The §6751(b) supervisory approval requirement for penalties has been a thorn within the facet of each the IRS and the Tax Courtroom. Right this moment’s lesson reveals us how the IRS penalty approval course of in conservation easement audits has compelled taxpayers to succeed in for wilder and fewer credible assaults of their makes an attempt to keep away from penalties by discovering IRS procedural foot-faults.
First, in Pickens Ornamental Stone LLC v. Commissioner, T.C. Memo. 2022-22 (Mar. 17) (Decide Lauber), the taxpayer argued that when the IRS had publicly dedicated in a common Discover to in search of penalties in opposition to the forms of syndicated conservation easement scheme it had engaged in, the IRS was disabled from complying with §6751(b) as a result of the supervisor within the audit had not signed off on that public Discover. Yeah, pull your eyebrows down; the argument misplaced.
Second, in Oxbow Bend, LLC v. Commissioner, T.C. Memo. 2022-23 (Mar. 21, 2022) (additionally Decide Lauber), the taxpayer equally argued the IRS did not adjust to §6751(b) when the Income Agent (RA) had did not safe supervisory approval earlier than telling the taxpayer throughout a standing convention that penalties had been “into account” when in actual fact the RA was finishing an inner doc recommending penalties that very day. That was a loser as effectively. Particulars beneath the fold.
Background: Conservation Easements
The widespread abuse of conservation easements donations is effectively documented. Learn this informative Senate Finance Committee Report from August 2020. The abuse not solely hurts the federal fisc but additionally hurts those that genuinely champion environmental preservation, as this Brookings Report defined in 2017.
The abusers are rejoicing, nonetheless, from latest occasions. The Eleventh Circuit just lately invalidated an vital Treasury regulation that tried to forestall the abuse in conservation easements. Hewitt v. Commissioner, 21 F.4th 1336 (Dec. 29, 2021). The abusers are additionally grateful for the latest Supreme Courtroom determination in CIC Companies v. IRS, 593 U.S. ___ (2021). There the Supremes permitted APA challenges in opposition to third celebration reporting necessities to proceed. Courts are actually discovering these Notices violate the APA. See Les Guide’s nice dialogue of this over at Procedurally Taxing. It’s wanting good for the abusers. They’ll have interaction of their conservation easement schemes with out concern of being ratted out…or so that they assume.
Their happiness is misplaced, nonetheless, and never simply due to a majority of the Sixth Circuit panel in Oakbrook Land Holdings v. Commissioner, ___ F.4th ___ (Mar. 14, 2022) got here to a opposite conclusion in regards to the validity of the conservation easement regulation.
Nope. They need to think about Decide Man’s ironic concurrence in Oakbrook (see my remark after the submit for why I name it ironic). He agreed the regulation was invalid, however upheld the IRS dedication of a deficiency based mostly on the statute. That’s, the IRS doesn’t want no stinkin’ regulation to implement the statutory perpetuity requirement. They simply have to audit.
And audit they do! The IRS does certainly audit this space robustly as one sees in this listing of all conservation easement circumstances from 2012 by means of April 2020. And when it does, you’ll be able to guess a considerable penalty is coming at you as effectively. Heck, the IRS instructed us that in Discover 2017-10. And when you can guess your candy bahooney that promotors of syndicated conservation easements won’t voluntarily report their consumer listing to the IRS, the IRS nonetheless retains the superior energy of its John Doe summonses “cryptonite.” See e.g. United States v. Coinbase, Inc., No.17-cv-01431-JSC (N.D. Cal. Nov. 28, 2017). Audits, like Winter, are coming. And with them will come penalties. So as we speak’s lesson on how the IRS complies with §6751(b) ought to be helpful.
Background: The Supervisory Approval Requirement of §6751(b).
Part 6751(b) says that “[n]o penalty underneath this title shall be assessed until the preliminary dedication of such evaluation is personally permitted (in writing) by the fast supervisor of the person making such dedication or such larger degree official because the Secretary might designate.”
Congress enacted §6751(b) in 1998 as a part of the IRS Restructuring and Reform Act. The supply was in response to complaints that Examination workers would stuff penalties right into a proposed deficiency simply to achieve bargaining energy over taxpayers in Appeals. That’s largely people historical past. The one place you discover something to help that’s within the Senate Finance Committee Report the place it says that the aim of the statute was to make sure that penalties would “solely be imposed the place acceptable and never as a bargaining chip.” S. Rept. No. 105-174, at 65 (1998).
The statute has been the topic of strong litigation over the previous 5 years.
The largest query offered has been a timing query. Certain, there should be supervisory approval of an “preliminary dedication” however the statute doesn’t say when that approval should be obtained. The legislative historical past is of little assist. The “Rationalization of Provision” part of the Senate Finance Committee Report says solely that the availability “requires the precise approval of IRS administration to evaluate all non-computer generated penalties until excepted.” Id.
So we’re left with a statute the place Congress supervisory approval of penalty determinations should happen in some unspecified time in the future earlier than the penalties had been assessed. And we (assume we) know Congress wished that supervisory examine due to a priority that rogue IRS workers had been making an attempt to beat up taxpayers by inappropriately proposing penalties.
However the statute is silent on simply when the required supervisory approval of the “preliminary dedication” should happen. What does that silence imply?
Traditionally, the Tax Courtroom and IRS took what I name a hyper-textual method: silence means silence. As long as the penalty approval comes earlier than the evaluation, it didn’t matter whether or not the approval is earlier than or after the IRS instructed the taxpayer it was going to say a penalty. The primary Circuit Courtroom to take care of this query rejected the hyper-textual interpretation of the statute in favor a sensible interpretation and the Tax Courtroom has since adopted go well with. For particulars, see Lesson From The Tax Courtroom: A Sensible Interpretation Of The Penalty Approval Statute § 6751, TaxProf Weblog (Jan. 13, 2020).
The Tax Courtroom now grounds its method on a sensible interpretation of the phrase “preliminary dedication.” Sooner or later within the back-and-forth between taxpayers and IRS workers, there comes what the Courtroom calls a “consequential second” the place the IRS operate (normally the Examination operate) tells the taxpayer “yup, we’re going to hit you with a penalty.” That’s, the consequential second is “the primary formal communication to the taxpayer of the preliminary dedication to evaluate penalties.” Beland v. Commissioner, 156 T.C. 80, 86 (2021). That’s the road. Gotta get approval earlier than that “first formal communication.” Whereas I disagree generally with the place the Tax Courtroom attracts that line—see Lesson From The Tax Courtroom: New ‘Consequential Second’ Rule For §6751 Supervisory Approval, TaxProf Weblog (Mar. 8, 2021)—that simply displays a disagreement about the place the road is, and to not the method.
Alert readers will notice right here, nonetheless, that the Ninth Circuit has now re-opened the timing query! Yessiree Bob. In Laidlaw v. Commissioner, No. 20-73420 (ninth Cir., Mar. 25, 2022), a divided panel upheld the standard hyper-textual interpretation lengthy favored by the Tax Courtroom. It is going to be attention-grabbing to see what affect the Laidlaw opinion has on the Tax Courtroom. My guess is that it’ll not alter the Tax Courtroom’s interpretation, which the Courtroom has spent numerous hours refining over the previous 5 years.
Right this moment’s lesson is a part of that refinement. Each of as we speak’s circumstances contain conservation easement litigation. These are areas the place there are some very massive potential penalties and taxpayers are thus fairly keen to throw out (up?) any potential argument to invalidate the penalties. However determined arguments generally make for good classes.
Right this moment we study extra about what doesn’t represent the sort of “consequential second” that alerts the most recent cut-off date by which an IRS worker should safe supervisory approval.
Lesson 1: A Common Public Discover to Impose Penalties is Not A Consequential Second
In Pickens, the taxpayer on this case engaged in a syndicated conservation easement scheme. For particulars on how these work, see IRS Discover 2017-10. Right here, the taxpayer (a partnership) mainly took a chunk of property that had been bought for some $490k, donated a conservation easement to Foothills Land Conservancy, after which took at $24.7 million §170 deduction that it handed by means of to its companions. Don’t ask me how they justified the valuation. It’s Appraisal Magic. However you’ll be able to see why these taxpayers would like to not get hit with penalties if it seems their donation was not a professional one!
The IRS audited in 2019. After concluding the donation was not a professional donation, the Income Agent (RA) not solely proposed to disallow the deduction but additionally advisable penalties underneath §6662 and §6662A. The RA’s supervisor signed off on the advisable penalties in April 2020. In July 2020 the RA despatched the taxpayer Kind 4605-A and Kind 886-A. These are each paperwork that formally clarify the outcomes of the audit, together with the choice to say penalties. In August 2020 the RA despatched out the Ultimate Partnership Administrative Adjustment (FPAA), which serves as a partnership’s ticket to the Tax Courtroom very similar to a Discover of Deficiency does for particular person taxpayers.
The taxpayer petitioned the Tax Courtroom and the federal government moved for abstract judgment each on the deserves and on the ever-present concern of whether or not the penalties had been correctly permitted. Decide Lauber denied abstract judgment on the deserves, noting that “on the idea of the document that at present exists, petitioner appears to have the stronger argument…”
However Decide Lauber had no drawback granting the federal government abstract judgment on the penalties.
The taxpayer had a really . . . artistic…argument on why the IRS had violated §6751(b). Usually, in partnership circumstances, the issuance of Kind 4605-A and Kind 886-A (if issued) could be the consequential second, the purpose by which the RA ought to have obtained supervisory approval. And the RA did that right here. However the taxpayer mentioned that for syndicated easement transactions the IRS had made a public dedication to say penalties in all such circumstances, through Discover 2017-10. That was the consequential second; that was the “preliminary dedication” and it was for all taxpayers. Due to this fact, mentioned the taxpayers, the supervisory approval right here got here too late as a result of it got here after the Discover.
Decide Lauber teaches the Lesson: the related consequential second comes when the IRS proposes to behave in opposition to a specific taxpayer as the results of a particularized audit. Writes Decide Lauber: “Our inquiry thus activates the timing of the IRS communication to the taxpayer in opposition to whom the penalties are being asserted. *** An IRS announcement directed to the general public at massive can not represent the primary formal communication to the taxpayer of penalties.” (emphasis in authentic)
Lesson 2: Oral Communication To Taxpayer Is Not Consequential Second
Oxbow: In 2014 the taxpayer right here (one other partnership) acquired land and made two donations to The Nationwide Wild Turney Federal Analysis Basis. First, the taxpayer donated a conservation easement, taking a $12.3 million §170 deduction. Second, the taxpayer then (three weeks later) donated its price easy curiosity within the land to a completely owned passthrough entity of the Basis, taking an extra $4.1 million deduction. I might love to listen to from anybody who can clarify the aim for that construction, aside from producing extra lawyer charges.
In 2017 the IRS opened an examination of Oxbow’s 2014 return.
In October 2018 the RA began drafting her Income Agent Report, together with drafting penalties underneath §6662 and §6662A. That’s the report that may usually be despatched to the taxpayer together with Kind 886-A.
In November 2018, she and her supervisor had a phone “standing convention” with the taxpayer’s consultant. In that decision, the RA defined that “penalties had been at present into account” and that she didn’t plan to provide this taxpayer a pre-FPAA alternative to go to Appeals, reminiscent of could be given by issuing a Kind 886-A. As a substitute, she deliberate to easily concern an FPAA. The phone name was simply that, a phone name. The RA didn’t give the taxpayer’s consultant any paperwork. No drafts, no waivers, nothing. However on that the identical day the RA accomplished an inner “penalty lead sheet” documenting the RA’s advice to say penalties.
In February 2019, the RA’s fast supervisor signed the right types approving the penalties the RA advisable. In April 2019, the IRS despatched Oxbow the FPAA disallowing the deductions and proposing penalties. As a result of the supervisor’s approval was secured earlier than the FPAA issued, it could appear as thought the IRS complied with §6751(b).
Not so, argued the taxpayer. The formal scheduling and designation of the November 2018 phone name as a “standing convention,” coupled with the truth that the RA accomplished the penalty lead sheet that exact same day, was sufficient to make that phone name the preliminary dedication for §6751(b) functions. It was the consequential second. The RA wanted to have obtained supervisory approval earlier than the phone name.
The taxpayer relied on Beland v. Commissioner, supra, for the proposition {that a} assembly is usually a consequential second. In Beland, the RA and the RA’s supervisor had a face-to-face “standing convention” with the taxpayers at which they personally delivered the pre-FPAA formal paperwork proposing a penalty, with out the supervisor having signed a previous written approval. I disagree with Beland, for the explanations I’ve in my New Consequentialist Second weblog submit, supra. However, hey, it’s a T.C. opinion so we gotta take care of it.
And Decide Lauber simply does so by distinguishing the info. In Beland, the IRS workers didn’t simply discuss the discuss; they walked the stroll by delivering the formal paperwork for the taxpayer to think about signing and agreeing to the penalties. On this case, the RA and her supervisor simply jawed with the taxpayer’s consultant. Writes Decide Lauber: “RA Stafford didn’t present Oxbow’s consultant—earlier than, throughout, or instantly after the cellphone name—with an RAR or different doc figuring out any penalties. By way of formality, the phone convention was on the reverse finish of the spectrum from the assembly in Beland, to which the taxpayers had been formally summonsed underneath risk of authorized sanctions.” Op. at 7.
Concludes Decide Lauber: “We’ve got by no means discovered a phone name of the type concerned right here to embody an “preliminary dedication” inside the which means of the statutory textual content, which denotes a communication with a excessive diploma of concreteness and ritual.” Op. at 8.
Remark: I mentioned Decide Man’s concurrence in Oakbrook was “ironic.” Here is why. Decide Man’ thought the regulation was what known as a “legislative” regulation and was not an “interpretive” regulation. Whereas Treasury had adopted the right APA course of for issuing an interpretive regulation, that course of was not correct for issuing a legislative regulation. So Decide Man mentioned the regulation was inoperative as a result of it had not been validly issued. Okay to this point. However then Decide Man finally ends up construing (oh! dare I say “decoding“) the statutory language at concern. The irony right here is that Decide Man completely agrees with the regulation on how the time period “perpetuity” within the statute ought to be interpreted. So the taxpayer loses. However I doubt Decide Man would say he was “legislating” from the bench! Nah! He was simply “decoding.” Cuz that is what a courtroom does, doncha know. Thus the irony: when Treasury does the identical factor as a Courtroom does in a regulation immediately it’s a legislative act and never an interpretive act. However when the Courtroom does it, it’s simply…effectively…interpretation. Go determine.
Bryan Camp is the George H. Mahon Professor of Legislation at Texas Tech College College of Legislation. He invitations readers to return every week to TaxProf Weblog for one more Lesson From The Tax Courtroom.
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