TAX COURT OPINION

Case: Robin J. Gray
Docket Number: 29374-09S
Judge: Colvin
Opinion Type: bench
Filed: 12/10/2010
Pages: 7

UNITED STATES TAX COURT WASHINGTON, DC 20217 CLC ROBIN J. GRAY, Petitioner, v. ) Docket No. 29374-09 S COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall petitioner and to respondent a copy of transcript of Diane L. Kroupa at Los Angeles, California, on November 10, 2010, containing her oral the above case before Judge the proceedings of findings of fact and opinion. the pages of transmit the to In accordance with the oral findings of decision will be entered for respondent for petitioner as to the accuracy-related penalty. fact and opinion, for the deficiency and (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. December 10, 2010 SERVED Dec 13 2010 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 Bench Opinion By Judge Diane L. Kroupa November 10, 2010 Robin J. Gray v. Commissioner Docket No. 29374-095 3 THE COURT: 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 proceeding was conducted as a Small Tax Case under sectiod 7463 and Rules 170 through 175. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. All section references are to the Internal Revenue Code and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner appeared on her own behalf. Chad Martinelli (specially recognized) appeared on behalf of respondent. FINDINGS OF FACT Certain facts have been stipulated and are so found. Petitioner resided in Valley Village, California at the time she filed the petition. Petitioner was a teacher for 39 years before Heritage Reporting Corporation (202) 628-4888 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 4 she retired in 2007, the year at issue. Before her retirement, she had a brokerage account with Shufro, Rose & Co., LLC (Shufro), a small brokerage firm in Manhattan. She chose Shufro because her father had worked there and had invested with Shufro. She had invested money in the account from time to time before her retirement and learned that she was to keep her investments separate from her other accounts. She inherited approximately $1 million of stock when her father died in 2004 that he had invested with Shufro. She also had inherited telephone stock from her mother but kept the stock from her mother separate from her investment account with Shufro to honor her mother's memory. Petitioner paid Shufro $19,469 for its services in 2007. The fee was an investment advisory fee based on her portfolio value of approximately $2 million. The Shufro fee began at one percent for the first million of assets and was prorated for values in excess of a million. This fee was paid quarterly from liquid assets in petitioner's investment account with Shufro. Petitioner claimed the full amount of the Shufro fees as a Schedule A miscellaneous deduction on the return for 2007. The tax preparer who prepared Heritage Reporting Corporation (202) 628-4888 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 5 petitioner's return for 2007 had prepared petitioner's returns for several previous years. He was retired and no longer a certified public accountant in 2007. The tax preparer also invested with Shufro. Respondent determined that petitioner was not entitled to deduct 100 percent of the Shufro fees. Respondent determined that petitioner was only entitled to deduct the amount that exceeded 2 percent of her adjusted gross income. Respondent issued petitioner a deficiency notice and later conceded he had miscalculated petitioner's alternative minimum taxable income. The corrected deficiency for 2007 is $6,327 and the correct accuracy-related penalty is $1,265.40. Petitioner timely filed a petition. OPINION We must decide whether petitioner is entitled to deduct 100 percent of the Shufro fees and whether petitioner is liable for the section 6662(a) accuracy-related penalty. We address each issue in turn. We focus now on whether petitioner is entitled to fully deduct the investment advisory fees or management fees petitioner paid to Shufro or whether the fees are deductible only to the extent that they exceed 2 percent of petitioner's adjusted Heritage Reporting Corporation (202) 628-4888 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 6 gross income. Itemized deductions that are characterized as miscellaneous itemized deductions are allowed only to the extent that they exceed 2 percent of adjusted gross income. Sec. 67(a). Petitioner argues that she should be entitled to deduct the full amount of the Shufro fees because they are essentially a cost of doing business and should be deductible as any other ordinary and necessary business expense. Petitioner fails to establish, however, that she is in any trade or business for this purpose. In addition, petitioner argues that she is entitled to deduct the full amount of the Shufro fees because trusts are permitted to deduct advisory fees without regard to the 2-percent floor. We disagree for several reasons. First, petitioner's investments are not held in a trust. Second, petitioner would not be entitled to deduct the full amount even if her investments were held in a trust. Investment advisory fees that are commonly incurred outside the context of trust administration are still subject to the 2-percent floor. Knight v. Commissioner, 552 U.S. 181, 184-185 (2008) affg. 124 T.C. 304 (2005). Individual investors routinely incur costs for investment advice as an integral part of their investment activities. Heritage Reporting Corporation (202) 628-4888 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 7 Investment advisory expenses are therefore not an example of items unique to the administration of a trust that a fiduciary might feel compelled to incur to meet the prudent person standards imposed by State law. Id. Investment advisory fees instead are deductible pursuant to section 212 (expenses incurred for the production of income or for investment). Id.; sec. 1.212-1(g), Income Tax Regs. Therefore, investment advisory fees are "miscellaneous itemized deductions" subject to the 2-percent floor. Id.; sec. 1.67-1T(a) (1) (ii), Income Tax Regs. We further note that petitioner reported the Shufro fees as a miscellaneous itemized deduction on Schedule A. Petitioner has failed to establish that she is entitled to deduct more than the amount that exceeds 2 percent of her adjusted gross income. We now turn to respondent's determination that petitioner is liable for the accuracy-related penalty under section 6662. The accuracy-related penalty under section 6662(a) does not apply, however, to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, that portion. Sec. 6664(c) (1); sec. 1.6664-4(b), Income Tax Regs. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 2s 8 The determination of whether the taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the taxpayer's efforts to assess his or her proper tax liability, the knowledge and experience of the taxpayer, and the reliance on the advice of a professional. Sec. 1.6664-4(b) (1), Income Tax Regs. Petitioner deducted the entire amount of the Shufro fees on the advice of her tax preparer, who also had invested with Shufro. She relied on the same tax preparer for several years before the year at issue. We find therefore that petitioner acted with reasonable cause and in good faith in claiming the deduction. Accordingly, she is not liable for the accuracy-related penalty. To give effect to the foregoing, decision will be entered for respondent for the $6,327 deficiency but for petitioner as to the accuracy- related penalty for 2007. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:23 a.m., the bench opinion in the above-entitled matter wa,s concluded.) // // Heritage Reporting Corporation (202) 628-4888