Opinion ID: 566858
Heading Depth: 1
Heading Rank: 2

Heading: additions to tax under sections 6653 and 6661 of the internal revenue code

Text: 26 Taxpayer claims finally that since his deductions under Section 212(2) of the Code were proper, there is no liability for additions to tax. This argument fails because we have held that his legal fees were not properly deducted. Taxpayer also contends that he relied upon advice of counsel and his tax preparer in claiming these deductions, so that a negligence penalty is unjustified. Because there was no basis for deductibility, this argument is also unpersuasive. As noted previously, the funds used to purchase the assets in question were not obtained from racketeering (App. A13) and were not forfeitable under then Section 1963 of the Criminal Code, nor even sought under the indictment (App. A12). Moreover, Gilmore, Lykes, and Treasury Regulation § 1.212-1(m) foreclose the deduction of these legal expenses even if any forfeiture claim against taxpayer might have been satisfied out of his assets. Finally, the record does not show that taxpayer believed that the law supported deductibility of the legal fees. 27
28 Taxpayer argues that deductibility of legal fees under Section 212(2) in a RICO prosecution presents a question of first impression. He also claims to have relied on the advice of his tax preparer in claiming the deduction. Therefore, taxpayer asks this Court to overturn the penalty he must bear for the negligent underpayment of taxes under Section 6653(a) (26 U.S.C.). Section 6653(a) of the Code acts as a check on taxpayers. If the Commissioner finds that a taxpayer has underpaid taxes, then he may recover the deficiency and may also impose an added penalty of five percent plus 50 percent of the interest attributable to the underpayment. Standard principles of negligence apply to the Commissioner's determination of underpayment, so that the penalty may be imposed when the taxpayer shows a lack of due care or failure to do what a reasonable and ordinarily prudent [taxpayer] would do under the circumstances. Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir.1967). However, taxpayer carries the burden to prove that he was not negligent, because the Commissioner is deemed to be prima facie correct as to a determination of negligence or intentional disregard of the Code. Neely v. Commissioner, 85 T.C. 934, 947 (1985); Luman v. Commissioner, 79 T.C. 846, 860-861 (1982). Furthermore, the Tax Court's determination that taxpayer failed to meet his burden that he acted with due care is a finding of fact, reviewed under the clearly erroneous standard. Skeen v. Commissioner, 864 F.2d 93, 96 (9th Cir.1989). 29 As shown above, RICO Section 1963(a) provides only for forfeiture of assets earned in connection with racketeering activity. Because the certificates of deposit were not forfeitable, taxpayer had no basis upon which to claim his deduction under Section 212(2). Moreover, taxpayer knew the tax law well enough to avoid claiming his deduction as a business expense under Section 162(a), and instead attempted to recharacterize the legal fees in different terms in order to receive favorable treatment under Section 212(2). This provision, as amply demonstrated by the cases discussing RICO forfeiture and the breadth of Section 212(2), does not afford taxpayer a credible argument that the law was unclear. 30 Additionally, taxpayer did not support with sufficient evidence his claim that he relied on the advice of counsel and his tax preparer in claiming his deduction of legal fees under Section 212(2). Even if the record had shown that taxpayer had relied in good faith on the advice of competent counsel, in contrast to taxpayer's assertion at oral argument, the Supreme Court's recent decision in Cheek v. United States, --- U.S. ----, 111 S.Ct. 604, 611, 112 L.Ed.2d 617 (1991), would be of no avail because there the Court only held in a criminal case that the willful failure to pay taxes was not necessarily proven if the defendant truly believed the Internal Revenue Code did not treat wages as income. Whereas Cheek simply creates a jury question out of a defendant's interpretation of the Code, id. 111 S.Ct. at 613, Section 6653 imposes a burden of production on a taxpayer. 31 As the Tax Court noted in its order denying a motion to vacate its decision, Accardo failed to produce the required evidence that he relied upon his tax preparer or that the preparer gave him reasonable advice. Similarly, he has not shown that he received advice from his counsel, that he relied on it in good faith, and that any such reliance was reasonable. See Betson v. Commissioner, 802 F.2d 365, 372 (9th Cir.1986) (reversing imposition of negligence penalty where the record indicates that taxpayer relied in good faith on the substantive advice of his accountant). That the signature of the accountant tax preparer appeared on Accardo's tax return is not enough. Taxpayer must demonstrate that he supplied all relevant information to his tax preparer and subsequently relied on the preparer's advice in erroneously claiming the deduction. Pritchett v. Commissioner, 63 T.C. 149, 174 (1974); Pessin v. Commissioner, 59 T.C. 473, 489 (1972). In the present case, the Tax Court properly upheld the addition to tax on the ground that the underpayment was negligent. 32
33 In addition to the penalty imposed for negligent underpayment of tax, the Tax Court also imposed liability for addition to tax under Section 6661(a) of the Internal Revenue Code. 6 Under Section 6661(a) (26 U.S.C.), the taxpayer owes an addition to tax in an amount equal to 25 percent of the amount of the substantial underpayment. Section 6661(b)(1)(A) establishes that a taxpayer has substantially underpaid when the underpayment exceeds the greater of either 10 percent of the amount of tax due or $5,000. 34 Taxpayer makes no argument with respect to the $9,903 deficiency imposed by the Commissioner on account of taxpayer's substantial understatement of liability under Section 6661 of the Code. As noted above, taxpayer substantially understated his income tax liability for the two years in question within the meaning of Section 6661. The provision therefore will apply by virtue of the fact that taxpayer's understatement exceeded the limits set forth in the statute. However, Section 6661 permits a reduction of the penalty for understatement in either of two situations: 35 (1) if there is or was substantial authority for such treatment (26 U.S.C. § 6661(b)(2)(B)(i)); 36 (2) if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return (26 U.S.C. § 6661(b)(2)(B)(ii)). 37 Additionally, Section 6661(c) permits waiver of the entire penalty for understatement if there was reasonable cause for the understatement (or part thereof) and the taxpayer acted in good faith (Section 6661(c) (26 U.S.C.)). 38 The Tax Court found that taxpayer did not meet any of the above conditions, so that he was not entitled to a reduction in or waiver of the penalty for understatement. Taxpayer's claim that there was substantial authority supporting the deduction of legal fees is undercut by Treasury Regulation 1.6661-3(b)(1), limiting substantial authority to situations in which the weight of the authorities supporting the treatment is substantial in relation to the weight of the authorities supporting contrary positions. Treasury Regulations on Income Tax (23 C.F.R.). As the above discussion of the non-deductibility of taxpayer's legal fees amply demonstrates, there is a dearth of authority supporting his position, much less the balance of authorities required by the Treasury Regulation. 39 Furthermore, taxpayer did not provide relevant facts on his tax return sufficient to permit a reduction for adequate disclosure. He stated only that his deduction of $207,000 was for Legal fees re conservation of property held for production of income. This assertion falls short of the exposition of relevant facts required under Section 6661(b)(2)(B)(ii). Schirmer v. Commissioner, 89 T.C. 277, 285-286 (1987) (mere listing of income, expenses and claimed depreciation did not constitute disclosure of relevant facts). Particularly where taxpayer lacked substantial authority for his position and where he appeared to think that his deduction presented a novel legal issue, the mere declaration of a deduction does not entitle taxpayer to a reduced penalty for understatement of tax. 40 Finally, Section 6661(c) vests discretion in the Commissioner to reduce or waive the penalty for understatement if he believes that the taxpayer acted in good faith. As the preceding discussion of the penalty for negligent underpayment demonstrates, the record does not contain evidence of taxpayer's good faith. Given the absence of authority supporting his position, the Commissioner acted well within his discretion in concluding that the understatement was unreasonable. 41 The decision of the Tax Court is affirmed.