Recently, the Tax Court opined in the case of Legg v. Comm’r, 145 T.C. 13 (Dec. 7, 2015) that a 40% accuracy-related penalty for gross valuation misstatement under Section 6662(h) was appropriately applied in the matter of a charitable conservation easement. The petitioner/taxpayer argued about the technicalities of timing and supervisory approval in the IRS’s application of the higher level penalties and whether it had done so properly. Ultimately the IRS prevailed.
But the stipulated facts behind the case remind us of the harsh realities of playing fast and loose with valuations. In this case, Brett and Cindy Legg took a $1.4 Million charitable deduction for the gift of a charitable easement to the Colorado Natural Land Trust, a bona fide charitable entity. Although the opinion does not reveal whether a qualified valuation was sought or attached to the Legg’s income tax return, it does indicate that the actual value of the donation was far less than what was reported.[i] In this case it was more than 200% less. The reported value of the donation was $1,418,500, the actual stipulated value was $80,000.
Generally, the IRS will assess a 20% accuracy-related penalty for the understatement of tax, but it shall assess the higher 40% penalty if there is a greater than 200% differential in the reported value and actual value and there is no reasonable cause for the error. It is easy to see why the IRS applied the higher penalties. The facts were stipulated, and given such a large understatement (1700 times) it would be hard to argue a case for reasonable cause.
The lesson learned, if you take a charitable deduction for a non-cash, hard to value asset, like a conservation easement, secure a qualified valuation through a reputable valuation firm, one who will stand behind their work and conclusion.
[i] Tax law requires that a qualified valuation be attached along with Form 8283 to an individual’s Form 1040 if there is a gift of a non-cash asset valued in excess of $500,000.
Charles Bradford Jones, Esquire