T.C. Memo. 2010-111
UNITED STATES TAX COURT
WAYNE A. CARTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17070-08. Filed May 18, 2010.
William R. Leighton and Leonard L. Leighton, for petitioner.
Jeffrey D. Heiderscheit, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $72,794
in petitioner’s Federal income tax for 2005 and a penalty of
$14,559 under section 6662(a). The deficiency resulted from
petitioner’s failure to report capital gains of $512,086 from
stock sales during 2005. The deficiency is now conceded, and the
issue for decision is whether petitioner is liable for the
- 2 -
penalty. All section references are to the Internal Revenue
Code.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Texas at the time his petition was filed.
At all material times, petitioner was self-employed in a retail
landscape business.
In August 2003, petitioner acquired stock in Birch Mountain
through a private placement. He sold the stock in August and
October 2005, receiving proceeds of $658,447 and realizing a net
long-term capital gain of $512,086. After he sold the stock, the
price dropped and he repurchased some stock in Birch Mountain.
The amount and price of the repurchased stock and the date of
purchase are not in the record.
The proceeds of the stock sales were not reported on
petitioner’s Form 1040, U.S. Individual Income Tax Return, for
2005. The return reported various small items of income not
identifiable as relating to a retail landscape business, gross
income totaling $7,012, and no tax due. The return was prepared
by Johnnie D. Coley (Coley), who had prepared returns for
petitioner’s parents and for petitioner for many years before
2005. Coley’s education after high school consisted of business
- 3 -
accounting courses at the college level and a course given by H&R
Block.
Petitioner’s bookkeeping was generally performed by his
mother or his wife during 2005. As was the custom with respect
to tax return preparation, records were delivered by petitioner’s
mother to Coley approximately 30 days before a return was due.
A summary spreadsheet was also delivered to Coley, but she did
not use the spreadsheet in preparing the returns, preferring to
consult the folders provided for details of reportable
transactions. After a return was prepared, the records were
returned to petitioner.
Before September 2007, petitioner received an inquiry from
the Internal Revenue Service (IRS) about the income omitted from
the 2005 return. An amended return reporting the proceeds and
gain from the sales of the Birch Mountain stock was prepared by
Coley and sent to the IRS in September 2007. In an explanation
of changes included in the amended return, Coley stated that she
had overlooked the sales of stock on the original 2005 return and
“therefore Schedule D was not filed.” Coley was unaware of the
Birch Mountain stock sales until after the IRS contacted
petitioner in 2007.
OPINION
Section 6662(a) and (b)(2) imposes an accuracy-related
penalty where, among other things, an underpayment of tax is
- 4 -
attributable to a substantial understatement of income tax.
Petitioner does not dispute the substantial understatement but
claims that he is entitled to relief under section 6664(c)
because of his alleged good faith reliance on Coley. Petitioner
bears the burden of demonstrating that he is not subject to the
penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Our findings of fact do not include findings about whether
information concerning petitioner’s sales of Birch Mountain stock
was among the material delivered to Coley before preparation of
the 2005 return. Petitioner claims that it was and also that the
accompanying spreadsheet contained information about the stock
sales. He testified that the information provided to her
included “all the 1099s” (information returns that led to the IRS
inquiry and examination). Neither the records nor the
spreadsheet was produced at trial. Coley did not recall seeing
any information or having any conversations about the stock sales
until after the return was filed.
At the time of trial, petitioner testified that he discussed
the stock sales with Coley as follows:
Q On your petition, it did not state that you
received advice from her that the sale of stock was
nontaxable?
A No. She didn’t tell me that.
Q Ms. Coley did not tell you that the sale of
stock was nontaxable?
A Well, we had the conversation about stock.
- 5 -
That’s--I asked her, since I sold the stock and I
repurchased it, since I never took the money, am I
going to be required to pay taxes on it? She told me
she didn’t think so.
He acknowledged that he had never told the IRS during the
examination or respondent’s counsel after the petition was filed
that he had spoken to Coley about the stock sales. We conclude
that this claim is an afterthought, implausible, and not
credible. We are not persuaded that petitioner asked Coley about
the taxability of the stock proceeds, and he has not presented
any other evidence that he made an effort to assess his proper
tax liability. Cf. Stanford v. Commissioner, 152 F.3d 450, 460-
461 (5th Cir. 1998), affg. in part and vacating in part 108 T.C.
344 (1997); Williams v. Commissioner, 123 T.C. 144, 153 (2004);
sec. 1.6664-4(b)(1), Income Tax Regs. The amount of the gain as
a large multiple of his reported income from other activities
could not be overlooked by him, and his claim that Coley
suggested that he need not report it is inconsistent with any
claim that he was unaware that it was omitted.
Even assuming there was some indication of the stock sales
in the records delivered to Coley before she prepared
petitioner’s 2005 tax return, petitioner cannot be absolved of
the penalty when he knew that the stock sales were not reported.
Whether or not Coley overlooked information provided to her, we
do not believe that petitioner relied in good faith on Coley,
reasonably or otherwise, in omitting over $500,000 in income from
- 6 -
his 2005 return, especially if he received the Form 1099
information returns that he referred to during his testimony.
His claimed lack of training in accounting is insignificant in
view of his apparent sophistication and success in dealing with
privately placed securities.
As petitioner’s brief acknowledges, at the conclusion of the
trial the Court directed the parties to Metra Chem Corp. v.
Commissioner, 88 T.C. 654 (1987), where the Court applied the
predecessor to section 6662(a) as follows:
As a general rule, the duty of filing accurate
returns cannot be avoided by placing responsibility on
a tax return preparer. See, e.g., Pritchett v.
Commissioner, supra [63 T.C. 149] at 174-175; Enoch v.
Commissioner, 57 T.C. 781, 802 (1972); Soares v.
Commissioner, 50 T.C. 909, 914 (1968). As the
petitioners have noted, this Court has declined to
sustain the addition to tax under section 6653(a) in
cases in which the taxpayer relied in good faith on the
advice of a tax expert. See, e.g., Woodbury v.
Commissioner, 49 T.C. 180, 199 (1967); Brown v.
Commissioner, 47 T.C. 399, 410 (1967), affd. per curiam
398 F.2d 832 (6th Cir. 1968). However, a close
examination of these cases reveals that they raised
questions as to the tax treatment of complex
transactions and that the position taken on the returns
with respect to such items had a reasonable basis.
This case presents no such difficult issues.
* * * [Metra Chem Corp. v. Commissioner, supra at
662.]
Here, too, the transactions are not complex or difficult. There
is no tenable reason for omitting them from the 2005 return, and
petitioner has not shown anything on which he could have based a
good faith belief that repurchasing the stock at a decreased
- 7 -
price shortly after selling it would negate the sales that
resulted in a gain exceeding $500,000.
Petitioner contends that an unpublished opinion of the Court
of Appeals for the Fifth Circuit establishes the standard in this
case, citing Prudhomme v. Commissioner, 345 Fed. Appx. 6 (5th
Cir. 2009), affg. T.C. Memo. 2008-83. Petitioner’s argument is
as follows:
In Prudhomme, the Fifth Circuit noted that it
“must consider whether the taxpayer made ‘an honest
misunderstanding of fact or laws that is reasonable in
the light of all the facts and circumstances, including
the experience, knowledge, and education of the
taxpayer.’” [Prudhomme v. Commissioner, 345 Fed. Appx.
6 (5th Cir. 2009) (quoting section 1.6664-4(b), Income
Tax Regs.) (as quoted by petitioner in petitioner’s
brief).] The court further noted that where the
taxpayer relies on a return preparer the court must
consider “‘[a]ll facts and circumstances’ regarding
whether that reliance was reasonable and in good faith,
including the ‘taxpayer’s education, sophistication and
business experience.’” [Id. (quoting section 1.6664-
4(c)(1), Income Tax Regs.).] And, finally, the court
“observed that ‘[i]f a taxpayer is able to show that
there was a reasonable cause for the understatement and
good faith, which may stem from reasonable reliance on
the advice of [a] professional, the I.R.S. may waive
the understatement penalty.’” [Id. (quoting Streber v.
Commissioner, 138 F.3d 216, 222 (5th Cir. 1998), revg.
T.C. Memo. 1995-601).]
Without regard to whether an unpublished opinion can establish a
standard when it is not considered a precedent under Fifth
Circuit Rule 47.5.4, we see nothing in that case supporting
petitioner’s position under the facts and circumstances of this
case. The Court of Appeals for the Fifth Circuit affirmed our
conclusions in Prudhomme that there was no reasonable cause for
- 8 -
the taxpayers’ error (omitting income from sale of their company
and not recognizing the omission in a complicated return) and
that the taxpayers did not act in good faith. The Court of
Appeals distinguished cases in which the taxpayers were
unsophisticated in regard to the taxable transactions. See
Prudhomme v. Commissioner, supra at 12 (distinguishing Streber v.
Commissioner, supra at 223, and Heasley v. Commissioner, 902 F.2d
380, 384-385 (5th Cir. 1990), revg. T.C. Memo. 1988-408). We
reach the same conclusion here, essentially for the same reasons.
In summary, we do not believe (1) that petitioner discussed
treatment of the sales with his preparer before filing the
return, (2) that there was reasonable cause for the error, or (3)
that he acted in good faith. To reflect the foregoing,
Decision will be entered
for respondent.