T.C. Memo. 2009-278

UNITED STATES TAX COURT

ESTATE OF EDSEL F. STIEL, DECEASED, LAURIE STIEL, SPECIAL

ADMINISTRATOR AND LAURIE STIEL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14116-08. Filed December 1, 2009.

R determined a deficiency and a penalty pursuant

to sec. 6662(a), I.R.C., for Ps’ 2005 tax year. Ps

conceded that they are liable for the deficiency.

Held: Ps are liable for the sec. 6662(a), I.R.C.,

penalty for 2005.

Laurie Stiel, pro se.

Jeffrey W. Belcher, for respondent.
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1Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended and in effect for

the tax year in issue.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of a deficiency. Petitioners concede that

they are liable for a $5,296 Federal income tax deficiency for

the 2005 tax year. The issue remaining for decision is whether

petitioners are liable for a $1,059.20 accuracy-related penalty

under section 6662(a)1 for that year.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are incorporated herein by this

reference. Laurie Stiel resided in California when she filed the

petition.

Petitioners filed their 2005 Form 1040, U.S. Individual

Income Tax Return, electronically on April 15, 2006. Jon

Nichols, their tax preparer since 1968, prepared the return for

them. Edsel F. Stiel met with Mr. Nichols with respect to

petitioners’ 2005 Federal income tax return and gave him

financial documents, including a 2005 Form SSA-1099, Social

Security Benefit Statement, indicating that they had received

$21,445 of Social Security benefits in 2005. Petitioners did

not, however, provide Mr. Nichols a 2005 Form 1099-DIV, Dividends
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and Distributions, indicating that they had received $216 of

dividend income, or a 2005 Form 1099-INT, Interest Income,

indicating that they had received $24 of interest income. 

Mr. Nichols failed to consider or include the three taxable

income items described above when he prepared petitioners’ 2005

Form 1040. Although Mr. Nichols gave petitioners a summary of

the items that would be included on their return, they were not

provided a copy of the return until it was accepted by the

Internal Revenue Service (IRS). Petitioners were aware that they

had received taxable Social Security benefits in their 2002,

2003, and 2004 tax years. However, petitioners did not detect

any errors in the summary of income items considered by Mr.

Nichols in preparing their 2005 Federal income tax return or with

respect to the return itself either before or after it was filed. 

Respondent issued the aforementioned notice of deficiency on

March 27, 2008, and petitioners timely petitioned this Court on

June 9, 2008. A trial was held on June 22, 2009, in Los Angeles,

California.

OPINION

 Under section 7491(c), respondent bears the burden of

production with respect to petitioners’ liability for the section

6662(a) accuracy-related penalty. This means that respondent

“must come forward with sufficient evidence indicating that it is
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2There is a “substantial understatement” of income tax for

any taxable year where the amount of the understatement exceeds

the greater of (1) 10 percent of the tax required to be shown on

the return for the taxable year, or (2) $5,000. 

Sec. 6662(d)(1)(A). However, the amount of the understatement is

reduced to the extent attributable to an item (1) for which there

is or was substantial authority for the taxpayer’s treatment

thereof, or (2) with respect to which the relevant facts were

adequately disclosed on the taxpayer’s return or an attached

statement and there is a reasonable basis for the taxpayer’s

treatment of the item. See sec. 6662(d)(2)(B).

appropriate to impose the relevant penalty.” Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).

 Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b). Among the causes justifying

the imposition of the penalty is any substantial understatement

of income tax as defined in section 6662(d).2 The section

6662(a) penalty is not imposed if a taxpayer can demonstrate (1)

reasonable cause for the underpayment and (2) that the taxpayer

acted in good faith with respect to the underpayment. Sec.

6664(c)(1). Regulations promulgated under section 6664(c)

further provide that the determination of reasonable cause and

good faith "is made on a case-by-case basis, taking into account

all pertinent facts and circumstances." Sec. 1.6664-4(b)(1),

Income Tax Regs. 

Reliance on the advice of a tax professional may, but does

not necessarily, establish reasonable cause and good faith for

the purpose of avoiding a section 6662(a) penalty. See United
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States v. Boyle, 469 U.S. 241, 251 (1985) (“Reliance by a lay

person on a lawyer is of course common; but that reliance cannot

function as a substitute for compliance with an unambiguous

statute.”). Such reliance does not serve as an “absolute

defense”; it is merely a “factor to be considered.” Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991).

The caselaw sets forth the following three requirements in

order for a taxpayer to use reliance on a tax professional to

avoid liability for a section 6662(a) penalty: “(1) The adviser

was a competent professional who had sufficient expertise to

justify 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.” See

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002). 

A fortiori, unconditional reliance on a preparer or adviser

does not always, by itself, constitute reasonable reliance; the

taxpayer must also exercise “Diligence and prudence”. Marine v.

Commissioner, 92 T.C. 958, 992-993 (1989), affd. without

published opinion 921 F.2d 280 (9th Cir. 1991). “The general

rule is that the duty of filing accurate returns cannot be

avoided by placing responsibility on an agent.” Pritchett v.

Commissioner, 63 T.C. 149, 174 (1974). Taxpayers have a duty to
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read their returns to ensure that all income items are included. 

Reliance on a preparer with complete information regarding a

taxpayer’s business activities does not constitute reasonable

cause if the taxpayer’s cursory review of the return would have

revealed errors. Metra Chem Corp. v. Commissioner, 88 T.C. 654,

662-663 (1987). “Even if all data is furnished to the preparer,

the taxpayer still has a duty to read the return and make sure

all income items are included.” Magill v. Commissioner, 70 T.C.

465, 479-480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981). 

Petitioners concede that the understatement of tax on their

2005 Federal income tax return is a substantial understatement of

income tax as defined in section 6662(d). They argue that they

are not liable for the section 6662(a) penalty, however, because

they relied on Mr. Nichols to accurately prepare their return. 

We conclude that petitioners did not rely in good faith on

Mr. Nichols’ advice because they did not examine their return

before it was submitted to the IRS. See Neonatology Associates,

P.A. v. Commissioner, supra at 99 (third prong). As a result

they failed to ensure that all of their income items,

particularly their taxable Social Security benefits, were

included on the return. See Metra Chem Corp. v. Commissioner,

supra at 662-663; Magill v. Commissioner, supra at 479-480. 

Thus, petitioners’ unconditional reliance on Mr. Nichols does
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3The Court notes that at least in the opinion of the

Treasury Secretary “Negligence is strongly indicated where--(i) A

taxpayer fails to include on an income tax return an amount of

income shown on an information return” such as a Form 1099-DIV or

a Form 1099-INT. Sec. 1.6662-3(b)(1), Income Tax Regs. 

Negligence alone may trigger a sec. 6662 penalty. Sec.

6662(b)(1), (c).

not, on these facts, constitute reasonable reliance and does not

excuse their failure to closely examine their return. 

Petitioners’ reliance defense is also undercut by the fact

that petitioners did not provide Mr. Nichols with necessary Form

1099 documentation regarding their dividend and interest income

in 2005.3 See Neonatology Associates, P.A. v. Commissioner,

supra at 99 (second prong). Given our conclusion, we need not,

and do not, decide whether petitioners satisfied the first prong

of the Neonatology test.

Petitioners have not demonstrated good faith and reasonable

cause for their underpayments for 2005. Accordingly, the Court

sustains respondent’s determination that petitioners are liable

for the section 6662(a) accuracy-related penalty for substantial

understatements of income tax for the 2005 tax year.

The Court has considered all of petitioners’ contentions,

arguments, requests, and statements. To the extent not discussed

herein, the Court concludes that they are meritless, moot, or

irrelevant.
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To reflect the foregoing,

Decision will be entered

for respondent.