Federal Case Law: Fifth Circuit and Tax Court Rule on Penalties, Charitable Deductions

Fifth Circuit Disallows 40% Valuation Misjudgment Penalty, OKs 20% Negligence Penalty

The Court of Appeals for the Fifth Circuit disallows a 40% valuation misjudgment penalty in Bemont Invs., LLC v. United States, but affirms a Texas Court’s 20% negligence penalty.  Judge Goeke at the Tax Court draws distinctions on when charitable deductions are allowable in Dunlap v. Commissioner.

Bemont Invs., LLC v. United States

2012 U.S. App. LEXIS 8505

April 26, 2012

Judge Davis

United States Court of Appeals for the Fifth Circuit

Summary:

Defendant government appealed from the U.S. District Court for the Eastern District of Texas’s ruling disallowing the 40%  valuation misstatement penalty, and the ruling that the final partnership administrative adjustment (FPAA) issued for the 2001 tax year was time-barred. Plaintiff partnerships appealed the judgment upholding the imposition of the 20%  substantial understatement and negligence penalties. 

The court reversed the judgment of the district court that the FPAA as to the 2001 tax year was untimely; the court affirmed the judgment of the district court in all other respects, including disallowing the 40%  valuation misstatement penalty and upholding the 20%  negligence penalty for both 2001 and 2002. The court remanded the case to the district court for entry of judgment consistent with the opinion.

Dunlap v. Commissioner

T.C. Memo 2012-126

May 1, 2012

Judge Goeke

United States Tax Court

Summary:

These cases involved charitable contribution deductions claimed as the result of a historic preservation easement (facade easement) contribution. Respondent IRS Commissioner determined income tax deficiencies and additions to tax with respect to each of the petitioners in these consolidated cases.  The taxpayers were condominium owners who claimed deductions for donating a historic facade easement and making cash contributions to an entity that advertised itself as a charitable organization.

The IRS determined that neither the facade donation nor the cash contributions could be deducted under I.R.C. § 170 and that the taxpayers were liable for accuracy-related penalties under I.R.C. § 6662. Rejecting expert reports that lacked credibility, the court found that the facade easement had no value.

Therefore, the taxpayers failed to meet their burden of sustaining any charitable contribution deduction resulting from the facade easement donation. However, the court found that the taxpayers were entitled to charitable contribution deductions as a result of the cash contributions they made to the entity at issue.

Further, the taxpayers were not liable for accuracy-related penalties under § 6662 because they showed that the claimed value of the facade easement was based on a “qualified appraisal” by a “qualified appraiser” and that they made a good-faith investigation of the value of the facade easement as required by I.R.C. § 6664(c)(2). 

While the court found that the taxpayers improperly claimed charitable contribution deductions resulting from the donation of a facade easement, the taxpayers were not liable for accuracy-related penalties. Further, the taxpayers were entitled to charitable contribution deductions resulting from cash contributions.

Peter H. Agrapides, MBA, AVA, is a Principal at Western Valuation Advisors, which has offices in Salt Lake City, Utah, and Las Vegas, Nevada. Mr. Agrapides’ practice focuses primarily on valuations for gift and estate tax reporting. He has experience valuing companies in a diverse array of industries. These engagements have ranged from small family owned businesses to companies over $1billion.