Friday, April 20, 2012

Jerald W. White, et ux. v. Commissioner, TC Memo 2012-104 , Code Sec(s) 61; 72; 162; 301; 402; 419; 6662; 7491.

Reasonable Cause “Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 98. The good-faith reliance on the advice of an independent, competent professional as to the tax treatment of an item may meet this requirement. See id. (citing United States v. Boyle, 469 U.S. 241 [55 AFTR 2d 85-1535] (1985));sec. 1.6664-4(b), Income Tax Regs. Reliance on an opinion or advice must be based upon all pertinent facts and circumstances and the law as it relates to those facts and circumstances. Sec. 1.6664-4(c)(1)(i), Income Tax Regs.

To be reasonable, the professional tax advice must generally be from a competent and independent adviser unburdened with a conflict of interest and not from promoters of the investment. Mortensen v. Commissioner, 440 F.3d 375, 387 [97 AFTR 2d 2006-1229] (6th Cir. 2006), aff'g T.C. Memo. 2004-279 [TC Memo 2004-279]. “Courts have routinely held that taxpayers could not reasonably rely on the advice of promoters or other advisers with an inherent conflict of interest such as one who financially benefits from the transaction.” Tigers Eye Trading, L.L.C. v. Commissioner T.C. Memo. 2009-121 [TC Memo 2009-121] , (citing Hansen v. Commissioner, 471 F.3d 1021, 1031 [98 AFTR 2d 2006-8234] (9th Cir. 2006) (”a taxpayer cannot negate the negligence penalty through reliance on a transaction's promoters or on other advisors who have a conflict of interest”),aff'g T.C. Memo. 2004-269 [TC Memo 2004-269], Van Scoten v. Commissioner, 439 F.3d 1243, 1253 [97 AFTR 2d 2006-1420] (10th Cir. 2006) (”To be reasonable, the professional adviser cannot be directly affiliated with the promoter; instead, he must be more independent”),aff'g T.C. Memo. 2004-275 [TC Memo 2004-275], Barlow v. Commissioner, 301 F.3d 714, 723 [90 AFTR 2d 2002-6019] (6th Cir. 2002) (noting “that courts have found that a taxpayer is negligent if he puts his faith in a scheme that, on its face, offers improbably high tax advantages, without obtaining an objective, independent opinion on its validity”),aff'g T.C. Memo. 2000-339 [TC Memo 2000-339]; Goldman v. Commissioner, 39 F.3d 402, 408 [74 AFTR 2d 94-6923] (2d Cir. 1994) (taxpayer could not reasonably rely on professional advice of someone known to be burdened with an inherent conflict of interest—a sales representative of the transaction),aff'g T.C. Memo. 1993-480 [1993 RIA TC Memo ¶93,480], Pasternak v. Commissioner, 990 F.2d 893, 903 [71 AFTR 2d 93-1469] (6th Cir. 1993) (reliance on promoters or their agents is unreasonable because such persons are not independent of the investment), aff'g Donahue v. Commissioner, T.C. Memo. 991-181, and Illes v. Commissioner, 982 F.2d 163, 166 [71 AFTR 2d 93-1724] (6th Cir. 1992) (finding negligence where taxpayer relied on a person with financial interest in the venture), aff'g T.C. Memo. 1991-449 [1991 TC Memo ¶91,449]). “A promoter's self-interest makes such `advice' inherently unreliable.” Id.

Substantial Authority The amount of an understatement is reduced by that portion of the understatement which is attributable to: (1) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or (2) the taxpayer's adequately disclosing relevant facts in the return or in a statement attached to the return, with a reasonable basis for the tax treatment of such item by the taxpayer. Sec. 6662(d)(2)(B). “In evaluating whether a taxpayer's position regarding treatment of a particular item is supported by substantial authority, the weight of authorities in support of the taxpayer's position must be substantial in relation to the weight of authorities supporting contrary positions.” Antonides v. Commissioner, 91 T.C. 686, 702 (1988), aff'd, 893 F.2d 656 [65 AFTR 2d 90-521] (4th Cir. 1990); see also sec. 1.6662-4(d)(3)(i), Income Tax Regs. The substantial authority standard is objective and, therefore, it is not relevant in determining whether the taxpayer believed substantial authority existed. Sec. 1.6662-4(d)(3)(i), Income Tax Regs.

In Booth v. Commissioner, 108 T.C. 524, 578 (1997), we stated that although legal opinions are not authority, the “authorities underlying a legal opinion, however, may give rise to substantial authority for the tax treatment of an item.” Section 1.6662-4(d)(3)(iii), Income Tax Regs., provides that only the following are authority for purposes determining whether there is substantial authority for the tax treatment of an item: [A]pplicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases; and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin. *** (212) 588-1113

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