TAX COURT OPINION

Case: Seymour & Phyllis C. Bronson
Docket Number: 11377-00
Judge: Dinan
Opinion Type: memo
Filed: 10/09/2002
Pages: 16

SWIC STAT. h5 T. J DGE T. C. Memo. 2002-260 UNITED STATES TAX COURT SEYMOUR BRONSON AND PHYLLIS C. BRONSON, ET AL.,¹ Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 11377-00, 11378-00, Filed October 9, 2002. 11383-00. E. Martin Davidoff, for petitioners. Rodney J. Bartlett and Timothy S. Sinnott, for respondent. MEMORANDUM OPINION DINAN, Special Trial Judge: In separate notices of deficiency, respondent determined that petitioners are liable for the following additions to tax for the respective taxable years: ¹Cases of the following petitioners are consolidated herewith: Donald K. Gordon-Wylie and Frances T. Gordon-Wylie, docket No. 11378-00; and James R. Garrity and Sandra T. Garrity, docket No. 11383-00. SEMED _0CT 9 2002 - 2 - Docket .No. 11377-00 11378-00 11383-00 Taxable Year Ending Feb. 29, 1984 Dec. 31, 1983 Dec. 31, 1983 Additions to Tax Sec. 6653(a) (1) Sec. 6653(a) (2) $186 256 184 * * * * 50% of the interest due on deficiencies of $3,712, $5,117, and $3,672, respectively. Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue. The issue for decision is whether petitioners are liable for each of the additions to tax determined by respondent.2 Background Some of the facts have been stipulated and are so found. The stipulations of fact and those attached exhibits which were admitted into evidence are incorporated herein by this reference. On the date the petitions were filed in these cases, petitioners all resided in New Jersey. Petitioners each invested in a venture known as Arid Land Research Partners ("Arid Land" or "the partnership") in December 1983. They all became involved with the partnership through Paul Trimboli, an accountant and financial planner. Prior to the time (2) the notice "is invalid due to the fact that 2In each of facts particular to petitioners' case; and (3) the petitions, petitioners argued that notice of deficiency was issued "beyond the Statute of Limitations"; the Commissioner failed to make a determination" after an examination of Commissioner failed to allow petitioners "their appeal .rights within the Internal Revenue Service". Petitioners concede the first issue. Petitioners did not address the remaining issues in their briefs, and we therefore consider them to have been abandoned and we need not address them here. (1) the the period in issue, Mr. Trimboli~had worked at the public accounting firm.Bugni, LaBanca & Paduano for approximately 7 years, doing. primarily tax work and some auditing work. In 1983, he started a business on his own as a certified public accountant and financial planner. The education.Mr. Trimboli had completed at that time¬-a bachelor's degree in accóunting and the bulk of the courses required to becóme a certified financial planner through the College of Financial Planning--included courses in Federal and State täxation. However, MrL Trimboli had.no.experience as a financial·planner prior to.starting his own business in 1983. Mr. Trimboli learned of jojoba investments in early 1983 through a financial planning association to which he belonged. In June 1983 and again in September 1983, Mr. Trimboli traveled to California to investigate the partnership as a potential . investment. opportunity. He traveled to Blythe, California, and to Bakersfield, California, where there.were plantations on which jojoba was already being grown. He also visited a research facility located at and operated~ for the use of the University of California at Riversidé which was involved in the growing of jojoba. On the first trip, Mr. Trimboli was accompanied by . Robert Cole--who .would become the general partner of the partnership--and on the second trip he was accompanied by Mr. Cole and"three of Mr. Trimboli's own colleagues. On these trips, I - Mr. Trimboli also met with Eugene Pace, who was the president of - 10 - the Bronsons' tax return for thé taxable year in issue. Ms. DiTommaso does not specifically recall preparing the return in question.. Howéver, the procedure which she would have followed at the time wäs to use the Schedule K-1 provided and to rely upon the information on the schedule because nothing looked "odd or out of the ordinary". Following the entry of the decision concerning the partnership, discussed above, respondent adjusted 'the Bronsons' return by disallowing their claimed.share of the partnership loss, $17,369, and making a computational adjustment to their itemized deductions. In the statutory notice of deficiency which provides the basis for our jurisdiction.in this.case, respondent determined that the Bronsons are liable for additions to tax under section 6653(a)(1) and (2) in the respective amounts of $186 and 50 percent of the interest due on a $3,712 deficiency. Prior to issuing the notice of deficiency, respondent did not make inquiries of the Bronsons concerning the proposed adjustments, nor did respondent provide them with an opportunity for an administrative appeal. The Gordon-Wylies Petitioner Donald K. Gordon-Wylie was a- sales account manager at Digital Equipment Corporation during 1983. He possesses an associate's degree and has no academic background in accounting, finance, tax, or economics. Petitioner Frances T. - 11 - Gordon-Wylie worked as a receptionist and clerk at Bugni, LaBanca & Paduano during 1983. Both of the Gordon-Wylies had limited investing experience. Mrs. Gordon-Wylie met Mr. Trimboli several years prior to 1983 while working at Bugni, LaBanca & Paduano. Mr. Gordon-Wylie was introduced to Mr. Trimboli in 1983, when Mr. Trimboli began preparing the Gordon-Wylies' tax returns as well as assisting • them with financial planning. In December 1983, the Gordon- Wylies purchased six units in Arid Land through Mr. Trimboli for a total of $6,600 in cash and a promissory note of $9,900. The Gordon-Wylies filed a joint Federal income tax return for the taxable year 1983. On this return, they reported the following amounts of income and loss:4 income Wages Interest Dividends Capital Rental Subtotal Arid Land loss Total income loss loss $63,673 276 978 (1,153) (2,943) 60,831 (14,888) 45,943 Mr. Trimboli prepared the Gordon-Wylies' return for taxable year 1983. Following the entry of the decision concerning the partnership, discussed above, respondent adjusted thé Gordon- Wylies' return by disallowing their claimed share of the . partnership loss, $14,888. In the statutory notice of deficiency 4See supra note 3. - 12 - which provides the basis for our jurisdiction in this case, respondent determined that the Gordon-Wylies are liable for additions to tax under section 6653(a)(1) and (2) in the respective amounts of $256 and 50 percent of the interest due on a $5,117 deficiency. Prior to issuing the notice of deficiency, respondent did not make inquiries of the Gordon-Wylies concerning the proposed adjustments, nor did respondent provide them with an opportunity for an administrative appeal. The Garritys During 1983, petitioners James R. Garrity and Sandra T. Garrity assisted in operating a family-run Exxon Service Center. Mr. Garrity has a bachelor's degree in business and has taken basic courses in taxes and economics. Mrs. Garrity has a high school education and has no academic background in taxes, economics, or finance. Mr. Trimboli had been assisting the Garritys and their family with their personal and corporate tax returns for several years prior to 1983. The Garritys knew that Mr. Trimboli would • likely receive a commission for selling them an interest in Arid Land. In December 1983, the Garritys purchased five units in Arid Land through Mr. Trimboli for a total of $5,500 in cash and a promissory note of $8,250. - 13 - The Garritys filed a joint Federal income tax return for the taxable year 1983. On this return, they reported the following amounts of income and loss:5 income Wages Interest Subtotal Arid Land loss Total income $46,158 1,015 47,173 (12,407) 34,-766 Mr. Trimboli prepared the Garritys' return for taxable year 1983. Following the entry of the decision concerning the partnership, discussed above, respondent adjusted the Garritys' return by disallowing their claimed share of the partnership loss, $12,407. In the statutory notice of deficiency which provides the basis for our jurisdiction in this case, respondent determined that the Garritys are liable for additions to tax under section 6653(a)(1) and (2) in the respective amounts of $184 and 50 percent of the interest due on a $3,672 deficiency. Prior to issuing the notice of deficiency, respondent did not make inquiries of the Garritys concerning the proposed adjustments, nor did respondent provide them with an opportunity for an administrative appeal. Discussion Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment of tax if any part of the SSee supra note 3. underpayment is attributable to negligence or intentional disregard of rules or regulations. Section 6653(a)(2) provides for a further addition to tax equal to 50 percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations. Negligence is defined to include "any failure to reasonably comply with the Tax Code, including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances." Merino v. Commissioner, 196 F.3d 147, 154 (3d Cir. 1999) (quoting Heasley v. Commissioner, 902 F.2d 380, 383 (5th Cir. 1990)), affg. T.C. Memo. 1997-385. Petitioners' primary argument is that they were not negligent because they relied on advice from Mr. Trimboli and, in the case of the Bronsons, Ms. DiTommaso. Reasonable reliance on professional advice may be a defense to the negligence additions . to tax. United States v. Boyle, 469 U.S. 241, 250-251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. on another issue 501 U.S. 868 (1991). The advice must be from competent and independent parties, not from the promoters of the investment. LaVerne v. Commissioner, 94 T.C. 637, 652 (1990), affd. without published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991), affd. without published opinion 956 F.2d 274 (9th Cir. 1992); Rybak v. Commissioner, 91 T.C. 524, 565 (1988). - 15 - Petitioners analogize their cases to Anderson v. Commissioner, 62 F.3d 1266, 1271 (10th Cir. 1995), affg. T.C. Memo. 1993-607. In Anderson, the taxpayer relied on both an investment adviser and an accountant in making his investment. The Court of Appeals, although it affirmed the decision of the Tax Court that the taxpayers were liable for additions to tax for negligence, found that reliance on the investment adviser, who • received a commission for selling the investment to the taxpayer, was reasonable under the circumstances of the case. Cf., e.g., Carmena v. Commissioner, T.C. Memo. 2001-177 (financial adviser receiving commissions for sale of investments had inherent conflict of interest in advice given to investors). However, the Court of Appeals stressed that the investment adviser--an independent insurance agent and registered securities dealer--was a good friend of the taxpayer and was not affiliated with the investment the taxpayers entered into. Anderson v. Commissioner, supra at 1271. The present cases are distinguishable from Anderson in two important respects. First, in the cases at hand, Mr. Trimboli was involved with principals of the investment prior to the creation of the partnership. In particular, he was in contact with Mr. Cole, who was to become the general partner of Arid Land, and with Mr. Pace, who was to become the president of the research and development contractor. Although petitioners argue - 16 - that Mr. Trimboli was an outsider who coincidentally prepared the partnership's return and the Schedules K-1, we find that Mr. Trimboli's relationship with the partnership and its principals makes him more than a.disinterested commission-based salesman, as was the case in Anderson. In light of his relationship to Arid Land, Mr. Trimboli cannot be considered to be an independent adviser. Second, the investment adviser in Anderson was a good friend of the taxpayer. Petitioners' purely professional relationships with Mr. Trimboli, spanning no more than several years, are not analogous to the close friendship between taxpayer and adviser in Anderson. See also Dyckman v. Commissioner, T.C. Memo. 1999-79 (taxpayers reasonably relied on an adviser who was a close personal friend); Reile v. Commissioner, T.C. Memo. 1992-488 (taxpayers reasonably relied on advice from an adviser who was an acquaintance and fellow "temple recommend holder"). Furthermore, petitioners' professional dealings with Mr. Trimboli were only in the context of an accountant-client relationship (or that of a coworker, as was the case with Mrs. Gordon-Wylie). No petitioner could have had prior dealings with Mr. Trimboli as a financial planner because he had no experience in the field prior to 1983. Cf. Wright v. Commissioner, T.C. Memo. 1994-288 (taxpa'yers reasonably relied upon an individual who was recommended to them as a financial adviser, who had a strong presence in the - 17 - community as such, and who misled the taxpayers concerning the propriety of an investment). Thus, the relationships between petitioners and Mr. Trimboli were not close enough or prolonged enough--either personally or professionally--to merit special consideration in the level of due care required by petitioners in these cases. With respect to his role as tax adviser,6 Mr. Trimboli largely relied on the opinion letter addressed to Arid Land's general partner, Mr. Cole. There is little to indicate that Mr. Trimboli researched the issues himself thoroughly enough to come to any independent conclusions concerning the propriety of the deductions. We find that Mr. Trimboli's reliance on the opinion letter further supports our conclusion that Mr. Tri-mboli did not render independent, objective advice concerning the propriety of the partnership's position on tax issues. Thus, we do not accept petitioners' assertion that Mr. Trimboli's reliance on the opinion letter should itself insulate petitioners from the negligence additions to tax. Because Mr. Trimboli was not an independent adviser, petitioners' reliance on any advice from him was not reasonable. Bello v. Commissioner, T.C. Memo. 2001-56 (reliance on advice 6We assume for the sake of argument that petitioners approached Mr. Trimboli There is no evidence in the record that any petitioner did more than rely on Mr. Trimboli's representation that Arid Land was a good financial investment. for substantive tax advice. - 18 - from an accountant concerning an investment was unreasonable where the accountant had been retained by the investment promoter); LaVerne v. Commissioner, suora; Rybak v. Commissioner, supra. Petitioners assert that the standard set forth by the Fifth Circuit Court of Appeals in Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408, should be applicable in this case. In Heasley, the court found that the taxpayers-- who were moderate-income, blue-collar investors with little education or prior investment experience--were to be held to a lower standard of due care when evaluating whether they were negligent in making an investment. The court found that the taxpayers, the Heasleys, were not negligent because, among other reasons, they had relied on financial advisers. Id. at 384. The financial consultant who had sold the Heasleys the investment had referred them to an independent accountant for assistance in preparing their tax return with respect to the investment. The accountant, in turn, had reviewed the investment materials prior to completing the return. The court noted that "nothing in the record supports a finding that Smith [the accountant] did not independently assess the Heasleys' tax liability or that Danner [the financial consultant] influenced Smith's calculations." Id. at 384 n.9. - 19 - Heasley is not applicable to the cases at hand. First, petitioners in these cases, although having limited investment experience, are not entirely unsophisticated in business matters: The Bronsons operated two sole proprietorships; Mr. Gordon-Wylie was a corporate sales account manager; Mrs. Gordon-Wylie was employed by an accounting firm; and the Garritys assisted in the operation of an incorporated business. Second, we have found • petitioners' reliance on Mr. Trimboli to be unreasonable because he was not an independent adviser. Furthermore, the Gordon- Wylies and the Garritys relied solely on one individual, and that individual both sold them their investment and advised them as to its legal effect without independently researching the legal issues involved. The Bronsons also effectively relied on one individual because, as discussed below, they did not consult with their return preparer concerning the investment, nor did the preparer independently investigate it herself before classifying the purported loss as a deduction. In addition to reliance on Mr. Trimboli, the Bronsons also claim reliance on their tax return preparer, Ms. DiTommaso. From the record, we conclude Ms. DiTommaso's role was confined to a routine return preparation in which she merely transferred the purported loss from the Schedule K-1 onto the Bronsons' return-the Bronsons neither sought nor received from Ms. DiTommaso any particular advice concerning the investment or the - 20 - related deduction. Blind reliance on a return preparer is not a defense to negligence, and taxpayers retain a duty to file an accurate return and generally are required to review their return before signing it. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987). Furthermore, in order to avoid a negligence addition to tax with respect to an error on a return, the error must be the result of the preparer's mistake based upon otherwise correct information provided by the taxpayer. Pessin v. Commissioner, 59 T.C. 473, 489 (1972). Submitting the Schedule K-1 reflecting an improper loss to their return preparer, and in turn receiving a completed tax return reflecting the same loss, does not constitute a defense to negligence in the Bronsons' case. Finally, petitioners cite Hummer v. Commissioner, T.C. Memo. 1988-528, for the proposition that taxpayers cannot be negligent where the relevant legal issue was "not well settled". Petitioners, however, did not receive substantive advice concerning the deduction from anyone independent of the investment, nor did they conduct their own investigation into the propriety of the deduction. Indeed, there is no indication that petitioners ever were aware of the nature of the purportedly uncertain legal issues involved. Petitioners may not rely upon a "lack of warning" as a defense to negligence where no reasonable investigation was ever made, and where they were repeatedly - 21 - warned of the relevant risks in the private placement memorandum. Christensen v. Commissioner, T.C. Memo. 2001-185; Robnett v. Commissioner, T.C. Memo. 2001-17. The private placement memorandum contained numerous warnings regarding the tax risks involved with making an investment in Arid Land. Although the parties stipulated that petitioners all received a copy of the private placement memorandum, for the most . • part petitioners could not recall having seen and/or having reviewed the memorandum prior to making an investment. In any case, the warnings were there and would have been evident if petitioners had exercised reasonable care and read the memorandum. After making their investments regardless of these risks, petitioners claimed large losses despite the fact that they had only recently invested cash in amounts far less than the amounts of the losses:' The Bronsons paid $7,700 and claimed a loss of $17,369 (43.3 percent of their income); the Gordon-Wylies paid $6,600 and claimed a loss of $14,888 (24.5 percent of their income); and the Garritys paid $5,500 and claimed a loss of 'Petitioners argue that the instructions for Schedules K-1 The instructions state that the individual provided by the Internal Revenue Service required them to report the loss. "must treat partnership items * partnership treated the items on its filed return." instructions have further provisions dealing with errors on Schedules K-1 as well as with the filing of statements to explain inconsistencies between the partnership's return and the taxpayer's return. petitioners or their return preparers that law to mechanically deduct a loss which was improper. find to be unreasonable any belief by * * consistent with the way the taxpayer The We they were required by - 22 - $12,407 (26.3 percent of their income).8 These disproportionate and accelerated losses--along with the resulting substantial tax savings--should have been further warning to petitioners for the need to obtain outside, independent advice regarding the propriety of the deduction. Despite these warnings, petitioners did not seek such advice or conduct any other type of inquiry into the propriety of the deductions. We find that it was negligent for petitioners to have claimed these deductions under the circumstances of these cases. We sustain respondent's determinations that petitioners are liable for the section 6653(a)(1) and (2) additions to tax for negligence. To reflect the foregoing, Decisions will be entered for respondent. 8See supra note 3.