T.C. Memo. 2015-222
UNITED STATES TAX COURT
RANDY STEINBERG AND BETINA STEINBERG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
JON M. NISSLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 28810-13, 28865-13. Filed November 19, 2015.
Ward R. Nyhus, Jr., for petitioners.
Cassidy B. Collins and Katherine Holmes Ankeny, for respondent.
MEMORANDUM OPINION
NEGA, Judge: These cases have been consolidated for purposes of trial,
briefing, and opinion. Respondent determined a deficiency in petitioners Randy
Steinberg and Betina Steinberg’s Federal income tax of $254,520 and an accuracy-
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[*2] related penalty under section 6662 of $50,904.1 Respondent determined a
deficiency in petitioner Jon M. Nissley’s Federal income tax of $20,014 and an
accuracy-related penalty under section 6662 of $4,003. The issues for decision are
whether (1) Kelmark Tow, LLC (Kelmark), Mr. Steinberg’s and Mr. Nissley’s
wholly owned limited liability company, sustained an $800,000 loss in tax year
2009 with respect to a towing contract with the City of Los Angeles, and (2)
whether petitioners are liable for section 6662 accuracy-related penalties for tax
year 2009.
Background
All of the facts in these cases, which the parties submitted under Rule 122,
have been stipulated by the parties and are so found except as stated below. All
petitioners resided in California when they filed their petitions.
Petitioners’ Towing Business
Mr. Steinberg and Mr. Nissley are both members of Kelmark. Mr.
Steinberg owns a 90% interest in the profits and losses of Kelmark whereas Mr.
Nissley owns a 10% interest.
1
All section references are to the Internal Revenue Code (Code) in effect for
the year at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure. All monetary amounts are rounded to the nearest dollar.
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[*3] Official Police Garages (OPGs) in the City of Los Angeles are regulated
through a contract process. In 2005 Kelmark purchased a towing contract,
Agreement No. C-106804, from Nissley Corp. for $1,200,000 in a transaction in
which Kelmark acquired all of the assets constituting Nissley Corp. towing
business. No other intangibles apart from the towing contract were purchased as
part of the transaction. The towing contract was effective as of June 28, 2004.
The Los Angeles City Council (city council) approved the sale and transfer of the
contract to Kelmark on November 24, 2004, and Kelmark placed the contract in
service on January 1, 2005.
Upon the purchase of the towing contract, Kelmark obtained the sole and
exclusive right to operate the OPG for the Southeast Area of the Los Angeles
Police Department (LAPD). The contract provided for a five-year term ending on
June 27, 2009. At the end of the five-year term, the City of Los Angeles could, at
its sole option, extend the towing contract for an additional five-year term.
On February 22, 2008, the city council drafted a motion proposing that the
city reexamine its system of OPGs. The original OPG model had been created in
the 1940s and paired each LAPD division with one OPG. Due to growth in the
city and the LAPD over the preceding decades, the divisional concept of OPGs
had become outdated. In the mid-1980s non-law-enforcement traffic officers
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[*4] separated from the LAPD and began to operate under the Department of
Transportation (DOT). The DOT and the LAPD work closely with one another,
but they have separate command structures and boundaries. The February 22,
2008, motion directed the LAPD to provide recommendations as to how the city
could improve the current OPG system so as to better serve the changing
boundaries of the DOT and the LAPD.
The Board of Police Commissioners responded to the city council via letter
on June 19, 2008. The Board of Police Commissioners recommended that the city
council direct the city attorney to draft the necessary amendments to the Los
Angeles Municipal Code to establish permanent OPG geographic boundaries. On
August 12, 2008, the city council concurred with the recommendation of the
Board of Police Commissioners.
Amending the city’s Municipal Code to establish permanent OPG
boundaries necessitated the drafting of new OPG contracts. The Board of Police
Commissioners recommended that, rather than entering into new five-year
contracts with existing contractors, the city council extend the existing OPG
contracts for a period of 180 days in order to prevent an interruption of OPG
services. On December 4, 2009, the Mayor of the City of Los Angeles transmitted
the Board of Police Commissioner’s request to the city council. The city council
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[*5] did not adopt the Board of Police Commissioner’s recommendation until
February 12, 2010. The February 12, 2010, adoption of the recommendation had
the effect of retroactively changing the expiration date of Kelmark’s towing
contract from June 27 to December 27, 2009.2 In the meantime, on December 8,
2009, the Board of Police Commissioners notified Kelmark in writing that (1) its
first five-year term had expired, and (2) if Kelmark wished to be considered for a
second five-year term, it needed to submit a written request for renewal to the
Board of Police Commissioners no later than February 15, 2010.
On April 9, 2010, the city council approved an ordinance that amended the
Los Angeles Municipal Code and established permanent OPG boundaries. The
ordinance became effective on June 1, 2010. The city council and Kelmark
executed a first amendment to Agreement No. C-106804 (Amendment to
Agreement No. C-106804) on June 8, 2010, that stated, inter alia, that (1) on May
26, 2010, the city council had approved the exercise of the option to extend
Kelmark’s contract for an additional five-year term, (2) the term of Agreement No.
C-106804 had expired on December 27, 2009, and (3) both parties agreed to
2
The date that is 180 days from June 27, 2009, is actually December 24,
2009. However, all documentation relating to the 180-day extension refers to
December 27, 2009, as the new expiration date of Kelmark’s towing contract, and
we will treat it as such.
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[*6] extend the term of Agreement No. C-106804 to June 26, 2014. The
Amendment to Agreement No. C-106804 includes a ratification clause which
states: “If [Kelmark’s] services were required prior to the execution of this
Amendment, and services were performed in accordance with the terms and
conditions of this Amendment, they are hereby ratified.”
Despite the upheaval surrounding OPGs across the city, Kelmark was the
only provider of towing services for the LAPD in the Southeast Area and was the
only operator of the Southeast Area OPG during 2009. Kelmark continued to
operate the Southeast Area OPG during the entire taxable year ending December
31, 2009. Kelmark submitted monthly summary reports to the Board of Police
Commissioners for each month of tax year 2009. The monthly reports included
information on the number of vehicles impounded, stored, released, or sold during
each calendar month of 2009.
Tax Returns Relating to Tax Year 2009
Kelmark timely filed its Form 1065, U.S. Return of Partnership Income, for
tax year 2009. On August 18, 2011, Kelmark filed an amended Form 1065 for tax
year 2009. The amended Form 1065 increased Kelmark’s deduction for Other
Deductions: Amortization Expense from $240,000 on the originally filed return to
$880,000.
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[*7] Mr. and Mrs. Steinberg timely filed a joint Form 1040, U.S. Individual
Income Tax Return, for tax year 2009. Mr. Nissley also timely filed a Form 1040
for tax year 2009. On May 12, 2011, Mr. Nissley filed a Form 1040X, Amended
U.S. Individual Income Tax Return, for tax year 2009.3 On October 11, 2011, Mr.
and Mrs. Steinberg filed a Form 1040X for tax year 2009. The Forms 1040X
increased Mr. Nissley’s and the Steinbergs’ shares of passthrough losses from
Kelmark pursuant to amended Schedules K-1, Partner’s Share of Income,
Deductions, Credits, etc., received from the partnership.
On May 3, 2013, respondent issued Kelmark a Form 4605-A, Examination
Changes--Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic
International Sales Corporations, for tax year 2009 that disallowed $800,000 of
Kelmark’s claimed deductions for Other Deductions: Amortization Expense. On
September 12, 2013, respondent issued a notice of deficiency for tax year 2009 to
Mr. and Mrs. Steinberg that disallowed a deduction for passthrough losses of
3
The parties stipulated that Mr. Nissley filed a Form 1040X on May 12,
2011, but Kelmark did not file an amended Form 1065 until August 18, 2011.
Although it may seem anomalous that Mr. Nissley amended his personal income
tax return to account for an increased share of partnership losses before Kelmark’s
filing of an amended return to increase partnership losses, stipulations are
generally treated as conclusive admissions. Rule 91(e). Since the order in which
Mr. Nissley and Kelmark filed amended returns is not relevant to the Court’s
decision in this matter, we ignore the discrepancy in the stipulated filing dates.
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[*8] $720,000 from Kelmark and determined an accuracy-related penalty under
section 6662. On September 12, 2013, respondent issued a notice of deficiency
for tax year 2009 to Mr. Nissley that increased State income tax refunds received
by $11,250,4 disallowed a deduction for passthrough losses of $67,655 from
Kelmark, and determined an accuracy-related penalty under section 6662.
Discussion
I. Burden of Proof for Deficiencies in Income Tax
Generally, the Commissioner’s determinations are presumed correct, and the
taxpayer bears the burden of proving otherwise. Rule 142(a); see Welch v.
Helvering, 290 U.S. 111, 115 (1933). However, because our conclusions are
based on the preponderance of evidence, we need not decide whether petitioners
or respondent bears the burden of proof. See Knudsen v. Commissioner, 131 T.C.
185, 189 (2008).
II. Applicable Law
Deductions are a matter of legislative grace. Deputy v. du Pont, 308 U.S.
488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must comply with specific requirements for any deductions claimed.
4
Respondent conceded this issue in a stipulation signed January 21, 2015.
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[*9] See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial
Ice Co. v. Helvering, 292 U.S. at 440.
Section 165(a) provides that a taxpayer may deduct any loss sustained
during the taxable year that is not compensated for by insurance or otherwise.
Individual taxpayers may deduct only certain losses, including, inter alia, losses
incurred in a trade or business or in a transaction entered into for profit although
not connected with a trade or business. Sec. 165(c). In general, a loss is
deductible only for the year in which it is sustained. Sec. 1.165-1(d)(1), Income
Tax Regs. To be allowable as a deduction, the loss must be evidenced by closed
and completed transactions, fixed by identifiable events, and, except for disaster
losses, actually sustained during the taxable year. Id. para. (b). Further, only a
bona fide loss is allowable as a deduction. Id. Substance and not mere form
governs in determining whether a taxpayer has suffered a deductible loss. Id.
Section 197(a) allows a taxpayer an amortization deduction with respect to
any section 197 intangible. Section 197 intangibles include any license, permit, or
other right granted by a governmental unit or an agency or instrumentality thereof.
Sec. 197(d)(1)(D). Generally, a taxpayer must amortize the adjusted basis of the
section 197 intangible ratably over a 15-year period beginning with the month in
which the intangible was acquired. Sec. 197(a).
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[*10] III. Parties’ Arguments
The parties agree that Agreement No. C-106804 is a section 197 intangible
that must be amortized over a 15-year period.5 However, they disagree as to
whether petitioners suffered passthrough losses under section 165 in tax year 2009
when the contract lapsed on either June 27 or December 27, 2009, and was not
amended until June 8, 2010. We briefly summarize the parties’ arguments here.
A. Petitioners’ Argument
Petitioners argue that since the express terms of Agreement No. C-106804
state that it must terminate on June 27, 2009, the contract became worthless in
2009 and they are therefore entitled to loss deductions under section 165 for tax
year 2009 equal to the remaining basis in the contract. Petitioners argue that State
or local law determines property rights and ask the Court to take judicial notice of
Los Angeles Municipal Code sec. 80.77.4, which limits the duration of OPG
contracts to a five-year term. Petitioners argue that general rules of contract
interpretation require the Court to ascertain the intent of the parties from the plain
5
Sec. 197(e)(4)(D) excludes from the definition of a sec. 197 intangible any
right under a contract if such right has a fixed duration of less than 15 years but
only if such right is not acquired in a transaction (or series of related transactions)
involving the acquisition of assets constituting a trade or business or a substantial
portion thereof. Since Kelmark purchased the five-year contract from Nissley
Corp. in a transaction in which Kelmark acquired all of the assets constituting
Nissley Corp.’s towing business, sec. 197(e)(4)(D) does not apply.
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[*11] language of the contract itself. Since the plain language of the contract and
city law require termination of the contract after five years, petitioners argue that
Kelmark and the City of Los Angeles intended for the contract to terminate in
2009. For support of their argument that the contract became worthless in 2009,
petitioners argue that the contract had no commercial value after its termination in
June 2009. Petitioners cite the definition of “fair value” as defined by the
Financial Accounting Standards Board and “fair market value” as defined in
section 20.2031-1(b), Estate Tax Regs.
B. Respondent’s Argument
Respondent argues that notwithstanding the interim period between the
expiration of the original contract and the signing of the amendment, petitioners
did not, in substance, sustain uncompensated passthrough losses. Respondent
cites section 1.165-1(b), Income Tax Regs., which provides that “[s]ubstance and
not mere form shall govern” in determining whether a taxpayer has suffered a loss.
Like petitioners, respondent also urges us to consider rules of contract
interpretation, arguing that (1) the city’s option to renew was part of a larger
contract, (2) substantial performance applies to the time periods stated in the
contract, and (3) general rules governing the construction and operation of
contracts should override the rules of offer and acceptance.
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[*12] Respondent argues that the contract did not become worthless in 2009
because (1) Kelmark continued to enjoy the same benefits of towing for the
Southwest Area OPG after the towing contract expired by its own terms on June
27, 2009, (2) the city delayed extending the towing contract to include details of
the new OPG ordinance in all existing OPG contracts, and Kelmark was not at risk
of losing its OPG contract, (3) the city was not required to exercise its option to
extend the contract before the expiration of the initial term, (4) the city did in fact
exercise its option to extend, first with a temporary extension and then with an
amendment to the initial contract, and (5) the terms of the amendment reflect the
intentions of Kelmark and the city to include the interim period as part of the
towing contract.
Respondent notes that the amendment extended the terms of the contract
until June 26, 2014, which is five years after the original term expired on June 27,
2009. Respondent argues that if the parties did not intend to include the interim
period in the towing contract, the amendment would have provided for a five-year
term beginning on the date the amendment was signed on June 8, 2010.
Additionally, respondent notes the ratification clause in the amendment that
explicitly ratified acts performed during the interim period to include them within
the terms of the towing contract. Further, respondent argues that the Court must
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[*13] consider the original contract and the amendment as one agreement because
the amendment incorporated the original contract into its terms. Finally,
respondent notes that financial accounting and tax accounting have different
objectives, and regardless of the contract’s value for financial accounting
purposes, petitioners are not entitled to a deduction under section 165 for tax
purposes.
IV. Analysis
Whether Kelmark’s towing contract became worthless in tax year 2009 is
partly a question of fact. See, e.g., Boehm v. Commissioner, 326 U.S. 287, 293
(1945) (whether corporate stock became worthless during a given year is a
question of fact); Favia v. Commissioner, T.C. Memo. 2002-154 (worthlessness
and taxable year in which a security becomes worthless are questions of fact). The
requirement that losses be deducted for the year in which they are sustained calls
for a practical rather than a legal test. Lucas v. Am. Code Co., 280 U.S. 445, 449
(1930). Substance and not mere form governs in determining whether a taxpayer
has suffered a deductible loss. Sec. 1.165-1(b), Income Tax Regs. A taxpayer is
entitled to a loss deduction under section 165 for an asset that has become
worthless, even if the taxpayer does not take steps to abandon the asset. Echols v.
Commissioner, 950 F.2d 209, 211 (5th Cir. 1991), denying reh’g to 935 F.2d 703,
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[*14] rev’g and remanding 93 T.C. 553 (1989). The test for worthlessness is both
subjective and objective: “a subjective determination by the taxpayer of the fact
and the year of worthlessness to him, and the existence of objective factors
reflecting completed transaction(s) and identifiable event(s) in the year in
question”. Id. at 213.
Petitioners urge us to focus only on the provisions of the original contract
regarding termination in tax year 2009. We disagree that the original contract
language is dispositive of whether petitioners sustained passthrough losses in
2009. Both the Code and caselaw require that we consider all facts and
circumstances surrounding Kelmark’s towing contract with the City of Los
Angeles.
When we consider Kelmark’s conduct in conjunction with the original
contract, the amendment to the contract, and the Los Angeles Municipal Code, it is
clear that Kelmark did not, in substance, suffer a loss in 2009 even if the contract
expired in form. Kelmark continued to enjoy the benefits of the towing contract
even after it initially expired on June 27, 2009, and subsequently expired after the
180-day extension on December 27, 2009. It continued to operate the Southeast
Area OPG, and no other party provided towing services for the LAPD in the
Southeast Area during any part of 2009. Kelmark also continued to provide
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[*15] monthly summary reports to the LAPD for the Southeast Area OPG. In
short nothing material occurred in 2009 that changed the relationship Kelmark
maintained with the LAPD in the Southeast Area or the City of Los Angeles. This
fact favors a finding that the contract was neither subjectively worthless in
petitioners’ eyes nor objectively worthless given the surrounding facts and
circumstances. See Echols v. Commissioner, 950 F.2d at 213.
Further, we must consider the original contract in conjunction with the
amendment, which clearly amends and extends Agreement No. C-106804. The
plain language of the amendment evidences an intent by Kelmark and the City of
Los Angeles to include the interim period within the amendment’s terms. Not
only does the amendment call for an additional five-year term that ends exactly
five years after the expiration date of the original contract, the amendment also
includes a clause that specifically ratifies services that Kelmark performed before
the execution of the amendment. The fact that the original contract includes no
such ratification clause indicates that the signatories to the amendment added it to
specifically recognize the interim period.
Petitioners urge us to consider State and local law in determining the
property rights under the contract. While they are correct that State law controls
in determining the nature of the legal interest a taxpayer has in property, see, e.g.,
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[*16] Aquilino v. United States, 363 U.S. 509, 513 (1960), petitioners do not cite
any applicable California State laws or caselaw to support their argument that the
contract became worthless in 2009. Petitioners cite only Los Angeles City
Municipal Code sec. 80.77.4, requiring OPG contracts to be awarded for a fixed
five-year term as support for their argument that the original contract became
worthless after five years. In fact Los Angeles City Municipal Code sec. 80.77.4
further convinces us that Kelmark and the city intended to include the interim
period within the terms of the amendment. Otherwise the amendment would have
created a term of shortly over four years rather than a five-year term as required by
city law.
We also agree with respondent that a contract’s value for financial
accounting purposes does not determine its value for Federal income tax
accounting purposes. Financial and tax accounting have vastly different
objectives. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-543 (1979)
(“The primary goal of financial accounting is to provide useful information to
management, shareholders, creditors, and others properly interested; * * * [t]he
primary goal of the income tax system, in contrast, is the equitable collection of
revenue. * * * [A]ny presumptive equivalency between tax and financial
accounting would be unacceptable.”).
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[*17] Petitioners also cite the definition of fair market value under section
20.2031-1(b), Estate Tax Regs., arguing that the contract had no commercial value
because, inter alia “[t]here were no remaining rights to tow or store * * * [and it]
could not be assigned for value”. In contrast to their assertion, Kelmark did in fact
retain the rights to tow and store vehicles during all of 2009 as evidenced by the
fact that only Kelmark provided towing services for the LAPD in the Southeast
Area, and Kelmark was the sole operator of the Southeast Area OPG. Further,
Kelmark’s rights to tow and store vehicles in 2009 were ratified by the ratification
clause in the Amendment to Agreement No. C-106804. Petitioners’ argument that
the contract “could not be assigned for value” is a red herring considering that (1)
the city council has final approval over the assignment of towing contracts and (2)
during 2009, the city council intentionally did not enter into new towing contracts
because of the impending changes to the Los Angeles Municipal Code. In sum,
we disagree that application of the willing buyer/willing seller standard under
section 20.2031-1(b), Estate Tax Regs., would render the contract valueless in
2009.
Moreover, to be deductible, a loss must be evidenced by closed and
completed transactions. Sec. 1.165-1(b), Income Tax Regs. There was no closed
and completed transaction between petitioners and the City of Los Angeles in
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[*18] 2009. As previously stated, Kelmark continued to enjoy the benefits of a
contractual relationship with the City of Los Angeles during the entirety of 2009.
The fact that the amendment was not signed until 2010, after the debate about
setting permanent OPG boundaries had been resolved, clearly shows that there
was no closed and completed transaction that would support finding that Kelmark
suffered a loss in 2009. See, e.g., Nicolazzi v. Commissioner, 79 T.C. 109, 131-
132 (1982) (finding no closed and completed transaction in 1976 where taxpayer
purchased a lottery lease in 1976 and did not exercise a put option until 1977),
aff’d, 722 F.2d 324 (6th Cir. 1983). Accordingly, we find that Kelmark’s contract
with the City of Los Angeles did not become worthless in 2009, and petitioners
are not entitled to deductions under section 165 equal to the then-remaining
unamortized basis in the contract.
V. Section 6662 Accuracy-Related Penalties
Generally, the Commissioner bears the burden of production with respect to
any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). To meet that burden, the Commissioner
must come forward with sufficient evidence indicating that it is appropriate to
impose the relevant penalty. Higbee v. Commissioner, 116 T.C. at 446. However,
once the Commissioner has met the burden of production, the taxpayer bears the
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[*19] burden of proving that the penalty is inappropriate. See Rule 142(a); Higbee
v. Commissioner, 116 T.C. at 446-449.
Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of any
portion of an underpayment that is attributable to, inter alia, negligence or
disregard of rules or regulations, or to any substantial understatement of income
tax. Respondent argues that petitioners should be liable for the section 6662(a)
and (b)(1) and (2) penalties because their underpayments are due to substantial
understatements of their 2009 Federal income tax and because petitioners acted
negligently and disregarded rules and regulations by claiming loss deductions
under section 165 to which they were not entitled. Because we conclude that
petitioners acted negligently in claiming loss deductions under section 165 to
which they were not entitled, we need not consider whether their underpayments
are due to substantial understatements of their 2009 Federal income tax.
Section 6662(c) defines negligence as any failure to make a reasonable
attempt to comply with the provisions of the internal revenue laws. The term
“disregard” includes any careless, reckless, or intentional disregard. Sec. 6662(c);
sec. 1.6662-3(b)(2), Income Tax Regs. Negligence is indicated where a taxpayer
fails to make a reasonable attempt to ascertain the correctness of a deduction,
credit or exclusion on a return that would seem to a reasonable and prudent person
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[*20] to be “too good to be true” under the circumstances. Sec. 1.6662-3(b)(1)(ii),
Income Tax Regs. A disregard of rules or regulations is “careless” if the taxpayer
does not exercise reasonable diligence to determine the correctness of a return
position that is contrary to the rule or regulation. Id. subpara. (2).
We agree with respondent that petitioners were negligent and disregarded
rules and regulations when they claimed loss deductions under section 165 on
their amended 2009 Federal income tax returns. Section 165 allows deductions
only for “bona fide” losses, and substance and not mere form governs in
determining whether a loss is deductible. Sec. 1.165-1(b), Income Tax Regs. At
the time petitioners filed the amended returns in which they claimed the loss
deductions under section 165, Kelmark had already entered into the amendment
with the City of Los Angeles that extended the terms of the towing contract for an
additional five-year period. As previously discussed at length, Kelmark continued
to enjoy the benefits of the towing contract during the interim period, and, in
substance, it suffered no loss during tax year 2009. Claiming a deduction for a
loss under section 165 when no loss has actually occurred would seem to be “too
good to be true” to a reasonable and prudent person, and petitioners acted
negligently in failing to ascertain the correctness of the deductions. Further,
petitioners were careless when they did not exercise reasonable diligence to
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[*21] ascertain whether their claimed loss deductions were contrary to the
requirement that only bona fide losses are allowed as deductions under section
165. See sec. 1.165-1(b), Income Tax Regs. Respondent has met his burden of
production to show that petitioners were negligent and disregarded rules and
regulations by claiming loss deductions to which they were not entitled.
Section 6664(c)(1) provides that taxpayers may avoid a penalty for any
portion of an underpayment under section 6662 if they are able to demonstrate that
there was reasonable cause for such portion and that the taxpayers acted in good
faith with respect to such portion. Reasonable cause and good faith are
determined on a case-by-case basis, taking into account all pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor
is the extent of the taxpayers’ efforts to assess their proper tax liabilities. Id.
Reliance on professional advice may constitute reasonable cause and good
faith, but “it must be established that the reliance was reasonable.” Freytag v.
Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011
(5th Cir. 1990), aff’d, 501 U.S. 868 (1991). We have previously held that the
taxpayer must satisfy a three-prong test to be found to have reasonably relied on
professional advice to negate a section 6662(a) accuracy-related penalty: (1) the
adviser was a competent professional who had sufficient experience to justify the
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[*22] reliance; (2) the taxpayer provided necessary and accurate information to the
adviser; and (3) the taxpayer actually relied in good faith on the adviser’s
judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),
aff’d, 299 F.3d 221 (3d Cir. 2002).
Petitioners do not meet two of the requirements laid out in Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. at 99. Petitioners argue that they relied
on certified public accountants to prepare both their 2009 individual Federal
income tax returns and Kelmark’s 2009 partnership tax return. While we take
petitioners at their word that they relied in good faith on their preparers’ judgment,
petitioners have not established that the preparers were competent professionals
with sufficient experience to justify relying on their advice. Petitioners did not
provide any information about the individuals who prepared their 2009 individual
Federal income tax returns or Kelmark’s 2009 partnership tax return. Apart from
the preparers’ names being listed as paid preparers on the returns, the Court has no
information about these individuals because their names, backgrounds, and
expertise were not mentioned or detailed in the record. Moreover, petitioners have
not established what information was given to the preparers. In sum, the record
establishes that petitioners do not qualify for relief from any portions of the
section 6662 penalties on the basis of the defense of reasonable reliance.
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[*23] In reaching our holding, we have considered all arguments made, and, to the
extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered for
respondent in docket No. 28810-13.
Decision will be entered under
Rule 155 in docket No. 28865-13.