IRS made 'initial determination'.

• Author: Beavers, James A.

The Tax Court held that the IRS could impose the 40% gross-valuation-misstatement penalty on the taxpayers because the IRS examiner had made an initial determination that the penalty applied.

Background

During 2007, Brett and Cindy Legg, through a disregarded entity, donated 80 acres as a conservation easement to the Colorado Natural Land Trust. On their timely filed 2007 federal income tax return, the Leggs valued the donation at $1,418,500 and claimed a charitable contribution deduction. They deducted a portion of the contribution on their 2007 return and carried over to and deducted the rest in 2008, 2009, and 2010.

On examination, the IRS found that the Leggs had indeed been generous with their contribution--to themselves. The IRS examiner determined that the couple did not satisfy the legal requirements for a charitable contribution deduction or, alternatively, that even if they had met the legal requirements, the actual value of the conservation easement donation was zero. As a result, the examination concluded that there was an underpayment of tax for each of the tax years at issue due to a decrease of the charitable contribution deduction for the donated conservation easement. The examiner's supervisor sent a copy of the examiner's report to the Leggs.

The IRS examiner determined the Leggs were liable for the 20% accuracy-related penalty under Sec. 6662(a) or, alternatively, they were liable for the 40% accuracy-related penalty for a gross-valuation misstatement under Sec. 6662(h). The examination report stated that the Leggs were "subject to the Accuracy Related Penalty--Gross Valuation Misstatement pursuant to IRC Section 6662 for the tax year 2007." However, the examiner calculated the proposed penalties in the report using the 20% rate. The examiner's supervisor signed the examination report in writing.

The examiner included the 40% gross-valuation-misstatement penalty analysis as an alternative position because of uncertainty as to whether the IRS could impose that penalty where an underpayment was the consequence of an adjustment not based on valuation. Specifically, at the time the examiner issued the report, it was uncertain whether the IRS could impose a gross-valuation-misstatement penalty on the theory that the Leggs' donation of the conservation easement did not meet the charitable contribution deduction requirements of Sec. 170, because the adjustment was not based on valuation.

The Leggs appealed the determination...