T.C. Mem o. 2 01 3- 17 7

UNITED STAT ES TAX COURT

DONALD L. ROGERS AND VY ON M. ROGERS, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 13 13 8- 11 . Fil edAug us t 1 , 20 13 . Sco ttW . Gros s, fo r pe ti ti on ers . Fred eri c J. Fe rn an de z an d M arkJ. Mi ll er, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION PARIS , Ju dg e: On Ma rch 7, 2 01 1, re sp on de ntis su edto pe ti ti on ers a no ti ce of de fic ie nc y

for tax y ear 2 00 7 d et erm in in g ade fic ie nc y inFed eral in co m e ta x o f- 2 -

[* 2] $2 9,4 79 an d a n a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) of $ 5,8 95 .80 . 1 Pet it io ne rs see k re de te rm in at io n o f th e d efi ci en cy an d the pe na lty . On No ve m

be r 5, 2 01 2, the pa rti es subm it te d ajoi ntst ip ul at io n o f se tt le d is su es refl ect in g the res ol ut io n o f a num be r of is su es with re sp ectto pe ti ti on ers ’ 20 07 tax y ear. Th e rem ai ni ng is su es forde ci si on are: (1 ) whe th er p et it io ne rs fai le d t o re po rt i nc om e o f $4 3,2 00 rel at edto Mr. 2 Ro ge rs ’ se rv ic es as apa st orfortax y ear 2 00 7; an d (2 ) whe th er p et it io ne rs are l iabl e fo r th e acc ur acy-rela te d p en al ty im po se d un de r se ct io n 6 66 2( a) fo r ta x year 20 07 . FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e p ro po se d st ip ul at io ns de em edadm it te d u nd er Ru le 91 (f) o n Oct ob er 2 6, 2 01 2, the st ip ul at io n o f fac ts fil edan d s up pl em en te d o n No ve m be r 6, 2 01 2, an d the as so ci at edex hi bi ts rece iv edinev id en ce ar e in co rp or at edhe rei n b y th is refe ren ce. Pet it io ne rs res id edinW is co ns inwhen th e p et it io n was fil ed . Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de ineffe ctforth e y ear i n i ss ue , andRu le refe ren ces are t o the Tax C ou rt Rul es of Prac ti ce an d P ro cedur e. Thi s amoun t co ns is ts of $ 30 ,61 2 i n h om e m ortg ag e p aym en ts , $8 ,26 8 i n 2 cred itcardpa ym en ts , and$4 ,32 0 i n u ti li ty paym en ts m ad e o n b eh al f of pe ti ti on ers .- 3 -

[* 3] Pet it io ne r Don al d R og ers is a pa st orat t he Pen te co st al s o f W is co ns in (Po W ). He was fo rm erl y em pl oyed i n the fie ld s o f sa le s an d m ark et in g b utha s be enin vo lv edinm in is try for o ve r 30 y ears . Mr. Ro ge rs ’ du ti es as apa st orin cl ud e free ho m e Bi bl e stud ie s, n ew li fe cl as se s, m en ’s andwom en ’s m in is tri es , m arri ag e ou tre ach , y ou th ou tre ach , andch il dr en ’s ou tre ach . In re turnforth es e se rv ic es , Po W pa y s p et it io ne rs ’ pe rs on al cred itcardbi ll s, u ti li ty bil ls , andho m e m ortg ag e pa ym en ts . 3 Mr. Ro ge rs reg is te redPo W in19 95 as ano ns to ckco rp or at io n i n the Sta te of W is co ns in , for

whi chMr. Ro ge rs was l is te d a s a r eg is te redag en t. Po W op erat ed inth is fas hi on un ti l 2 00 5, wh enMr. Ro ge rs an d o th er m em be rs of P oW so ug ht di ss ol ut io n o f th e en ti ty in fa vo r of set ti ng up a co rp or at io n s ol e. Mr. Ro ge rs an d th e o th er m em

be rs so ug htou t SAC M Ma na ge m en t (S ACM) t o h el p fa ci li tate th e st ep s n eces sa ry

to co m pl et e th e co nv ers io n t o aco rp or at io n s ol e. On Fe brua ry

1, 2 00 5, M r. Ro ge rs si gn eda do cu m en t en ti tl ed“ Vow o f Po ve rty, Stat em en t o f Fai th ” d et ai li ng th atan y do na ti on /h on or ari um , and/o r an d en do wm en t g iv ento Mr. Ro ge rs pe rs on al ly w il l b e co ns id eredth e p ro pe rty of The m ortg ag e p aym en ts m ad e b y Po W on pe ti ti on ers ’ be ha lf we re fo r a 3 ho us e so le ly owne d b y

pe ti ti on ers an d t it le d i n the ir n am es . The h ou se was or ig in al ly tran sf

erre d t o P oW in19 95 bu t was tra ns ferr edba ckto pe ti ti on ers in 19 97 .- 4 -

[* 4] Po W , andth atPo W

wil l i n turn p ro vi de forMr. Ro ge rs ’ ne ed s. Th e do cu m en t fu rth er s ta te s tha t [Mr . Rog ers ] furth er u nd ers tand s tha t an y ho no rari um , do na ti on , an d/ or en do wm en t re cei ve d b y

* * * [h im ] whe n p erfo rm in g m in is te ria l dut ie s among an y othe r m em

be rs hi p o f th e ecc le si as ti cal ch ur chbo dy or am on g the publ ic th atis requi redby the chur chis no t m in e p ers on al ly, bu t i s ac tu al ly tha t o f * * * [P oW] an d wi ll be turn ed ov er t o s am e. * * * Ev enth ou gh * * * [M r. Ro ge rs ] ha s t ak enth is vo w of p ov erty , * * * [h e] furthe r un de rs tand s tha t an y in co m e/wag es * * * [h e] woul d re cei ve d o ut si de of * * * [Po W ] th atis no t d on e o n be ha lf o f, oris no t re qu ire d b y chur chm in is try, is co ns id ereda th ird pa rty andwil l b e co ns id eredin co m e to * * * [h im ] an d i s t ax ab le . On Fe brua ry

22 , 20 05 , an e nt ity

reg is te redas “ The Offic e o f Pres di ng [si c] Pas to r Don al d L. Ro ge rs an d h is su cces so rs , a Co rp or at io n S ol e” was crea te d i n th e St at e o f Nev ad a. On Ap ril 14 , 20 05 , PoW fil edart ic le s o f di ss ol ut io n i n the St at e o f W is co ns in . Desp it e th e co rp or at io n s ol e’s ha vi ng be ensetup as aNeva da en ti ty w ith aNeva daad dr es s, Po W co nt in ue d t o o pe rat e in th e Mi lwau ke e, W is co ns in , area. Intax y ear 2 00 7 v ari ou s amoun ts were p ai d o n p et it io ne rs ’ be ha lf b y Po W inreturn fo r Mr. Ro ge rs ’ m in is te ria l s erv ic es . PoW m ad e $ 30 ,61 2 o f ho m e m ortg ag e p aym en ts , $8 ,26 8 i n p ers on al cred itcardpa ym en ts , and$4 ,32 0 o f ut il ity pa ym en ts on pe ti ti on ers ’ be ha lf f ora to ta l o f $4 3,2 00 . Peti ti on ers ti m el y fil eda joi ntFed eral in co m e ta x re tu rnfortax y ear 2 00 7 b y Apri l 1 5, 2 00 8. Onth ei r- 5 -

[* 5] return, p et it io ne rs rep orte d wag e in co m e fro m Vict ory Ch ris ti anAcad em

y of $5 3,7 70 . Peti ti on ers als o re po rte d i te m iz edde du ct io ns forho m e m ortg ag e in te res t an d c harit ab le co nt rib ut io ns of $ 17 ,96 5 a nd$1 0,8 20 , res pe ct iv el y . Peti ti on ers di d no t re po rt a ny inc om e fro m am ou nt s Po W

pa idon th ei r be ha lf, n ordi d the y fil e a ti m el y cert ifi cat e o f ex em

pt io n fr om

sel f-em pl oym en t t ax inacco rd an ce wi th se ct io n 1 40 2( e). On M arch 7, 2 01 1, re sp on de ntis su edto pe ti ti on ers a no ti ce o f de fic ie nc y fo r ta x year 20 07 , det erm in in g ade fic ie nc y of $ 29 ,47 9 a ndanaccu racy-rela te d pe na lty un de r se ct io n 6 66 2( a) o f $5 ,89 5.8 0. Th is de te rm in at io n re fle ct ed , inpa rt, res po nd en t’s fi nd in g tha t p et it io ne rs fai le d t o re po rt $ 43 ,20 0 o f ta xabl e in co m e 4 fo r am ou nt s Po W

pa idon th ei r be ha lf f

ortax y ear 2 00 7. On Jun e 3 , 20 11 , 5 pe ti ti on ers ti m el y

fil eda pe ti ti on inth is Co urt fo r red et erm in at io n.

The no ti ce fu rth er d et erm in edth atth is in co m e sh ou ldbe rep orte d a s p ro fit 4 orlo ss fro m

a bu si ne ss an d tha t p et it io ne rs were l iabl e fo r se lf- em pl oym en t t ax on th atin co m e. The rem ai nd er o f res po nd en t’s d et erm in at io ns have be enres ol ve d thr ou gh 5 th e st ip ul at io n o f se tt le d i ss ue s l od ge d b y th e p art ie s o n No ve m

be r 5, 2 01 2, as refe ren cedab ov e.- 6 -

[* 6] OPINION I. Unre po rte d In co m e Sect io n 6 1( a) d efi ne s g ro ss in co m e as “ al l i nc om e fro m what ev er s ou rce de riv ed ”, in cl ud in g c om

pe ns at io n fo r se rv ic es . This de fin it io n i nc lu de s al l acce ss io ns to weal th , cle arl y real iz ed , andov er wh ic h the tax pa y ers ha ve co m pl et e do m in io n. Co m

m is si on er v . Glen sh aw Glas s C o., 3 48 U.S. 42 6, 4 31 (19 55 ). Sect io n 1 40 1 i m

po se s a t ax on anin di vi du al ’s sel f-em pl oym en t i nc om e, whi chis de fin edas t he “ ne t ea rn in gs fro m sel f-em pl oym en t” de riv edby an in di vi du al du rin g atax ab le y ear. Se c. 14 02 (b ). “ Net e arn in gs fro m

sel fem pl oym en t” is th e g ro ss in co m e d eri ve d b y anin di vi du al fro m

an y tra de or bu si ne ss carr ie d o n b y

th atin di vi du al les s the de du ct io ns att rib ut ab le to th attra de orbu si ne ss . Sec. 1 40 2( a). Pu rs ua ntto sec ti on 14 02 (c)( 4) , a “ du ly ord ai ne d, co m m is si on ed , or l ic en se d m in is te r of a ch ur chinth e ex erci se of h is m in is try” is en ga ge d i n c arrying on a tr ad e o r bu si ne ss un le ss th e m in is te r is ex em ptfro m sel fem pl oym en t t ax pu rs ua ntto sec ti on 14 02 (e). Un le ss anex em pt io n c ert ifi cat e is ti m el y fil ed , th e m in is te r is li ab le forsel f-em pl oym en t t ax on in co m e d eri ve d fr om th e m in is try. Sec. 1 40 2( e)(3 ). The t im e li m it at io n i m po se d b y sec ti on 14 02 (e)( 3) 6 The op erat iv e d oc um en t u se d t o app ly for thi s ex em pt io n i s Fo rm

43 61 , 6 App li cat io n fo r Exe m

pt io n F ro m

Sel f-Em pl oym en t Tax forUse b y Mi ni st ers , Mem be rs of R el ig io us Orde rs an d C hr is ti anSci en ce Pr act it io ne rs .- 7 -

[* 7] is m an da to ry

an d i s t o b e co m

pl ie d wi th stric tl y . W in go v. Co m m is si on er, 8 9 T.C. 92 2, 9 30 (19 87 ); B en ne ttv. Co m m is si on er, T.C. Mem o. 2 00 7- 35 5; sec . 1.1 40 2( e)- 3A, In co m e Tax Reg s. Pet it io ne rs di d n otfil e a t im el y ap pl ic at io n fo r ex em pt io n fr om

sel f-em pl oym en t t ax fortax y ear 2 00 7. Pe ti ti on ers th eref or e d o no t qua li fy

foranex em

pt io n fr om

sel f-em pl oym en t t ax foram ou nt s Po W pa idon th ei r be ha lf. Sect io n 1 07 pro vi de s tha t g ro ss in co m e d oe s n otin cl ud e, in th e cas e o f a m in is te r of

th e g os pe l, “ th e ren ta l al lo wan ce p ai d t o h im as p artof h is co m pe ns at io n, t o the ex te ntus edby him to ren t o r pr ov id e a h om e”. Inord er fo r a m in is te r to be eli gi bl e fo r th is ex cl us io n, the fol lo win g re qu ire m en ts m us t b e m et : (1 ) th e h om e o r ren ta l al lo wan ce m us t b e p ro vi de d a s re m

un erat io n fo r se rv ic es whi chare o rd in ari ly the du ti es of amin is te r of th e g os pe l; (2) be fo re the pa ym en t of th is ren ta l al lo wan ce, the em pl oyin g c hu rchor o th er qua li fie d o rg an iz at io n m us t de si gn at e th e ren ta l al lo wan ce p ur su an t t o o ffi ci al act io n, wh ic h m ay be ev id en ced inanem pl oym en t co ntractor b y

an y othe r ap pr op ria te in st ru m en t; an d (3 ) th e de si gn at io n m

us t b e su ffi ci en t i n tha t i t cl earl y id en ti fie s the po rti on of t he m in is te r’s sa lary

th atis th e ren ta l al lo wan ce. Sec . 1.1 07 -1 (a) and(b) , Inc om e Tax Reg s.- 8 -

[* 8] The re i s n o e vi de nc e th ata ren ta l al lo wan ce was de si gn at edinanoff ic ia l act io n b etweenPo W

an d p et it io ne rs . In fa ct , Mr. Ro ge rs tes ti fie d a t tria l tha t Po W ne ve r co ns id eredth e m ortg ag e p aym en ts m ad e o n p et it io ne rs ’ be ha lf t o b e pa rs on ag e al lo wan ces . Accor di ng ly, pe ti ti on ers are n oten ti tl edto ex cl ud e m ortg ag e p aym en ts Po W m ad e o n the ir b eh al f as a pars on ag e al lo wan ce u nd er se ct io n 1 07 . Pet it io ne rs fai le d t o a va il th em se lv es of e ithe r th e ex em pt io n fr om

sel fem pl oym en t t ax un de r se ct io n 1 40 2( e) o r th e ex cl us io n fo r ren ta l al lo wan ce und er se ct io n 1 07 . Ins te ad , pet it io ne rs ’ pr im ary co nt en ti on at t hi s p oi ntis th atMr. Ro ge rs ’ vo w of p ov erty

in su la te d the m

fro m be in g t ax edon th e co m

pe ns at io n the y rece iv edforMr. Ro ge rs ’ se rv ic es to Po W . Pet it io ne rs po in t t o s ev eral cas es an d arev enue rul in g i ss ue d b y th e Co m m is si on er t o i ll us tra te th atwhi le m em be rs of r el ig io us ord ers who ha ve tak en a v ow o f po ve rty are subjec t t o t ax forin co m e rec ei ve d i n the ir i nd iv idua l cap aci ti es , th ey

are n otsubjec t t o t ax on in co m e rec ei ve d b y th em m erel y as a ge nt s of th e o rd ers of wh ic h the y are m em be rs . See Sch us te r v. C omm is si on er, 8 00 F.2d 67 2, 6 77 (7t h C ir. 1 98 6) , aff’g 8 4 T.C. 7 64 (19 85 ); F og arty v. Un it edSta te s, 7 80 F.2 d 1 00 5, 1 01 2 (F ed . Cir . 19 86 ); M cEn ean y v. Co m m is si on er, T.C. Mem o. 1 98 6- 41 3; Rev . Rul . 77 -2 90 , 19 77 -2 C.B. 2 6. Ho wev er, p et it io ne rs ’ rel ianc e o n the se- 9 -

[* 9] au th or it ie s i s m is gu id ed . In ea chof t he se cas es , th e ta xp ay er was pa ida sa lary by a thi rdpa rty andrem it te d thi s s al ary to th e rel ig io us ord er b y ass ig nm en t inacco rd an ce wi th th e v ow o f po ve rty. Here, p et it io ne rs di d n otrece iv e a s al ary fro m a th irdpa rty anddi d n otrem it an y in co m e to Po W

by ass ig nm en t. Mr . Rog ers pro vi de d s erv ic es to Po W an d rece iv edco m

pe ns at io n fo r th os e se rv ic es inth e fo rm of p aym en ts Po W

m ad e o n pe ti ti on ers ’ be ha lf. Th e cri ti cal di ffer en ce i s tha t, i n thi s ca se , th ere was no in co m e tr an sf

erre d t o P oW from pe ti ti on ers pu rs uantto th ei r vo w of p ov erty . The m ortg ag e p aym en ts Po W m ad e were app li edto warda ho us e o wne d s ol el y by pe ti ti on ers an d t it le d i n p et it io ne rs ’ na m es . Sim il arl y , th e cre di t ca rdpa ym en ts an d u ti li ty paym en ts Po W m ad e o n b eh al f of

pe ti ti on ers serve d o nl y

to be ne fit pe ti ti on ers inm eet in g the ir b as ic li vi ng ex pe ns es . It wo ul d b e a m is ch arac te riz at io n o f th e fac ts to st at e th atpe ti ti on ers were p ai d a“ sa lary ” as ag en ts of P oW andth atth is sal ary was ass ig ne d fo r th e b en efi t o f Po W when , in fact , no su chsal ary was pa idan d a ll in co m e is su edto pe ti ti on ers was u se d s ol el y fo r th ei r be ne fit . Accor di ng ly, th e au th or it ie s ci te d b y pe ti ti on ers are i napp li cab le inth is parti cu lar cas e. Po W pa id$4 3,2 00 onpe ti ti on ers ’ be ha lf f or tax y ear 2 00 7, co ns is ti ng of $3 0,6 12 inho m e m ortg ag e p aym en ts , $8 ,26 8 i n c red itcardpa ym en ts , and$4 ,32 0- 10 -

[* 10 ] inut il ity

pa y m en ts . Peti ti on ers fai le d t o s ho w th atth ey were en ti tl edto an ex em pt io n fr om

sel f-em pl oym en t t ax forth es e am ou nt s u nd er s ect io n 1 40 2( e). Pet it io ne rs li ke wis e fai le d t o s ho w th atth ey were en ti tl edto ex cl ud e m ortg ag e pa ym en ts Po W

m ad e o n the ir b eh al f as a pa rs on ag e al lo wan ce u nd er s ect io n 1 07 . Acco rd in gl y , res po nd en t’s d et erm in at io n tha t p et it io ne rs rece iv ed$4 3,2 00 of un rep orte d s el f-em

pl oym en t i nc om e fo r ta x year 20 07 is su st ai ne d. II. Sect io n 6 66 2( a) Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b )(2 ) im po se s an accu racy-rela te d p en al ty equ al to 20 % of a n u nd erp aym en t at tri bu tabl e to any subs tant ia l u nd ers tate m en t o f in co m e ta x. Un de r se ct io n 7 49 1( c), the Co m m is si on er h as th e b ur de n o f pr oduc ti on to sh ow tha t the im

po si ti on of ape na lty

un de r se ct io n 6 66 2( a) i s ap pr op ria te . Howev er, thi s d oe s n otm eanth e Co m m is si on er b ears th e b ur de n o f pr oo f with reg ardto pe na lt ie s, o nl y

th atth e Co m

m is si on er “ m

us t co m e fo rwardwith su ffi ci en t ev id en ce i nd ic at in g tha t i t i s ap pr op ria te to im po se th e rel ev an t p en al ty.” Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). Furth er, the Co m m is si on er d oe s n othave th e b ur de n t o i nt ro du ce ev id en ce re ga rd in g reas on ab le cau se or s ub st an ti al au th or ity . Id. Sect io n 6 66 2( d) de fin es a “ subs tant ia l u nd ers ta te m en t” of i nc om e ta x a s o ne whi chex ceed s the gre at er o f: (1 ) 10 % of the am ou ntof t ax requi redto be sh own- 11 -

[* 11 ] on th e return; or ( 2) $5 ,00 0. Ina cas e su chas t hi s wh ere the return s ho ws a zero tax li ab il ity , th e und ers tate m en t an d the am ou ntof t ax requi redto be sh own on th e return a re the same. Acco rd in gl y , th e und ers ta te m en t o f in co m e ta x wi ll be

“ subs tant ia l” on ly if th e am ou ntof t ax requi redto be sh own on th e return e xc eed s $5 ,00 0. No p en al ty w il l b e im

po se d u nd er s ect io n 6 66 2( a) i f th e ta xp ay er es tabl is he s th athe act edwith re as on ab le cau se an d i n g oo d fa ith. Se c. 66 64 (c)( 1) . Ci rcu m st an ces th atin di cat e rea so nabl e cau se an d g oo d fa ith i nc lu de rel ianc e o n th e advi ce o f a t ax pro fes si on al or a n h on es t m is un de rs tand in g o f th e la w th atis reas on ab le inli gh t o f al l the fact s an d c irc um st an ces . Sec. 1 .66 64 -4 (b ), In co m e Tax Reg s. Th e ta xp ay er h as th e b ur de n o f pr ov in g tha t h e act edwith re as on ab le cau se an d i n g oo d fa ith. Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 - 44 7. Re gu la ti on s p ro m

ul ga te d und er s ect io n 6 66 4( c) fu rth er p ro vi de th atth e de te rm in at io n o f rea so nabl e cau se an d g oo d fa ith “ is m ad e o n acas e-b y -cas e b as is , ta ki ng in to acco un t al l p ert in en t fa ct s an d c irc um st an ces .” Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. It m ay be arg ue d tha t p et it io ne rs act edwith re as on ab le cau se an d i n g oo d fai th whenth ey

rel ie d o n a dv ic e fro m

SACM t o s etup a co rp or at io n s ol e st ru ctur e fo r Po W . Howev er, Mr . Rog ers tes ti fie d a t tria l tha t h e an d the m em be rs of P oW- 12 -

[* 12 ] ha d d on e th e res earc h o ve r a num be r of y ears an d d eci de d t o c on ve rt P oW to th e co rp or at io n s ol e st ru ctur e. He furth er t es ti fie d tha t the y so ug htSACM’s advi ce m erel y

to effe ctth e o rg an iz at io n o f Po W as aco rp or at io n s ol e. It i s cl ear th atth e m em

be rs of P oW cho se to co nv ertPo W in to a co rp or at io n s ol e an d tha t an y rel ianc e o n S ACM was inth e ex ecu ti on of tha t d eci si on . Accor di ng ly, pe ti ti on ers di d n otrel y

on a ta x p ro fes si on al su chth atth e rel ianc e wou ld co ns ti tu te reas on ab le cau se un de r se ct io n 6 66 4( c)(1 ). Alt ern at iv el y , itm ay

be arg ue d tha t p et it io ne rs m ad e a rea so nabl e an d ho ne stm is ta ke of l aw th atus in g the co rp or at io n s ol e stru ctur e in co nju nc ti on with th ei r vo w of p ov erty

wou ldex em

ptth em fro m tax on am ount s Po W

pa idonth ei r be ha lf. Inactua li ty, res tru ctur in g P oW as a c or po rat io n s ol e o n i ts owndi d no th in g t o s hi el d p et it io ne rs fro m tax on th e am ount s p ai d o n the ir b eh al f. Pet it io ne rs ’ un de rs tand in g o f th e p ert in en t l aw se em s t o b e th atth e v ow o f po ve rty pr ot ect s the m

fro m in co m e ta x i n a ll cir cu m st an ces , parti cu larly whenth e rel ig io us en ti ty is s etup as aco rp or at io n s ol e. Pet it io ne rs m is to okth e b od y of l aw su rro un di ng th e v ow o f po ve rty to app ly to the ir c irc um st an ces . As ex pl ai ne d ab ov e, itdo es no t. Pet it io ne rs ’ fai lu re t o a va il th em se lv es of t he est ab li sh ed ex em pt io n u nd er s ect io n 1 40 2( e) i n fa vo r of th e te nu ou s co rp or at io n s ol e th eo ry- 13 -

[* 13 ] th ey

esp ou se d was no t a r eas on ab le m is ta ke of l aw gi ve n a ll th e fac ts an d ci rcu m st an ces . Pet it io ne rs ha ve fai le d t o p res en t a c ol or ab le arg um en t tha t the y act edwith reas on ab le cau se an d i n g oo d fa ith i n fi li ng a ta x re tu rnrefl ect in g z ero in co m e ta x du e fo r ta x year 20 07 . Accor di ng ly, if t he fin al co m pu ta ti on s u nd er Ru le 15 5 refl ectanun de rs ta te m en t o f in co m e ta x e xc eed in g $ 5,0 00 fortax y ear 2 00 7, pe ti ti on ers wil l b e li ab le forth e acc ur acy-rela te d p en al ty und er s ect io n 6 66 2( a). Res po nd en t al te rn at iv el y ass ert s tha t i f th e und ers ta te m en t o f in co m e ta x fo r ta x year 20 07 do es no t ex ceed$5 ,00 0, p et it io ne rs sh ou ldst il l b e li ab le forth e accu racy-rela te d p en al ty und er s ect io n 6 66 2( b) (1 ) be cau se th ey act edwith ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . Negl ig en ce i s d efi ne d a s a l ackof du e car e o r fai lu re t o d o wh ata reas on ab le an d o rd in ari ly pru de ntpe rs on wou lddo un de r th e ci rcu m st an ces . Neely v. Co m m is si on er, 8 5 T.C. 9 34 , 94 7 (1 98 5) ; s ec. 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Whil e th e Co urt fi nd s tha t p et it io ne rs ’ m is ta ke of law i n thi s i ns tanc e was no t re as on ab le for th e p ur po se s o f es tabl is hi ng reas on ab le cau se , th e Co urt wi ll no t g o s o fa r as to say tha t p et it io ne rs act edwith ne gl ig en ce o r di sr eg ardof rul es an d re gu la ti on s i n the pre pa rat io n o f th ei r 20 07 return. Acco rd in gl y , if p et it io ne rs ’ un de rs ta te m en t o f in co m e ta x fo r ta x year 20 07 do es no t ex ceed$5 ,00 0 (i .e., itis no t a “ subs tant ia l” un de rs ta te m en t),- 14 -

[* 14 ] pe ti ti on ers wil l n otbe li ab le forth e acc ur acy-rela te d p en al ty for an un de rp aym en t o f ta x a ttrib ut ab le to ne gl ig en ce u nd er s ect io n 6 66 2( b) (1 ). The Co urt h as co ns id eredall of t he arg um en ts m ad e b y th e p art ie s an d, t o th e ex te ntth ey

are n otad dr es se d h erei n, the y are co ns id eredun ne ces sa ry , m oo t, irr el ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red un de r Ru le 15 5.