No. 95-1497

In the Supreme Court of the United States

OCTOBER TERM, 1995

RICHARD A. CRAMER, ET AL., PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

DREW S. DAYS,III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

GILBERT S. ROTHENBERG
CHARLES BRICKEN
Attorneys

Department of Justice
Washington, D.C. 20530
(202)514-2217

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     QUESTION PRESENTED

Whether, when petitioners intentionally and with-
out adequate disclosure took a position in their
income tax returns that they knew was contrary to
the applicable regulation and thereby substantially
understated their income tax liability, their pur-
ported reliance on professional advice excuses them
from additions to tax for intentional disregard of
rules and regulations under Section 6653(a) of the
Internal Revenue Code, 26 U.S.C. 6653(a), and for
substantial understatement of liability under Section
6661(a) of the Code, 26 U.S.C. 6661(a), as in effect for
the year in suit.

(1)

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IV

Cases-Continued:             Page

Hill v. Commissioner, 63 T.C. 225 (1974), aff'd
sub nom. Tenner v. Commissioner, 551 F.2d 313
(9th Cir. 1977) . . . .  14, 16
Howard v. Commissioner, 931 F.2d 578 (9th
Cir. 1991) . . . .  15
Mauerman v. Commissioner, 22 F.3d 1001 (l0th
Cir. 1994) . . . .  18
McMurray v. Commissioner, 985 F.2d 36 (lst Cir.
1993) . . . . 15
Pagel, Inc. v. Commissioner, 905 F.2d 1190 (8th
Cir. 1990)  . . . .  4
Pessin v. Commissioner, 59 T.C. 473 (1972) . . . . 19
Pritchett v. Commissioner, 63 T.C. 149 (1974) . . . .  19
Sire-Air USA, Ltd. v. Commissioner, 98 T.C. 187
(1992) . . . .  15
Tiffany Fine Arts, Inc. v. United States, 469
U.S. 310 (1985) . . . .  20
United States v. Boyle, 469 U.S. 241 (1985)  . . . . 12, 13, 14
Statutes and regulations:
Internal Revenue Code (26 U.S.C.):
  83 . . . .  2, 3, 4, 5, 7, 9, 10, 19
  83(a)  . . . .  3
   83(a)(1) . . . . 3
  83(b)  . . . . 3, 4, 6, 7, 10
  83(e)(3) . . . .  4
  6651  . . . . 12
  6651(a) . . . . 12
  6653  . . . .  2
   6653(a)  . . . . 9, 10, 11, 15, 17
  6661  . . . . 2, 17
   6661(a)  . . . . 9, 10, 11
   6661(b)(2)(B) . . . . 17
   6661(c) . . . . 18
  6662  . . . . 11
Treas. Reg. (26 C.F.R.):
Section 1.83-7  . . . . 2, 3, 4, 5, 11, 13

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TABLE OF CONTENTS

Opinions  below  . . . . 1 
Jurisdiction  . . . . 1
Statutes and regulations involved  . . . . 2 
Statement  . . . . 2
Argument  . . . . 11
Conclusion  . . . . 20

TABLE OF AUTHORITIES

Cases:

Accardo v. Commissioner, 942  F.2d 444 (7th Cir.
1991), cert. denied, 503 U.S. 907 (1992)  . . . . 19 
American Properties, Inc. v. Commissioner, 28 T.C.
1100 (1957), aff `d per curiam, 262 F.2d 150 (9th
Cir. 1958)  . . . . 18-19
Bagley v. Commissioner, 85 T.C. 663(1985), aff'd,
806 F. 2d 169 (8th Cir.1986)  . . . . 4
Betson v. Commissioner, 802 F.2d 365(9th Cir.
1986) . . . . 15
Business Ventures International v. Olive, 893
F.2d 641 (3d Cir. 1990)  . . . .16 
Chamberlain v. Commissioner, 66 F.3d 729 (5th
Cir. 1995)  . . . . 15 
Daugherty v. Commissioner, 78 T.C.623 (1982)  . . . . 18 
Druker v. Commissioner, 697 F.2d 46 (2d Cir.
1982), cert. denied, 461 U. S. 957(1983)  . . . . 15, 16
Durrett v. Commissioner, 71 F.3d 515 (5th Cir.
1996)  . . . . 15 
Gill v. Commissioner, 77 A.F.T.R. 2d 997 (6th
Cir. 1996)  . . . . 15
Goldman v. Commissioner, 39 F.3d 402 (2d Cir.
1994)  . . . . 15
Hansen v, Commissioner, 820 F.2d  1464 (9th Cir.
1987)  . . . . 14

(III)
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IV

Cases-Continued:			Page

Hill v. Commissioner, 63 T.C. 225 (1974), aff'd
   sub nom. Tenner v. Commissioner, 551 F.2d 313
    (9th Cir. 1977) . . . . 14, 16
Howard v. Commissioner, 931 F .2d 578 (9th
    Cir. 1994). . . . 15
Mauerman v. Commissioner, 22 F.3d 1001 (10th
Cir. 1994) . . . . 18
McMurray v. Commissioner, 985 F.2d 36 (1st Cir.
1993) . . . . 15
Pagel, Inc. v. Commissioner, 905 F.2d 1190 (8th
   Cir. 1990) . . . . 4
Pessin v. Commissioner, 59 T.C. 473 (1972) . . . . 19
Pritchett v. Commissioner, 63 T.C. 149 (1974) . . . . 19
Sim-Air USA, Ltd. v. Commissioner, 98 T.C. 187
   (1992) . . . . 15
Tiffany Fine Arts, Inc. v. United States, 469
U.S. 310 (1095) . . . . 20
United States v. Boyle, 469 U.S. (1985). . . .  12, 13, 14

Statutes and regulations:

     Internal Revenue Code (26 U.S.C.) :
83 . . . . 2, 3, 4, 5, 7, 9, 10, 19
83 (a) . . . . 3
83 (a) (1) . . . . 3
83 (b) . . . . 3, 4, 6, 7, 10
83 (e) (3) . . . . 4
6651 . . . . 12
6651 (a) . . . . 12
6653 . . . . 2
6653 (a) . . . . 9, 10, 11, 15, 17
6661 . . . . 2, 17
6661 (a) . . . . 9, 10, 11
6661 (b)(2)(B) . . . . 17
6661 (c) . . . . 18
6662 . . . . 11
Treas. Reg. (26 C.F.R.):
   Section 1.83-7 . . . . 2, 3, 4, 5, 11, 13

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v

Regulations-Continued:            Page

Section 1.83-7(a)  . . . . 4
Section 1.83-7(b) . . . .  9, 10

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IN THE SUPREME COURT OF  THE UNITED STATES

OCTOBER TERM, 1995

No. 95-1497

RICHARD A. CRAMER, ET AL., PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 3a-
22a) is reported at 64 F.3d 1406. The opinion of the
Tax Court (Pet. App. 30a-75a) is reported at 101 T.C.
225.

       JURISDICTION

The judgment of the court of appeals was entered on
September 11, 1995. The petition for rehearing with
suggestion for rehearing en bane that petitioners
filed on November 15, 1995, with respect to the addi-
tions to tax imposed in this case was denied on

(1)

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2

December 22, 1995.  1 Pet. App. la. The petition for a
writ of certiorari was filed on March 19, 1996. The
jurisdiction of this "Court is invoked under 28 U. S.C.
1254(1).

STATUTES AND REGULATIONS INVOLVED

The relevant portions of Sections 83, 6653, and 6661
of the Internal Revenue Code, 26 U.S.C. 83,6653, and
6661, and of Section 1.83-7 of  the Treasury Regula-
tions on Income Tax, 26 C.F.R. 1.83-7, as in effect
during the year in suit, are set forth at Pet.. 2-6.

       STATEMENT

1. In. 1972, petitioner Richard Cramer founded
IMED Corporation, which designed, manufactured,
and sold electronic medical instruments.2 Cramer
was the chairman, president, and chief executive
officer of IMED from the time of its formation until it
was acquired by Warner-Lambert Company in 1982
(Pet. App. 4a). Petitioner Boynton was vice-presided
of IMED and petitioner Monaghan was general
counsel to, and assistant secretary of, the corporation
(id. at 4a, 33a). All "three also served at various times
as directors of IMED (id. at 4a). From 1978 through

                               
___________________(footnotes)

1  A separate petition for rehearing was filed by petitioner
Monaghan on November 16, 1995. That petition, which ad-
dressed only the underlying substantive tax issue, was denied
on December 19, 1995-91 days before the petition for a writ of
certiorari was filed Pet. App. 2a. Petitioners do not now seek
review of the underlying substantive tax determination.
2 References to "petitioners" are to Richard A. Cramer
(Cramer), Warren K. Boynton (Boynton), and Kevin P. Monag-
han (Monaghan). Petitioners Alice D. Cramer, Susi M. Boyn-
ton, and Dins E. Monaghan are parties to this case solely
because they filed joint income tax returns with their husbands
for 1982.

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3

1981, the stock of IMED was not publicly traded on an
established stock exchange (ibid.).
In 1978 and 1979, IMED issued options to purchase
IMED stock to petitioners (Pet. App. 4a-5a). The
options were subject to restrictions on vesting and
transfer that, when taken together with the fact that
neither the options nor the underlying IMED stock
was publicly traded, precluded the options from
having a readily ascertainable fair market value
under the standards set forth in Treas. Reg. $1.83-7
(Pet. App. 4a, 5a).  3 The options were issued to

___________________(footnotes)

3 In general, the tax treatment of the receipt of property in
connection with the performance of services is governed by
Section 83 of the Internal Revenue Code, which requires the
person who performs the services to include in his gross income
the excess of the fair market value of the property over the
amount, if any, paid therefor in the first taxable year in which
the property is either transferable to others or not subject to a
substantial risk of forfeiture. 26 U.S.C. 83(a)(l). The amount
to be included in the recipient's income is the fair market value
of the property determined as of the time the property
becomes transferable or no longer subject to a substantial risk of
forfeiture. Ibid. Any appreciation in the value of the property
that occurs between the time of the receipt and the time the
value of the property becomes includible in income under
Section 83(a) is thus treated as ordinary income rather than as
capital gains. In the alternative, the recipient of the restricted
property may elect to include in his gross income for the year
in which the property is received the excess of the fair market
value of the property at that time over the amount, if any,
paid for the property, in which event Section 83(a) will not
apply with respect to the receipt of the property. 26 U.S. C.
83(b). Such an election has the effect of preventing any appre-
ciation in the value of the property that occurs between the
year of the receipt and the time the property otherwise would

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4

petitioners in connection with the performance of
persona] services as employees of lMED. The delayed
vesting schedules were intended to induce their
continued employment with IMED (id. at 5a).
In 1978, Dan Hendrickson, an accountant who was
the controller and treasurer of IMED, consulted with
an accountant at Arthur Young & Co. concerning the
IMED options. Hendrickson thereafter advised peti-
tioners that, under Section 83(b) of the Internal Re-
venue Code, they would have to file elections to take
the value of the options into income at the time the
options were granted if they wished to have any
chance of obtaining capital gains treatment for their
options (Pet. App. 6a, 40a). He further informed them,
however, that he believed (i) that the options did not
have a readily ascertainable fair market value at the
time they were granted and that, under Treas. Reg.
l.83-7, elections under Section 83(b) were therefore
unavailable and (ii) that the IRS could therefore take
the position that any future disposition of the options
would result in ordinary income rather than capital
gains (Pet. App. 6a, 40a). He further advised peti-
tioners that elections under Section 83(b) of the
                           
___________________(footnotes)

become includable income under Section 83(a) from being
treated as ordinary income.
The foregoing rules, however, do not apply to "the trans-
fer of an option without a readily ascertainable fair market
value." 26 U.S.C. 83(e)(3). If Section 83 does not apply to a
nonqualified stock option because it does not have a readily
ascertainable fair market value, then the recipient of the option
realizes ordinary income when the option is exercised or
otherwise disposed of in an arm's length transaction. Treas.
Reg.  1.83-7(a); Pagel, Inc. v. Commissioner, 905 F.2d 1190,
1191 (8th Cir. 1990); Bagley v. Commissioner, 85 T.C. 663, 671
(1985), aff'd, 806 F.2d 169 (8th Cir. 1986).

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5

Internal Revenue Code might be permissible if Treas.
Reg. $1.83-7 was invalid (because contrary to the
congressional intent expressed in a 1976 con-
gressional committee report). But he informed them
that successfully advancing a position contrary to the
regulation would be most difficult (Pet. App. 6a, 40a).
Petitioner Monaghan, being a lawyer, was also
involved in evaluating the position to be taken with
respect to the IMED options (RT (Vol. VI) at 776-
777).4 To inform himself on this issue, Monaghan read
some articles on the subject, read the statute
(Section 83 of the Code), the regulations (Treas. Reg.
1.83-7), and the 1976 committee report to which
Hendrickson had referred.  Monaghan understood
Treas. Reg.  1.83-7 to provide essentially that an
option (like the IMED options) that was not traded on
an established market did not have a readily
ascertainable fair market value for purposes of
Section 83. He read the 1976 committee report, how-
ever, as requiring the IRS to adopt a new and
different regulation (RT (Vol. VI) at 783-784). He
claimed to have concluded that the terms of the
existing regulation should be disregarded in favor of
the views expressed in the committee report (RT
(Vol. VI) at 783-784). Monaghan discussed his con-
clusions with Boynton and Cramer (RT (Vol. III) at
245; RT (Vol. VI) at 779).
                 
___________________(footnotes)

4 "CR" references are to the docket control numbers
assigned by the Clerk of the Tax Court to the documents in the
original record of Cramer v. Commissioner. "RT" references
are to the reporter's transcript of proceedings (CR 53).
"Exh." references are to the exhibits attached to the stipula-
tion of facts (CR 45), attached to the first supplement to the
stipulation of facts (CR 52) or admitted at the trial.

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6

Cramer, Monaghan, and Hendrickson concluded
that IMED should adopt the policy of causing
elections under Section 83b) to be filed with respect
to all options it granted because, if elections were not
filed, it would be certain that the options would be
treated as ordinary `income (RT (Vol. VI) at 778; RT
(Vol. VII) at 840). In an attempt to obtain capital gain
treatment upon future deposition of the options,
petitioners filed elections under Section 83(b) with
the IRS with respect to Cramer's 1978 option-and the
options granted to Boynton and Monaghan in 1979
(Pet. App. 6a). Even though petitioners believed that
the options had value, their elections declared that.
the ascertainable fair market value of the options at
the date of grant was zero (ibid.). No such elections
were filed with respect to the options issued to
Cramer in 1979 or the options issued in 1981 to an off-
shore trust whose beneficiaries included petitioners
(id. at 5a, 6a). Petitioners did not report any taxable
income from the receipt of any of the options (id. at
6a).
In 1980, John Stine of Arthur Young took over the
handling of the tax aspects of the IMED account (Pet.
App. 7a). In 1981, petitioners inquired whether the
period of limitations on assessing tax would run from
the time of their Section 83(b) elections (Pet. App. 7a).
Stine determined that it would not. He sent a letter
to Hendrickson and Monaghan stating (ibid.):

IMED currently takes the position that its stock
options are governed by Section 83 and therefore
the present tax treatment is . . . no income to the
employee on grant or exercise and no compen-
sation deduction to IMED. However, Regulation
1.83-7 states that an option must have a "readily

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7

ascertainable fair market value" before  83 will
apply. Since the definition of "readily ascertain-
able fair market value" is virtually impossible to
meet, IMED's present position is subject to
challenge.

Stine went on to suggest that IMED consider adopt-
ing a plan under the new rules pertaining to incentive
stock options "in light of the potential exposure to
exercising employees, should the IRS successful y
assert the nonapplication of 83" (Pet. App. 7a). Mon-
aghan discussed the letter with Cramer (ibid.).
In 1982, Warner-Lambert Company bought all of
the outstanding stock of IMED. It also bought all of
the outstanding unexercised IMED options, both
vested and unvested, for the excess of the negotiated
stock purchase price over the exercise price of the
option (Pet. App. 7a). Cramer received nearly $67
million in connection with the sale of IMED to
Warner-Lambert, of which approximately $26 million
was attributable to the sale of his options (i bid.; Exh.
129). Boynton received almost $11 million from the
sale, of which approximately $8 million was attrib-
utable to the options (Pet. App. 7a CR 45 at 13-15;
Exh. 8-Hat Sched. D). Monaghan received more than
$9 million, of which more than $2 million was attrib-
utable to the options (Pet. App. 7a).
Robert Jassoy, an accountant and former partner of
Hendrickson, supervised the preparation of Cramer's
and Monaghan's 1982 income tax returns (Pet. App.
43a). At the time he prepared Cramer's 1982 return,
Jassoy had not seen either the options or the corpora-
tion's stock option plan. He was therefore not able
independently to determine whether Section 83 of the
Code applied to them (Pet. App. 43a). Jassoy was

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8

informed that Section 83(b) elections had been timely
filed for all years involved and that Arthur Young had
determined that capital gain treatment of the option
sale was appropriate (Pet. App. 64a). Monaghan told
Jassoy that the `transaction should be reported as
giving rise to long-term capital gain (RT (Vol. VII)
at 841). Based on the information given to him, Jassoy
concluded that there was a reasonable basis for
claiming long-term capital gain treatment for the
dispositions of Cramer's and Monaghan's options (RT
(Vol. V) at 488, 516). He advised Cramer and Monag-
han of this, further advising them that the IRS might
challenge the asserted capital gains treatment of the
options (Pet. App. 65a RT (Vol. V) at 529-531).
Cramer reported most of the proceeds of the sale of
his options on his 1982 federal income tax return as
long-term capital gain (failing, however, to report
$1.3 million of the proceeds, which he claimed to hold
on behalf of others). The option sale was reported on a
schedule to his return entitled "Stocks & Bonds."
even though there was also a different schedule to his
return entitled "Options." Although Cramer knew
that he had a zero basis in the options and had re-
ceived sales proceeds of approximately $26 million, he
misreported the options as having a basis of approxi-
mately $7 million and sales proceeds of over $32
million (Pet. App. 43a).
Monaghan reported the entire amount that he
received as long-term capital gain on his 1982 federal
income tax return. Like Cramer, Monaghan misre-
ported the basis and sales proceeds of his options as
being over $2 million and over $5 million, respectively,
even though he knew that he did not have any basis in
the options and that he received less than $3 million
as the proceeds of their sale (Pet. App. 44a).

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9

Boynton reported the entire amount that he
received on his 1982 return as having been a sale of
stock with zero basis-not a sale of options-result-
ing in long-term capital gain (Pet. App. 44a). Monag-
han had told Boynton's accountant, Charles Wieseler,
that the sale should be treated as long-term capital
gain (RT (Vol. VII) at 841-842, 882-883). Wieseler
was not provided with any of the option documents for
review (Pet. App. 43a).
None of petitioners' 1982 income tax returns dis-
closed that the IMED options were subject to trans-
fer and vesting restrictions, that the options and the
underlying stock were not publicly traded, that
petitioners had taken a reporting position that was
inconsistent with the controlling regulation, or the
basis for having taken such a position. Moreover,
none of the returns reflected that elections to take
the value of some of the options into income in an
earlier year had been filed (Pet. App. 8a, 44a).
After auditing petitioners' 1982 returns, the Com-
missioner of Internal Revenue determined that the
amount that petitioners realized from the sale of their
options was compensation for services and thus
ordinary income, not capital gain. The Commissioner
determined income tax deficiencies accordingly and
also determined that additions to the tax should be
imposed for intentional disregard of rules and regula-
tions under Section 6653(a) of the Code and for sub-
stantial understatement of tax under Section 6661(a)
(Pet. App. 8a).
2. Petitioners sought review of the Commis-
sioner's determinations in the Tax Court. The Tax
Court held that Treas. Reg.  1.83-7(b) is a valid
interpretation of Section 83 of the Code (Pet. App.
59a-60a), that the options did not satisfy the require-

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10

ments set forth in Treas. Reg.  1.83-7(b) for an
option that' is not publicly traded to have a readily
ascertainable fair market value (Pet. App. 49a-50a),
and that petitioners  had realized ordinary income
from the sale of their IMED options (id. at 61a). The
Tax Court accordingly upheld the Commissioner's
determination of deficiencies in taxpayers' taxes for
1982. The Tax Court also found that petitioners (i) knew
that their options did not have a fair market value of
zero at the time that they filed elections under
Section 83(b) reporting zero value for the options
(Pet. App. 45a), (ii) intentionally disregarded the ap-
plicable regulations in reporting long term capital
gain from the disposition of the options on their 1982
tax returns (id. at 64a), (iii) did not act in reliance on
the advice of tax professionals that their reporting
position was correct (id, at 45a, 64a-67a), (iv) mis-
reported the option Sale on their returns in a manner
that concealed its nature (id. at 68a, 69a) and (v) did
not act in good faith (id. at 68a, 70a). "The Tax Court
therefore upheld the Commissioner's imposition of
the additions to tax under Sections 6653(a) and 6661(a)
of the Code,
3. The court or appeals affirmed (Pet. App. 22a).
The court agreed with the Tax Court that Treas.
Reg.  1.83-7(b) is a valid interpretation of Section 83
of the Code, that under the regulation the IMED
options did not have a readily ascertainable fair
market value, and that petitioners therefore realized
ordinary income upon the sale of their options (Pet..
App. 14a-18a). The court of appeals also upheld the
imposition of the addition to the tax for intentional
disregard of rules and regulations under Section
6653(a) of the Code, noting that petitioners in fact

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11

knew that capital gain treatment of the sale of their
options was contrary to Treas. Reg. 1.83-7 but that
they nevertheless intentionally claimed capital gain
treatment on their tax returns (Pet. App. 19a).
The court rejected petitioners' assertion that
reliance on advice from their tax advisors excused
them from the imposition of the addition to tax for
intentional disregard of the regulation.  The court
observed that petitioners could have paid the tax and
challenged the regulation in a refund suit but instead
chose to "play the audit lottery" and lost (Pet. App.
20a). The court of appeals also affirmed the imposi-
tion of the addition to tax under Section 6661(a) for
substantial understatement of tax, concluding that
petitioners' position was not supported by substantial
authority, that petitioners had not adequately dis-
closed the relevant facts on their tax returns, and
that the Tax Court's finding that petitioners had not
acted in good faith was not clearly erroneous (Pet.
App. 21a-22a).

       ARGUMENT

Petitioners challenge the imposition of additions to
tax in this case. But the decision of the court of
appeals is correct and does not conflict with any
decision of this Court or any other court of appeals.
Further review is therefore not warranted.
1. a. As in effect during the years in issue, Section
6653(a) of the Internal Revenue Code provided for the
imposition of an addition to the tax if any part of an
underpayment of tax was due to negligence or in-
tentional disregard of rules and regulations.5 The
          
___________________(footnotes)

5 The additions to tax for negligence and for intentional dis-
regard of rules or regulations now appear in Section 6662 of the
Internal Revenue Code.

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12

Tax Court upheld the Commissioner's  imposition of
the addition to tax in this case because it found that
petitioners were aware that their tax return position
was contrary to the applicable regulations, which
they intentionally disregarded (Pet. App. 65a-68a).
Petitioners did not challenge those basic findings of
fact on appeal (id. at 19a).
Petitioners nonetheless claim that they should be
immunized from additions to tax in this case because
they relied on professional advice in good faith.
According to petitioners, the decision below is
inconsistent both with this Court's decision in
United States v. Boyle, 469 U.S. 241 (1985), and with
decisions of other courts of appeals. Petitioners'
asserted factual premise, however, is inconsistent
with the record of this case. Their legal analysis is
similarly flawed.
b. In United States v. Boyle, a taxpayer asserted
that he should not have to pay a penalty under Section
6651(a) of the Code-for failing to file a tax return on
time without "reasonable cause''-because he had
relied on his attorney to file the return, and, through
an inadvertent error, the attorney filed the return
late. This Court rejected the taxpayer's argument,
holding that "[the failure to make a timely filing of a
tax return is not excused by the taxpayer's reliance
on an agent., and such reliance is not `reasonable
cause' for a late filing under  6651(a)" (469 U.S. at
252). Noting that Boyle was not a case in which "a
taxpayer has relied on the erroneous advice of counsel
concerning a question of law" (id, at 250), the Court
stated that reliance on professional advice could be
reasonable in that circumstance: "When an accoun-
tant or attorney advises a taxpayer on a matter of tax
law, such as whether a liability exists, it is reason-

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13

able for the taxpayer to rely on that advice." Id. at
251. Petitioners contend (Pet. 16) that the decision in
this case conflicts with Boyle. That contention, how-
ever, ignores both the substance of the advice that
petitioners received and the nature of their actions.
Petitioners were correctly advised that their report-
ing position-claiming capital gain treatment on the
sale of their IMED options was contrary to Treas.
Reg.  1.83-7- because the options did not have a
readily ascertainable fair market value under the
provisions of that regulation (Pet. App. 6a, 19a, 40a,
65a, 66a). They were further advised that, although
they had a basis (the 1976 committee report) from
which to argue that the regulation was invalid, that
argument was difficult to make (id. at 6a, 40a, 65a).
With that advice in mind, petitioners simply reported
capital gains on the sale of their IMED options
without disclosing on their returns the basis for that
position (id. at 8a, 44a).
The Tax Court found that, in reporting capital gain
on their options, petitioners were not acting in
reliance on professional advice that they were doing
what the law required (Pet. App. 45a). The court
observed that "petitioners had serious doubts about
the viability of their plan to obtain capital gain
treatment upon the sale of the options but * * * they
proceeded because they believed they had nothing to
lose and had a large incentive to try" (id. at 66a).
Being fully advised as to their doubtful position under
the applicable law, petitioners took a calculated risk.
In an "effort to obtain capital gain treatment, they
adopted a tax reporting position that, to their knowl-
edge, was contrary to the controlling regulation. As
the court of appeals put it, petitioners "decided to

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14

ignore" the regulation on the theory that it was
invalid and, instead of making a direct challenge to
the validity of the regulation, they "chose to play the
audit lottery" and "[they lost" (id. at 20a).
This is not a case in which petitioners, unfamiliar
with the law, relied completely on decisions made and
advice given by their advisors. Cf. Hill v. Commis-
sioner, 63 T.C. 225, 251-252 (1974), aff'd sub nom.
Tenner v. Commissioner, 551 F.2d 313 (9th Cir. 1977).
Instead, petitioners, having been advised that their
position was contrary to the applicable regulations
and was subject to challenge by the IRS, deliberated
among themselves as to whether to comply with the
regulations and decided that they would not. The
factual setting of this case is thus far removed from
the type of reliance on professional advice that this
Court referred to as. "reasonable" in Boyle, 469 U.S.
at 251.
Petitioners not only knew of the regulation and
chose among themselves to ignore it. They also took
steps to conceal their action by including false
statements on their returns concerning the basis of
their options (Pet. App. 22a). The facts of this case
thus plainly distinguish it from the hypothetical,
innocent and reasonable reliance on professional
advice that was postulated by the Court in the Boyle
case. As the court of appeals explained in this case,
"[i]ntentional disregard occurs when a taxpayer who
knows or should know of a rule or regulation chooses
to ignore its requirements" (Pet. App. 19a, quoting
Hansen v. Commissioner, 820 F.2d 1464, 1469 (9th
Cir. 1987) (emphasis added)). Petitioners' conduct
brought them directly within the scope of this penalty
provision.

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15

2. a. Petitioners also err in contending (Pet. 17-
19) that the decision in this case conflicts with de-
cisions of other circuits. All but one of the cases on
which petitioners rely under Section 6653(a) of the
Code involve the negligence penalty, not the addition
to tax for intentional disregard of rules and regula-
tions.6 While a taxpayer's reasonable reliance on the
advice of a tax professional that the taxpayer is doing
what the law requires may shield the taxpayer from
the negligence penalty, it has no hearing on the
different standard applicable to a taxpayer who, being
fully advised that he is taking a reporting position
directly at odds with a governing regulation, never-
theless decides intentionally to disregard that
regulation.  As the Second Circuit correctly ob-
served, "[t]he reasonableness of a taxpayer's action
may indeed be relevant when he is charged with
negligence but not when he admittedly has flouted
applicable rules and regulations which he fully
understood." Druker v. Commissioner, 697 F.2d 46,
53 (2d Cir. 1982), cert. denied, 461 U.S. 957 (1983).
This is so even when the taxpayer had disregarded a
regulation in reasonable reliance on advice of counsel
that the regulation in question was invalid. See id. at
54. "[A] taxpayer is required to pay taxes due pur-
suant to issued rules and regulations, and sue for a

___________________(footnotes)

6 Gill v. Commissioner, 77 A.F.T.R. 2d 997, 1002 (6th Cir.
1996); Durrett v. Commissioner, 71 F.3d 515, 518 (5th Cir.
1996); Chamberlain v. Commissioner, 66 F.3d 729, 733 (5th Cir.
1995); Goldman v. Commissioner, 39 F.3d 402, 407 (2d Cir.
1994); McMurray v. Commissioner, 985 F.2d 36, 43 (lst Cir.
1993); Howard v. Commissioner, 931 F.2d 578, 582 (9th Cir.
1991); Betson v. Commissioner, 802 F.2d 365, 372 (9th Cir.
1986); Sire-Air USA, Ltd. v. Commissioner, 98 T.C. 187, 198
(1992).

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16

refund, or risk paying penalties if the [substantive
tax] position of the Internal Revenue Service is
upheld by the courts."  Business Ventures Inter-
national v. Olive, 893 F.2d 641, 646 (3d Cir. 1990).
b. The only case that petitioners have cited that
indicates that reliance on advisors may relieve a
taxpayer from the addition to tax for intentional
disregard of rules or-regulations is Hill v. Commis-
sioner, 63 T.C. 225, 251-252 (1974), aff'd sub nom.
Tenner v. Commissioner, 551 F.2d 313 (9th Cir. 1977).
That case involves plainly distinguishable facts. In
Hill, the Tax Court `was unable to conclude that the
taxpayers were aware that their reporting position
was inconsistent with rules or regulations. As the
court explained in Druker v. Commissioner, 697 F.2d
at 54, the decision in Hill "relied on the fact that the
taxpayers themselves did not know what they were
doing." By contrast, petitioners in this case un-
questionably knew that they were taking a position
that was expressly in conflict with the provisions of
the controlling Treasury regulation, chose to dis-
regard the regulation, and took steps to conceal their
action by misstating relevant facts in their returns.
3. a. Petitioners contend that the court of appeals
improperly attributed to them errors made by their
tax return preparers in finding that petitioners did
not act with "reasonable cause" (Pet. 22). The court
of appeals pointed to the fact that petitioners misre-
ported the options transactions on their returns and
that petitioners did not challenge the Tax Court's
finding that the returns thus did not disclose, but
instead concealed, the true nature of the transactions

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17

(Pet. App. 22a) 7 The court reasoned that "[t]hese
unexplained misrepresentations appear designed to
avoid audit" (ibid.). Petitioners contend that, by hold-
ing them responsible for the misrepresentations in
their returns, the decision below has "created con-
fusion about when a taxpayer who relies on a com-
petent tax return preparer acts with reasonable
cause" (Pet. 22).
Contrary to petitioners' assertion, however, the
court of appeals made no finding as to whether
petitioners had acted with reasonable cause. The
additions to tax under Section 6653(a) for intentional
disregard of rules and regulations and under Section
6661 for substantial understatement of liability do not
provide relief for a taxpayer who acted with reason-
able cause. Indeed, the addition to tax for substantial
understatement of liability applies whenever the
taxpayer's position is not supported by substantial
authority and was not adequately disclosed in the
return. 26 U.S.C. 6661(b)(2)(B). The "-courts" below
correctly concluded that petitioners' position in this
case was not supported by substantial authority and
was not adequately disclosed in their returns (Pet.
App. 21a-22a, 68a-69a). 8
                                             
___________________(footnotes)

7 Cramer and Monaghan both claimed a basis in the options
when they knew they had none. Cramer listed the sales in the
portion of his return referring to stock and bond sales rather
than the section reporting option sales. Boynton reported the
option sale as a sale of stock (Pet. App. 22a, 43a-44a).
8 Even though petitioners failed to challenge on appeal the
finding that their returns concealed the nature of their
transaction (Pet. App. 22a), they now claim that the disclosures
in their returns were adequate to apprise the Commissioner of
the transaction and that "these were the same options for
which Section 83(b) elections had been filed" (Pet. 23). Even if

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18

Section 6661(c) authorizes the Commissioner to
waive all or part of the substantial understatement
penalty "on a showing by the taxpayer that there was
reasonable cause for. the understatement (or part
thereof) and that the taxpayer acted in good faith."
See Mauerman v. Commissioner, 22 F.3d 1001, 1006,
(l0th Cir. 1994). But the Tax Court concluded, on the
facts of this case, that petitioners had not acted in
good faith and that the Commissioner had not abused
her discretion in declining to waive the substantial
understatement penalty (Pet. App. 70a-71a). The
court of appeals upheld that finding, for it was amply
supported by petitioners' concealment of the nature of
the option sales in their returns and by their decision
intentionally to disregard the governing regulations
(id. at 22a).
b. Petitioners err in asserting (Pet. 22-23) that
they should not be held responsible for errors in the
manner in which the option sales were reported in
their returns because they had entrusted the pre-
paration of the returns to tax professionals. It has
long been the rule that the duty of filing accurate
returns can not be avoided by placing the responsi-
bility on an agent. See, e.g., Daugherty v. Commis-
sioner, 78 T.C. 623, 641 (1982); American Properties,
Inc. v. Commissioner, 28 T.C. 1100, 1116-1117 (1957),
                                                     
___________________(footnotes)

an examiner were actually aware of petitioners' elections,
however, he would have had no way of knowing from the face
of petitioners' 1982 returns that the transactions reported
thereon related to the same options for which elections were
filed. After all, the elections showed that petitioners had paid
nothing for the options, whereas Cramer's and Monaghan's
returns reported a substantial basis in options and Boynton's
return reported only a sale of stock, not of options (Pet. App.
22a, 43a-44a).

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19

aff'd per curiam, 262 F.2d 150 (9th Cir. 1958). It is
particularly appropriate to hold petitioners respon-
sible for misstatements in their returns because of
the limited and erroneous information that they
provided to their tax return preparers.  While
reasonable reliance on a tax advisor may excuse a
taxpayer from the negligence penalty for failure to
file a correct return, that is so only if the taxpayer
establishes that he provided all relevant information
to the advisor. Accardo v. Commissioner, 942 F.2d
444, 453 (7th Cir. 1991), cert. denied, 503 U.S. 907
(1992); Pritchett v. Commissioner, 63 T.C. 149, 174
(1974). The taxpayer `must demonstrate that the tax
return preparer was provided with the information
necessary to file a correct tax return. Pessin v.
Commissioner, 59 T.C. 473,489 (1972).
In this case, however, the Tax Court correctly
found (Pet. App. 64a) that the tax return preparers
were not provided with copies of the IMED options
and that they therefore could not form a valid opinion
as to whether Section 83 applied to the options.
Indeed, Monaghan testified that he instructed his
return preparers (Jassoy and Wieseler) to report the
option sales as a capital gain (RT (Vol. VII) at 841-
842, 882-883). Jassoy was further advised that Sec-
tion 83(b) elections had been timely filed for all the
options and that Arthur Young had determined that
both the filing of the elections and capital gains
treatment were proper (Pet. App. 64a). Wieseler, for
his part, was not even aware that options were
involved (id. at 43a). Since petitioners failed to pro-
vide all relevant information to their tax return
preparers, they cannot escape responsibility for mis-
leading information in their returns by claiming that
the errors were made by the preparers.

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20

The factual contentions that petitioners raise in
the petition were considered and rejected by both
courts below. Further review is therefore not war-
ranted. See Tiffany-Fine Arts, Inc. v. United States,
469 U.S. 310, 317-318n.5 (1985).

       CONCLUSION

The petition for a writ of certiorari should be
denied.

Respectfully submitted.

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

GILBERT S. ROTHENBERG
CHARLES BRICKEN
Attorneys

MAY 1996