Opinion ID: 577526
Heading Depth: 2
Heading Rank: 2

Heading: Penalties and Interest

Text: 28 The Tax Court also upheld the IRS's imposition of negligence penalties and enhanced interest rates on the amount of tax owed by taxpayers. We review the factual findings related to the imposition of penalties under the clearly erroneous standard. See Allen v. Commissioner, 925 F.2d 348, 353 (9th Cir.1991). 3
29 In accordance with § 6653(a) the IRS imposed a penalty on taxpayers for negligence in claiming the deductions from the loss incurred by The Barbados Partnerships. This assessment is presumptively correct. Allen, 925 F.2d at 353. Negligence under section 6653 is defined as the lack of due care or the failure to do what a reasonable and prudent person would do under similar circumstances. Id. There is ample factual and legal support to uphold the Tax Court's findings. 30 Taxpayers stood to realize a tax loss almost eight times as much as their initial investment. This should have alerted a reasonable taxpayer to seriously question the transaction. See id. The promotional material emphasized the tax benefits, discussing high write-offs and sheltering income. Compare Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir.1988) (discussions in the prospectus of high write-offs and risk of audits should have alerted taxpayers). Furthermore, taxpayers should have known that they had no realistic opportunity to realize a business profit. Taxpayers should have independently and fully investigated the legality of taking these deductions before proceeding. 31 Taxpayers argue that they reasonably relied on the legal opinion in the promotional materials they were supplied. However, taxpayers were ill-advised to rely so heavily on the representations of the sellers of the investment. See Collins, 857 F.2d at 1386. The legal opinion they were supplied with, moreover, contained numerous explanations of potential problems. When purchasing the Sun Package, taxpayers explicitly agreed not to rely on the legal opinions and acknowledged the risk that any tax deductions might ultimately be denied. Taxpayers were negligent in not further investigating the deductions. 32 Appellant LaVerne, an attorney, allegedly sought the advice of his personal tax advisor, who stated that he thought the investment appeared legitimate. However, in these circumstances this additional investigation is not enough to shield LaVerne from the negligence penalty. See Allen, 925 F.2d at 353-54; Collins, 857 F.2d at 1386.
33 The Tax Court upheld the imposition of an addition to the tax under § 6661 because taxpayers substantially underpaid their taxes. 4 The Tax Court found that the transactions at issue in this case were tax shelters because they were tax-motivated, sham transactions. See § 6661(b)(2)(C). For the reasons outlined in Part I of this decision, we uphold this finding by the Tax Court. Therefore, to avoid the substantial understatement penalty, taxpayers must show that there was substantial authority that led the taxpayers to reasonably believe that the tax treatment submitted was more likely than not the proper treatment. § 6661(b)(2)(C). 34 Taxpayers cannot make such a showing. Substantial authority is found  'only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions.'  Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir.1990) (quoting Treas.Reg. § 1.6661-3(b)(1)). Taxpayers assert that they relied on the legal opinion in the sales material. That opinion, however, did not adequately address the sham transaction issue. We agree with the Tax Court that taxpayers have not offered substantial authority to support the investment in The Barbados Partnerships as having genuine economic substance. Nor have we found any authority ourselves that would support such a position. We uphold the Tax Court's finding of substantial understatement.
35 The IRS also applied an accelerated interest rate to the taxes owed because it found the substantial underpayment of tax resulted from a tax motivated transaction. § 6621(c). A tax motivated transaction includes any sham or fraudulent transaction. § 6621(c)(3)(A)(v). We are affirming the Tax Court's finding that the transaction in this case was a sham transaction. Therefore, the accelerated interest rate provision of § 6621(c) was properly applied. Skeen v. Commissioner, 864 F.2d 93, 96 (9th Cir.1989).