Opinion ID: 668628
Heading Depth: 2
Heading Rank: 1

Heading: R.C. Sec. 6661 (Repealed 1989).2 Substantial understatement of liability, provides in pertinent part:

Text: 35 (c) AUTHORITY TO WAIVE.--The Secretary may waive all or any part of the addition to tax proved by this section on a showing by the taxpayer that there was reasonable cause for the understatement (or part thereof) and that the taxpayer acted in good faith. 36 26 C.F.R. Sec. 1.6661-6(b) provides in pertinent part: 37 Reasonable cause and good faith. In making a determination regarding waiver of the penalty under section 6661, the most important factor ... will be the extent of the taxpayer's effort to assess the taxpayer's proper tax liability under the law. For example, reliance on a position contained in a proposed regulation would ordinarily constitute reasonable cause and good faith. In addition, circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge, and education of the taxpayer.... Reliance on an information return or on the advice of a professional (such as an appraiser, an attorney, or an accountant) would not necessarily constitute a showing of reasonable cause and good faith. Similarly, reliance on facts that, unknown to the taxpayer, are incorrect would not necessarily constitute a showing of reasonable cause and good faith. Reliance on an information return, professional advice, or other facts, however, would constitute a showing of reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.... 38 As a result of Pre-Paid's reinsurance investment, other taxpayers had substantial understatement of liability penalties imposed upon them by the Commissioner. See, e.g., Fisher v. Commissioner, 64 T.C.M. (CCH) 1670, 1992 WL 386282 (1992); Estate of Baxter v. Commissioner, 63 T.C.M. (CCH) 1706, 1992 WL 185 (1992); Krizer v. Commissioner, 62 T.C.M. (CCH) 1598, 1991 WL 271596 (1991). In each of these cases, based on the facts presented, the tax court upheld the Commissioner's decision. 39 In Fisher, the petitioners/spouses were employed as a cardiovascular surgeon and a secretary--neither of whom was a tax professional. Fisher, 64 T.C.M. (CCH) 1670. Petitioners relied on and had a long-standing relationship with their attorney and their accountant. Id. Petitioners also were sophisticated investors who had previously invested in Pre-Paid's stock prior to investing in Pre-Paid's reinsurance program. Id. Most significantly, however, was the fact that Jaques was Fishers' attorney and Thomas of Fentem CPAs was Fishers' accountant. Id. In Fisher, the tax court stated: 40 ... Clearly, Jaques and Thomas were not in a position to offer independent, unbiased tax advice about Pre-Paid's plan to petitioners. As general counsel to Pre-Paid and a member of Pre-Paid's board of directors, Jaques had fiduciary obligations to Pre-Paid that were inconsistent with his obligations to petitioners. Whatever may have been the appropriateness of Jaques' other investment advice to petitioners, Jaques' advice to petitioners about Pre-Paid's reinsurance arrangement had to be clouded by his obligations to Pre-Paid. Thomas was not independent of Jaques and Pre-Paid. 41 Fisher's obvious intelligence and extensive investment experience should have caused him to realize that he could not insulate himself from tax harm by relying on Jaques and Fentem with regard to their tax advice.... Id. 42 By the same token, in Krizer and Baxter, the petitioners were again clients of Jaques, who had advised them to take current deductions for payments to Pre-Paid's reinsurance pooling program. Krizer, 62 T.C.M. (CCH) 1598; Baxter, 63 T.C.M. (CCH) 1706. In Krizer, the tax court stated: 43 Petitioners presented no evidence of the facts surrounding their reliance on professional advice other than Mr. Jaques' testimony.... The record is silent as to what advice, if any, petitioners received from the certified public accountant who in fact prepared their return. 44 [The Commissioner] contends that petitioners' reliance on Mr. Jaques could not constitute reasonable cause or good faith by petitioners because, as the second largest shareholder of Pre-Paid Legal, Mr. Jaques stood to profit from the transaction petitioners entered into with Pre-Paid Legal, a fact that [the Commissioner] asserts 'was undoubtedly known to petitioners.' ... 45 Essentially, [the Commissioner] argues that Mr. Jaques was not an independent adviser under these circumstances, and, therefore, in considering petitioners' request for waiver of the addition to tax, petitioners' reliance on his advice was deemed inadequate to establish reasonable cause and good faith. On this record, the Court does not find respondent's decision not to waive the addition to tax to be an abuse of discretion. 46 Krizer, 62 T.C.M. (CCH) 1598. 47 Our case is distinguishable. Here, though Jaques, Fentem Management, and Fentem CPAs are involved, Mauerman used his own, independent, attorneys and accountants, Don Atkins and Blake Atkins, to advise him and prepare his return. Mauerman had a long-standing professional relationship with Don Atkins, who was both an attorney and a CPA. Don Atkins's employee, Blake Atkins, though not a CPA, was an attorney with an accounting degree. The Atkins had satisfied themselves that the deduction was proper. Mauerman had reasonable cause, because of the Atkins' expertise, to trust their advice. Moreover, the tax dispute here involved the timing of the deduction, not whether the deduction should be completely disallowed. 48 Mauerman was not trained in tax law. Though he had been an investor for over ten years, it is not reasonable to expect that Mauerman could monitor his independent advisors to make sure they had done sufficient research to give knowledgeable advice. It is for exactly this reason that many intelligent investors hire independent, educated experts to advise them. Moreover, Mauerman did not attempt to limit the scope of his advisors' research. Therefore, we hold that Mauerman acted in good faith under these circumstances in relying on his independent advisors. See Vorsheck v. Commissioner, 933 F.2d 757, 759 (9th Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 591, 116 L.Ed.2d 615 (1991); Heasley v. Commissioner, 902 F.2d 380, 385 (5th Cir.1990). See also United States v. Boyle, 469 U.S. 241, 250, 105 S.Ct. 687, 692, 83 L.Ed.2d 622 (1985) ( '[R]easonable cause' is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken). 49 We REVERSE the tax court's decision upholding the Commissioner's assessment of a penalty pursuant to Sec. 6661.