JOHN L. ROTH; DEANNE M. ROTH, Petitioners - Appellants,
COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee.
from the United States Tax Court (CIR No. 005544-12)
R. Walker, Lewis Roca Rothgerber Christie LLP, Denver,
Colorado, for Petitioners - Appellants.
Bethany B. Hauser, Tax Division Attorney (Richard E.
Zuckerman, Principal Deputy Assistant Attorney General, and
Bruce R. Ellisen, Tax Division Attorney, with her on the
brief), Department of Justice, Washington, DC, for Respondent
LUCERO, BACHARACH, and McHUGH, Circuit Judges.
MCHUGH, CIRCUIT JUDGE.
Roths appeal from a decision of the Tax Court imposing a 40%
penalty for their gross misstatement of the value of a
conservation easement they donated to a land trust in
Colorado. The Roths primarily contend that, before imposing
the penalty, the IRS failed to obtain written, supervisory
approval for its "initial determination" of a
penalty assessment as required by I.R.C. § 6751(b). The
Roths also seek a deduction in 2007 for repayments they made
on the proceeds from their sale of tax credits generated by
their donation of a separate conservation easement in 2006.
We disagree on both counts and therefore affirm the judgment
of the Tax Court.
2007, John and Deanne Roth donated a conservation easement
("the 2007 Easement") encumbering 40 acres of land
they owned in Prowers County, Colorado to the Colorado
Natural Land Trust. The 2007 Easement relinquished the
Roths' rights to, among other things, mine gravel from
the subject property.
their 2007 income tax return, the Roths valued the 2007
Easement at $970, 000 and claimed a charitable-contribution
deduction based on that amount. Because they could not make
use of the entire claimed value as a deduction in 2007, the
Roths claimed a carryover contribution on their 2008 tax
return based on the unused portion of the $970, 000.
2011, the IRS audited the Roths' tax returns for 2007,
2008, and 2009. In the course of this evaluation, the IRS
hired an appraiser to provide an opinion of the fair market
value of the 2007 Easement. The appraiser determined the
easement to be worthless, although the parties later
stipulated to a value of $40, 000.
the audit, an IRS Revenue Agent, Denise Soss ("RA
Soss"), issued the Roths a set of Income Tax Discrepancy
Adjustments. Based on the revaluation of the 2007 Easement,
RA Soss determined the Roths were subject to a "gross
valuation misstatement" penalty under I.R.C. §
6662(h), which allows for a 40% penalty on unpaid taxes when
the claimed value of property exceeds its actual value by
200% or more. See I.R.C. §§ 6662(e)(1)(A),
(h). RA Soss's "Group Manager" signed a
"Civil Penalty Approval Form," approving the gross
valuation misstatement penalty. RA Soss informed the Roths by
letter of the proposed 40% penalty under § 6662(h).
Roths filed a protest in response to the letter, seeking
administrative review of RA Soss's proposed 40% penalty
with the Internal Revenue Service Office of Appeals. The IRS
granted review and assigned the Roths' case to Appeals
Officer Mark Kawakami ("AO Kawakami"). AO Kawakami
produced a memorandum concluding that "all issues
including [RA Soss's proposed] penalties should be fully
sustained for the government" with respect to the 2007
Easement. App. at 16.
AO Kawakami's apparent agreement with RA Soss's
proposal, however, his memo detailed a set of revised
penalties owed by the Roths for 2007 and 2008. For each year,
AO Kawakami's memo recites the Roths' tax obligation
and the 40% penalty on that obligation proposed by RA Soss,
but then it also states a revised tax obligation and a
revised penalty calculated at 20% of that obligation. An
"Explanation of Items" attached to AO
Kawakami's memo explains that the Roths are liable for an
"accuracy-related" penalty under I.R.C. §
6662(a) amounting to 20% of their unpaid taxes. App. at 19.
Nowhere in the memo does AO Kawakami explain the IRS's
pivot from a 40% penalty under § 6662(h) to a 20%
penalty under § 6662(a). In fact, the memo states RA
Soss's proposed penalties were "[n]ot sustained in
full by [the] Appeals [Office] due to a computational
adjustment only." App. at 14. The IRS, for its part,
explains the change as a clerical error. Whatever the reason,
AO Kawakami's supervisor signed the memo, indicating her
approval of the revised 20% penalty.
then sent the Roths a notice of deficiency setting forth the
revised 20% penalty. The notice makes no mention of a 40%
penalty under § 6662(h), and the pages attached to the
notice clearly calculate a 20% penalty on the Roths'
unpaid taxes for 2007 and 2008 under § 6662(a). The
notice also informed the Roths of their right to file a
petition with the United States Tax Court contesting the
IRS's determinations, which the Roths did in 2012. In
response to the Roths' petition, the IRS filed an answer
re-asserting the Roths' liability for "a [40%] gross
valuation misstatement penalty under I.R.C § 6662(a)
& (h) for each of the 2007 and 2008 taxable
years." App. at 84. Sara Barkley, Senior Counsel for the
IRS ("SC Barkley"), and her supervisor Robert
Varra, Associate Area Counsel ("AAC Varra"), both
signed the IRS's answer.
in 2006, the Roths donated another conservation easement (the
"2006 Easement") on a different forty-acre parcel
of land to the Noah Land Conservation. In exchange for this
donation, the Roths received $260, 000 of tax credits that
they later sold for $195, 000. They reported the proceeds
from this sale on their 2007 return. As a result of
litigation in Colorado state courts, the Roths repaid
portions of these proceeds in 2013 and 2014.
2016, the Roths and the IRS agreed to a set of stipulated
facts with respect to the 2006 and 2007 Easements and
submitted two questions to the Tax Court for decision: first,
whether the IRS complied with § 6751(b)'s
written-approval requirement before attempting to impose a
gross valuation misstatement penalty; and second, whether
I.R.C. § 1341 or a similar doctrine entitles the Roths
to a deduction in 2007 for the repayments they made in 2013
Court entered judgment against the Roths on both counts. With
respect to the 2007 Easement, the Tax Court reasoned that any
of three instances in the Roths' case could be
interpreted as fulfilling § 6751(b)'s "initial
determination" written-approval requirement. First, RA
Soss obtained the written approval of her supervisor for a
40% penalty at the conclusion of the IRS's audit. Second,
AO Kawakami obtained written approval from his supervisor
supporting his conclusion that RA Soss's "proposed
penalties [would be] fully sustained for the
government," even though AO Kawakami's memo and the
notice of deficiency actually calculated a 20% penalty.
Finally, SC Barkley asserted in the IRS's answer that the
Roths should be liable for a 40% penalty. On this final
point, the Tax Court considered itself bound by Graev v.
Commissioner (Graev III), 149 T.C. 485 (Dec. 20, 2017),
and Chai v. Commissioner, 851 F.3d 190 (2d Cir.
2017), which, together with I.R.C. § 6214(a), ...