Tax litigation: The week of August 22, 2022 to August 26, 2022
Warner Enterprises, Inc. v. Comm’r, TC Memo. 2022-85 | August 22, 2022 | Buch, J. | Dekt. No. 17163-19L.
Short summary: This collection case deals with issues presented in a motion for summary judgment by the IRS, primarily asserting that the taxpayer Warner Enterprises, Inc. (Warner) was not permitted to challenge the IRS’ compliance with statutory recovery procedures in a final partnership procedure. Warner was a partner in AD Investment 2000 Fund, LLC (the Partnership). The IRS has issued a notice of final administrative adjustment to the partnership for the partnership’s 2000 tax year; partnership-level decisions, including penalties. These rulings went to the Tax Court and neither partner raised the issue of whether the IRS had complied with the requirement to obtain a supervisor’s approval for a penalty. See AD Inv. 2000 Fund LLC v. Commissioner, Memo TC. 2016-226, cancellation and replacement CT memo. 2015-223. Thus, the IRS assessed and began collecting the tax and penalties resulting from the partnership-level proceedings. Warner received a Notice of Filing of Federal Tax Lien and a Notice of Intent to Levy from which he requested a collection hearing with the IRS Appeals Office. Warner disputed its liability, alleging that it had not received notice of the defect of the affected items. Warner also alleged that the IRS failed to comply with the supervisory approval requirement and demanded proof of compliance. But, the settlement agent did not provide any document proving his approval. The IRS sent Warner a Notice of Determination supporting the lien filing and proposed levy. Warner filed a timely motion with the Tax Court alleging that the IRS erred in preventing Warner from raising the failure to follow assessment procedures as an issue.
Has the IRS demonstrated, in law, that the Settlement Agent is not required to prove compliance with the Valuation Determination and Supervision Approval issues because the Court of had already conclusively determined the applicability of the penalties?
Yes, the IRS has proven its judgment on the matter. Warner did not contest its status as a party to the proceedings at the partnership level. Since compliance with Section 6751(b) (the collection procedure then applicable in Tefra proceeding) must be raised in a partnership-level proceeding, not in a partner’s subsequent collection proceeding, summary judgment for the IRS was in order.
Main points of law:
Summary judgment. A party may seek summary judgment regarding any or all of the legal issues in a controversy. Summary judgment is appropriate where there is no genuine dispute of a material fact and a decision can be made as a matter of law. Rule 121(a)-(b); Sundstrand Corp. vs. Commissioner, 98 TC 518, 520 (1992), affirmed, 17 F.3d 965 (7th Cir. 1994). The non-moving party cannot rely on mere allegations or denials in the pleadings but must set out specific facts demonstrating a genuine dispute. Rule 121(d).
Note on Tefra Repeal. The IRS followed the Partnership’s Unified Audit and Dispute Procedures under the Tax Fairness and Accountability Act of 1982 (TEFRA), codified at Sections 6221 through 6234 and repealed for returns filed for taxation years of the partnership beginning after December 31, 2017.
Tefra Procedure. TEFRA governs the adjustment of any Partnership Item and the applicability of any penalties related to the adjustment of any Partnership Item. See 26 USC § 6221. Partnership-level penalty determinations “include all legal and factual determinations underlying the determination of any penalty, tax addition, or additional amount, other than partner-level defenses.” Treasures. Reg. § 301.6221-1(c). Partnerships do not pay income tax; partners do. See 26 USC § 701. All partners are deemed to be parties to a company-level proceeding and bound by its outcome. See id. at §§ 6226(vs). “[T]he characteristic of a partnership element is that it » is common to all the partners. Grigoraci c. CommissionerTC Memo 2002-202, 84 TCM (CCH) 186, 189.
Partnership-level penalty determinations “include all legal and factual determinations that underlie the determination of any penalty, tax addition, or additional amount, other than partner-level defenses.” Reg. § 301.6221-1(vs). Section 6751(b)(1) provides that the IRS Commissioner may not impose a penalty “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the person making that decision”.
IRS compliance with section 6751(b) is a partnership-level matter, and the burden of addressing it rests with the participating partners, not the IRS. Partners may only elevate partner-level defenses to sanctions in subsequent partner-level proceedings. Treasures. Reg. § 301.6221-1(d).
Res Judicata. Under this doctrine, a taxpayer cannot challenge its underlying liability in collection proceedings after a court has issued a final decision for the tax year concerned: “[I]If an action for liability or non-responsibility relating to a given tax year is contested, the judgment on the merits has the authority of res judicata on any subsequent proceedings relating to the same action and the same tax year. Newstat v. Commissioner, Memo TC. 2004-208, 88 TCM (CCH) 254, 260 (citing Commissioner v. Sunnen333 U.S. 591, 598 (1948)), supplemented byC. Note 2005-262. Chapter 6330(c)(4) limits the issues taxpayers can raise at a collection hearing. Section 6330(c)(2)(B) prevents a taxpayer from challenging the underlying liability if the person has received a notice of deficiency or otherwise had an opportunity to challenge that liability.
Verification requirement. The adjudication officer conducting a recovery hearing must verify “that the requirements of any applicable law or administrative procedure have been met.” 26 USC § 6330(c)(1). But, where the Tax Court has already rendered a decision and issued a decision determining the applicability of the penalties, the administrative settlement officer need only determine that the penalty was properly imposed, but did not no need to review the Court’s underlying decision. See Rockafellor v. Commissioner, Memo TC. 2019-160 (providing a potential exception in case of fraud, embezzlement or misrepresentation of fact).
Insight: This opinion illustrates a key objective of Tefra tax protocol. Allowing partner-level compliance review would defeat TEFRA’s objective of avoiding duplicative procedures on a matter that applies equally to all partners. The proper place to raise compliance with Section 6751(b) is in a partnership-level proceeding. For Warner, there was a binding decision from the previous procedure at the level of the partnership as to the applicability of the sanctions. A partnership-level defense against sanctions must have been raised or waived in this proceeding.[View source.]