We all know Reg Section 1.6662-2(c) limits the imposition of penalties to only one on the list, even when more than one would give rise to a chop. Thus substantial understatement (five-and-ten) and negligent disregard can only impose one 20% chop. So when Tax Court hands out chops, must they consider more than one?

Before you say “no, why should they?” read Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, T. C. Memo. 2024-73, filed 7/17/24. Judge Albert G. (“Scholar Al”) Lauber heeds IRS’ concern that partner-level adjustments based on the FPAA sustentation of five-and-ten might bail out some partners whose computational adjustments let them slide under the tag.

When Judge Scholar Al slugged the Oconees, he found them liable for the five-and-ten, but never mentioned negligence. IRS wants reconsideration, but the Oconees object: no change in law, no new facts.

“Respondent notes that the applicability of the substantial understatement penalty is based on a mathematical calculation, whereas the negligence penalty is not so conditioned.

“Our decision to forgo determination of the negligence penalty was premised on our understanding that the no-stacking rule prohibited the application of multiple penalties with respect to a given portion of Oconee’s underpayment. See Oconee, T.C. Memo. 2024-25, at *75 n.34. But Treasury Regulation § 1.6662-2(c) makes clear that the no-stacking rule relates to ‘the maximum accuracy-related penalty imposed.’ (Emphasis added.) This Court has jurisdiction to determine partnership items and the applicability of any penalty that relates to an adjustment to a partnership item. §§ 6221, 6226; United States v. Woods, 571 U.S. 31, 39–42 (2013). There is thus no limitation on our ability to determine the applicability of more than one accuracy-related penalty at the partnership level.” T. C. Memo. 2024-73, at p. 3.

As for reconsideration, Judge Scholar Al has a footnote at hand.

“Petitioner incorrectly characterizes respondent’s Motion as a request ‘to reverse [the Court’s] ruling on the negligence penalty.’ The Court in its prior opinion made no ruling on the negligence penalty; that is the error of which respondent complains. Petitioner urges that reconsideration is inappropriate because respondent cites ‘no intervening change in law’ and ‘no new evidence.’ That is true, but those are not the only grounds for seeking reconsideration. Another ground is to correct ‘substantial errors of law or fact,’ and that is the ground respondent urges. Petitioner contends that respondent failed to produce partner-level evidence showing that individual partners would not be subject to the substantial understatement penalty. This argument is silly: Respondent could not possibly know, in this TEFRA partnership proceeding, whether individual partners in future partner-level proceedings would have a ‘substantial understatement’ of tax, which will obviously depend on their individual tax circumstances. Respondent is simply arguing that the error in our prior opinion creates a risk of prejudice to him in future partner-level proceedings, and that is sufficient to justify his Motion.” T. C. Memo. 2024-73, at pp. 4-5, footnote 4. (Emphasis by the Court).

And this is yet another reason why I don’t mourn TEFRA.