LaRUE v. COMMISSIONER

T.C. Summary Opinion 2002-63

UNITED STATES TAX COURT

BERT LaRUE AND MICHELLE NOLEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5255-01S. Filed May 31, 2002.

Bert LaRue Nolen, 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.
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Respondent determined deficiencies of $1,508, $1,163, 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 $302, $233, 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 McIntosh, 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.

Petitioners were both employed during 1997 and 1998;

however, petitioner Michelle Nolen was not employed during 1999.
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Mr. Nolen (petitioner) was employed during 1999. Petitioner

worked for several employers during the years at issue, doing

ground boring and tunneling work for the laying of underground

water lines, sewage pipes, and other types of utilities. For the

3 years in question, petitioners engaged the services of Robin

Beltran to prepare their Federal income tax returns. Mr. Beltran

had been recommended to petitioner by one of petitioner's

coworkers. When petitioners first met with Mr. Beltran, they

provided records that petitioners believed were necessary to

substantiate the deductions to be claimed on their tax returns.

Somewhat to their surprise, Mr. Beltran did not rely on those

records and represented to petitioners that the amounts to be

claimed on the returns would be allowable amounts well in excess

of their records. Petitioners accepted that position without

question. It appears that the same procedure was followed for

each of the succeeding years in question.

Respondent's determinations address two categories of

itemized deductions claimed by petitioners, which were totally

disallowed in the notice of deficiency: charitable contributions

and other miscellaneous expenses, essentially unreimbursed

employee business expenses. The following amounts were claimed

by petitioners on their returns:
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1997 1998 1999

Charitable contributions $ 2,639 $3,525 $3,941
Unreimbursed employee expenses
(before the sec. 67(a)
limitation) 12,923 9,063 8,221

Petitioners agreed at trial that their actual charitable

contributions were far less than the amounts claimed on the

returns. They provided documentation of $250 for 1998

contributions, $435 for 1999, and no proof of any contributions

during 1997.2 The unreimbursed employee expenses were all

related to petitioner's employment. Petitioner readily admitted

that the amounts above were far in excess of what he actually

expended. For example, the $12,923 shown above for 1997 was

related to petitioner's construction work, for which he earned

$20,249 in wages that year. Thus, the amount claimed for

unreimbursed employee expenses for that year represents

approximately 64 percent of the wages earned in connection with

that employment. Petitioner agreed that he would not, in the

real world, accept employment where unreimbursed employee

expenses would be of such magnitude.

2
The Court notes that, as stated earlier, petitioners
conceded the deficiencies in the stipulation, and any amounts
substantiated at trial would be less than the standard deduction;
consequently, there are no grounds for disregarding the
stipulation as in Jasionowski v. Commissioner, 66 T.C. 312
(1976).
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When petitioners' returns were thereafter audited by

respondent, all correspondence they received was referred to Mr.

Beltran, who had promised he "would take care of it". There is

no indication in the record that Mr. Beltran provided any

assistance to petitioners in the audit process.3

Petitioners contend they should be absolved of liability for

the section 6662(a) 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

3
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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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),

"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.
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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. Petitioners knew that Mr. Beltran disregarded the

documentary information they had provided to him to substantiate

their claimed deductions and, moreover, knew that they could

claim tax deductions only for amounts actually expended. The

Court is satisfied that petitioners consciously failed to examine

the returns prepared by Mr. Beltran because they knew that some

of the deductions claimed on the returns were false, and they

hoped their returns would escape the audit process. With the

obvious reservations petitioners had or should have had, they,
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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. 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
 - 9 -

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

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.