      BRETT E. LEGG AND CINDY L. LEGG, PETITIONERS v.
           COMMISSIONER OF INTERNAL REVENUE,
                       RESPONDENT
          Docket No. 594–14.           Filed December 7, 2015.

        During 2007 Ps, through a disregarded entity, donated a
      conservation easement to a Colorado trust. On their 2007 Fed-
      eral income tax return Ps valued the donation at $1,418,500
      and claimed a charitable contribution deduction. Ps claimed
      carryover charitable contribution deductions for tax years

344
(344)                    LEGG v. COMMISSIONER                              345


        2008, 2009, and 2010. R examined Ps’ 2007, 2008, 2009, and
        2010 returns and determined that Ps did not satisfy the legal
        requirements for a charitable contribution deduction or, alter-
        natively, that the value of the donated property was zero. R
        also determined that Ps were liable for 20% accuracy-related
        penalties under I.R.C. sec. 6662(a) or, alternatively, 40% pen-
        alties for a gross valuation misstatement under I.R.C. sec.
        6662(h). R’s examination report was signed, in writing, by the
        examiner’s immediate supervisor. R mailed Ps a notice of defi-
        ciency determining that Ps were liable for the 40% penalties.
        The parties subsequently stipulated and agreed that Ps satis-
        fied the legal requirements for a charitable contribution
        deduction and that the value of the conservation easement
        was $80,000. Ps contend that R’s determination of I.R.C. sec.
        6662(h) 40% penalties was improper because R did not make
        an ‘‘initial determination’’ regarding the penalties pursuant to
        I.R.C. sec. 6751(b). R contends that I.R.C. sec. 6751(b) does
        not apply in deficiency proceedings or, alternatively, that R
        satisfied the procedural requirements of I.R.C. sec. 6751(b).
        Held: R’s determination of I.R.C. sec. 6662(h) penalties was
        proper because R’s examination report, determining as an
        alternative position that Ps were liable for the penalties, was
        an ‘‘initial determination’’ as required by I.R.C. sec. 6751(b).

  James R. Walker, for petitioners.
  Miles B. Fuller, Debra K. Moe, Edwin A. Herrera, and Mat-
thew A. Houtsma, for respondent.

                                  OPINION

  KERRIGAN, Judge: Respondent determined the following
deficiencies and penalties with respect to petitioners’ Federal
income tax liabilities for tax years 2007, 2008, 2009, and
2010:
                                                             Penalty
            Year                   Deficiency              sec. 6662(h)

            2007                   $61,625                   $24,650
            2008                    63,243                    25,294
            2009                    39,947                    15,979
            2010                    23,973                     9,589

  Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all monetary amounts to the
nearest dollar.
346           145 UNITED STATES TAX COURT REPORTS                      (344)


  The parties reached a settlement on all issues in the notice
of deficiency 1 except for the determined section 6662(h) 40%
gross valuation misstatement penalties. The sole issue for
consideration is whether respondent’s determination of pen-
alties under section 6662(h) was proper.

                               Background

   This case was fully stipulated under Rule 122. The stipu-
lated facts are incorporated in our findings by this reference.
Petitioners resided in Colorado when they filed the petition.
   During 2007 petitioners, through a disregarded entity,
donated 80 acres of land as a conservation easement to the
Colorado Natural Land Trust. On their timely filed 2007
Federal income tax return, petitioners valued the donation at
$1,418,500 and claimed a charitable contribution deduction.
Pursuant to section 170 petitioners were not entitled to
deduct the entire value of the conservation easement for tax
year 2007. Accordingly, petitioners claimed a charitable con-
tribution deduction of $183,737. Petitioners also claimed
carryover charitable contribution deductions for tax years
2008, 2009, and 2010 on the reported $1,418,500 conserva-
tion easement value.
   Respondent selected petitioners’ 2007, 2008, 2009, and
2010 tax returns for examination. On September 16, 2011,
the examiner’s supervisor, the Director of Western Area
Examination, sent petitioners a letter that included a copy of
the examiner’s report. The report determined that petitioners
did not satisfy the legal requirements for a charitable con-
   1 The parties stipulated and agreed to the following: (1) petitioners re-

ceived Conservation Reserve Program (CRP) payments of $12,188, $2,188,
$8,071, and $9,349 which they included in income on their 2007, 2008,
2009, and 2010 Federal income tax returns; (2) petitioners’ CRP payments
are not subject to self-employment tax; (3) petitioners are entitled to self-
employed health insurance deductions of $12,357 and $13,983 for tax years
2007 and 2008, respectively; (4) petitioners are not entitled to self-em-
ployed health insurance deductions for tax years 2009 and 2010; (5) as a
result of the donation of a conservation easement, petitioners are entitled
to a sec. 170 charitable contribution deduction for tax year 2007, subject
to any adjusted gross income limitations; and (6) to the extent petitioners
are unable to deduct all of their charitable contributions for tax year 2007
because of sec. 170(b)(1)(E)(i), petitioners are entitled to a carryover con-
tribution deduction as permitted under sec. 170(b)(1)(E)(ii).
(344)               LEGG v. COMMISSIONER                     347


tribution deduction or, alternatively, that even if petitioners
had met the legal requirements, the actual value of the con-
servation easement donation was zero. As a result the exam-
ination concluded that there was an underpayment of tax for
each of the tax years at issue due to a decrease of the chari-
table contribution deduction for the donated conservation
easement.
   Respondent’s examiner determined that petitioners were
liable for the 20% accuracy-related penalty under section
6662(a) or, alternatively, that petitioners were liable for the
40% accuracy-related penalty for a gross valuation
misstatement under section 6662(h). The examination report
concludes that petitioners are ‘‘subject to the Accuracy
Related Penalty-Gross Valuation Misstatement pursuant to
IRC Section 6662 for the tax year 2007’’. The examination
report, however, calculated the proposed penalties using the
20% rate.
   On October 25, 2011, petitioners filed a written protest and
requested that the Internal Revenue Service (IRS) Appeals
Office review the examiner’s proposed changes. The IRS
Appeals Office granted petitioners’ request, but the parties
did not reach an agreement. On October 24, 2013, the IRS
Appeals Office issued its report agreeing with the examiner’s
appraisal valuation determination of zero for the donated
conservation easement. Additionally the report agreed that
accuracy-related penalties should be imposed on petitioners
for the tax years at issue. The report explained that imposing
40% gross valuation misstatement penalties should be
respondent’s primary position because the value of the con-
servation easement reported on petitioners’ tax returns
exceeded more than 200% of the correct value (zero) and the
case is unagreed. The report further explained that imposing
20% accuracy-related penalties should be respondent’s alter-
native position.
   On October 24, 2013, the Appeals officer’s immediate
supervisor—the Appeals Team Manager—approved the
report. On October 24, 2013, respondent issued the notice of
deficiency and determined 40% gross valuation misstatement
penalties under section 6662(h).
   After the issuance of the notice of deficiency, petitioner and
respondent stipulated and agreed that the value of the con-
servation easement was $80,000 at the time of petitioners’
348        145 UNITED STATES TAX COURT REPORTS            (344)


donation. The parties agreed that mathematically petitioners’
reported value of $1,418,500 was a gross valuation
misstatement per section 6662(h)(2)(A)(i). The parties also
agreed that petitioners cannot invoke a reasonable cause
defense against the gross valuation misstatement penalties
under section 6662(h) but that petitioners have satisfied the
reasonable cause defense requirements for substantial valu-
ation misstatement penalties under section 6662(a) and
(b)(3).

                          Discussion

   Section 6751(b)(1) requires that no penalty be assessed
‘‘unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor
of the individual making such determination.’’ Additions to
tax under section 6651 (failure to file tax return or pay tax),
6654 (failure by individual to pay estimated income tax),
6655 (failure by corporation to pay estimated income tax) or
‘‘any other penalty automatically calculated through elec-
tronic means’’ are excepted from the requirement of section
6751(b)(1). See sec. 6751(b)(2).
   Before the enactment of section 6751 in the IRS Restruc-
turing and Reform Act of 1998, Pub. L. No. 105–206, sec.
3306(a), 112 Stat. at 744, the law did not require the IRS to
show how penalties were computed. Prior law also allowed
the imposition of some penalties without supervisory
approval. S. Rept. No. 105–174, at 65 (1998), 1998–3 C.B.
537, 601. Congress enacted section 6751 because it believed
‘‘that taxpayers are entitled to an explanation of the pen-
alties imposed upon them.’’ Id. In addition to including the
name, Code section, and computation of the penalty, section
6751 ‘‘also requires the specific approval of IRS management
to assess all non-computer generated penalties unless
excepted.’’ Id. The Senate Finance Committee believed that
‘‘penalties should only be imposed where appropriate and not
as a bargaining chip.’’ Id.
A. Timing Arguments
   The parties dispute the timing aspects of section 6751(b).
Petitioners believe that section 6751(b) must apply to the
first notice that the IRS sends the taxpayer. Thus, peti-
(344)               LEGG v. COMMISSIONER                     349


tioners argue that respondent’s examiner was the only per-
son qualified to make an ‘‘initial determination’’ of the appro-
priate penalties and the examiner determined a penalty of
20% pursuant to section 6662(a). Respondent contends that
section 6751(b) applies only before the assessment of pen-
alties, not before the determination of penalties in a notice
of deficiency. We find it unnecessary to decide whether sec-
tion 6751(b) applies only before the assessment of penalties
or before the determination of penalties in a notice of defi-
ciency since we conclude that respondent’s examiner made an
‘‘initial determination’’ regarding the section 6662(h) 40%
penalties.
B. The ‘‘Initial Determination’’
   The phrase ‘‘initial determination’’ is not defined anywhere
in the regulations. Nor did Congress define ‘‘initial deter-
mination’’ in the Code. The dictionary defines ‘‘initial’’ as
‘‘having to do with, indicating, or occurring at the beginning’’.
Webster’s New World College Dictionary 735 (4th ed. 2010).
   Petitioners argue that respondent’s examiner did not make
an ‘‘initial determination’’ of the section 6662(h) 40% pen-
alties because the examination report calculated the penalty
adjustments at 20%. They argue that this calculation sug-
gests that respondent never considered imposing the 40%
gross valuation misstatement penalties and that con-
sequently the examiner’s immediate supervisor could not
have approved, in writing, such penalties.
   Respondent argues that the examiner made an ‘‘initial
determination’’ that the 40% penalties were appropriate, con-
cluding in the examination report that petitioners were liable
for such penalties. Respondent further avers that the mere
fact that the examiner computed the proposed penalties at a
rate of 20% does not nullify the fact that the report con-
cluded that petitioners were liable for the 40% penalties.
Because the report was approved, in writing, by the exam-
iner’s immediate supervisor, respondent argues that the sec-
tion 6751(b) procedural requirements were met.
   As a result of respondent’s examination of petitioners’
2007, 2008, 2009, and 2010 tax returns, the examiner con-
cluded that section 6662(a) and (b)(2) 20% penalties were
applicable because it was determined that petitioners’ under-
350        145 UNITED STATES TAX COURT REPORTS            (344)


statement of tax for each year exceeded the greater of 10%
of the tax required to be shown on petitioners’ return or
$5,000. The examiner’s report also included a detailed discus-
sion of the applicability of the section 6662(h) 40% penalties.
The report explained that petitioners valued their conserva-
tion easement at $1,418,250 while the IRS appraised it at
zero. Because the value of the property reported on peti-
tioners’ income tax return was 200% or more of the amount
determined to be the correct value, the examiner determined
that petitioners were liable for the 40% gross valuation
misstatement penalties for the tax years 2007, 2008, 2009,
and 2010. The examiner’s immediate supervisor, the Director
of Western Area Examination, signed the report in writing.
   Respondent’s examination report included the 40% gross
valuation misstatement penalties analysis as an alternative
position because of uncertainty as to whether such penalties
could be imposed where an underpayment was the con-
sequence of an adjustment not based on valuation. Specifi-
cally, respondent was uncertain whether he could impose
gross valuation misstatement penalties on the theory that
petitioners’ donation of the conservation easement did not
meet the charitable contribution deduction requirements of
section 170, an adjustment not based on valuation. This
uncertainty has since been resolved. In the notice of defi-
ciency respondent contended that petitioners failed to meet
the legal requirements for a conservation easement chari-
table contribution deduction. We find that even though the
gross valuation misstatement penalties were posed as an
alternative position, the report made an ‘‘initial determina-
tion’’ that petitioners were liable for the 40% penalties.
   Our conclusion that respondent made an ‘‘initial deter-
mination’’ regarding the 40% penalties comports with
congressional intent. Congress enacted section 6751(b) to
ensure that taxpayers understood the penalties that the IRS
imposed upon them. The examination report clearly
explained why petitioners were liable for the gross valuation
misstatement penalties. The report applied section 6662(h)
and the relevant regulations to petitioners’ specific facts,
reaching the conclusion that petitioners were liable for the
40% penalties. Petitioners cannot contend that they lacked
an understanding of the penalties imposed upon them
because the penalties were posed as an alternative position.
(344)              LEGG v. COMMISSIONER                    351


   Petitioners’ argument that respondent’s examiner did not
make an ‘‘initial determination’’ of the section 6662(h) 40%
penalties because the examination report calculated the pen-
alty adjustments at 20% is unpersuasive. The fact that
respondent’s examiner calculated the penalties at a lower
rate does not nullify the ‘‘initial determination’’ that peti-
tioners were liable for the 40% gross valuation misstatement
penalties. Respondent’s examiner calculated the penalties at
20% to be consistent with the primary position in the report.
Even as an alternative position, the examination report con-
cluded that petitioners were liable for the 40% gross valu-
ation misstatement penalties.
   Therefore, because respondent made an ‘‘initial determina-
tion’’ regarding the section 6662(h) penalties which was
approved, in writing, by the examiner’s immediate super-
visor, we find that respondent satisfied the procedural
requirements of section 6751(b). We conclude that respond-
ent’s determination of section 6662(h) penalties was proper.
   Any contentions we have not addressed are irrelevant,
moot, or meritless.
   To reflect the foregoing,
                     Decision will be entered under Rule 155.

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