DELGARITO v. COMMISSIONER

T.C. Summary Opinion 2002-56

UNITED STATES TAX COURT

BENNIE AND CATHERINE DELGARITO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1407-01S. Filed May 23, 2002.

Bennie and Catherine Delgarito, pro se.

Dennis R. Onnen, 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.
 - 2 -

Respondent determined deficiencies of $2,927, $1,943, and

$1,470 in petitioners' Federal income taxes, respectively, for

1997, 1998, and 1999 and corresponding penalties under section

6662(a) in the amounts of $585, $389, and $294.

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 Grants, New Mexico.

At trial, petitioners conceded the deficiencies in tax. The

sole issue for decision is whether petitioners are liable for the

section 6662(a) penalty for each of the years at issue.

Petitioners were both employed during the years at issue.

Mr. Delgarito was a mechanic for an electric utility company, and

Mrs. Delgarito was an automation technologist for Intel Corp. On

their joint Federal income tax returns, petitioners reported

total income and claimed itemized deductions as follows:

1997 1998 1999

Gross income $61,788 $56,670 $54,036
Itemized deductions 21,433 20,292 17,251

In the notice of deficiency, respondent disallowed the

following itemized deductions:
 - 3 -

1997 1998 1999

Home mortgage interest $2,016 $1,667 --
Charitable contributions 5,359 5,040 $4,586
Unreimbursed employee expenses
and tax preparation fees 9,913 9,661 7,897

Total amounts disallowed $17,288 $16,367 $12,483

As a result of these adjustments, respondent determined that

petitioners were entitled to the standard deduction under section

63(c) for each year. As noted earlier, petitioners conceded

these adjustments, except for the penalties under section

6662(a). With respect to the penalties, petitioners contend they

should be absolved of liability for the reason that they

reasonably relied on their return preparer, Mr. Robin Beltran

(Mr. Beltran).

In the years prior to 1997, petitioners had always utilized

the services of a commercial tax return preparation service for

preparation of their Federal income tax returns. Their returns

had never previously been audited by respondent. For the year

1997 and the years thereafter, upon the recommendation of a

coworker of Mrs. Delgarito at Intel Corp., petitioners engaged

Mr. Beltran to prepare their Federal income tax returns.

Petitioners believed Mr. Beltran was a certified public

accountant, although that was never verified, nor did they ever

inquire whether that was the case. They presented only minimal
 - 4 -

records to Mr. Beltran to substantiate their income and expenses;

however, with respect to the itemized deductions claimed, these

records did not, in any way, come close to equaling the amounts

deducted on the returns. After their returns were prepared and

presented to them each year, petitioners did not review the

returns, nor did they go over the returns with Mr. Beltran. When

they subsequently received notices from respondent that their

returns for the 3 years at issue were under audit, Mr. Beltran

advised petitioners "not to worry", and, based on that advice,

petitioners ignored all correspondence they received from

respondent.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

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

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.
 - 5 -

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,

222 (1992). Although a taxpayer is not subject to the addition
 - 6 -

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 returns prepared by Mr.

Beltran. Petitioners clearly did not make a reasonable effort to

determine whether their returns were accurate. Petitioners made

no effort to contact other tax professionals to verify the

accuracy of the returns prepared by Mr. Beltran. The Court is

satisfied from the record that Mr. Beltran knew, or had reason to
 - 7 -

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, and the documentary evidence

petitioners offered, by their admission, did not come close to

the amounts claimed on the returns. The Court is further

satisfied that petitioners knew they were required under the law

to substantiate deductions claimed on their returns and,

moreover, given the fact that they had only submitted minimal

records to Mr. Beltran, they had every reason to examine the

returns prepared by Mr. Beltran for accuracy, which they failed

to do. Petitioners, therefore, made no effort to assess their

tax liability correctly. On this record, the Court sustains

respondent on the section 6662(a) accuracy-related penalties for

the years in question.

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, the Court

considers petitioners' claim that they should not be liable for

the section 6662(a) penalties to be frivolous and groundless.
 - 8 -

Petitioners should have known that a substantial portion of the

itemized deductions at issue were false and could not be

sustained. The documentation they provided to Mr. Beltran in

substantiation of their claimed deductions was for amounts far

less than what was reported on the returns. Petitioners knew

that they could deduct only amounts that they had actually paid.

They made no attempt to determine the qualifications of their

return preparer and, moreover, did not even examine the returns

once they were prepared. Petitioners 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

deficiencies but continued 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.
 - 9 -

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

for respondent.