Bowen v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, JUDGE: In separate notices of deficiency, respondent determined the following income tax deficiencies and penalties with respect to petitioners' Federal income tax returns for the taxable year 1995: ²

WALTER O. BOWEN & SUSAN M. BOWEN, DOCKET NO. 13714-99

      Deficiency      Sec. 6662(a) penalty

      __________      ____________________

      $ 205,316         $ 41,063

BOW N ARROW FAMILY TRUST, DOCKET NO. 13723-99

      Deficiency      Sec. 6662(a) penalty

      __________  *57     ____________________

      $ 98,219          $ 19,644

NATURALLY RIGHT CO., A.K.A. NATURALLY RIGHT COMPANY, DOCKET NO.

13724-99

      Deficiency      Sec. 6662(a) penalty

      __________      ____________________

      $ 98,060          $ 19,612

Petitioners in each docket filed separate petitions contesting respondent's determinations. These cases were consolidated for trial, briefing, and opinion pursuant to Rule 141(a) because they present common issues of fact and law. At trial, respondent conceded the deficiencies and penalties in docket Nos. 13723-99 and 13724-99, leaving only the issues in docket No. 13714-99 for trial. In docket No. 13714-99, Walter O. Bowen and Susan M. Bowen (hereinafter petitioners) conceded that they were liable for a deficiency to be calculated by using a formula agreed to by the parties and that the exact amount would be determined in accordance with Rule 155.

After the parties' concessions, the only remaining issues for decision are:

(1) Whether petitioners are liable for the accuracy-related penalty for taxable year 1995 under section*58 6662(a); and

(2) whether petitioners are liable for a penalty pursuant to section 6673.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts into these findings by this reference. Petitioners resided in Shadow Hills, California, at the time the petition in docket No. 13714-99 was filed. Walter O. Bowen (petitioner) has been a chiropractor since 1975. Susan M. Bowen worked in petitioner's office as a recordkeeper.

Each year, petitioners hired a return preparer to prepare their income tax returns. Marvin Weisbrod was petitioners' return preparer for approximately 15 years. After Mr. Weisbrod passed away, petitioners hired John Gillis to prepare their 1994 tax return.

In 1995, petitioner paid National Trust Services (NTS) $ 9,500 to attend a week-long program about trusts. Shortly after attending the program, petitioners decided to establish two trusts into which they would transfer their home, business, and other assets. In or about April 1995, petitioners established the Bow N Arrow Family Trust and the Naturally Right Co. business trust, using trust documents acquired from NTS. Petitioners hoped that the creation and*59 funding of the trusts would facilitate the preservation and protection of their assets. ³

Petitioners hired James Baker to prepare their 1995 tax return and the tax returns for their two trusts. Some chiropractic colleagues, who claimed Mr. Baker was knowledgeable about trusts and taxes, recommended Mr. Baker to petitioner.

Petitioners did not give Mr. Baker all the information necessary to evaluate the trusts for Federal income tax purposes or to complete their 1995 tax return accurately. As a result, petitioners' 1995 return understated their correct income tax liability.

In his notice of deficiency in docket No. 13714-99, respondent determined that the trusts must be disregarded for Federal income tax purposes, that petitioner's income*60 from his chiropractic business was reportable on petitioners' 1995 return, and that petitioners were liable for an income tax deficiency for 1995. Respondent also determined that petitioners were liable for an accuracy-related penalty under section 6662(a) and (b)(1) (for negligence or disregard of rules or regulations) or, alternatively, under section 6662(a) and (b)(2) (for substantial understatement). At trial, respondent also asserted that petitioners were liable for a penalty under section 6673.

OPINION

SECTION 6662(a) PENALTY

Section 6662(a) and (b)(1) imposes a penalty equal to 20 percent of the portion of an underpayment of income tax 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]". Sec. 6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985) (negligence is lack of due care or failure to do what a reasonable and prudent person would do under the circumstances). The term "disregard" includes "any careless, reckless, or intentional disregard." Sec. 6662(c). Disregard of rules or regulations is careless*61 if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. See sec. 1.6662-3(b)(2), Income Tax Regs.

Section 6662(a) and (b)(2) imposes a penalty equal to 20 percent of the portion of any underpayment of income tax attributable to any substantial understatement of income tax. An understatement is substantial if it exceeds the greater of (a) 10 percent of the tax required to be shown on the return or (b) $ 5,000. See sec. 6662(d)(1)(A).

Respondent's determination is presumed correct, and petitioners have the burden of proving otherwise. See Rule 142(a); Hall v. Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo 1982-337; Neely v. Commissioner, supra at 947; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972). Petitioners' contention that they are not liable for the section 6662(a) penalty is rooted in section 6664(c)(1), which provides, in pertinent part, that the section 6662(a) penalty shall not be imposed with respect to any portion of an underpayment if a taxpayer shows that there was a reasonable*62 cause for such portion and that the taxpayer acted in good faith with respect to such portion.

Generally, the responsibility to file returns and pay tax when due rests upon the taxpayer and cannot be delegated; the taxpayer must bear the consequences of any negligent errors committed by his or her agent. See Pritchett v. Commissioner, 63 T.C. 149, 173- 175 (1974); American Properties, Inc. v. Commissioner, 28 T.C. 1100, 1116-1117 (1957), affd. 262 F.2d 150 (9th Cir. 1958). An exception to this rule arises when a taxpayer selects a competent tax adviser, supplies the adviser with all relevant information, and, consistent with ordinary business care and prudence, relies on the adviser's professional judgment as to the taxpayer's tax obligations. See sec. 6664(c); United States v. Boyle, 469 U.S. 241, 250-251, 83 L. Ed. 2d 622, 105 S. Ct. 687 (1985); Estate of Young v. Commissioner, 110 T.C. 297, 317 (1998); American Properties, Inc. v. Commissioner, supra; secs. 1.6662-3(a), 1.6664- 4(a), Income Tax Regs. In order to qualify for this exception, a taxpayer must prove by a preponderance of the evidence that (1) the adviser was a competent professional*63 who had sufficient expertise to justify the taxpayer's reliance on him, (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. See Zabolotny v. Commissioner, 97 T.C. 385, 400-401 (1991), affd. in part and revd. in part on other grounds 7 F.3d 774 (8th Cir. 1993); see also Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 78 L. Ed. 212, 54 S. Ct. 8 (1933); cf. Patin v. Commissioner, 88 T.C. 1086, 1129-1131 (1987), affd. without published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989); Coldwater Seafood Corp. v. Commissioner, 69 T.C. 966, 974 (1978); New York State Association of Real Estate Bds. Group Ins. Fund v. Commissioner, 54 T.C. 1325, 1336 (1970).

Petitioners contend that their reliance on Mr. Baker protects them from liability for the section 6662(a) penalty. We disagree. Petitioners hired Mr. Baker because petitioner's colleagues*64 recommended him for his knowledge of trusts and their tax consequences. Petitioners introduced no evidence regarding Mr. Baker's credentials or his knowledge and experience in preparing tax returns or analyzing trust arrangements for Federal income tax purposes. In short, petitioners failed to prove that Mr. Baker was a competent tax adviser and that petitioners were justified in relying on him. See Ewing v. Commissioner, 91 T.C. 396, 423 (1988), affd. without published opinion 940 F.2d 1536 (9th Cir. 1991); sec. 1.6664- 4(b), Income Tax Regs.

In addition, petitioner admitted at trial and conceded on brief that Mr. Baker did not have all the necessary information to complete the returns properly. There is no evidence that petitioners gave Mr. Baker copies of the trust documents or other information that would have allowed Mr. Baker to evaluate the legitimacy of the trusts or analyze the tax consequences of the trusts.

Because petitioners failed to prove they reasonably relied on a fully informed and competent tax adviser and because they did not assert any other basis for obtaining relief from the section 6662(a) penalty, we hold that petitioners have failed*65 to prove that they had reasonable cause within the meaning of section 6664(c). ⁴ We, therefore, sustain respondent's determination that petitioners are liable for the section 6662(a) penalty.

SECTION 6673 PENALTY

Section 6673(a)(1)(A) and (B) authorizes the Court to impose a penalty of up to $ 25,000 wherever proceedings have been instituted or maintained by the taxpayer primarily for delay, or whenever the taxpayer's position in a proceeding is frivolous or groundless. Respondent argues that we should impose a section 6673(a) penalty because petitioners' positions in this proceeding were frivolous and without merit and petitioners instituted this lawsuit primarily for delay.

We decline to impose a penalty under section 6673 in this case. Petitioners do not appear to have instituted*66 or maintained this proceeding primarily for delay. Petitioners abandoned their arguments regarding the validity of their trusts prior to trial and conceded their liability for deficiencies to be calculated pursuant to Rule 155. Petitioners' argument regarding the section 6662(a) penalty was neither frivolous nor groundless.

CONCLUSION

We have carefully considered all remaining arguments made by the parties for contrary holdings and, to the extent not discussed, find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155 in docket No. 13714-99.

Decisions will be entered for petitioners in docket Nos. 13723-99 and 13724-99.