T.C. Memo. 2007-226

UNITED STATES TAX COURT

ALEX AND TONJA ORIA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 246-05. Filed August 14, 2007.

Steve M. Williard, for petitioners.

Richard T. Cummings, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: Respondent has determined deficiencies of

$191,651 and $550,914 in petitioners’ 1999 and 2000 Federal

income taxes, respectively, and accuracy-related penalties of

$38,330.20 and $110,182.80 for those years, respectively. The

parties have filed a stipulation of settled issues (the 
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stipulation), which we accept. Among other things, the

stipulation disposes of the deficiency in tax and accuracyrelated penalty for 1999. The stipulation also provides that

petitioners’ taxable income, as reported on their 2000 Form 1040,

U.S. Individual Income Tax Return (the Form 1040), is increased

by $313,804. At the trial, petitioners conceded that a $70,000

portion of their reported bad debt deduction of $185,000 for 2000

was not allowable. Respondent agreed that petitioners would be

allowed a bad debt deduction of $120,000 (which amount,

intentionally, is $5,000 greater than the difference between

$185,000 and $70,000). Petitioner further agreed that the

underpayment in tax resulting from the disallowed portion of the

deduction ($65,000) would be subject to the accuracy-related

penalty. We accept that concession and those agreements. That

leaves for our disposition only the question of whether the

accuracy-related penalty applies to any or all of the

underpayment in tax resulting from the stipulation that

petitioners underreported their 2000 taxable income by $313,804.

All section references are to the Internal Revenue Code of

1986, as amended and in effect for 2000, and all Rule references

are to the Tax Court Rules of Practice and Procedure.
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1 In part, Rule 151 provides as follows:

RULE 151. BRIEFS

* * * * * * *

(e) Form and Content: * * *

* * * * * * *

(3) * * * In an answering or reply brief, the

party shall set forth any objections, together with the

reasons therefor, to any proposed findings of any other

party, showing the numbers of the statements to which

the objections are directed; in addition, the party may

set forth alternative proposed findings of fact.

Petitioners have filed an answering brief, but they

have failed therein to set forth objections to the proposed

findings of fact made by respondent. Accordingly, we must

conclude that petitioners have conceded respondent’s proposed

findings of fact as correct except to the extent that respondent

has failed to direct us to any evidence in the record supporting

those proposed findings or those findings are clearly

inconsistent with either evidence in the record or petitioners’

proposed findings of fact. See, e.g., Jonson v. Commissioner,

118 T.C. 106, 108 n.4 (2002), affd. 353 F.3d 1181 (10th Cir.

2003).

FINDINGS OF FACT1

Some facts are stipulated and are so found. The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.

Residence

At the time the petition was filed, petitioners resided in

Houston, Texas.

Medico Medical Services, Inc.

In 2000, petitioner husband (Mr. Oria) was the president and

sole shareholder of Medico Medical Services, Inc. (Medico). He

signed all of Medico’s checks issued in 2000 and generally
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performed all duties connected with its business. Mr. Oria is a

college graduate, with a degree in business.

Robert A. Loeser

Robert A. Loeser (Mr. Loeser) is a certified public

accountant with extensive experience in preparing tax returns. 

In December 1999, petitioners hired him to resolve an employment

tax problem and to prepare tax returns for themselves and for

Medico. Mr. Loeser set up Medico’s general ledger (the general

ledger). He, or a member of his staff, made entries in the

general ledger for 2000. Mr. Loeser prepared the Form 1040; he

also prepared the Form W-2, Wage and Tax Statement, issued by

Medico to Mr. Oria for 2000, Medico’s 2000 Form 1120, U.S.

Corporation Income Tax Return, and Medico’s quarterly employment

tax returns for 2000.

The Form 1040

The Form 1040 was erroneous, and taxable income as reported

thereon is to be increased on account of the following items:

Checks received from Medico

 not reported on Form 1040 $248,524

Personal charges on American

 Express Card paid by Medico 32,580

Deposits of Medico receipts,

 net of payments on Medico’s

 behalf, in personal bank

 account 27,550

Golf club dues and charges

 paid by Medico 5,150

 Total 313,804
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The $248,524 Omission

Medico made salary payments to Mr. Oria by check. Mr. Oria

signed those checks for Medico. Mr. Loeser advised Mr. Oria

that, whenever, on Medico’s behalf, he wrote a salary check to

himself, he should write a second check on Medico’s behalf to

cover applicable withholding and employment taxes.

Mr. Loeser or a member of his staff would record salary

payments to Mr. Oria in the general ledger in one of two ways.

Generally, if a corresponding tax deposit had been made, the

payment would be recorded as a salary expense (i.e., debited to

an account labeled “Officer Salaries”). If Medico lacked

sufficient funds both to pay Mr. Oria’s salary and to make the

necessary tax deposit, the payment would be recorded as an amount

due from Mr. Oria (i.e., debited to an account labeled “Due from

Officer” (sometimes, Mr. Oria’s drawing account)). The amounts

debited to Mr. Oria’s drawing account were not true loans, but

were only classified as due from him to give cover to Medico’s

failure to make adequate tax deposits. The expectation was that,

when sufficient funds became available, and Medico made the

delinquent tax deposits, the improper classification would be

corrected; i.e., the Due from Officer account would be credited,

and the Officer Salaries Account would be debited, to properly

reflect all of the payments to Mr. Oria as salary. No such

corrections were made, however. 

Bayliwix, Inc. (Bayliwix), is a corporation owned by Mr.

Loeser. The following are unincorporated businesses or trade
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names owned and used by Mr. Loeser (together with Bayliwix, Mr.

Loeser’s affiliates): Reeves Consulting, Zarzana Consulting, and

Marketplace on the Net.

The general ledger records numerous transactions between

Medico and Mr. Loeser or one of his affiliates during 2000. The

following check and account information appears with respect to

one such transaction, involving Bayliwix, Inc. A copy of the

face of Medico check No. 1221, dated July 14, 2000, payable to

Bayliwix, in the amount of $15,000, and signed by Mr. Oria, is

attached to the pages of the ledger for the quarter ending

September 30, 2000. Account No. 7011, Cost of Labor, records a

payment on July 14, 2000, by Medico check No. 1221, to Bayliwix,

in the amount of $90,000 ($75,000 greater than the amount shown

on the face of Medico check No. 1221). Account No. 1032, Mr.

Oria’s drawing account, is credited (reduced) on July 14, 2000,

in the amount of $75,000, on account of the payment by check No.

1221 to Bayliwix. At least one-half dozen more transactions

between Medico and Mr. Loeser or one of his affiliates during

2000 share the pattern of an expense being recorded in an amount

greater than the amount appearing on the associated Medico check,

with the difference being credited to Mr. Oria’s drawing account.

Mr. Oria did not make payments to Mr. Loeser or his

affiliates during 2000 corresponding to the amounts credited to

Mr. Oria’s drawing account during that year. Those credits,

however, reduced the yearend balance of Mr. Oria’s drawing

account, which reduced the amount Mr. Loeser calculated with
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reference to that account as salary paid to Mr. Oria during 2000. 

The Form W-2 Medico issued to Mr. Oria for 2000 reported

that Mr. Oria had received wage or salary income of $543,600 in

2000. Mr. Oria reported that amount on the Form 1040. Both the

Forms W-2 and 1040 understated Mr. Oria’s wage or salary income

from checks issued to him by Medico in the amount of $248,524.

Mr. Loeser met or spoke with Mr. Oria on numerous occasions

and attempted to explain Medico’s tax returns and general ledger

to him, but Mr. Oria was not interested in Mr. Loeser’s

explanations, regarding them as “mumbo jumbo numbers”, and he

made little or no attempt to understand them. In response to a

question from his attorney as to whether he questioned Mr.

Loeser’s plan that Medico would pay Mr. Loeser money and it would

save Medico taxes, he answered:

Well, no. I believed him for several reasons. My

best friend told me that it was working fine for him. 

* * * [Mr. Loeser is] an accountant; I’m not. And,

third, in all honesty, I thought it was a rite of * * *

[passage]. Here I am now making seven figures, and you

always hear guys that make that kind of money, you got

all kinds of these loopholes that you can do. So I

said: Sure, it makes sense to me; what have we got to

do.

His attorney then asked him: “What did he tell you you had to

do?” Mr. Oria answered:

Well, just like I said. I mean, he would tell me

I got to pay money to his entities, and we would sit

down once a month, once a quarter –- I’m not sure –-

and he would do this math. Okay, Alex; you’ve already

paid yourself 100 grand this month. By paying –- your

normal tax burden that would be 40 grand. By paying

Bayliwix or one of those entities that he has 20-, you

just –- and then I would lose him there, and, you know,

it looked like I was saving money, because I was paying
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2 Respondent concedes any basis for a sec. 6662 penalty

other than negligence.

less than the 40 percent or so that I was supposed to

be paying.

The $32,580 Omission

During 2000, Mr. Oria failed to report $32,580 of personal

expenses charged on Medico’s American Express card and paid by

Medico.

The $27,550 Omission

During 2000, Mr. Oria deposited receipts of Medico’s

totaling $194,888.57 into his personal bank account. Those

deposits were not entered in the general ledger and were not

reported on Medico’s 2000 Federal income tax return. Mr. Oria

paid certain expenses of Medico’s from his personal bank account;

the excess of deposits made over expenses paid during 2000 is

$27,550. Petitioners did not provide personal bank account

records to Mr. Loeser.

The $5,150 Omission

During 2000, Mr. Oria failed to report $5,150 of golf club

dues and other personal expenses paid by Medico.

OPINION

Section 6662 imposes an accuracy-related penalty in the

amount of 20 percent of the portion of any underpayment

attributable to, among other things, negligence.2 Sec. 6662(a),

and (b)(1). Negligence has been defined as the failure to

exercise the due care of a reasonable and ordinarily prudent

person under like circumstances. Nis Family Trust v.
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Commissioner, 115 T.C. 523, 542 (2000). Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws or to exercise ordinary

and reasonable care in the preparation of a tax return. Sec.

1.6662-3(b)(1), Income Tax Regs.

The Commissioner bears the burden of production with respect

to the accuracy-related penalty. Sec. 7491(c). In order to meet

that burden, the Commissioner must produce sufficient evidence

that it is appropriate to impose the penalty. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). We may take a taxpayer’s

concession into account in determining whether the Commissioner

has carried his burden. See, e.g., Rogers v. Commissioner, T.C.

Memo. 2005-248. Petitioners have conceded that they understated

their taxable income on account of: (1) erroneous credits to Mr.

Oria’s drawing account resulting from fictitious payments to Mr.

Loeser or one of his affiliates, (2) Mr. Oria’s personal expenses

charged on Medico’s American Express card, (3) Mr. Oria

depositing Medico’s receipts into his personal account, and (4)

Medico’s payment of Mr. Oria’s golf club and other personal

expenses. Petitioners’ concessions are sufficient for us to

conclude that respondent has carried his burden. Mr. Oria signed

all of Medico’s checks issued in 2000, and he generally performed

all duties connected with its business. Given Mr. Oria’s

business degree, his experience in business, and his knowledge of

both Medico’s and his own affairs, petitioners’ tax treatment of

the conceded items is not plausible. Mr. Oria failed to use the
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due care of a reasonable and ordinarily prudent person under like

circumstances to insure that his own compensation from Medico was

properly accounted for and reported.

The accuracy-related penalty does not apply to any part of

an underpayment of tax if it is shown the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1). The

determination of whether a taxpayer acted in good faith is made

on a case-by-case basis, taking into account all the pertinent

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. 

Generally, the most important factor is the extent of the

taxpayer’s effort to assess his proper tax liability. Id. The

taxpayer bears the burden of proof that he had reasonable cause

and acted in good faith with respect to the underpayment. Higbee

v. Commissioner, supra at 447.

Petitioners defend against the accuracy-related penalty on

the ground that they acted with reasonable cause and in good

faith. They argue that the penalty should not apply because they

relied on the advice of Mr. Loeser, a certified public accountant

with extensive experience in preparing tax returns.

The general rule is that a taxpayer has a duty to file a

complete and accurate tax return and cannot avoid that duty by

placing responsibility with an agent. United States v. Boyle,

469 U.S. 241, 252 (1985); Metra Chem Corp. v. Commissioner, 88

T.C. 654, 662 (1987). In limited situations, the good faith

reliance on the advice of an independent, competent professional

in the preparation of the tax return can satisfy the reasonable
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cause and good faith exception. United States v. Boyle, supra at

250-251; Weis v. Commissioner, 94 T.C. 473, 487 (1990). However,

reliance on the advice of a professional tax adviser does not

necessarily demonstrate reasonable cause and good faith. Sec.

1.6664-4(b)(1), Income Tax Regs. All facts and circumstances

must be taken into account. Sec. 1.6664-4(c)(1), Income Tax

Regs. The advice must be based upon all pertinent facts and the

applicable law. Sec. 1.6664-4(c)(1)(i), Income Tax Regs. The

advice must not be based on unreasonable factual or legal

assumptions. Sec. 1.6664-4(c)(1)(ii), Income Tax Regs. The

advice cannot be based on an assumption that the taxpayer knows,

or has reason to know, is unlikely to be true. Id.

At the close of the trial of this case, the Court instructed

petitioners to address on brief the particular advice from Mr.

Loeser on which they were relying to show reasonable cause and

good faith with respect to each of the conceded items of

underreported taxable income. In their briefs, petitioners

address only the transaction involving the fictitious payments to

Mr. Loeser or one of his affiliates and resulting in the

erroneous credits to Mr. Oria’s drawing account. We assume,

therefore, that they concede their reasonable cause and good

faith defense with respect to the remaining conceded items of

underreported taxable income. Mendes v. Commissioner, 121 T.C.

308, 312-313 (2003) (“If an argument is not pursued on brief, we

may conclude that it has been abandoned.”).
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Petitioners concede that they underreported their 2000

taxable income in the amount of $248,524 by failing to report the

total of the checks Mr. Oria received from Medico in that year. 

They claim that they did so on the advice of Mr. Loeser. They do

not claim that Mr. Oria was not aware of the total of salary

checks that, during 2000, he had signed on behalf of, and

received from, Medico. They claim that they relied on Mr. Loeser

to prepare a correct income tax return for them. Mr. Oria was

aware that Medico was participating in a plan designed by Mr.

Loeser under which Medico was paying Mr. Loeser money so that,

Mr. Loeser claimed, Mr. Oria could save on taxes. A reasonably

prudent person would not rely on an adviser having an interest in

the subject of the advice. Neonatology Associates, P.A. v.

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

2002). Moreover, Mr. Oria made no attempt to understand the

transactions Medico was engaging in to implement Mr. Loeser’s

plan. The detail of those transactions was spelled out in

Medico’s tax returns and the general ledger, yet Mr. Oria was

uninterested in Mr. Loeser’s explanation of those documents,

regarding their contents as “mumbo jumbo numbers”. The

assumption underlying the erroneous credits posted to his drawing

account was either that he had paid Mr. Loeser or one of his

affiliates directly on Medico’s behalf or that he had reimbursed

Medico, which had paid Mr. Loeser or one of his affiliates. Had

he paid attention to Mr. Loeser’s explanations, Mr. Oria would

have realized that the factual premises relied on by Mr. Loeser
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were incorrect, since he had neither paid Mr. Loeser or one of

his affiliates directly nor had he reimbursed Medico. A taxpayer

cannot stick his head in the sand while an adviser explains the

basis of his advice and pop it out only to hear the favorable

conclusion. Considering all the facts and circumstances, we

conclude, and find, that petitioners did not act with reasonable

cause and in good faith in relying on Mr. Loeser to prepare a

correct income tax return for them. The underpayment in tax

attributable to the $248,524 in checks received from Medico and

not reported on the Form 1040 is due to negligence, and there is

not reasonable cause, nor did petitioners act in good faith, with

respect to that portion of the underpayment.

We sustain the accuracy-related penalty determined by

respondent with respect to petitioners’ underpayment of tax for

2000.

Decision will be entered

under Rule 155.