T.C. Memo. 2008-79
UNITED STATES TAX COURT
RONALD D. AND NADINE M. NEUFELD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8101-06. Filed April 2, 2008.
R determined deficiencies and penalties pursuant
to sec. 6662(a), I.R.C., for Ps’ 2001 and 2002 taxable
years. The parties stipulated to Ps’ taxable income
for 2001 and 2002.
Held: Ps are liable for the sec. 6662(a), I.R.C.,
penalty for 2001 and 2002.
Held, further: Ps are liable for the sec. 6673,
I.R.C., penalty.
Ronald D. Neufeld and Nadine M. Neufeld, pro sese.
Christopher B. Sterner, Barbara M. Leonard, Kimberely J.
Peterson, Rachel L. Hester, and Matthew A. Mendizabal, for
respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of a deficiency. After concessions,1 the
issues for decision are:2
(1) Whether petitioners are liable for the section 6662(a)3
penalty for taxable years 2001 and 2002 in the amounts of $8,433
and $12,596, respectively;4
1
The parties stipulated that petitioners’ taxable income for
2001 and 2002 was $159,114 and $229,522, respectively. On the
basis of the stipulations, the recalculated deficiencies for 2001
and 2002, according to respondent, are $42,213 and $62,981,
respectively.
2
Although petitioners stipulated the amount of their taxable
income for 2001 and 2002, see supra note 1, they continued to
argue at trial and on brief that the deficiencies could not be
sustained. Their contention was based entirely on the meritless
and frivolous argument that respondent was precluded from
assessing tax liabilities because the Commissioner did not
maintain tax tables in the Internal Revenue Code or regulations
pursuant to sec. 1(f) for taxable years 1993 and later. The IRS
publishes tax tables for each tax year in revenue procedures and
includes these tax tables in the instructions to Form 1040, U.S.
Individual Income Tax Return, for each tax year. See Rev. Proc.
2001-59, sec. 3.01, 2001-2 C.B. 623; Rev. Proc. 2001-13, sec.
3.01, 2001-1 C.B. 337; Instructions for 2002 Form 1040;
Instructions for 2001 Form 1040.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
4
The sec. 6662(a) penalty amounts are based on the
stipulated taxable income amounts and respondent’s revised
deficiency computations. See supra note 1. The penalty amounts
in the notice of deficiency were $12,746 and $16,349, for 2001
and 2002, respectively.
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(2) whether to grant respondent’s motion to impose sanctions
pursuant to section 6673.
FINDINGS OF FACT
Some of the facts have been stipulated by the parties. The
stipulations, with accompanying exhibits, are incorporated herein
by this reference. At the time the petition was filed,
petitioners resided in Sonora, California.
During 2001 and 2002, Ronald D. Neufeld (Mr. Neufeld)
operated a dentistry business reported on Schedule C, Profit or
Loss From Business. As stipulated, petitioners’ taxable income
for 2001 and 2002 was $159,114 and $229,522, respectively. See
supra note 1.
Petitioners’ 2001 and 2002 joint Forms 1040, U.S. Individual
Income Tax Return, and 2002 joint Form 1040X, Amended U.S.
Individual Income Tax Return, were prepared by Richard Fisher
(Mr. Fisher), a tax return preparer recommended by Mr. Neufeld’s
brother-in-law. Petitioners admitted that they did not
independently look into Mr. Fisher’s qualifications; instead,
they relied on Mr. Neufeld’s brother-in-law’s recommendation.5
Mr. Neufeld used the computer accounting program Quicken to
track the income and expenses of his dentistry business for
5
At trial, Mr. Neufeld stated that when he met Mr. Fisher
for the first time, he thought he was a competent accountant and
tax-preparer because “He had certificates on the wall and lots of
them. He seemed to be really organized. It was a nice office.
And so I had no reason to believe or to doubt his competence.”
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taxable years 2001 and 2002 and provided Mr. Fisher with a
printed register created by Quicken (Quicken registers).
Mr. Fisher used the information in Mr. Neufeld’s Quicken
registers to prepare petitioners’ 2001, 2002, and amended 2002
joint Federal income tax returns.
Neither petitioner met with Mr. Fisher to discuss their
Federal income tax returns or their tax liabilities for 2001 or
2002. After completing petitioners’ Federal income tax returns
using the information in Mr. Neufeld’s Quicken registers,
Mr. Fisher mailed the returns to petitioners along with a “little
memo, [regarding] the amount of tax that * * * [petitioners]
[owed].” Petitioners signed their 2001 and 2002 joint Federal
income tax returns without examining them and mailed their
returns to the IRS.6
Petitioners filed their 2001 joint Federal income tax return
on October 1, 2002, which reflected a tax liability of $15,136.
Petitioners filed their 2002 joint Federal income tax return on
August 8, 2003, which reflected a tax liability of $20,532.
Petitioners filed an amended joint Federal income tax return for
2002 on August 5, 2004, which reflected a tax liability of
6
Petitioners admitted that “Due to their complete reliance
on their accountant, and inability to understand tax forms,
neither Petitioner examined either return prior to signing or
submitting them.” Mr. Neufeld testified that “I do not even look
them [tax returns] over because they’re complicated, to me. * * *
I write a check and I put them in the mail and I send them.”
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$16,253. Petitioners did not discuss their 2002 amended return,
nor the reason they were filing an amended return, with
Mr. Fisher.
On February 2, 2006, respondent issued to petitioners the
aforementioned notice of deficiency that reflected deficiencies
of $63,731 and $81,746 for taxable years 2001 and 2002,
respectively, and penalties pursuant to section 6662(a) of
$12,746 and $16,349 for taxable years 2001 and 2002,
respectively. On May 1, 2006, this Court received a letter from
petitioners in response to the notice of deficiency and filed the
letter as a petition. By order dated May 3, 2006, petitioners
were ordered to file a proper amended petition on or before
June 19, 2006. The time for petitioners to file a proper amended
petition was subsequently extended to July 19, 2006. On June 21,
2006, petitioners filed with the Court their amended petition,
which stated in pertinent part:
The deficiencies set forth in the notice of
deficiency are based on the following errors:
i. Respondent’s erroneous disallowance of several
incurred expenses, including office, insurance,
vehicle, wage, legal and professional, taxes and
licenses, commissions and fees, and depreciation and
capital losses;
ii. asserting there were additions to tax under
IRC § 6662;
iii. the person who issued the deficiency notice
lacked any delegated authority for doing so, and the
office issuing the notice lacks jurisdiction over
Petitioner’s geographic location;
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iv. The tax figures asserted by Respondent are not
based on any tax table or other valid authority.
OPINION
I. Section 6662 Penalty
Under section 7491(c), respondent bears the burden of
production with respect to petitioners’ liability for the section
6662(a) penalty. This means that respondent “must come forward
with sufficient evidence indicating that it is appropriate to
impose the relevant penalty.” Higbee v. Commissioner, 116 T.C.
438, 446 (2001).
The Court concludes that respondent has met the section
7491(c) burden of production with respect to the accuracy-related
penalty. As explained below, the Court ultimately finds
unavailing petitioners’ argument that they are not liable for the
accuracy-related penalty for 2001 and 2002 because they acted
with reasonable cause and in good faith by relying on Mr. Fisher
to prepare their 2001 and 2002 joint Federal income tax returns.
Subsection (a) of section 6662 imposes an accuracy-related
penalty of 20 percent of any underpayment that is attributable to
causes specified in subsection (b). Among the causes justifying
the imposition of the penalty is any substantial understatement
of income tax.
There is a “substantial understatement” of income tax for
any taxable year where the amount of the understatement exceeds
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the greater of (1) 10 percent of the tax required to be shown on
the return for the taxable year or (2) $5,000.7
Sec. 6662(d)(1)(A)(i) and (ii). However, the amount of the
understatement is reduced to the extent attributable to an item
(1) for which there is or was substantial authority for the
taxpayer’s treatment thereof, or (2) with respect to which the
relevant facts were adequately disclosed on the taxpayer’s return
or an attached statement and there is a reasonable basis for the
taxpayer’s treatment of the item. See sec. 6662(d)(2)(B).
There is an exception to the section 6662(a) penalty when a
taxpayer can demonstrate (1) reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c)(1). Regulations
promulgated under section 6664(c) further provide that the
determination of reasonable cause and good faith “is made on a
case-by-case basis, taking into account all pertinent facts and
circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs.
7
There is a substantial understatement of income tax for
each of petitioners’ 2001 and 2002 taxable years. For their 2001
taxable year, petitioners reported a $15,136 tax liability on
their joint Federal income tax return. On the basis of the
stipulations, petitioners’ tax liability for 2001 is $57,349,
which results in a $42,213 understatement. See supra note 1.
For their 2002 taxable year, petitioners reported a $16,253 tax
liability on their amended joint Federal income tax return. On
the basis of the stipulations, petitioners’ tax liability for
2002 is $79,234, which results in a $62,981 understatement. See
supra note 1.
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Reliance upon the advice of a tax professional may, but does
not necessarily, establish reasonable cause and good faith for
the purpose of avoiding a section 6662(a) penalty. See United
States v. Boyle, 469 U.S. 241, 251 (1985) (“Reliance by a lay
person on a lawyer is of course common; but that reliance cannot
function as a substitute for compliance with an unambiguous
statute.”). Such reliance does not serve as an “absolute
defense”; it is merely a “factor to be considered.” Freytag v.
Commissioner, supra at 888.
The case law sets forth the following three requirements in
order for a taxpayer to use reliance on a tax professional to
avoid liability for a section 6662(a) penalty: (1) The adviser
was a competent professional who had sufficient expertise to
justify reliance, (2) the taxpayer provided necessary and
accurate information to the tax adviser, and (3) the taxpayer
actually relied in good faith on the adviser's advice. See
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
(2000), affd. 299 F.3d 221 (3d Cir. 2002). However, by itself,
unconditional reliance on a preparer or adviser does not always
constitute reasonable reliance; the taxpayer must also exercise
“diligence and prudence”. Marine v. Commissioner, 92 T.C. 958,
992-993 (1989), affd. 921 F.2d 280 (9th Cir. 1991).
In the instant case, the notice of deficiency included the
imposition of the section 6662(a) penalty for taxable years 2001
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and 2002 on the basis that there was a substantial understatement
of petitioners’ tax liability for those years. The
understatements of petitioners’ income tax for each of those
years were attributable to petitioners’ failure to report income
from Mr. Neufeld’s dentistry business. Petitioners focused their
section 6662(a) penalty arguments solely on their reliance on
Mr. Fisher to prepare their Federal income tax returns.
With respect to the third prong of the Neonatology test,
petitioners did not rely in good faith on Mr. Fisher’s advice.
Petitioners did not meet with Mr. Fisher or otherwise discuss
with him their 2001 and 2002 joint Federal income tax returns or
2002 amended return, and they did not examine their returns
before signing and submitting them to the IRS. See supra note 6.
Taxpayers have a duty to read their returns to ensure that all
income items are included. Magill v. Commissioner, 70 T.C. 465,
479-480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981). Petitioners
did not ensure that all of the income from Mr. Neufeld’s
dentistry business was included in their 2001 and 2002 joint
Federal income tax returns.
A taxpayer’s duty to file an accurate tax return cannot be
avoided simply by delegating responsibility to an agent.
Pritchett v. Commissioner, 63 T.C. 149, 174 (1974). Petitioners’
unconditional reliance on Mr. Fisher does not, on the facts,
constitute reasonable reliance and does not excuse their failure
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to closely examine their 2001 and 2002, and amended 2002, joint
Federal tax income returns. See Marine v. Commissioner, supra at
992-993; Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662-663
(1987) (reliance on accountant with complete information
regarding taxpayer’s business activities not reasonable cause
where taxpayer’s cursory review of return would have revealed
errors). As the Court has determined that petitioners have not
satisfied the third prong of the Neonatology test, the Court need
not, and does not, decide whether petitioners satisfied the first
or second prong.
Petitioners have not demonstrated good faith and reasonable
cause for their underpayments for 2001 and 2002. Accordingly,
the Court sustains respondent’s determination that petitioners
are liable for the section 6662(a) accuracy-related penalty for
substantial understatements of income tax for taxable years 2001
and 2002.
II. Section 6673 Penalty
Section 6673(a)(1) authorizes the Tax Court to impose a
penalty not in excess of $25,000 on a taxpayer for proceedings
instituted primarily for delay or in which the taxpayer’s
position is frivolous or groundless. “A petition to the Tax
Court, or a tax return, is frivolous if it is contrary to
established law and unsupported by a reasoned, colorable argument
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for change in the law.” Coleman v. Commissioner, 791 F.2d 68, 71
(7th Cir. 1986).
Respondent, on motion, has asked the Court to impose a
penalty under section 6673(a)(1). On October 2, 2006, respondent
mailed to petitioners a letter that informed them that their
arguments were frivolous and warned them that if they persisted
with their arguments, then respondent might request the section
6673 penalty. Petitioners raised frivolous and meritless tax-
protester arguments in their petition, at trial, and on brief,
and repeatedly sent to respondent documents that contained
frivolous and meritless tax-protester arguments. See, e.g.,
supra note 2. The Court concludes that petitioners are liable
for a section 6673 penalty in the amount of $1,000.
The Court has considered all of petitioners’ contentions,
arguments, requests, and statements. To the extent not discussed
herein, the Court concludes that they are meritless, moot, or
irrelevant.
To reflect the foregoing,
An appropriate order and
decision under Rule 155 will
be entered.