner, T.C. Memo. 2004-208, 88 T.C.M. (CCH) 254, 260 (quoting Commissioner v. Sunnen, 333 U.S. 591, 598 (1948)), supplemented byC. Memo 2005-262. Section 6330(c)(4) limits the issues taxpayers may raise at a collection hearing. Section 6330(c)(2)(B) precludes a taxpayer from challenging the underlying liability if the person received a notice of deficiency for, or otherwise had a prior opportunity to dispute, such liability.

Verification Requirement. The settlement officer conducting a collection hearing must verify “that the requirements of any applicable law or administrative procedure have been met.” 26 U.S.C. § 6330(c)(1). But, where the Tax Court previously adjudicated and entered a decision determining the applicability of penalties, the administrative settlement officer merely needs to determine that the penalty was properly assessed but need not revisit the Court’s underlying determination. See Rockafellor v. Commissioner, T.C. Memo. 2019-160 (providing potential exception for fraud, malfeasance, or misrepresentation of fact).

Insight: This opinion exemplifies a key purpose of TEFRA tax protocol. Allowing a review for compliance at the partner level would defeat TEFRA’s aim of avoiding duplicative proceedings on a question that applies equally to all partners. The proper place to raise compliance with section 6751(b) is in a partnership-level proceeding. For Warner, there was a binding decision from the prior partnership-level proceeding as to the applicability of penalties. A partnership-level defense to the penalties must have been raised or waived in that proceeding.