T.C. Summary Opinion 2002-72
UNITED STATES TAX COURT
THELDON AND MARY PARRETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11502-01S. Filed June 12, 2002.
Mary Parrett, 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.
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Respondent determined deficiencies of $5,561 and $5,818 in
petitioners' Federal income taxes, respectively, for 1998 and
1999 and corresponding penalties under section 6662(a) in the
amounts of $1,112 and $1,164.
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 Jemez Pueblo, New Mexico.
For each of the years in question, petitioners claimed
itemized deductions on a Schedule A, Itemized Deductions, of
their Federal income tax return. For 1998, petitioners claimed
itemized deductions totaling $28,346, of which $19,861 was
disallowed by respondent. For 1999, petitioners deducted
$28,263, of which $20,757 was disallowed by respondent.
Petitioners, nevertheless, were allowed itemized deductions for
both years, since the total of their other claimed and allowed
deductions exceeded the standard deduction under section 63(c).
For the 2 years at issue, the disallowed deductions consisted of
charitable contributions, job expenses, and other miscellaneous
deductions.
The issues for decision are: (1) Whether petitioners are
entitled to the disallowed itemized deductions for charitable
contributions, job expenses, and other miscellaneous deductions,
and (2) whether petitioners are liable for the penalties under
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section 6662(a). In addition, the Court considers the
applicability of section 6673(a) to the facts of this case.
Petitioners were both employed during the 2 years in
question. Mr. Parrett was a construction supervisor, and Mrs.
Parrett was a floor supervisor and a dealer at a casino. They
reported combined wages of $88,220 and $82,787, respectively, for
1998 and 1999.
Prior to the years at issue, petitioners either prepared
their Federal income tax returns themselves or had them prepared
by a friend. For the 2 years in question, however, petitioners'
returns were prepared by Robin Beltran. The record does not
reflect the circumstances surrounding their employment of Mr.
Beltran.2 Mr. Beltran prepared petitioners' returns for 3 years,
1998, 1999, and 2000. For the initial year, 1998, petitioners
presented to Mr. Beltran the same type documentation petitioners
maintained for the years in which petitioners prepared their own
returns. That documentation appeared to be for charitable
contributions but not for the miscellaneous deductions at issue.
Mr. Beltran advised petitioners that such records were not
necessary and could be disregarded because, irrespective of
2
The Court notes that 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 issue here.
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records, a taxpayer, under the law, was "allowed" deductions for
such expenses pursuant to a "formula".
The disallowed deductions consisted of the following:
1998 1999
Charitable contributions $ 7,159 $ 6,725
Unreimbursed employee expenses
(before the sec. 67(a)
limitation) 14,472 15,701
Petitioners acknowledged at trial that their actual
charitable contributions were considerably less than the amounts
claimed on their returns. Mrs. Parrett estimated that
petitioners actually contributed to charity approximately 33
percent of the amount claimed on their 1998 return and
approximately 24 percent of the amount claimed on their 1999
return.
The unreimbursed employee expenses shown above represented
the commuting expenses of petitioners to and from their residence
with respect to their respective places of employment. Mr.
Beltran advised petitioners that such expenses were deductible,
even though it appears that petitioners had never previously
claimed such expenses as deductions on their returns for prior
years.
With respect to the first issue regarding petitioners'
entitlement to deductions for charitable contributions and
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unreimbursed employee business expenses, the Court notes that
commuting expenses incurred by a taxpayer to and from the
taxpayer's place of employment are personal expenses and are not
deductible. Sec. 262; Commissioner v. Flowers, 326 U.S. 465
(1946). Petitioners presented no argument and cited no authority
to the contrary. Petitioners contended at trial that they had
incurred expenses for tax preparation and for special clothing
required by Mrs. Parrett in her employment. The Court holds
that, to the extent any expenses of this nature were incurred,
the amounts would not exceed 2 percent of petitioners' adjusted
gross income each year, and, therefore, under section 67(a),
petitioners are not entitled to deductions for those items.
With respect to charitable contributions, petitioners
produced no documentary evidence to substantiate their
contributions for the 2 years at issue. Petitioners testified
that their records were destroyed in the flooding of their home.
Even though their records were destroyed, petitioners made no
attempt to reconstruct evidence of their contributions for the 2
years in question. However, it appears to the Court that
petitioners did make qualifying charitable contributions during
the years at issue and, therefore, under the Court's
discretionary authority pursuant to Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930), allows petitioners charitable
contribution deductions of $300 for each year at issue.
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The second issue is whether petitioners should be held
liable for the section 6662(a) penalties. Petitioners contend
they should be absolved of liability for such penalties because
they relied on the representations of their return preparer, Mr.
Beltran.
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
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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 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.; see 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). Reliance on a
professional adviser, standing alone, is not an absolute defense
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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. They did
not examine the returns prepared by Mr. Beltran, except perhaps
to ascertain the amount of the refunds they would receive. The
record does not show that petitioners looked beyond that. The
Court is satisfied that petitioners knew that they could only
claim deductions on their returns that could be substantiated,
and, even if they did not know that, at the very least, the
representations that the deductible amount of such deductions was
based on a formula should have prompted them to verify the
accuracy of such a representation with a qualified preparer.
Moreover, the amounts claimed for unreimbursed employee expenses
were clearly disproportionate to petitioners' wages, which also
merited further inquiry. These facts demonstrate to the Court
that petitioners made no reasonable effort to ascertain their
correct tax liability for the years at issue. Stubblefield v.
Commissioner, supra. Additionally, when petitioners were
contacted by respondent with respect to their returns,
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petitioners referred all correspondence to Mr. Beltran, who had
promised to "take care" of the problem, which he failed to do.
On this record, the Court sustains respondent on the section
6662(a) accuracy-related penalties for the 2 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.
The Court considers petitioners' claim that they should not be
liable for the deficiencies and penalties to be frivolous and
groundless. Petitioners knew, or should have known, 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. 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 the Court is satisfied that 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, his return preparer, as a basis for relief from a
penalty that was determined by respondent on facts that clearly
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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.