Tax Court in Order Denying Petitioner's Hail Mary § 6751(b) Pass Cautions Counsel About Speculative Claims, Particularly Those Impugning IRS Counsel (2/3/26)

I write again on another “Hail Mary” attempt by a taxpayer to get out of penalty to avoid the consequences of their own conduct/misconduct. The setting is the ubiquitous issue in penalty cases as to whether the IRS foot-faulted in the written supervisor approval requirement in § 6751(b). Not surprisingly, the setting is a conservation easement case with what appears to have been an excessive valuation claim—$44,937,000. (It is not clear from the Order whether it is a syndicated conservation easement, but that makes no difference for excessive valuation claims.) Usually, in those cases, a fair inference is that the promoters and those reporting the claim knew the valuation was excessive and thereby intended to report fraudulently within the meaning of § 6663 civil fraud penalty.

In Palmwood Holdings, LLC v. Commissioner (T.C. No. 17489-23, here, Order at # 54 dated 2/3/26), the IRS asserted the civil fraud penalty, § 6663, in the Answer to the Petition. Judge Urda briskly goes through the relevant facts that compel rejection of the petitioner’s Hail Mary pass. Judge Urda rejects petitioner’s wild speculations about some of the proffered summary judgment record. Judge Urda concludes (Slip Op.  4-5) with this cautionary advice directed to the tax matters partner's (Investment's) Counsel):

          We have time and again rejected the argument that penalties in fact [*5] recommended by the relevant IRS official were in substance determined by someone else. See, e.g., Sand Valley Holdings, LLC v. Commissioner, T.C. Memo. 2025-74, at *7–8; Cattail Holdings, LLC v. Commissioner, T.C. Memo. 2023-17, at *9–11. The “‘initial determination’ of a penalty assessment” is a formal action directed to a particular taxpayer. See Frost v. Commissioner, 154 T.C. 23, 32 (2020) (quoting Belair Woods, 154 T.C. at 15). The word “determination” has “an established meaning in the tax context” and denotes an action “with a high degree of concreteness and formality.” Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *6 (quoting Belair Woods, 154 T.C. at 15). The record before us conclusively establishes that Mr. Wooldridge made the “initial determination” to assert the fraud penalty set forth in that pleading. Communications three years prior, even if they involved this case, would be neither here nor there.

          Having dispatched Investments’ argument as a legal matter, we pause to remind Investments’ counsel that accusing officers of the Court of untruthfulness is a very serious accusation and requires strong support. In this case, the accusation (“Investments has reason to believe that [the Commissioner’s] assertion regarding the initial determination is not true.”) was leveled in an ill-conceived attempt to obtain discovery on a point that our precedent has repeatedly shown to be irrelevant. Worse yet, the purported smoking gun supporting this accusation—an email from three years prior involving a different taxpayer, a different property, and different IRS personnel—has nary a connection to this case. Counsel who engage in such tactics risk losing their credibility with, and the patience of, the Court.

That, of course, is good advice for all attorneys in these cases. I wonder if it can extend to the bullshit valuations Petitioners often proffer to support the claimed conservation easement deduction. See Tax Court Rejects a Bullshit Tax Shelter False Valuation Claim with Warning of Sanctions for Taxpayers, their Counsel, and Expert Witness Proffering the Bullshit (Federal Tax Procedure Blog 7/16/25; 9/10/25), here.

Added 2/3/26 12:15pm: Shortly after I posted this blog, Lew Taishoff reported on this Order. “I WALK THE LINE” (Taishoff Law 2/3/26), here. He concludes:

Taishoff says that the line between zealous advocacy and “such tactics” can be a fine one. While the “zealous advocacy” of the old Code of Professional Responsibility has been superseded by “competent representation” in ABA Model Rule 1.1, an attorney must make any honestly colorable argument, unless vetoed by the client.

All attorneys walk the line.

I have only a quibble with Taishoff’s conclusion that there is a fine line between “zealous advocacy and such tactics.” I guess his point is that, in pursuit of zealous advocacy, one may not perceive the fine line and unintentionally cross it. Assuming the relevant facts as recounted by Judge Urda, I am not sure the relevant facts presented the issue of a fine line.