Court Opinion

ID: 4337018
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:07:56.787707+00
Date Added: 2024-06-11T14:47:32.303175
License: Public Domain

T.C. Memo. 2008-83

                      UNITED STATES TAX COURT

         RICHARD A. AND CATHY G. PRUDHOMME, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 6680-06.               Filed April 3, 2008.

     William A. Roberts and Kyle Coleman, for petitioners.

     Alvin A. Ohm, for respondent.

              MEMORANDUM FINDINGS OF FACT AND OPINION

     KROUPA, Judge:   Respondent determined a $576,728 deficiency in

petitioners’ Federal income tax for 2003 and determined that

petitioners were liable for a $28,565.70 addition to tax for

failure to file a timely return under section 6651(a)(1), a $64.98

addition to tax for failure to pay estimated taxes under
                                  -2-

section 6654, and a $115,345.60 accuracy-related penalty under

section 6662.1

     After concessions,2 two issues remain for decision.   The first

issue is whether petitioners are liable for an addition to tax

under section 6651(a)(1) for failure to file timely their income

tax return, and the second issue is whether petitioners are liable

for the accuracy-related penalty under section 6662(a).    We hold

that petitioners are liable for the addition to tax for failure to

file timely and the accuracy-related penalty.

                          FINDINGS OF FACT

     The stipulation of facts and the accompanying exhibits are

incorporated by this reference.   Petitioners resided in Texas at

the time they filed their petition.

     Petitioners Richard A. and Cathy G. Prudhomme (Mr. and Mrs.

Prudhomme) started Bronco Oilfield Services, Inc. (Bronco) in 1981.

Bronco provided services, rentals, and equipment for the oil

industry.   Cathy G. and Richard A. Prudhomme owned 55 and 45

percent, respectively, of Bronco.   Petitioners sold Bronco, a C

corporation, through a broker in 2003.

     1
      All section references are to the Internal Revenue Code in
effect for the year at issue.
     2
      Petitioners paid the $576,728 underpayment of tax on Nov. 28,
2005, before respondent issued the deficiency notice on Jan. 5,
2006. Although they originally disputed the deficiency and the
addition to tax for failure to pay estimated taxes in their
petition, petitioners eventually conceded both issues. We have
jurisdiction over the addition to tax for failure to file a timely
return and the penalty. See, e.g., Estate of Di Rezza v.
Commissioner, 78 T.C. 19, 30 (1982).
                                  -3-

     Petitioners have high school educations.    They successfully

ran Bronco for many years.   Mr. Prudhomme worked in the field, and

Mrs. Prudhomme ran the office.    Mrs. Prudhomme managed the clerical

staff and prepared the company’s financial information for their

accountants.   In this capacity, she assisted with the preparation

of Bronco’s general ledgers.   The accountants contacted Mrs.

Prudhomme with questions regarding Bronco’s finances and

petitioners’ personal finances.

     Petitioners hired Jon Hurt’s (Mr. Hurt) accounting firm to

prepare their 2003 individual and Bronco’s corporate income tax

returns.   Alice Vaughan (Ms. Vaughan) and Dwayne Whitley (Mr.

Whitley) worked as accountants and return preparers for Mr. Hurt.

Ms. Vaughan had prepared corporate and individual returns for

petitioners for many years before 2003.   Although Ms. Vaughan

prepared Bronco’s corporate return for 2003, Mr. Hurt signed the

return for 2003 as the preparer.3   Mr. Whitley prepared

petitioners’ individual Federal income tax return for 2003, and Mr.

Hurt signed as the preparer.   Mrs. Prudhomme knew that Mr. Whitley,

and not Ms. Vaughan, prepared petitioners’ individual income tax

return for 2003.

     Petitioners provided their accountants with limited

information from which to prepare the individual return for 2003.

Petitioners did not cause Bronco to issue Forms 1099-DIV, Dividends

and Distributions, reflecting the proceeds from the sale of Bronco,

     3
     Bronco’s corporate returns are not at issue in this case.
                                  -4-

and they did not provide information about the dividends and Bronco

sale to Mr. Whitley.    Petitioners did not consult Mr. Whitley, Mr.

Hurt, or Ms. Vaughan about any aspect of the Bronco sale before it

occurred.

        Mr. Whitley was vaguely aware that petitioners had sold Bronco

but knew very little else about the transaction.    Mr. Whitley was

not familiar with the Form 1120, U.S. Corporation Income Tax

Return, for Bronco.    Petitioners did not provide Mr. Whitley with

their bank statements.    Petitioners provided their accountants with

Bronco’s general ledger, which Mrs. Prudhomme had prepared and

maintained.    They also provided their brokerage statement from

Morgan Stanley.

        Mrs. Prudhomme’s involvement with respect to filing the

return was limited to picking up the tax return from the preparer

on the day that she signed and mailed it.    When she picked up the

return, she asked Mr. Hurt whether any tax was due, looked to line

72 to confirm that nothing was due, and then signed and mailed the

return.    Mrs. Prudhomme did not check to see whether all items of

income, including the income from the sale of Bronco, were reported

on the return.

        Mr. Prudhomme did not read or sign the return.   Mrs. Prudhomme

signed Mr. Prudhomme’s name on the return in addition to her own

name.

        Petitioners’ initial filing deadline for their individual

income tax return for 2003 was April 15, 2004.    They applied for
                                  -5-

and received two extensions.    Their extended return filing date was

October 15, 2004.    Petitioners’ tax return for 2003 was postmarked

October 27, 2004, 12 days beyond the extended filing date.

Respondent received the return on October 29, 2004.

        Petitioners’ late-filed return for 2003 reported a tax due of

$431,568, based on their reporting $2,194,666 of adjusted gross

income.    Petitioners deposited $406,579, $2,000,000, and $3,900,000

from the sale of Bronco into their personal bank accounts during

2003.    Petitioners failed to report $3.2 million in dividend income

and $450,000 of long-term capital gain from the sale of Bronco.

Petitioners’ income tax liability for 2003 was $1,008,296, and not

$431,568, the amount they reported.     Respondent determined that

petitioners were liable for a $28,565.70 addition to tax for late

filing and a $115,345.60 accuracy-related penalty.

                                OPINION

Addition to Tax for Failure To File

        We first address the penalty for failure to file timely.

Respondent determined that petitioners were liable for a $28,565.70

addition to tax under section 6651(a)(1) for failure to file a

timely return.

        An addition to tax is due for failure to file a tax return on

or before the specified filing date unless it is shown that such

failure is due to reasonable cause and not due to willful neglect.

Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985).

The addition to tax equals 5 percent of the tax reported as due but
                                     -6-

remaining unpaid on the return filing date if the failure to file

timely is for 1 month or less.      Sec. 6651(a)(1).

        The Commissioner has the burden of production with respect to

additions to tax.      Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
438, 446 (2001).      To meet this burden, the Commissioner must

produce sufficient evidence establishing that it is

appropriate to impose the additions to tax.       See Higbee v.

Commissioner, supra at 446-447.

        Petitioners’ income tax return for 2003 was due April 15,

2004.       They applied for and received two extensions making October

15, 2004, the extended filing date.        The envelope containing

petitioners’ tax return for 2003 was postmarked October 27, 2004,

12 days late, and respondent received it on October 29, 2004.

Petitioners concede that this evidence is sufficient to carry

respondent’s burden of production.

        Petitioners bear the burden of proof with respect to whether

there was reasonable cause for their late filing.       Id. at 446.

Petitioners argue that they are not liable for the addition to tax

because respondent failed to prove willful neglect.       The taxpayer,

however, has the burden of proving both (1) that the failure did

not result from willful neglect, and (2) that the failure was due

to reasonable cause.      United States v. Boyle, supra at 245 (quoting

section 6651(a)(1)); see sec. 7491(c).4       A taxpayer wishing to

        4
      Sec. 7491(c), which postdates United States v. Boyle, 469
U.S. 241 (1985), does not relieve a taxpayer of the burden of proof
                                                     (continued...)
                                   -7-

demonstrate reasonable cause must show the exercise of ordinary

business care and prudence in spite of the late filing.      United

States v. Boyle, supra at 246; Crocker v. Commissioner, 92 T.C.
899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

     Income tax returns are among the types of documents that are

considered to be delivered on the postmark date only if the

postmark falls within the prescribed period, or on or before the

prescribed date, for the filing of the return.      Sec. 7502(a).

Unavoidable postal delay may fall within the meaning of reasonable

cause.   United States v. Boyle, supra at 243 n.1, 248 n.6.

     Mrs. Prudhomme testified that she mailed the return on October

15, 2007.   This contradicts the postmark date on the envelope in

which the return was mailed.   Petitioners argue on brief that the

post office failed to postmark and send the item for 12 days.

Petitioners offer no evidence to support this claim other than

making the unsupported observation that October 15, 2004, is a busy

day for the U.S. Postal Service.    Even if we found Mrs. Prudhomme’s

testimony and explanation credible, this would not render the

return timely.   The envelope in which the return was mailed bore a

postmark date that was after the last day for filing the return.

The return is thus untimely as a matter of law.      See, e.g., Drake

v. Commissioner, 554 F.2d 736 (5th Cir. 1977); Hendley v.

Commissioner, T.C. Memo. 2000-348.       We therefore hold that

     4
      (...continued)
or production respecting such defenses as reasonable cause.       Higbee
v. Commissioner, 116 T.C. 438, 446 (2001).
                                  -8-

petitioners did not show that their failure to file timely was due

to reasonable cause.    Accordingly, respondent’s determination that

petitioners are liable for the addition to tax under section

6651(a)(1) for failure to file timely is not in error.

Accuracy-Related Penalty

        We turn now to respondent’s determination that petitioners are

liable for the accuracy-related penalty under section 6662.

Respondent has the burden of production under section 7491(c) and

must come forward with sufficient evidence that it is appropriate

to impose the penalty.    See Higbee v. Commissioner, supra at 446-

447.

        A taxpayer is liable for an accuracy-related penalty in the

amount of 20 percent for any part of an underpayment attributable

to, among other things, a substantial understatement of income tax.

See sec. 6662(a) and (b)(2); sec. 1.6662-2(a)(2), Income Tax Regs.5

There is a substantial understatement of income tax if the amount

of the understatement exceeds the greater of 10 percent of the tax

required to be shown on the return, or $5,000.    See sec.

6662(b)(2), (d)(1)(A); sec. 1.6662-4(a) and (b)(1), Income Tax

Regs.

        5
      Respondent determined in the alternative that petitioners
were liable for the accuracy-related penalty for negligence or
disregard of rules or regulations under sec. 6662(b)(1) for the
years at issue. Because respondent has proven that petitioners
substantially understated their income tax for the year at issue,
we need not consider whether petitioners were negligent or
disregarded rules or regulations.
                                   -9-

     Petitioners argue that respondent failed to meet his burden of

production under section 7491(c).    We disagree.    Petitioners paid

the $576,728 deficiency before respondent issued the notice of

deficiency.   Petitioners conceded the underpayment at trial and on

brief.   The deficiency was sufficiently large to meet the statutory

threshold for a substantial understatement of tax.      Petitioners

reported $431,568 of income tax on the tax return for 2003 but

should have reported $1,008,296 of tax.      Their $576,728

understatement exceeds 10 percent of the tax required to be shown

on the return.

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion.      See

sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.      Taxpayers bear

the burden of proof with respect to whether they acted in good

faith and whether there was reasonable cause for the underpayment

giving rise to the accuracy-related penalty.      Higbee v.

Commissioner, 116 T.C. at 446.

     The determination of whether the taxpayers had reasonable

cause for, and acted in good faith with respect to, an underpayment

of tax is made on a case-by-case basis, considering all the

pertinent facts and circumstances.       Williams v. Commissioner, 123
T.C. 144, 153 (2004); Higbee v. Commissioner, supra at 448; sec.

1.6664-4(b)(1), Income Tax Regs.    One pertinent factor is whether
                                 -10-

the underpayment is attributable to reliance on the advice of a

professional tax adviser that was reasonable under all the facts

and circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   Another

important factor is the extent of the taxpayer’s effort to assess

his or her proper tax liability.   Williams v. Commissioner, supra

at 153; sec. 1.6664-4(b)(1), Income Tax Regs.   We address these

factors in turn.

     1.     Petitioners’ Reliance on a Professional Tax Adviser

     We first consider whether it was reasonable for petitioners to

rely on Mr. Hurt or Mr. Whitley.

     Reasonable cause can exist when a taxpayer selects a competent

tax adviser, supplies that adviser with all relevant information,

and, consistent with ordinary business care and prudence, relies on

the adviser’s professional judgment as to the taxpayer’s tax

obligations.   See sec. 6664(c); Lehrer v. Commissioner, T.C. Memo.

2006-156.   Reliance on the advice of a professional tax adviser

does not, standing alone, absolve a taxpayer of responsibility for

an underpayment of tax.   United States v. Boyle, 491 U.S. at 251;

Deihl v. Commissioner, T.C. Memo. 2005-287.   Rather, it is a factor

to be considered when an underpayment results from reliance on such

advice.   United States v. Boyle, supra at 251; Deihl v.

Commissioner, supra.

     Even if a taxpayer establishes that a competent tax adviser

has been selected, the adviser was provided with the relevant

information, and the taxpayer relied on the adviser’s professional
                                  -11-

judgment, the taxpayer remains responsible for reading and

reviewing the return to verify that all income items are included.

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Loftus

v. Commissioner, T.C. Memo. 1992-266.    Generally, the

responsibility to file accurate returns and pay tax when due rests

upon the taxpayer and cannot be delegated.   Pritchett v.

Commissioner, 63 T.C. 149, 173-175 (1974).   The taxpayer may have

to bear the consequences of any negligent errors committed by his

or her agent.   Id.

     Petitioners contend that their reliance on Mr. Hurt and Mr.

Whitley insulates them from liability for the accuracy-related

penalty.   We are not persuaded, however, that petitioners acted

reasonably and in good faith.    Petitioners provided their

accountants with insufficient information to accurately and

properly prepare their returns.

     Petitioners did not fully inform Mr. Whitley, their return

preparer, of the pertinent details of their finances, including the

details of the sale of Bronco.    We note that Mr. Whitley prepared

the return for 2003, and Mr. Hurt reviewed and signed it, yet

neither noticed the omission of the Bronco sales proceeds from

income.    Mr. Whitley testified that he had only a “vague” notion of

petitioners’ sale of Bronco.    Petitioners did not cause the

issuance of Forms 1099-DIV for the dividends they received from

Bronco.    Petitioners did not provide their accountants with bank

statements or personal books and bank records for the year.     Other
                                 -12-

than Bronco’s general ledgers (which were provided to Ms. Vaughan,

but not Mr. Whitley) and certain information from Morgan Stanley

that did not reveal the Bronco sale, petitioners failed to provide

relevant information to their return preparer.

     2.     Petitioners’ Efforts To Assess the Proper Tax Liability

     We next address the extent of petitioners’ efforts to assess

their proper tax liability.   Generally, the most important factor

in determining whether taxpayers had reasonable cause for, and

acted in good faith with respect to, their underpayment of tax is

the extent of their efforts to assess their proper tax liability.

Williams v. Commissioner, supra at 153; Compaq Computer Corp. &

Subs. v. Commissioner, 113 T.C. 214, 226 (1999), revd. on other

grounds 277 F.3d 778 (5th Cir. 2001); sec. 1.6664-4(b)(1), Income

Tax Regs.   Generally, the taxpayer who does not make sufficient

efforts to assess his or her proper tax liability has not acted

with reasonable cause and in good faith with respect to an

underpayment of tax.   See Mailman v. Commissioner, 91 T.C. 1079,

1084-1085 (1988).   Also, the taxpayer may be charged with knowledge

of Federal tax law.    Niedringhaus v. Commissioner, 99 T.C. 202, 222

(1992).

     Petitioners did not make adequate efforts to assess their

proper tax liability for 2003.   They did not verify that all income

items were included on their return.    Mr. Prudhomme failed to read

or sign the return.    Mrs. Prudhomme explained that she asked Mr.
                                -13-

Hurt whether they owed anything, looked to line 72, and then signed

the return without even glancing at anything else.

     Petitioners portray themselves as unsophisticated taxpayers

who relied upon tax professionals to prepare their return.

Although they had high school educations, petitioners were very

successful business people.   Mrs. Prudhomme had overseen the

clerical staff of Bronco for over 20 years.    She was responsible

for and coordinated Bronco’s financial information with

petitioners’ accountants.   Yet she did not make any effort to

determine whether all items of income were included on the return.

     Moreover, if petitioners failed to understand the return, they

did not request clarification from their preparers.    Mrs. Prudhomme

knew that different accountants prepared the corporate and

individual income tax returns for 2003.    She also knew that her

longtime tax return preparer did not prepare the individual return

for 2003.   Yet she failed to review the tax return or even ask

about the income from the sale of Bronco (petitioners’ single

largest transaction for the year).     Even if we were able to find

that petitioners were ignorant of the tax law, their failure to

provide sufficient information to enable their accountants to

prepare their return properly cannot be ignored and has not been

adequately explained.

     3.     Conclusion

     Petitioners’ efforts to assess their tax liability were

insufficient, and their behavior fell below the standard of
                                  -14-

reasonable care and good faith.    Petitioners could not in good

faith rely upon their accountants’ advice or preparation of their

returns when they neither shared with their accountants the details

of their financial transactions nor made any effort to review the

return that their accountants prepared.      Accordingly, we sustain

respondent’s determination of the section 6662 accuracy-related

penalty.

     We have considered all the remaining arguments that the

parties made and, to the extent not addressed, we find them to be

irrelevant, moot, or without merit.      Accordingly, we sustain

respondent’s determinations with respect to the addition to tax

under section 6651(a)(1) and the accuracy-related penalty under

section 6662.

     To reflect the foregoing,

                                         Decision will be entered for

                                  respondent.