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Tax Court Holds IRS Penalty Was Overly Harsh on Couple’s Gross Overstatement of the Value of Land Donated as a Charitable Contribution

Conservation Easement

The Tax Court held that an examiner properly assigned penalties. In the case there was a husband and wife (taxpayers), an examiner, and a plot of land involved. In 2007, the taxpayers donated a parcel of land with the intention of taking advantage of a charitable deduction under a conservation reserve program or CRP. The land was donated to the Colorado Natural Land Trust. They claimed the value of the land was 1.4 million dollars and took part of the deduction in 2007. The remainder was rolled over in 2008, 2009, and 2010 when it was finally used up.

In 2011 the taxpayers were sent a report that the donation did not satisfy the legal requirements for a charitable deduction and also, the value of the land was not $1.4 million. The actual value was more like zero.

However, by trial all the facts had been stipulated and the value of the parcel was stipulated at $80,000. What was at issue was whether the 40% penalty was appropriate given that the initial determination done by the examiner was for 20%. The court found that the Internal Revenue Code Section 6662(h) did not require the 40% determination on the “initial determination”. The verbiage was common language and not a statutory requirement.

Editor’s Comments

This was a remarkable job by an attorney on his client’s behalf and I believe this case will go further. Recently, the penalties that the IRS can dish out are much harsher than what they previously had and taxpayer’s need a victory. On the other hand, this whole thing could have been avoided had the taxpayers gotten a fair appraisal and worked within the letter of the law to get the deduction. We will see where this goes.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors