T.C. Memo. 2007-347
UNITED STATES TAX COURT
JUAN AND ESTHER RAMIREZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12141-06. Filed November 26, 2007.
Juan and Esther Ramirez, pro se.
Michael W. Berwind, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and
penalties with respect to petitioners’ Federal income tax as
follows:
- 2 -
Penalty
Year Deficiency I.R.C. sec. 6662
2002 $58,816 $11,763.20
2003 95,217 19,043.40
2004 87,442 17,488.40
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue.
After concessions by the parties, the sole issue for
decision is whether petitioners are liable for the accuracy-
related penalties determined by respondent pursuant to section
6662 for substantial understatements of their Federal tax
liability for the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in California at the time they filed their
petition. For purposes of trial only, this case was consolidated
with a related worker classification case at docket No. 12139-06.
The amounts of total tax liability that petitioners reported
on their income tax returns for the years in issue and the
deficiencies determined by respondent, which amounts include
disallowed credits, for those years are as follows:
Year Tax on return Corrected tax Understatement
2002 $4,499 $61,219* $58,816
2003 5,769 100,326* 95,217
2004 11,566 99,008 87,442
*
Includes credits disallowed by respondent for this year.
- 3 -
Petitioners have conceded the deficiencies in tax as determined
by respondent. Petitioners understated gross receipts on their
Schedule C, Profit or Loss From Business, for all the years in
issue. Petitioners have conceded that they understated gross
receipts by $267,273 for 2003, which amount was nearly half of
the actual gross receipts in that year.
OPINION
Under section 6662, a taxpayer may be liable for a penalty
of 20 percent on the portion of an underpayment of tax
attributable to a substantial understatement of tax. Sec.
6662(a). The term “substantial understatement” is defined as the
greater of 10 percent of the tax required to be shown on the
return for the taxable year or $5,000. Sec. 6662(d). However,
the accuracy-related penalty is not imposed with respect to any
portion of the understatement as to which the taxpayer acted with
reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v.
Commissioner, 116 T.C. 438, 448-449 (2001). The decision as to
whether the taxpayer acted with reasonable cause and in good
faith depends upon all the pertinent facts and circumstances.
Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant factors include
the taxpayer’s efforts to assess his proper tax liability,
including the taxpayer’s reasonable and good faith reliance on
the advice of a tax professional. See id.
- 4 -
The amounts required to be reported by petitioners on their
income tax returns for the years in issue and the understatements
determined by respondent for those years are set forth in our
findings. The amount of the understatement for each of the years
in issue is more than 10 percent of the tax required to be shown
and greater than $5,000, which meets the section 6662(d)
definition of “substantial understatement”. Thus, petitioners
substantially understated their income for those years, and
respondent’s burden of production under section 7491(c) has been
met.
Petitioner Juan Ramirez (petitioner) argued at trial that he
was not aware that petitioners’ income tax liability was
substantially understated on their returns for the years in
issue, because he simply turned over all records to his
accountant and paid what she told him to pay. The return
preparer was not called as a witness at trial. Even if
petitioners did not review their returns for the years in issue
and relied blindly on the calculations of petitioner’s
accountant, such course of action is not reasonable, especially
in light of the substantial amounts of petitioner’s gross
receipts in those years, petitioner’s business experience, and
the large discrepancy between the tax liability reported and the
tax liability actually owed. Petitioners have not met their
burden of proving that they acted with reasonable cause and in
- 5 -
good faith with regard to their substantial understatements of
tax.
To reflect the foregoing,
Decision will be entered
for respondent.