The IRS met the supervisory approval requirements when it assessed penalties against Sand Valley after disallowing the company’s $35.38 million conservation easement deduction, the Tax Court ruled. (Sand Valley, T.C. Memo. 2025-74)
Deduction Claim
Sand Valley, a Georgia limited liability company treated as a TEFRA partnership for federal income tax purposes, acquired a tract of land in Jefferson County and granted a conservation easement over the property in December 2016.
The company claimed a $35.38 million charitable contribution deduction for the donation on its 2016 Form 1065, U.S. Return of Partnership Income, which the IRS later examined.
Penalty Approval Process
The case was assigned to Revenue Agent Anthony Bryant, who proposed disallowing the charitable contribution deduction in toto because Sand Valley had “offered no credible evidence for the value of the conservation easement and therefore … failed to establish a value greater than $0.”
He also recommended various penalties against the company, as reflected on a draft Form 886-A, Explanation of Items, and a civil penalty approval he prepared. In January 2020, Bryant’s immediate supervisor Margaret McCarter approved the penalties.
Because Sand Valley had not agreed to an extension of the limitations period on assessment, Bryant submitted his draft documents to IRS chief counsel for review without waiting for the appraisal review from an IRS in-house appraiser.
He also asked Olivia Rembach, senior counsel from the IRS Office of Chief Counsel, whether he could proceed with his recommended position before receiving the final appraisal report. Chief Counsel approved but told Bryant to forward a revised report if the appraisal placed a positive value on the easement.
Bryant then prepared an updated Form 886-A recommending penalties, which McCarter approved a second time in February 2020 by digitally signing the civil penalty approval form.
In March 2020, Bryant received the appraisal review determining zero value for the easement, as he had concluded. In July 2020, the IRS issued Sand Valley a Notice of Final Partnership Administrative Adjustment (FPAA) disallowing the deduction and determining the penalties.
Sand Valley’s tax matters partner Sand Valley Investors, LLC petitioned the Tax Court for readjustment of partnership items. The IRS moved for partial summary judgment, contending it properly obtained supervisory approval for all penalties at issue.
Court Upholds IRS Compliance
The Tax Court granted the IRS’ motion, ruling that the IRS complied with supervisory approval requirements under IRC § 6751(b)(1).
This statute is satisfied “so long as a supervisor approves an initial determination of a penalty assessment before [the IRS] assesses those penalties,” the court said. Following 11th Circuit precedent, the court further noted that supervisory approval must be secured before the supervisor “has lost the discretion to disapprove” assertion of the penalty.
Here, the court found that Bryant made the initial determination to assert the penalties, as evidenced by the civil penalty approval form and the penalty lead sheet he prepared. It added that McCarter timely approved the penalties in writing, when the examination remained at a stage where she had discretion to approve or disapprove the recommendations.
The court also rejected Sand Valley’s “frivolous” argument that it was McCarter who made the initial determination.
The company cited an October 2019 email McCarter sent to her group telling them they needed to include “all specific code sections regarding penalties” on any Form 4605-A they prepared and to double check the information for accuracy. The court, however, said that McCarter’s email was merely technical advice to her team, not a directive to assert a particular penalty against a taxpayer.
Sand Valley also argued that Rembach or someone else in the Office of Chief Counsel made the initial determination since they permitted Bryant to proceed without an appraisal.
The court disagreed, pointing out that when IRS counsel received the FPAA package in January 2020, Bryant had already proposed valuing the easement at zero, recommended the penalties, and received McCarter’s approval. It said the Chief Counsel attorneys’ advice that Bryant could proceed without an appraisal was “purely technical in nature, designed to ensure that the FPAA met all formal requirements.”
The court also denied Sand Valley’s request to defer decision pending further discovery, finding it irrelevant.
For more information on IRS supervisory approval requirements for penalty assessments, see Checkpoint’s Federal Tax Coordinator 2d ¶ V-1601.1.
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