T.C. Summary Opinion 2002-64
UNITED STATES TAX COURT
EUGENE I. AND LEONARDA T. VALDEZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3053-01S. Filed May 31, 2002.
Eugene I. and Leonarda T. Valdez, 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.
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Respondent determined deficiencies of $1,432, $1,372, and
$1,102 in petitioners' Federal income taxes, respectively, for
1997, 1998, and 1999 and corresponding penalties under section
6662(a) in the amounts of $286, $274, and $220.
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.
For each of the years in question, petitioners claimed
itemized deductions on a Schedule A, Itemized Deductions. In the
notice of deficiency, respondent disallowed all the amounts
claimed as deductions for each of the years at issue for
charitable contributions and miscellaneous itemized deductions,
the latter consisting of unreimbursed employee business expenses.
Other itemized deductions claimed by petitioners, although
substantiated, were less than the allowable standard deduction
under section 63(c); consequently, respondent allowed petitioners
the standard deduction for each of the 3 years at issue.
In the stipulation, petitioners conceded the deficiencies,
challenging only the penalties under section 6662(a). In
addition to considering that issue, the Court also considers the
applicability of section 6673(a) to the facts of this case.
Petitioner Eugene I. Valdez (petitioner) was employed for
the 3 years at issue as an architectural technician for a
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corporation that subcontracted its employees to the Intel Corp.
at Albuquerque, New Mexico. Mrs. Valdez was not employed during
1997 and 1998 and worked briefly for the Santa Fe Star Casino
during 1999.
Prior to the years at issue, petitioners engaged the
services of a certified public accountant, or a nationally
recognized tax preparation service, for the preparation of their
Federal income tax returns. For the years at issue, one of
petitioner's coworkers recommended that petitioners employ a
return preparer, Robin Beltran, because "this man can get you
more money back on your taxes than what you've been getting."2
When petitioners met with Mr. Beltran, for each of the 3
years they presented to him substantiation for itemized
deductions for home mortgage interest and real estate taxes.
They presented no documentation to substantiate any other
itemized deductions. Nonetheless, the returns for each year
claimed the following itemized deductions (in addition to the two
aforementioned expenses for home mortgage interest and real
estate taxes):
2
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.
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1997 1998 1999
Charitable contributions $3,957 $3,030 $3,736
Unreimbursed employee expenses
(before the sec. 67(a)
limitation) 6,577 7,710 4,775
Petitioners agree that they did not incur any unreimbursed
employee expenses during the 3 years at issue and had no
intention of claiming such expenses as deductions on their
returns. Even though petitioners made some charitable
contributions during the years at issue, they maintained no
records of their contributions and, likewise, had no intent to
claim such contributions as deductions. Petitioner's only
explanation for the inclusion of such items on their returns was
that the amounts on the returns simply "came out of his [Mr.
Beltran's] head."
Petitioners never examined the returns prepared by Mr.
Beltran except for the amounts claimed on the returns as refunds
for overpayments. Mr. Beltran advised petitioners to ignore any
correspondence they received from the Internal Revenue Service
questioning their returns, and petitioners followed that advice.
Petitioners contend they should be absolved of liability for
the section 6662(a) penalties because they relied on the
representations of their return preparer.
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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
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.
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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 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 penalty 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
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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 failed to examine the returns prepared by Mr.
Beltran, except to ascertain the amount of the refunds they could
expect. Petitioners did not look beyond that, as they were
obviously interested more in the recommendation they had received
on Mr. Beltran that "this man can get you more money back on your
taxes than what you've been getting." The Court is satisfied
that petitioners knew they could only claim deductions that could
be substantiated, and, when their returns reflected refunds
considerably higher than what they normally would have received,
their failure to examine the returns or to have someone examine
the returns for them to ascertain the reasons for such
overpayments, constitutes negligence or disregard of rules or
regulations. Petitioners consciously failed to examine the
returns because they knew that the returns must have contained
information that was false. With the obvious reservations
petitioners had or should have had, they, nevertheless, failed to
ascertain from tax professionals whether their returns were
correctly prepared. These facts demonstrate to the Court that
petitioners made no reasonable effort to ascertain their correct
tax liabilities for the years at issue. Stubblefield v.
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Commissioner, supra. On this record, the Court sustains
respondent on the section 6662(a) accuracy-related penalties for
the 3 years at issue.
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
false and could not be sustained. Other circumstances noted
above need not be repeated here.
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 chose to continue 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 be sustained, and
petitioners knew that. We do not and should not countenance the
use of this Court as a vehicle for disgruntled litigants to
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proclaim the wrongdoing of another, their return preparer, as a
basis for relief from penalties that were 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
for respondent.