In Whitehouse Hotel Ltd Partnership v. Commissioner, No. 13-60131 (6/11/2014), the Fifth Circuit Court of Appeals vacated the Tax Court’s enforcement of a gross undervaluation penalty imposed on a taxpayer claiming a charitable deduction for a historic preservation façade conservation easement because the taxpayer obtained a qualified appraisal, analyzed the appraisal, sought a second appraisal, and submitted a professionally prepared tax return, reports Williams Mullen. The Fifth Circuit deferred to the Tax Court’s determination of value.
Although the issue of whether a taxpayer acts with reasonable cause is determined on a case-by-case basis, the Fifth Circuit determined that the Tax Court clearly erred when it enforced a penalty even though the taxpayer had relied on professional advice. Therefore, taxpayers will want to have tax counsel involved in charitable gifts and have their returns professionally prepared. Taxpayers might also want to obtain a second appraiser to verify the value of hard to value gifts. Taxpayers should also be aware that the Tax Court and the Fifth Circuit do not always have the same views on when professional advice is sufficient to avoid an undervaluation penalty. Therefore, taxpayers can expect that the Tax Court will continue to enforce undervaluation penalties under similar circumstances unless the case is appealable to the Fifth Circuit.