THORNTON v. COMMISSIONER

T.C. Summary Opinion 2002-45

UNITED STATES TAX COURT

KYLE L. AND CAROL B. THORNTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11133-01S. Filed May 3, 2002.

Kyle L. and Carol B. Thornton, pro se.

Douglas S. Polsky, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.

1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
 - 2 -

Respondent determined deficiencies of $3,781 and $4,746 in

petitioners' Federal income taxes, respectively, for 1999 and

2000 and corresponding penalties under section 6662(a) in the

amounts of $756 and $949.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners'

legal residence was Albuquerque, New Mexico.

In the stipulation, the parties agreed to reduced

deficiencies of $3,697 and $4,690, respectively, for 1999 and

2000.2 Petitioners conceded their liability for the agreed

deficiencies. The sole issue for decision is whether petitioners

are liable for the section 6662(a) penalty for each of the years

1999 and 2000.

Petitioners were both employed full time during 1999 and

2000. Mr. Thornton (petitioner) was coordinator for a paramedic

program of the University of New Mexico School of Medicine. Mrs.

2
The reduced deficiencies result from respondent's
concession that petitioners were entitled to itemized deductions
for charitable contributions of $313.70 and $189.82,
respectively, for 1999 and 2000 in lieu of the corresponding
amounts of $6,260 and $7,200 claimed on their returns.
Respondent also conceded that petitioners substantiated
unreimbursed employee business expenses of $24.51 and $546.67,
respectively, for the 2 years at issue in lieu of the
corresponding amounts of $9,394 and $11,440 claimed on their
returns. Due to the limitations of sec. 67(a), the conceded
amounts for unreimbursed employee business expenses do not result
in a tax benefit to petitioners for the years at issue.
 - 3 -

Thornton was supervisor of the communications center for an

ambulance service.

On their joint Federal income tax returns for 1999 and 2000,

petitioners reported adjusted gross income of $74,949 and

$85,228, respectively. For both years, petitioners claimed

itemized deductions under section 63(d) reflected on Schedule A,

Itemized Deductions, of their returns.

In the notice of deficiency, respondent disallowed the total

amounts claimed as itemized deductions for charitable

contributions and unreimbursed employee business expenses.

Petitioners had claimed the following amounts on their returns:

1999 2000

Charitable contributions $6,260 $ 7,200
Unreimbursed employee expenses and tax
preparation fees (before the sec.
67(a) limitation) 9,394 11,440

At least for the 2 years prior to the years at issue,

petitioners did not utilize the services of a preparer in filing

their Federal income tax returns. Petitioner prepared the

returns himself. For the 1999 return, petitioner prepared a

return as he had done in past years. Based on that draft,

petitioner testified that he and his wife would have owed $1,500
 - 4 -

in taxes.3 Petitioners did not file the draft of the return

because, at some point, it was suggested to petitioner by friends

that he should engage the services of a return preparer, Robin

Beltran. These friends represented that Mr. Beltran was very

knowledgeable in tax law and could get tax refunds that other

preparers could not get. Petitioner believed that Mr. Beltran

was a "C.P.A." and a former "IRS employee". Petitioner

thereafter contacted Mr. Beltran to prepare petitioners' 1999

return. As best as the Court can ascertain from the record,

petitioner had one meeting, at the home of Mr. Beltran, with

regard to the 1999 return. The only documentation petitioner

provided to Mr. Beltran was the draft of the 1999 return

petitioner had prepared. Mr. Beltran did not request or discuss

the need for any documentation to substantiate the income or

expenses shown on the draft prepared by petitioner, nor did Mr.

Beltran question or ascertain from petitioner the amounts to be

claimed on the return for charitable contributions and

unreimbursed employee business expenses. The return prepared by

Mr. Beltran listed the same amounts shown on petitioner's draft

return, except for the deductions claimed for charitable

3
The draft for 1999 prepared by petitioner was not
offered in evidence; however, petitioner testified that "I was
going to pay $1,500". The Court construes that statement to mean
that petitioners would have owed $1,500 after all withholdings
and prior payments of taxes for 1999.
 - 5 -

contributions and unreimbursed employee business expenses, which

Mr. Beltran grossly inflated. The return prepared by Mr. Beltran

reflected an overpayment of $2,324. Petitioners filed that

return, and the $2,324 was subsequently refunded to them.

For the year 2000, petitioner again prepared a draft return,

which he submitted to Mr. Beltran. On the return prepared by Mr.

Beltran, which petitioners filed, the deductions for charitable

contributions and unreimbursed employee business expenses were

also inflated. That return reflected an overpayment of $2,338,

which was also refunded to petitioners in due course.

With respect to preparation of the 2000 return by Mr.

Beltran, petitioner testified:

The following year then I went back to him and he then
charged me $250 because he got me $2,500 back or whatever
those estimations were, and again, I certainly saw that
difference between my return and the return he prepared, and
I did ask him if that seemed rather excessive, and again, *
* * he was quite convincing, seemed to be quite credible in
his explanations and his referring to his tax books, et
cetera, explaining that "No, these numbers are very
allowable." Sort of a tax averaging kind of theory if you
will, and again, quite credible and quite convincing in his
explanation.

Regarding the inflated amounts claimed on the returns,

petitioner further testified:

MR. THORNTON: The amount that we provided to him and
the amount that we could provide proof for was minimal
compared to what he submitted for us, and then when I asked
him about that again, he was very convincing and seemed very
 - 6 -

credible in his explanation of what * * * [another taxpayer
before the Court] called a loophole.

THE COURT: But did you question what sort of a loophole
would that be, because you're acknowledging that the amounts
that you really paid for –– gave to charity were laughable
amounts compared to what --

MR. THORNTON: Absolutely.

THE COURT: —-he put on the return for you?

MR. THORNTON: Again, he was simply very, very credible
in the way he would explain and the way he would assure, and
this is a perfectly allowable, perfectly acceptable amount
for our level of income.

THE COURT: Did you ever go to some other professional
to verify that --

MR. THORNTON: No sir.

* * * * * * *

MR. THORNTON: No sir. Now, and that's –- the term if
it's too good to be true, it is. Compared to what?
Certainly it was much better compared to my own tax
preparation, but this was the first professional I've been
to, and --

THE COURT: Anybody can put numbers down.

MR. THORNTON: I understand that now, sir. Yes, sir.

When petitioners later received notices from respondent that

their returns for 1999 and 2000 would be audited, Mr. Beltran

advised petitioners to ignore such notices and not meet with
 - 7 -

respondent's agents. Petitioners followed that advice, and the

notice of deficiency followed in due course.4

As noted above, the deficiencies are no longer in dispute.

Petitioners contend they should be absolved of liability for the

section 6662 penalties because they relied on the representations

of their return preparer.

Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer's negligence or disregard of rules or regulations. Sec.

6662(a) and (b)(1). Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code and disregard consists of any careless, reckless, or

intentional disregard. Sec. 6662(c). The courts have refined

the Code definition of negligence as a lack of due care or

failure to do what a reasonable and prudent person would do under

similar circumstances. Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989). Section 1.6662-3(b)(1),

Income Tax Regs., provides that "Negligence is strongly indicated

where * * * a taxpayer fails to make a reasonable attempt to

ascertain the correctness of a deduction * * * on a return which

4
This case is one of numerous cases heard by the Court
involving tax returns prepared by Mr. Beltran, which essentially
involve the same deductions. At some point in the audit process,
Mr. Beltran ceased all communications with his former clients.
 - 8 -

would seem to a reasonable and prudent person to be 'too good to

be true' under the circumstances." An exception applies when the

taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c). Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances. The most important factor

is the extent of the taxpayer's effort to assess the proper tax

liability. Stubblefield v. Commissioner, T.C. Memo. 1996-537;

sec. 1.6664-4(b)(1), Income Tax Regs. Under section 1.6664-

4(b)(1), "Circumstances that may indicate reasonable cause and

good faith include an honest misunderstanding of fact or law that

is reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

taxpayer." Moreover, a taxpayer is generally charged with

knowledge of the law. Niedringhaus v. Commissioner, 99 T.C. 202,

222 (1992). Although a taxpayer is not subject to the addition

to tax for negligence where the taxpayer makes honest mistakes in

complex matters, the taxpayer must take reasonable steps to

determine the law and to comply with it. Id.

Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence where the taxpayer

reasonably relied on the advice of a competent professional.

Sec. 1.6664-4(b)(1), Income Tax Regs.; sec. 6664(c); Freytag v.
 - 9 -

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991). However, a taxpayer bears

the responsibility for any negligent errors of his or her

professional adviser. Am. Props., Inc. v. Commissioner, 28 T.C.

1100 (1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958).

Reliance on a professional adviser, standing alone, is not an

absolute defense to negligence; it is only one factor to be

considered. In order for reliance on a professional adviser to

relieve a taxpayer from the negligence penalty, the taxpayer must

establish that the professional adviser on whom he or she relied

had the expertise and knowledge of the relevant facts to provide

informed advice on the subject matter. Freytag v. Commissioner,

supra at 888.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer, Mr.

Beltran. The drafts of petitioners' returns prepared by

petitioner showed tax liabilities considerably in excess of the

amounts shown on Mr. Beltran's returns. Petitioner knew that Mr.

Beltran's returns were incorrect and knew that his returns

contained inflated itemized deductions. Petitioner admitted

questioning Mr. Beltran as to the deductibility of the amounts

claimed on the returns but made no effort to contact other tax

professionals to verify the accuracy of Mr. Beltran's

representations. Petitioner, in his testimony, characterized the
 - 10 -

inflated amounts on Mr. Beltran's returns as "too good to be

true". The Court is satisfied from the record that Mr. Beltran

knew, or had reason to know, all the relevant facts upon which,

had he been a qualified professional, he could have accurately

advised petitioners on the amount of their allowable deductions.

Mr. Beltran never sought the correct amount of petitioners'

charitable contributions and employee business expenses. The

Court is further satisfied that petitioners knew they were

required under the law to substantiate deductions claimed on

their returns and, moreover, knew that the amounts on their

returns for charitable contributions and unreimbursed employee

business expenses were not only questionable but were incorrect.

On this record, the Court sustains respondent on the section

6662(a) accuracy-related penalties for 1999 and 2000.

Section 6673(a) authorizes the Court to require a taxpayer

to pay to the United States a penalty not exceeding $25,000 when,

in the Court's judgment, proceedings have been instituted or

maintained by the taxpayer primarily for delay or where the

taxpayer's position in the proceeding is frivolous or groundless.

Although petitioners conceded the deficiencies and challenged

only the penalties under section 6662(a), the Court considers

petitioners' claim that they should not be liable for the

penalties to be frivolous and groundless. Petitioners knew that

a substantial portion of the itemized deductions at issue was
 - 11 -

false and could not be sustained. Petitioners had reservations

at the times the returns were filed as to the accuracy of the

claimed itemized deductions. Petitioners knew that they were

entitled to deduct only amounts that they had actually paid.

They made no attempt to determine the qualifications of their

return preparer; they did not consult with tax professionals as

to the accuracy of Mr. Beltran's representations; and, moreover,

they cited no legal authority to the Court that, under similar

facts, would exonerate them from the penalties under section

6662(a). The function of this Court is to provide a forum to

decide issues relating to liability for Federal taxes. At trial,

petitioners wisely saw that they had no case with respect to the

deficiencies and, instead, chose to challenge the imposition of

the penalties under section 6662(a). Any reasonable and prudent

person, under the facts presented to the Court, should have known

that the claimed deductions could not have been sustained, and

petitioners knew that. This Court does not and should not

countenance the use of this Court as a vehicle for a disgruntled

litigant to proclaim the wrongdoing of another, their return

preparer, as a basis for relief from a penalty that was

determined by respondent on facts that clearly are not

sustainable. Golub v. Commissioner, T.C. Memo. 1999-288.

Petitioners, therefore, have interfered with the Court's function

to the detriment of other parties having cases with legitimate
 - 12 -

issues for the Court to consider. Petitioners have caused

needless expense and wasted resources, not only for the Court,

but for its personnel, respondent, and respondent's counsel.

Under these circumstances, the penalty under section 6673 is

warranted, and petitioners will be ordered to pay a penalty of

$500 to the United States under section 6673(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.