Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

Tenth Circuit: IRS Can Make Initial Determination of Penalty After Issuing Notice of Deficiency

(Parker Tax Publishing May 2019)

The Tenth Circuit affirmed the Tax Court and held that the IRS obtained supervisory approval of its initial determination of a 40 percent gross valuation misstatement penalty as required by Code Sec. 6751(b) after an audit, even though the IRS later issued a notice of deficiency setting forth a 20 percent penalty. The Tenth Circuit rejected the taxpayers' argument that the notice of deficiency was the initial penalty determination and that Code Sec. 6751(b) precluded the IRS from later reasserting the 40 percent penalty. Roth v. Comm'r, 2019 PTC 163 (10th Cir. 2019).

In 2007, John and Deanne Roth donated a conservation easement encumbering 40 acres of land they owned in Colorado. The easement was one of several so-called "gravel-pit cases" in which Colorado taxpayers claimed large deductions for donating conservation easements prohibiting the mining of gravel on what had historically been farmland. The IRS determined that these easements were effectively worthless, or worth drastically less than the taxpayers claimed, because the subject land was more valuable as farmland than it would be if mined for gravel.

On their 2007 income tax return, the Roths valued their easement at $970,000 and claimed a charitable deduction based on that amount. In 2011, the IRS audited the Roths' returns and hired an appraiser to provide an opinion of the value of the easement. The appraiser determined the easement to be worthless, although the Roths and the IRS later stipulated to a value of $40,000. After the audit, IRS Revenue Agent Denise Soss determined that the Roths were subject to a 40 percent gross valuation misstatement penalty under Code Sec. 6662(h). Soss's manager signed a form approving the penalty determination.

The Roths sought review of their case in the IRS Office of Appeals. Appeals Officer Mark Kawakami wrote a memorandum concluding that the penalties should be "fully sustained," but his memo concluded that the Roths were liable for a 20 percent penalty under Code Sec. 6662(a). The IRS later explained the change as a clerical error. Kawakami's supervisor signed the memo to indicate her approval of the 20 percent penalty. The IRS sent the Roths a notice of deficiency setting forth the revised 20 percent penalty.

In 2012, the Roths filed a Tax Court petition to contest the IRS's determinations. In response, the IRS filed an answer reasserting the Roths' liability for the 40 percent gross valuation misstatement penalty. The answer was signed by Sara Barkley, Senior Counsel for the IRS, and her supervisor, Robert Varra. The Roths and the IRS eventually agreed to a stipulated set of facts, and asked the Tax Court to decide whether the IRS complied with the written-approval requirement under Code Sec. 6751(b) before attempting to impose a gross valuation misstatement penalty.

The Tax Court ruled in the IRS's favor, reasoning that any of three instances could be interpreted as fulfilling the "initial determination" written-approval requirement in Code Sec. 6751(b). First, the Tax Court noted that Soss obtained written approval of her supervisor for a 40 percent penalty at the conclusion of the IRS's audit. Second, Kawakami obtained written approval supporting his conclusion to "fully sustain" the proposed penalties, even though his memo actually calculated a 20 percent penalty, Finally, Barkley asserted in the IRS's answer that the Roths should be liable for a 40 percent penalty. On this final point, the Tax Court considered itself bound by Graev v. Comm'r, 149 T.C. 485 (2017), and Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017), which, together with Code Sec. 6214(a), allow the IRS to assert additional penalties in an answer to a taxpayer's petition.

The Roths appealed to the Tenth Circuit, arguing that Soss merely proposed the 40 percent penalty and that the notice of deficiency was the IRS's initial determination. Because the notice included only a 20 percent penalty, the Roths argued, Code Sec. 6751(b) prevented the IRS from attempting to impose any other penalty.

The Tenth Circuit affirmed the Tax Court and held that Code Sec. 6751(b) does not limit the IRS's initial determination with respect to a penalty assessment to the penalty included in the notice of deficiency. The court found that the Roths' argument was not supported by the statutory context of Code Sec. 6751(b). The court pointed out that Code Sec. 6212(a) authorizes the IRS to send a notice of deficiency but does not require the notice to contain the IRS's determination. The court pointed out that, in fact, the statute contemplates that the IRS's determination will precede the sending of a notice. The court also noted that Code Sec. 6214(a) explicitly authorizes the Tax Court to redetermine a deficiency and any penalties stated in the notice and, because a Tax Court proceeding necessarily occurs after the taxpayer has received a notice, some initial determinations of penalty assessments will not be contained in a notice of deficiency.

The Tenth Circuit found that the IRS's initial determination of a 40 percent penalty could have been made either by Soss or Barkley, and that it was logical to conclude that Soss made the initial determination. The Tenth Circuit noted that the Tax Court concluded that Kawakami's statement that Soss's proposed penalties "are fully sustained" was an initial determination that a 40 percent penalty should apply. The Tenth Circuit explained that, to the contrary, Kawakami had determined to apply a 20 percent penalty, but found that it did not need to decide whether such an inconsistent document could satisfy Code Sec. 6751(b) because it concluded that the statute could have been satisfied by either Soss or Barkley.

The court rejected the Roths' argument that Soss's conclusions were merely proposed, noting that the same argument had been rejected by the Tax Court in Graev. Moreover, even if Soss did not make the initial determination, Barkley's answer to the petition, signed by her supervisor and asserting the 40 percent penalty, satisfied Code Sec. 6751(b), according to the court. The Tenth Circuit said that the central premise of the Roths' argument was that the IRS could make only one initial determination of a penalty, and it rejected that contention.

For a discussion of the procedural requirements for computing penalties, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2019 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance