T.C. Summary Opinion 2010-65

UNITED STATES TAX COURT

DOUGLAS B. AND SALLY ZIEGELER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18748-08S. Filed May 26, 2010.

Douglas B. and Sally Ziegeler, pro sese.

Maya Solh, for respondent.

VASQUEZ, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code (Code) in

effect when the petition was filed. Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case. Unless otherwise indicated, all section references are to

the Code in effect for the year in issue. 
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1 Petitioner held a 30-percent ownership interest in

HealthFirst. Dr. Ronald Crowel, the managing member of

HealthFirst, owned the remaining 70-percent interest. According

to petitioner, a dispute over fee arrangements led to the

termination of HealthFirst in July 2005. 

2 The parties stipulated that petitioner received $86,577

of income from HealthFirst. We note that respondent introduced

into evidence checks from HealthFirst totaling only $77,585. 

Since neither party addressed this discrepancy at trial or on

brief, we rely on the stipulated amount. 

Respondent determined a $25,123 deficiency in petitioners’

2005 Federal income tax and a $5,025 accuracy-related penalty

under section 6662(a). Petitioners concede liability for the

$25,123 deficiency. The issue remaining for decision is whether

petitioners are liable for the section 6662(a) accuracy-related

penalty.

Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioners resided in California.

In 2005 Douglas Ziegeler (petitioner) worked as a management

consultant in the healthcare industry and Sally Ziegeler was a

housewife. Petitioner received $86,577 of income from

HealthFirst Medical Management Co., L.L.C. (HealthFirst),1 which

petitioners failed to report on their 2005 tax return.2

Petitioner also received $15,000 in wages from Health First
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3 Petitioner did not receive a Schedule K-1 from

HealthFirst in 2005, nor did he attempt to obtain one.

4 Ms. Bach also prepared petitioners’ 2004 Federal income

tax return. Petitioner provided Ms. Bach with a Schedule K-1

from HealthFirst for 2004 that indicated petitioner received $226

of income. Ms. Bach reported the income on the Schedule E for

2004.

Medical Group (Health First Medical) and $142,827 in additional

income from various consulting clients.

In 2005 petitioner received about six to eight checks per

month from his consulting business, which he signed and deposited

into a single bank account. Petitioner kept monthly totals of

his income but did not separately track the amount of income he

received from each source.

Randi Bach (Ms. Bach), a certified public accountant

(C.P.A.), prepared petitioners’ 2005 Federal income tax return. 

Petitioner provided Ms. Bach with his “approximate cash flow” for

2005, Forms 1099-MISC, Miscellaneous Income, from his consulting

clients, and a Form W-2, Wage and Tax Statement, from Health

First Medical. Petitioner did not provide Ms. Bach with a

Schedule K-1, Partner’s Share of Income, Deductions, Credits,

etc., from HealthFirst or any additional information that would

have enabled her to calculate his income from HealthFirst.3 Ms.

Bach listed HealthFirst on Schedule E, Supplemental Income and

Loss, of petitioners’ Form 1040, U.S. Individual Income Tax

Return, for 2005 but left the amount of income blank.4
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5 “Understatement” means the excess of the amount of the

tax required to be shown on the return over the amount of the tax

imposed which is shown on the return, reduced by any rebate. Sec.

6662(d)(2)(A).

Discussion

Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for additions to tax and penalties. “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”. Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see Higbee v.

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

however, does not have the obligation to introduce evidence

regarding reasonable cause or substantial authority. Higbee v.

Commissioner, supra at 446-447. Once the Commissioner has met

his burden of production, the taxpayer must come forward with

evidence sufficient to persuade a court that the Commissioner’s

determination is incorrect. Id.

Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer

may be liable for a penalty of 20 percent on the portion of an

underpayment of tax (1) due to negligence or disregard of rules

or regulations or (2) attributable to a substantial

understatement5 of income tax. See sec. 6662(b). “Negligence”

includes any failure to make a reasonable attempt to comply with
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the provisions of the Code or to exercise ordinary care in the

preparation of a return, and “disregard” means any careless,

reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662-

3(b)(1) and (2), Income Tax Regs. A substantial understatement

of income tax is defined as an understatement of tax that exceeds

the greater of 10 percent of the tax required to be shown on the

tax return or $5,000. See sec. 6662(d)(1)(A).

The accuracy-related penalty is not imposed with respect to

any portion of an underpayment as to which the taxpayer acted

with reasonable cause and in good faith. See sec. 6664(c)(1). 

The determination of whether a taxpayer acted with reasonable

cause and in good faith depends on the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer’s efforts to

assess his or her proper tax liability. Id. “Circumstances that

may indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.” Id.

Good faith reliance on the advice of an independent,

competent professional as to the tax treatment of an item may

constitute reasonable cause. Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 98-99 (2000), affd. 299 F.3d 221 (3d

Cir. 2002); sec. 1.6664-4(b), Income Tax Regs; see also United
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States v. Boyle, 469 U.S. 241 (1985). In order to prevail on

this issue, the taxpayer must prove by a preponderance of the

evidence that the taxpayer meets each requirement of the

following three-prong test: (1) The adviser was a competent

professional who had sufficient expertise to justify reliance;

(2) the taxpayer provided all necessary and accurate information

to the adviser; and (3) the taxpayer actually relied in good

faith on the adviser’s judgment. Neonatology Associates, P.A. v.

Commissioner, supra at 98-99. The ultimate responsibility for a

correct return lies with the taxpayer, who must furnish the

necessary information to the agent who prepares the return.

ASAT, Inc. v. Commissioner, 108 T.C. 147, 176 (1997).

For the 2005 tax year respondent determined that petitioners

are liable for an accuracy-related penalty attributable to a

substantial understatement of income tax or, in the alternative,

due to negligence or disregard of rules or regulations. With

regard to the substantial understatement of income tax,

respondent has met his burden of production under section

7491(c). The amount of tax required to be shown on petitioners’

return is $39,797. The understatement, $25,123, exceeds the

greater of 10 percent of the amount required to be shown,

$3,979.70, and $5,000. Therefore, we conclude that respondent

has met his burden of production for his determination of the
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6 HealthFirst paid petitioner by check, and petitioner

deposited all checks from his consulting business into a single

account. Therefore, petitioners could have determined the amount

of income from HealthFirst by requesting copies of canceled

checks or reviewing bank records and deposit slips.

accuracy-related penalty based on a substantial understatement of

income tax.

Petitioners have failed to meet their burden of proving that

they acted with reasonable cause and in good faith. Though

petitioners never received a Schedule K-1, they never requested

one, nor did they make any attempt to calculate and report the

income from HealthFirst.6 As a result, petitioners did not make a

reasonable attempt to comply with the Code, nor did they exercise

reasonable care in the preparation of their Federal income tax

return. Since the payments from HealthFirst account for over 35

percent of petitioners’ income for 2005, their inaction is

especially unreasonable.

Petitioners’ contention that nonreceipt of a Schedule K-1

constitutes reasonable cause is mistaken. See Deas v.

Commissioner, T.C. Memo. 2000-204 (nonreceipt of Schedule K-1 did

not constitute reasonable cause where taxpayer failed to report

partnership income). Also, the fact that a C.P.A. prepared

petitioners’ tax return does not establish good faith reliance on

an independent, competent professional in this case. Petitioners

did not provide Ms. Bach with necessary and accurate information

for her to correctly determine petitioner’s income. See
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Neonatology Associates, P.A. v. Commissioner, supra at 98-99;

ASAT, Inc. v. Commissioner, supra at 176. Ms. Bach credibly

testified that had petitioner informed her of the income from

HealthFirst, she would have reported it. Ms. Bach was not

required to perform an audit of petitioner’s books and records. 

Rather, she relied on the information petitioners provided. 

Petitioners’ failure to report the $86,577 of income from

HealthFirst was not on account of reasonable cause and in good

faith.

We therefore sustain respondent’s determination that

petitioners are liable for the accuracy-related penalty on the

underpayment. In reaching all of our holdings herein, we have

considered all arguments made by the parties, and to the extent

not mentioned above, we find them to be irrelevant or without

merit.

To reflect the foregoing,

Decision will be entered

for respondent.