T.C. Summary Opinion 2002-70
UNITED STATES TAX COURT
MICHAEL WHITE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10060-01S. Filed June 11, 2002.
Michael White, 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 $2,942 and $3,654 in
petitioner's Federal income taxes, respectively, for 1998 and
1999 and corresponding penalties under section 6662(a) in the
amounts of $588 and $731.
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, petitioner's
legal residence was Edgewood, New Mexico.
For each of the years in question, petitioner claimed
itemized deductions on a Schedule A, Itemized Deductions, of his
Federal income tax return. 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. For the year 1998,
other itemized deductions claimed by petitioner, although
substantiated, were less than the allowable standard deduction
under section 63(c); consequently, respondent allowed petitioner
the standard deduction for that year. At trial, respondent
conceded that petitioner substantiated an itemized deduction for
home mortgage interest for 1999, and, as a result of that
concession, petitioner is entitled to itemized deductions for
1999 in lieu of the standard deduction determined in the notice
of deficiency.
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At trial, petitioner 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 was gainfully employed for the 2 years at issue
as a paramedic firefighter for one of the counties in New Mexico.
Prior to the years at issue, petitioner prepared his own
Federal income tax returns. For the 2 years in question, someone
recommended that petitioner employ a return preparer, Robin
Beltran. The individual who recommended Mr. Beltran represented
that Mr. Beltran was a "great guy", who was a "CPA", and "really
knows his stuff, is willing to show you the stuff in the tax laws
that show you all the loopholes, and he can certainly save you a
lot of money." Petitioner arranged to engage the services of Mr.
Beltran for his 1998 Federal income tax returns and for 2 years
thereafter. For the initial year, 1998, petitioner presented to
Mr. Beltran the same type documentation petitioner maintained for
the years in which petitioner prepared his own returns. That
documentation appeared to be for charitable contributions and
employee expenses. Mr. Beltran advised petitioner that such
records were not necessary because, irrespective of records, a
taxpayer, under the law, was "allowed" certain amounts as
deductions for such expenses.
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The 1998 return prepared by Mr. Beltran reflected an
overpayment of $3,983, an amount which surprised petitioner. He
questioned Mr. Beltran about the size of the refund, as he
testified at trial:
How do you get that much money back? I haven't been getting
that type of return back myself. I don't know that much
about taxes. That's why I'm hiring you, but how does that
work? How do you do that? Well, Mr. White, that's why
you're hiring a tax professional. That's why you come to a
CPA. Because I study this for a living.
There are loopholes that you can't find on your own
that I can find for you. Therefore, you have a larger
return, and because I'm able to find those loopholes for
you, you'll keep coming back to me. And by the way, if you
can refer people to me and tell them what a good job I've
done for you, I'll give you a break on next year's taxes.
Mr. Beltran, you're a wonderful guy. Thank you for
your assistance. How can I spread your name around? Well,
let me give you a stack of cards. And of course, he gives
me a stack of cards, Robin the tax man.
So I start telling other people about him and talking
to other people that have used him before. Yes. He did the
same thing for me. He did a great job. So that was '98, I
believe. I used him for 1999. I used him for the year
2000. Did not realize that there was a problem until 2001,
when I got the first notice of audit, and then all alarms
went off.
In spite of his reservations about the refunds for the 2
years in question, petitioner did not review the returns or
ascertain what deductions claimed on the returns accounted for
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such overpayments. Petitioner did not consult with any tax
professionals to review the returns prepared by Mr. Beltran.2
The following itemized deductions (as well as others not in
question) were claimed on the 1998 and 1999 tax returns prepared
by Mr. Beltran:
1998 1999
Charitable contributions $3,704 $4,543
Unreimbursed employee expenses
(before the sec. 67(a)
limitation) 9,878 5,517
Petitioner acknowledged that his actual charitable
contributions were considerably less than the amounts claimed on
his returns, and, although he maintained logs for his employee-
related expenses, Mr. Beltran advised him, as noted above, that
such records were not necessary. Petitioner did not, at trial,
make any claim for a deduction for employee business expenses or
charitable contributions.
When petitioner began receiving correspondence from the
Internal Revenue Service questioning his 1998 and 1999 returns,
he referred everything to Mr. Beltran, who promised to "take
care" of the problem. However, petitioner never executed a power
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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of attorney designating Mr. Beltran as his representative, nor
did Mr. Beltran undertake to represent petitioner with the
Internal Revenue Service or otherwise assist petitioner in
addressing respondent's inquiries.
Petitioner contends he should be absolved of liability for
the section 6662(a) penalties because he relied on the
representations of his 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
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
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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 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
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Cir. 1990), affd. 501 U.S. 868 (1991). 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.
Petitioner made no effort to ascertain the professional
background and qualifications of his return preparer, Mr.
Beltran. He failed to examine the returns prepared by Mr.
Beltran, except to ascertain the amount of the refunds he could
expect. Petitioner did not look beyond that, as he was obviously
interested more in the recommendation he had received on Mr.
Beltran that he was a "good guy" and "can certainly save you a
lot of money." The Court is satisfied that petitioner knew that
he could only claim deductions that could be substantiated, and,
when his returns reflected refunds considerably higher than what
he normally would have received, his failure to examine the
returns or to have someone examine the returns for him to
ascertain the reasons for such overpayments, constitutes
negligence or disregard of rules or regulations. Petitioner
consciously failed to examine the returns because he knew that
the returns must have contained information that was false. With
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the obvious reservations petitioner had at the time the returns
were prepared, he, nevertheless, failed to ascertain from tax
professionals whether his returns were correctly prepared. These
facts demonstrate to the Court that petitioner made no reasonable
effort to ascertain his correct tax liability 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 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.
Although petitioner conceded the deficiencies and challenged only
the penalties under section 6662(a), the Court considers
petitioner's claim that he should not be liable for the penalties
to be frivolous and groundless. Petitioner 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,
petitioner realized that he had no case with respect to the
deficiencies but chose to continue to challenge the imposition of
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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
petitioner 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 are not sustainable. Golub v.
Commissioner, T.C. Memo. 1999-288. Petitioner, therefore, has
interfered with the Court's function to the detriment of other
parties having cases with legitimate issues for the Court to
consider. Petitioner has 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 petitioner 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.