T.C. Memo. 2007-158
UNITED STATES TAX COURT
G. KIERSTEAD FAMILY HOLDINGS TRUST, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 24183-05, 24184-05, Filed June 19, 2007.
24185-05.
Anthony V. Diosdi, for petitioners.
Jeremy L. McPherson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Petitioners in these consolidated cases are
G. Kierstead Family Holdings Trust, G. Kierstead Family Trust,
and Glenn E. and Carol L. Kierstead as individuals. Before
1
Cases of the following petitioners are consolidated
herewith: Glenn E. and Carol L. Kierstead, docket No. 24184-05;
and G. Kierstead Family Trust, docket No. 24185-05.
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trial, the parties stipulated that there are no deficiencies in
Federal income tax or penalties due from petitioners G. Kierstead
Family Holdings Trust or G. Kierstead Family Trust. Respondent
determined Federal income tax deficiencies and penalties for
petitioners2 Glenn and Carol Kierstead as follows3:
Year at Issue Deficiency Sec. 6662(a)
2001 $40,410 $8,080
2002 38,165 7,633
2003 66,179 13,235
The parties filed a stipulation of settled issues necessary
for a determination of the amount of the liability for the years
in question, other than applicable penalties. Accordingly, the
only issue to be determined is whether petitioners Glenn and
Carol Kierstead are liable for accuracy-related penalties under
section 6662(a) for 2001, 2002, and 2003 (years at issue).4
FINDINGS OF FACT
2
Unless otherwise indicated, reference to “petitioners”
shall mean petitioners Glenn E. and Carol L. Kierstead as
individuals.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
4
The parties stipulated that petitioners are liable for
accuracy-related penalties under sec. 6662(a) for 2001, 2002, and
2003 for the portion of their deficiencies allocable to their
failure to include interest income in the amounts of $8,633,
$8,465, and $8,174, respectively.
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Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. Petitioners resided in
Vacaville, California, when they filed this petition. Petitioner
trusts both used addresses in Lansing, Michigan, on their Tax
Court petitions.
In 1998, with the assistance of National Trust Services
(NTS), petitioners established the G. Kierstead Family Holdings
Trust and the G. Kierstead Family Trust. Petitioner Glenn
Kierstead assigned all rights to his lifetime services and future
earnings to the trusts. Petitioners deducted inter alia their
personal living expenses and depreciation of their residence on
Form 1041, U.S. Income Tax Return for Estates and Trusts, filed
for the years at issue.
In early 2001, upon learning that one of the promoters of
NTS stole money from an investment promoted by NTS, petitioners
sought advice about the legality of the trusts from attorney
David Kallman. Mr. Kallman provided petitioners with information
about the classification of business trusts for Federal income
tax purposes. He advised petitioners to consult David Carter, an
attorney who is also a certified public accountant (C.P.A.)
regarding the income tax issues of the trusts. At petitioners’
request, Mr. Kallman amended the terms of the trusts in July
2001.
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Petitioners timely filed Federal individual as well as trust
income tax returns for the years at issue. On September 28,
2005, separate notices of deficiency were sent to each party. In
the notice of deficiency sent to petitioners Glenn and Carol
Kierstead, respondent determined that the trusts must be
disregarded for Federal income tax purposes. Petitioners Glenn
and Carol Kierstead, as well as the two trusts, timely filed
petitions with the Court on December 22, 2005.
OPINION
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to a substantial understatement
of income tax. While the Commissioner bears the initial burden
of production and must come forward with sufficient evidence
showing it is appropriate to impose an accuracy-related penalty,
the taxpayer bears the burden of proof as to any exception to the
penalty. See sec. 7491(c); Rule 142(a); Higbee v. Commissioner,
116 T.C. 438, 446-447 (2001). In order to meet the burden of
proof, a taxpayer must present evidence sufficient to persuade
the Court that the Commissioner’s determination is incorrect.
Higbee v. Commissioner, supra at 447. Petitioners concede that
respondent has met his burden of production. However, they argue
that they are not liable for a portion of the section 6662(a)
penalties because they, in good faith, relied on the advice of
two competent tax professionals.
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An accuracy-related penalty is not imposed on any portion
of the understatement as to which the taxpayer acted with
reasonable cause and in good faith. Sec 6664(c)(1). Reliance on
the advice of a tax professional may constitute reasonable cause
and good faith, if under all the facts and circumstances the
reliance is reasonable and in good faith. Neonatology
Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd.
299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c)(1), Income Tax
Regs. To qualify for this exception, a taxpayer must prove by a
preponderance of the evidence that: (1) The adviser was a
competent professional who had sufficient expertise to justify
reliance; (2) the taxpayer provided necessary and accurate
information to the adviser; and (3) the taxpayer actually relied
in good faith on the adviser’s judgment. Neonatology Associates,
P.A. v. Commissioner, supra at 98-99.
Petitioners contend that their reliance on attorneys Kallman
and Carter relieves them from the accuracy-related penalties. We
disagree. Respondent has not disputed that petitioners satisfied
part (2) of the 3-prong test. Accordingly, the issue to be
determined is whether petitioners actually relied in good faith
on the advice of competent tax professionals possessing
sufficient expertise to justify their reliance.
In 2001, petitioners consulted Mr. Kallman, an attorney with
24 years’ experience regarding the trusts. Mr. Kallman does not
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hold himself out as a tax attorney, nor does he prepare tax
returns. Mr. Kallman provided petitioners with limited tax
advice about the tax treatment of business trusts. He also
provided general tax information that business expenses, but not
personal expenses, were allowed as deductions. Mr. Kallman was
careful to qualify any tax advice by telling petitioners to
consult their tax attorney and accountant. Therefore,
petitioners did not rely on Mr. Kallman’s advice in the
preparation and filing of their Federal individual and trust
income tax returns.
On the advice of Mr. Kallman, petitioners consulted David
Carter, an attorney and C.P.A., regarding tax issues of the
trusts. Petitioner Glenn Kierstead testified that Mr. Carter
“said he was very comfortable with [the trusts].” Though
petitioners listed Mr. Carter as a potential witness, he did not
testify at trial. Petitioners introduced no evidence as to Mr.
Carter’s qualifications as a tax expert other than Mr. Kallman’s
testimony that he was an attorney with a C.P.A. background. No
evidence has been submitted of any specific tax advice provided
by Mr. Carter relating to petitioner’s assignment of lifetime
earnings to the trusts or the allowance of deductions for
personal expenses. For these reasons, petitioners failed to
prove that Mr. Carter was a competent tax professional and that
petitioners were justified in relying on his opinion.
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Because petitioners failed to prove they reasonably relied
on a competent tax professional, and because they failed to
assert any other basis for relief, we hold that petitioners
failed to prove that they had reasonable cause within the meaning
of section 6664(c). Therefore, we find petitioners are liable
for accuracy-related penalties under section 6662(a) for the
years at issue.
In reaching our holdings, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155 in docket No.
24184-05.
Decisions will be entered for
petitioners in docket Nos. 24183-05
and 24185-05.