T.C. Memo. 2018-30

UNITED STATES TAX COURT

GREGORY S. LARSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21834-16. Filed March 19, 2018.

Gregory S. Larson, pro se.

Steven Mitchell Roth, Daniel V. Triplett, Jr., and Kim-Khanh Nguyen, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies of $7,649 and

$19,229 and section 6662(a) penalties of $1,529.80 and $3,845.80 in relation to

petitioner’s Federal income tax for 2013 and 2014, respectively. After

concessions, the issue for decision is whether petitioner is liable for each year for
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[*2] the penalty on an underpayment attributable to a substantial understatement

of income tax provided for in section 6662(a) and (b)(2). All section references

are to the Internal Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioner was a resident of

California when he filed the petition in this case. During 2013 and 2014 petitioner

was a practicing lawyer. For each year he reported the income from that business

and claimed deductions on Schedule C, Profit or Loss From Business, of his Form

1040, U.S. Individual Income Tax Return. For 2013, he claimed a $46,705

casualty loss resulting from a fire at his residence. For 2013 he reported only selfemployment tax of $1,170 and additional tax on a pension of $1,869 for a total due

of $3,039, and requested a refund of the excess amount withheld from his wages. 

For 2014 he reported income tax of $11,275 and self-employment tax of $12,130,

for a total due of $23,405.

Petitioner hired a bookkeeping firm to maintain his records. He did not

provide receipts to the bookkeeper, “just [his] checking account and descriptions

of whatever the check was for”. Petitioner’s returns were prepared by Andres
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[*3] Garcia, a certified public accountant (C.P.A.) affiliated with the bookkeeping

firm. Although the C.P.A. was designated on the returns as a person with whom

the returns could be discussed, the C.P.A. refused to assist petitioner when the

returns were audited. Although petitioner obtained other representation for the

audit, no records substantiating travel or meals and entertainment expenses were

produced. The representative presented information that “thrift shop value” of

items lost in a fire, rather than adjusted basis, was used in claiming the casualty

loss.

The audit resulted in a determination of the deficiencies shown above after

the examiner adjusted petitioner’s income and disallowed deductions. Before the

notice of deficiency was sent, a group manager executed a Civil Penalty Approval

Form in which he approved a substantial understatement penalty. However, the

negligence penalty was not asserted “since [the] substantial understatement

penalty has been assessed.”

Before trial the parties executed a stipulation of settled issues. In that

stipulation respondent conceded certain itemized deductions and business

expenses, and petitioner conceded unreported income and various deductions. 

The deductions that petitioner conceded included travel expenses of $3,448 for

2013 and $4,736 for 2014; meals and entertainment of $5,613 for 2013 and
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[*4] $7,071 for 2014; and $36,705 of the casualty loss. After all concessions by

both parties are taken into account, the recomputed deficiencies are $6,894 for

2013 and $5,882 for 2014.

OPINION

Petitioner contends that he is not liable for the substantial understatement

penalties because he relied on a C.P.A. to prepare his returns using books

maintained by a bookkeeping service. He acknowledges that he identified the

purposes for which checks were written and did not provide receipts to his

bookkeeper. He could not state definitively whether he had provided to the

preparer backup receipts for the totals claimed as travel expenses on his returns. 

He testified that he gave the preparer the items and amounts claimed for the

casualty loss. Petitioner testified: “Mr. Garcia didn’t ask me any questions. I

relied a hundred percent on him after I handed him those materials. He didn’t ask

me any questions”. Petitioner did not describe any specific advice that Garcia

gave him before the audit. He testified that after the audit began Garcia said:

“[Y]ou’re on your own”. Petitioner did not address any of the disallowed

deductions on the merits, so we infer that they were appropriately disallowed--and

conceded--for lack of substantiation.
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[*5] Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any underpayment of Federal income tax which is attributable to negligence,

disregard of rules or regulations, or a substantial understatement of income tax. 

An understatement of income tax is substantial if it exceeds the greater of 10% of

the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). 

Respondent has the burden of going forward with respect to penalties. See sec.

7491(c). For each year the understatement as recomputed exceeds $5,000, which

is greater than 10% of the tax required to be shown on the return, and the assertion

of the substantial underpayment penalty was approved as required by section

6751(a). See Graev v. Commissioner, 149 T.C. __, __ (slip op. at 14) (Dec. 20,

2017), supplementing 147 T.C. __ (Nov. 30, 2016). Thus respondent’s burden has

been met.

Once the Commissioner has met the burden of production, the taxpayer

must come forward with persuasive evidence that the penalty is inappropriate

because, for example, he or she acted with reasonable cause and in good faith. 

Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. 438, 448-449 (2001). The

decision as to whether a taxpayer acted with reasonable cause and in good faith is

made on a case-by-case basis, taking into account all of the pertinent facts and

circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
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[*6] A taxpayer may demonstrate reasonable cause and good faith by showing

reliance on the advice of a tax professional, such as an accountant or a lawyer,

regarding a particular item’s tax treatment. Id. para. (c)(1). To rely in good faith

on the advice of a professional, the taxpayer must show that: (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.” Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d

Cir. 2002).

Petitioner’s showing falls short of persuading us that he relied in good faith

on a qualified preparer. We know nothing about Garcia’s expertise and

experience, although petitioner mentioned that Garcia had just passed the C.P.A.

exam. Petitioner’s vague testimony suggests that he did not provide complete

information to Garcia. Moreover, petitioner presented no direct evidence of

Garcia’s advice with respect to the disallowed deductions. Garcia’s response

when petitioner’s returns were audited appears to disassociate Garcia from the

amounts reported on the returns. The substantial understatement penalties will be

sustained.
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[*7] To reflect the stipulation of settled issues and our conclusions above, 

An appropriate decision will be

entered.