Mossy Flats Property, LLC v. Commissioner of Internal Revenue: Supervisory Approval Under Section 6751(b)

The $25 Million Penalty Battle: IRS Supervisory Approval Under Scrutiny

The stakes could not have been higher when the U.S. Tax Court granted the IRS’s motion for partial summary judgment on supervisory approval in Mossy Flats Property, LLC, a case that could redefine how the agency polices its own penalty procedures. At issue was a staggering $24.9 million in penalties; $17.8 million in imputed underpayment under Section 6225 of the Internal Revenue Code, which imposes a 40.8% tax on partnership adjustments at the highest individual rate, and an additional $7.1 million in accuracy-related penalties under Section 6662(h) for gross valuation misstatements. The court’s ruling underscored the Tax Court’s willingness to wield its judicial power over the IRS, particularly in enforcing Section 6751(b), which requires written supervisory approval before penalties can be assessed.

This case is part of a broader crackdown by the IRS on conservation easement deductions, a tax strategy that has drawn intense scrutiny for its potential abuse. The Tax Court’s decision to side with the IRS on supervisory approval sends a clear message: the court will not hesitate to police procedural missteps by the agency, even in high-stakes disputes involving millions of dollars. For taxpayers and practitioners, the ruling serves as a warning that the Tax Court is actively asserting its authority to ensure the IRS adheres to its own rules; no matter the size of the penalty at stake.

Conservation Easement Timeline: Key Events

In 2018, SRC Property Investors, LLC (SRC) acquired 206.3 acres of undeveloped land in Jefferson Davis Parish, Louisiana. By October 2019, SRC transferred the property to Mossy Flats Property, LLC (Mossy Flats), a Missouri partnership structured under the Bipartisan Budget Act of 2015 (BBA). In December 2019, Mossy Flats granted a conservation easement on 201.3 acres to the Barn Group Land Trust, Inc., a qualified organization under Section 170(h), and claimed a $48,181,000 charitable contribution deduction based on an appraisal.

The IRS selected Mossy Flats’ 2019 return for examination. On July 31, 2023, the IRS issued a Notice of Proposed Partnership Adjustment (NOPPA), proposing:

• Full disallowance of the $48,181,000 deduction;
• An imputed underpayment of $17,826,970 under Section 6225; and
• Accuracy-related penalties totaling $7,104,148 under Sections 6662 and 6662A.

The NOPPA was the first formal communication of penalties, without contemporaneous supervisory approval documentation. In May 2024, the IRS issued a Notice of Final Partnership Adjustment (FPA), reaffirming the disallowance and penalties. Mossy Flats petitioned the Tax Court, alleging failure to comply with Section 6751(b)'s supervisory approval requirement.

Penalty Approval Dispute: Substance vs. Form

Mossy Flats challenged the IRS’s penalty approval process under Section 6751(b), which requires written supervisory approval before the first formal penalty communication. The IRS countered with a penalty approval form signed by Supervisory Revenue Agent (SRA) Andrea Breece on April 2, 2023, and sworn declarations from SRA Breece and Revenue Agent (RA) Macauley attesting to her supervisory role.

The Petitioner argued SRA Breece was not RA Macauley’s immediate supervisor on April 2, 2023, citing:

1. RA Macauley’s activity record listing multiple managers without clear hierarchy;
2. SRA Breece’s designation as “Team Manager” in the record only on April 12, 2023;
3. A July 2024 team list naming SRA Steven W. Johnson as RA Macauley’s supervisor.

The Petitioner also claimed the declarations were self-serving hearsay. The IRS dismissed these objections, asserting that IRS organizational fluidity (e.g., reassignments) does not invalidate prior approvals and that the declarations were admissible business records.

Section 6751(b): The Legal Battle Over IRS Penalty Procedures

The IRS’s burden to prove compliance with § 6751(b) is deceptively straightforward; yet the Tax Court’s interpretation of the statute has become a battleground for penalty defenses. Enacted as part of the IRS Restructuring and Reform Act of 1998, § 6751(b)(1) imposes a critical procedural hurdle: "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." The provision was designed to prevent arbitrary penalty imposition by low-level agents, requiring managerial oversight before any penalty becomes final. The statute’s text is sparse, but its enforcement has spawned a thicket of litigation over what constitutes an "immediate supervisor," the timing of approval, and the sufficiency of documentary evidence.

The IRS carries the initial burden of production to show compliance with § 6751(b), but once it introduces evidence; such as a penalty approval form or sworn declarations; the burden shifts to the taxpayer to disprove compliance. This allocation of proof is pivotal: the Tax Court has repeatedly held that the IRS need not "prove a negative" by eliminating every possible alternative explanation for the absence of contemporaneous documentation. Instead, the taxpayer must present specific facts creating a genuine dispute of material fact to survive summary judgment. The court’s approach reflects its pragmatic view of IRS organizational fluidity, where job titles and reporting structures evolve during examinations; a reality the Tax Court has repeatedly acknowledged as "a fact of life in the IRS."

In this case, the IRS met its burden by submitting the penalty approval form signed by SRA Breece, listing her title as "Team Manager – Group 1244," along with sworn declarations from both SRA Breece and RA Macauley averring that SRA Breece was RA Macauley’s immediate supervisor on April 2, 2023. The court rejected the taxpayer’s objections to these declarations as inadmissible hearsay, finding they satisfied the Federal Rules of Evidence’s business records exception under Fed. R. Evid. 803(6). The declarations were not offered for their truth but to authenticate the IRS’s internal records, a distinction the court has consistently upheld in penalty approval disputes. The Tax Court has long treated IRS penalty approval forms as self-authenticating business records, a position reinforced in cases like Raifman v. Commissioner, where the court refused to "look behind" the civil penalty approval form absent clear evidence of procedural defect.

The taxpayer’s arguments centered on three alleged inconsistencies: RA Macauley’s activity record listing multiple managers, SRA Breece’s later designation as "Team Manager" in an April 12, 2023 entry, and a July 2024 team list identifying SRA Johnson as RA Macauley’s supervisor. The court dismissed these objections as legally irrelevant. First, it noted that organizational changes during examinations are common, and prior supervisory relationships do not negate a contemporaneous approval by the individual who was, in fact, the immediate supervisor at the time. Second, the April 12, 2023 entry corroborated rather than undermined SRA Breece’s supervisory role, as it aligned with her contemporaneous approval of the penalty. Third, the July 2024 team list was post hoc documentation that could not retroactively alter the supervisory structure in April 2023. The court’s reasoning underscores its deference to IRS organizational realities, treating supervisory titles as functional rather than rigidly formalistic.

The court’s analysis also rejected the taxpayer’s attempt to introduce extrinsic evidence challenging the authenticity of the approval process. By relying on the sworn declarations and the penalty approval form, the IRS satisfied its burden under § 6751(b)(1) without needing to prove the absence of alternative supervisory structures. The Tax Court has consistently held that a group manager’s signature on a penalty approval form, standing alone, is sufficient to meet the statutory requirement, as seen in Sparta Pink and Belair Woods. This approach aligns with the statute’s purpose: ensuring meaningful managerial oversight rather than imposing an impossible documentary standard. The court’s refusal to "probe behind" the approval form reflects its pragmatic stance that substance, not form, governs compliance with § 6751(b).

Finally, the court addressed the taxpayer’s hearsay objection to the declarations, finding they were admissible under Rules 121(c)(4) and 143(a). The declarations were made on personal knowledge, set forth facts admissible in evidence, and demonstrated the declarants’ competence to testify. The court’s treatment of these declarations as probative evidence of compliance; rather than mere hearsay; highlights its willingness to accept IRS internal documentation as reliable, provided it meets the foundational requirements for business records. This stance reinforces the Tax Court’s role as a gatekeeper of procedural fairness, ensuring that taxpayers cannot derail penalty approvals through technical evidentiary challenges when the IRS has met its minimal burden of production.

Why the Court Sided with the IRS: Key Takeaways

The Tax Court’s ruling in Mossy Flats LLC v. Commissioner (T.C. Memo. 2026-XX) underscores the judiciary’s deference to IRS procedural compliance under Section 6751(b) while reinforcing the court’s gatekeeping role over evidentiary challenges. The decision hinged on the court’s willingness to exercise its authority to streamline penalty disputes when the IRS meets its minimal burden of production.

First, the court held that the petitioner failed to raise a genuine dispute of material fact regarding the supervisory approval of penalties. The IRS introduced a penalty approval form signed by SRA Breece, listing her title as “Team Manager – Group 1244.” The petitioner’s argument that SRA Breece’s presence in the activity record was limited to a single date; ten days after the approval; was deemed insufficient to create doubt, as the court relied on precedent such as Belair Woods, LLC v. Commissioner (154 T.C. 1, 17 (2020)), which dismissed similar challenges as “inconsequential” given the fluidity of IRS staffing. This ruling affirms the court’s power to reject speculative evidentiary attacks on IRS documentation when the agency has met its foundational requirements.

Second, the court found that SRA Breece’s signature and title on the penalty approval form were sufficient to satisfy Section 6751(b)(1). The petitioner’s contention that the form lacked corroborating evidence was rejected, as the court reiterated its longstanding position that a group manager’s signature alone; without further evidentiary excavation; meets the statutory threshold. Citing Sparta Pink, LLC v. Commissioner (T.C. Memo. 2022-88), the court emphasized that Section 6751(b) does not require a “look behind” the approval form, a stance that limits taxpayer discovery into IRS internal processes and consolidates the court’s role as the final arbiter of procedural compliance.

Third, the court admitted the declarations of SRA Breece and RA Macauley as probative evidence under the Federal Rules of Evidence (Fed. R. Evid. 803(6)). The petitioner’s attempt to dismiss these declarations as “self-serving” was dismissed as mere speculation, with the court noting that taxpayers cannot derail penalty approvals through technical evidentiary challenges when the IRS has met its minimal burden. This decision expands the court’s acceptance of IRS internal documentation as reliable, provided it adheres to foundational requirements.

Finally, the court rejected the petitioner’s argument that the activity record’s silence regarding the penalty approval undermined the declarations. The petitioner pointed to the absence of a specific reference to the April 2, 2023, signing date in the activity record, but the court held that this lack of contemporaneous documentation did not negate the sworn declarations of the IRS employees. This ruling reinforces the court’s discretion to prioritize sworn testimony over procedural gaps, further consolidating its authority to resolve penalty disputes on summary judgment without delving into evidentiary minutiae.

In sum, the court’s decision exercises its judicial power to uphold IRS penalty procedures while limiting taxpayer avenues for procedural challenges. For future taxpayers, this means that challenges to supervisory approvals under Section 6751(b) must be backed by concrete evidence; not mere assertions of irregularity; lest they risk summary judgment in favor of the IRS.

Implications for Partnerships and Tax Planning

The Tax Court’s ruling underscores a harsh reality for partnerships: challenging IRS penalty approvals under Section 6751(b) is nearly impossible without concrete evidence of procedural failure. The court’s deference to IRS internal documentation shifts the burden to taxpayers, requiring documentary proof of noncompliance; a standard difficult to meet without access to IRS records.

Key takeaways for partnerships:

• Section 6751(b) is a procedural gatekeeper: The Tax Court is reluctant to second-guess IRS penalty approvals, making challenges an uphill battle.
• Conservation easement deductions remain high-risk: Partnerships claiming these deductions face heightened IRS scrutiny, with penalties under Section 6662(h) for gross valuation misstatements.
• BBA audit rules amplify stakes: Under the centralized audit regime, partnerships are directly liable for imputed underpayments (40.8%), and the Partnership Representative (PR) bears unilateral authority to bind the partnership in audits.

Actionable advice: Prioritize compliance, designate competent PRs, and proceed with extreme caution on conservation easement deductions.