T.C. Memo. 1999-248

UNITED STATES TAX COURT

FRANKLIN D. AND SANDRA M. TERRELL, Petitioners

v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9473-97. Filed July 28, 1999.

Held: R's determination that Ps are liable for the

addition to tax under sec. 6651(a)(1), I.R.C., for failure

to timely file their Federal income tax returns for their

1991, 1992, and 1993 taxable years is sustained.

Held, further, R's determination that Ps are liable for

the accuracy-related penalty under sec. 6662(a), I.R.C., for

their 1991, 1992, and 1993 taxable years is sustained. 

Franklin D. Terrell and Sandra M. Terrell, pro se.

Sherri L. Munnerlyn, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, Judge: Respondent determined deficiencies, additions

to tax, and accuracy-related penalties for 1991, 1992, and 1993

with respect to petitioners' Federal income taxes as follows:

Addition to tax Penalty

Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1991 $23,617 $5,345 $4,723

1992 28,454 6,597 5,691

1993 32,748 1,566 6,550 

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure. All dollar amounts are rounded to the

nearest dollar.

After concessions by both parties, the remaining issues for

decision are: (1) Whether petitioners are liable for the

additions to tax under section 6651(a)(1) for failure to timely

file their 1991, 1992, and 1993 Federal income tax returns; and

(2) whether petitioners are liable for the accuracy-related

penalty under section 6662(a).

FINDINGS OF FACT

At the time the petition was filed, petitioners resided in

Los Angeles, California. During the years in issue, petitioner

Franklin Terrell was a general contractor engaged in the

construction business. 
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Petitioners filed their 1991 income tax return on January 8,

1993, and their 1992 and 1993 income tax returns on May 11, 1994. 

Petitioners did not file extensions to file their income tax

returns for any of the years in issue. 

Petitioners failed to report interest income earned from

their bank accounts in the amounts of $1,201, $932, and $433, for

their 1991, 1992, and 1993 taxable years, respectively. 

Petitioners had unreported rental income in the amounts of

$14,842, $7,472, and $14,405 for their 1991, 1992, and 1993

taxable years, respectively. In 1993, petitioners received a

portion of the unreported rental income from the rental of their

residence at 5260 Maymont Drive, Los Angeles, California. 

Petitioners had unreported Schedule C income of $12,780,

$51,858, and $58,608, for their 1991, 1992, and 1993 taxable

years. Respondent estimated and allowed Schedule C expenses in

the amounts of $14,218, $38,526, and $39,524, for petitioners'

1991, 1992, and 1993 taxable years, respectively; respondent's

estimate, which was based on a percentage of petitioners' gross

receipts, was required due to petitioners' failure to keep

adequate records to substantiate their claimed Schedule C

expenses. 
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Petitioners were not entitled to deduct rental expenses in

the amounts of $8,417, $9,473, and $15,158, for their 1991, 1992,

and 1993 taxable years because they had no records to

substantiate these expenses. 

OPINION

I. Addition to Tax Under Section 6651(a)(1)

Respondent determined that petitioners were liable for the

additions to tax under section 6651(a)(1) for the 1991, 1992, and

1993 taxable years. Section 6651(a)(1) imposes an addition to

tax for failing to file a timely income tax return, unless such

failure to file is due to reasonable cause and not due to willful

neglect. The addition to tax is 5 percent of the amount required

to be reported on the return for each month or fraction thereof

during which such failure to file continues, but not to exceed 25

percent in the aggregate. See sec. 6651(a)(1). As calendar year

taxpayers, petitioners' 1991, 1992, and 1993 returns were due on

April 15, 1992, 1993, and 1994, respectively. See sec. 6072(a). 

However, in this case, petitioners filed their 1991 return on

January 8, 1993, and their 1992 and 1993 returns on May 11, 1994. 

Unless petitioners can show that their failure to timely file

their returns was due to reasonable cause and not due to willful

neglect, respondent's determination will be sustained.

The term "reasonable cause" as set forth in section

6651(a)(1) has been defined as the exercise of ordinary business
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care and prudence. See sec. 301.6651-1(c)(1), Proced. & Admin.

Regs. "Willful neglect" means a "conscious, intentional failure

or reckless indifference." United States v. Boyle, 469 U.S. 241,

245 (1985). The question of whether a failure to file a timely

return is due to reasonable cause and not willful neglect is one

of fact, on which petitioners bear the burden of proof. See Rule

142(a); Commissioner v. Walker, 326 F.2d 261, 264 (9th Cir.

1964), affg. in part and reversing in part 37 T.C. 962 (1962);

BJR Corp. v. Commissioner, 67 T.C. 111, 131 (1976).

At trial, Mr. Terrell admitted on direct examination that

there was no reasonable cause for petitioners' failure to timely

file their 1992 and 1993 returns. However, petitioners attempt

to establish, by Mr. Terrell's testimony, that their failure to

file their 1991 return was due to riots and fires occurring near

their home during 1991 and the subsequent relocation of

petitioners and their family to Arizona. 

We disagree. Mr. Terrell's testimony fails to explain how

the fires and riots prevented them from timely filing their

returns or how these occurrences prevented them from filing an

extension to file their 1991 return. Moreover, the record shows

that despite the riots and fires occurring near petitioners'

home, Mr. Terrell's business records were unaffected and were

taken with petitioners to Arizona. The fact that petitioners had 
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possession of Mr. Terrell's business records indicates a lack of

causal link between their failure to file and the riots and fires

occurring near their home. 

Under these circumstances, we conclude that petitioners'

failure to file their 1991, 1992, and 1993 income tax returns was

not due to reasonable cause. Therefore, respondent properly

imposed the addition to tax.

II. Accuracy-Related Penalty Under Section 6662(a)

Respondent determined that petitioners were liable for the

accuracy-related penalty under section 6662(a) for their 1991,

1992, and 1993 taxable years, respectively. Section 6662(a)

imposes an accuracy-related penalty of 20 percent on any portion

of an underpayment of tax that is attributable to items set forth

in section 6662(b). Section 6662(b)(1) applies section 6662(a)

to any portion of an underpayment attributable to negligence or

disregard of rules or regulations. 

Petitioners must prove that they were not negligent; i.e.,

that they made a reasonable attempt to comply with the provisions

of the Internal Revenue Code, and that they were not careless,

reckless, or intentional disregard of rules or regulations. See

sec. 6662(c); Rule 142(a); LaVerne v. Commissioner, 94 T.C. 637,

652 (1990), affd. without published opinion 956 F.2d 274 (9th

Cir. 1992); sec. 1.6662-3(b), Income Tax Regs. "Negligence" has

also been defined as a "lack of due care or failure to do what a
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reasonable and ordinarily prudent person would do under the

circumstances." Neely v. Commissioner, 85 T.C. 934, 947 (1985). 

The accuracy-related penalty under section 6662(a) does not apply

to any portion of an underpayment if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith. See sec. 6664(c)(1).

In this case, petitioners were negligent. For each of the

taxable years in issue, petitioners failed to report interest

income, Schedule C income, and rental income. In addition,

petitioners failed to maintain adequate records to substantiate

Schedule C expenses and rental deductions claimed on their

return. Thus, the record adequately demonstrates that

petitioners were "careless" and did not make a "reasonable"

attempt to comply with the provisions of the Internal Revenue

Code.

By Mr. Terrell's testimony, petitioners contend that they

are not liable for the accuracy-related penalty under section

6662(a) for any of the years in issue because they relied on

their tax return preparer, Mr. Still, to prepare their returns

accurately. In the circumstances petitioners' responsibility of

filing accurate tax returns "cannot be avoided by placing

responsibility on an agent." Pritchett v. Commissioner, 63 T.C.

149, 174 (1974). In the case of alleged reliance upon an

accountant who prepared the taxpayer's return, a taxpayer may
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demonstrate reasonable cause if he can show that he relied in

good faith on a qualified adviser after full disclosure of all

necessary and relevant information, see Jackson v. Commissioner,

86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521 (10th Cir.

1989); Paula Constr. Co. v. Commissioner, 58 T.C. 1055, 1061

(1972), affd. without published opinion 474 F.2d 1345 (5th Cir.

1973); sec. 1.6664-4(b)(1), Income Tax Regs., and that the

incorrect returns resulted from the preparer's error, see Enoch

v. Commissioner, 57 T.C. 781, 803 (1972).

In this case, petitioners have failed to establish that they

fully disclosed all necessary and relevant information to Mr.

Still or that the incorrect returns were a result of Mr. Still's

errors. Thus, petitioners' negligence was not due to reasonable

cause.

Accordingly, we sustain respondent's determination that

petitioners are liable for the accuracy-related penalty under

section 6662(a) for their 1991, 1992, and 1993 taxable years.

To reflect the foregoing,

Decision will be

entered under Rule 155.