Court Opinion

ID: 9366067
Source: CourtListenerOpinion
Date Created: 2023-01-25 20:02:00.472799+00
Date Added: 2024-06-11T17:15:49.544126
License: Public Domain

United States Tax Court

                         T.C. Summary Opinion 2023-2

                       ASHENAFI GETACHEW MULU,
                               Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 12975-21S.                                      Filed January 25, 2023.

                                     —————

Temple Keith Fogg, Elizabeth W. Segovis, Alejandro Rodriguez
(student), and Charlotte Schmidt (student), for petitioner.

Erika B. Cormier, Xheni D. Gallagher, and Michael E. D’Anello, for
respondent.

                              SUMMARY OPINION

       LEYDEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code 1 in effect
when the Petition was filed. Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case.

        1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

                                 Served 01/25/23
                                           2

      The Internal Revenue Service (IRS) 2 examined petitioner’s 2018
federal income tax return. The IRS issued a notice of deficiency dated
February 2, 2021, and determined a deficiency of $11,688 and a section
6662(a) accuracy-related penalty of $2,337.60 for 2018. Petitioner
timely filed a Petition for redetermination pursuant to section 6213(a).

       After concessions, the sole issue for decision is whether for 2018
petitioner is liable for a section 6662(a) accuracy-related penalty of
$1,212.20. The Court finds for respondent on this issue.

                                    Background

      Some of the facts have been stipulated and are so found. The
Stipulation of Facts and the accompanying Exhibits are incorporated
herein by this reference, except for paragraphs 30, 31, 32, and 33. 3

       Petitioner resided in Massachusetts when he timely filed the
Petition.

I.      Petitioner’s 2018 Tax Return

       Petitioner hired David Clerie to prepare his 2018 federal income
tax return. Friends and family in the Ethiopian immigrant community,
who were happy with the amounts of the refunds they received and how
quickly they received them, recommended Mr. Clerie to petitioner. Mr.
Clerie prepared petitioner’s tax returns for at least four years. Mr.
Clerie referred to himself as “Dave, Tax Doctor.”

     Mr. Clerie did not have a preparer tax identification number
(PTIN), 4 and the 2018 federal income tax return was electronically

       2 The Court uses the term “Internal Revenue Service” or “IRS” to refer to

administrative actions taken outside of these proceedings. The Court uses the term
“respondent” to refer to the Commissioner of Internal Revenue, who is the head of the
IRS and is respondent in this case, and to refer to actions taken in connection with this
case.
        3Respondent objected to paragraphs 30, 31, 32, and 33, and the Court ruled
that these paragraphs were inadmissible on the ground of relevancy under Rules 401
and 402 of the Federal Rules of Evidence.
        4 A PTIN is a required credential from anyone who prepares or assists in

preparing federal tax returns for compensation. Treas. Reg. § 1.6109-2. However,
many individuals prepare federal income tax returns without obtaining the PTIN. See
Nat’l Taxpayer Advoc., National Taxpayer Advocate 2022 Purple Book: Compilation of
Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax
                                    3

submitted as though it had been self-prepared by petitioner. Petitioner
has always relied on a paid preparer to prepare his tax returns.
Petitioner’s other federal income tax returns that Mr. Clerie prepared
also were submitted to the IRS as though they had been self-prepared
by petitioner. Petitioner had timely filed his past tax returns, and they
had never been examined by the IRS.

       In 2017 petitioner purchased a house. Mr. Clerie advised
petitioner to renovate the house for the purpose of renting the second
and third floors to pay for the cost of the purchase. Petitioner began
renting out the second and third floors of the house during 2018. This
house was petitioner’s first real estate purchase.

       Mr. Clerie visited petitioner’s workplace in February 2019 to
gather information to prepare his 2018 tax return and asked him
questions, including questions about the house he purchased and
whether he was renting and fixing it. Mr. Clerie also requested
petitioner’s documents, including his Form W–2, Wage and Tax
Statement, and Form 1099. Petitioner answered the questions and
provided Mr. Clerie with his documents.

       Petitioner’s 2018 federal income tax return prepared by Mr.
Clerie claimed deductions and reported expenses related to the purchase
of the house and costs incurred with respect to the rental of the second
and third floors. With respect to his real estate petitioner claimed
passive activity losses on Form 8582, Passive Activity Loss Limitations,
and deductions on Schedule E, Supplemental Income and Loss, that
were related to the purchase of the house. However, petitioner
substantiated only $9,500 in repairs and conceded the remainder.
Petitioner also claimed deductions for car and truck expenses on
Schedule C, Profit or Loss From Business, and reported his principal
business or profession as a “driver,” in part because he used his vehicle
to drive his parents and others in his community to church and to
commute to his jobs. Petitioner concedes he is not entitled to those
deductions.

      During the 2018 tax year petitioner worked as a pharmacist.
However, the 2018 return prepared by Mr. Clerie listed petitioner’s
occupation as “Laborer.”

Administration 9 (2021) (“Authorize the IRS to Establish Minimum Competency
Standards for Federal Tax Return Preparers”).
                                   4

II.    Petitioner’s Filing of His 2018 Tax Return

      Petitioner became concerned when he had not received a copy of
his 2018 federal income tax return and the time for filing was
approaching. He decided to check whether it was filed. Petitioner made
many efforts to obtain a copy of his return from Mr. Clerie. Ultimately,
he drove to Mr. Clerie’s home.

       At Mr. Clerie’s home he met Mr. Motoban, who told petitioner he
was Mr. Clerie’s brother. Petitioner had never met Mr. Motoban. Mr.
Motoban told petitioner that Mr. Clerie had passed away on March 8,
2019. Mr. Motoban also told petitioner that he was handling Mr. Clerie’s
tax return and tax return preparation business. Petitioner did not ask
Mr. Motoban questions to determine whether Mr. Motoban was
qualified to file his tax return or to handle Mr. Clerie’s tax return and
preparation business.

       Petitioner agreed to have Mr. Motoban file his 2018 federal tax
return. Mr. Motoban informed petitioner that his return had been
prepared and e-filed using FreeTaxUSA tax preparation software.
Petitioner did not review the tax return before it was e-filed. He
subsequently learned that Mr. Motoban is not Mr. Clerie’s brother and
that Mr. Motoban does not have a PTIN.

III.   IRS Correspondence

       The IRS sent petitioner a Letter 3572, dated December 23, 2019,
that informed him that the IRS was examining his 2018 tax return.
That letter also requested that petitioner call for an appointment and
listed the items on his return that the IRS was examining. Although
the letter was addressed to petitioner’s correct address, he did not
receive it and thus, he did not respond to it.

      The IRS subsequently sent petitioner Letter 915, Examination
Report Transmittal, signed by a group manager, along with Form 4549,
Report of Income Tax Examination Changes, dated February 4, 2020.
Also on February 4, 2020, the immediate supervisor of the IRS examiner
who determined an accuracy-related penalty for petitioner’s 2018 tax
year signed a Civil Penalty Lead Sheet and Civil Penalty Approval
Form, personally approving of the penalty in writing.

       Petitioner subsequently received a notice of deficiency, dated
February 2, 2021, for tax year 2018. After receiving the notice of
deficiency, petitioner filed a Petition with the Court. After filing the
                                           5

Petition, petitioner received a contact letter from the IRS Appeals officer
(AO) assigned to the case. 5 Petitioner and the AO discussed the case,
but they could not reach a settlement. Petitioner submitted a copy of a
proposed amended 2018 federal income tax return. The amended tax
return eliminated the claimed Schedule C deductions but also contained
multiple inaccuracies, including listing petitioner’s occupation as
“General Helper.” The person who prepared the proposed amended 2018
federal income tax return did not sign it. Petitioner submitted a copy of
that proposed amended tax return to the AO.

                                     Discussion

      Section 6662(a) and (b)(2) imposes an accuracy-related penalty
equal to 20% of the amount of any underpayment of tax required to be
shown on a return that is attributable to any substantial
understatement of income tax. An understatement is a “substantial
understatement” if it exceeds the greater of $5,000 or 10% of the tax
required to be shown on the return. I.R.C. § 6662(d)(1)(A). Respondent
has determined the section 6662(a) penalty on the basis of a substantial
understatement of income tax.

I.      Burden of Production

      The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for any penalty. I.R.C. § 7491(c);
Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). Once the
Commissioner meets his burden of production, the taxpayer must come
forward with persuasive evidence that the Commissioner’s
determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933).

      Substantial understatement penalties generally must be
approved in writing by the immediate supervisor of the IRS employee
who made the penalty determination. See I.R.C. § 6751(b). Respondent
has asserted that the stipulated Civil Penalty Lead Sheet and the Civil
Penalty Approval Form, each dated February 4, 2020, and signed by the
IRS examiner’s immediate supervisor on February 4, 2020, meets the

        5 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,
983 (2019). We will use the name in effect at the times relevant to this case, i.e., the
Office of Appeals or Appeals.
                                   6

section 6751(b) written supervisory approval requirement. The Court
agrees.

       Further, the record shows an undisputed understatement of tax,
attributable to the Schedule E and Schedule C deductions disallowed by
respondent and conceded by petitioner, that meets the definition of a
substantial understatement of income tax. See I.R.C. § 6662(d). Thus,
respondent has met his burden of production with respect to the
accuracy-related penalty.

II.   Reasonable Cause and Good Faith

       Petitioner asserts that he should not be liable for the penalty
because he consistently acted with reasonable cause and in good faith.
Petitioner claims that he lacks knowledge regarding tax and finance and
has always relied on a tax return preparer to prepare his federal income
tax returns. He asserts he did not understand the depreciation and
expenses of the first and only real property he purchased and renovated
upon Mr. Clerie’s advice. Rather, he asserts that he was victimized by
an unscrupulous return preparer who had been recommended to him by
family and friends of the Ethiopian immigrant community.

      Respondent contends that petitioner’s reliance on Mr. Clerie or
Mr. Motoban does not constitute reasonable cause. Respondent further
contends that petitioner was a well-educated professional who worked
in a complex, detail-oriented field and who should have sufficient
knowledge to understand the basics of his 2018 federal income tax
return and that he had a duty to review it for accuracy. Respondent
contends that the inaccurate listing of petitioner’s occupation on his
return demonstrates that petitioner did not adequately review it.

        A taxpayer may avoid a section 6662(a) penalty by showing that
there was reasonable cause for the underpayment and that the taxpayer
acted in good faith. I.R.C. § 6664(c)(1). This determination is made on
a case-by-case basis, taking into account all pertinent facts and
circumstances. Treas. Reg. § 1.6664-4(b)(1); see Higbee, 116 T.C. 438.
“Relevant factors include the taxpayer’s efforts to assess his proper tax
liability, including the taxpayer’s reasonable and good faith reliance on
the advice of a professional such as an accountant.” Higbee, 116 T.C.
at 448–49.

       The Court finds that petitioner did not exercise diligence and
prudence or good faith because he did not review the 2018 tax return
before it was filed. A taxpayer must exercise diligence and prudence in
                                     7

filing his return. Stough v. Commissioner, 144 T.C. 306, 323 (2015).
Reasonable cause is not met if a cursory review of a return might have
revealed errors. Walton v. Commissioner, T.C. Memo. 2021-40, at *12.
A taxpayer has a duty to read and review his return. Id. at *12–13. The
record shows that petitioner did not review his return. See Trial Tr. 29
(“Q Before he filed the return, did you review it? A I don’t know -- I don’t
know if I say I reviewed, no.”). If petitioner had reviewed his return, he
would have noticed that his occupation was listed as “Laborer.”
Petitioner was a pharmacist, and the obvious listing of his occupation as
laborer should have prompted him to question the accuracy of the
return. Further, given that he was aware that for 2018 he was claiming
tax deductions with respect to real estate and had not done so in the
past, petitioner was put on notice that he should have reviewed the
return with respect to such deductions. Therefore, regardless of
whether he understood the rules regarding depreciation or deducting
real estate expenses, petitioner had a duty to review the return and
exercise prudence before filing it. He did not do so.

      Petitioner did not have reasonable cause for the underpayment
and did not exercise good faith with respect to his 2018 federal income
tax return. Accordingly, petitioner is liable for the accuracy-related
penalty for an underpayment due to a substantial understatement of
income tax for taxable year 2018.

      To reflect the foregoing,

      Decision will be entered for respondent.