Orange Stone, LLC v. Comm'r of Internal Revenue

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ORANGE STONE, LLC, MARLIN WOODS CAPITAL LLC, TAX MATTERS PARTNER Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 30286-21

United States Tax Court

May 9, 2023

ORDER

Joseph Robert Goeke Judge

On November 4, 2022, respondent filed a motion for partial summary judgment that he has complied with the supervisory approval requirement of section 6751(b) with respect to the penalties asserted in this case.^[1] On March 27, 2023 petitioner filed a response in which it stated that it has no basis for disputing that respondent has complied with section 6751(b).^[2]

Standards for Summary Judgment

The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Id. However the nonmoving party may not rest upon the mere allegations or denials of his pleadings but instead must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Celotex Corp. v. Catrett, 477 U.S. 317 324 (1986).

Section 6751(b)(1) provides that "No penalty . . . 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 or such higher level official as the Secretary may designate."

The following background is based on the parties' pleading motion papers, declarations and exhibits attached thereto and solely for the purpose of ruling on respondent's motion.^[3] The Petition states that petitioner and Orange Stone, LLC (Orange Stone) had mailing addresses in Georgia and their principal places of business were in Georgia and Florida, respectively. Accordingly, this case should be appealable to the Eleventh Circuit. See § 7482(b)(1)(E).

In a Notice of Final Partnership Administrative Adjustment (FPAA) dated August 18, 2021, respondent determined a fraud penalty under section 6663(a), and alternatively, penalties for a gross valuation misstatement under section 6662(h), a reportable transaction understatement under section 6662A, a substantial valuation misstatement under section 6662(e) negligence under section 6662(c), and a substantial understatement under section 6662(d). The penalties asserted in the alternative were initially determined and asserted by the Examination Division.

Revenue Agent (RA) Elijah Mallery made the initial determination to assert the alternative penalties, and his immediate supervisor, Senior RA Kevin Woodward, approved the determination in writing on February 3, 2021, with an electronic signature on a penalty leadsheet. By letter dated March 16, 2021, which enclosed a copy of RA's summary report, respondent first formally communicated the exam penalty determinations to petitioner.

Chief Counsel Attorney Joel Dickens was assigned to review the FPAA before its issuance. He made the initial determination to assert the section 6663(a) fraud penalty, and his immediate supervisor, Associate Area Counsel William Peck, personally approved the determination in writing by signing a penalty consideration memorandum on August 12, 2021, before respondent first formally communicated the assertion of the fraud penalty in the FPAA on August 18, 2021.

The Court of Appeals for the Eleventh Circuit has held that respondent's failure to comply with section 6751(b) is a partnership defense to penalties that must be raised in the partnership proceeding. Ginsberg v. United States 17 F.4th 78 (11^thCir. 2021). On September 13, 2022, the Court of Appeals for the Eleventh Circuit held in Kroner v. Commissioner, 48 F.4th 1272, 1274 (11th Cir. 2022), rev'g in part, T.C. Memo. 2020-73, that section 6751(b) requires supervisory approval to occur before the penalty is assessed, i.e., when the Internal Revenue Service (IRS) "formally places the taxpayer's liability on the IRS books." Id. at 1274-75. The penalties asserted in this case have not been assessed. Respondent has obtained written supervisory approval of the penalties asserted in this case. Accordingly, respondent has complied with section 6751(b) as interpreted by the Court of Appeals in Kroner.

Respondent has...