Friday, December 14, 2012

Reasonable cause - reliance on a Professional 1.6664-4(b)(1)

Stephen M. Gaggero v. Commissioner, TC Memo 2012-331 , Code Sec(s) 61; 1001; 1034; 6662.

Case Information:

Code Sec(s):       61; 1001; 1034; 6662
Docket:                Docket No. 21378-03.
Date Issued:       11/29/2012


 IV.       Penalties

The Commissioner imposed penalties under section 6662 based on a substantial understatement of tax because Gaggero's 1997's tax return reported no tax due and the determined deficiency totaled more than $180,000. [*51] Penalties under section 6662 are subject to the defense of reasonable, good-faith reliance on professional advice. Sec. 6664(c)(1); see also sec. 1.6664-4(a), Income Tax Regs.; Higbee v. Commissioner, 116 T.C. 438, 448 [*51] (2001). Whether the taxpayer acted with reasonable cause and in good faith depends upon all the pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Generally, a taxpayer must show that: (1) the adviser was a competent professional who had sufficient expertise to justify reliance; (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. See 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); see also Estate of La Meres v. Commissioner, 98 T.C. 294, 315-16 (1992).

Well. The problem here for the Commissioner is that we're not looking at Gaggero's good faith in the transaction as a whole—where he had to deal with a hard-nosed third party in Monticello and what seems to have been a very [*55] contentious relationship with a real-estate broker who wanted by turns to profit from the deal or torpedo it. We're looking instead at whether he reasonably relied in good faith on the advice of his professional tax adviser. And with both Walters specifically and K&A more generally, Gaggero made sure he was honest and completely forthcoming and that he followed their advice.

Gaggero consulted with K&A about the allocation of the sale price between BCC and himself. K&A, and in particular Walters, were expert tax advisers and competent in the tax matters at issue in this case. It was K&A who advised Gaggero how to report the transaction and to roll over the sale proceeds into another personal residence so that the gains from the sale would qualify for deferral under section 1034. The fact that the transaction began six years before its reporting reinforces our belief it had true and genuine economic substance, and we attribute the partial inaccuracy of the reporting as due solely to Gaggero's tax preparer.

We agree with the Commissioner on the amount of the gain that Gaggero must recognize, but do not sustain the penalty, so (212) 588-1113

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