Meyer Papermasterv. United States [81-1 USTC ¶9217, U. S. District Court, East. Dist. Wis., No. 79-C-710, 4/21/80

[Code Secs. 6694 and 7701]

Return preparers: Understatement of income: Penalties: Negligence.--An individual who was an accountant and an attorney was a return preparer with respect to returns he prepared, at no charge, for individual taxpayers, because it was his customary practice to prepare the returns of shareholders for free when he prepared and was paid for preparing their corporate return. Thus, the compensation received for preparing the corporate return actually paid him for the entire package deal of individual and corporate returns. The taxpayers did not challenge the Commissioner's determination that they had claimed excessive losses from their tax-option corporation, so the court concluded that their liability was understated on the returns. Finally, a negligence penalty was properly imposed because the understatement of income tax liability arose out of the preparer's disregard of the express provisions of Code Sec. 1374(c).
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Decision and Order


GORDON, District Judge:


The plaintiff, proceeding pro se, brings this action under 26 U. S. C. §6694(c) challenging a one hundred dollar tax return preparer penalty imposed on him by the Internal Revenue Service (IRS) pursuant 26 U. S. C. §6694(a). The matter is before me on cross motions for summary judgment. Finding no genuine dispute as to any material fact and that the government is entitled to judgment as a matter of law, I will grant the government's motion, deny the plaintiff's, and this action will be dismissed. Rule 56(c), Federal Rules of Civil Procedure.


[Facts]


The relevant background facts are these: The plaintiff, who is both an attorney and a certified public accountant, prepared the 1976 joined individual income tax return of Adolf and Anna Ament. He also prepared the 1976 income tax return of Ament Construction, Inc., a subchapter-s corporation of which Mr. Ament is a shareholder. For preparing the corporation's return, the plaintiff received $440.00 compensation; however, he was not separately compensated for preparing the Aments' joint individual return.


The corporation's return declared a net operating loss of $9,794.22 for the year 1976. In determining the Aments' adjusted gross income, the plaintiff deducted this sum as Adolf Ament's distributive share of such loss. The IRS later determined that this deduction was overstated by $6,576.22, the amount by which the 1976 operating loss exceeded the sum of the adjusted basis of Mr. Ament's stock in the corporation and the adjusted basis of the corporation's indebtedness to him. 26 U. S. C. §1376(c)(2). The IRS assessed a deficiency against the Aments of over $1,500.00 for the year 1976, and the Aments paid the deficiency.


Thereafter, the plaintiff prepared for the Aments an amended 1976 income tax return claiming a refund of $1,568.24. This claim was denied by the IRS, and the Aments have never challenged the disallowance of this claim.


After denying the refund claim, the IRS assessed a $100.00 return preparer penalty against the plaintiff pursuant to 26 U. S. C. §6694(a), which provides:


"If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of the rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim."


In accordance with 26 U. S. C. §6694(c), the plaintiff paid fifteen percent of the penalty and commenced this action to have the penalty set aside and his fifteen dollars refunded. In his complaint and motion for summary judgment, the plaintiff asserts that he did not negligently prepare the Aments' 1976 joint individual return, that he was not an income tax return preparer with respect to such return, that he did not understate the Aments' tax liability for 1976, and that the IRS has denied him procedural due process in assessing the penalty and refusing to reopen the matter of the Aments' 1976 deficiency. Mr. Papermaster also seeks an award of attorney's fees.


[Three Issues]


The instant motions require me to resolve three issues: (1) with respect to the preparation of the Aments' 1976 joint individual income tax return, was the plaintiff "an income tax return preparer" within the meaning of §6694(a)? (2) Was there an understatement of liability in the Aments' 1976 return? (3) If there was an understatement, was it due to any negligent or intentional disregard of applicable rules and regulations on the part of the plaintiff? For reasons which follow, I answer each of these questions affirmatively.


[Package deal]


Section 7701(a)(36)(A) of the Internal Revenue Code defines "income tax return preparer" as "any person who prepares for compensation" an income tax return or claim for refund. In the case at bar, it is undisputed that Mr. Papermaster was compensated for preparing the corporation's 1976 tax return but not for preparing the Aments' individual return. In responding to the government's request for admissions, the plaintiff stated that he customarily prepares free of charge the individual returns of persons for whom he prepares corporate returns. I find little merit in Mr. Papermaster's contention that he was not "compensated" for preparing the Aments' individual return; he is by trade an income tax return preparer who offers a small businessman a package deal whereby he prepares the business' return for a fee which includes his charge for preparing the proprietor's individual return. This arrangement is reasonably distinguishable from the situation where someone prepares the return for a friend, neighbor or relative without charge or for a minor gratuity. See Senate Report No. 94-938, 94th Cong., 1st Sess. 351-52 (1976). Accordingly, I find that Mr. Papermaster did act as an income tax return preparer under §6694(a) with respect to the Aments' 1976 joint individual return.


[Understatement of liability]


Despite the failure of the Aments to challenge the IRS's disallowance of their claim for a refund of the amount they paid to satisfy the 1976 deficiency, the plaintiff contends that the Aments did not understate their tax liability on their original 1976 return. The essence of Mr. Papermaster's argument is that, because the corporation ended the year 1976 with over $8000.00 in the bank despite the net operating loss of $9,794.22 that year, Mr. Ament must have made substantial unrecorded cash advances to the corporation during the year. Such cash advances would have increased the corporation's indebtedness to Mr. Ament, making the operating loss fully deductible on the Aments' individual return pursuant to §1374. Mr. Papermaster speculates that the cash advances probably resulted from Mr. Ament's withdrawing a smaller salary from the corporation during 1976 than that to which he was entitled.


This argument is unpersuasive. The assumptions upon which the argument rests have never been documented or satisfactorily proved. The Aments themselves have never challenged the IRS' disallowance of their refund claim, which was based on an amended return prepared by the plaintiff. Moreover, Mr. Papermaster has not submitted such documentary proof to this court but has merely persisted in his unfounded speculation that the existence of a sizeable cash balance in the corporation's bank account at the end of 1976 conclusively proves that Mr. Ament increased the corporation's indebtedness to him by making substantial cash advances in the form of withdrawing a diminutive salary. However, it is equally plausible to assume that the corporation began the year with cash on hand out of which the operating losses were paid during the course of the year, or even that the corporation had undeclared income during the year which was used to meet operating expenses.


The undisputed fact is that an understatement of liability for the year 1976 on the Aments' individual joint return led to the imposition of a deficiency, and this deficiency was paid by the Aments without their ever challenging the IRS' underlying determination that Mr. Ament could not claim the full amount of the corporation's loss. Therefore, I find that there was an understatement of liability on the Aments' 1976 joint tax return within the meaning of 26 U. S. C. §6694(a).


[Negligence]


The last question is whether this understatement of tax liability was due to the "negligent or intentional disregard of rules and regulations" on the part of the plaintiff. The undisputed facts compel the conclusion that this was the case. Mr. Papermaster prepared the Aments' 1976 individual joint tax return. He claimed a deduction for the Aments which is provided for by §1374(a) but which is expressly limited as previously described by §1374(c). In responding to the government's request for admissions, however, the plaintiff expressly stated that he was "not familiar" with this code section when he prepared the Aments' return. I conclude that the understatement of the Aments' 1976 tax liability was due to Mr. Papermaster's disregard of the express limitations of §1374(c).


Mr. Papermaster's due process contentions are also devoid of merit. To the extent that his challenge is aimed at the IRS' handling of the Aments' 1976 refund claim, he has no standing to press that claim. Insofar as he alleges a lack of procedural due process in connection with the IRS' imposition of the $100 tax return preparer penalty, he has been afforded whatever process he is due by this court's resolution of the issues he has raised in his complaint and motion for summary judgment. Finally, having found that the government is entitled to dismissal of this case, I need not consider Mr. Papermaster's request for attorney's fees.


Therefore, IT IS ORDERED that the plaintiff's motion for summary judgment be and hereby is denied.


IT IS ALSO ORDERED that the defendant's motion for summary judgment be and hereby is granted.


IT IS FURTHER ORDERED that the complaint and this action be and hereby are dismissed.