Opinion ID: 160849
Heading Depth: 2
Heading Rank: 3

Heading: Additions to Tax for Taxpayer Negligence

Text: 35 We review the Tax Court's factual findings regarding a taxpayer's negligence for clear error and its legal conclusions de novo. See Anderson v. Comm'r, 62 F.3d 1266, 1270 (10th Cir. 1995). The Commissioner's determination of negligence is presumed correct, and the taxpayer has the burden of proving it wrong. Id. at 1271 (citations omitted). 36 During the time period relevant to this appeal, § 6653(a)(1) of the Code imposed an addition equal to five percent of an underpayment of income tax where any part of the underpayment was due to negligence or intentional disregard of rules or regulations. For purposes of section 6653, `negligence' is lack of due care or failure to do what a reasonable and prudent person would do under similar circumstances. Id. (citation omitted) (construing the prior version of § 6653 relevant to the instant case). When appropriate, a taxpayer is required to make reasonable inquiry into the legality of a tax plan. 37 Taxpayer has not met his burden of proving he did not act negligently. By all accounts a sophisticated investor, taxpayer nonetheless traded with an inexperienced company knowing prices were set by a formula rather than by market forces. By keeping substantial overage in his margin account, he lost at least a year's interest on more than $1,000,000. Finally, despite his contention that he thoroughly investigated the Merit markets, taxpayer has failed to produce evidence that he believed the Merit program was anything other than a tax shelter. Taxpayer's alleged reliance on his accountant's advice is insufficient to disprove negligence. His accountant did not testify at trial and represented Merit as well as taxpayer, which prevented the accountant from being able to provide an independent judgment of the Merit program. The Tax Court's finding that taxpayer was negligent was not clearly erroneous, and based on that finding the penalty imposed under I.R.C. § 6653(a)(1) was proper. 38 Finally, in light of our holding that the transactions at issue lacked economic substance and were not engaged in for profit, the Commissioner properly subjected taxpayer to an increased interest rate under former I.R.C. § 6621(c) (repealed 1989) on the ground that his underpayments were attributable to tax-motivated transactions. See Thompson v. United States, 223 F.3d 1206, 1212 (10th Cir. 2000) (holding that sham transactions are subject to the former I.R.C. § 6621(c) increased penalty provision); Hildebrand, 28 F.3d at 1028 (holding that former § 6621(c) applies to activities not engaged in for profit).