T.C. Memo. 2007-347

UNITED STATES TAX COURT

JUAN AND ESTHER RAMIREZ, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12141-06. Filed November 26, 2007.

Juan and Esther Ramirez, pro se.

Michael W. Berwind, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies and

penalties with respect to petitioners’ Federal income tax as

follows:
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 Penalty

Year Deficiency I.R.C. sec. 6662

2002 $58,816 $11,763.20

2003 95,217 19,043.40

2004 87,442 17,488.40

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue.

After concessions by the parties, the sole issue for

decision is whether petitioners are liable for the accuracyrelated penalties determined by respondent pursuant to section

6662 for substantial understatements of their Federal tax

liability for the years in issue. 

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. 

Petitioners resided in California at the time they filed their

petition. For purposes of trial only, this case was consolidated

with a related worker classification case at docket No. 12139-06.

The amounts of total tax liability that petitioners reported

on their income tax returns for the years in issue and the

deficiencies determined by respondent, which amounts include

disallowed credits, for those years are as follows:

Year Tax on return Corrected tax Understatement

 

2002 $4,499 $61,219* $58,816

2003 5,769 100,326* 95,217

2004 11,566 99,008 87,442

* Includes credits disallowed by respondent for this year. 
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Petitioners have conceded the deficiencies in tax as determined

by respondent. Petitioners understated gross receipts on their

Schedule C, Profit or Loss From Business, for all the years in

issue. Petitioners have conceded that they understated gross

receipts by $267,273 for 2003, which amount was nearly half of

the actual gross receipts in that year. 

OPINION

Under section 6662, a taxpayer may be liable for a penalty

of 20 percent on the portion of an underpayment of tax

attributable to a substantial understatement of tax. Sec.

6662(a). The term “substantial understatement” is defined as the

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

return for the taxable year or $5,000. Sec. 6662(d). However,

the accuracy-related penalty is not imposed with respect to any

portion of the understatement as to which the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1); Higbee v.

Commissioner, 116 T.C. 438, 448-449 (2001). The decision as to

whether the taxpayer acted with reasonable cause and in good

faith depends upon all the pertinent facts and circumstances. 

Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant factors include

the taxpayer’s efforts to assess his proper tax liability,

including the taxpayer’s reasonable and good faith reliance on

the advice of a tax professional. See id.
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The amounts required to be reported by petitioners on their

income tax returns for the years in issue and the understatements

determined by respondent for those years are set forth in our

findings. The amount of the understatement for each of the years

in issue is more than 10 percent of the tax required to be shown

and greater than $5,000, which meets the section 6662(d)

definition of “substantial understatement”. Thus, petitioners

substantially understated their income for those years, and

respondent’s burden of production under section 7491(c) has been

met.

Petitioner Juan Ramirez (petitioner) argued at trial that he

was not aware that petitioners’ income tax liability was

substantially understated on their returns for the years in

issue, because he simply turned over all records to his

accountant and paid what she told him to pay. The return

preparer was not called as a witness at trial. Even if

petitioners did not review their returns for the years in issue

and relied blindly on the calculations of petitioner’s

accountant, such course of action is not reasonable, especially

in light of the substantial amounts of petitioner’s gross

receipts in those years, petitioner’s business experience, and

the large discrepancy between the tax liability reported and the

tax liability actually owed. Petitioners have not met their

burden of proving that they acted with reasonable cause and in
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good faith with regard to their substantial understatements of

tax.

To reflect the foregoing,

Decision will be entered

for respondent.