A Detailed Look at Accuracy‐Related Penalties

• Published date: 01 March 2018
• DOI: http://doi.org/10.1002/npc.30436
• Date: 01 March 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

March 2018

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

authority, and we have found none, to support the prop-

osition that a desire to raise revenue (whether rebated to

members or not) is sufficient to meet the requirements

of the ‘convenience’ exception.” [25.1(g), 25.2(b)] ◆

GOVERNMENT PREVAILS ON

APPEAL IN CASE CONSTRUING

SCOPE OF TRUST CHARITABLE

DEDUCTION

The US Court of Appeals for the Tenth Circuit, on Janu-

ary 12, held that the amount of a charitable contribution

deduction that a trust may properly claim in connection

with its gift of three parcels of real property is limited to

its adjusted basis in the properties (Green v. United States).

The district court’s decision, which held that the deduc-

tion is based on the property’s fair market value and was

reversed, is summarized in the January 2016 issue.

This trust, for the tax year involved, claimed a chari-

table deduction in excess of $20 million. This included

the gifts of the real property, plus a cash gift. The trust’s

total adjusted basis in the properties was reported to be

$10.7 million and the properties’ fair market value at the

time of the gifts was about $30.3 million. The trust never

reported as income the properties’ unrealized appre-

ciation of approximately $19.6 million. On an amended

return, the trust claimed a charitable deduction in the

amount of about $30 million, based on the properties’

fair market value.

The appellate court analyzed at some length the

meaning of the phrase “amount of the gross income”

in the charitable deduction provision (IRC § 642(c)

(1)). This led the court to conclude that the phrase is

ambiguous. Using the Chevron regulation construction

regime, the court concluded that the phrase means that

charitable donations must be made out of a trust’s gross

income, real property purchased with gross income can

be treated as the equivalent of gross income for these

purposes, and the deduction amount is limited to the

donor’s adjusted basis in the donated property—that is,

the amount of gross income the donor originally paid

for the property. The court of appeals thus agreed with

the government’s view that the district court’s holding

effectively “allows a duplicative tax benefit, in the form

of a deduction for an amount that was never taxed.”

This case turned in part on the principle that tax

deductions are generally considered a matter of “legisla-

tive grace.” A corollary principle is that tax provisions

allowing for charitable deductions are expressions of

“public policy” rather than legislative grace. These latter

provisions are to be liberally construed in favor of the

taxpayer. The district court relied on these concepts in

construing the trust charitable deduction to operate in the

same manner as the charitable deduction for individuals

and corporations (IRC § 170), which generally bases the

deductible amount on fair value. But, wrote the appellate

court, “[n]ever has the Supreme Court said that this canon

of liberal construction regarding charitable deductions

means that a taxpayer must win in every case.” [9.22] ◆

A DETAILED LOOK AT

ACCURACY-RELATED

PENALTIES

When the dust settled in this case, the petitioners,

donors of a conservation easement, were found liable

for the 40 percent accuracy-related penalty for a gross

valuation misstatement (Roth v. Commissioner, US Tax

Court, December 28). They claimed a charitable contri-

bution deduction in the amount of $970,000; the parties

settled on a deduction amount of $30,000. There was

agreement that the donors had reasonable cause for the

amount of the claimed deduction.

Facts

The IRS, in three instances, sought to assert penalties

in this case. In each instance, the individual proposing

the penalties received personal approval from his or her

immediate supervisor. An examiner proposed the 40

percent gross valuation misstatement penalty (and the

20 percent accuracy-related penalty in the alternative);

she received personal, written approval from her group

manager. An appeals officer received personal, written

approval from his team manager for the 40 percent

penalty (and for the 20 percent penalty that was shown

on the notice of deficiency). The senior counsel who

pleaded affirmatively in the government’s answer to the

petition that the donors are liable for the 40 percent

penalty received her associate area counsel’s personal,

written approval.

The amount of $970,000 is more than 200 percent

of $30,000.

Law

The procedure to be followed in these instances

(IRC § 6751(b)) requires the IRS personnel involved to

have approval in writing from an immediate supervisor.

A 20 percent penalty is imposed for an underpayment

of tax (IRC § 6662(a)) for a substantial valuation mis-

statement (IRC § 6662(b)(3)). That misstatement exists

where the value of property claimed on a return is 150

percent or more of the correct value (IRC § 6662(e)(1)

(A)). Where that percentage is 200 percent, the penalty

rate is increased to 40 percent (IRC § 6662(h)(1), (2)(A)

(i)). In the context of the 20 percent penalty, a reason-

able cause exception is available (IRC § 6664(c)(1)); that

exception is unavailable in the 40 percent penalty setting

(IRC § 6664(c)(3)).