Mossy Flats Property, LLC v. Commissioner

$48 Million Easement Case Hits Penalty Roadblock

At stake is a staggering $48.1 million charitable contribution deduction tied to a conservation easement donation, and the IRS's assertion of over $7 million in penalties. The Tax Court has granted the IRS's motion for partial summary judgment regarding supervisory approval of those penalties under Section 6751(b). Section 6751(b)(1) mandates that the initial determination of a penalty assessment must be personally approved in writing by the immediate supervisor of the individual making that determination. The court rejected the taxpayer's argument that ambiguities existed regarding the identity of the relevant supervisor, preventing them from invalidating the penalties on procedural grounds.

The Deduction and the Audit Trail

As the previous section discussed, the Tax Court is considering the IRS's motion for partial summary judgment regarding supervisory approval of penalties under Section 6751(b). Section 6751(b)(1) mandates that the initial determination of a penalty assessment must be personally approved in writing by the immediate supervisor of the individual making that determination. The court rejected the taxpayer's argument that ambiguities existed regarding the identity of the relevant supervisor, preventing them from invalidating the penalties on procedural grounds.

The facts began in 2018 when SRC Property Investors, LLC (SRC) acquired real property in Jefferson Davis Parish, Louisiana. In October 2019, SRC contributed approximately 206.3 acres of that property to Mossy Flats Property, LLC (Mossy Flats) in exchange for a one-percent membership interest. Then, in December 2019, Mossy Flats granted a conservation easement on 201.3 acres of the property to the Barn Group Land Trust, Inc. On its 2019 Form 1065, U.S. Return of Partnership Income, Mossy Flats claimed a charitable contribution deduction of $48,181,000 related to the donation of the conservation easement.

The IRS selected the 2019 Form 1065 for examination. Revenue Agent (RA) Henry J. Macauley was assigned as the examiner. On July 31, 2023, the IRS issued to Mossy Flats Letter 5892, Notice of Proposed Partnership Adjustment (NOPPA), proposing adjustments that included disallowance of the charitable contribution deduction. The NOPPA also included an imputed underpayment of $17,826,970, and penalties under sections 6662 and 6662A totaling $7,104,148. Section 6662 imposes an accuracy-related penalty of 20% on underpayments of tax. The NOPPA was the first formal communication to the petitioner regarding these penalties. Crucially, Supervisory Revenue Agent (SRA) Breece signed the penalty lead sheet approving the penalties on April 2, 2023.

Petitioner's Argument: The Case of the Missing Supervisor

The petitioner, challenging the accuracy-related penalties under Section 6662, argued that a genuine dispute of material fact existed regarding Supervisory Revenue Agent (SRA) Breece's status as RA Macauley's "immediate supervisor" on April 2, 2023, the date she approved the penalties. Section 6662 imposes an accuracy-related penalty of 20% on underpayments of tax. The petitioner asserted that the IRS had not met its burden of demonstrating proper supervisory approval under Section 6751(b). Section 6751(b)(1) mandates that no penalty 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.

To cast doubt on SRA Breece's supervisory role, the petitioner highlighted three key pieces of evidence. First, while RA Macauley's activity record listed several managers, including SRA Breece, it didn't identify her as "Team Manager" until the entry for April 12, 2023—ten days after she signed the penalty approval form. Furthermore, the activity record was silent regarding her role on the specific date of approval. Second, the petitioner pointed to a "team list" generated on July 18, 2024, attached to RA Macauley’s declaration, that identified a different supervisor, SRA Johnson, as RA Macauley’s immediate supervisor.

Finally, the petitioner launched an evidentiary challenge, arguing that the sworn declarations from RA Macauley and SRA Breece were self-serving and inadmissible hearsay under Tax Court Rule 121(c)(4) and Rule 143(a). The petitioner contended that these declarations were "out-of-court statements offered for the truth of the matter asserted" and, therefore, inadmissible under Rules 801 and 802 of the Federal Rules of Evidence (FRE).

Court's Analysis: Speculation Cannot Beat Signatures

The petitioner argued that Revenue Agent (RA) Macauley had multiple supervisors throughout the examination, and that Supervisor Revenue Agent (SRA) Breece appeared in activity records only ten days after signing the penalty approval form. Judge Ronald L. Buch emphasized that changing supervisors is a "fact of life" within the IRS, citing Belair Woods, LLC v. Commissioner, 154 T.C. 1, 17 (2020). Having a different supervisor at various times is inconsequential if the correct supervisor signed the penalty approval form when required.

The court noted that the IRS met its burden under Section 6751(b)(1), which requires written supervisory approval of penalties. The Tax Court has repeatedly held that a supervisor's signature on a penalty approval form, by itself, satisfies this requirement.

Further, Judge Buch found the IRS's evidence persuasive. SRA Breece’s signature appeared on the penalty approval form, with her title listed as “Team Manager – Group 1244.” Both RA Macauley and SRA Breece averred under penalty of perjury that SRA Breece was RA Macauley’s immediate supervisor on April 2, 2023.

The court also addressed the petitioner's evidentiary challenges. The petitioner argued that the sworn declarations from RA Macauley and SRA Breece were inadmissible hearsay. The court dismissed this argument, noting that the declarations appeared entirely consistent with Tax Court Rule 121(c)(4), which governs declarations used in summary judgment motions.

Judge Buch explained that IRS records generally are admissible as business records under Federal Rule of Evidence (FRE) 803(6). FRE 803(6) allows admission of records of regularly conducted activity if a record was made at or near the time of the event by someone with knowledge; the record was kept in the course of a regularly conducted business activity; making the record was a regular practice; and these conditions are shown by the testimony of the custodian or another qualified witness. Declarations of IRS employees prepared in the course of litigation are frequently admitted as evidence to authenticate IRS records.

The court concluded that the petitioner offered "little to support its position" besides dismissing the declarations as “self-serving." Judge Buch stated that "such speculation is not enough to establish a genuine dispute of material fact," citing Jefferson Prop. Holdings, LLC v. Commissioner, T.C. Memo. 2025-75, at *7.

Impact: The High Bar for 6751(b) Challenges

This opinion reinforces that challenging Section 6751(b) requires more than pointing out gaps in activity logs or personnel changes. Section 6751(b)(1) states that penalties cannot be assessed unless the initial determination is personally approved in writing by the immediate supervisor of the individual making the determination. If the IRS produces a signed penalty approval form and declarations, the taxpayer needs "specific facts"—not theories—to survive summary judgment. This closes off a common avenue of procedural attack in high-dollar easement cases, particularly those involving the 40% penalty for gross valuation misstatements under Section 6662(h), which applies when the claimed value of property is 200% or more of its correct value.