T.C. M em o . 2 0 1 8 -3 0

UNITED STATES TAX COURT
GREGORY S. LARSON, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 1 8 34 -1 6
. Fi l edM arch 1 9 , 2 01 8
. Greg o ry S. Lars o n , p ro s e. St ev enM it ch el l Ro t h , Dan i el V. Tri p l et t , J r., an d Ki m -Kh an h Ng u y en , fo r res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION COHEN, Ju d g e: Res p o nd en t d et erm i n edd efi ci en ci es o f $ 7,6 4 9 an d $ 1 9 ,2 2 9 an ds ect i o n 6 6 6 2 (a) p en al t i es o f $ 1,5 2 9 .8 0 an d $ 3,8 4 5 .8 0 i n rel at i o n t o p et i t i o n er’ s Fed eral i n co m e t ax fo r 2 0 1 3 an d2 01 4 , res p ect i v el y . Aft er co n ces si o n s , th e i s s u e fo r d eci si o n i s wh et h er p et i t i on er i s l i ab l e fo r each y ear fo r- 2
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[* 2 ] th e p en al t y

o n an u n derp aym en tat t ri b u t ab l e t o a s ubs t an ti al u nd ers t at em en t
o f i n co m e t ax p ro v id edfo r i n s ect i o n 6 66 2 (a) an d(b )(2 ). Al l s ect i o n referen ces are t o t he In t ern al Rev en u e Co d e i n effect fo r t h e y ears i n i ss ue, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed , an dth e s t i p u l at edfact s are i n co rp o rat edi n o u r fi n d in g s b y th i s referen ce. Pet i t i o n er was a res i d en t o f Cal i fo rn i a wh en h e fi l edth e p et i t i o n i n t hi s cas e. Du ri n g 2 0 1 3 an d2 0 1 4 p et i t i o n er was a p ract i ci n g l awy er. Fo r each y ear h e rep o rt edth e i n co m e fro m th atb u s i n es s an d cl ai m edd edu ct i o n s o n Sch edu l e C, Pro fi t o r Lo s s Fro m Bu s i nes s , o f h i s Fo rm 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn . Fo r 2 0 1 3 , h e cl ai m eda $ 4 6 ,7 0 5
cas u al t y l o s s res u l t i n g fro m

a fi re at h i s res i d en ce. Fo r 2 0 1 3 h e rep ort edo n l y s el fem pl o y m en tt ax o f $ 1 ,1 7 0 an dad d i t i o n al t ax o n a p en s i o n o f $ 1 , 8 6 9 fo r a t o t al du e o f $ 3 , 0 3 9 , an dreq u es teda refu n do f t h e ex ces s am o u n twi t h h el dfro m h i s wag es . Fo r 2 01 4 h e rep o rt edi nco m e t ax o f $ 1 1 ,2 75 an d s el f-em p l o ym en tt ax o f $ 1 2 ,1 3 0 , fo r a t o tal du e o f $ 2 3 ,4 0 5
. Pet i t i o ner h i reda b o ok k eep i n g fi rm t o m ai n t ai n h i s reco rd s . He d i dn o t p ro v id e recei p ts t o th e b o ok k eep er, “ ju s t [h i s ] ch eck i n g acco u n tan d d es cri p t i o n s o f wh at ev er t h e ch eckwas fo r”. Pet i t i o n er’ s retu rn s were p rep aredb y An d res- 3
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[* 3 ] Garci a, a cert i fi edp ubl i c acco u n tan t(C.P.A.) affi l i at edwi t h th e b oo kk eep i ng fi rm . Al t h ou g h t h e C.P.A. was d es i g n at edo n t h e ret u rn s as a p ers o n wi t h wh o m t h e ret urn s co ul d b e d i s cu s s ed , th e C.P.A. refu s edt o as si s t p et i t i o n er wh enth e retu rn s were au d i t ed
. Al t ho u g h p et i t io n er o b t ai n edo t her rep res en tat i o n fo r t h e au d it , n o reco rd s s ub s t an t iat i n g trav el o r m eal s an den t ert ai n m en tex p en ses were p ro duced . Th e rep res en t at iv e p res en t edi nfo rm at i on th at“ t hri fts h op v al ue” o f i t em s l o s t i n a fi re, rat h er t h an ad ju s t edb as i s , was u s edi n cl ai m i n g t h e cas u al t y l o s s . Th e au d i tres u l t edi n a d et erm i n at io n o f t h e d efi ci en ci es s h o wn ab o v e aft er t h e ex am i n er ad

ju s t edp et i t i o n er’ s i n co m e an dd i s al l o wed d edu ct i on s . Befo re t h e
n o t i ce o f d efi ci en cy

was s en t , a g ro up m an ag er ex ecu t ed a Ci v i l Pen al t y Ap p ro val Fo rm i n wh i ch h e ap pro veda s ub s t an t ial u n d ers t at em en tp en al ty . Ho wev er, th e
n eg li g en ce p en al t y was n o tas sert ed“ s i n ce [t he] s ubs t an t i al u n d ers t at em en t p en al t y h as b een as s es sed .” Befo re t ri al th e p art i es ex ecu t eda s t i p u l at i o n o f s et t ledi s s u es . Inth at
s t ip u l at i o n res p o n d en tco n ced edcert ai n i t em i zedd edu ct i o n s an db u s in es s ex p en s es , an dp et it i o n er co n ced edu n rep ort edi n co m e an dv ari ou s d edu ct i o n s . Th e d edu ct i o n s t h atp et i t i o ner co n ced edi n cl ud ed t rav el ex p en s es o f $ 3 ,4 4 8 fo r 2 0 1 3 an d$ 4 ,7 3 6 fo r 2 0 1 4 ; m eal s an d en t ert ai n m en to f $ 5 , 6 1 3 fo r 2 01 3 an d- 4
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[* 4 ] $ 7 ,0 7 1 fo r 2 0 1 4 ; an d$ 3 6 ,7 0 5 o f t h e cas u al t y l o s s. Aft er al l co n ces si o n s b y b o t h p art i es are t ak en i n t o acco u n t , th e reco m pu t edd efi ci en ci es are $ 6 ,8 9 4 fo r 2 0 1 3 an d$ 5 ,8 8 2 fo r 2 0 1 4
. OPINION Pet i t i o ner co n ten d s th ath e i s n o tl i ab l e fo r t h e s ub s t an t i al u n d ers t at em en t p en al t i es b ecau s e h e rel i ed o n a C.P.A. t o p rep are h i s retu rn s u si n g b o o k s
m ai n t ai n edb y

a b o ok k eep i n g s erv i ce. He ackn o w led g es th ath e i d en t i fi edth e p u rp os es fo r wh i ch ch eck s were wri t t en an dd i dn o tp ro vi de recei p t s t o h i s b o o kk eep er. He co u ldn o ts t at e d efi n i t i v el y wh et h er h e h ad p ro v i d edt o th e p rep arer b ackup recei p t s fo r t h e t o t al s cl ai m edas trav el ex p en s es o n h i s retu rn s . He t es t i fi edth at h e g av e th e p rep arer t h e i t em s an d am o u n t s cl ai m edfo r t he
cas u al t y l o s s . Pet i t i o n er t es t i fi ed : “ M r. Garci a d id n ’ tas km e an y ques t i o ns . I rel i eda h u nd redp ercen to n h i m aft er I h an d ed h i m

th o s e m at eri al s. He d i d n ’ tas k
m e an y qu es t i o n s ”. Pet it i on er d i dn o td es cri b e an y s peci fi c ad v i ce t h atGarci a g av e h i m b efo re t h e au d it . He t es t i fi edth ataft er t h e au d i tb eg an Garci a s ai d :

“ [Y] o u’ re o n y o u r o wn ”. Pet i t i o n er d i dn o t ad d res s an y o f t he d i s al l o wed d educt i o n s o n th e m eri t s , s o w e i n fer t hatth ey were ap p ro p ri at el y d is al lo wed --an d
co n ced ed --fo r l ack o f s ub s t an t i at i o n .- 5
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[* 5 ] Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a 2 0 % accu racy -rel at ed p en al t y o n an y u n d erp aym en to f Fed eral i n co m e t ax wh i ch i s at t ri b u tab l e t o n eg li g en ce, d i s reg ardo f ru l es o r reg u l at i on s , o r a s ub s tan t i al u n d ers tat em en to f i n co m e t ax . An u n d ers t at em en t o f i n co m e t ax i s s ub st an t i al i f i tex ceed s th e g reat er o f 1 0 % o f t h e t ax req ui redt o b e s h own o n th e ret u rno r $ 5,0 00 . Sec. 6 66 2 (d )(1 )(A). Res po n d en th as th e b u rd en o f g o i n g fo rwardwi th res p ectt o p en al t i es . See s ec. 7 4 9 1 (c). Fo r each y ear t h e u n ders t at em en tas reco m p ut edex ceed s $ 5 ,0 00 , wh i ch i s g reat er t han 1 0 % o f t h e t ax req u i redt o b e s h o wn o n th e ret u rn , an dth e as s ert i o n o f t h e s ub s t an t i al u n derp aym en tp en al t y was ap pro v ed as req u i redb y s ect i on 6 7 5 1 (a). See Graev v . Co m m i s s i o n er, 1 4 9 T.C. _

_ , _

_ (s l ip o p . at1 4 ) (Dec. 2 0 , 2 0 1 7 ), s up p l em en t i n g 1 4 7 T.C. _

_ (No v . 3 0 , 2 01 6 ). Thu s res p o n d en t ’ s b u rd en h as b een m et . On ce t h e Co m

m i s s io n er h as m etth e b u rd eno f p ro du ct i o n , th e t ax pay er
m u stco m e fo rward wi t h p ers u as i v e ev i d en ce t hatth e p en al t y i s i n ap p ro p ri at e b ecau s e, fo r ex am

p l e, h e o r s h e act edwi t h reas o nab l e cau s e an di n g o odfai t h
. Sec. 6 6 64 (c)(1 ); Hi g b ee v . Co m m is s i o n er, 1 1 6 T.C. 4 38 , 4 48 -4 4 9 (2 0 0 1 ). Th e d eci s i o n as t o wh et h er a t ax p ay er act edwi t h reas o n ab l e cau s e an di n g oo dfai t h i s
m ad e o n a cas e-b y -cas e b as i s , t ak i n g i n t o acco u n tal l o f t h e p ert in en tfact s an d ci rcu m s t an ces . See s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s .- 6
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[* 6 ] A t ax p ay er m ay

d em o n st rat e reas on ab le cau s e an dg o o d fai t h b y s h owi n g rel i an ce o n th e ad v i ce o f a t ax p ro fes s i o n al , s u ch as an acco u n tan to r a l awy er, reg ard i n g a p art icu l ar i t em ’ s t ax treat m en t . Id . p ara. (c)(1 ). To rel y i n g o o dfai t h
o n th e ad v ice o f a p ro fes s i o n al , th e t ax p ay er m u s t s ho w th at : (1 ) th e ad v i s er “ was a co m p et en tp ro fes s i on al wh o h ad s uffi ci en t ex pert i s e t o ju s t ify rel i an ce”; (2 ) “ t h e t ax p ay er p ro v i d edn eces s ary an daccu rat e i n fo rm at i o n t o th e ad v is er”; an d(3 ) “ t h e t ax p ay er act u al l y

rel i edi n g o o dfai t h o n th e ad vi s er’ s ju d g m en t .” Neo n at o l o g y As s ocs ., P.A. v
. Co m

m i ss i o n er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d, 2 9 9 F.3 d 2 2 1 (3 d Ci r. 2 0 02 ). Pet i t i o ner’ s s h owi n g fal l s s h o rto f p ers u ad in g u s t h at h e rel i ed i n g o o dfai t h
o n a qu al i fi edp rep arer. W e kn o w n ot h i ng ab o u tGarci a’ s ex p ert i se an d
ex p eri en ce, al th ou g h p et i t i on er m en t i on edth at Garci a h adju s t p as s edth e C.P.A.
ex am . Pet i t i o n er’ s v ag u e t es ti m o n y s ug g es ts th ath e d i dn o tp ro vi d e co m p let e i n fo rm at i o n t o Garci a. M o reo v er, p et it i on er p res en t ed n o d irect ev i d en ce o f Garci a’ s ad v i ce wi t h res p ect t o th e d i s al l o wedd educt i o n s . Garci a’ s res p o n s e wh en p et i t i o n er’ s retu rn s were au d i t edap p ears t o d i s as s oci at e Garci a fro m th e am ou n t s rep o rt edo n the ret u rn s . Th e s ub st an t i al u n d ers t at em en t p en al t i es wi l l b e s u s t ai n ed
.- 7
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[* 7 ] To refl ectthe s t i p u l at i o n o f s et t l edi s s ues an do u r co n cl u s i o n s ab o ve, An ap p ro p ri at e d eci s i o n wi l l b e en t ered
.