T.C. M em o . 2 0 1 7 -1 7 1

UNITED STATES TAX COURT
TONY PEDREGON LOPEZ AND ANDREA R. LOPEZ PEDREGON, Pet i ti o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 1 8 4 2 -1 5 , 6 7 94 -1 6
. Fi l edAu gu s t 3 0 , 2 0 1 7
.

To n y Ped reg on Lo p ez an dAn drea R. Lo p ez Ped reg o n , p ro s es e. Nat h an M . Swi n g l ey

an dSam u el A. Nay lo r, fo r res po n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju d ge: In th es e co n s ol i d at edcas es , res p o n d en t d et erm in ed d efi ci en ci es i n p et i ti o n ers ’ Fed eral i n co m e t ax o f $ 2 9 ,1 2 3 an d $ 4 ,7 5 9 an d
accu racy -rel at edp en al ti es o f $ 5 ,8 2 4.6 0 an d $ 9 5 1
. 8 0 fo r 2 0 1 1 an d2 0 1 2 , res p ect i vel y .- 2
-

[* 2 ] Aft er co n ces si o ns , 1 th e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers are: (1 ) en t i t l edt o l o s s d educt i o n s at tri b u t ab l e t o ex p en s es rel at edt o thei r ch i l d’ s p ag ean t act i vi ty ; an d(2 ) l i ab le fo r s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t ies
. 2 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 dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed b y th is referen ce. Pet i t i o n ers are h u s b an dan dwi fe. Th ey

res i d edi n Bro wn sb u rg , In d i an a, wh en th ey fi l edth ei r p et i t i o n . C.P.’ s Pag ean tW i n n i n g s Pet i t i o ners h av e s ev eral ch i l dren , i n cl u d i ng C.P., wh o was b o rn i n 1 9 9 9
. 3 Atap pro xi m at el y

n i n e y ears o f ag e, C.P. b eg anco m p et i n g i n b eau ty p ag ean t s i n fu rt heran ce o f a p erfo rm i n g career. W i th i n each p ag ean t , C.P. en t eredv ari o u s

1 Res p o n den td et erm i n eda cap i t al g ai n i n s t eado f a cap i t al l o s s wi th res p ect t o the s al e o f a ren t al p ro p ert y i n 2 0 1 1 , as d i s cu ss edi n th e b o dy o f t h i s o p i n i o n . Pet i t io n ers h av e co n ced edthi s i s s u e, t h ou g h th ey h av e n o tco nced ed th ei r l i ab i l i ty fo r t h e accu racy -rel at edp en al ty t o th e ex t en ti ti s at tri b ut ab l e t o th e d i s al l o wed cap i t al l o s s d edu ct i on .

2 Un l es s o th erwi s e i n d i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect fo r t h e y ears i n i s su e, an d al l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.

3 Iti s th e p o l i cy

o f t he Co u rtt o refer t o a m i n o r b y h er i n i t i al s . See Ru l e 2 7 (a)(3 ).- 3
-

[* 3 ] co m p et i t i o ns , s u ch as th e “ RedCarp et ”, “ Ph o t og en i c”, an d “ In t erv i ew”
co m p et i t i o ns . Ino rd er fo r C.P. t o p art i ci p at e i n th e p ag ean t s ata co m p et i t i v e l ev el , p et i t i o n ers i n cu rreds ev eral th o u s an dd o l l ars o f ex p en s es fo r trav el , o u t fi t s , 4
an d o ther s i m i lar i t em s . In2 0 11 an d 2 0 1 2 C.P. wo n s ev eral o f t h es e ev en t s an d recei v edcas h p ri zes . Th es e p ri zes were p ai db y ch eck s wri t t eno u t t o C.P., wh i ch were d ep o s i t edi n t o h er co ll eg e s av in g s acco u n t. In2 0 11 h er wi n ni n g s t o t al ed $ 1 ,3 2 5 ; i n 2 0 1 2 , $ 1 ,8 5 0 . In2 0 1 1 p et i t i o n ers ’ p ag ean tex p en s es t o t al ed $ 2 1 ,7 3 2 ; i n 2 0 1 2, $ 1 5 ,4 4 5. Pet i t i o ners h i redFran kBo h an n o n t o p rep are t h ei r Fed eral i nco m e t ax retu rn s fo r 2 0 11 an d 2 0 1 2
. 5 Ino rd er t o p rep are p et i t i o ners ’ retu rn s , M r. Bo h an n o n
s en tth em a t ax o rg an i zer. Wh en p et it i o n ers b ro u gh tM r. Bo h an no n th ei r
o rg an i zer, t h ey

i ncl u d edi n fo rm at i o n s ub st an t i at in g C.P.’ s p ag ean twi n n i n g s an d
ex p en s es . Acco rd i n g t o h i s u n d ers t an d i n g o f In d i an a’ s ch i l dl ab o r l aws , M r. Bo h an n on b el iev edth es e am ou n t s were al lo cab l e t o p et it i o n ers rat h er th ant o C.P. i n h er o wn ri gh t . Thus , fo r 2 0 1 1 an d2 0 1 2 M r. Bo h an n o n p rep aredSch edu l es C

4 Whet h er t h e o u t fi t s were b o n a fi d e b u s i nes s ex p en s es i s n otati s s u e i n th es e cas es .

5 Pet i t i o n ers fi rs tret ai n edM r. Bo han n o n as th ei r t ax retu rn p rep arer i n 2 0 0 8 . As o f t h e d at e o f t ri al , h e h adp rep aredt ax retu rn s fo r 4 9 y ears .- 4
-

[* 4 ] fo r p et i t io n ers ’ t ax retu rn s rep o rt i n g i nco m e an d ex p en s es fro m C.P.’ s p ag ean t co m

p et it i o n s . Cap it al Lo s s In 2 0 1 1 p et i t i o n ers s o l da ren t al p ro pert y th ey o wn edi n M i ch i g an . Th ey p ro v id edM r. Bo h an n on wi th the ap p l i cab l e d ep reci at i o n s ch edu l e fo r t h e p ro p ert y
as wel l as th e s al e ag reem en t . Th e d ep reci at i o n s ch edu le, h o wev er, h adb een p rep aredb y

p et i t i on ers ’ p rev i o u s acco u n tan t s an di ncl u d edan acco u n t i ng m i s t ak e --i ts wap ped th e b as i s o f t h e p ro p ert y i n qu es t i on fo r t h ato f a p ro p ert y wi th a
s i m i l ar ad dres s . M r. Bo h an n o n u s edth i s erro n eo u s b as is t o rep o rtth e s al e o f t h e p ro p erty o n p et i t i o n ers ’ 2 0 1 1 t ax retu rn . As a res u l t , p et i t i o n ers ’ 2 01 1 retu rn refl ect eda cap i t al l o s s o f $ 1 3 9 , 8 3 5 wh en i ts h o u l d h av e s h own a cap i t al g ai n o f $ 3 6 4
. 6 No t ice o f Defi ci en cy OnJ u ne 3 , 2 0 15 , res p o n d en tt i m el y i s s u eda s t atu t o ry

n o t i ce o f d efi ci en cy fo r t h e 2 0 1 1 t ax y ear. Res po nd en td et erm i n eda d efi ci en cy o f $ 2 9 ,1 2 3, d i s al lo wi n g d edu ct i o n s fo r C.P.’ s p ag ean tex pen s es as wel l as fo r t h e cap i t al l o s s .

6 Th e reco rdd o es n o trefl ectth atp et i t i o n ers carri edfo rwardth i s cap i t al l o s s t o 2 0 1 2 . Res po n d en tm ad e n o ad ju s tm en tt o p et i t i o n ers ’ 2 0 1 2 return as a res u l t o f t h e d i sal lo wan ce o f t h e cap i tal l o s s d edu ct i o n thatth ey cl ai m edfo r 2 0 1 1
.- 5
-

[* 5 ] Res po n den tal s o d et erm in edan accu racy -rel at edp en al ty u n d er s ect i o n 6 6 6 2 (a) o f $ 5 , 82 4 .6 0
. OnDecem

b er 1 7, 2 01 5 , res p o n d en tt i m el y i ss u ed a s t atu t o ry n o t i ce o f d efi ci en cy

fo r th e 2 01 2 t ax y ear. Res p on d en td et erm i n eda d efi ci en cy o f $ 4 ,7 5 9 , d en y i n g d educt i o n s fo r C.P.’ s p ag ean t ex p en s es . Res p o n d en tal s o d et erm i n edan
accu racy -rel at edp en al ty

u n d er s ect i o n 6 6 62 (a) o f $ 9 51 .8 0
. Pet i t i o ners t i m el y

p et i t i on edthi s Co u rt , an da t ri al was h el do n Sep t em b er 2 0 , 2 0 1 6
. OPINION I. Bu rd en o f Pro o f As a g en eral ru l e, the Co m m i s s i on er’ s d et erm i nat i o n o f a t ax p ay er’ s l i ab i l i ty i n a n o ti ce o f d efi ci en cy

i s p res u m edco rrect , an dth e t ax pay er b ears th e b urd en o f p ro v in g th atth e d et erm i n at io n i s i n co rrect . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race, an dth e t ax p ay er g en eral l y

b ears th e b u rd en o f p ro v i n g en t i t l em en tt o an y d edu ct i o n- 6
-

[* 6 ] cl ai m ed
. 7 Ru l e 1 42 (a); INDOPCO, In c. v . Co m m i s s io n er, 5 0 3 U.S. 7 9, 8 4 (1 9 9 2); New Co l o n i al Ice Co . v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 4 0 (1 93 4 ). II. Dedu ct i o n s fo r Ch i ld ’ s Pag ean tEx p en s es W e fi rs td eci d e wh et h er p et i t i o ners m ay d edu ctex p en s es p ert ai n in g t o C.P.’ s p ag ean tact i v i ty . Pet i t i o n ers arg u e t h atth ey are en t i t l edt o i n cl u d e o n th ei r retu rn s i n co m e an d d edu ct i o ns rel at edt o C.P.’ s p ag ean t s . Res po n den tco n t en d s th atu n d er s ect i o n 7 3 , p et i t io ners can n o ttreat C.P.’ s p ag ean t -rel at ed i n co m e an d
ex p en d i tu res as th ei r o wn . Fo r t h e fo l l o w i n g reas o ns , we s u s t ai n res p o n den t ’ s d et erm i n at i o n . Sect io n 7 3 (a) req ui res i n cl u s i o n o f “ am o u n t s recei v edi n res p ecto f t h e
s erv i ces o f a ch il d ” i n th e ch i l d ’ s o wng ro s s i n co m e rat h er th an th ato f t h e p aren t s . 8 “ Am o un t s recei v edi n res pect o f t h e s erv i ces o f a ch i l d ” en co m p as s

7 Sec. 7 4 9 1 (a) p ro v i des th ati f, i n an y co u rtp ro ceed i ng , a t ax p ay er i n tro du ces cred i b le ev id en ce wi th res p ectt o an y fact u al i s s ue rel ev an tt o as cert ai n i n g th e l i ab i l i ty

o f t h e t ax p ay er fo r an y

t ax i m po s edb y s ub t i t . A o r B an d m eet s o th er p rereq u i si t es , th e Secret ary s h al l h av e t h e b u rd eno f p ro o f wi th res p ect t o that i s s u e. Hi g bee v . Co m m i s s i o ner, 1 1 6 T.C. 4 3 8 , 4 4 0 -4 4 1 (2 0 0 1 ). Ho wev er, p et i t i o n ers h av e n ei th er cl ai m edn or s h o wnthatth ey s at i sfi edth e requ i rem en t s o f s ec. 7 4 91 (a) t o s h i ftth e b u rd en o f p ro o f t o res p o nd en t . Acco rd i ng l y , p et i t i o n ers b ear t he b u rd en o f p ro of. See Ru l e 1 4 2 (a).

8 Befo re t h e en act m en to f t h e p red eces s or o f s ec. 7 3, i nco m e recei v edi n res p ecto f t h e s erv i ces o f a ch i l dwas rep ort edb y p aren t s wh o h el dri g h t s t o s u ch s erv i ces u n d er l o cal l aw. H.R. Rep t . No
. 7 8 -1 3 6 5 , at2 1 (1 9 44 ), 1 9 4 4 C.B. 8 2 1 , (co n ti n u ed ...)- 7
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[* 7 ] d i rect an di n d i rect p aym en t s fo r s erv i ces . See Al l env . Co m m is si o n er, 5 0 T.C. 4 6 6 , 4 7 6 (1 9 6 8 ) (b o nu s p ai dt o the m o th er o f a m i n o r as an i n du cem en tt o
o b t ai n h i s s erv i ces as a p ro fes s i o n al b as eb al l p l ay er i ncl u d ab l e i n m i n o r’ s g ro s s i n co m e), aff’ d , 4 1 0 F.2 d3 9 8 (3 dCi r. 1 9 69 ). Th i s p ro v is io n o p erat es t o t ax a
m i n o r ch i l do n i nco m e s h e i s d eem edt o h av e earn ed . Fri ts ch l e v . Co m m i s s i o n er, 7 9 T.C. 1 5 2 , 1 5 7 (1 9 8 2 ). To d et erm i n e t he t ru e earn er, we l o o k t o wh o h adth e

“ u l ti m at e d i rect i o n an dco n tro l o v er t h e earn i n g ” o f t h e i n co m e. Verci o v . Co m m i s s i o n er, 7 3 T.C. 1 24 6 , 1 2 5 4 (1 9 80 ); s ee Fri t s ch l e v . Co m m i s si on er, 7 9 T.C. at1 5 8
. Sect io n 7 3 (b ) t reat s al l ex p en d i tu res at tri bu t ab le t o am ou n t s i n cl u dab l e i n th e ch i l d ’ s g ro s s i nco m e s o lel y b y reas on o f s ect i o n 7 3 (a) as p ai do r i n cu rredb y th e ch i l d . Th i s i s th e cas e ev en i f a p aren tm ad e t h e ex p en d i tu re. Sec. 1 .7 3 -1 (b ), In co m e Tax Reg s . Thu s , i f we fi ndth at C.P.’ s p ag ean twi n ni n g s co n s t i tut e

“ am o u n t s recei v edi n res p ecto f t h e s erv i ces o f a ch i l d ”, th en p et i t i o n ers can n o t d eductth ei r p ag ean t -rel at edex p en s es . See s ec. 7 3 (b ). An y d edu ct i o n fo r s u ch
ex p en s es wo u l db el o n g t o C.P.

8 (...co n t in u ed ) 8 7 6 -8 7 7 . Ho wev er, m an y St at es h adv ary i n g l aws an d ex cep ti o n s co n cern i n g p aren t al en t i t l em en t t o the s erv i ces o f a ch i l d . Id . Co n gres s s o ug h tt o creat e u n i fo rm i ty

b y req u i ri n g i n cl u s i o n o f am o u n t s recei vedfo r a ch i ld ’ s s erv i ces i n th e ch i l d ’ s o wng ro s s i n co m e. Id
.- 8
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[* 8 ] Pri ze wi n ni n g s are g en eral l y i n cl u dedi n a t ax p ay er’ s g ro ss i n co m e. Sec. 7 4 (a). In p art i cu l ar, p ri ze wi n n i n g s fro m s at i s fy i n g a co n tes t ’ s t erm s o r req u i rem en t s are i n cl ud ab l e as i n co m e b ecau s e th ey are co n s id ered“p aym en t* * * i n return fo r s erv i ces ren d ered ” reg ard l es s o f wh et h er t h e d o no r d eri v es an
eco n om i c b en efi tfro m

thes e s erv i ces . Ro b ert s o n v . Un i t edSt at es , 3 4 3 U.S. 7 1 1 , 7 1 3 -7 1 4 (1 9 5 2 ). In the p as t , we h av e s p eci fi cal ly treat edp ag ean t-rel at ed
rem u n erat i o n s --ev en th o s e n am edas s ch o l ars h i p s --as co m p en sat i on fo r s erv i ces . See M i s s Ga. Sch ol ars h ip Fu n d , In c. v . Co m m i s s i o ner, 7 2 T.C. 2 6 7 , 2 6 9 -2 71 (1 9 7 9) (h o l d i n g th ata p ag ean t ’ s “ s ch o l ars h i p award ” was co m p en s at i o n b ecau s e i t
was a p aym en tfo r t h e co n t es t an t ’ s ag reem en t t o p erfo rm th e req u i rem en t s o f t h e p ag ean t co n tract ). Th e reco rdrefl ect s t h atth e g ro s s recei p t s rep o rt edo n p et i t i o n ers ’ Sch edu l es C rel at e s o lel y

t o C.P.’ s p ag ean twi n n i n gs . Th es e wi nn i n g s were cl earl y earn edb y C.P. 9 It w as C.P. wh o p erfo rm edi n th e p ag ean t s , an dC.P. was th e d i rect reci p i en t
o f t h e p ag ean twi n n i n g s . See Fri t s ch l e v . Co m m i s si on er, 7 9 T.C. at1 5 6 . Becau s e

9 Pet i t i o n ers arg u e t h atC.P.’ s i n co m e i s n o t earn edi n co m e b ecau s e t h ere i s n o o n g o i n g rel at i o n s hi p b etween C.P. an dthe p ag ean ts an db ecau s e t h e am o u n t s at i s su e were p ri ze wi n n i ng s th atwere n o tco n t i n g en tup o n th e p erfo rm an ce o f s ub s t an t i al fu tu re s erv i ces . Ho wev er, n ei th er o f t hes e fact o rs i s a req u i rem en tfo r “ earn edi n co m e”. See Fri t s ch l e v . Co m m i ss i o ner, 7 9 T.C. 1 5 2 , 1 5 5 -1 57 (1 9 8 2 ); Verci o v . Co m

m i s s i o n er, 7 3 T.C. 1 2 4 6 , 1 2 5 4 (1 9 8 0 ).- 9
-

[* 9 ] p ri ze wi n n i n g s earn edb y C.P. are co m

p en s at i o n fo r h er s erv i ces i n t h e p ag ean t , s ee Ro b ert s on v . Un i tedSt at es , 3 43 U.S. at7 1 3 -7 1 4 , th ey are i ncl u d ab le i n h er g ro s s i n co m e u n d er s ect i o n 7 3 (a). Acco rd i n g l y , o n l y C.P. m ay d edu ct p et i t i o n ers ’ p ag ean t -rel at ed ex p en s es . See s ec. 7 3 (b ). W e th erefo re s us t ai n
res p o n d en t’ s d i s al l o wan ce o f p et i t i on ers ’ Sch edul e C l o s s d edu ct i o n s p ert ai n i n g t o C.P.’ s p ag ean tex p en ses . III. Accu racy -Rel at edPen al t i es Nex t , we ad dres s wh eth er p et i t i o n ers are l i ab le fo r accu racy -rel at ed p en al t i es . Res p o n d en targ u es th at p et i t io n ers are l i ab l e fo r accu racy -rel at ed p en al t i es fo r t ax y ears 2 01 1 an d2 0 1 2 u n d er s ect i o n 6 6 6 2 (a) an d (b )(1 ) an d(2 ) fo r ei th er n eg l i g en ce o r d i s reg ardo f ru les o r reg ul at i o n s o r fo r a s ub s t an t i al
u n d ers t at em en to f i n co m e t ax . 1 0 Pet i ti o n ers arg u e th atth ey are n o tl i ab l e b ecau s e th ey act edwi th reas o n ab l e cau se an di n g o o d fai th
. Pu rs uan tt o s ect i o n 6 6 6 2(a) an d(b )(1 ), a t ax p ay er m ay b e l i ab l e fo r a p en al ty o f 2 0 % o n th e p o rt i o n o f an u n d erp aym en to f t ax at tri b u t ab le t o n eg l i g en ce
o r d i s reg ard o f ru les o r reg u lat io n s . Ho wev er, a t ax pay er i s n o tl i ab l e fo r t h e
accu racy -rel at edp en al ty

u n d er ei ther p ro vi s i o n i f th ere was reas o n ab l e cau s e fo r

1 0 Wh i l e p et i t i o n ers d i d n o t ad dres s th ei r l i ab i li ty fo r t h e accu racy -rel at ed p en al t i es i n th ei r p et i t i o n s , we fi n dth atth i s i ss u e was tri edb y co n sen t . See Ru l e 4 1 (b ).- 1 0 -

[* 1 0 ] th e u n d erp aym en t an dth e t ax p ay er act edi n g oo d fai th
. Sec. 6 6 6 4(c)(1 ); s ec. 1 .6 66 4 -4 (a), In co m e Tax Reg s . Th e t erm “ n eg l i gen ce” i n cl u d es an y fai l u re t o m ak e a reas o nab l e at t em p tt o
co m p l y wi th th e p ro v i s i o n s o f t h e Co d e, an d “ d i s reg ard ” i n cl u d es an y carel es s , reck l es s , o r i n t en t io n al d i s reg ardo f ru l es o r reg u l at i o n s. Sec. 6 6 6 2 (c); s ec. 1 .6 66 2 -3 (b )(1 ) an d(2 ), In co m e Tax Reg s . A d i s reg ardo f ru l es o r reg u l at i o n s i s

“ carel es s ” i f t h e t ax p ay er d o es n o tex erci s e reas o n ab l e d i l ig en ce i n d et erm i n i n g th e co rrect n es s o f a retu rn p o s i t i o n th ati s co n traryt o a ru le o r reg u lat i o n . Sec. 1 .6 66 2 -3 (b )(2 ), In co m e Tax Reg s . A d i s reg ardi s “ reck l es s ” i f t h e t ax p ay er m ak es l i tt l e o r n o effo rtt o d et erm i n e wh et h er a ru l e o r reg ul at i o n ex i s t s , u n d er ci rcu m s t an ces wh i ch d em o n st rat e a s ub s t an t i al d ev i at io n fro m th e s t an d ardo f
co n du ct th ata reas o n ab le p ers o n wo u l do b s erv e. Id . A d i sreg ardi s “ i n t en t i o n al ” i f t h e t ax p ay er kno ws o f t h e ru le o r reg u l at i on th ati s d i s reg ard ed . Id
. Th e Co m m is s i o n er h as th e b u rd en o f p ro duct i o n wi th res p ectt o th e
accu racy -rel at edp en al ty . Sec. 7 4 91 (c). To m eetth i s b u rd en , th e Co m m i s s i o n er
m u stp ro du ce s u ffi ci en t ev i d en ce i nd i cat i n g th ati ti s ap p ro pri at e t o i m p o s e t h e p en al ty . See Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. at4 4 6 . On ce th e Co m m i s s i o n er
m eet s h i s b u rd en o f p ro du ct i on , t ax p ay ers m u s tco m e fo rwardwi th p ers u as i v e
ev i d en ce t h atth e Co m

m i s s i o ner’ s d et erm i n at i o n i s i nco rrect . Ru l e 1 4 2 (a); s ee- 1 1 -

[* 1 1 ] Hi gb ee v . Co m

m i s s i o n er, 1 16 T.C. at4 4 7
. Tax p ay ers m ay m eetth ei r b u rd en b y p ro v i n g th atth ey

act edwi th reas on ab l e cau s e an di n g o o dfai th wi th res p ectt o th e u n derp aym en t. See s ec. 6 6 6 4 (c)(1 ); s ee al s o Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 7 ; s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s. Th e d eci s i o n as t o wh et h er t he t ax p ay ers act edwi th reas on ab l e cau s e an di n g o o dfai th d ep en d s up o n al l th e p ert i nen tfact s an dci rcu m s t an ces . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Gen eral l y , th e m o sti m

p o rt an tfact o r i s the ex t en to f t h e t ax p ay ers ’ effo rtt o as s es s th ei r p ro p er t ax l i ab i li t i es . Hu m p h rey , Farri n g t o n & M cCl ai n , P.C. v
. Co m m i s s i o n er, T.C. M em o . 2 0 1 3 -2 3 ; s ec. 1 .6 6 6 4-4 (b )(1 ), In co m e Tax Reg s . Go o d-fai th rel ian ce o n the ad v i ce o f an i n d ep en den t , co m p et en t p ro fes s i on al --s u ch as an en ro l l edag en t --as t o th e t ax treat m en t o f an i t em m ay
co n st i tu t e reas o n ab l e cau s e. Neo n at o l o g y As s o cs ., P.A. v . Co m

m is s i o n er, 1 1 5 T.C. 4 3 , 9 8 -9 9 (2 00 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 02 ); s ec. 1 .6 6 6 4-4 (b ), In co m e Tax Reg s .; s ee Es t at e o f Ro b i n s o n v . Co m m i s s i o ner, T.C. M em o . 2 0 1 0
- 1 6 8 , s l i p o p . at1 0 -1 1 ; s ee al s o Un i t edSt at es v . Bo y le, 4 6 9 U.S. 2 4 1 , 2 5 0 (1 9 8 5 ). Th i s Co u rth as s t at edthatreas o n ab l e cau s e an dg o o d fai th are p res en t wh ere t h e
reco rdes t ab li s hes b y

a p rep o n d eran ce o f ev id en ce t h at : (1 ) t h e t ax p ay er
reas on ab l y

b el i ev es th atth e p ro fes s i o n al up on wh o m th e rel ian ce i s p l aced i s a
co m p et en tt ax ad v i s er wh o h as s u ffi ci en tex p ert i s e t o ju s t i fy rel i an ce; (2 ) t h e- 1 2 -

[* 1 2 ] t ax p ay er p ro v i d es n eces s ary an d accu rat e i n fo rm at i o n t o th e ad v i s er; an d(3 ) th e t ax p ay er act u al l y rel i es i n g o o dfai th o n t h e ad v i ser’ 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 s s io ner, 1 15 T.C. at9 9
. Res p o n d en ts at i s fi ed h i s b u rd en o f p ro du ct io n wi th res p ectt o n eg l i g en ce o r d i s reg ardo f ru l es o r reg u l at i on s . Pet i t io n ers cl ai m edSch edu l e C l o s s d edu ct i o n s t o wh ich th ey

were n o ten t i t l edas wel l as a cap i t al l o s s d edu ct i on fro m th e s al e o f p ro p erty wh ere t h ere was actual l y a g ai n . Pet i t i o ners , h o wev er, h av e m etth ei r b u rd en o f p ers uas i o n an dd em on s trat ed th atth ey h adreas o n ab le cau s e an d act ed i n g o o dfai th wi th res p ectt o th e p ag ean t
ex p en s e d educt i o ns an dth e cap i t al l o s s d edu ct i o n . Wh i l e p et i ti o n ers h av e s o m e b us i n es s ex p eri en ce, t h ey are n o t s o ph i s t i cat ed i n t ax m at t ers . Pet i ti o n ers rel i edo n M r. Bo h an n o n , an en ro l l edag en t wi th o v er 4 0 y ears o f retu rn p rep arat i o n ex p eri en ce, fo r m an y y ears wi th ou t i n ci d en tan d
co n ti n u edt o tru sth i s ex p l an at i o n s an d ad vi ce. Acco rd i ng l y , p et i t i o n ers
es t ab l i s h edth atth ey

reas o n ab ly

b el i ev edth atM r. Bo h an no n was a co m p et en tt ax ad v is er. M o reo v er, p et i t i o n ers p ro v i d edM r. Bo h an n o n wi th al l rel ev an t i n fo rm at i o n reg ard i n g C.P.’ s p ag ean t s . Th ey al s o p ro v i d edh i m

wi th wh atth ey

b el i ev edwas th e n eces s ary

fi n an ci al i n fo rm at i o n ab o u tth e 2 01 1 s al e o f t h ei r ren t al p ro p ert y i n- 1 3 -

[* 1 3 ] M i ch i gan . Wh il e t h e i n fo rm at i o n p et i t i o n ers g av e M r. Bo h an no n was
erro neo u s , th e erro rs were at tri b u t ab l e t o p et i t i o n ers ’ fo rm er acco un t an t an dwo ul d
n o th av e b een read il y

ap p aren tt o p et i ti o n ers . W e t h erefo re fi n dth atp et i t i o n ers p ro v id edM r. Bo h an n on wi th ad equ at e i nfo rm at i o n i n g o o dfai th an d wi th o u t kn o wl ed g e o f i t s erro rs . W e al s o fi n d p et i t i o n ers rel i edo n M r. Bo h an n o n i n g o odfai th. Pet it i o n ers h av e n ev er h adan y fo rm al trai n i n g i n acco u nt i n g o r t ax at i on an dh av e al way s rel i edo n th e g ui d an ce o f ex p ert s i n th es e areas . Th ei r ret en ti o n o f M r. Bo h an n o n i s i nd i cat i v e o f a g o o d -fai th effo rtt o as ses s th ei r p ro p er t ax l i ab i l i ty . Acco rd i n g ly , we h o l dth atp et i t i o n ers are n o tl i ab l e fo r an y accu racy -rel at ed p en al t i es fo r t h e y ears i n i s s u e. In reach i n g al l o f o ur h o l d i n g s h erei n , we h av e co n s i d eredal l arg u m en t s
m ad e b y th e p art i es , an dt o t h e ex t en tn o tm en t i o n edab o ve, we fi n d them t o b e i rrel ev an to r wi th o u tm eri t . Deci s i o n s wi l l b e en t eredfo r
res p o nd en t as t o the d efi ci en ci es an dfo r p et i t i o ners as t o th e accu racy -rel at ed p en al ti es u n d er s ect i o n 6 6 6 2 (a).