CHAMBERS v. COMMISSIONER

T.C. Summary Opinion 2002-105

UNITED STATES TAX COURT

STEVEN L. AND LAURA J. CHAMBERS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1345-01S. Filed August 7, 2002.

Steven L. and Laura J. Chambers, pro se.

Dennis R. Onnen, 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 $2,707, $3,318, and

$1,058 in petitioners' Federal income taxes, respectively, for

1997, 1998, and 1999, and penalties under section 6662(a) in the

amounts of $541, $664, and $212 for 1997, 1998, and 1999,

respectively.

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 Rio Rancho, New Mexico.

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

entitled to itemized deductions for charitable contributions and

unreimbursed employee business expenses for the 3 years at issue,

and, additionally, for a deduction for medical expenses for 1997,

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 3 years in

question. Mr. Chambers was a technician for GSA Albuquerque

Federal Building during 1997 and 1998. He also worked for

Timberland Services, Inc., for a portion of 1997 and for

Presbyterian Healthcare Service in 1998. During 1999, he worked

only for Presbyterian Healthcare Service. Mrs. Chambers was a

document controller for Intel Corp. during 1997 and for a portion
 - 3 -

of 1998. In 1998, she also worked for Gateway 2000 Technical

Support. During 1999, she was employed by the Gateway company

and Sun Healthcare, Inc. Together, petitioners reported $59,438,

$68,603, and $37,245 in salaries and wages, respectively, for the

3 years at issue.

Prior to the years at issue, petitioners' tax returns were

prepared by a local tax return preparer. Sometime before filing

their 1997 return, petitioners explored the idea of having

someone else prepare their returns because they were "a little

nervous about handling our taxes". At that time, petitioners had

exercised stock options that Mrs. Chambers received from her

employer, Intel Corp., and, because of that, they decided to

employ a different return preparer. A friend recommended a

return preparer, Robin Beltran, and they engaged him for the 3

years at issue.2 It was represented to petitioners that "Robin

was easy going" and "required very little information".

Accordingly, Mr. Beltran prepared petitioners' returns for the 3

years in question, as well as for 2000, which is not before the

Court.

For each of the years in question, petitioners claimed

itemized deductions on Schedule A, Itemized Deductions, of their

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.
 - 4 -

Federal income tax returns. On the 1997 return, petitioners

claimed itemized deductions totaling $21,622, for 1998 the

itemized deductions totaled $24,811, and for 1999 the deductions

totaled $14,250. In the notice of deficiency, respondent

disallowed $13,968, $15,910, and $14,250, respectively, of the

itemized deductions for the 3 years in question.3

At the time petitioners met with Mr. Beltran for preparation

of their 1997 return, they were aware and knew that documentary

information was necessary to substantiate the income and expenses

reported and claimed on their returns. They presented such

information to Mr. Beltran; however, as Mrs. Chambers testified

at trial: "We handed Robin everything we had and he handed it

back to us, stating that he didn't need to see what we had."

The only adjustments in the notice of deficiency relate to

petitioners' itemized deductions for the 3 years in question. On

their 1997 return, petitioners claimed an itemized deduction of

$5,842 for medical and dental expenses, prior to application of

the 7.5-percent limitation under section 213(a). Respondent

disallowed the amount claimed for lack of substantiation.

3
For 1997 and 1998, other claimed itemized deductions
were not adjusted, and the total of such allowed deductions
exceeded the standard deduction under sec. 63(c). Petitioners,
therefore, were allowed itemized deductions for these 2 years in
the notice of deficiency. For 1999, petitioners were allowed the
standard deduction under sec. 63(c).
 - 5 -

The other adjustments for the 3 years in question relate to

petitioners' claimed deductions for charitable contributions and

unreimbursed employee business expenses, all of which were

disallowed for lack of substantiation.

Prior to trial, counsel for respondent mailed three letters

to petitioners offering to meet and to consider any documentary

information they had with respect to the items at issue.

Petitioners never responded to these letters and, at trial,

stated that the letters had been referred to their return

preparer, Mr. Beltran, who had agreed to take the matter up with

respondent. Mr. Beltran never contacted respondent, nor did

petitioners attempt to contact respondent, even though they knew

Mr. Beltran had disregarded his offer of assistance. For the

first time, on the date the case was calendared for trial,

petitioners presented to respondent some documentation to support

their charitable contributions and unreimbursed employee

expenses. Petitioners presented no information with respect to

the disallowed medical expenses for 1997, stating at trial "up

until today, we did not realize that was an issue and we weren't

prepared for that".4

4
The Court observes that, had petitioners followed up on
respondent's three letters, they would have known that this item
was at issue, notwithstanding that the adjustment is clearly set
out in the notice of deficiency.
 - 6 -

In connection with the first issue, whether petitioners are

entitled to deductions for medical and dental expenses for 1997,

based on the recited factual predicate, the Court sustains

respondent on this issue.5

With respect to the charitable contributions, petitioners

deducted the following amounts on their returns, all of which

were disallowed by respondent:

1997 1998 1999

Cash $4,700 $5,157 $2,502
Noncash 453 413 413
Total $5,153 $5,570 $2,915

From petitioners' testimony at trial, the above amounts were

arbitrarily determined by the return preparer, Mr. Beltran, who,

as noted earlier, advised petitioners that substantiating

information was not necessary for such deductions.

5
The Court takes cognizance of sec. 7491, which, in
certain instances, places the burden of proof on respondent with
respect to examination of returns commencing after July 22, 1998.
Although the parties did not address the applicability of sec.
7491 to this case, the Court notes that, because of the years
involved, the examination of petitioners' returns at issue here
likely commenced after July 22, 1998. However, for the burden to
be placed on the Commissioner, the taxpayer must comply with the
substantiation and recordkeeping requirements of the Internal
Revenue Code. Sec. 7491(a)(2)(A) and (B). In addition, sec.
7491(a) requires that the taxpayer cooperate with reasonable
requests by the Commissioner for "witnesses, information,
documents, meetings, and interviews". Sec. 7491(a)(2)(B). On
this record, the burden has not shifted to respondent under sec.
7491. Higbee v. Commissioner, 116 T.C. 438 (2001).
 - 7 -

At trial, petitioners presented a list of checks and the

amounts of each check for contributions to their church during

1999. However, no copies of the checks or other receipts to

substantiate the amounts listed were submitted. The list,

although purportedly prepared by the church, was not signed by

either the pastor or any representative of the church. For 1998,

petitioners presented a similar list of their contributions to

the same church but also included check register receipts

totaling $200. No documentation was submitted for church

contributions during 1997. Petitioners presented copies of

several receipts for noncash contributions during 1999 to an

organization, Arc of New Mexico; however, except for three

receipts, the properties donated are not described, nor are any

costs or values shown for such properties. The three receipts

that did list values were in the amounts of $800, $675, and $375.

Two other receipts were submitted for noncash contributions to

Clothes Helping Kids for various household items donated during

1997. These receipts listed values of $400 and $250 for the

household items. Petitioners' tax returns did not include

Internal Revenue Service Form 8283, Noncash Charitable

Contributions, of property other than money, which form is

required for noncash contributions in excess of $600.6

6
Although petitioners claimed less than $500 in noncash
charitable contributions on their returns for each of the years
(continued...)
 - 8 -

On this record, the Court sustains respondent on the

disallowance of petitioners' noncash charitable contributions for

the 3 years at issue. As to the cash contributions, the Court,

pursuant to its discretionary authority under Cohan v.

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

petitioners cash contribution deductions of $200 for each year at

issue.

With respect to petitioners' unreimbursed employee business

expenses and other miscellaneous deductions, the following

amounts were claimed on their returns, prior to application of

the 2-percent limitation under section 67(a):

1997 1998 1999

Unreimbursed employee expenses $8,872 $11,325 $5,372
Tax preparation 200 400 500
Total $9,072 $11,725 $5,872

All of these expenses were disallowed by respondent in the notice

of deficiency. The Court notes that the unreimbursed employee

expenses equal 26.4 percent, 16.5 percent, and 14.4 percent of

6
(...continued)
in question, it is evident from petitioners' testimony at trial
that their claimed noncash contributions, at least for some of
the years in question, were in excess of $500. It is evident to
the Court that petitioners' return preparer intentionally placed
the amounts of their noncash contributions on their returns at
under $500 to avoid compliance with sec. 1.170A-13(b)(3), Income
Tax Regs.
 - 9 -

the salaries and wages petitioners earned each year. The amounts

claimed allegedly represented the costs petitioners incurred in

using their personal vehicles in connection with their

employment. Some of the expenses also were for what petitioners

identified as "Work/Tool Expenses".

Petitioners did not maintain any log or other record

documenting the dates, times, and places their vehicles were used

in connection with their respective employments during the years

in question.

The deductions cannot be allowed for the reason that, under

section 274(d) and the regulations thereunder, vehicle expenses

are subject to strict substantiation rules that require "adequate

records" through either an account book, diary, statement of

expense, or similar record, as well as documentary evidence to

establish each element of an expenditure. Sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.

6, 1985). No records were presented at trial to substantiate

these expenses; consequently, respondent is sustained on the

disallowance of the employee business expense deductions.7

7
The Forms W-2, Wage and Tax Statement, that were
offered in evidence with petitioners' tax returns indicate that
petitioner Steven L. Chambers was an employee of the United
States Government. The Court is very skeptical that a Federal
employee incurring job-related expenses of the magnitude claimed
on petitioners' returns would not have been reimbursed in whole
or in part by the employing Federal agency.
 - 10 -

Petitioners also claimed work/tool expenses of $216.41,

$319.82, and $270.16 for 1997, 1998, and 1999, respectively.

Although petitioners presented a list of the various retail

places where the expenses were incurred, at places such as Home

Depot, Pep Boys, Harbor Freight, and others, no documentation was

presented describing the tools or other merchandise that was

purchased and the need for or the use of such merchandise in

connection with their employment. The Court, therefore, rejects

petitioners' claim to an allowance of work/tool expenses for the

years in question.

As noted above, petitioners claimed deductions for tax

preparation fees for each of the years in question. The Court

need not pass upon the substantiation of these expenses because

these expenses, even if allowable, would not exceed 2 percent of

petitioners' adjusted gross income under section 67(a).

Petitioners contend they should be absolved of liability for

the section 6662(a) penalties because they relied on the

representations of their return preparer.

The Court is satisfied that petitioners knew that the

amounts deducted on their tax returns for charitable

contributions and employee business expenses were false. They

even submitted records to their return preparer that purportedly

would have substantiated their deductions, which their preparer

declined to use. Petitioners knew they could only deduct
 - 11 -

expenses actually incurred and, therefore, knew that the amounts

claimed on their returns were false.

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 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
 - 12 -

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). 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
 - 13 -

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

knew that their claimed deductions were not based on the amounts

they actually expended. That circumstance should have prompted

petitioners to determine whether such representations by their

return preparer were correct. They did not consult other tax

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 listed unrealistic amounts as deductions

on petitioners' returns. Petitioners knew they were required

under the law to substantiate deductions claimed on their

returns. The circumstances should have prompted them to look

beyond and ascertain the accuracy of their preparer's

representations. Petitioners, therefore, made no effort to

assess their tax liabilities correctly. On this record, the
 - 14 -

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

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 accuracy of their returns. 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
 - 15 -

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

under Rule 155.