ALBACH v. COMMISSIONER

T.C. Summary Opinion 2002-85

UNITED STATES TAX COURT

MICHAEL A. AND TERESA F. ALBACH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11500-01S. Filed July 11, 2002.

Michael A. Albach, 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 $3,983 and $7,182 in

petitioners' Federal income taxes, respectively, for 1998 and

1999 and corresponding penalties under section 6662(a) in the

amounts of $797 and $1,436.

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, of

their Federal income tax return. For 1998, petitioners claimed

itemized deductions totaling $19,380, which were totally

disallowed by respondent. For 1999, petitioners deducted

$36,214, of which $25,655 was disallowed by respondent.

Petitioners were allowed itemized deductions for 1999, since the

total of their other claimed and allowed deductions exceeded the

standard deduction under section 63(c); however, for 1998,

petitioners were allowed the standard deduction in lieu of

itemized deductions. For the 2 years at issue, the disallowed

deductions consisted of charitable contributions, job expenses,

and other miscellaneous deductions. In addition, for 1998,

respondent disallowed a dependency exemption deduction and

disallowed itemized deductions, for that year, of $894 for taxes

and $2,743 for interest. At trial, respondent conceded the
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adjustments for the disallowed dependency exemption, the taxes,

and the interest.

The issues for decision are: (1) Whether petitioners are

entitled to charitable contribution deductions, unreimbursed

employee expenses, and tax preparation fees for the 2 years at

issue, and (2) whether petitioners are liable for the accuracy-

related penalties under 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. Albach was employed by a medical laboratory as a

courier and facility and securities manager, and Mrs. Albach was

a blackjack dealer at a casino. They reported combined wages of

$52,797 and $85,803, respectively, for 1998 and 1999.

For prior years, Mr. Albach (petitioner) prepared

petitioners' Federal income tax returns. Petitioner was in the

military and had no difficulty preparing their returns. In

December 1997, petitioner retired from the military and took on

private employment. With the military pension he was receiving,

along with the wages he and his wife were earning, their combined

income during 1998 increased considerably from their income in

prior years. Nevertheless, as he had done in prior years,

petitioner prepared their joint return for 1998, which was filed.

Thereafter, petitioner began having second thoughts about the
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1998 return he had prepared and had the feeling that perhaps he

and his wife might have been paying "too much" in taxes. He

inquired with several of his friends, who recommended that he

consult Robin Beltran, a tax return preparer "who has been doing

a great job for years" in preparing income tax returns.

Petitioner contacted Mr. Beltran, who met with petitioners at

their home. He prepared an amended return for 1998, which

petitioners filed. The adjustments in the notice of deficiency

are to the amended return for 1998. Petitioners also engaged the

services of Mr. Beltran for their 1999 return.2

In preparing their returns, Mr. Beltran did not request any

substantiating documentation for any of the deductions at issue.

Petitioners' understanding was that Mr. Beltran used a "formula"

in arriving at the amounts deducted on the returns for charitable

contributions and unreimbursed employee expenses. Mr. Beltran's

tax preparation fees were 10 percent of the amounts claimed as

refunds on the returns.

The itemized deductions at issue for the 2 years in question

consisted of the following:

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 issue here.
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1998 1999

Charitable contributions
Cash $5,925 $7,266
Noncash 413 $ 6,338 413 7,679
Unreimbursed employee expenses 10,468 18,791
Tax preparation fees 300 1,200

Petitioner acknowledged at trial that their actual

charitable contributions were considerably less than the amounts

deducted on their returns. He estimated that their cash

contributions were approximately $400 per year, but the greater

amount for both years was military memorabilia, which petitioners

donated to a thrift store on a military base. Petitioners

presented no records at trial to substantiate any of the cash

contributions, nor was any information presented listing the

items of property donated and the values of such properties.

Nor, as noted earlier, did Mr. Beltran request or solicit such

information from petitioners. Although the Court is allowed some

discretionary authority in allowing some basic amount as a

deduction when the Court is satisfied from the record that a

payment or contribution was made pursuant to the case of Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), the Court

declines to do so in this case because there is no evidence in

the record from which the Court can conclude that any charitable

contributions were in fact made by petitioners during the years

in question.
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With respect to the unreimbursed employee expenses,

petitioner incurred expenses in the use of his personal vehicle

in making deliveries for his employer. However, he maintained no

logs to document the use of his vehicle, nor did not retain any

receipts or any other documentary information to substantiate any

amount paid or incurred for such expenses. Such expenses are

subject to the strict substantiation requirements of section

274(d), either through an account book, diary, statement of

expense, or similar record. Sec. 1.274-5T(c)(2)(i), Temporary

Income Tax Regs., 50 Fed Reg. 46017 (Nov.6, 1985). The Court,

therefore, sustains respondent in disallowing the unreimbursed

employee expense deductions for the 2 years in question. The tax

preparation fees, although deductible and allowed, are deductible

only to the extent such expenses exceed 2 percent of adjusted

gross income. Sec. 67(a). Whether petitioners realize any tax

benefit from this allowance will be determined in the Rule 155

computation.

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.
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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.

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
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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). 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 knew that the amounts claimed as deductions on

their returns for charitable contributions were excessive, and
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that the amounts claimed were not substantiated by any

documentary evidence. They knew the amounts claimed were false.

They knew that Mr. Beltran arrived at the amounts claimed based

on a formula, which Mr. Beltran claimed was "allowed" by the

Internal Revenue Service. Since Mr. Beltran based his tax

preparation fees on the amounts claimed as refunds, the Court

questioned petitioner at trial as to whether he had any concerns

about such a practice. Petitioner admitted he had concerns but

never pursued the matter further.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer. They

knew that the items at issue were false. Petitioner knew that

the practice of basing tax preparation fees on the percentage of

the refund could and did in fact invite the preparer to claim

inflated deductions on the returns. Such knowledge and

reservations by petitioners should have prompted them to look

beyond Mr. Beltran to have their returns accurately prepared and

whether or not Mr. Beltran's use of a "formula" was a correct

application of the tax law, particularly with regard to certain

expenses that are only deductible if strict substantiation

requirements are followed. Petitioners did not do that and,

therefore, made no effort to accurately assess their tax

liability for the 2 years in question. On this record, the Court
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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.

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. 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 seek other professional advice to satisfy

the concerns they had over the returns prepared by Mr. Beltran.

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. Any reasonable

and prudent person, under the facts presented to the Court,

should have known that petitioners' claimed deductions could not

have been sustained, and petitioners knew that. This Court does
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not and should not countenance the use of this Court as a vehicle

for disgruntled litigants to proclaim the wrongdoing of another,

his 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

under Rule 155.