DELARA v. COMMISSIONER

T.C. Summary Opinion 2002-54

UNITED STATES TAX COURT

MANUEL AND LUELLA J. DELARA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9265-01S. Filed May 17, 2002.

Manuel and Luella J. Delara, 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
year at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined a deficiency of $5,366 in petitioners'

Federal income tax for 1999, an addition to tax under section

6651(a)(1) in the amount of $122, and a penalty under section

6662(a) in the amount of $1,073.

In the notice of deficiency, respondent made several

adjustments disallowing some of the itemized deductions claimed

by petitioners on Schedule A, Itemized Deductions, of their 1999

return. In the stipulation filed with the Court, the parties

agreed that petitioners were entitled to charitable contribution

deductions of $330.70 instead of $6,968 claimed on their return;

that petitioners were entitled to a deduction for home mortgage

interest of $6,586.31 instead of $11,686 claimed on their return;

that petitioners were entitled to a deduction for taxes paid of

$2,575.56 instead of $2,117 claimed on their return; and that

petitioners were entitled to a deduction for moving expenses of

$391, for which no amount was claimed on their tax return. The

other Schedule A adjustment was the disallowance in the notice of

deficiency of $9,781 claimed for unreimbursed employee expenses

and tax preparation fees. No concessions were made by respondent

on these disallowed deductions. With these concessions,

petitioners conceded all other adjustments, including the

addition to tax under section 6651(a)(1). Thus, the issues

remaining are whether petitioners are liable for the accuracy-
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related penalty under section 6662(a) and a penalty under section

6673(a).

Petitioners were both employed full time during 1999. Mr.

Delara was a produce manager for a grocery chain, and Mrs. Delara

was employed by a wholesaler. Together their wages totaled

$79,758 for 1999. Along with two other income items, their total

income was $80,172. The itemized deductions claimed on their

return totaled $28,945.

In the years prior to 1999, petitioners always utilized the

services of an accountant or a recognized tax preparation service

for the preparation of their income tax returns. Petitioners

moved to Albuquerque, New Mexico, in June 1999. On the

recommendation of Mrs. Delara's sister and her husband,

petitioners engaged Robin Beltran (Mr. Beltran) to prepare their

1999 return. Their return was received by respondent's Austin,

Texas, office on May 8, 2000. Petitioners did not know Mr.

Beltran. They believed he was a certified public accountant

because they noticed a plaque in his office that they thought

might have related to Mr. Beltran being a certified public

accountant; however, they did not read the plaque or otherwise

attempt to obtain information from others about Mr. Beltran's

qualifications.

After petitioners' return was prepared by Mr. Beltran, they

did not review the contents of the return. There is no evidence
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in the record to indicate that petitioners presented any

documentation to Mr. Beltran to substantiate the itemized

deductions claimed on their return; there is no evidence that Mr.

Beltran asked for any records, and petitioners did not question

Mr. Beltran about the contents of the return or the need to

present any documentary information. The amounts claimed as

deductions for charitable contributions and home mortgage

interest were substantially in excess of the amounts petitioners

actually paid, along with the unreimbursed employee expenses.

Petitioners contend they should be absolved of liability for the

section 6662 penalties because they relied on their return

preparer.2

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

2
This case is one of numerous cases heard by the Court
involving tax returns prepared by Mr. Beltran, which essentially
involve the same inflated deductions. At some point in the audit
process, Mr. Beltran ceased all communications with his former
clients.
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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

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), Income

Tax Regs., "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,
 - 6 -

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.

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

Cir. 1990), affd. 501 U.S. 868 (1991). However, 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. They did not review the return prepared by Mr. Beltran.

Petitioners clearly did not make a reasonable effort to determine

whether their return was accurate. Petitioners made no effort to

contact other tax professionals to verify the accuracy of the

return prepared by Mr. Beltran. The Court is satisfied from the
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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, nor did petitioners offer any evidence of

these expenses. The Court is further satisfied that petitioners

knew they were required by law to substantiate all items of

income and expense shown on their returns. Based on the

overpayments shown on the returns, which petitioners were well

aware of, and which substantially exceeded the amounts generally

received by them in prior years, petitioners had reason to know

that the claimed overpayments had to be based on erroneous

information on the returns. Petitioners were far more impressed

with the bottom-line numbers than the numbers used to arrive at

the results shown on the returns. On this record, the Court

sustains respondent on the section 6662(a) accuracy-related

penalty for 1999.

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 deficiency, after allowance for
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certain expenses that were substantiated to respondent's

satisfaction, the Court considers petitioners' claim that they

should not be liable for the section 6662(a) penalty to be

frivolous and groundless. Petitioners knew that a substantial

portion of the itemized deductions at issue was false and could

not be sustained. Petitioners should have had reservations at

the time the return was filed as to the accuracy of the claimed

itemized deductions, particularly when they were never requested

by the return preparer as to the amount of and/or the

documentation to substantiate the amounts reported on the return.

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 realized that they had no case with respect to the

deficiency but chose to continue to challenge the imposition of

the penalty 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
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petitioners knew that. We do 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 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.