"reasonable cause" - reliance on a professional

As indicated in thn Kierstead case, the negligence penalty can be abated for "reasonable cause" if there is reliance on a "professional." This 9th Circuit case and the annnotations below indicate who is NOT a "professional." This case states that a "tax attorney" is a professional and they did not recognize, as a professional, an attorney who is not a tax attorney. The court also appears to classify a CPA as a "professional" for purposes of the reaconable cause exception. This issue is and will continue to be important for the reasonable cause exception for the 6694 penalty, although the threshold for "reasonable cause" under 6677 is much higher. Notwithstanding, everyone would be advised to use a tax professional if opinions are needed to support the "substantial authority" standard under section th4 6694(a)statute.


Glenn E. Kierstead; Carol L. Kierstead, Petitioners v. Commissioner of Internal Revenue, Respondent.

U.S. Court of Appeals, 9th Circuit; 07-74870, May 11, 2009.

Unpublished opinion affirming the Tax Court, 93 TCM 1392, Dec. 56,975(M), TC Memo. 2007-158.



Accuracy-related penalties were properly imposed on a couple because they did not show that they received advice from competent professionals with sufficient experience to justify reliance and that they actually relied on their attorney's advice regarding their use of two business trusts to avoid personal tax. The couple sought the advice of an attorney who did not claim to be a tax specialist and specifically advised them to seek the assistance of a tax attorney or an accountant. Moreover, the attorney advised them of the general legal requirements for creating and operating business trusts, not as to the permissibility of the deductions actually taken. Although the couple allegedly sought the additional advice of a tax attorney, they failed to call the attorney as a witness and did not present any evidence regarding his expertise or the nature of any specific tax advice he gave.



Before: Hug, Hawkins and Tallman, Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT. NOT FOR PUBLICATION. No. 07-74870. Tax Ct. No. 24184-05. Appeal from a Decision of the United States Tax Court. Submitted May 6, 2009 ** . San Francisco, California.


MEMORANDUM *


Glenn and Carol Kierstead appeal the decision of the United States Tax Court finding them liable for accuracy-related penalties under I.R.C. § 6662. They claim they should not be subject to penalties because they believed in good faith, based on advice of counsel, that their use of the G. Kierstead Holdings Trust and the G. Kierstead Family Trust (the "Trusts") was proper. We have jurisdiction under I.R.C. § 7482(a)(1), and we affirm.

The Commissioner's decision to impose negligence penalties is presumptively correct. Hansen v. Comm'r, 820 F.2d 1464, 1469 (9th Cir. 1987). The taxpayer bears the burden of proving that he is eligible for an exception to the penalty. I.R.C. § 7491(a), (c); Higbee v. Comm'r, 116 T.C. 438, 446-47 (2001). We review for clear error the Tax Court's findings of fact and its finding that a taxpayer is liable for accuracy-related penalties. See Keane v. Comm'r, 865 F.2d 1088, 1090 (9th Cir. 1989); Custom Chrome, Inc. v. Comm'r, 217 F.3d 1117, 1121 (9th Cir. 2000).

Reliance on the advice of a tax professional may demonstrate reasonable cause for an understatement of tax, if the reliance was reasonable and in good faith. See United States v. Boyle, 469 U.S. 241, 251 (1985) (noting that a taxpayer may reasonably rely on an accountant's or attorney's advice regarding a matter of tax law); Collins v. Comm'r, 857 F.2d 1383, 1386 (9th Cir. 1988); 26 C.F.R. § 1.6664-4(b)(1) (reliance on practitioner may be reasonable cause for understatement if "under all the circumstances such reliance was reasonable and the taxpayer acted in good faith"). We "examine the circumstances surrounding the advice to determine whether the taxpayer's actions were reasonable." Hansen v. Comm'r, 471 F.3d 1021, 1032 (9th Cir. 2006).

Here, the Tax Court determined the Kiersteads had not proven that they received advice from competent professionals with sufficient expertise to justify reliance, and had not actually relied in good faith on the attorneys' advice. G. Kierstead Family Holdings Trust v. Comm'r, T.C. Memo. 2007-158, at 5 (2007). The record supports these findings. The Kiersteads first sought advice from attorney David Kallman. Mr. Kallman appears to be an experienced attorney, but does not hold himself out as a tax specialist. He advised the Kiersteads to seek specific advice from a tax attorney or Certified Public Accountant ("CPA"). He advised the Kiersteads of the general legal requirements for creating and operating business trusts. However, he did not advise them that all of the deductions actually taken were permissible uses of the Trusts. When questioned about the notion that a person might use a business trust to avoid all personal income tax, he testified the idea was "crazy stuff" and contrary to the advice he gives to his clients.

The Kiersteads apparently sought additional advice from David Carter, a tax attorney and CPA, but he did not testify at trial. Nor did the Kiersteads call as a witness William Yee, a tax preparer on whose advice they also purportedly relied. The Kiersteads introduced no evidence, other than Mr. Kierstead's own hearsay testimony, of Mr. Carter's or Mr. Yee's qualifications or the specific tax advice received from them.

The Tax Court considered and weighed all of the relevant evidence. It reasonably concluded that the Kiersteads failed to prove that they had received advice from a competent professional, the nature of that advice, or that reliance on such advice was justifiable. While the Kiersteads did put forth some evidence of their good faith, the Tax Court's determination that the Kiersteads were liable for penalties under I.R.C. § 6662 was not clearly erroneous.

AFFIRMED.

** The panel unanimously finds this case suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2).

* This disposition is not appropriate for publication and is not precedent except as provided by 9th Circuit Rule 36-3.



G. Kierstead Family Holdings Trust, et al. v. Commissioner.

Dkt. Nos. 24183-05 , 24184-05 , 24185-05 , TC Memo. 2007-158, June 20, 2007.


A couple failed to prove they reasonably relied on the advice of a competent tax professional regarding two trusts they created and were, therefore, subject to the accuracy-related penalty under Code Sec. 6662(a). The husband assigned all rights to his lifetime services and future earnings to two trusts from which the couple deducted all personal and other living expenses. The couple sought the advice of an attorney regarding income tax issues related to the trusts. At trial, however, the couple failed call the attorney as a witness, failed to present any evidence of his expertise, and failed to present evidence of any specific tax advice he gave.


Anthony V. Diosdi, for petitioner; Jeremy L. McPherson, for respondent.

G. KIERSTEAD FAMILY HOLDINGS TRUST, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.


MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Petitioners in these consolidated cases are G. Kierstead Family Holdings Trust, G. Kierstead Family Trust, and Glenn E. and Carol L. Kierstead as individuals. Before trial, the parties stipulated that there are no deficiencies in Federal income tax or penalties due from petitioners G. Kierstead Family Holdings Trust or G. Kierstead Family Trust. Respondent determined Federal income tax deficiencies and penalties for petitioners2 Glenn and Carol Kierstead as follows3 :



Year at
Issue Deficiency Sec. 6662(a)




2001 $40,410 $8,080

2002 38,165 7,633

2003 66,179 13,235


The parties filed a stipulation of settled issues necessary for a determination of the amount of the liability for the years in question, other than applicable penalties. Accordingly, the only issue to be determined is whether petitioners Glenn and Carol Kierstead are liable for accuracy-related penalties under section 6662(a) for 2001, 2002, and 2003 (years at issue).4


FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by reference. Petitioners resided in Vacaville, California, when they filed this petition. Petitioner trusts both used addresses in Lansing, Michigan, on their Tax Court petitions.

In 1998, with the assistance of National Trust Services (NTS), petitioners established the G. Kierstead Family Holdings Trust and the G. Kierstead Family Trust. Petitioner Glenn Kierstead assigned all rights to his lifetime services and future earnings to the trusts. Petitioners deducted inter alia their personal living expenses and depreciation of their residence on Form 1041, U.S. Income Tax Return for Estates and Trusts, filed for the years at issue.

In early 2001, upon learning that one of the promoters of NTS stole money from an investment promoted by NTS, petitioners sought advice about the legality of the trusts from attorney David Kallman. Mr. Kallman provided petitioners with information about the classification of business trusts for Federal income tax purposes. He advised petitioners to consult David Carter, an attorney who is also a certified public accountant (C.P.A.) regarding the income tax issues of the trusts. At petitioners' request, Mr. Kallman amended the terms of the trusts in July 2001.

Petitioners timely filed Federal individual as well as trust income tax returns for the years at issue. On September 28, 2005, separate notices of deficiency were sent to each party. In the notice of deficiency sent to petitioners Glenn and Carol Kierstead, respondent determined that the trusts must be disregarded for Federal income tax purposes. Petitioners Glenn and Carol Kierstead, as well as the two trusts, timely filed petitions with the Court on December 22, 2005.


OPINION

Section 6662(a) imposes a 20-percent penalty on the portion of an underpayment attributable to a substantial understatement of income tax. While the Commissioner bears the initial burden of production and must come forward with sufficient evidence showing it is appropriate to impose an accuracy-related penalty, the taxpayer bears the burden of proof as to any exception to the penalty. See sec. 7491(c); Rule 142(a); Higbee v. Commissioner [Dec. 54,356], 116 T.C. 438, 446-447 (2001). In order to meet the burden of proof, a taxpayer must present evidence sufficient to persuade the Court that the Commissioner's determination is incorrect. Higbee v. Commissioner, supra at 447. Petitioners concede that respondent has met his burden of production. However, they argue that they are not liable for a portion of the section 6662(a) penalties because they, in good faith, relied on the advice of two competent tax professionals.

An accuracy-related penalty is not imposed on any portion of the understatement as to which the taxpayer acted with reasonable cause and in good faith. Sec 6664(c)(1). Reliance on the advice of a tax professional may constitute reasonable cause and good faith, if under all the facts and circumstances the reliance is reasonable and in good faith. Neonatology Associates, P.A. v. Commissioner [Dec. 53,970], 115 T.C. 43, 98 (2000), affd. [2002-2 USTC ¶50,550] 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c)(1), Income Tax Regs. To qualify for this exception, a taxpayer must prove by a preponderance of the evidence that: (1) The adviser was a competent professional who had sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer actually relied in good faith on the adviser's judgment. Neonatology Associates, P.A. v. Commissioner, supra at 98-99.

Petitioners contend that their reliance on attorneys Kallman and Carter relieves them from the accuracy-related penalties. We disagree. Respondent has not disputed that petitioners satisfied part (2) of the 3-prong test. Accordingly, the issue to be determined is whether petitioners actually relied in good faith on the advice of competent tax professionals possessing sufficient expertise to justify their reliance.

In 2001, petitioners consulted Mr. Kallman, an attorney with 24 years' experience regarding the trusts. Mr. Kallman does not hold himself out as a tax attorney, nor does he prepare tax returns. Mr. Kallman provided petitioners with limited tax advice about the tax treatment of business trusts. He also provided general tax information that business expenses, but not personal expenses, were allowed as deductions. Mr. Kallman was careful to qualify any tax advice by telling petitioners to consult their tax attorney and accountant. Therefore, petitioners did not rely on Mr. Kallman's advice in the preparation and filing of their Federal individual and trust income tax returns.

On the advice of Mr. Kallman, petitioners consulted David Carter, an attorney and C.P.A., regarding tax issues of the trusts. Petitioner Glenn Kierstead testified that Mr. Carter "said he was very comfortable with [the trusts]." Though petitioners listed Mr. Carter as a potential witness, he did not testify at trial. Petitioners introduced no evidence as to Mr. Carter's qualifications as a tax expert other than Mr. Kallman's testimony that he was an attorney with a C.P.A. background. No evidence has been submitted of any specific tax advice provided by Mr. Carter relating to petitioner's assignment of lifetime earnings to the trusts or the allowance of deductions for personal expenses. For these reasons, petitioners failed to prove that Mr. Carter was a competent tax professional and that petitioners were justified in relying on his opinion.

Because petitioners failed to prove they reasonably relied on a competent tax professional, and because they failed to assert any other basis for relief, we hold that petitioners failed to prove that they had reasonable cause within the meaning of section 6664(c). Therefore, we find petitioners are liable for accuracy-related penalties under section 6662(a) for the years at issue.

In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155 in docket No. 24184-05.

Decisions will be entered for petitioners in docket Nos. 24183-05 and 24185-05.

1 Cases of the following petitioners are consolidated herewith: Glenn E. and Carol L. Kierstead, docket No. 24184-05; and G. Kierstead Family Trust, docket No. 24185-05.

2 Unless otherwise indicated, reference to "petitioners" shall mean petitioners Glenn E. and Carol L. Kierstead as individuals.

3 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended. All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

4 The parties stipulated that petitioners are liable for accuracy-related penalties under sec. 6662(a) for 2001, 2002, and 2003 for the portion of their deficiencies allocable to their failure to include interest income in the amounts of $8,633, $8,465, and $8,174, respectively.

Reliance on professionals was not reasonable cause. --Substantial Understatement: Reliance on professionals was not reasonable cause

Absent substantial authority, a domestic holding corporation was liable for the substantial understatement component of the accuracy-related penalty for one tax year. The understatement was attributable to foreign tax credits that the corporation claimed with respect to a sizable dividend that it reported it received from one of its foreign operating subsidiaries. The relevant facts affecting the tax treatment of the transaction were not adequately disclosed in the taxpayer's return or in a later disclosure letter; and the entity did not have reasonable cause for, or act in good faith with respect to, its treatment of the transaction in its return. Finally, no evidence supported the taxpayer's contention that it reasonably relied on its accounting firm.

InterTan, Inc., CA-5, 2005-1 USTC ¶50,111, 353 F3d 1357.

A corporation's officers and attorney were liable for the substantial understatement penalty because their tax treatment of options was not supported by substantial authority and they did not adequately disclose the facts relevant to the tax treatment. They could not avoid the penalty because they did not reasonably rely in good faith on their tax advisors.

R.A. Cramer, CA-9, 95-2 USTC ¶50,491. Cert. denied, 6/10/96.

T.D. Davenport, DC Ky., 2006-2 USTC ¶50,394.

Understatement penalties were imposed in the following cases because relying on a professional is not reasonable when the taxpayer does not provide the professional with correct, sufficient and/or complete and accurate information.

S.R. Loftus, 63 TCM 2944, Dec. 48,203(M), TC Memo. 1992-266.

E. Taylor, 69 TCM 2932, Dec. 50,701(M), TC Memo. 1995-269. Aff'd, CA-10 (unpublished opinion), 97-1 USTC ¶50,310.

United Circuits, Inc., 70 TCM 1619, Dec. 51,069(M), TC Memo. 1995-605.

S.D. Podd, 75 TCM 2575, Dec. 52,765(M), TC Memo. 1998-231.

D.W. Stark, 77 TCM 1181, Dec. 53,202(M), TC Memo. 1999-1.

J.C. Archer, 79 TCM 2057, Dec. 53,891(M), TC Memo. 2000-166.

Delaware Corp., 88 TCM 589, Dec. 55,825(M), TC Memo. 2004-280.

H.J. Kaplan, 91 TCM 695, Dec. 56,422(M), TC Memo. 2006-16.

The substantial understatement penalty was properly imposed because the taxpayers failed to prove that they acted in good faith in the preparation of their returns and that there was reasonable cause for the understatement in their tax or that there was an abuse of discretion by the IRS in refusing to waive the addition to penalty.

J.M. Estes, Jr., 64 TCM 705, Dec. 48,494(M), TC Memo. 1992-531.

A "termination allowance" received by a telephone technician from his employer was not excludable from his income because the payment was in the nature of severance pay rather than damages received for personal injuries. The taxpayer's reliance on his tax return preparer did not insulate him from liability for the tax deficiency or substantial understatement penalty.

J.E. Huff, 64 TCM 1547, Dec. 48,698(M), TC Memo. 1992-718.

Individual joint filers who claimed that their attorney failed to notify them of the Tax Court's decision on their petition were not entitled to have the decision vacated after the appeal period had expired. The deficiency and additions to tax were upheld.

V.C. Gazdak, 66 TCM 479, Dec. 49,233(M), TC Memo. 1993-381.

A damage award received by an individual as compensation for a breach of contract suit was taxable income. The taxpayer's reliance on an attorney's opinion that the award was excludable did not relieve him from failure to file and substantial understatement penalties.

J.A. Climenhage, 65 TCM 2736, Dec. 49,051(M), TC Memo. 1993-223.

Reliance on its accounting service did not excuse a publishing company from liability for penalties for failure to timely file returns and for substantial understatement of income. The substantial understatement penalty was imposed because the expenditure for a land purchase was large in relation to the expense account to which it was attributed and the accountant's mistake should have been detected on a reasonable inspection of the return by the taxpayer.

Olde Towne Typesetters, Inc., 66 TCM 51, Dec. 49,138(M), 1993-296.

Additions to tax for substantial understatement of taxes were owed by investors in a limited partnership who unreasonably relied upon their accountant's advice and did not make an independent factual analysis that would enable them to formulate a reasonable belief as to the tax treatment of the investment.

A. Kaplan, 67 TCM 2258, Dec. 49,691(M), TC Memo. 1994-81.

A taxpayer who relied on a tax professional was subject to the substantial understatement penalty. Reliance on a professional did not constitute substantial authority for their tax treatment of the affected items that enabled him to avoid the penalty.

J. Epstein, 67 TCM 2046, Dec. 49,636(M), TC Memo. 1994-34.

The substantial understatement penalty was imposed because the taxpayers did not act reasonably in relying on an accountant's preparation of their return. They unreasonably relied on their accountant and invested in tax shelter partnerships without a profit motive when they knew that he lacked expertise regarding various investment recommendations. The taxpayers, who made numerous poor business decisions based on the accountant's advise, did not act in good faith when they relied on his investment recommendations.

R. Lax, CA-3 (unpublished opinion), 95-2 USTC ¶50,639.

A circuit board manufacturer that improperly claimed deductions for equipment lease payments that should have been capitalized was liable for the substantial understatement penalty. The manufacturer did not reasonably rely in good faith on the advice of its accountant. The manufacturer did not provide its accountant with full details or complete and accurate information concerning the transactions. It relied on the accountant for accounting advice rather than for tax advice. Moreover, the manufacturer did not follow the accountant's advice as to the characteristics of a legitimate lease. Finally, the negligence penalty was also imposed.

United Circuits, Inc., 70 TCM 1619, Dec. 51,069(M), TC Memo. 1995-605.

An individual who operated his business through a number of trusts that were determined to be part of a scheme to avoid taxation on his business income was not liable for the fraud penalty because the IRS did not prove fraud by clear and convincing evidence. However, the individual was liable for substantial understatement penalties because he was unable to show substantial authority for his position. Opinion letters from the promoter's attorney did not constitute substantial authority for the individual's actions.

Para Technologies Trust, 68 TCM 294, Dec. 50,013(M), TC Memo. 1994-366. Aff'd sub nom. T. Anderson, CA-9 (unpublished opinion), 97-1 USTC ¶50,294.

Penalties for negligence and substantial understatement were imposed against a realtor who improperly attempted to use the installment method to report income from his transfer of depreciable property to a related buyer. He failed to show that there was reasonable cause for his understatement of tax or that he had acted in good faith. He did not carefully review his return or correct obvious errors on the document, and he failed to show the types of information or documentation that he had provided to his return preparer.

R.J. Guenther, 69 TCM 2980, Dec. 50,713(M), TC Memo. 1995-280.

An owner and his giftware corporation were liable for negligence and substantial understatement penalties. They could not avoid liability for the penalties based on their purported reliance on the advice of their accountants in light of the fact they had conspired to prepare and present to the IRS backdated documents and accounting entries. Even if the owner and the corporation relied on the accountants, they disregarded that advice.

G. Georgiou, 70 TCM 1341, Dec. 51,005(M), TC Memo. 1995-546.

In the following cases, the substantial understatement penalty was imposed because the taxpayers' claimed reliance on the advice of an unidentified IRS employee was insufficient to avoid the penalty.

D.W. Harker, 68 TCM 1272, Dec. 50,259(M), TC Memo. 1994-583. Aff'd on another issue, CA-8, 96-1 USTC ¶50,244.

M. Dogali, 69 TCM 1759, Dec. 50,445(M), TC Memo. 1995-39.

An individual was subject to the penalty for substantial understatement of income tax because he showed no reasonable cause for the understatement. Self-serving testimony that the taxpayer relied on his accountant to correctly prepare his returns was not credible, and the accountant did not testify.

M.D. Morgan, 73 TCM 2313, Dec. 51,940(M), TC Memo. 1997-132.

In the following cases, the substantial understatement penalty was imposed because the taxpayers' claimed reliance on the advice of a tax professional was not reasonable cause for the understatement.

B.R. House, 69 TCM 2005, Dec. 50,502(M), TC Memo. 1995-92.

INI, Inc., 69 TCM 2113, Dec. 50,526(M), TC Memo. 1995-112.

N. Nahikian, 69 TCM 2370, Dec. 50,582(M), TC Memo. 1995-161.

T.M. Fries, 73 TCM 2085, Dec. 51,898(M), TC Memo. 1997-93.

K.S. Rao, 72 TCM 1198, Dec. 51,642(M), TC Memo. 1996-500.

Cordes Finance Corp., 73 TCM 2493, Dec. 51,975(M), TC Memo. 1997-162. Aff'd, CA-10 (unpublished opinion), 98-2 USTC ¶50,824.

J. Montoro, 73 TCM 3113, Dec. 52,107(M), TC Memo. 1997-281.

Reaves Livestock, Inc., 73 TCM 3137, Dec. 52,108(M), TC Memo. 1997-283.

A.M. Moye, 74 TCM 1397, Dec. 52,400(M), TC Memo. 1997-554.

M. Roy, M.D., Inc., 74 TCM 1428, Dec. 52,409(M), TC Memo. 1997-562. Aff'd, CA-9 (unpublished opinion), 99-1 USTC ¶50,588.

Cleo Perfume, Inc., 75 TCM 2200, Dec. 52,677(M), TC Memo. 1998-155.

S.D. Emmons, 75 TCM 2275, Dec. 52,696(M), TC Memo. 1998-173.

Florida Industries Investment Corp., 78 TCM 605, Dec. 53,590(M), TC Memo. 1999-346. Aff'd, per curiam, CA-11 (unpublished opinion), 2001-1 USTC ¶50,334.

E.R. Stolz, II, 78 TCM 941, Dec. 53,654(M), TC Memo. 1999-404.

J. Pinson, 80 TCM 13, Dec. 53,945(M), TC Memo. 2000-208.

R. Haeder, 81 TCM 987, Dec. 54,211(M), TC Memo. 2001-7.

W.O. Bowen, 81 TCM 1216, Dec. 54,257(M), TC Memo. 2001-47.

V.M. Bello, 81 TCM 1271, Dec. 54,268(M), TC Memo. 2001-56.

Burien Nissan, Inc., 81 TCM 1624, Dec. 54,339(M), TC Memo. 2001-116. Aff'd , CA-9 (unpublished opinion), 2004-1 USTC ¶50,102, 75 Fed Appx 652.

J.J. LeBouef, 82 TCM 685, Dec. 54,504(M), TC Memo. 2001-261.

L.T. Baldwin, III, 83 TCM 1915, Dec. 54,798(M), TC Memo. 2002-162.

W. Pratt, 84 TCM 523, Dec. 54,929(M), TC Memo. 2002-279.

C.R. Bitker, 86 TCM 72, Dec. 55,229(M), TC Memo. 2003-209.

W.A. Egan, 90 TCM 365, Dec. 56,162(M), T.C. Memo. 2005-234.

L.J. Wadsworth, 96 TCM 20, Dec. 57,490(M), TC Memo. 2008-171.

A married couple, whose tax shelter trust's charitable contributions deduction were disallowed, was liable for accuracy-related penalties. The couple conceded that their understatement was substantial; however, they argued that they reasonably relied on their tax preparer to prepare their return correctly. Although reliance on a tax professional may be a defense to the accuracy-related penalty in certain circumstances, the couple failed to prove that (1) they relied on a competent professional whose expertise was sufficient to justify reliance, (2) they provided necessary and accurate information to that professional, and (3) they actually relied on the professional's advice in good faith.

J.L. Hill, 87 TCM 1451, Dec. 55,680(M), TC Memo. 2004-156.

A privately organized pooled investment vehicle, or "hedge fund", created by two Nobel Prize winning economists participated in transactions that lacked economic substance and, therefore, the IRS properly denied its capital loss deductions and imposed penalties for gross valuation misstatements and substantial understatements. The district court found that the accuracy-related penalties imposed by the IRS were not erroneous because the taxpayer did not satisfy the reasonable cause exception. Although the taxpayer argued that (1) there was no valuation misstatement on its tax return, (2) it did not act negligently, and (3) that it had substantial authority for its return position, the court concluded that the penalties imposed were justified. The court found that there was a substantial valuation misstatement on the taxpayer's return; the taxpayer substantially overstated its basis in the stock it sold. Additionally, the taxpayer acted negligently because LTCH lacked a reasonable belief that the basis it claimed for the stock was valid. Finally, the taxpayer did not have substantial authority for its return position; a tax professional's opinion did not constitute "substantial authority" for the taxpayer's return position.

Long Term Capital Holdings, DC Conn., 2004-2 USTC ¶50,351.

A tax shelter partnership was subject to the gross valuation misstatement, negligence and substantial understatement penalties. The TMP, a highly educated, sophisticated tax attorney, engineered the plan to transfer built-in losses to the partnership, which transaction had no economic substance for federal tax purposes. Under the circumstances, a reasonably prudent person with the TMP's tax experience would not have reported the partnership's basis in the receivables as he did. Thus, the partnership failed to meet the reasonable cause exception to the negligence penalty.

Santa Monica Pictures, LLC, 89 TCM 1157, Dec. 56,016(M), TC Memo. 2005-104.

An individual was liable for the substantial understatement penalty for failing to report income and claiming unsupported deductions. He failed to maintain adequate books and records. His claim that he relied on the advice of an attorney with respect to his failure to include forgiveness of debt in his income was rejected. The attorney merely advised the taxpayer as to the characterization of the settlement, not the tax consequences of the forgiveness of debt.

R.E. Corrigan, 89 TCM 1313, Dec. 56,034(M), TC Memo. 2005-119.

Taxpayers failed to satisfy the threshold requirements of a reasonable cause exception to the penalty for gross valuation misstatement. The taxpayers' argument that they relied on tax advice failed because they did not present evidence that the advice was relevant to the valuation misstatement. Furthermore, even if the advice were relevant, there was no evidence that the tax advice was based on all of the pertinent facts and circumstances.

Long-Term Capital Holdings LP, CA-2, 2005-2 USTC ¶50,575.

An accuracy-related penalty under Code Sec. 6662(a) for substantial understatement of income tax was imposed. The taxpayer's claim that the understatement was due to reasonable cause and made in good faith because he relied on his accountant, was not persuasive. The only alleged erroneous advice related to the carryforward of a claimed NOL, which the court disallowed because the taxpayer failed to substantiate it.

M.D. Lee, 91 TCM 999, Dec. 56,476(M), TC Memo. 2006-70.

A taxpayer was liable for the accuracy-related penalty for substantial understatement of income tax attributable to the portion of the jury award she received and incorrectly excluded from income. While the taxpayer alleged that she and her husband met with a nationally renowned expert on the taxation of legal awards, the reasonable cause exception did not apply because she provided no evidence of what tax advice was actually rendered.

M.S. Green, 93 TCM 917, Dec. 56,841(M), TC Memo. 2007-39.

A taxpayer was liable for the accuracy-related penalty on substantial understatements of tax. Although he claimed that he reasonably relied on his accountant's advice, he failed to show that the accountant was a competent professional who had sufficient expertise to justify the taxpayer's purported reliance.

J. Calvao, 93 TCM 988, Dec. 56,862(M), TC Memo. 2007-57.

Similarly.

G. Kierstead Family Holdings Trust, 93 TCM 1392, Dec. 56,975(M), TC Memo. 2007-158.

A married couple's reliance on their accountant to calculate their taxes did not excuse them from liability for the penalty for substantial understatement of tax. The taxpayers' actions were not reasonable, given the substantial amounts of gross receipts involved, the taxpayer's business experience, and the large discrepancy between the tax reported and the actual tax owed.

J. Ramirez, 94 TCM 496, Dec. 57,181(M), TC Memo. 2007-347.

The accuracy-related penalty for substantial underpayment of income tax was imposed on a car dealership that improperly deducted legal fees relating to its landlord's defense of title and its acquisition of another dealership. The exception for reliance on a tax professional did not apply in the absence of evidence that its accountant was supplied with all of the correct and necessary information needed to establish its position, that the error was the result of a preparer's mistake, or that there was any discussion of the treatment of the legal fees with the accountant before the return was filed.

West Covina Motors, Inc., Dec. 57,564(M), TC Memo. 2008-237.

The accuracy-related penalty for substantial underpayment of income tax was imposed on a car dealership that improperly deducted legal fees relating to its landlord's defense of title and its acquisition of another dealership. The exception for reliance on a tax professional did not apply in the absence of evidence that its accountant was supplied with all of the correct and necessary information needed to establish its position, that the error was the result of a preparer's mistake, or that there was any discussion of the treatment of the legal fees with the accountant before the return was filed.

West Covina Motors, Inc., Dec. 57,564(M), TC Memo. 2008-237.

The accuracy-related penalty for a substantial underpayment of tax attributable to a net operating loss that an individual taxpayer conceded was improper was imposed. Reliance on the taxpayer's accountant was not reasonable since no steps were taken to verify that the accountant had sufficient expertise or was sufficiently independent of the entity that sponsored the offshore investment programs that generated the net operating loss.

W.C. Wyatt, Dec. 57,581(M), TC Memo. 2008-253.

The Tax Court's decision finding that an individual was liable for the accuracy-related penalty for substantial understatement of income tax was reversed and remanded. Since the individual and her husband sought tax advice from two attorneys, the Tax Court should have considered the aggregate advice received from both attorneys to determine the reasonableness of the individual's reliance on their tax advice.

M. Green, CA-9, 2009-1 USTC ¶50,245.

Accuracy-related penalties were imposed because the authority cited by the taxpayer was easily distinguished.

P. Ackerman, Dec. 57,790(M), TC Memo. 2009-80.



No evidence of reliance on professional advice. --Negligence: No evidence of reliance on professional advice

The taxpayer was liable for an addition to tax for negligence where there was no showing of what information the taxpayer gave his accountant. Furthermore, the issues were neither complex nor did they require any sophisticated tax knowledge which might have excused the taxpayer's errors.

F. Samp, 43 TCM 89, Dec. 38,488(M), TC Memo. 1981-706. Taxpayer's appeal to CA-10 dismissed 7/30/82.

A taxpayer who improperly deducted interest paid to brokerage firms as a trade or business expense was liable for additions to tax for negligence. The taxpayer failed to prove that he relied on his accountant's advice.

S.A. Paoli, 62 TCM 275, Dec. 47,506(M), TC Memo. 1991-351.

The taxpayers failed to prove that they had relied on the advice of either an accountant or an attorney in setting up the family trust which resulted in their income tax deficiency.

R.N. Brown, 43 TCM 1322, Dec. 39,006(M), TC Memo. 1982-253.

J.W. Preston, 47 TCM 417, Dec. 40,625(M), TC Memo. 1983-705.

There was no evidence that the accountant had given any advice resulting in the understatements of taxpayer's income.

A.C. Engineering Corp., 17 TCM 737, Dec. 23,114(M), TC Memo. 1958-147.

The Commissioner's imposition of a negligence penalty against the taxpayers for underpayment of tax was sustained. The taxpayer failed to prove that his underpayment of tax was not due to negligence. There was no evidence to show that the taxpayer relied in good faith upon the advice of competent counsel or an experienced accountant to assure himself of the validity of a grantor trust.

H.M. Ward, 47 TCM 588, Dec. 40,661(M), TC Memo. 1983-736.

Where taxpayers presented no evidence that their professional return preparer was aware of the facts and circumstances of their various disallowed claimed deductions, or that he ever advised their sales corporation that it was proper to claim such deductions, or that he advised the taxpayer/president that he recognized no income from having personal expenses paid by his corporation, the taxpayers were held liable for additions to tax for negligence.

H.L. Snyder, 47 TCM 355, Dec. 40,611(M), TC Memo. 1983-692.

An individual was held liable for the negligent underpayment of tax. He persisted in structuring a transaction as a sale despite his attorney's warnings that the transaction would be characterized as a sham.

N.W. Portemain, 58 TCM 293, Dec. 46,065(M), TC Memo. 1989-359.

Taxpayer was liable for additions to tax where he alleged, but introduced no evidence to support the allegation, that his accountant was informed of the income but failed to include it in the taxpayer's income tax return.

E. Ross, 37 TCM 1560, Dec. 35,427(M), TC Memo. 1978-380.

Additions to tax for negligence were imposed against a nurse who failed to establish that she had not acted negligently in claiming her mother as a dependent and in taking an excessive deduction for work clothes. Her purported reliance on the advice of her certified public accountant did not relieve her of liability for the penalties absent proof that she had provided him with accurate information.

C. Chacon, 64 TCM 1169, Dec. 48,606(M), TC Memo. 1992-632. Aff'd, CA-11 (unpublished opinion 10/21/94).

A married couple who assembled clothing in their home for clothing manufacturers was liable for the negligence penalty because they offered no substantiation of their contention that they relied on the advice of a tax professional.

T.V. Pham, 70 TCM 814, Dec. 50,912(M), TC Memo. 1995-459.

In the following cases, the negligence penalty was imposed because the taxpayers failed to show that they reasonably relied on the advice of a tax professional.

M. Veglia, DC Ill., 97-2 USTC ¶50,700.

W.T. Wright, 66 TCM 214, Dec. 49,174(M), TC Memo. 1993-328. Aff'd, CA-9 (unpublished opinion), 96-1 USTC ¶50,086.

D. Page, 66 TCM 571, Dec. 49,251(M), TC Memo. 1993-398. Aff'd on other issues, CA-8, 95-2 USTC ¶50,369, 58 F3d 1342.

M. Lieber, 66 TCM 722, Dec. 49,280(M), TC Memo. 1993-424.

M.L. Stiebling, 67 TCM 3006, Dec. 49,865(M), TC Memo. 1994-233. Aff'd, CA-9 (unpublished opinion), 97-1 USTC ¶50,467.

W.L. Marcy, 68 TCM 1028, Dec. 50,201(M), TC Memo. 1994-534.

J.R. Williams, Jr., 68 TCM 1172, Dec. 50,229(M), TC Memo. 1994-560.

INI, Inc., 69 TCM 2113, Dec. 50,526(M), TC Memo. 1995-112.

J.A. Ruf, CA-9 (unpublished opinion), 95-2 USTC ¶50,331.

L.F. Paullus, 72 TCM 636, Dec. 51,554(M), TC Memo. 1996-419.

P.M. Welch, 73 TCM 2256, Dec. 51,927(M), TC Memo. 1997-120.

M.L. Stephens, 73 TCM 2700, Dec. 52,023(M), TC Memo. 1997-204.

M.J. Laney, 74 TCM 507, Dec. 52,236(M), TC Memo. 1997-403. Aff'd, per curiam, CA-4 (unpublished opinion), 99-1 USTC ¶50,187.

R.D. Ciaravella, 75 TCM 1635, Dec. 52,535(M), TC Memo. 1998-31.

C.C. Wang, 75 TCM 2087, Dec. 52,645(M), TC Memo. 1998-127.

Prindle Intl. Marketing, 75 TCM 2239, Dec. 52,686(M), TC Memo. 1998-164. Aff'd sub nom. R.R. Fox, CA-9 (unpublished opinion), 2000-2 USTC ¶50,554.

R.A. Garcia, 75 TCM 2405, Dec. 52,728(M), TC Memo. 1998-203. Aff'd, per curiam, CA-5 (unpublished opinion), 99-2 USTC ¶50,762.

D.S. Bundridge, 75 TCM 2452, Dec. 52,734(M), TC Memo. 1998-206.

C.A. Willits, 78 TCM 74, Dec. 53,455(M), TC Memo. 1999-230.

K.W. Frische, 80 TCM 143, Dec. 53,979(M), TC Memo. 2000-237.

M.L. Barmes, 80 TCM 209, Dec. 53,999(M), TC Memo. 2000-254. Aff'd, CA-7 (unpublished opinion), 2001-2 USTC ¶50,487.

R.A. Lund, 80 TCM 599, Dec. 54,101(M), TC Memo. 2000-334. Aff'd, CA-9 (unpublished opinion), 2002-2 USTC ¶50,507.

U. Tarakci, 80 TCM 727, Dec. 54,129(M), TC Memo. 2000-358.

R. Haeder, 81 TCM 987, Dec. 54,211(M), TC Memo. 2001-7.

A.A. Tokh, 81 TCM 1207, Dec. 54,255(M), TC Memo. 2001-45. Aff'd, CA-7 (unpublished opinion), 2002-1 USTC ¶50,128.

R. O'Connor, 81 TCM 1509, Dec. 54,306(M), TC Memo. 2001-90.

K.D. Castro, 81 TCM 1615, Dec. 54,338(M), TC Memo. 2001-115.

E.C. Tietig, 82 TCM 304, Dec. 54,423(M), TC Memo. 2001-190. Aff'd, per curiam, CA-11 (unpublished opinion), 2003-1 USTC ¶50,205.

Z. Brodsky, 82 TCM 505, Dec. 54,480(M), TC Memo. 2001-240.

J.L. Thomas, 83 TCM 1576, Dec. 54,729(M), TC Memo. 2002-108. Aff'd, CA-11 (unpublished opinion), 2003-1 USTC ¶50,460.

H.C. Boler, 83 TCM 1879, Dec. 54,791(M), TC Memo. 2002-155.

B.M. Cohen, 85 TCM 861, Dec. 55,048(M), TC Memo. 2003-42.

F. Assaad, 85 TCM 1478, Dec. 55,186(M), TC Memo. 2003-171.

G.W. Gouveia, 88 TCM 424, Dec. 55,799(M), TC Memo. 2004-256.

O. Kooyers, 88 TCM 605, Dec. 55,826(M), TC Memo. 2004-281.

L. G. Bangs, Dec. 56,492(M), TC Memo. 2006-83.

T. Gleason, 92 TCM 250, Dec. 56,616(M), TC Memo. 2006-191.

G. Kierstead Family Holdings Trust, 93 TCM 1392, Dec. 56,975(M), TC Memo. 2007-158.

N.J. McConnell, 96 TCM 10, Dec. 57,486(M), TC Memo. 2008-167.

The issue of married taxpayers' liability for negligence penalties was remanded for further proceedings. No evidence in the record indicated that the taxpayers had consulted with tax professionals in an effort to obtain advice during the tax years at issue. However, the couple's returns, at least facially, supported their position.

J.Z. Schrum, CA-4, 94-2 USTC ¶50,451.

A taxpayer was liable for the negligence component of the accuracy-related penalty. Even though she claimed to have reasonably relied on the advice of the tax preparer who signed her return when she claimed a mortgage interest deduction with respect to property owned by her brother, she did not call the preparer as a witness and failed to provide other supporting evidence regarding the disallowed deduction.

J. Song, 70 TCM 745, Dec. 50,897(M), TC Memo. 1995-446.

An individual who greatly overvalued a flight helmet that he donated to a museum was liable for the accuracy-related penalty. Although he claimed to have relied on the advice of his accountant and of the individual who purportedly appraised the helmet, they were not called as witnesses and the record was devoid of evidence relating to what information he provided to them.

M.H. Droz, 71 TCM 2204, Dec. 51,184(M), TC Memo. 1996-81.

A married couple was liable for the negligence penalty for an underpayment attributable to the rent-free use of a new apartment. They did not reasonably rely on the advice of their attorney since his testimony established that he did not provide tax advice.

G. Stotis, 72 TCM 704, Dec. 51,567(M), TC Memo. 1996-431.

The negligence penalty applied to an attorney's underpayment of tax attributable to a disallowed real estate rental loss deduction. His defense of "good-faith" reliance was rejected because he did not produce evidence, apart from his own testimony, establishing that he had received tax advice concerning the losses.

S.G. Opperwall, CA-9 (unpublished opinion), 97-1 USTC ¶50,160, aff'g an unreported Tax Court decision.

Taxpayers who failed to adequately substantiate various deductions were liable for accuracy-related penalties for negligence. The husband's testimony, without more, did not establish reasonable reliance on an accountant.

T.E. Tilley, 73 TCM 2763, Dec. 52,041(M), TC Memo. 1997-222.

Married taxpayers were liable for the negligence component of the accuracy-related penalty for their failure to include Code Sec. 1231 gain in income. The taxpayers failed to establish that they reasonably relied on their accountant in failing to report such income. Documentation indicated that the couple's accountant advised them to report the gain.

R.K. Lowry, 86 TCM 198, Dec. 55,247(M), TC Memo. 2003-225. Motion to reconsider denied, 87 TCM 811, Dec. 55,511(M), TC Memo. 2004-10. Aff'd, CA-9 (unpublished opinion), 2006-1 USTC ¶50,187, 171 FedAppx 6.

In consolidated cases involving an automobile dealership, a former shareholder, and his deceased wife, the dealership was properly required to amortize payments made to the shareholder pursuant to a noncompetition agreement over a 15-year period because the agreement constituted an amortizable intangible that was entered into by the parties after the effective date of Code Sec. 197. In light of the taxpayers' failure to take due care in reporting their income, the assessed deficiencies and accuracy-related penalties were sustained.

Burien Nissan, Inc., 81 TCM 1624, Dec. 54,339(M), TC Memo. 2001-116. Aff'd, CA-9 (unpublished opinion), 2004-1 USTC ¶50,102, 75 FedAppx 652.

A C corporation's transfers to various related parties were not loans, but were distributions of property to shareholders or contributions to capital of related entities. The IRS's imposition of the accuracy-related penalty on the shareholder was sustained if the recalculation of the taxpayer's liabilities indicates substantial understatements for the years at issue. The shareholder was well-versed in corporate finance and made the decisions regarding the terms and conditions of the transfers between the C corporation and its subsidiaries. Thus, the shareholder's argument that he relied on professional advice for the treatment of the transfers as debt rather than equity was unpersuasive.

P.K. Ventures, Inc., 89 TCM 880, Dec. 55,965(M), TC Memo. 2005-56.

Similarly.

PK Ventures, Inc., 91 TCM 806, Dec. 56,442(M), TC Memo. 2006-36, aff'd in part and rev'd in part on another issue, CA-11 (unpublished opinion), per curiam, 2008-1 USTC ¶50,318.

The accuracy-related penalty was imposed. A couples' failure to maintain and produce the required documentation to support their deductions was negligence that was not attributable to their tax return preparer.

K. Jackson, 89 TCM 1516, Dec. 56,079(M), T.C. Memo. 2005-159.

An individual was held liable for an accuracy-related penalty under Code Sec. 6662(a) because he claimed a Schedule C trade or business expense deduction for legal fees incurred in what was an employment-related controversy. His reliance upon certain nonapplicable decisions did not provide substantial authority for his argument. He also did not introduce evidence indicating he reasonably relied upon the advice of a tax professional. Finally, his argument that his liability for the alternative minimum tax (AMT) was penalty enough for his underreporting was not acceptable. The effect of the AMT does not have any bearing upon the accuracy-related penalty.

P.T. Chaplin, 93 TCM 991, Dec. 56,863(M), TC Memo. 2007-58.

The negligence penalty was imposed on an individual who claimed that a taxable bonus from her employer was a gift. The taxpayer failed to establish that she had reasonable cause for her position and that she acted in good faith Although the taxpayer claimed that she relied upon professional advice she did not meet the three-prong test for reliance. The taxpayer did not present credible evidence that the owner of the company and the company accountant characterized the payment as a gift or were qualified to do so. The company attorney who prepared her return provided no advice to the taxpayer and merely relied on her characterization of the payment, without independent inquiry.

F.J. Larsen, 95 TCM 1273, Dec. 57,378(M), TC Memo. 2008-73.

Married taxpayers who ran a motel business did not fall under the reasonable cause exception to the accuracy-related penalty on the ground that they relied on their return preparer because they provided the preparer with false information.

B.I. Patel, 96 TCM 202, Dec. 57,546(M), TC Memo. 2008-223.

An individual who invested in a jojoba partnership was liable for additions to tax for negligence. The underlying activity was determined to lack legitimacy by the Tax Court and deductions for research and development expenditures were disallowed. Although the taxpayer sought some advice before investing in the partnership, there was no written opinion regarding the investment. Neither the taxpayer's CPA, who was deceased, nor his broker with whom the taxpayer discussed the investment, testified at trial. The taxpayer himself offered only vague testimony as to the advice he received, but testified that neither he nor his advisors reviewed the pertinent documents. The promotional private placement letter, touting substantial tax benefits, should have provided a warning, given the deduction, which was 225 percent of the taxpayer's investment. The taxpayer's actions were unreasonable under the circumstances. Additions to tax for the substantial understatement of tax were also imposed. The taxpayer did not argue that he had substantial authority for claiming the loss. Nor did he demonstrate that the facts of the investment were adequately disclosed on his return or an attached statement.

C.D. Helbig, 96 TCM 287, Dec. 57,570(M), TC Memo. 2008-243.

Married taxpayers, who invested with her husband in a jojoba partnership from which claimed losses were ultimately disallowed, were subject to additions to tax for underpayments due to negligence. The partnership was not a reasonable investment from an income tax perspective. In addition, the couple's use of professional tax return preparers to prepare their joint federal income tax returns did not shield them from being liable for the negligence additions to tax at issue, as there was no evidence that the preparer did not merely transfer the losses from the Schedules K-1 provided by the partnership onto the couple's returns.

D.L. Watson, 96 TCM 418, Dec. 57,607(M), TC Memo. 2008-276.

A married couple who had deducted losses arising from an investment in a jojoba partnership was liable for additions to tax for understatement of tax due to negligence. They improperly relied for advice on two people who were involved with the partnership, failed to notice obvious indicators of problems with the investment, and did not act with due care with respect to their investment. Moreover, there was insufficient evidence that the petitioners had relied on the advice of their tax return preparer.

D. Altman, 96 TCM 479, Dec. 57,626(M), TC Memo. 2008-290.


Reliance on professionals was not reasonable cause. --Substantial Understatement: Reliance on professionals was not reasonable cause

Absent substantial authority, a domestic holding corporation was liable for the substantial understatement component of the accuracy-related penalty for one tax year. The understatement was attributable to foreign tax credits that the corporation claimed with respect to a sizable dividend that it reported it received from one of its foreign operating subsidiaries. The relevant facts affecting the tax treatment of the transaction were not adequately disclosed in the taxpayer's return or in a later disclosure letter; and the entity did not have reasonable cause for, or act in good faith with respect to, its treatment of the transaction in its return. Finally, no evidence supported the taxpayer's contention that it reasonably relied on its accounting firm.

InterTan, Inc., CA-5, 2005-1 USTC ¶50,111, 353 F3d 1357.

A corporation's officers and attorney were liable for the substantial understatement penalty because their tax treatment of options was not supported by substantial authority and they did not adequately disclose the facts relevant to the tax treatment. They could not avoid the penalty because they did not reasonably rely in good faith on their tax advisors.

R.A. Cramer, CA-9, 95-2 USTC ¶50,491. Cert. denied, 6/10/96.

T.D. Davenport, DC Ky., 2006-2 USTC ¶50,394.

Understatement penalties were imposed in the following cases because relying on a professional is not reasonable when the taxpayer does not provide the professional with correct, sufficient and/or complete and accurate information.

S.R. Loftus, 63 TCM 2944, Dec. 48,203(M), TC Memo. 1992-266.

E. Taylor, 69 TCM 2932, Dec. 50,701(M), TC Memo. 1995-269. Aff'd, CA-10 (unpublished opinion), 97-1 USTC ¶50,310.

United Circuits, Inc., 70 TCM 1619, Dec. 51,069(M), TC Memo. 1995-605.

S.D. Podd, 75 TCM 2575, Dec. 52,765(M), TC Memo. 1998-231.

D.W. Stark, 77 TCM 1181, Dec. 53,202(M), TC Memo. 1999-1.

J.C. Archer, 79 TCM 2057, Dec. 53,891(M), TC Memo. 2000-166.

Delaware Corp., 88 TCM 589, Dec. 55,825(M), TC Memo. 2004-280.

H.J. Kaplan, 91 TCM 695, Dec. 56,422(M), TC Memo. 2006-16.

The substantial understatement penalty was properly imposed because the taxpayers failed to prove that they acted in good faith in the preparation of their returns and that there was reasonable cause for the understatement in their tax or that there was an abuse of discretion by the IRS in refusing to waive the addition to penalty.

J.M. Estes, Jr., 64 TCM 705, Dec. 48,494(M), TC Memo. 1992-531.

A "termination allowance" received by a telephone technician from his employer was not excludable from his income because the payment was in the nature of severance pay rather than damages received for personal injuries. The taxpayer's reliance on his tax return preparer did not insulate him from liability for the tax deficiency or substantial understatement penalty.

J.E. Huff, 64 TCM 1547, Dec. 48,698(M), TC Memo. 1992-718.

Individual joint filers who claimed that their attorney failed to notify them of the Tax Court's decision on their petition were not entitled to have the decision vacated after the appeal period had expired. The deficiency and additions to tax were upheld.

V.C. Gazdak, 66 TCM 479, Dec. 49,233(M), TC Memo. 1993-381.

A damage award received by an individual as compensation for a breach of contract suit was taxable income. The taxpayer's reliance on an attorney's opinion that the award was excludable did not relieve him from failure to file and substantial understatement penalties.

J.A. Climenhage, 65 TCM 2736, Dec. 49,051(M), TC Memo. 1993-223.

Reliance on its accounting service did not excuse a publishing company from liability for penalties for failure to timely file returns and for substantial understatement of income. The substantial understatement penalty was imposed because the expenditure for a land purchase was large in relation to the expense account to which it was attributed and the accountant's mistake should have been detected on a reasonable inspection of the return by the taxpayer.

Olde Towne Typesetters, Inc., 66 TCM 51, Dec. 49,138(M), 1993-296.

Additions to tax for substantial understatement of taxes were owed by investors in a limited partnership who unreasonably relied upon their accountant's advice and did not make an independent factual analysis that would enable them to formulate a reasonable belief as to the tax treatment of the investment.

A. Kaplan, 67 TCM 2258, Dec. 49,691(M), TC Memo. 1994-81.

A taxpayer who relied on a tax professional was subject to the substantial understatement penalty. Reliance on a professional did not constitute substantial authority for their tax treatment of the affected items that enabled him to avoid the penalty.

J. Epstein, 67 TCM 2046, Dec. 49,636(M), TC Memo. 1994-34.

The substantial understatement penalty was imposed because the taxpayers did not act reasonably in relying on an accountant's preparation of their return. They unreasonably relied on their accountant and invested in tax shelter partnerships without a profit motive when they knew that he lacked expertise regarding various investment recommendations. The taxpayers, who made numerous poor business decisions based on the accountant's advise, did not act in good faith when they relied on his investment recommendations.

R. Lax, CA-3 (unpublished opinion), 95-2 USTC ¶50,639.

A circuit board manufacturer that improperly claimed deductions for equipment lease payments that should have been capitalized was liable for the substantial understatement penalty. The manufacturer did not reasonably rely in good faith on the advice of its accountant. The manufacturer did not provide its accountant with full details or complete and accurate information concerning the transactions. It relied on the accountant for accounting advice rather than for tax advice. Moreover, the manufacturer did not follow the accountant's advice as to the characteristics of a legitimate lease. Finally, the negligence penalty was also imposed.

United Circuits, Inc., 70 TCM 1619, Dec. 51,069(M), TC Memo. 1995-605.

An individual who operated his business through a number of trusts that were determined to be part of a scheme to avoid taxation on his business income was not liable for the fraud penalty because the IRS did not prove fraud by clear and convincing evidence. However, the individual was liable for substantial understatement penalties because he was unable to show substantial authority for his position. Opinion letters from the promoter's attorney did not constitute substantial authority for the individual's actions.

Para Technologies Trust, 68 TCM 294, Dec. 50,013(M), TC Memo. 1994-366. Aff'd sub nom. T. Anderson, CA-9 (unpublished opinion), 97-1 USTC ¶50,294.

Penalties for negligence and substantial understatement were imposed against a realtor who improperly attempted to use the installment method to report income from his transfer of depreciable property to a related buyer. He failed to show that there was reasonable cause for his understatement of tax or that he had acted in good faith. He did not carefully review his return or correct obvious errors on the document, and he failed to show the types of information or documentation that he had provided to his return preparer.

R.J. Guenther, 69 TCM 2980, Dec. 50,713(M), TC Memo. 1995-280.

An owner and his giftware corporation were liable for negligence and substantial understatement penalties. They could not avoid liability for the penalties based on their purported reliance on the advice of their accountants in light of the fact they had conspired to prepare and present to the IRS backdated documents and accounting entries. Even if the owner and the corporation relied on the accountants, they disregarded that advice.

G. Georgiou, 70 TCM 1341, Dec. 51,005(M), TC Memo. 1995-546.

In the following cases, the substantial understatement penalty was imposed because the taxpayers' claimed reliance on the advice of an unidentified IRS employee was insufficient to avoid the penalty.

D.W. Harker, 68 TCM 1272, Dec. 50,259(M), TC Memo. 1994-583. Aff'd on another issue, CA-8, 96-1 USTC ¶50,244.

M. Dogali, 69 TCM 1759, Dec. 50,445(M), TC Memo. 1995-39.

An individual was subject to the penalty for substantial understatement of income tax because he showed no reasonable cause for the understatement. Self-serving testimony that the taxpayer relied on his accountant to correctly prepare his returns was not credible, and the accountant did not testify.

M.D. Morgan, 73 TCM 2313, Dec. 51,940(M), TC Memo. 1997-132.

In the following cases, the substantial understatement penalty was imposed because the taxpayers' claimed reliance on the advice of a tax professional was not reasonable cause for the understatement.

B.R. House, 69 TCM 2005, Dec. 50,502(M), TC Memo. 1995-92.

INI, Inc., 69 TCM 2113, Dec. 50,526(M), TC Memo. 1995-112.

N. Nahikian, 69 TCM 2370, Dec. 50,582(M), TC Memo. 1995-161.

T.M. Fries, 73 TCM 2085, Dec. 51,898(M), TC Memo. 1997-93.

K.S. Rao, 72 TCM 1198, Dec. 51,642(M), TC Memo. 1996-500.

Cordes Finance Corp., 73 TCM 2493, Dec. 51,975(M), TC Memo. 1997-162. Aff'd, CA-10 (unpublished opinion), 98-2 USTC ¶50,824.

J. Montoro, 73 TCM 3113, Dec. 52,107(M), TC Memo. 1997-281.

Reaves Livestock, Inc., 73 TCM 3137, Dec. 52,108(M), TC Memo. 1997-283.

A.M. Moye, 74 TCM 1397, Dec. 52,400(M), TC Memo. 1997-554.

M. Roy, M.D., Inc., 74 TCM 1428, Dec. 52,409(M), TC Memo. 1997-562. Aff'd, CA-9 (unpublished opinion), 99-1 USTC ¶50,588.

Cleo Perfume, Inc., 75 TCM 2200, Dec. 52,677(M), TC Memo. 1998-155.

S.D. Emmons, 75 TCM 2275, Dec. 52,696(M), TC Memo. 1998-173.

Florida Industries Investment Corp., 78 TCM 605, Dec. 53,590(M), TC Memo. 1999-346. Aff'd, per curiam, CA-11 (unpublished opinion), 2001-1 USTC ¶50,334.

E.R. Stolz, II, 78 TCM 941, Dec. 53,654(M), TC Memo. 1999-404.

J. Pinson, 80 TCM 13, Dec. 53,945(M), TC Memo. 2000-208.

R. Haeder, 81 TCM 987, Dec. 54,211(M), TC Memo. 2001-7.

W.O. Bowen, 81 TCM 1216, Dec. 54,257(M), TC Memo. 2001-47.

V.M. Bello, 81 TCM 1271, Dec. 54,268(M), TC Memo. 2001-56.

Burien Nissan, Inc., 81 TCM 1624, Dec. 54,339(M), TC Memo. 2001-116. Aff'd , CA-9 (unpublished opinion), 2004-1 USTC ¶50,102, 75 Fed Appx 652.

J.J. LeBouef, 82 TCM 685, Dec. 54,504(M), TC Memo. 2001-261.

L.T. Baldwin, III, 83 TCM 1915, Dec. 54,798(M), TC Memo. 2002-162.

W. Pratt, 84 TCM 523, Dec. 54,929(M), TC Memo. 2002-279.

C.R. Bitker, 86 TCM 72, Dec. 55,229(M), TC Memo. 2003-209.

W.A. Egan, 90 TCM 365, Dec. 56,162(M), T.C. Memo. 2005-234.

L.J. Wadsworth, 96 TCM 20, Dec. 57,490(M), TC Memo. 2008-171.

A married couple, whose tax shelter trust's charitable contributions deduction were disallowed, was liable for accuracy-related penalties. The couple conceded that their understatement was substantial; however, they argued that they reasonably relied on their tax preparer to prepare their return correctly. Although reliance on a tax professional may be a defense to the accuracy-related penalty in certain circumstances, the couple failed to prove that (1) they relied on a competent professional whose expertise was sufficient to justify reliance, (2) they provided necessary and accurate information to that professional, and (3) they actually relied on the professional's advice in good faith.

J.L. Hill, 87 TCM 1451, Dec. 55,680(M), TC Memo. 2004-156.

A privately organized pooled investment vehicle, or "hedge fund", created by two Nobel Prize winning economists participated in transactions that lacked economic substance and, therefore, the IRS properly denied its capital loss deductions and imposed penalties for gross valuation misstatements and substantial understatements. The district court found that the accuracy-related penalties imposed by the IRS were not erroneous because the taxpayer did not satisfy the reasonable cause exception. Although the taxpayer argued that (1) there was no valuation misstatement on its tax return, (2) it did not act negligently, and (3) that it had substantial authority for its return position, the court concluded that the penalties imposed were justified. The court found that there was a substantial valuation misstatement on the taxpayer's return; the taxpayer substantially overstated its basis in the stock it sold. Additionally, the taxpayer acted negligently because LTCH lacked a reasonable belief that the basis it claimed for the stock was valid. Finally, the taxpayer did not have substantial authority for its return position; a tax professional's opinion did not constitute "substantial authority" for the taxpayer's return position.

Long Term Capital Holdings, DC Conn., 2004-2 USTC ¶50,351.

A tax shelter partnership was subject to the gross valuation misstatement, negligence and substantial understatement penalties. The TMP, a highly educated, sophisticated tax attorney, engineered the plan to transfer built-in losses to the partnership, which transaction had no economic substance for federal tax purposes. Under the circumstances, a reasonably prudent person with the TMP's tax experience would not have reported the partnership's basis in the receivables as he did. Thus, the partnership failed to meet the reasonable cause exception to the negligence penalty.

Santa Monica Pictures, LLC, 89 TCM 1157, Dec. 56,016(M), TC Memo. 2005-104.

An individual was liable for the substantial understatement penalty for failing to report income and claiming unsupported deductions. He failed to maintain adequate books and records. His claim that he relied on the advice of an attorney with respect to his failure to include forgiveness of debt in his income was rejected. The attorney merely advised the taxpayer as to the characterization of the settlement, not the tax consequences of the forgiveness of debt.

R.E. Corrigan, 89 TCM 1313, Dec. 56,034(M), TC Memo. 2005-119.

Taxpayers failed to satisfy the threshold requirements of a reasonable cause exception to the penalty for gross valuation misstatement. The taxpayers' argument that they relied on tax advice failed because they did not present evidence that the advice was relevant to the valuation misstatement. Furthermore, even if the advice were relevant, there was no evidence that the tax advice was based on all of the pertinent facts and circumstances.

Long-Term Capital Holdings LP, CA-2, 2005-2 USTC ¶50,575.

An accuracy-related penalty under Code Sec. 6662(a) for substantial understatement of income tax was imposed. The taxpayer's claim that the understatement was due to reasonable cause and made in good faith because he relied on his accountant, was not persuasive. The only alleged erroneous advice related to the carryforward of a claimed NOL, which the court disallowed because the taxpayer failed to substantiate it.

M.D. Lee, 91 TCM 999, Dec. 56,476(M), TC Memo. 2006-70.

A taxpayer was liable for the accuracy-related penalty for substantial understatement of income tax attributable to the portion of the jury award she received and incorrectly excluded from income. While the taxpayer alleged that she and her husband met with a nationally renowned expert on the taxation of legal awards, the reasonable cause exception did not apply because she provided no evidence of what tax advice was actually rendered.

M.S. Green, 93 TCM 917, Dec. 56,841(M), TC Memo. 2007-39.

A taxpayer was liable for the accuracy-related penalty on substantial understatements of tax. Although he claimed that he reasonably relied on his accountant's advice, he failed to show that the accountant was a competent professional who had sufficient expertise to justify the taxpayer's purported reliance.

J. Calvao, 93 TCM 988, Dec. 56,862(M), TC Memo. 2007-57.

Similarly.

G. Kierstead Family Holdings Trust, 93 TCM 1392, Dec. 56,975(M), TC Memo. 2007-158.

A married couple's reliance on their accountant to calculate their taxes did not excuse them from liability for the penalty for substantial understatement of tax. The taxpayers' actions were not reasonable, given the substantial amounts of gross receipts involved, the taxpayer's business experience, and the large discrepancy between the tax reported and the actual tax owed.

J. Ramirez, 94 TCM 496, Dec. 57,181(M), TC Memo. 2007-347.

The accuracy-related penalty for substantial underpayment of income tax was imposed on a car dealership that improperly deducted legal fees relating to its landlord's defense of title and its acquisition of another dealership. The exception for reliance on a tax professional did not apply in the absence of evidence that its accountant was supplied with all of the correct and necessary information needed to establish its position, that the error was the result of a preparer's mistake, or that there was any discussion of the treatment of the legal fees with the accountant before the return was filed.

West Covina Motors, Inc., Dec. 57,564(M), TC Memo. 2008-237.

The accuracy-related penalty for substantial underpayment of income tax was imposed on a car dealership that improperly deducted legal fees relating to its landlord's defense of title and its acquisition of another dealership. The exception for reliance on a tax professional did not apply in the absence of evidence that its accountant was supplied with all of the correct and necessary information needed to establish its position, that the error was the result of a preparer's mistake, or that there was any discussion of the treatment of the legal fees with the accountant before the return was filed.

West Covina Motors, Inc., Dec. 57,564(M), TC Memo. 2008-237.

The accuracy-related penalty for a substantial underpayment of tax attributable to a net operating loss that an individual taxpayer conceded was improper was imposed. Reliance on the taxpayer's accountant was not reasonable since no steps were taken to verify that the accountant had sufficient expertise or was sufficiently independent of the entity that sponsored the offshore investment programs that generated the net operating loss.

W.C. Wyatt, Dec. 57,581(M), TC Memo. 2008-253.

The Tax Court's decision finding that an individual was liable for the accuracy-related penalty for substantial understatement of income tax was reversed and remanded. Since the individual and her husband sought tax advice from two attorneys, the Tax Court should have considered the aggregate advice received from both attorneys to determine the reasonableness of the individual's reliance on their tax advice.

M. Green, CA-9, 2009-1 USTC ¶50,245.

Accuracy-related penalties were imposed because the authority cited by the taxpayer was easily distinguished.

P. Ackerman, Dec. 57,790(M), TC Memo. 2009-80.

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