PACHECO v. COMMISSIONER

T.C. Summary Opinion 2002-82

UNITED STATES TAX COURT

MARIE G. AND MICHAEL L. PACHECO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6292-01S. Filed July 9, 2002.

Marie G. and Michael L. Pacheco, 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.
 - 2 -

Respondent determined deficiencies of $5,026 and $5,838 in

petitioners' Federal income taxes, respectively, for 1998 and

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

amounts of $1,005 and $1,168.

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 Edgewood, 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 $32,042, of which $17,937 was

disallowed by respondent. For 1999, petitioners deducted

$33,401, of which $24,822 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.

At trial, the parties settled the issue involving the

disallowed job expenses and other miscellaneous deductions for
 - 3 -

the 2 years in question.2 The remaining issues for decision are:

(1) Whether petitioners are entitled to charitable contribution

deductions 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. Pacheco was an officer for a manufacturing

company, and Mrs. Pacheco was an equipment technician for the

Intel Corp. They reported combined wages of $85,951 and $98,982,

respectively, for 1998 and 1999.

For prior years, petitioners had engaged the services of a

public accountant for the preparation of their Federal income tax

returns. Their preparer died prior to the time for preparation

of the 1998 and 1999 returns. Based on the recommendation of a

coworker of Mrs. Pacheco, petitioners engaged Robin Beltran to

prepare their 1998 and 1999 returns.3

2
The parties agreed that, for the year 1998, petitioners
were entitled to a deduction of $3,525 for automobile (mileage)
expenses and tax preparation fees of $235.11, and $3,403 for
automobile expenses and $721 for tax preparation fees for 1999,
subject to the 2-percent limitation of sec. 67.
3
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.
When the subject returns were called into question by the
Internal Revenue Service, Mr. Beltran advised petitioners to
(continued...)
 - 4 -

For the years in question, petitioners claimed the following

itemized deductions on their returns, which were disallowed in

full by respondent in the notice of deficiency:

1998 1999

Charitable contributions $ 6,925 $ 7,272
Unreimbursed employee expenses and
tax preparation fees (before the
sec. 67(a)limitation) 12,770* 15,515*

* As noted supra note 2, the parties settled this
adjustment.

Petitioners acknowledged at trial that their actual

charitable contributions were considerably less than the amounts

claimed on their returns. They estimated their actual charitable

contributions to be approximately $2,000 for each year. However,

on their 1996 and 1997 tax returns, which were offered in

evidence by respondent, their contributions were $520 and $545,

respectively, for 1998 and 1999, and they made no claim for job

expenses and other miscellaneous deductions on their returns for

these 2 years.

With respect to the charitable contributions issue,

petitioners' testimony at trial satisfies the Court that the

amounts claimed were arbitrarily determined by the return

3
(...continued)
ignore all correspondence they received concerning their tax
returns.
 - 5 -

preparer, Robin Beltran, and had no reasonable basis in law or in

fact, as addressed later in this opinion. Petitioners virtually

admitted that in their testimony. The Court is, nevertheless,

satisfied that petitioners made some contributions during the

years in question. In the absence of more convincing evidence,

the Court, on this record, allows petitioners a deduction of $300

for each of the years in question. Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).

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
 - 6 -

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

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.
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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.; 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 of the deductions claimed

on their returns for charitable contributions were considerably

in excess of what they had claimed on prior years' returns and,

therefore, were false. They questioned Mr. Beltran about that at

the time the returns were prepared, and his explanation was that

they were entitled to the deductions claimed based on a "formula"

allowed by the Internal Revenue Service. At trial, petitioners

testified:

MR. PACHECO: * * * Mr. Beltran explained that he knew
the IRS laws and guidelines in and out. He knew exactly
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what was allowed and that most people do not take advantage
of it. Other preparers don't go through the homework, or
the work, to get their clients what they're allowed.

* * * * * * *

MS. PACHECO: I did question Mr. Beltran and I asked
him, How do you come up with these numbers? And he showed
me some examples. You know, he got kind of offended, upset,
and said he knew what he was doing. He was more aggressive,
you know, preparing taxes and that he ---

THE COURT: * * * So, then, you had sort of raised
questions yourself, then?

MS. PACHECO: Yes, I did. I asked him and he said,
Well, you think I'm stupid? I wouldn't do this. I have two
kids. I'd be thrown in prison, you know, if I did this.
And I said, Well, I just want to make sure that you are
doing them right.

THE COURT: Did you, perhaps, go check with other CPAs
to find out if that was correct?

MS. PACHECO: No, because we've already paid a lot of
money to him to prepare our taxes. It's just like if I go
to anybody else, whether it's a doctor or anybody else, if I
go to somebody and they do this as a profession, I'm going
to take their word for it. You know, if I go to a doctor
and says he needs to cut off my leg, I'm not going to
question it. You know, the same thing with him. You know,
I thought he knew what he was doing.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer. They

knew that the items at issue were false and expressed their

reservations to Mr. Beltran. The answers he gave them should

have raised other questions. Petitioners clearly did not make a

reasonable effort to determine whether the representations of Mr.

Beltran were correct. They did not consult other tax
 - 9 -

professionals to verify the accuracy of the returns prepared by

Mr. Beltran or the representations he made to them regarding

their deductions. The Court is satisfied from the record that

Mr. Beltran knew, or had reason to know, all the relevant facts

upon which, had he been a qualified professional, he could have

accurately advised petitioners on the amount of their allowable

deductions. Mr. Beltran claimed unrealistic and false amounts as

deductions on petitioners' returns. The Court is satisfied that

petitioners knew they were required under the law to substantiate

deductions claimed on their returns, as they had done in prior

years. The questions they posed to Mr. Beltran and the answers

he gave them should have prompted them to look beyond and

ascertain the accuracy of his representations. Petitioners,

therefore, made no effort to assess their tax liability

correctly. On this record, the Court 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
 - 10 -

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

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,
 - 11 -

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.