Lanigan v. Commissioner

T.C. Memo. 1996-48

UNITED STATES TAX COURT

ERIC A. AND JANE C. LANIGAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5735-94. Filed February 12, 1996.

Eric A. Lanigan, pro se.

Reginald R. Corlew, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARKER, Judge: Respondent determined the following

deficiencies, additions to tax, and penalties:

Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662

1990 $ 4,919 $2,274 $ 984
1991 14,569 3,644 2,914
Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the taxable years before the

Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

After concessions,1 the only remaining issue is whether

petitioners are liable for the accuracy-related penalty under

section 6662 for the taxable years 1990 and 1991.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of facts, and

the exhibits attached thereto are incorporated herein by this

reference.

Petitioners Eric A. and Jane C. Lanigan resided in Winter

Park, Florida, at the time they filed their petition in this

case. Petitioner in the singular will refer to petitioner Eric

A. Lanigan.

During 1989 and 1990, petitioners were having a house built.

The cost of the house exceeded the amount they had budgeted for

it, depleting petitioners' assets. Shortly after they moved into

the house, the builder disappeared, and petitioners received

notice of mechanic's liens on the house in the amount of

approximately $35,000.

1
Petitioners have conceded the deficiencies and the
additions to tax for late filing under sec. 6651(a)(1) for both
1990 and 1991. Respondent has also conceded some income and
deduction items; thus, a recomputation of the deficiencies and
additions will be necessary.
 - 3 -

In the years 1990 and 1991, petitioner was a financial

planner. He received compensation from multiple sources such as

insurance and investment companies. Petitioner also paid

commissions to other individuals for which he was entitled to

business expense deductions. In 1990, petitioner received

compensation from at least six sources. In 1991, he received

compensation from 15 sources. Some of petitioner's compensation

was reported on Forms W-2 and some on Forms 1099. In each year,

petitioner received more than one income statement from at least

one company.2

Petitioners filed for, and were allowed, an extension of

time to file their Federal income tax return for taxable year

1990, extending the due date to October 15, 1991. Their 1991

return was due on April 15, 1992. Both returns were filed on

October 19, 1992.

Sometime prior to October 19, 1992, petitioners received a

letter from the Internal Revenue Service (IRS) requesting

petitioners to bring in their records at a specified time for

purposes of preparing a return. Just prior to the scheduled

meeting, petitioner filled out portions of the returns (Forms

2
In 1990, petitioner received two Forms 1099 from Security
Life of Denver, and both a Form 1099 and a Form W-2 from New
England Mutual Life Insurance Co. The Form 1099 from Gordon
Anthony for 1990 is marked "corrected", indicating a previous
incorrect form had been issued. In 1991, petitioner received
both a Form 1099 and a Form W-2 from New England Mutual Life
Insurance Co. and two Forms W-2 from Provident Mutual Life
Insurance Co.
 - 4 -

1040) for 1990 and 1991, and both petitioners signed these Forms

1040 and dated them October 19, 1992. Petitioner was uncertain

of the proper treatment of his earnings reported on the Forms W-2

as compared to the nonemployee compensation reported on the Forms

1099, but he believed that any questions would be resolved during

the meeting.

On or about October 19, 1992, petitioner met with an IRS

representative in response to the IRS letter; petitioner's wife

did not attend the meeting. The IRS representative had computer

printouts of IRS records. She revised some of petitioner's

figures and wrote in others.

For 1990, the IRS representative revised Line 7 wages of

$144,707.23 to zero, not including any Form W-2 income. She

prepared or completed two Schedules C to compute Line 12 business

income. On one Schedule C she listed the $60,263.40 W-2 wage

income and no expenses; on the other Schedule C that petitioner

had partially filled out, the Forms 1099 nonemployee compensation

was listed as gross receipts of $83,173.97. For 1991, she

entered the Form W-2 income in Line 7 and used petitioner's

Schedule C expenses to compute Line 12 business income. The IRS

representative completed Schedules SE Self-Employment Tax for

both 1990 and 1991.

The following charts summarize selected information from the

Forms W-2 and 1099 attached to the returns, the returns as

partially filled out by petitioner (original returns), and as
 - 5 -

revised or completed by the IRS representative (revised returns).

For each year what is described as the original return and what

is described as the revised return is the same document; i.e.,

the Form 1040 signed by petitioners and filed with the IRS on

October 19, 1992:

Taxable Year 1990

Form W-2 $ 60,263.40
Forms 1099 83,262.91
Total Comp. $143,526.31

Original Return Revised Return
1
Wages $144,707.23 $ 0.00
Interest 285.48 285.48
Business Income (45,472.50) 97,974.87
Total $ 99,520.21 $98,260.35
2
Adj. Gross Inc. $ 99,519.98 $98,260.35

Sched. C
4
Gross Receipts $ $143,437.37
3
Total Expenses (45,472.50) (45,462.50)
Net Profit $ $ 97,974.87

1
The record does not explain the source of this $144,707.23
figure that petitioner placed on the return.
2
This figure is $.23 less than the above figure; there is no
explanation for this discrepancy.

3
Petitioner partially filled out one Schedule C with the
total expenses as indicated here; the correct total of the
listed expenses is $45,462.50. On that Schedule C, gross
receipts was listed as $83,173.97 and net profit as
$37,711.47. It is uncertain who wrote in these figures.
The IRS representative completed a second Schedule C showing
gross receipts of $60,263.40 (the W-2 income) and zero
expenses. We note that the $83,173.97 is exactly $88.94
less than the nonemployee compensation shown on the Forms
1099 attached to the return as filed with the IRS.
4
This figure represents the combined gross receipts on the
two Schedules C: $60,263.40 of W-2 wage income and
 - 6 -

$83,173.97 of the $83,262.91 income reported on the Forms
1099 attached to the return as filed with the IRS. See
supra n.3. Again this $143,437.37 is exactly $88.94 less
than the total of the Forms 1099 and W-2 attached to the
return as filed with the IRS.

Taxable Year 1991

Forms W-2 $39,548.06
Forms 1099 12,875.24
Total Comp. $52,423.30

Original Return Revised Return
1
Wages $45,123.33 $39,548.06
Interest 149.57 149.57
Business Income (9,990.95) 2,884.29
Self-Employment Tax (203.77)

Total $35,281.95 $42,378.15
2
Adj. Gross Inc. $35,281.95 $42,138.58

Sched. C
3
Gross Receipts $ $12,875.24
Total Expenses (9,990.95) (9,990.95)

Net Profit $ $ 2,884.29
1
The record does not explain the source of this $45,123.33
figure that petitioner placed on the return.
2
There is no explanation as to why this figure is $239.57
less that the preceding figure. In any event, with the five
personal and dependency exemptions claimed by petitioners
and with Schedule A itemized deductions of $38,918.12,
petitioners' return reported no taxable income for 1991,
showing instead a negative figure of $7,529.
3
It appears that the IRS representative entered the
$12,875.24 in gross receipts and computed the net profit at
$2,884.29.

Attached to petitioners' 1990 return as filed were four

Forms 1099 and one Form W-2; attached to the 1991 return as filed

were four Forms 1099 and three Forms W-2. The revised figures

used by the IRS representative were generally the figures shown
 - 7 -

on these Forms W-2 and 1099 attached to the returns as filed. On

each of the Forms W-2 attached to the returns, the box indicating

petitioner was a statutory employee was checked.

It is unclear whether the IRS representative, in completing

the returns, used the records provided by petitioner or solely

information she had available from IRS records. The IRS

representative asked petitioner few questions, if any, and

indicated to him that the IRS had records of his income.

Petitioner knew that Form 1099 information is sent to the IRS,

and he believed the IRS records present at the meeting contained

information regarding his Forms 1099 income. However, he took no

steps to verify if that were the case. There is no evidence that

the IRS representative had available to her at that meeting any

additional Forms 1099 or information about the items of

unreported income involved in this case.

Petitioner did not review the returns after the IRS

representative completed them and informed petitioner of the

amount owed. He does not remember whether he was given copies of

the returns at that time; he does not remember exactly what

records he took with him to the meeting. What he does remember

is being told that he owed over twenty thousand dollars including

interest, that that amount was due within a 10-day to 2-week

period, and that if that amount was not paid promptly, he need

not worry about his house because it would belong to the

Government. Petitioner borrowed money to pay the taxes and
 - 8 -

apparently paid the amounts reflected on the returns as filed.3

On January 28, 1993, respondent selected petitioners'

returns for audit. Income from numerous Forms 1099 had been

omitted from the returns, particularly the return for the taxable

year 1991. As a result of the audit, the notice of deficiency

increased (decreased) petitioners' income by the following

amounts:

Item 1990 1991

Schedule C $16,034 $63,502
Interest income 17
Self-Employment tax (1,907)
Itemized deductions 113

Total adjustments $16,034 $61,725

Respondent also determined additional self-employment tax of

$4,222 for the taxable year 1991. Petitioner filed a petition in

this Court challenging the deficiencies, additions to tax, and

penalties determined in the notice of deficiency.

Shortly before trial petitioners stipulated and agreed to

the following items of unreported income. In the taxable year

1990, petitioners received the following income which was omitted

from their tax return for that year:

3
The record does not disclose how much tax and interest
petitioners in fact paid or when they made such payment. The
notice of deficiency indicates that $15,646 and $408 for the
taxable year 1990 and 1991, respectively, were the total taxes
shown on the returns as filed. The $408 for 1991 was self-
employment tax.
 - 9 -

Source Amount

Provident Mutual $10,581
Gordon Anthony 5,047
Stuart and Florence Bellus 199
Variable Investment Plans, NEC 888
Total $16,715

In the taxable year 1991, petitioners received the following

nonemployee compensation that was omitted from their tax return

for that year.

Source Amount

Ernest Beccaris $14,751
Anthony Mastrangelo 118
North American Co. 8,670
Life U.S.A. Insurance 7,999
American Association for
Secured Planning 1,400
Fourth Financial Services 24,780
Rex Huffman 2,324
Provident Life 1,020
Palumbo Partners 2,136
Pan American Life 4,747
Security Life 8,314
Total $76,259

Of these amounts of unreported income for 1991, respondent

now concedes that $4,335 of the $8,670 from North American

Company and $12,518.45 of the $24,780 from Fourth Financial

Services were "assigned" to other persons; i.e., were paid as

commissions to those other persons and hence are deductible by

petitioner as business expenses.4 Petitioners have now conceded

4
In other words, while the assigned amounts are includable
in petitioner's income, he is entitled to a business expense
deduction in an equal amount. See Helvering v. Eubank, 311 U.S.
122 (1940); Bird v. Commissioner, T.C. Memo. 1962-74.
 - 10 -

the deficiencies and the delinquency additions for both years.

Respondent has since conceded that the $5,047 from Gordon Anthony

for the taxable year 1990 was already included in the $5,179.06

previously reported from the corrected Form 1099 petitioner

received from Gordon Anthony. See supra note 2.

OPINION

Section 6662 imposes an accuracy-related penalty of 20

percent of the underpayment of tax required to be shown on a

return where the underpayment is attributable to negligence or

disregard of rules or regulations or to any substantial

understatement of income tax. Negligence includes any failure to

make a reasonable attempt to comply with the provisions of the

internal revenue laws or to exercise ordinary and reasonable care

in the preparation of a tax return. Sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence is strongly indicated where

a taxpayer fails to include on an income tax return an amount of

income shown on an information return such as a Form 1099. Sec.

1.6662-3(b)(1)(i), Income Tax Regs. Disregard includes any

careless, reckless, or intentional disregard of rules or

regulations. Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

Apparently, in the notice of deficiency, the commissions of
$12,518 have already been deducted from the $76,259 to arrive at
the amount of unreported Schedule C income of $63,502. However
there appears to be a discrepancy of $239 that perhaps can be
resolved in the Rule 155 proceedings.
 - 11 -

A substantial understatement of income tax is an

understatement which exceeds the greater of (1) 10 percent of the

tax required to be shown on the return for the taxable year, or

(2) $5,000. Sec. 6662(d)(1)(A). The understatement shall be

reduced by that portion of the understatement attributable to the

tax treatment of any item if (1) there is or was substantial

authority for such treatment, or (2) the relevant facts affecting

the item's tax treatment were adequately disclosed with the

return and there is a reasonable basis for the tax treatment.

Sec. 6662(d)(2)(B).

The accuracy-related penalty will not be imposed with

respect to any portion of an underpayment if it is shown that

there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion. Sec.

6664(c). The determination of whether a taxpayer acted with

reasonable cause and in good faith depends upon the facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer's effort to assess

the taxpayer's proper tax liability. Id.

Petitioner argues that it was not his intention to

understate his income or avoid paying taxes. He admits that he

gave a higher priority to the financial problems surrounding the

construction of his house than to filing his returns and that he

is responsible for the late filing of the returns and for payment
 - 12 -

of the deficiencies. However, he asserts that he cooperated

fully with respondent in the preparation of the returns, that he

took in the records that he had at that time, and that he made

payment of the taxes as computed by the IRS representative by the

date she specified.

Generally, the taxpayer cannot avoid the duty of filing

accurate returns by placing responsibility on a tax return

preparer. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662

(1987). Reliance on the advice of a professional does not

necessarily demonstrate reasonable cause and good faith, unless

under all the facts and circumstances, such reliance was

reasonable and the taxpayer acted in good faith. Sec. 1.6664-

4(b)(1), Income Tax Regs. Where the taxpayer claims reliance on

an accountant who prepared the taxpayer's return, the taxpayer

must establish that the correct information was provided to the

accountant and that the item incorrectly claimed or reported in

the return was the result of the accountant's error. Ma-Tran

Corp. v. Commissioner, 70 T.C. 158, 173 (1978); Enoch v.

Commissioner, 57 T.C. 781, 803 (1972).

Here, the tax preparer was not petitioners' accountant but

an IRS representative. He reasonably relied on her expertise as

a tax preparer. Petitioner believed from the statements made by

the IRS representative that the IRS records contained his income

information. However, he took no steps to verify those records.
 - 13 -

There is simply no evidence that the IRS representative had

available to her at that time any more information than that

which was filed with petitioners' returns; namely, some but not

all of petitioners' Forms W-2 and 1099. Petitioner could not say

what records he took to the meeting with the IRS representative.

He certainly did not suggest that he had with him at that time

the Forms W-2 and 1099 for the unreported income. For 1990 there

were three items of unreported income totaling $11,668; for 1991

there were 11 items of unreported income totaling $76,259.

The IRS representative slightly reduced petitioners' income

for the taxable year 1990. While the IRS representative may have

made some minor errors in some of the revisions she made to the

partially filled-in Form 1040 for 1990, she accounted for the

income for all of the Forms W-2 and 1099 that were filed with the

return, except for $88.94. The IRS representative's minor

computational errors, however, have nothing to do with the

problem in this case, the unreported income. Without verifying

what information the IRS representative had available to her at

that time and without showing that she knew about these items of

unreported income, petitioners cannot shift their own

responsibilities to her shoulders. They were negligent in not

maintaining proper records of their W-2 and Form 1099 income.

They were negligent in failing to assure that the return

preparer, albeit an IRS employee, had the necessary information
 - 14 -

to prepare their returns properly. The notice of deficiency

determined a section 6662 penalty for 1990 for negligence, not

for a substantial understatement of income tax.5 We hold that

petitioners are liable for the accuracy-related penalty for the

taxable year 1990 under section 6662(b)(1).

Nearly all of the unreported income for 1991 stemmed from

petitioner's financial planning business. The 1991 return as

filed reported Form 1099 nonemployee compensation of only

$12,875.24. Form 1099 nonemployee compensation of $76,259 was

omitted from that return, an omission of 85 percent of such

income. Where the omission of income is so great, we cannot find

that petitioner's reliance on the IRS representative for the

preparation of the 1991 return was reasonable. Petitioner was

negligent. Petitioner was a financial planner and as such knew

or should have known that he was failing to report most of his

income from that business. The understatement of income tax was

clearly a substantial understatement. We hold petitioners are

liable for the accuracy-related penalty for the taxable year 1991

under section 6662(b)(2).

5
It appears that the amount of the understatement even as
determined in the deficiency notice did not exceed the greater of
(1) 10 percent of the tax required to be shown on the return or
(2) $5,000. Sec. 6662(d)(1)(A).
 - 15 -

In keeping with the above holdings and the parties'

concessions,

Decision will be entered

under Rule 155.