Opinion ID: 2796442
Heading Depth: 3
Heading Rank: 2

Heading: The Accuracy-Related Penalties

Text: The court then turned to the issue of penalties. Before explaining the Tax Court's findings, we provide an overview of the relevant statutory provisions. Section 6662 of the Internal Revenue Code imposes a penalty equal to 20% of any underpayment of income tax due to, among other things, [n]egligence or disregard of rules or regulations, [a]ny substantial understatement of income tax, or [a]ny substantial valuation misstatement. 26 U.S.C. § 6662.6 In the case of a gross valuation misstatement, defined as a 400% or more overstatement of the value of any property claimed on a tax return, the penalty is increased to 40% of the underpayment. Id. § 6662(h). The value . . . claimed on a return of any property with a correct value . . . of zero is considered to be 400% or more of the correct amount, and the 6 A substantial understatement of income tax is defined as at least 10% of the actual amount of the tax or $5,000, whichever is greater. 26 U.S.C. § 6662(d)(1)(A). A substantial valuation misstatement occurs if the value of any property . . . claimed on any return of tax . . . is 200 percent or more of the amount determined to be the correct amount of such valuation. Id. § 6662(e)(1)(A). -15- applicable penalty is 40%. 26 C.F.R. § 1.6662-5(g). Only one accuracy-related penalty may be assessed with respect to a given underpayment, even if the underpayment is subject to a penalty on multiple grounds. See id. § 1.6662-2(c). There are exceptions to imposition of penalties. Section 6664(c) sets forth a reasonable cause exception for underpayments. It provides, in relevant part:
imposed . . . with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.
overstatements. In the case of any underpayment attributable to a substantial or gross valuation overstatement . . . with respect to charitable deduction property, paragraph (1) shall not apply unless-- (A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and (B) in addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property. 26 U.S.C. § 6664(c). The regulations instruct that [t]he determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances, including, inter alia, the taxpayer's experience, knowledge, and education; whether the taxpayer relied on an appraisal, and if so, whether such reliance was reasonable and in good faith; and whether the taxpayer relied -16- on information in a W-2 or other tax form, provided that the taxpayer did not know or have reason to know the information was incorrect. 26 C.F.R. § 1.6664-4(b)(1). The Tax Court found the Kaufmans liable for a 40% penalty for a gross valuation misstatement because they claimed a deduction for the donation of a facade easement whose true value was zero. Kaufman IV, 107 T.C.M. (CCH) 1262, slip op. at 66-67. The court further determined that the reasonable cause exception was not applicable. That was because, although the first prong of the test was met, that is, the reported value of the easement was based on a qualified appraisal made by a qualified appraiser, the second prong was not, that is, the Kaufmans had not made a good faith investigation of the easement's value. Id. at 71-75. The court explained that there is no evidence that, other than consulting Mr. Bahar -- who in fact told them that the donation of the easement would not reduce the value of their home -- the Kaufmans made any independent investigation of the value of the facade easement, much less an investigation confirming that its value was the value they reported on the 2003 and 2004 returns, viz, $220,800. Id. at 75. In a separate analysis, the court also found, for essentially the same reason, that the Kaufmans had not acted with reasonable cause and in good faith. Id. at 76-81.7 7 The Tax Court held in the alternative that the Kaufmans were liable for a 20% penalty for substantial understatement of income tax and negligence. Kaufman IV, 107 T.C.M. (CCH) 1262, slip -17- This appeal followed. The Kaufmans challenge the Tax Court's finding that they are liable for accuracy-related penalties. They have not, however, appealed the court's finding that the actual value of the easement was zero.