Legg v. Comm'r, 145 T.C. 13 (2015) (J. Kerrigan), is a conservation easement deduction case centered around the issue of accuracy-related penalties. The taxpayers in Legg claimed deductions totaling more than $1.4 million for an easement they contributed to the Colorado Natural Land Trust. After a timely examination of the taxpayers' returns, the IRS examiner issued an “initial report” that took the primary position that the deduction be disallowed entirely for failure to satisfy certain legal requirements and the alternative position that the easement's value was $0. The initial examination report computed penalties at 20% but also took the alternative position that the taxpayers were liable for the 40% gross valuation misstatement penalty under § 6662(h).
Following examination, the taxpayers entered into a partial settlement order with the IRS agreeing that: (1) the taxpayers were entitled to a charitable deduction; (2) the value of the conservation easement was $80,000; and, (3) the taxpayers satisfied the reasonable cause defense requirements for the 20% substantial valuation misstatement penalties under §§ 6662(a) and (b)(3) but that the taxpayers could not invoke the reasonable cause defense against the 40% gross valuation misstatement penalty under § 6662(h).
At trial, the taxpayers argued that the 40% penalty was not properly assessed because the IRS did not satisfy the procedural requirement of § 6751(b) which, in relevant part, provides that no penalty shall be assessed “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” The taxpayers argued that asserting penalties as an alternate position in the examination report was not an “initial determination” as required by the statute. In rejecting the taxpayers' arguments, the court explained that, “Congress enacted section 6751(b) to ensure that taxpayers understood the penalties that the IRS imposed upon them” and, by raising the 40% penalty as an alternative position in the examiner's initial examination report, the procedural requirements of § 6751(b) were satisfied. Accordingly, the court sided with the IRS and held that the taxpayers were subject to the 40% gross valuation misstatement penalty.