                        T.C. Memo. 2004-31



                      UNITED STATES TAX COURT



                  PAUL R. PEETE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16002-02.             Filed February 6, 2004.


     Paul R. Peete, pro se.

     Jean Song, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined a deficiency in

petitioner’s 2000 Federal income tax of $20,015 and an accuracy-

related penalty under section 6662(a)1 of $3,659.80.   After



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

concessions,2 the sole issue for decision is whether petitioner

is liable for the penalty.    We hold that he is liable.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.    The stipulation of

facts, the stipulation of settled issues, and the attached

exhibits are incorporated herein by this reference.    Petitioner

resided in Gardena, California, at the time his petition was

filed.

     On Schedule C, Profit or Loss From Business, of his 2000

Form 1040, U.S. Individual Income Tax Return, petitioner claimed

a business loss of $60,044 for a principal business or profession

listed as “Marketing Sales”.    The loss comprised the following

claimed expenses:   (1) $2,007 for advertising; (2) $7,471 for car

and truck expenses; (3) $24,944 for depreciation and section 179

expense deduction; (4) $1,960 for mortgage expenses; (5) $1,268

for travel; (6) $1,295 for meals and entertainment; and (7)

$21,099 for other expenses.    The other claimed expenses included:

(1) $4,955 for donations at Bible college; (2) $8,707 for repairs

service; (3) $699 for tax preparation fees; (4) $980 for


     2
      In a stipulation of settled issues, petitioner conceded
that he is liable for interest income of $68 and a taxable
distribution of $1,917, and that he is not entitled to Schedule
C, Profit or Loss From Business, expenses of $60,044. On brief,
respondent concedes that petitioner is not subject to the 10-
percent additional tax of $1,156 for early distribution under
sec. 72(t). The remaining adjustments contained in the notice of
deficiency are computational in nature and will be resolved by
the parties in the Rule 155 computation.
                              - 3 -

financial planning; (5) $986 for cell phone; (6) $169 for

parking; (7) $829 for professional business expenses; (8) $1,002

for prospecting green fees; and (9) $2,772 for teaching expenses.

Petitioner reported tax liability of $10,071 on his 2000 return.

     Petitioner’s occupation is listed on the return as “SERV

TECH”, and the majority of his reported wage, salaries, tips,

etc., income for the year was from Lucent Technologies.     Elray

Wise of E.W. Holding Co., is listed as the paid preparer of the

tax return.3

     Respondent issued to petitioner a notice of deficiency dated

July 15, 2002, for the taxable year 2000.   Respondent determined

that petitioner’s corrected tax liability was $28,930 and that he

was liable for additional tax of $1,156 under section 72(t).     One

of respondent’s determinations was that petitioner was not

entitled to the claimed Schedule C expenses.   Respondent

calculated that the underpayment of tax attributable to the

disallowed Schedule C expenses was $18,299.    Finally, respondent

determined that petitioner was liable for an accuracy-related

penalty under section 6662(a) of 20 percent of the underpayment

attributable to the disallowed Schedule C expenses.   Petitioner

timely filed a petition to this Court seeking a redetermination.




     3
      The evidence in the record indicates that Robin Manasseh,
who worked for E.W. Holding Co., actually prepared petitioner’s
2000 tax return.
                                 - 4 -

     The trial in this case was held on September 9, 2003.    At

the conclusion of the trial, the Court ordered respondent to file

a brief and then allowed petitioner until January 15, 2004, to

file an answering brief.   Respondent timely filed a brief;

however, petitioner failed to file an answering brief.

                                OPINION

     The issue for decision is whether petitioner is liable for

the accuracy-related penalty on the underpayment of tax

attributable to the disallowed Schedule C loss.    Petitioner’s

position is that he is not liable for the penalty because he

relied on the advice of his tax return preparer.

     Section 6662(a) imposes a penalty of 20 percent of the

portion of the underpayment of tax attributable to the taxpayer’s

negligence, disregard of rules or regulations, or substantial

understatement of income tax.    Sec. 6662(a), (b)(1) and (2).    An

understatement is substantial if it exceeds the greater of 10

percent of the tax required to be shown on the return for the

taxable year, or $5,000.   Sec. 6662(d)(1) and (2).

     The accuracy-related penalty does not apply to any part of

an underpayment of tax if it is shown that there was reasonable

cause for and that the taxpayer acted in good faith with respect

to that part.   Sec. 6664(c)(1).   The determination of whether a

taxpayer acted in good faith is made on a case-by-case basis,
                               - 5 -

taking into account all the pertinent facts and circumstances.

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

     Under section 7491(c), the Commissioner must come forward

with sufficient evidence to show that a penalty is appropriate.4

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).   However, the

Commissioner does not bear the burden of proof as to a penalty,

and once the initial burden of production is met, the taxpayer

must come forward with sufficient evidence to establish that the

addition to tax does not apply.   Id. at 447.

     Petitioner reported a tax liability of $10,071 on his 2000

tax return.   Respondent determined that petitioner’s corrected

tax liability, including additional tax under section 72(t), was

$30,086.   Respondent calculated that $18,299 of the corrected tax

liability was attributable to the Schedule C loss which

petitioner has conceded he is not entitled to deduct.   Thus,

respondent has satisfied the burden of showing that the accuracy-

related penalty is appropriate because the understatement of tax

exceeds the greater of 10 percent of the tax required to be shown

on the return, or $5,000.5   In order to avoid imposition of the

     4
      Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations commencing after July 22,
1998. Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. The evidence
in the record indicates that the examination in this case
commenced after July 22, 1998.
     5
      The computational adjustments to petitioner’s 2000 return
                                                   (continued...)
                               - 6 -

penalty, petitioner must establish that he had reasonable cause

and acted in good faith with respect to the claimed Schedule C

loss.

     The general rule is that taxpayers have a duty to file

complete and accurate tax returns and cannot avoid the duty by

placing responsibility with an agent.   United States v. Boyle,

469 U.S. 241, 252 (1985); Metra Chem Corp. v. Commissioner, 88

T.C. 654, 662 (1987).   However, in limited situations, the good

faith reliance on the advice of an independent, competent

professional in the preparation of the tax return can satisfy the

reasonable cause and good faith exception.   United States v.

Boyle, supra at 250-251; Weis v. Commissioner, 94 T.C. 473, 487

(1990).   The reliance must be reasonable, in good faith, and

based on full disclosure.   United States v. Boyle, supra at 250-

251; Weis v. Commissioner, supra.

     Petitioner testified that the activity reported on Schedule

C was related to a pyramid scheme run by “The Tax People”.

Petitioner testified that he was recruited by participants in the

scheme and attended a seminar describing the activity.

Petitioner initially invested $300 and then paid $25 per month to

participate in the activity.   The only way for petitioner to

accumulate money was if he recruited other people to join the

     5
      (...continued)
are relatively minor in amount and do not impact the finding that
there was a substantial understatement of income tax.
                               - 7 -

activity.   Petitioner’s business activities consisted of meeting

with people and trying to recruit them into the activity.

Petitioner testified that his tax return preparer, Robin Manasseh

(Ms. Manasseh), introduced him to the scheme and told him that he

could deduct expenses related to recruiting other individuals.

After getting involved, petitioner testified that he discovered

that Ms. Manasseh was being investigated and that she informed

petitioner to stop trying to recruit people until the

investigation was finished.

     Petitioner had difficulty explaining how the various items

constituting the Schedule C loss related to a business activity.

He testified that he did not know of any advertising expenses,

that he had “absolutely no idea” what the $24,944 reported as

depreciation related to, that he did not know what the $8,707 in

repair service expenses related to, and that he did not make any

gifts to charities other than those listed on other parts of his

tax return.   He testified that he claimed expenses related to

playing golf and meals on the basis of the advice of Ms.

Manasseh.   Petitioner acknowledged that it occurred to him that

this may have been too good to be true and that he did not take

steps to investigate what he was told other than trusting the

judgment of Ms. Manasseh.   Petitioner also acknowledged a large

part of food expenses were for meals that he had by himself and
                               - 8 -

that the hospital visits were in connection with his position as

a reverend.

     Petitioner was open and candid at trial regarding his

involvement in the pyramid scheme.     Unfortunately for petitioner,

his own testimony clearly establishes that he did not have

reasonable cause and did not act in good faith in claiming the

Schedule C loss.   Petitioner was unaware of certain items claimed

as expenses on the return, he knew that some of the claimed

deductions were too good to be true, and he failed to investigate

the appropriateness of the claimed deductions after learning that

his tax return preparer was being investigated in connection with

the same activity.   Petitioner failed to call Ms. Manasseh or any

other witnesses at trial to corroborate his claim of good faith

reliance, and his testimony indicates that he did not rely on the

advice of an independent, competent tax professional.

Accordingly, we hold that petitioner is liable for the accuracy-

related penalty.


                                            Decision will be entered

                                       under Rule 155.
