Opinion ID: 167170
Heading Depth: 2
Heading Rank: 6

Heading: Negligence Standard

Text: 70 The Van Scotens argue that the Tax Court held them to an improper negligence standard because it neglected to consider the similar circumstances portion of the test. The Tax Court did not hold the Van Scotens to an improper standard of due care. The Van Scotens lacked the necessary knowledge to assess the economic legitimacy of the Hoyt partnerships and the tax benefits they claimed. Under these circumstances, it was incumbent upon them, as reasonably prudent persons, to gain such knowledge either through their own investigation or by seeking advice from a competent independent advisor. The Van Scotens' did neither. Instead, they relied on information they received from Mr. Hoyt, the Hoyt organization, and Edward. As discussed, such reliance was not reasonable. Accordingly, The Tax Court properly concluded that their actions fell below the standard of due care under the circumstances. 9 71 The Van Scotens also refer us to this courts decision in Anderson, in support of their argument that the Tax Court applied the wrong negligence standard. In Anderson, the taxpayers invested in a program to purchase marine cargo containers that they never saw or verified personally, and for which they agreed to finance the bulk of the purchase price. 62 F.3d at 1267-69. As noted, the taxpayers in Anderson relied on their investment advisor to assess the economic substance of the proposed investment, which he found to be legitimate. Id. at 1268-69. The taxpayers' accountant, on the other hand, expressed concern as to the purported tax treatment of the investment. Id. at 1269. The taxpayers proceeded to invest in the business despite such concerns because they were convinced of the economic substance of the investment. Id. at 1271-72. Like the Hoyt partnerships, the container business turned out to be a sham. Id. at 1268. We ultimately found the taxpayers to be negligent because they failed to verify that the containers actually existed, actions a mythical reasonably prudent person would have taken under the circumstance. See id. at 1272-73. However, we found that the taxpayers were not negligent in disregarding their accountant's advice because [his] concerns would not necessarily have caused a reasonable investor to investigate the business aspects of the program more thoroughly. Id. at 1272. 72 The Van Scotens contend that they did far more than the taxpayers in Anderson because they actually verified that the cattle existed before they invested. This argument is not persuasive because our review of the record reveals that their independent confirmation efforts went no further than considering the comments made by Edward that he had seen cattle while working on a Hoyt ranch. 10 See I Tr. at 30. The fact that Edward observed some cattle surely would not satisfy a reasonably prudent person that the entire herd of cattle, which DSBS 87-C purported to own, actually existed. 73 They also argue that, like the taxpayers in Anderson, had they done more to investigate the tax aspects of the Hoyt partnerships they still would not have discovered that the operation was a sham and that they should not, therefore, be subject to the negligence penalty. The Commissioner responds that the Van Scotens' contention in this regard is built on a misunderstanding of the negligence penalty. The Commissioner maintains that [t]he negligence test asks simply whether a taxpayer exercised the due care in filing his tax return that would be expected of a reasonable and prudent person under the circumstances. Aplee. Br. at 45. It also contends that Anderson does not support the proposition that a taxpayer can blindly rely on a tax shelter promoter and then avoid the negligence penalty by arguing that, in hindsight, any investigation would have been futile, emphasizing that such an approach would improperly place more emphasis on the skill of the charlatan than on the diligence of the taxpayer. Id. at 46 n. 18. 74 We need look no further than the plain language of I.R.C. § 6662(a) to conclude that the Commissioner's argument focuses too narrowly on the due care element of the negligence test. It our duty to give effect, if possible, to every clause and word of a statute. Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001) (internal quotation omitted). When confronted with clear and unambiguous statutory language, our duty is simply to enforce the statute that Congress has drafted. United States v. Ortiz, 427 F.3d 1278, 1282 (10th Cir.2005). Section 6662(a) imposes an addition to tax of 20 percent on the portion of an underpayment which is attributable to ... negligence or disregard of rules or regulations. I.R.C. § 6662(a), (b)(1) (emphasis added). Under the statute's plain and unambiguous language, in order for the accuracy-related penalty to apply, the understatement must be attributable to the negligence of the taxpayer. This is akin to a causation requirement. That is, a taxpayer may be negligent in his efforts to comply with the Tax Code, but if the understatement at issue is not attributable to such negligence, then the penalty does not apply. 75 The Commissioner responds by arguing that even if an independent advisor might not have been able to uncover Mr. Hoyt's precise scheme, the advisor could have given the Van Scotens valuable insight regarding the Hoyt partnerships. Aplee. Br. at 46. For example, an attorney or accountant knowledgeable in the fields of agriculture and partnership taxation could have confirmed or disputed Mr. Hoyt's claim that cattle ranching enjoyed a tax-favored status. Id. Such an advisor could have challenged the claim that the Hoyt organization could somehow, during the return-filing season, rearrange partnership losses to meet the individual tax needs of the partners. Id. at 46-47. And, an advisor would have spotted the timing problem for 1990, would have spotted the material participation problem in 1991, and would have told them that their partnership deductions were likely overstated given the amount of their contributions. Id. at 47. 76 Our determination of the issue presented here is guided by reference to the burden the Van Scotens must overcome. As stated, the Commissioner's determination of negligence is presumptively correct, and the taxpayer has the burden of proving it wrong. Anderson, 62 F.3d at 1271. This presumption of correctness extends to each element of the negligence determination, including whether an underpayment was attributable to the taxpayer's negligence. 77 We need not decide precisely where further investigation into the tax claims of the Hoyt partnerships would have led, given the Van Scotens' lack of evidence substantiating their contention that further investigation would not have revealed that the operation was a sham. No such investigation was conducted, and no professional testified that the fraud probably could not have been discovered given an appropriate investigation. This would be a different case had (1) the Van Scotens consulted an independent tax professional and provided her with all the relevant information and she then advised them that, in her opinion, the deductions were legitimate, or (2) testimony from an independent professional supported the contention that the fraud could not have been discovered given an appropriate investigation based upon the facts and circumstances known at the time of the deductions. Argument of counsel will not suffice. 78 Moreover, to the extent that the evidence tends to show that Mr. Hoyt had a complete stranglehold on the Hoyt partnerships, and that the investors were unaware of the partnerships' dealings and weren't given enough written information to allow an objective third party opinion by competent counsel, such evidence weighs against the Van Scotens on this issue. R. Ex. 502-P at 27. The Van Scotens exposed themselves to enormous potential liability when investing in the partnership by signing power of attorney forms that granted Mr. Hoyt the authority to incur recourse debt on their behalf and the power to control numerous aspects of their investment without prior consultation with them. A reasonably prudent person confronted with the prospect of making an investment bearing such risks, but to whom enough information was not given to allow an objective third party opinion by competent counsel as to the merits of the investment or the tax implications thereof, would surely do more than what was done here before investing and claiming the resulting tax deductions. 79 Thus, the Tax Court's conclusion that the understatement at issue was attributable to the Van Scotens negligence in claiming the DSBS 87-C loss on their 1991 return is not clearly erroneous.