Opinion ID: 167170
Heading Depth: 2
Heading Rank: 3

Heading: Reliance on Mr. Hoyt, His Organization's Tax Professionals, and Edward

Text: 52 The Van Scotens argue first that the negligence penalty should not apply because they acted reasonably in relying on Mr. Hoyt for their tax reporting obligations. Rejecting this argument, the Tax Court held that such reliance was not objectively reasonable because Mr. Hoyt and his organization created and promoted DSBS 87-C, completed the Van Scotens' tax return, and received the bulk of the tax benefits from doing so. The Van Scotens challenge this finding because it ignores the unique circumstances of this case, emphasizing Mr. Hoyt's status as an enrolled agent, his success in litigating the Bales case, and his first hand knowledge of the partnership's financial and tax affairs. 53 Reliance on professional advice can, in certain circumstances, provide a defense to a negligence penalty. See Mauerman v. Comm'r, 22 F.3d 1001, 1006 (10th Cir.1994) (superseded on other grounds); Illes v. Comm'r, 982 F.2d 163, 166 (6th Cir.1992); Heasley v. Comm'r, 902 F.2d 380, 384 (5th Cir.1990); Treas. Reg. § 1.6664-4(c). However, reliance on such advice must be reasonable. See United States v. Boyle, 469 U.S. 241, 250, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985) (holding taxpayer's reliance on attorney to file timely return was not reasonable under § 6651). To be reasonable, the professional adviser cannot be directly affiliated with the promoter; instead, he must be more independent. See Goldman v. Comm'r, 39 F.3d 402, 408 (2nd Cir.1994) (finding taxpayers' reliance on accountant who was also a sales representative for investment unreasonable because of inherent conflict of interest); Pasternak v. Comm'r, 990 F.2d 893, 903 (6th Cir.1993) (finding reliance on promoters or their agents unreasonable because such persons are not independent of the investment); cf. Anderson, 62 F.3d at 1271 (finding taxpayer's reliance on an advisor who was an independent insurance agent and registered securities broker not unreasonable because the commission paid by taxpayer to the advisor, who was not affiliated with the investment, did not jeopardize the advisor's independence). 54 The Van Scotens' reliance on the advice of Mr. Hoyt was not reasonable. As the Tax Court found, Mr. Hoyt and his organization created and promoted the partnership, completed the Van Scotens' tax return, and received the bulk of the tax benefits from doing so. While Mr. Hoyt's status as an enrolled agent during the tax year at issue, his success in the Bales case, and his knowledge of the financial affairs of the partnership may speak to his professional competency, such facts do not alter the conclusion that he lacked the independence necessary to allow the Van Scotens to reasonably rely on his advice. Accordingly, the Tax Court correctly determined that the Van Scotens' reliance on Mr. Hoyt was unreasonable. 55 The Van Scotens argue next that they acted reasonably in relying on the tax professionals hired by Mr. Hoyt and his organization. The Tax Court found that the Van Scotens failed to establish in what manner they personally relied upon these professionals or even the details of what advice the professionals provided that would be applicable to their situation regarding the tax year at issue. The Tax Court also found that because the tax professionals were affiliated with the Hoyt organization, any such reliance would be unreasonable. The Van Scotens argue that this finding was in error because, in light of their lack of sophistication, it was not unreasonable for them to believe that the tax professionals retained by the Hoyt organization represented their specific interests. This argument is not persuasive. Regardless of their level of sophistication, it was unreasonable for the Van Scotens to rely on tax professionals that they did not personally consult with, explain their unique situation to, or receive formal advice from. Further, the tax professionals were agents of Mr. Hoyt and his organization. Thus, even if such advice were forthcoming, the Van Scotens could not reasonably rely on it. See Pasternak, 990 F.2d at 903 (finding reliance on promoters or their agents unreasonable). 56 Last, the Van Scotens argue that it was reasonable for them to rely on Edward's personal knowledge and experience regarding the merits of their investment. The Tax Court rejected this argument, finding that Edward lacked the expertise necessary to provide objectively reasonable advice concerning an investment in a Hoyt partnership. The Van Scotens maintain that the Tax Court applied too stringent of a standard to their reliance on Edward because in Anderson this court held that one does not have to be an expert in an industry before he can invest in the industry himself or recommend an investment to another. 62 F.3d at 1271. 57 We agree with the Van Scotens that, to the extent the Tax Court found their reliance on Edward's advice unreasonable because he was not an expert in the cattle industry, that finding is inconsistent with Anderson. We disagree, however, that Anderson supports their reliance on Edward here. The advisor in Anderson was the taxpayer's investment advisor who performed a far more thorough investigation of the business at issue than that performed by Edward. For example, the advisor in Anderson had his accountant and attorney review the business and check out its structure. Id. He spoke with the business's principal and looked into his background by checking his references, banks, other business connections and the Better Business Bureau. Id. The advisor also checked with other companies in the industry to ensure that the business could be competitive based on its purported assumptions. Id. 58 Here, on the other hand, Edward's investigation of the Hoyt partnerships was mostly limited to his review of the fairly generalized information he received from the Hoyt organization and his nephew. He did not seek advice from an independent professional such as an attorney or an accountant. To be sure, Edward had some experience with the cattle industry through living and working on dairy farms and he also had some investing experience, but such experiences certainly cannot substitute for his rather anemic investigation of the Hoyt partnerships. The Van Scotens reliance on Edward was not, therefore, reasonable. 6