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Informal Discussion of Penalties Didn't Trigger Supervisor Approval Requirement

(Parker Tax Publishing April 2022)

The Tax Court held that an IRS revenue agent's statement during a conference call with a taxpayer that penalties were currently under discussion in connection with the IRS's denial of a deduction for the donation of a conservation easement was not a communication to the taxpayer of the "initial determination" of a penalty assessment which required supervisory approval under Code Sec. 6751(b)(1). The court held that 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, which in this case was the final partnership administrative adjustment. Oxbow Bend, LLC v. Comm'r, T.C. Memo. 2022-23.


In September 2014, Oxbow Bend, LLC (Oxbow) acquired roughly 133 acres of land in Elmore County, Alabama. On December 4, 2014, Oxbow granted to the National Wild Turkey Federation Research Foundation (NWT) a conservation easement over the land. Three weeks later, Oxbow donated a fee simple interest in the land to NWT. On its 2014 partnership return, Oxbow claimed a charitable contribution deduction of $12,375,000 for the donation of the easement. It also claimed a charitable contribution deduction of $4,125,000 for its donation of the fee simple interest. The IRS selected Oxbow's return for audit and in February 2017 assigned the case to Revenue Agent (RA) Pamela Stafford.

On November 1, 2018, RA Stafford and Christopher Pavilonis, an attorney in the IRS Office of Chief Counsel, participated in a telephone conference with Oxbow's representative to discuss "the current status of the examination." Catherine Brooks, RA Stafford's immediate supervisor, did not participate in the call. During the call, RA Stafford informed Oxbow's representative "what the adjustments would be" and indicated the "penalties that were currently under consideration." RA Stafford explained that, once she completed her work, she planned to recommend that the case be closed and a final partnership administrative adjustment (FPAA) issued. RA Stafford did not provide Oxbow's representative, in conjunction with the call, any document setting forth her recommendations. Nor did she ask Oxbow's representative to sign any document.

That same day RA Stafford prepared a penalty lead sheet. The document reflected her recommendation that penalties be asserted against Oxbow for substantial and gross valuation misstatements. RA Stafford took a few more steps before formally closing the examination. On November 5, 2018, she sent a draft notice of proposed adjustment (NOPA) to her manager for "approval/review." Over the next two days RA Stafford finished the NOPA, finalized her revenue agent report (RAR), and prepared a transmittal letter. On November 9, 2018, she met briefly with her manager about potential penalties. She continued to work on the case through November 13, 2018.

On February 11, 2019, RA Stafford digitally signed the draft penalty lead sheet and sent it to Brooks. Brooks signed the lead sheet that same day. Two months later, on April 10, 2019, the IRS issued the FPAA disallowing the charitable contribution deduction for the easement, reducing the deduction for the fee simple donation, and determining penalties. The IRS attached to the FPAA a copy of the penalty lead sheet as executed by Brooks. Oxbow challenged the FPAA in the Tax Court.

In a motion for partial summary judgment, Oxbow contended that the IRS failed to comply with Code Sec. 6751(b)(1), which provides that the IRS 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 the determination. In Palmolive Bldg. Inv'rs, LLC v. Comm'r, 152 T.C. 75 (2019), the Tax Court held that in a Tax Equity and Fiscal Responsibility Act (TEFRA) case such as the one at issue, supervisory approval generally must be obtained before the IRS issues an FPAA to the partnership. If supervisory approval is obtained by that date, then under Frost v. Comm'r, 154 T.C. 23 (2020), the partnership must establish that the approval was untimely, i.e., that there was a "formal communication" of the penalties before the proffered approval was secured. In Belair Woods, LLC v. Comm'r, 154 T.C. 1 (2020), the Tax Court held that 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. In Tribune Media Co. v. Comm'r, T.C. Memo. 2020-2, the Tax Court held that a "mere suggestion, proposal, or initial informal mention of" penalties does not reflect an examining agent's initial determination.

Oxbow argued that the penalty lead sheet manifested RA Stafford's initial determination to assert penalties, and this determination was communicated to Oxbow during the November 1, 2018, conference call - five months before Brooks approved the penalties by signing the lead sheet. In its own motion for partial summary judgment, the IRS asserted that it complied with Code Sec. 6751(b)(1) because Brooks approved the penalty lead sheet in writing two months before the definite decision to assert penalties was formally communicated to Oxbow in the FPAA.


The Tax Court granted the IRS's motion for summary judgment. The court held that, although RA Stafford mentioned the likelihood of penalties during the telephone conference, the first formal communication to Oxbow of penalties was contained in the FPAA, which did not occur until two months after Brooks approved RA Stafford's recommendation to assert penalties against Oxbow.

The court regarded the facts of this case as substantially similar to those in two prior cases: Excelsior Aggregates, LLC v. Comm'r, T.C. Memo. 2021-125, and Tribune Media. In Excelsior Aggregates, a conference call was held with the examining agent and the taxpayer's counsel during which the agent discussed the applicability of penalties and offered the taxpayer the opportunity to supply new information that might change her mind, such as the possible availability of defenses to the penalties. The Tax Court held that the agent was not required to secure her supervisor's approval for the penalties before participating in that call. Rather, the court held that the IRS had complied with Code Sec. 6751(b) because the "first formal communication" of penalties did not occur until the IRS issued the FPAA, which was mailed after the agent had secured written supervisory approval. In Tribune Media, the taxpayers asserted that the examining agent was required to obtain his supervisor's approval before discussing penalties at a meeting. That meeting, like the meeting in the instant case, included not only the examining agent but also an attorney from the IRS Office of Chief Counsel. During the meeting in Tribune Media, the Chief Counsel attorney informed the taxpayers' representatives that the IRS would apply a penalty "to any underpayment determined." The Tax Court held that this statement did not embody the "initial determination" of any penalty because the IRS had yet to issue a written communication purporting to determine a penalty with any sense of finality.

The Tax Court held that, like in Excelsior Aggregates and Tribune Media, in the instant case RA Stafford convened a status conference with the taxpayer's representative and informed him that she intended to recommend assertion of penalties. The court noted that when the call concluded, Oxbow's representative was apparently certain enough of RA Stafford's position that he did not make any supplemental submissions to her. However, the court said that it was undisputed that the first "formal written communication" of penalties did not occur until the IRS issued the FPAA five months later.

The court noted that Oxbow cited no case in which an informal, oral communication of an agent's penalty recommendations - without more - was deemed to constitute an initial determination requiring prior supervisory approval. The court rejected Oxbow's reliance on Beland v. Comm'r, 156 T.C. 80 (2021), a case in which the IRS examining agent presented the taxpayers with a revenue agent report (RAR) which included the agent's signature, a fraud penalty of a definite amount, and a signature box for the taxpayers to consent to the fraud penalty. During the closing conference in Beland, the agent told the taxpayers that if they did not sign the RAR, the IRS would issue a notice of deficiency. The Tax Court held in Beland that the RAR reflected the examining agent's initial determination because it evidenced a formal means of communicating to the taxpayer that the fraud penalty would be asserted. In the court's view, Oxbow's reliance on Beland was misplaced for several reasons. The court noted that RA Stafford did not provide Oxbow's representative - before, during, or immediately after the telephone call - with an RAR or other document determining any penalties. In terms of formality, the court said that a telephone conference was at the opposite end of the spectrum from the meeting in Beland, to which the taxpayers were formally summonsed under threat of legal sanctions. The court concluded that in this case, there was no document, and the events surrounding the telephone call - a status conference - did not formally communicate to Oxbow the IRS' decision to definitively assert penalties.

For a discussion of the penalty supervisory approval requirement, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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