Opinion ID: 3063594
Heading Depth: 2
Heading Rank: 1

Heading: The Tax Additions

Text: On appeal, the Basses first argue that the tax court clearly erred in finding that they were liable for tax additions under §§ 6653(a)(1), (a)(2), and 6661. The tax court found the Basses liable under §§ 6653(a)(1) and (a)(2) because their tax underpayment was due to negligence. The tax court found the Basses liable under § 6661 because their tax underpayment was not supported by substantial authority, and the facts underlying the disallowed deduction were not disclosed. We review the tax court’s findings of fact for clear error and its legal conclusions are reviewed de novo. Florida Hosp. Trust Fund v. Comm’r, 71 F.3d 808, 810 (11th Cir. 1996). “A finding of fact is clearly erroneous if the record lacks substantial evidence to support it, so that our review of the entire evidence leaves us with the definite and firm conviction that a mistake has been committed.” Creel v. Comm’r, 419 F.3d 1135, 1139 (11th Cir. 2005) (quotation omitted). Several Internal Revenue Code (“IRC”) provisions impose penalties, or tax 5 additions, for the nonpayment of federal income tax liabilities. Former § 6653(a)(1) imposed a tax addition in an amount equal to five percent of the taxpayer’s underpayment of a tax if such underpayment was “due to negligence or intentional disregard of rules and regulations.” 26 U.S.C. § 6653(a)(1) (1982).1 Section 6653(a)(2) imposed a tax addition in an amount equal to fifty percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules and regulations. Id. § 6653(a)(2). Negligence is defined as a taxpayer’s failure to exercise “due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.” Marcello v. Comm’r, 380 F.2d 499, 506 (5th Cir. 1967). The tax court determined in this case that the Basses’ underpayment was due to negligence. Substantial evidence supported the tax court’s finding that the tax additions under § 6653(a)(1) and (a)(2) were appropriate because the Basses were negligent in failing to investigate their Cal-Neva Partners investment and seek independent advice on that investment. Specifically, the tax court found that Mr. Bass relied solely on the representations of promoters who had no known experience in jojoba farming, and that he spent very little time investigating the investment or its tax treatment. While the Basses argue on appeal that Mr. Bass’ experiences growing 1 The IRC provisions for the penalties at issue in this case were restructured for tax returns due after 1989 and now appear at 26 U.S.C. §§ 6662-6663. See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, § 7721, 103 Stat. 2106, 2395-99. 6 up on a farm, his education and career as an accountant, and his prior experience with similar investments meant that his investigation into Cal-Neva Partners was sufficient to constitute due care, the tax court considered these facts and found that Mr. Bass’ experience was not persuasive evidence that he was qualified to assess the Cal-Neva Partnership. Therefore, we cannot say that the tax court clearly erred in finding that the Basses were negligent in their underpayment of tax. Section 6661 of the IRC provided that, “[i]f there is a substantial understatement of income tax for any taxable year, there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement.” 26 U.S.C. § 6661(a) (1988).2 A substantial understatement existed if the amount of the understatement exceeded the greater of ten percent of the tax required to be shown on the return or $5,000. Id. § 6661(b)(1)(A). The amount of the understatement was reduced by that portion of the understatement that was attributable to (1) the tax treatment of any item for which there was “substantial authority,” or (2) the tax treatment of any item for which the relevant facts affecting the treatment were adequately disclosed on or with the return. Id. § 2 Although the penalty under § 6661(a) was only 10 percent of the underpayment attributable to the substantial understatement in 1982, 26 U.S.C. § 6661(a) (1982), Congress passed a law in 1986 raising the rate to 25 percent for all penalties assessed after the law’s enactment, see Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, § 8002(a), (b), 100 Stat. 1874 (1986); Karr v. Comm’r, 924 F.2d 1018, 1026 n.9 (11th Cir. 1991) (noting the amendment). The Basses do not dispute the 25 percent rate used to calculate their § 6661 tax addition. 7 6661(b)(2)(B). Substantial authority exists when “the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions.” 26 C.F.R. § 1.6661-3(b)(1) (1985). In order for a disclosure to be adequate under § 6661(b)(2)(B)(ii), a taxpayer should provide the IRS with information regarding the tax treatment of the item that “reasonably may be expected to apprise the [IRS] of the nature of the potential controversy.” 26 C.F.R. § 1.6661-4(b) (1985). For the purposes of § 6661, authority includes IRC provisions, IRS regulations, court cases, and administrative pronouncements. 26 C.F.R. § 1.6661- 3(b)(2) (1985). Authority does not include an individual taxpayer’s prior tax practices. See id. The Basses have pointed to no authority other than their tax practices from other years. Therefore, the tax addition under § 6661 was proper because substantial authority did not support the Basses’ deduction related to the investment in Cal-Neva Partners, and they did not disclose facts regarding the deduction on their 1982 tax return. Thus, the tax court properly found that the Basses were liable for tax additions pursuant to §§ 6653(a)(1), (a)(2), and 6661.3