For tax professionals representing clients in partnership proceedings, the procedural requirements of Internal Revenue Code Section 6751(b) remain a critical area of litigation. A recent Order from the United States Tax Court in Palmwood Holdings, LLC v. Commissioner, Docket No. 17489-23, provides significant clarity regarding the "initial determination" of penalties asserted for the first time in an answer. The Court granted the Commissioner’s motion for partial summary judgment, firmly rejecting the taxpayer’s attempt to expand discovery based on speculative theories regarding IRS internal communications.

Factual Background and Procedural History

The underlying substantive tax issue involves a syndicated conservation easement transaction. In April 2016, a distinct entity purchased approximately 840 acres in Louisiana for approximately $2.5 million. Through a series of transfers, Palmwood Holdings, LLC (Palmwood) acquired 100.6 acres of this property in November 2018. In December 2018, Palmwood donated a conservation easement over 96.6 acres and claimed a non-cash charitable contribution deduction of $44,937,000 on its 2018 tax return.

Following an examination, the IRS issued a notice of final partnership adjustment (FPA) disallowing the deduction and asserting penalties under Section 6662(c), (d), (e), and (h). Palmwood’s partnership representative, Palmwood Investments, LLC (Investments), petitioned the Tax Court. Subsequent to the petition, the Commissioner asserted a civil fraud penalty under Section 6663(a) in his answer.

The Commissioner moved for partial summary judgment regarding compliance with Section 6751(b), contending that the timely supervisory approval was secured for the penalties at issue. While Investments conceded that the IRS satisfied the requirements for the penalties in the FPA, it contested the supervisory approval regarding the civil fraud penalty asserted in the answer.

The Taxpayer’s Request for Relief

Investments opposed the summary judgment motion, arguing that genuine issues of material fact remained regarding the fraud penalty. Specifically, Investments argued that there was "reason to believe that [the Commissioner’s] assertion regarding the initial determination is not true". This argument relied heavily on a 2021 email related to a different taxpayer and case, which Investments claimed suggested that the IRS attorney asserting the penalty may have made false representations to the Court.

Based on this speculation, Investments requested additional discovery to investigate the veracity of the IRS counsel’s declarations regarding who made the initial penalty determination.

Court’s Analysis of the Law

The Court analyzed the motion under the standard of Rule 121(a), noting that summary judgment is appropriate "if there is no genuine dispute of material fact and a decision may be rendered as a matter of law".

The core legal analysis focused on Section 6751(b)(1), which mandates that "[n]o penalty under this title 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".

Citing Belair Woods, LLC v. Commissioner, the Court reiterated that an "initial determination" is typically the document by which the IRS "formally notifie[s] [the taxpayer] that [it] ha[s] completed its work and . . . ha[s] made a definite decision to assert penalties". In the specific context of litigation where a penalty is raised after the FPA, "the initial determination can take the form of an answer asserting penalties".

Because an appeal in this case would lie with the Eighth Circuit, which has not yet addressed compliance with Section 6751(b), the Tax Court applied its own precedent pursuant to the Golsen rule.

Application of Law to the Facts

The Court found that the record "conclusively establishes that the requirements of section 6751(b) were met". The Commissioner’s answer explicitly identified Richard Wooldridge (Commissioner’s counsel) as the individual who made the initial determination and represented that his immediate supervisors, Melissa Lang and Alexandra Nicholaides, personally approved the penalty.

The Court noted that "[a]ll three of these attorneys signed the answer asserting the fraud penalty". Additionally, the IRS submitted declarations from Wooldridge and his supervisors stating that "Mses. Lang and Nicholaides personally approved, in writing, the section 6663 fraud penalty by signing the answer, which raises the penalty in the first instance".

The Court rejected Investments’ request for discovery as meritless. The Judge characterized the taxpayer’s reliance on a 2021 email involving a different taxpayer as "wildly speculating" that IRS attorneys made false representations. The Court emphasized that the "’initial determination’ of a penalty assessment is a formal action directed to a particular taxpayer" and that the term "determination" denotes an action "with a high degree of concreteness and formality".

Consequently, the Court held that even if prior communications occurred, they are irrelevant to the statutory requirement. The Court stated, "We have time and again rejected the argument that penalties in fact recommended by the relevant IRS official were in substance determined by someone else". The signature on the pleading by the determining attorney and the supervisors satisfied the statute.

Conclusion and Judicial Admonition

The Tax Court granted the Commissioner’s motion for partial summary judgment. In doing so, Chief Judge Urda issued a stern warning to the taxpayer’s counsel regarding the baseless accusations of untruthfulness leveled against IRS counsel.

The Court admonished: "accusing officers of the Court of untruthfulness is a very serious accusation and requires strong support". The Judge described the taxpayer’s motion as an "ill-conceived attempt to obtain discovery on a point that our precedent has repeatedly shown to be irrelevant" and warned that "[c]ounsel who engage in such tactics risk losing their credibility with, and the patience of, the Court".

Prepared with assistance from NotebookLM.