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Roth v. Commissioner of Internal Revenue

United States Court of Appeals, Tenth Circuit

April 29, 2019

JOHN L. ROTH; DEANNE M. ROTH, Petitioners - Appellants,

          Appeal from the United States Tax Court (CIR No. 005544-12)

          James 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 - Appellee.

          Before LUCERO, BACHARACH, and McHUGH, Circuit Judges.


         The 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.

         I. BACKGROUND

         In 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.[1]

         On 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.

         In 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.

         After 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).

         The 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.

         Despite 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.

         The IRS 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)[2] 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.

         Separately, 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.

         In 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 and 2014.

         The Tax 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. ยง 6214(a), ...

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