Wright v. Comm'r

FOLEY, Judge: The issues for decision, relating to 2002 (year in issue), are whether petitioners are liable for an income tax deficiency and a section 6662(a) accuracy-related penalty.¹

During the year in issue, Terry Wright was a professional investor. Mr. Wright and his wife, Cheryl, owned 100% of Cyber Advice, LLC (Cyber Advice). In December 2002, Cyber Advice purchased a euro put option and, several days later, assigned it to a charity (transaction).² On its 2002 Form 1065, U.S. Return of Partnership Income, Cyber Advice reported a short-term capital loss of over $3 million relating to the transaction.^3*175 The tax effects flowed through to petitioners, who reported a short-term capital loss of approximately $3 million on their 2002 Form 1040, U.S. Individual Income Tax Return.

The law firm of Larry C. Fedro & Associates, P.A. (Fedro law firm), issued Cyber Advice a tax opinion relating to the transaction.⁴ The opinion stated that *177 Cyber Advice's tax treatment of the transaction was "more likely than not" to be "upheld by a court if * * * challenged by the IRS and fully litigated on the merits". At the time the Fedro law firm issued the opinion, the firm's principal, Larry C. Fedro, did not have significant experience relating to the taxation of foreign currency options. In preparing the tax opinion, the Fedro law firm reviewed a copy of unsigned investor representations and an engagement letter. The opinion stated that the Fedro law firm relied upon certain "representations and advice" provided to it by Cyber Advice and that the opinion could not be relied on if such representations and advice were "inaccurate in any material respect, or * * * prove not to be authentic". In a March 9, 2003, letter to Cyber Advice transmitting the tax opinion, Mr. Fedro wrote that "[w]hile we are furnishing you the opinion letter, please be advised*176 that the opinion letter may not be relied upon (and is not otherwise released) unless and until we have * * * the Investor Representations fully executed by you".

In 2002, petitioners' estate tax attorney was Frank O. Hendrick III and their accountant was John Carpentier. Neither Mr. Hendrick nor Mr. Carpentier had significant experience relating to the taxation of foreign currency options. Prior to the time Cyber Advice engaged in the transaction, Mr. Hendrick conducted limited research relating to the transaction and failed to read all of the tax opinion. He *178 prepared petitioners' 2002 Form 1040 and advised them that the tax opinion set forth a reasonable position consistent with the Internal Revenue Code.

In October 2009, respondent issued petitioners a notice of deficiency determining that they were liable for a $603,093 income tax deficiency relating to 2002. In addition, respondent determined that petitioners had substantially understated their income tax and were liable, pursuant to section 6662(a) and (b)(2), for a $120,619 accuracy-related penalty. On August 1, 2011, the Court filed respondent's motion for*177 partial summary judgment, pursuant to which respondent sought judgment that petitioners' euro put option was not a "foreign currency contract" within the meaning of section 1256(g)(2). The Court, pursuant to Wright v. Comm'r, T.C. Memo 2011-292 , issued an order granting respondent's motion. The parties submitted to the Court, fully stipulated pursuant to Rule 122, the issue of whether petitioners are liable for a section 6662(a) accuracy-related penalty.

In their brief, petitioners address only their liability relating to a section 6662(a) accuracy-related penalty and do not further contest the 2002 income tax deficiency. Accordingly, respondent's deficiency determination is sustained pursuant to our opinion in Wright.

*179 Petitioners contend they relied, reasonably and in good faith, on the Fedro law firm's tax opinion and thus are not liable for a penalty.⁵ Petitioners failed to establish reasonable cause and good-faith reliance on the Fedro law firm's tax opinion and did not make a reasonable effort to assess their tax liability. Seesec. 1.6664-4(b)(1), (c)(1), Income Tax Regs. Mr. Fedro lacked the requisite tax expertise to justify petitioners' reliance. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). Moreover, the Fedro law firm required, but petitioners did not provide, signed investor representations. See id. The Fedro law firm informed*178 petitioners that "the opinion letter may not be relied upon (and is not otherwise released) unless and until we have * * * the Investor Representations fully executed by you." Petitioners' reliance on the tax opinion was accordingly unreasonable. Seesec. 1.6664-4(b)(1), Income Tax Regs. Furthermore, petitioners failed to establish that they relied upon either Mr. Hendrick's or Mr. Carpentier's advice. Seesec. 1.6664-4(c)(1), Income Tax Regs. We note that neither adviser had relevant *180 experience sufficient to justify petitioners' reliance. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99.

Finally, petitioners contend that the Fedro law firm's tax opinion was, pursuant to section 6662(d)(2)(B), substantial authority for their understatement. The Fedro law firm based its opinion that a foreign currency option constitutes a foreign currency contract primarily on its interpretation of section 1256. This interpretation, however, was not well reasoned and ignored the plain language of the statute. See Summitt v. Comm'r, 134 T.C. 248, 264-265 (2010) (stating*179 that "[i]t is clear that, as originally enacted in 1982, section 1256(g)(1) applied only to forward contracts", that it is "also clear" that the 1984 amendment to section 1256(g)(2) did not bring foreign currency options within the definition of foreign currency contracts, and that "[t]he statute's plain language is dispositive"); sec. 1.6662-4(d)(3)(ii), Income Tax Regs. Accordingly, the Fedro law firm's tax opinion did not constitute, nor did it rely upon, substantial authority. Seesec. 1.6662-4(d)(3)(ii) and (iii), Income Tax Regs.

Contentions we have not addressed are irrelevant, moot, or meritless.

*181 To reflect the foregoing,

Decision will be entered for respondent.