reasonable cause - reliance on an attorney

Reliance on an attorney is normally reasonable cause sufficient to abate a negligence penalty.  The case below notes that for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) accuracy-related penalty determined by the Commissioner, the taxpayer must prove *** that the taxpayer meets each requirement of the following three-prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reli[pg. 226] ance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment. ***

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002). 

Faina Bronstein v. Commissioner, 138 T.C. No. 21, Code Sec(s) 163.

FAINA BRONSTEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Case Information:

[pg. 221]

Code Sec(s):       163

Docket:                Dkt. No. 24168-10.

Date Issued:       05/17/2012 .

Judge:   Opinion by Goeke, J.

Tax Year(s):        Year 2007.

Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty if any part of an underpayment of tax required to be shown on a return is due to, among other things, negligence or disregard of rules or regulations or a substantial understatement of income tax. The penalty is 20% of the portion of the underpayment of tax to which the section applies. Sec. 6662(a).

The Commissioner bears the burden of production on the applicability of an accuracy-related penalty in that he must come forward with sufficient evidence indicating that it is proper to impose the penalty. See  sec. 7491(c); see also Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets this burden, the burden of proof remains with the taxpayer, including the burden of proving that the penalty is inappropriate because of reasonable cause and good faith. See Higbee v. Commissioner, 116 T.C. at 446-447.

Respondent satisfies his burden of production by showing that the understatement meets the definition of “substantial”. See Janis v. Commissioner, T.C. Memo. 2004-117 [TC Memo 2004-117], aff'd, 461 F.3d 1080 [98 AFTR 2d 2006-6075] (9th Cir. 2006), and aff'd, 469 F.3d 256 [98 AFTR 2d 2006-7836] (2d Cir. 2006). An understatement of income tax is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). An “understatement” is defined as the excess of the [pg. 225] tax required to be shown on the return over the tax actually shown on the return, less any rebate. Sec. 6662(d)(2)(A). The understatement of income tax in this case is $7,589, which exceeds the greater of 10% of the tax required to be shown on the return 8 or $5,000 and is thus “substantial”. Respondent has therefore met his burden of production.

The amount of an understatement shall be 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) any item if the taxpayer adequately disclosed relevant facts affecting the item's tax treatment in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of the item by the taxpayer. Sec. 6662(d)(2)(B).

Although petitioner claims to have followed the advice given to her by her tax adviser, 9 she has made no attempt to establish that the reliance was reasonable. See Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff'd on another issue, 904 F.2d 1011 [66 AFTR 2d 90-5322] (5th Cir. 1990), aff'd, 501 U.S. 868 [68 AFTR 2d 91-5025] (1991); sec. 1.6664-4(b)(1), Income Tax Regs. We have previously held that for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) accuracy-related penalty determined by the Commissioner, the taxpayer must prove *** that the taxpayer meets each requirement of the following three-prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reli[pg. 226] ance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment. ***

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002). Petitioner has failed to prove that she satisfied any of these three requirements.

Petitioner has failed to show substantial authority or a reasonable basis for the position she took on her 2007 tax return. Petitioner has also faileAlthough petitioner claims to have followed the advice given to her by her tax adviser, 9 she has made no attempt to establish that the reliance was reasonable. See Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff'd on another issue, 904 F.2d 1011 [66 AFTR 2d 90-5322] (5th Cir. 1990), aff'd, 501 U.S. 868 [68 AFTR 2d 91-5025] (1991); sec. 1.6664-4(b)(1), Income Tax Regs. We have previously held that for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) accuracy-related penalty determined by the Commissioner, the taxpayer must prove *** that the taxpayer meets each requirement of the following three-prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reli[pg. 226] ance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment. ***

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002). Petitioner has failed to prove that she satisfied any of these three requirements.

Petitioner has failed to show substantial authority or a reasonable basis for the position she took on her 2007 tax return. Petitioner has also faile

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