In Palmwood Holdings, LLC v. Comm’r, the United States Tax Court granted partial summary judgment in favor of the IRS, holding that the Service satisfied the supervisory approval requirement of section 6751(b) with respect to a civil fraud penalty first asserted in the IRS’ answer. The decision reinforces a growing body of Tax Court precedent clarifying when a penalty is “initially determined” for purposes of section 6751(b), particularly in cases governed by the centralized partnership audit regime. The Court’s order also signals increasing impatience with speculative discovery requests aimed at relitigating issues the Court has repeatedly deemed legally irrelevant.
Although the underlying merits of the asserted conservation easement deduction remain unresolved, Palmwood squarely addresses a procedural question that continues to recur in litigation with the IRS: whether supervisory approval is timely and sufficient when penalties are raised for the first time in pleadings signed by IRS counsel and their immediate supervisors. Here, the Court answered that question in the affirmative.
Facts
At the end of 2018, Palmwood Holdings, LLC (“Palmwood”), a Missouri limited liability company, donated a conservation easement over approximately 96.6 acres of land located in Jefferson Davis Parish, Louisiana. Palmwood claimed a non-cash charitable contribution deduction of $44,937,000 on its 2018 partnership return for the easement donation. Like most transactions of this nature, it drew IRS scrutiny.
Following examination, the IRS issued a notice of final partnership adjustment (“FPA”) disallowing the charitable contribution deduction and determining multiple penalties under section 6662, including penalties for gross valuation misstatements. Palmwood’s partnership representative conceded that the IRS had obtained timely supervisory approval under section 6751(b) with respect to those penalties.
After Palmwood petitioned the Tax Court for review of the FPA, the IRS asserted an additional civil fraud penalty under section 6663(a) in the answer. The answer identified one of the IRS’s attorneys as the individual who made the initial determination to assert the fraud penalty and further represented that the determination had been personally approved in writing by that attorney’s immediate supervisors. All three attorneys signed the pleading.
The IRS later moved for partial summary judgment, seeking a ruling that the supervisory approval requirement of section 6751(b) had been satisfied with respect to the fraud penalty. Palmwood opposed the motion, arguing that questions remained as to who actually made the “initial determination” of the penalty and requesting additional discovery.
Section 6751(b) Framework
Section 6751(b)(1) provides that “[n]o penalty under this title 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 Tax Court has repeatedly held that the “initial determination” of a penalty refers to a formal act by which the IRS communicates to the taxpayer that it has made a definite decision to assert a penalty.[1]
In the litigation context, the Court has recognized that the initial determination may occur in an answer or amended answer when a penalty is first asserted in that pleading.[2] Where that is the case, supervisory approval must be obtained before the answer is filed, and the signing of the pleading by the determining attorney and that attorney’s immediate supervisor can satisfy the statute.
In Palmwood, the IRS’s answer explicitly identified the IRS attorney who made the initial determination to assert the fraud penalty and stated that the determination had been approved by that attorney’s immediate supervisors. The answer bore the signatures of all three individuals. In addition, the IRS submitted sworn declarations confirming that the supervisors personally approved the penalty in writing by signing the answer, which raised the penalty in the first instance.
Relying on established precedent, the Court concluded that this evidence conclusively established compliance with section 6751(b), finding that supervisory approval is satisfied where a Chief Counsel attorney’s immediate supervisor signs a pleading asserting a penalty for the first time.[3] The Court also reiterated that the relevant inquiry focuses on the formal act of determination directed to the taxpayer, not on earlier internal discussions or recommendations.
Rejection of the Taxpayer’s Discovery Argument
Palmwood argued that a 2021 email involving a different taxpayer and different IRS personnel created “reason to believe” that the IRS’s representations regarding the initial determination of the fraud penalty were not true. On that basis, Palmwood sought additional discovery.
The Court rejected this argument in unusually direct terms. Although acknowledging that a nonmoving party must have an adequate opportunity for discovery before summary judgment is granted, the Court emphasized that discovery must be relevant to the subject matter of the case.[4] Even assuming the email had some tangential connection to the issues before the Court, it would not alter the legal analysis.
The Court explained that it has repeatedly rejected attempts to recharacterize a formally approved penalty determination as having been “really” made by someone else based on prior consultations or internal communications.[5] The term “determination” carries an established meaning in the tax context, denoting an action with a high degree of concreteness and formality.[6] Communications occurring years earlier, even if they involved discussion of a potential penalty, do not constitute an “initial determination” under section 6751(b).
Having disposed of the legal argument, the Court went further, admonishing Palmwood’s counsel for accusing officers of the Court of untruthfulness without meaningful evidentiary support. The Court characterized the accusation as an ill-conceived attempt to obtain discovery on an issue foreclosed by precedent and warned that such tactics risk undermining counsel’s credibility with the Court.
Conclusion
The Tax Court’s decision in Palmwood Holdings reinforces several principles that now appear firmly settled with respect to section 6751(b) jurisprudence. First, when a penalty is asserted for the first time in an answer, that pleading constitutes the “initial determination” of the penalty. Second, supervisory approval is satisfied where the determining attorney’s immediate supervisors personally approve the penalty in writing by signing the pleading. Third, speculative inquiries into pre-determination discussions or internal deliberations do not create a genuine issue of material fact and do not justify discovery. Palmwood also shows the Court’s growing annoyance for efforts to use section 6751(b) as a means for open-ended discovery divorced from the statute’s text and purpose. For taxpayers litigating with the IRS, particularly in conservation easement cases, the decision underscores that procedural challenges under section 6751(b) must be grounded in concrete defects, not conjecture.
[1] Belair Woods, LLC v. Comm’r, 154 T.C. 1, 14–15 (2020).
[2] Braen v. Comm’r, T.C. Memo. 2023-85, at *25–26; Koh v. Comm’r., T.C. Memo. 2020-77, at *5.
[3] River Moss Prop., LLC v. Comm’r, T.C. Memo. 2025-79, at *5; Braen, T.C. Memo. 2023-85, at *26; Koh, T.C. Memo. 2020-77, at *4 n.3.
[4] Robinson v. Terex Corp., 439 F.3d 465, 467 (8th Cir. 2006); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986); Rule 70(b); Hickman v. Taylor, 329 U.S. 495, 507–08 (1947).
[5] Sand Valley Holdings, LLC v. Comm’r, T.C. Memo. 2025-74, at *7–8; Cattail Holdings, LLC v. Comm’r, T.C. Memo. 2023-17, at *9–11.
[6] Frost v. Comm’r, 154 T.C. 23, 32 (2020) (quoting Belair Woods, 154 T.C. at 15); Nassau River Stone, LLC v. Comm’r, T.C. Memo. 2023-36, at *6.
