T.C. Memo. 2010-82
UNITED STATES TAX COURT
AILEEN YAT MUK LAM AND SHAOPING CHANG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13302-08. Filed April 19, 2010.
R determined tax deficiencies and accuracy-related
penalties pursuant to sec. 6662(a), I.R.C., for Ps’
2004 and 2005 tax years. The parties stipulated Ps’
deficiencies for 2004 and 2005.
Held: Ps are liable for sec. 6662(a), I.R.C.,
accuracy-related penalties for 2004 and 2005.
Aileen Yat Muk Lam and Shaoping Chang, pro sese.
Nathan C. Johnston, 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 deficiencies. After concessions, the sole
issue left for decision is whether petitioners are liable for
section 6662(a)1 accuracy-related penalties for tax years 2004
and 2005 of $1,013.80 and $867.80, respectively.
FINDINGS OF FACT
Some of the facts have been stipulated, and the
stipulations, with accompanying exhibits, are incorporated herein
by this reference. At the time the petition was filed,
petitioners resided in California.
During 2004 and 2005 Aileen Yat Muk Lam (Ms. Lam) operated a
real estate business and reported its income and expenses on
Schedule C, Profit or Loss From Business. Respondent issued a
deficiency notice on February 25, 2008, determining that
petitioners were liable for Federal income tax deficiencies of
$5,069 for 2004 and $4,339 for 2005. The notice of deficiency
also determined that petitioners were liable for section 6662(a)
accuracy-related penalties for 2004 and 2005 of $1,013.80 and
$867.80, respectively.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue.
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Petitioners’ 2004 and 2005 joint Forms 1040, U.S. Individual
Income Tax Return, were prepared by Ms. Lam using TurboTax. In
2004 and 2005, she reported expenses related to her real estate
business as well as unrelated losses on a single Schedule C for
each taxable year. Adjustments to this schedule resulted in most
of petitioners’ deficiencies and primarily stemmed from the fact
that respondent disallowed petitioners’ reported rental losses
and recharacterized the trading losses as capital losses. The
rental losses were disallowed under section 280A because the
property was used for personal use, as her father lived in the
rental property rent free.2 The trading losses were allowable
only as capital losses and were moved to Schedule D, Capital
Gains and Losses. Similar adjustments were made for 2005.
On June 2, 2008, petitioners filed a timely petition with
this Court arguing that they were not liable for the section
6662(a) accuracy-related penalties for 2004 and 2005. The
parties filed a stipulation of settled issues in which
petitioners conceded that they were liable for the tax
deficiencies determined in respondent’s notices of deficiency for
both the 2004 and 2005 tax years. The stipulation left
unresolved petitioners’ liability for the section 6662 penalties.
2
Sec. 280A generally disallows a deduction with respect to a
dwelling unit if it is used by the taxpayer, or by a member of
the taxpayer’s family, as a residence. Under sec. 280A(d)(3)(A)
a taxpayer is not treated as using a dwelling unit as a residence
if the unit is rented to a family member at a fair rental price.
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A trial on the penalty issues was held on June 18, 2009, in Los
Angeles, California.
OPINION
I. Burden of Proof
Under section 7491(c), respondent bears the burden of
production with respect to petitioners’ liability for the section
6662(a) penalties. This means that respondent “must come forward
with sufficient evidence indicating that it is appropriate to
impose the relevant penalty.” See Higbee v. Commissioner, 116
T.C. 438, 446 (2001).
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 2004 and
2005 because they acted with reasonable cause by making
consistent mistakes using TurboTax to prepare their 2004 and 2005
joint Federal income tax returns.
II. Accuracy-Related Penalty
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). Respondent asserts that one
or both of two causes justify the imposition of the penalty for
each year: a substantial understatement of income tax and
negligence. Sec. 6662(b)(1) and (2). The Court infers
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respondent is aware that the deficiency for 2005, of less than
$5,000, is too small to serve as the basis on which to impose a
penalty for substantial understatement.
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.
There is a “substantial understatement” of income tax for
any tax year where the amount of the understatement exceeds the
greater of (1) 10 percent of the tax required to be shown on the
return for the tax year or (2) $5,000. Sec. 6662(d)(1)(A).
However, the amount of the understatement is reduced to the
extent attributable to an item (1) if 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 no substantial authority for the
tax positions taken on petitioners’ tax returns. Petitioners did
not adequately disclose on either return or in a statement
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attached to either return, the relevant facts affecting their
treatment of any item in question, nor is there a reasonable
basis for such treatment.
Section 6662(a) also imposes a penalty for negligence or
disregard of the rules or regulations. Under this section
“negligence” is “any failure to make a reasonable attempt to
comply with the provisions of this title”. Sec. 6662(c). Under
caselaw, “‘Negligence is a lack of due care or the failure to do
what a reasonable and ordinarily prudent person would do under
the circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887
(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.
1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991).
There is a substantial understatement of income tax for
petitioners’ 2004 return. For their 2004 tax year, petitioners
reported no tax liability on their joint Federal income tax
return. On the basis of the stipulations, petitioners’ tax
liability for 2004 was $5,069, a $5,069 understatement.
The amount of petitioners’ 2005 deficiency is insufficient
to justify a finding of a substantial understatement of income
tax under section 6662(d)(1)(A). However, respondent also claims
that petitioners were negligent in the preparation of their 2004
and 2005 federal income tax returns and that accordingly the
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section 6662(a) penalty should be imposed for 2005 as well. At
trial respondent argued that petitioners did not seek the help of
a tax professional, consult the Internal Revenue Service (IRS),
visit the IRS’ Web site, or otherwise read any instructions for
filing a Schedule C and thus petitioners did not behave
reasonably in filing their 2004 and 2005 tax returns.
At trial Ms. Lam repeatedly argued that petitioners
consistently filled out their tax returns using TurboTax and that
she consistently confused capital gains and losses with ordinary
income and expenses. Although the Court concludes the errors in
petitioners’ tax preparation were made in good faith, petitioners
have not established that they behaved in a manner consistent
with that of a prudent person. Before the trial petitioners
stipulated that they did not consult a tax professional or visit
the IRS’ Web site for instructions on filing the Schedule C.
We do not accept petitioners’ misuse of TurboTax, even if
unintentional or accidental, as a defense to the penalties on the
basis of the facts presented. See, e.g., Bunney v. Commissioner,
114 T.C. 259 (2000). But see Thompson v. Commissioner, T.C.
Memo. 2007-174 (where, on the entire record, the Court did find
that the taxpayer behaved reasonably in obtaining software to aid
in the preparation of his return). At trial Ms. Lam did not
attempt to show a reasonable cause for petitioners’ underpayment
of taxes. Instead, she analogized her situation to that of the
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Secretary of the Treasury, Timothy Geithner. Citing a Wikipedia
article, Ms. Lam essentially argues that, like Secretary
Geithner, she used TurboTax, resulting in mistakes on her taxes.
In short, it was not a flaw in the TurboTax software which caused
petitioners’ tax deficiencies. “Tax preparation software is only
as good as the information one inputs into it.” Bunney v.
Commissioner, supra at 267. Because petitioners have not “shown
that any of the conceded issues were anything but the result of
[their] own negligence or disregard of regulations”, they are
liable for the section 6662(a) penalties. Id.
The duty to file an accurate tax return generally cannot be
avoided by shifting responsibility to a tax return preparer.
See, e.g., Pritchett v. Commissioner, 63 T.C. 149, 174 (1974).
However, reliance upon the advice of a tax professional may
establish, if warranted by the facts and circumstances,
reasonable cause and good faith for the purpose of avoiding a
section 6662(a) penalty. See United States v. Boyle, 469 U.S.
241, 250 (1985) (“Courts have frequently held that ‘reasonable
cause’ is established when a taxpayer shows that he reasonably
relied on the advice of an accountant or attorney”). Such
reliance, “standing alone” does not serve as an “absolute defense
to negligence”; it is merely “a factor to be considered.”
Freytag v. Commissioner, supra at 888; see also Neonatology
Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.
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299 F.3d 221 (3d Cir. 2002). However, Ms. Lam did not rely on a
professional preparer, but used TurboTax and stipulated to
preparing her own returns without a tax professional.
Respondent has satisfied the burden of production with
respect to the section 6662(a) penalties. Petitioners’
understatement of tax on their 2004 return is substantial under
section 6662(d)(1)(A) because it exceeds $5,000 and is greater
than 10 percent of the amount required to be shown on their
return. Petitioners’ 2004 and 2005 returns were both filed
negligently. The burden is therefore on petitioners to prove
that they acted with reasonable cause and in good faith. We find
that petitioners failed to carry their burden.
III. Conclusion
Accordingly, the Court sustains respondent’s determination
that petitioners are liable for the section 6662(a) accuracy-
related penalties for their 2004 and 2005 tax years. The Court
has considered all of petitioners’ contentions, arguments,
requests, and statements. To the extent not discussed herein, we
conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered
for respondent.