IRS Seeks Same Favorable Ruling but With Correct Facts

LAKEPOINT LAND II, LLC,
LAKEPOINT LAND GROUP, LLC,
TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

Judge Weiler

RESPONDENT'S MOTION FOR RECONSIDERATION

RESPONDENT MOVES, pursuant to Tax Court Rule 50, that the Court reconsider the portion of its Order dated March 24, 2023 relying on a Penalty Lead Sheet purportedly signed on July 16, 2016, to conclude that respondent complied with the requirements of section 6751(b)(1).¹ For the reasons explained below, respondent met the requirements of section 6751(b)(1); however, factual inaccuracies in respondent's Motion for Partial Summary Judgment (Respondent's Motion), as supplemented, resulted in the Court relying on inaccurate facts in its ruling in favor of respondent. Respondent moves that the Court reconsider the portion of its Order relying on inaccurate facts, but that the Court grant Respondent's Motion, as supplemented, on the correct facts.

IN SUPPORT THEREOF, respondent respectfully states:

1. On March 24, 2023, the Court issued an Order granting Respondent's Motion, as supplemented, finding that respondent complied with the requirements of section 6751(b)(1) for penalties under sections 6662(c), (d), (e), and (h).

2. In his Status Report filed April 10, 2023, respondent stated that on or about April 3, 2023, petitioner's counsel alerted respondent to possible factual inaccuracies in: (1) respondent's Motion for Partial Summary Judgment, as supplemented; (2) declarations provided by Revenue Agent Catherine C. Brooks (RA Brooks); and (3) the Court's March 24, 2023 Order.

3. Respondent did not intend that statement to imply that was the first or only time petitioner's counsel raised concerns about factual assertions made by respondent in this case. Respondent acknowledges that on August 8, 2022, petitioner raised such concerns. Respondent further acknowledges that discovery requests sent by petitioner on August 24, 2022, October 7, 2022, and January 27, 2023, and correspondence petitioner sent on February 28, 2023, related to those concerns.

4. In light of these allegations, respondent's counsel undertook an investigation into the matter so he would be able to determine what, if any, remedial action was necessary, the first act of which was notifying the Court via the aforementioned Status Report.

5. Upon review of this matter following petitioner's counsel's contentions, respondent now agrees with petitioner that respondent's factual representations regarding July 16, 2016 as the date respondent complied with the requirements of section 6751(b)(1) for penalties under sections 6662(c), (d), (e), and (h) were incorrect. That is, when preparing Respondent's Motion and the Declaration of RA Brooks attached to Respondent's Motion (First Brooks Declaration), respondent's counsel and RA Brooks incorrectly used July 16, 2016 as the date respondent complied with the requirements of section 6751(b)(1) for penalties under sections 6662(c), (d), (e), and (h).

6. Respondent expresses his contrition and apologizes to the Court and to petitioner for this error and the inconvenience it has caused. As is explained below, notwithstanding these inaccuracies, respondent complied with the written supervisory approval requirement of section 6751(b)(1) for the penalties under sections 6662(c), (d), (e), and (h).

A. Respondent inadvertently alleged incorrect facts in Respondent's Motion.

7. In Respondent's Motion, respondent alleged that Revenue Agent Pamela Stafford's (RA Stafford) immediate supervisor, RA Brooks, personally approved the initial determination of penalties by first signing a Penalty Consideration Lead Sheet on July 16, 2016. Respondent's Motion, ¶ 3. The allegation was supported by the First Brooks Declaration, which was attached as Exhibit A to Respondent's Motion. RA Brooks stated that she “signed and approved [the Penalty Lead Sheet] on July 16, 2016, by typing the following language in the lower left-hand corner of the first page of the lead sheet in the 'Manager Approval:' section, '/s/ Catherine C Brooks-.'” Respondent's Motion, Ex. A, ¶ 3. The First Brooks Declaration was supported by the Penalty Lead Sheet, dated July 15, 2016, which was attached to it.

8. Respondent has now determined that RA Brooks did not sign the Penalty Lead Sheet, dated July 15, 2016, on July 16, 2016, as she believed and as she stated in the First Brooks Declaration (filed on August 11, 2022). Instead, email correspondence reveals that the typed signature on the Penalty Lead Sheet was typed by RA Brooks on February 10, 2017.

B. An accurate timeline of respondent's penalty approval establishes that respondent complied with the requirements of section 6751(b)(1).

9. On July 12, 2016, RA Stafford, the Revenue Agent assigned to examine the returns at issue, sent an email to her immediate supervisor, RA Brooks, to transmit a “NOPA for the penalties” RA Stafford proposed. The attachment to the email consisted of a document titled “NOPA # 5, F. 886-A Accuracy Related Penalty” that contained RA Stafford's writeup of the issues, facts, law, taxpayer's position, and conclusion related to the penalties she determined (Penalty Form 886-A). Penalty Form 886-A listed penalties under sections 6662(b)(1), (b)(2), and (b)(3), in the issues section and included further explanation of the penalties under sections 6662(c), (d), (e), and (h) in the law section.

10. On the same date, July 12, 2016, RA Brooks returned via email an edited copy of Penalty Form 886-A to RA Stafford. RA Brooks left the penalties under sections 6662(c), (d), (e), and (h) unchanged in Penalty Form 886-A after her review. In the email back to RA Stafford, RA Brooks responded: “Good job — I did change some of the verbiage to take out some of the somewhat inflammatory commentary.” A copy of the email chain and Penalty Form 886-A with marked edits by RA Brooks are attached collectively as Exhibit A.

11. The next day, on July 13, 2016, RA Stafford asked RA Brooks by email to sign a Form 5701, Notice of Proposed Adjustment, for penalties. On July 21, 2016, RA Brooks returned the electronically signed Form 5701, which listed on its face penalties under section 6662(b)(1), (b)(2), and (b)(3) for the period ending December 31, 2013, and penalties under sections 6662(b)(1) and (b)(2) for the period ending December 31, 2014. The list of penalties corresponds to the list in the issues section of Penalty Form 886-A and the Form 5701 also included the statement: “See attached Form 886-A.” A copy of the July 13-21, 2016 email chain and attached signed Form 5701 are attached as Exhibit B.

12. The Form 5701 and final version of Penalty Form 886-A are attached to the Declaration of RA Brooks in Support of First Supplement to Motion for Partial Summary Judgment (Second Brooks Declaration). The attachment is comprised of the Form 5701, electronically signed by RA Brooks on July 21, 2016, and the final version of Penalty Form 886-A, which had been reviewed, revised, and approved by RA Brooks on July 12, 2016, as described above.

13. On November 29, 2016, RA Brooks signed a Penalty Lead Sheet, dated July 15, 2016, that included penalties under sections 6662(c) and (d). The Penalty Lead Sheet signed November 29, 2016, is included in Exhibit A to Respondent's Motion.

14. On February 10, 2017, TEFRA Coordinator Tammy Chung sent an email to RA Stafford pointing out that the Penalty Lead Sheet signed by RA Brooks on November 29, 2016, did not list penalties under sections 6662(e) or (h).² Ms. Chung advised that if those penalties were to be included on the forthcoming Notice of Final Partnership Administrative Adjustment (FPAA), they would have to be included on a Penalty Lead Sheet. A copy of the email chain that includes the February 10, 2017 email from Ms. Chung to RA Stafford is attached as Exhibit C.

15. On February 10, 2017, RA Stafford forwarded Ms. Chung's email to RA Brooks. RA Stafford requested that RA Brooks sign a copy of the Penalty Lead Sheet that included penalties under section 6662(e) and (h). See Exhibit C.

16. Also on February 10, 2017, RA Brooks responded to RA Stafford's email, stating “HUGE oversight.”³ RA Brooks returned to RA Stafford a signed Penalty Lead Sheet, dated July 15, 2016, which included penalties under sections 6662(c), (d), (e), and (h). Ms. Brooks typed “/s/ Catherine C Brooks —” on the Penalty Lead Sheet to indicate her approval. This Penalty Lead Sheet, which included a typed date of “7/16/2016” at the bottom, is the Penalty Lead Sheet respondent incorrectly understood to have been signed by RA Brooks on July 16, 2016.

17. As stated above, this Penalty Lead Sheet was approved by RA Brooks on February 10, 2017, when she sent it to RA Stafford by email. As such, it follows that this Penalty Lead Sheet was not signed by RA Brooks on July 16, 2016. A copy of the Penalty Lead Sheet, signed by RA Brooks on February 10, 2017, which was attached to her email to RA Stafford, is attached as Exhibit D.⁴ See also Exhibit C.

C. Reconsideration is appropriate to correct the substantial error of fact in the Order.

18. “Generally, reconsideration under Rule 161 is intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced, by the exercise of due diligence, in the prior proceeding.” Turner v. Commissioner, 138 T.C. 306, 307 (2012); Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998). The Court has discretion to grant a motion for reconsideration but will not do so unless the moving party shows unusual circumstances or substantial error. Estate of Quick, 110 T.C. at 441; see also Vaughn v. Commissioner, 87 T.C. 164, 166-67 (1986).

19. The Court has granted motions for reconsideration to consider substantial errors in fact. See Vaughn, 87 T.C. at167-68 (granting a motion for reconsideration after the Court initially held that the taxpayer received proceeds from a sale under the terms of an escrow agreement because the Court erred in its analysis of the escrow agreement and, in fact, the agreement was never carried out).

20. Here, the Court should exercise its discretion because the Court's Order relies on a fact that is now known to be incorrect. RA Brooks did not sign the Penalty Lead Sheet on July 16, 2016, as originally alleged by respondent.

D. After reconsideration, the Court should determine that respondent complied with the requirements of section 6751(b)(1).

21. As discussed in the Notice of Supplemental Authority filed by respondent on November 30, 2022, and as determined by the Court in the March 24, 2023 Order, the authority of Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022), controls here. As the Court explained in the March 24, 2023, Order:

Under a literal application of the standard enunciated by the Eleventh Circuit in Kroner, supervisory approval could seemingly be secured at any moment before actual assessment of the tax, which has not yet occurred. See Kroner, 48 F.4th at 1279-81. Nevertheless, the Eleventh Circuit left open the possibility that supervisory approval in some cases might need to be secured sooner — before the supervisor “has lost the discretion to disapprove” assertion of the penalty. See id. at 1279, n.1; cf. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022) (treating supervisory approval as timely if secured before the penalty is assessed or “before the relevant supervisor loses discretion whether to approve the penalty assessment”), rev'g and remanding 154 T.C. 68 (2020); Chai v. Commissioner, 851 F.3d at 220 (concluding that supervisory approval must be obtained at a time when “the supervisor has the discretion to give or withhold it”).

22. Section 6751(b)(1) does not require written supervisory approval on any particular form, and it does not require any particular form of signature or even any signature at all. Palmolive Building Investors, LLC v. Commissioner, 152 T.C. 75 (2019), citing Deyo v. United States, 296 F.App'x 157, 159 (2d Cir. 2008); Belair Woods v. Commissioner, 154 T.C. 1, 16 (holding that the statute “mandate[s] only that the approval of the penalty assessment be 'in writing' and by a manager”).

23. In this case, respondent first met the requirements of section 6751(b)(1) on July 12, 2016, when RA Brooks reviewed, edited, and returned to RA Stafford her edited Penalty Form 886-A. As the Court explained in the March 24, 2023 Order, section 6751(b)(1) does not require approval to be indicated by any particular form of signature; rather, respondent need only show written evidence that timely supervisory approval was obtained. Therefore, RA Brooks' review and concurrence by email with RA Stafford's write-up of the penalties to be asserted in Penalty Form 886-A satisfied this requirement.

24. Even if RA Brooks' email of July 12, 2016, with attachment, had not satisfied the requirement, respondent next met the requirements of section 6751(b)(1) when the NOPA was digitally signed by RA Brooks on July 21, 2016, reflecting her approval of its contents, which included assertion of penalties under sections 6662(c), (d), (e), and (h), through the incorporated Form 886-A, which she had previously reviewed and approved on July 12, 2016.

25. Even in the absence of the July 12, 2016 email from RA Brooks and the July 21, 2016 NOPA digitally signed by RA Brooks, respondent still satisfied the requirements of section 6751(b)(1) when RA Brooks signed the Penalty Lead Sheet on February 10, 2017, which included penalties under sections 6662(c), (d), (e), and (h).

26. Under the authority of Kroner, approval by RA Brooks on February 10, 2017, was timely — the penalties had not yet been assessed, and Ms. Chung's email made clear that RA Brooks still had authority to approve or to disapprove of the penalties. See Exhibit B, page 2 (Ms. Chung made clear to RA Stafford that the FPAA would not include any penalties that were not on a Penalty Lead Sheet).

27. Although Respondent's Motion, as supplemented, and the First Brooks Declaration contained an incorrect statement about the Penalty Lead Sheet having been signed on July 16, 2016, respondent complied with section 6751(b)(1) by timely obtaining written supervisory approval of the penalties under sections 6662(c), (d), (e), and (h) on multiple occasions that all predated assessment and were during the time that RA Brooks had authority to approve or disapprove of the penalties. As such, the errors respondent made regarding his reliance on the July 16, 2016 date were harmless and do not affect the outcome of this matter.⁵

28.Attached as Exhibit E is a Declaration by RA Brooks wherein RA Brooks withdraws the prior affirmation of July 16, 2016 as the date she signed the Penalty Lead Sheet.

29. Respondent respectfully requests that the Court reconsider its incorrect findings in the March 24, 2023 Order, but still conclude that respondent met the requirements of section 6751(b)(1).

30. Petitioner objects to the granting of this motion.

WHEREFORE, respondent requests that this motion be granted.

DRITA TONUZI
Deputy Chief Counsel (Operations)
Internal Revenue Service

Date: April 19, 2023

By: SHANNON E. CRAFT
Associate Area Counsel
(Large Business & International)
Tax Court Bar No. LS0473
401 W. Peachtree St., NW
Suite 1400, Stop 1000-D
Atlanta, GA 30308-3539
Telephone: (470) 639-2185
Shannon.E.Craft@irscounsel.treas.gov

OF COUNSEL:
ROBIN GREENHOUSE
Division Counsel
(Large Business & International)
RICHARD A. RAPPAZZO
Area Counsel
(Large Business & International)