IRS: Reasonable Cause Requires Legal Inquiry

Journal of Accountancy, April 2013 | Go to article overview

IRS: Reasonable Cause Requires Legal Inquiry


Although the Tax Court agreed with the IRS in PateL, 138 T.C. No. 23 (2012), that taxpayers improperly deducted the value of a. house they donated to a fire department to burn for training, the court overturned the IRS's imposition of an accuracy-related penalty against the taxpayers in the case.

In Action on Decision 2012-005 issued Jan. 17, the IRS said it will not acquiesce to the Tax Court's finding in Pate/that, with regard to the accuracy-related penalty under Sec. 6662, the taxpayers acted with reasonable cause and in good faith (see Tax Matters, "No Deduction for Bringing Down the House," Oct. 2012, page 63).

On the charitable deduction, the court found that under state law, the taxpayers' land included the house and any other structures and fixtures on it. Because the taxpayers retained title to the land after the fire department destroyed the house, if the donation was a real property interest at all, it was a partial interest. Finding that none of the categories qualifying as deductible contributions of partial interests in property under Sec. 170(f)(3)(B) applied, the court upheld the disallowance of the deduction.

Regarding the penalty, the court said that when the Patels filed the return at issue, in 2006, the legal issues were unsettled. …

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