Tax Court Sanctions Chief Counsel for Lack of Candor in Conservation Easement Fight

Well, yesterday the Tax Court dropped a sledgehammer on Chief Counsel, imposing sanctions for the big mess we have previously described under IRC 6673(a)(2).  Judge Weiler found that Counsel did not act with intentional bad faith but “so far beneath a reasonable standard of competence, much deeper than mere negligence, that it became essentially indistinguishable from bad faith.” Everybody is mad as hell right now.  Here are a few snippets from the opinion in which the Court found a lack of candor leading to unreasonable and vexatious delay and costs:

On July 15, 2016, RA Stafford prepared a penalty consideration lead sheet (July Lead Sheet). Initially, in respondent’s Motion for Partial Summary Judgment, we were led to believe that RA Brooks personally approved RA Stafford’s initial determination of the penalties in writing by electronically signing the July Lead Sheet on July 16, 2016, and that this July Lead Sheet asserted all of the penalties that were eventually determined in LakePoint’s final partnership administrative adjustment (FPAA). However, we have since learned from the parties that there exist different versions of this July Lead Sheet, including a version signed by RA Brooks on November 29, 2016 (November Lead Sheet). A Form 5701, Notice of Proposed Adjustment (NOPA), was also signed by RA Brooks on July 21, 2016. The parties now agree that the July Lead Sheet was amended by RA Stafford in February 2017 to include additional penalties (which were recommended by IRS Counsel) and was in fact signed by RA Brooks on February 10, 2017—although RA Brooks backdated her signature by writing in a date of July 16, 2016.

On August 11, 2022, respondent filed a Motion for Partial Summary Judgment seeking favorable adjudication on the issue of whether he complied with the written supervisory approval requirement of section 6751(b)(1) for the penalties asserted under section 6662(a), (b)(1), (2), and (3), and (h). On December 19, 2022, respondent filed a First Supplement to Motion for Partial Summary Judgment in which he argued that “complaints petitioner asserts with respect to the Penalty Consideration Lead Sheets signed on July 16 and November 29, 2016, are absent from the penalty-approval NOPA.” In respondent’s supplemental filing, there is no indication to the Court that the July Lead Sheet was in fact signed by RA Brooks on February 10, 2017. Rather, respondent’s counsel continued to represent to the Court that RA Brooks had in fact signed the document in question on July 16, 2016.

On the basis of the foregoing, we find respondent’s counsel knew or should have known, no later than November 2, 2022, that his representations made to this Court were less than accurate and lacked candor and that RA Brooks’ Declaration was false. Under ABA Model Rule 3.3, respondent’s counsel has an ongoing obligation to correct these misrepresentations of fact but failed to do so. Rather than correcting this material misrepresentation found in respondent’s Motion for Partial Summary Judgment, respondent’s counsel sought to pivot and present additional evidence on an alternative legal theory without withdrawing or conceding the original legal theory for why summary adjudication was appropriate here. Furthermore, no other remedial action was taken with the Court to correct the error until April 10, 2023, which was after this Court had issued its Order granting respondent’s Motion.

In other words, in contradistinction to several of its sister circuits, the Eleventh Circuit does not require an express factual finding by the Court that Plaintiff’s counsel acted in deliberate bad faith, merely that counsel’s conduct sunk so far beneath a reasonable standard of competence, much deeper than mere negligence, that it became essentially indistinguishable from bad faith.” 

While the actions of respondent’s counsel may have begun as unintentional and unknowing—as detailed above—we find his counsel’s actions lacked candor for some five months before counsel disclosed the issue to the Court.

The only good thing coming out of this head-lopping-off episode is that although the Court withdrew its summary judgement in favor of assessed penalties, it did not grant taxpayer’s request that the government be forever estopped from properly proving up penalties.  With honest evidence of course.  Trouble is, that seems only a temporary reprieve because the court’s finding suggests it is too late to get the approval required by IRC 6751.  And there are a bunch of other cases in which taxpayers are asserting that the same conspiratorial activities occurred.  Too bad, because this all started out as an effort to ferret out greed and avarice by the conservation easement syndicates.  What a mess.  It kinda proves all over again what we all know about good deeds.

darryll k. jones