T.C. Summary Opinion 2008-157
UNITED STATES TAX COURT
RONI YTSHAKY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14707-07S. Filed December 16, 2008.
Roni Ytshaky, pro se.
Jonathan H. Sloat, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2003 and 2004, the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case. Respondent determined deficiencies in
petitioner’s 2003 and 2004 Federal income taxes of $3,550 and
$1,825, respectively. Respondent also determined accuracy-
related penalties under section 6662(a) of $710 and $365 for
2003 and 2004, respectively. We consider whether petitioner is
responsible for the income tax deficiencies where the return
preparer intentionally included false deductions and whether
petitioner is liable for the accuracy-related penalties.
Background2
Petitioner resided in California at the time his petition
was filed. During 2003 and 2004 petitioner resided in New York
City, where he worked as a driver and received wages that were
reported to respondent by means of Forms W-2, Wage and Tax
Statement. When it was time to have his 2003 Federal income tax
return prepared, a friend at work advised petitioner of a return
preparer who was a certified public accountant (C.P.A.) and a
former employee of the Internal Revenue Service (IRS).
Petitioner went to the C.P.A.’s office and gave him his
Form W-2 for his 2003 wages. The C.P.A., by means of a
computerized program, produced a return which he instructed
petitioner to sign and mail to the IRS. Petitioner, relying
2
No question was raised in this case as to the burden of
proof or production or whether the burden of proof was shifted
under sec. 7491.
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on his preparer’s expertise, did not review the return, signed
it, and mailed it to the IRS. For his 2004 Federal income tax
return, petitioner used the same C.P.A. and followed the same
procedures and circumstances. For each of the years 2003 and
2004 petitioner received an income tax refund. Subsequently,
the C.P.A.-tax return preparer was indicted on charges of filing
false returns for his clients. Essentially, the C.P.A. was
placing false deductions on returns so that the taxpayer/filer’s
return would result in an overpayment or larger overpayment of
tax. Respondent, in connection with the criminal charges against
the C.P.A., audited petitioner’s returns for 2003 and 2004 and
determined that petitioner was not entitled to the false
deductions that had been placed on the returns. Petitioner
was, of course, not able to substantiate the deductions, and
respondent issued a notice of deficiency from which this
proceeding was initiated.
Discussion
Petitioner contends that he should not have to pay the
income tax deficiencies because his tax return preparer,
unbeknownst to petitioner, falsely and intentionally generated
the overpayments and the refunds that petitioner had received.
Petitioner also contends that he should not be liable for the
accuracy-related penalties because he reasonably relied on his
tax return preparer.
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With respect to petitioner’s contention that he should not
be liable to pay the income tax deficiencies, this Court has
previously addressed similar circumstances. In Kelly v.
Commissioner, T.C. Memo. 1983-156, we held that even though we
sympathized with the taxpayers “about the quality of the return
preparation services they received, this is simply no reason to
relieve petitioners of taxes which were legally owing and which
would have been paid upon the filing of their 1976 return if
their return had been correctly calculated.”
The holding in Kelly is based on the rationale that,
ultimately, the circumstances by which we prepare our returns or
calculate our tax liabilities do not obviate our obligation to
pay the correct tax liability. Petitioner contends that the
circumstances in Kelly are distinguishable because the incorrect
tax result in that case was caused by poor preparation skills
and inadvertence, whereas in petitioner’s situation, the
incorrect tax results were intentionally and fraudulently caused
by his preparer’s malfeasance.
Although we sympathize with petitioner’s circumstances,
the fact that his preparer intentionally caused the wrong tax
results does not mitigate his obligation to pay the correct
amount of tax. Accordingly, we hold that petitioner is liable
for the income tax deficiencies determined by respondent for
his 2003 and 2004 tax years.
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Respondent determined that petitioner is liable for
accuracy-related penalties for both taxable years. Petitioner
argues that he relied on his C.P.A. to prepare his return and
that such reliance was reasonable and constitutes reasonable
cause so as to excuse him from application of the penalties which
are otherwise applicable. There is no question here about
whether the section 6662(a) accuracy-related penalties would be
applicable but for the showing of reasonable cause. The
deductions claimed on petitioner’s 2003 and 2004 income tax
returns were false, and he is unable to substantiate them.
Section 6662(a) and (b)(1) imposes a penalty of 20 percent
on any portion of an underpayment of tax that is attributable to
negligence or disregard of rules or regulations. “Negligence” is
defined as any failure to make a reasonable attempt to comply
with the provisions of the Internal Revenue Code, and the term
“disregard” includes any careless, reckless, or intentional
disregard. See sec. 6662(c). A position with respect to an item
is attributable to negligence if it lacks a reasonable basis.
See sec. 1.6662-3(b)(1), Income Tax Regs. Section 6664(c)(1)
provides that the penalty under section 6662(a) shall not apply
to any portion of an underpayment if it is shown that there was
reasonable cause for the taxpayer’s position with respect to that
portion and that the taxpayer acted in good faith with respect to
that portion. The determination of whether a taxpayer acted with
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reasonable cause and in good faith within the meaning of section
6664(c)(1) is made on a case-by-case basis, taking into account
all the pertinent facts and circumstances. See sec. 1.6664-
4(b)(1), Income Tax Regs.
Generally, the duty of filing accurate returns cannot be
avoided by placing the responsibility on a tax return preparer.
See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).
Although a taxpayer remains liable for a deficiency attributable
to a return prepared by an accountant, a taxpayer who supplies a
qualified tax return preparer with all relevant information and
who reasonably and in good faith relies on the preparer’s advice
is not negligent and has not disregarded rules or regulations,
even if the advice is incorrect and results in a deficiency. See
Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d
1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).
Although numerous cases address this question, it is one
that is essentially a factual determination that must be
considered ad hoc in each case. Petitioner’s educational and
work background did not provide him with any expertise in tax
preparation or an understanding of tax law. It was reasonable
and appropriate that he seek assistance in the preparation of his
Federal income tax return. It was also reasonable for him to
hire a C.P.A. who had formerly worked for the IRS as his
preparer. Under the circumstances, it was reasonable for
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petitioner to rely on his C.P.A. We accordingly hold that
petitioner has shown reasonable cause and is not liable for the
accuracy-related penalties for his 2003 and 2004 tax years.
To reflect the foregoing,
Decision will be entered
for respondent as to the
deficiencies in income taxes
and for petitioner as to the
accuracy-related penalties.