Legg v. Commissioner

U.S. Tax Court, 145 T.C. No. 13, December 7, 2015: Upholds IRS procedure for imposition of 40% accuracy related penalty on conservation easement overvaluation.

The issue in this case was about the internal procedure of the IRS when imposing an accuracy related penalty under Internal Revenue Code section 6662 for the misstatement of valuation of conservation easement charitable deduction. The court upheld the IRS’ assertion that it had properly complied with the procedure to impose a 40% accuracy-related penalty for a gross valuation misstatement under section 6662(h), and was not limited to imposing a 20% accuracy-related penalty under section 6662(a).

Legg, the taxpayer, had claimed a Federal income tax charitable deduction based on the alleged value of a donated conservation easement at $1,418,500. The IRS said the contribution didn’t satisfy the requirements for a deduction or alternatively that the value of the conservation easement was zero.  Legg and the IRS ultimately reached agreement that there was a qualified contribution but that the value was $80,000. The difference between the deduction claimed by Legg and the settlement value meant that Legg has misstated the value by enough to be subject to the 40% gross valuation misstatement penalty.

Imposition of the 40% penalty depended on whether the IRS had complied with the procedural requirement of Code section 6751(b)(1), which requires that no penalty be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination” (with certain exceptions). The IRS examiner’s report had calculated both a 40% penalty and — because of uncertainty as to whether the 40% penalty could be imposed where an underpayment was the consequence of an adjustment not based on valuation — a 20% in the alternative. The report determined that Legg was liable for the 40% gross penalty and was approved in writing by the examiner’s immediate supervisor.  The court concluded that the IRS examiner made an “initial determination” regarding the section 6662(h) 40% penalties in compliance with section 6751(b)(1).

Decision available at http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10631.

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