BRETT E. LEGG AND CINDY L. LEGG, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 594-14.
United States Tax Court
Filed December 7, 2015.
145 T.C. 344
KERRIGAN, Judge
Held: R‘s determination of
James R. Walker, for petitioners.
Miles B. Fuller, Debra K. Moe, Edwin A. Herrera, and Matthew A. Houtsma, for respondent.
OPINION
KERRIGAN, Judge: Respondent determined the following deficiencies and penalties with respect to petitioners’ Federal income tax liabilities for tax years 2007, 2008, 2009, and 2010:
| Year | Deficiency | Penalty sec. 6662(h) |
|---|---|---|
| 2007 | $61,625 | $24,650 |
| 2008 | 63,243 | 25,294 |
| 2009 | 39,947 | 15,979 |
| 2010 | 23,973 | 9,589 |
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.
Background
This case was fully stipulated under Rule 122. The stipulated facts are incorporated in our findings by this reference. Petitioners resided in Colorado when they filed the petition.
During 2007 petitioners, through a disregarded entity, donated 80 acres of land as a conservation easement to the Colorado Natural Land Trust. On their timely filed 2007 Federal income tax return, petitioners valued the donation at $1,418,500 and claimed a charitable contribution deduction. Pursuant to section 170 petitioners were not entitled to deduct the entire value of the conservation easement for tax year 2007. Accordingly, petitioners claimed a charitable contribution deduction of $183,737. Petitioners also claimed carryover charitable contribution deductions for tax years 2008, 2009, and 2010 on the reported $1,418,500 conservation easement value.
Respondent selected petitioners’ 2007, 2008, 2009, and 2010 tax returns for examination. On September 16, 2011, the examiner‘s supervisor, the Director of Western Area Examination, sent petitioners a letter that included a copy of the examiner‘s report. The report determined that petitioners did not satisfy the legal requirements for a charitable con-
Respondent‘s examiner determined that petitioners were liable for the 20% accuracy-related penalty under
On October 25, 2011, petitioners filed a written protest and requested that the Internal Revenue Service (IRS) Appeals Office review the examiner‘s proposed changes. The IRS Appeals Office granted petitioners’ request, but the parties did not reach an agreement. On October 24, 2013, the IRS Appeals Office issued its report agreeing with the examiner‘s appraisal valuation determination of zero for the donated conservation easement. Additionally the report agreed that accuracy-related penalties should be imposed on petitioners for the tax years at issue. The report explained that imposing 40% gross valuation misstatement penalties should be respondent‘s primary position because the value of the conservation easement reported on petitioners’ tax returns exceeded more than 200% of the correct value (zero) and the case is unagreed. The report further explained that imposing 20% accuracy-related penalties should be respondent‘s alternative position.
On October 24, 2013, the Appeals officer‘s immediate supervisor—the Appeals Team Manager—approved the report. On October 24, 2013, respondent issued the notice of deficiency and determined 40% gross valuation misstatement penalties under section 6662(h).
After the issuance of the notice of deficiency, petitioner and respondent stipulated and agreed that the value of the conservation easement was $80,000 at the time of petitioners’
Discussion
Before the enactment of section 6751 in the IRS Restructuring and Reform Act of 1998, Pub. L. No. 105–206, sec. 3306(a), 112 Stat. at 744, the law did not require the IRS to show how penalties were computed. Prior law also allowed the imposition of some penalties without supervisory approval. S. Rept. No. 105–174, at 65 (1998), 1998–3 C.B. 537, 601. Congress enacted section 6751 because it believed “that taxpayers are entitled to an explanation of the penalties imposed upon them.” Id. In addition to including the name, Code section, and computation of the penalty, section 6751 “also requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted.” Id. The Senate Finance Committee believed that “penalties should only be imposed where appropriate and not as a bargaining chip.” Id.
A. Timing Arguments
The parties dispute the timing aspects of section 6751(b). Petitioners believe that section 6751(b) must apply to the first notice that the IRS sends the taxpayer. Thus, peti-
B. The “Initial Determination”
The phrase “initial determination” is not defined anywhere in the regulations. Nor did Congress define “initial determination” in the Code. The dictionary defines “initial” as “having to do with, indicating, or occurring at the beginning“. Webster‘s New World College Dictionary 735 (4th ed. 2010).
Petitioners argue that respondent‘s examiner did not make an “initial determination” of the section 6662(h) 40% penalties because the examination report calculated the penalty adjustments at 20%. They argue that this calculation suggests that respondent never considered imposing the 40% gross valuation misstatement penalties and that consequently the examiner‘s immediate supervisor could not have approved, in writing, such penalties.
Respondent argues that the examiner made an “initial determination” that the 40% penalties were appropriate, concluding in the examination report that petitioners were liable for such penalties. Respondent further avers that the mere fact that the examiner computed the proposed penalties at a rate of 20% does not nullify the fact that the report concluded that petitioners were liable for the 40% penalties. Because the report was approved, in writing, by the examiner‘s immediate supervisor, respondent argues that the section 6751(b) procedural requirements were met.
As a result of respondent‘s examination of petitioners’ 2007, 2008, 2009, and 2010 tax returns, the examiner concluded that section 6662(a) and (b)(2) 20% penalties were applicable because it was determined that petitioners’ under-
Respondent‘s examination report included the 40% gross valuation misstatement penalties analysis as an alternative position because of uncertainty as to whether such penalties could be imposed where an underpayment was the consequence of an adjustment not based on valuation. Specifically, respondent was uncertain whether he could impose gross valuation misstatement penalties on the theory that petitioners’ donation of the conservation easement did not meet the charitable contribution deduction requirements of section 170, an adjustment not based on valuation. This uncertainty has since been resolved. In the notice of deficiency respondent contended that petitioners failed to meet the legal requirements for a conservation easement charitable contribution deduction. We find that even though the gross valuation misstatement penalties were posed as an alternative position, the report made an “initial determination” that petitioners were liable for the 40% penalties.
Our conclusion that respondent made an “initial determination” regarding the 40% penalties comports with congressional intent. Congress enacted section 6751(b) to ensure that taxpayers understood the penalties that the IRS imposed upon them. The examination report clearly explained why petitioners were liable for the gross valuation misstatement penalties. The report applied section 6662(h) and the relevant regulations to petitioners’ specific facts, reaching the conclusion that petitioners were liable for the 40% penalties. Petitioners cannot contend that they lacked an understanding of the penalties imposed upon them because the penalties were posed as an alternative position.
Therefore, because respondent made an “initial determination” regarding the section 6662(h) penalties which was approved, in writing, by the examiner‘s immediate supervisor, we find that respondent satisfied the procedural requirements of section 6751(b). We conclude that respondent‘s determination of section 6662(h) penalties was proper.
Any contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered under Rule 155.