                       T.C. Memo. 2008-79



                     UNITED STATES TAX COURT



         RONALD D. AND NADINE M. NEUFELD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8101-06.              Filed April 2, 2008.



          R determined deficiencies and penalties pursuant
     to sec. 6662(a), I.R.C., for Ps’ 2001 and 2002 taxable
     years. The parties stipulated to Ps’ taxable income
     for 2001 and 2002.

          Held: Ps are liable for the sec. 6662(a), I.R.C.,
     penalty for 2001 and 2002.

          Held, further:   Ps are liable for the sec. 6673,
     I.R.C., penalty.



     Ronald D. Neufeld and Nadine M. Neufeld, pro sese.

     Christopher B. Sterner, Barbara M. Leonard, Kimberely J.

Peterson, Rachel L. Hester, and Matthew A. Mendizabal, for

respondent.
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             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of a deficiency.   After concessions,1 the

issues for decision are:2

     (1) Whether petitioners are liable for the section 6662(a)3

penalty for taxable years 2001 and 2002 in the amounts of $8,433

and $12,596, respectively;4




     1
      The parties stipulated that petitioners’ taxable income for
2001 and 2002 was $159,114 and $229,522, respectively. On the
basis of the stipulations, the recalculated deficiencies for 2001
and 2002, according to respondent, are $42,213 and $62,981,
respectively.
     2
      Although petitioners stipulated the amount of their taxable
income for 2001 and 2002, see supra note 1, they continued to
argue at trial and on brief that the deficiencies could not be
sustained. Their contention was based entirely on the meritless
and frivolous argument that respondent was precluded from
assessing tax liabilities because the Commissioner did not
maintain tax tables in the Internal Revenue Code or regulations
pursuant to sec. 1(f) for taxable years 1993 and later. The IRS
publishes tax tables for each tax year in revenue procedures and
includes these tax tables in the instructions to Form 1040, U.S.
Individual Income Tax Return, for each tax year. See Rev. Proc.
2001-59, sec. 3.01, 2001-2 C.B. 623; Rev. Proc. 2001-13, sec.
3.01, 2001-1 C.B. 337; Instructions for 2002 Form 1040;
Instructions for 2001 Form 1040.
     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
     4
      The sec. 6662(a) penalty amounts are based on the
stipulated taxable income amounts and respondent’s revised
deficiency computations. See supra note 1. The penalty amounts
in the notice of deficiency were $12,746 and $16,349, for 2001
and 2002, respectively.
                                - 3 -

     (2) whether to grant respondent’s motion to impose sanctions

pursuant to section 6673.

                          FINDINGS OF FACT

     Some of the facts have been stipulated by the parties.   The

stipulations, with accompanying exhibits, are incorporated herein

by this reference.    At the time the petition was filed,

petitioners resided in Sonora, California.

     During 2001 and 2002, Ronald D. Neufeld (Mr. Neufeld)

operated a dentistry business reported on Schedule C, Profit or

Loss From Business.    As stipulated, petitioners’ taxable income

for 2001 and 2002 was $159,114 and $229,522, respectively.    See

supra note 1.

     Petitioners’ 2001 and 2002 joint Forms 1040, U.S. Individual

Income Tax Return, and 2002 joint Form 1040X, Amended U.S.

Individual Income Tax Return, were prepared by Richard Fisher

(Mr. Fisher), a tax return preparer recommended by Mr. Neufeld’s

brother-in-law.   Petitioners admitted that they did not

independently look into Mr. Fisher’s qualifications; instead,

they relied on Mr. Neufeld’s brother-in-law’s recommendation.5

     Mr. Neufeld used the computer accounting program Quicken to

track the income and expenses of his dentistry business for


     5
      At trial, Mr. Neufeld stated that when he met Mr. Fisher
for the first time, he thought he was a competent accountant and
tax-preparer because “He had certificates on the wall and lots of
them. He seemed to be really organized. It was a nice office.
And so I had no reason to believe or to doubt his competence.”
                                - 4 -

taxable years 2001 and 2002 and provided Mr. Fisher with a

printed register created by Quicken (Quicken registers).

Mr. Fisher used the information in Mr. Neufeld’s Quicken

registers to prepare petitioners’ 2001, 2002, and amended 2002

joint Federal income tax returns.

         Neither petitioner met with Mr. Fisher to discuss their

Federal income tax returns or their tax liabilities for 2001 or

2002.    After completing petitioners’ Federal income tax returns

using the information in Mr. Neufeld’s Quicken registers,

Mr. Fisher mailed the returns to petitioners along with a “little

memo, [regarding] the amount of tax that * * * [petitioners]

[owed].”    Petitioners signed their 2001 and 2002 joint Federal

income tax returns without examining them and mailed their

returns to the IRS.6

     Petitioners filed their 2001 joint Federal income tax return

on October 1, 2002, which reflected a tax liability of $15,136.

Petitioners filed their 2002 joint Federal income tax return on

August 8, 2003, which reflected a tax liability of $20,532.

Petitioners filed an amended joint Federal income tax return for

2002 on August 5, 2004, which reflected a tax liability of



     6
      Petitioners admitted that “Due to their complete reliance
on their accountant, and inability to understand tax forms,
neither Petitioner examined either return prior to signing or
submitting them.” Mr. Neufeld testified that “I do not even look
them [tax returns] over because they’re complicated, to me. * * *
I write a check and I put them in the mail and I send them.”
                                - 5 -

$16,253.   Petitioners did not discuss their 2002 amended return,

nor the reason they were filing an amended return, with

Mr. Fisher.

     On February 2, 2006, respondent issued to petitioners the

aforementioned notice of deficiency that reflected deficiencies

of $63,731 and $81,746 for taxable years 2001 and 2002,

respectively, and penalties pursuant to section 6662(a) of

$12,746 and $16,349 for taxable years 2001 and 2002,

respectively.    On May 1, 2006, this Court received a letter from

petitioners in response to the notice of deficiency and filed the

letter as a petition.   By order dated May 3, 2006, petitioners

were ordered to file a proper amended petition on or before

June 19, 2006.   The time for petitioners to file a proper amended

petition was subsequently extended to July 19, 2006.    On June 21,

2006, petitioners filed with the Court their amended petition,

which stated in pertinent part:

          The deficiencies set forth in the notice of
     deficiency are based on the following errors:

          i. Respondent’s erroneous disallowance of several
     incurred expenses, including office, insurance,
     vehicle, wage, legal and professional, taxes and
     licenses, commissions and fees, and depreciation and
     capital losses;

          ii. asserting there were additions to tax under
     IRC § 6662;

          iii. the person who issued the deficiency notice
     lacked any delegated authority for doing so, and the
     office issuing the notice lacks jurisdiction over
     Petitioner’s geographic location;
                                 - 6 -

           iv. The tax figures asserted by Respondent are not
      based on any tax table or other valid authority.


                                OPINION

I.   Section 6662 Penalty

       Under section 7491(c), respondent bears the burden of

production with respect to petitioners’ liability for the section

6662(a) penalty.   This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.”     Higbee v. Commissioner, 116 T.C.

438, 446 (2001).

      The Court concludes that respondent has met the section

7491(c) burden of production with respect to the accuracy-related

penalty.   As explained below, the Court ultimately finds

unavailing petitioners’ argument that they are not liable for the

accuracy-related penalty for 2001 and 2002 because they acted

with reasonable cause and in good faith by relying on Mr. Fisher

to prepare their 2001 and 2002 joint Federal income tax returns.

       Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b).       Among the causes justifying

the imposition of the penalty is any substantial understatement

of income tax.

      There is a “substantial understatement” of income tax for

any taxable year where the amount of the understatement exceeds
                                - 7 -

the greater of (1) 10 percent of the tax required to be shown on

the return for the taxable year or (2) $5,000.7

Sec. 6662(d)(1)(A)(i) and (ii).    However, the amount of the

understatement is reduced to the extent attributable to an item

(1) for which there is or was substantial authority for the

taxpayer’s treatment thereof, or (2) with respect to which the

relevant facts were adequately disclosed on the taxpayer’s return

or an attached statement and there is a reasonable basis for the

taxpayer’s treatment of the item.    See sec. 6662(d)(2)(B).

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.    Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

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




     7
      There is a substantial understatement of income tax for
each of petitioners’ 2001 and 2002 taxable years. For their 2001
taxable year, petitioners reported a $15,136 tax liability on
their joint Federal income tax return. On the basis of the
stipulations, petitioners’ tax liability for 2001 is $57,349,
which results in a $42,213 understatement. See supra note 1.
For their 2002 taxable year, petitioners reported a $16,253 tax
liability on their amended joint Federal income tax return. On
the basis of the stipulations, petitioners’ tax liability for
2002 is $79,234, which results in a $62,981 understatement. See
supra note 1.
                                 - 8 -

     Reliance upon the advice of a tax professional may, but does

not necessarily, establish reasonable cause and good faith for

the purpose of avoiding a section 6662(a) penalty.    See United

States v. Boyle, 469 U.S. 241, 251 (1985) (“Reliance by a lay

person on a lawyer is of course common; but that reliance cannot

function as a substitute for compliance with an unambiguous

statute.”).   Such reliance does not serve as an “absolute

defense”; it is merely a “factor to be considered.”     Freytag v.

Commissioner, supra at 888.

     The case law sets forth the following three requirements in

order for a taxpayer to use reliance on a tax professional to

avoid liability for a section 6662(a) penalty:    (1) The adviser

was a competent professional who had sufficient expertise to

justify reliance, (2) the taxpayer provided necessary and

accurate information to the tax adviser, and (3) the taxpayer

actually relied in good faith on the adviser's advice.    See

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002).    However, by itself,

unconditional reliance on a preparer or adviser does not always

constitute reasonable reliance; the taxpayer must also exercise

“diligence and prudence”.     Marine v. Commissioner, 92 T.C. 958,

992-993 (1989), affd. 921 F.2d 280 (9th Cir. 1991).

     In the instant case, the notice of deficiency included the

imposition of the section 6662(a) penalty for taxable years 2001
                               - 9 -

and 2002 on the basis that there was a substantial understatement

of petitioners’ tax liability for those years.   The

understatements of petitioners’ income tax for each of those

years were attributable to petitioners’ failure to report income

from Mr. Neufeld’s dentistry business.   Petitioners focused their

section 6662(a) penalty arguments solely on their reliance on

Mr. Fisher to prepare their Federal income tax returns.

     With respect to the third prong of the Neonatology test,

petitioners did not rely in good faith on Mr. Fisher’s advice.

Petitioners did not meet with Mr. Fisher or otherwise discuss

with him their 2001 and 2002 joint Federal income tax returns or

2002 amended return, and they did not examine their returns

before signing and submitting them to the IRS.   See supra note 6.

Taxpayers have a duty to read their returns to ensure that all

income items are included.    Magill v. Commissioner, 70 T.C. 465,

479-480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981).   Petitioners

did not ensure that all of the income from Mr. Neufeld’s

dentistry business was included in their 2001 and 2002 joint

Federal income tax returns.

     A taxpayer’s duty to file an accurate tax return cannot be

avoided simply by delegating responsibility to an agent.

Pritchett v. Commissioner, 63 T.C. 149, 174 (1974).    Petitioners’

unconditional reliance on Mr. Fisher does not, on the facts,

constitute reasonable reliance and does not excuse their failure
                               - 10 -

to closely examine their 2001 and 2002, and amended 2002, joint

Federal tax income returns.   See Marine v. Commissioner, supra at

992-993; Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662-663

(1987) (reliance on accountant with complete information

regarding taxpayer’s business activities not reasonable cause

where taxpayer’s cursory review of return would have revealed

errors).    As the Court has determined that petitioners have not

satisfied the third prong of the Neonatology test, the Court need

not, and does not, decide whether petitioners satisfied the first

or second prong.

      Petitioners have not demonstrated good faith and reasonable

cause for their underpayments for 2001 and 2002.    Accordingly,

the Court sustains respondent’s determination that petitioners

are liable for the section 6662(a) accuracy-related penalty for

substantial understatements of income tax for taxable years 2001

and 2002.

II.   Section 6673 Penalty

      Section 6673(a)(1) authorizes the Tax Court to impose a

penalty not in excess of $25,000 on a taxpayer for proceedings

instituted primarily for delay or in which the taxpayer’s

position is frivolous or groundless.    “A petition to the Tax

Court, or a tax return, is frivolous if it is contrary to

established law and unsupported by a reasoned, colorable argument
                              - 11 -

for change in the law.”   Coleman v. Commissioner, 791 F.2d 68, 71

(7th Cir. 1986).

     Respondent, on motion, has asked the Court to impose a

penalty under section 6673(a)(1).   On October 2, 2006, respondent

mailed to petitioners a letter that informed them that their

arguments were frivolous and warned them that if they persisted

with their arguments, then respondent might request the section

6673 penalty.   Petitioners raised frivolous and meritless tax-

protester arguments in their petition, at trial, and on brief,

and repeatedly sent to respondent documents that contained

frivolous and meritless tax-protester arguments.   See, e.g.,

supra note 2.   The Court concludes that petitioners are liable

for a section 6673 penalty in the amount of $1,000.

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.   To the extent not discussed

herein, the Court concludes that they are meritless, moot, or

irrelevant.

     To reflect the foregoing,


                                         An appropriate order and

                                    decision under Rule 155 will

                                    be entered.
