Legg v. Comm’r—Conservation Easement Donor Liable for Gross Valuation Misstatement Penalties
Background
In 2007, Brett and Cindy Legg donated a conservation easement on 80 acres to the Colorado Natural Land Trust. The Leggs asserted that the easement had a value of over $1.4 million and they claimed deductions for the donation over a four-year period.
The IRS challenged the deductions, arguing that the deduction requirements were not met and the value of the easement was zero. The IRS examiner’s report, which was sent to the Leggs, stated that the Leggs were liable for 20% accuracy-related penalties under IRC § 6662(a) or, alternatively, 40% gross valuation misstatement penalties under IRC § 6662(h). The report calculated the proposed penalties using the 20% rate and the examiner’s immediate supervisor signed the report in writing.
After issuance of the notice of deficiency, the IRS and the Leggs stipulated that (1) the value of the conservation easement was only $80,000, (2) the Legg’s reported $1.4 million value for the easement constituted a gross valuation misstatement (the value for the easement reported on their tax returns was more than two times, or 200%, of the amount determined to be the correct value), and (3) the Leggs could not invoke a reasonable cause defense against the gross valuation misstatement penalties (for returns claiming conservation easement deductions filed after August, 17, 2006, the gross valuation misstatement penalty is a strict liability penalty).
The Dispute
IRC § 6751(b)(1) 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.” Prior law allowed the imposition of some penalties without supervisory approval. Congress enacted IRC § 6751 because it believed “that taxpayers are entitled to an explanation of the penalties imposed upon them” and “penalties should only be imposed where appropriate and not as a bargaining chip.”
The Leggs argued that the IRS examiner did not make an “initial determination” of the 40% penalties because the examination report calculated the penalties using the 20% rate. They further argued that the 20% calculation suggested that the IRS never considered imposing the 40% penalties and, thus, the examiner’s immediate supervisor could not have approved the 40% penalties in writing.
The Tax Court disagreed. It determined that even though the 40% penalties were posed as an alternative position in the examination report, the report made an “initial determination” that the Leggs were liable for the 40% penalties. The court explained that its conclusion was consistent with congressional intent. Congress enacted IRC § 6751(b) to ensure that taxpayers understand the penalties the IRS is imposing on them. The examination report sent to the Leggs clearly explained why the Leggs were liable for the 40% penalties; it applied IRC § 6662(h) and the relevant regulations to the specific facts and concluded that the Leggs were liable for the 40% penalties. Accordingly, the Leggs could not contend that they lacked an understanding of the penalties imposed upon them simply because the 40% penalties were posed as an alternative position.
In sum, because the IRS made an “initial determination” regarding the 40% penalties in the examination report and the report was approved, in writing, by the examiner’s immediate supervisor, the IRS satisfied the procedural requirements of IRC § 6751(b) and its determination of the 40% penalties was proper.
The Colorado Natural Land Trust was involved in abuse conservation easement transactions in Colorado.
Nancy A. McLaughlin, Robert W. Swenson Professor of Law, University of Utah S.J. Quinney College of Law