TAX COURT OPINION

Case: Ehteshamul H. Khoyratty & Bibi S. Khoyratty
Docket Number: 17100-13S
Judge: Marvel
Opinion Type: bench
Filed: 05/06/2014
Pages: 9

PA UNITED STATES TAX COURT WASHINGTON, DC 20217 EHTESHAMUL H. KHOYRATTY & BIBI S. KHOYRATTY, Petitioner(s), v. ) ) ) ) ) Docket No. 17100-13S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ORD ER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge L. Paige Marvel at St. Paul, Minnesota, on April 18, 2014, containing the Court's oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the Court's oral findings of fact and opinion, decision will be entered pursuant to Rule 155. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. May 5, 2014 SERVED May 06 2014 Capital Reporting Company 1 Bench Opinion by Judge L. Paige Marvel 2 April 18, 2014 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Ehteshamul H. & Bibi S. Khoyratty v. Codmissioner Docket No. 17100-13S THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986 as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precédent for any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code of 1986 as amended and in effect for the year in issue, and Ñule 866.488.DEPO www.CapitalReportingCompany.coin Capital Reporting Company 1 2 3 4 5 references are to the Tax Court Rules of Practice and Procedure. Ehteshamul H. Khoyratty appeared pro se and at he was authorized to speak fior and represent the interests of his wife, Bibi S. 6 Khoyratty, who knew about the scheduled trial but did 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 not appear. David L. Zoss appeared on behalf of respondent. Respondent determined a deficiency of $29,945, a section 6651(a)(1) addition to tax of $3,420, and a section 6662 accuracy-related penalty of $5,989 with respect to petitioners' 2010 taxable year. After concessions, the only issue for decision is whether petitioners are liable for the section 6662(a) accuracy-related penalty. We conclude that petitioners are liable for the section 6662(a) accuracy-related penalty but in a reduced amount consistent with this opinion and the parties' concessions. FINDINGS OF FACT The parties stipulated to the admissibility of certain facts and exhibits. We incorporate the stipulated facts and facts drawn from stipulated exhibits into this opinion. Petitioners, who are 25 married to each other, resided in Minnesota when they 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I 5 1 2 3 4 5 6 7 petitioned this Court. Mr. Khoyratty is a chemical engineer by education and training, who during 2010 was engaged in real estate development. Mrs. Khoyratty is a physician by education and training who was suffering from a disability requiring medical treatment during 2010. During 2010, Mrs. Khoyratty, who owned U.S. 8 Oncology (USO) stock that she originally purchased in 9 approximately 2006, received $106,944 from USO in a 10 11 12 13 14 15 redemption transaction. USO sent to Mrs. Khoyratty a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, reflecting its $106,944 payment and a copy of the Form 1099-B was furnished to the Internal Revenue Service. Mr. Khoyratty testified that he and his wife received the Form 1099-B but that he and his 16 wife did not think the proceeds were taxable so they 17 18 19 20 did not include the proceeds on their 2010 joint return, and they did not tell their return preparer about their receipt of the proceeds or give the preparer the Form 1099-B they received. Neither Mr. 21 Khoyratty nor his wife researched relevant tax law, 22 consulted any advisor, or investigated Mrs. 23 Khoyratty's adjusted basis in the USO stock before 24 _concluding that the proceeds were not taxable. 25 Petitioners' 2010 joint Federal income tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 return was prepared by a paid preparer, who signed the return as preparer. Petitioners filed their return late and agree that they are liable for a section 6651(a)(1) addition to tax of $135 for failure to timely file their 2010 return. The parties have stipulated that Mrs. Khoyratty had an adjusted basis of $47,147 in the USO shares that were redeemed in 2010, and that Mrs. Khoyratty recognized gain of $59,797 from the redemption transaction that should have been reported on petitioners' 2010 return. The parties further stipulate that petitioners are liable for a deficiency of $16,743 for 2010, that the deficiency amount is not a substantial understatement within the meaning of section 6662(d)(1), and that the only issue before the Court is petitioners' liability for the accuracy- related penalty. DISCUSSION Section 6662 authorized the Commissioner to impose a penalty on an underpayment of tax that is attributable to negligence or disregard of rules or regulations. Section 6662(a) and (b)(1). The Commissioner bears the initi.al burden of production 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 with respect to the taxpayer's liability for the 25 section 6662 penalty. Sec. 7491(c). At trial the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 Commissioner must introduce sufficient evidence "indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438,446 (2001). If the Commissioner satisfies his initial burden of production, the burden of producing evidence to refute the Commissioner's evidence shifts to the taxpayer, and the taxpayer must prove that the penalty does not apply. Id. at 447. For purposes of section 6662, negligence is 10 any failure to make a reasonable attempt to comply 11 with the provisions of the Internal Revenue Code, and 12 13 14 15 16 17 18 19 20 21 22 23 24 25 disregard includes any careless, reckless, or intentional disregard. Sec. 6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985) (negligence is lack of due care or failure to do what a reasonably prudent person would do under the circumstances); sec. 1.6662-3, Income Tax Regs. Negligence also includes any failure to exercise ordinary and reasonable care in the preparation of a tax return, sec. 1.6662-3(b)(1), Income Tax Regs., and ignorance of the tax law is not an excuse for failure to comply with it, see Carlebach v. Commissioner, 139 T. C. 1, 17 A012.. The record establishes that Mrs. Khoyratty received $106,944 from USO in a redemption 866.488.DEPO www.CapitalReportingCompany.corn Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 transaction and that petitioners received a Form 1099-B reflecting this payment from USO. the record further establishes that Mrs. Khoyratty had an adjusted basis of $47,147 in the redeemed USO shares and that Mrs. Khoyratty recognized gain of $59,797 from the redemption transaction that should have been reported on petitioners' 2010 return. Yet, petitioners took the position on their return that the redemption proceeds were not taxable without researching relevant tax law, consulting any advisor, or investigating Mrs. Khoyratty's adjusted basis in the USO stock. Accordingly, respondent has satisfied his initial burden of production by showing that petitioners acted negligently in failing to report the taxable gain from the USO redemption. Section 6664(c)(1) provides an exception to the section 6662(a) accuracy-related penalty with respect to any portion of an underpayment if the taxpayer shows that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. The determination of reasonable cause and good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 important factor is the extent of the taxpayer's 2 effort to assess his proper tax liability. Id.; see 3 4 5 6 7 8 9 also Woodsum v. Commissioner, 136 T.C. 585, 596 (2011). For the reasonable cause exception to apply, the taxpayer must prove that he exercised ordinary business care and prudence as to the disputed item. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff'd, 299 3d 221 (3d Cir. 2002). Petitioners bear the burden of proving that 10 they meet the requirements for relief under section 11 12 13 14 15 16 17 18 19 20 21 22 6664(c)(1). See Higbee v. Commissioner, 116 T.C. at 446-447. Generally, reliance upon the advice of the tax professional may establish reasonable cause and .good faith for the purpose of avoiding liability for the section 6662(a) penalty. See United States v. Boyle, 469 U.S. 241, 250 (1985). However, in Woodsum we held that the taxpayers could not claim to have on the advice of their return preparer when A there was no evidence that the return preparer made a judgment on the disputed tax item or that the taxpayers relied on the return preparer's judgment. 23 Woodsum v. Commissioner, 136 T.C. at 593-594. Here, 24 25 there is no evidence that petitione9DS\return preparer made a judgment that the redemption of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Khoyratty's shares did not result in taxable gain. 2 Moreover, there is no evidence that petitioners 3 4 5 6 relied on any such judgment by their return preparer. Instead, the evidence shows that petitioners omitted the redemption proceeds from their return without conducting any research into the relevant tax laws, 7 without mentioning the redemption proceeds to their 8 9 10 11 12 return preparer, and without giving their return preparer the Form 1099-B. Under such circumstances, we conclude that the taxpayers did not make a good faith effort to assess their proper tax liability and that the reasonable cause exception does not apply. 13 Accordingly, we sustain respondent's determination of the section 6662(a) penalty. To reflect the foregoing, decision will be entered pursuant to Rule 155. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:23 a.m., the above- entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com