T.C. Summary Opinion 2010-65
UNITED STATES TAX COURT
DOUGLAS B. AND SALLY ZIEGELER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18748-08S. Filed May 26, 2010.
Douglas B. and Sally Ziegeler, pro sese.
Maya Solh, for respondent.
VASQUEZ, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code (Code) in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, all section references are to
the Code in effect for the year in issue.
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Respondent determined a $25,123 deficiency in petitioners’
2005 Federal income tax and a $5,025 accuracy-related penalty
under section 6662(a). Petitioners concede liability for the
$25,123 deficiency. The issue remaining for decision is whether
petitioners are liable for the section 6662(a) accuracy-related
penalty.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners resided in California.
In 2005 Douglas Ziegeler (petitioner) worked as a management
consultant in the healthcare industry and Sally Ziegeler was a
housewife. Petitioner received $86,577 of income from
HealthFirst Medical Management Co., L.L.C. (HealthFirst),1 which
petitioners failed to report on their 2005 tax return.2
Petitioner also received $15,000 in wages from Health First
1
Petitioner held a 30-percent ownership interest in
HealthFirst. Dr. Ronald Crowel, the managing member of
HealthFirst, owned the remaining 70-percent interest. According
to petitioner, a dispute over fee arrangements led to the
termination of HealthFirst in July 2005.
2
The parties stipulated that petitioner received $86,577
of income from HealthFirst. We note that respondent introduced
into evidence checks from HealthFirst totaling only $77,585.
Since neither party addressed this discrepancy at trial or on
brief, we rely on the stipulated amount.
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Medical Group (Health First Medical) and $142,827 in additional
income from various consulting clients.
In 2005 petitioner received about six to eight checks per
month from his consulting business, which he signed and deposited
into a single bank account. Petitioner kept monthly totals of
his income but did not separately track the amount of income he
received from each source.
Randi Bach (Ms. Bach), a certified public accountant
(C.P.A.), prepared petitioners’ 2005 Federal income tax return.
Petitioner provided Ms. Bach with his “approximate cash flow” for
2005, Forms 1099-MISC, Miscellaneous Income, from his consulting
clients, and a Form W-2, Wage and Tax Statement, from Health
First Medical. Petitioner did not provide Ms. Bach with a
Schedule K-1, Partner’s Share of Income, Deductions, Credits,
etc., from HealthFirst or any additional information that would
have enabled her to calculate his income from HealthFirst.3 Ms.
Bach listed HealthFirst on Schedule E, Supplemental Income and
Loss, of petitioners’ Form 1040, U.S. Individual Income Tax
Return, for 2005 but left the amount of income blank.4
3
Petitioner did not receive a Schedule K-1 from
HealthFirst in 2005, nor did he attempt to obtain one.
4
Ms. Bach also prepared petitioners’ 2004 Federal income
tax return. Petitioner provided Ms. Bach with a Schedule K-1
from HealthFirst for 2004 that indicated petitioner received $226
of income. Ms. Bach reported the income on the Schedule E for
2004.
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Discussion
Section 7491(c) provides that the Commissioner bears the
burden of production with respect to the liability of any
individual for additions to tax and penalties. “The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount”. Swain v.
Commissioner, 118 T.C. 358, 363 (2002); see Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). The Commissioner,
however, does not have the obligation to introduce evidence
regarding reasonable cause or substantial authority. Higbee v.
Commissioner, supra at 446-447. Once the Commissioner has met
his burden of production, the taxpayer must come forward with
evidence sufficient to persuade a court that the Commissioner’s
determination is incorrect. Id.
Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer
may be liable for a penalty of 20 percent on the portion of an
underpayment of tax (1) due to negligence or disregard of rules
or regulations or (2) attributable to a substantial
understatement5 of income tax. See sec. 6662(b). “Negligence”
includes any failure to make a reasonable attempt to comply with
5
“Understatement” means the excess of the amount of the
tax required to be shown on the return over the amount of the tax
imposed which is shown on the return, reduced by any rebate. Sec.
6662(d)(2)(A).
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the provisions of the Code or to exercise ordinary care in the
preparation of a return, and “disregard” means any careless,
reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662-
3(b)(1) and (2), Income Tax Regs. A substantial understatement
of income tax is defined as an understatement of tax that exceeds
the greater of 10 percent of the tax required to be shown on the
tax return or $5,000. See sec. 6662(d)(1)(A).
The accuracy-related penalty is not imposed with respect to
any portion of an underpayment as to which the taxpayer acted
with reasonable cause and in good faith. See sec. 6664(c)(1).
The determination of whether a taxpayer acted with reasonable
cause and in good faith depends on the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer’s efforts to
assess his or her proper tax liability. Id. “Circumstances that
may indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.” Id.
Good faith reliance on the advice of an independent,
competent professional as to the tax treatment of an item may
constitute reasonable cause. Neonatology Associates, P.A. v.
Commissioner, 115 T.C. 43, 98-99 (2000), affd. 299 F.3d 221 (3d
Cir. 2002); sec. 1.6664-4(b), Income Tax Regs; see also United
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States v. Boyle, 469 U.S. 241 (1985). In order to prevail on
this issue, the taxpayer must prove by a preponderance of the
evidence that the taxpayer meets each requirement of the
following three-prong test: (1) The adviser was a competent
professional who had sufficient expertise to justify reliance;
(2) the taxpayer provided all necessary and accurate information
to the adviser; and (3) the taxpayer actually relied in good
faith on the adviser’s judgment. Neonatology Associates, P.A. v.
Commissioner, supra at 98-99. The ultimate responsibility for a
correct return lies with the taxpayer, who must furnish the
necessary information to the agent who prepares the return.
ASAT, Inc. v. Commissioner, 108 T.C. 147, 176 (1997).
For the 2005 tax year respondent determined that petitioners
are liable for an accuracy-related penalty attributable to a
substantial understatement of income tax or, in the alternative,
due to negligence or disregard of rules or regulations. With
regard to the substantial understatement of income tax,
respondent has met his burden of production under section
7491(c). The amount of tax required to be shown on petitioners’
return is $39,797. The understatement, $25,123, exceeds the
greater of 10 percent of the amount required to be shown,
$3,979.70, and $5,000. Therefore, we conclude that respondent
has met his burden of production for his determination of the
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accuracy-related penalty based on a substantial understatement of
income tax.
Petitioners have failed to meet their burden of proving that
they acted with reasonable cause and in good faith. Though
petitioners never received a Schedule K-1, they never requested
one, nor did they make any attempt to calculate and report the
income from HealthFirst.6 As a result, petitioners did not make a
reasonable attempt to comply with the Code, nor did they exercise
reasonable care in the preparation of their Federal income tax
return. Since the payments from HealthFirst account for over 35
percent of petitioners’ income for 2005, their inaction is
especially unreasonable.
Petitioners’ contention that nonreceipt of a Schedule K-1
constitutes reasonable cause is mistaken. See Deas v.
Commissioner, T.C. Memo. 2000-204 (nonreceipt of Schedule K-1 did
not constitute reasonable cause where taxpayer failed to report
partnership income). Also, the fact that a C.P.A. prepared
petitioners’ tax return does not establish good faith reliance on
an independent, competent professional in this case. Petitioners
did not provide Ms. Bach with necessary and accurate information
for her to correctly determine petitioner’s income. See
6
HealthFirst paid petitioner by check, and petitioner
deposited all checks from his consulting business into a single
account. Therefore, petitioners could have determined the amount
of income from HealthFirst by requesting copies of canceled
checks or reviewing bank records and deposit slips.
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Neonatology Associates, P.A. v. Commissioner, supra at 98-99;
ASAT, Inc. v. Commissioner, supra at 176. Ms. Bach credibly
testified that had petitioner informed her of the income from
HealthFirst, she would have reported it. Ms. Bach was not
required to perform an audit of petitioner’s books and records.
Rather, she relied on the information petitioners provided.
Petitioners’ failure to report the $86,577 of income from
HealthFirst was not on account of reasonable cause and in good
faith.
We therefore sustain respondent’s determination that
petitioners are liable for the accuracy-related penalty on the
underpayment. In reaching all of our holdings herein, we have
considered all arguments made by the parties, and to the extent
not mentioned above, we find them to be irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.