                              T.C. Memo. 2012-68



                        UNITED STATES TAX COURT



JASON MICHAEL JUHA AND STEPHANIE SEIKO SATO JUHA, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4109-10.                         Filed March 13, 2012.



      Jason Michael Juha and Stephanie Seiko Sato Juha, pro sese.

      Nick G. Nilan, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: Respondent determined a deficiency in petitioners’ 2007

Federal income tax of $6,275 and an accuracy-related penalty of $1,255 under
                                         -2-

section 6662(a)1. The issues for decision are: (1) whether the amounts petitioners

received from five Canadian entities constitute dividend distributions or returns of

capital;2 and (2) whether petitioners are liable for an accuracy-related penalty.

                                FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulations of

fact are incorporated herein by this reference. Petitioners resided in the State of

Washington when the petition was filed.

      Jason Michael Juha (Mr. Juha) holds a bachelor of science degree in

mechanical engineering. During 2007 Mr. Juha worked for KPMG, LLP, as a

senior associate in information technology infrastructure, and his wife, Stephanie

Seiko Sato Juha, worked as a prosecutor for King County, Washington.

      Petitioners owned publicly traded shares in five Canadian entities through a

brokerage account with Charles Schwab & Co., Inc. (Charles Schwab). Petitioners


      1
        Unless otherwise indicated, all section references are to the Internal Revenue
Code (Code), as amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure. All monetary amounts have been rounded to the nearest
dollar.
      2
        In the notice of deficiency, respondent characterized $38,890 of the
distributions as ordinary dividends. Respondent has since recalculated the
deficiency by characterizing $37,120 of the distributions as qualified dividends and
$1,770 of the distributions as ordinary dividends. Respondent’s recalculations
resulted in a reduced deficiency and sec. 6662(a) penalty.
                                         -3-

held shares in Canetic Resources Trust (Canetic), CanWel Building Materials

Income Fund (CanWel), Fording Canadian Coal Trust (Fording), True Energy Trust

(True Energy), and Harvest Energy Trust (Harvest Energy). During 2007

petitioners received the following distributions:

                Entity                          Distribution amount

             Canetic                                  $36,406
             CanWel                                     1,419
             Fording                                      486
             True Energy                                  352
             Harvest Energy                               229
               Total                                   38,892

Subsequently, for 2007 Charles Schwab issued to petitioners a Form 1099-DIV,

Dividends and Distributions. According to the Form 1099-DIV, petitioners received

ordinary dividends of $38,891, of which $37,120 was qualified dividends. Charles

Schwab also provided an account summary detailing the dividends and distributions

reported on petitioners’ Form 1099-DIV. According to the summary, petitioners

received qualified dividends of $36,406, $486, and $229, from Canetic, Fording,

and Harvest Energy, respectively, and nonqualified dividends of $1,419 and $352

from CanWel and True Energy, respectively.

      Mr. Juha prepared petitioners’ 2007 Federal income tax return. Although he

had received a copy of the Form 1099-DIV before he prepared the return, Mr. Juha
                                         -4-

decided to disregard the Form 1099-DIV. Instead, he relied on third quarter

financial statements from the Canadian entities and the advice and analysis of his

father, Michael Paul Juha, Jr.,3 who did not know at the time that Mr. Juha had

received a Form 1099-DIV.

      Using the third quarter financial statements, Michael Paul Juha, Jr., prepared

a spreadsheet with the income and distributions the entities had reported to that

point. He calculated the percentage of the distributions that would be returns of

capital and the percentage that would be dividend distributions. He then emailed

Mr. Juha the spreadsheet along with the third quarter financial statements.

Michael Paul Juha, Jr., and Mr. Juha relied on the third quarter financial statements

because the audited annual financial statements were not available at the time.

Although Mr. Juha had the Form 1099-DIV for 2007, he nevertheless estimated

both the fourth quarter financial information and the amounts of distributions the

entities would make in 2007. He relied on his father’s analysis and his own




      3
        Michael Paul Juha, Jr., is not a certified public accountant, but Mr. Juha
relied on him because he believed that his father had extensive knowledge of U.S.
and Canadian tax law.
                                         -5-

projections in preparing petitioners’ 2007 return and disregarding the Form 1099-

DIV.4

        Petitioners jointly filed their Form 1040, U.S. Individual Income Tax Return,

for 2007. On their Form 1040, petitioners reported no ordinary dividends and

$1,279 in qualified dividends. Petitioners claimed a refund of $5,897. Petitioners

attached a Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), to their

Federal income tax return. On the Form 1116, petitioners reported that they

received $38,891 in gross income from sources within Canada and claimed $29,168

in expenses related to that gross income. Petitioners reported $5,834 in taxes

withheld at the source on rents and royalties.

        On May 5, 2008, respondent mailed petitioners a letter informing them of a

computational error on their 2007 return that resulted in an increased refund for

2007. Accordingly, respondent sent petitioners a refund check dated May 3, 2008,

for $6,510.

        On June 1, 2009, respondent mailed to petitioners a Notice CP2000 for 2007.

In the Notice CP2000, respondent proposed an increase in petitioners’ taxable


        4
        At the end of March, Michael Paul Juha, Jr., received the annual audited
financial statements. He updated his initial spreadsheet and sent the spreadsheet,
along with the audited annual financial statements, to Mr. Juha. At the time he sent
this information to Mr. Juha, Mr. Juha had already filed petitioners’ 2007 return.
                                         -6-

dividends of $38,890 and a $10,176 increase in petitioners’ tax on the basis of the

Form 1099-DIV Charles Schwab had submitted to the Internal Revenue Service. In

response, on June 24, 2009, petitioners submitted a Form 1040X, Amended U.S.

Individual Income Tax Return. On a spreadsheet attached to the Form 1040X,

petitioners claimed that they received “gross royalty distributions” from the five

Canadian entities. Petitioners claimed that the distributions from Canetic, Harvest

Energy, and True Energy were not taxable dividends and that only portions of the

distributions from CanWel and Fording were taxable dividends. Respondent did not

process the Form 1040X because petitioners did not include the entire amount of

dividend income reported by Charles Schwab on the return. On August 28, 2009,

petitioners submitted a second Form 1040X for 2007. Respondent did not process

the second Form 1040X because petitioners still did not include the entire amount of

dividend income reported by Charles Schwab on the return.

      On January 4, 2010, respondent issued to petitioners a notice of deficiency

for 2007.
                                         -7-

                                      OPINION

I.    Taxation of Corporate Distributions

      A.     Burden of Proof

      Generally, the Commissioner’s determinations are presumed correct, and the

taxpayer bears the burden of proving them erroneous. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). If, however, a taxpayer produces credible

evidence5 with respect to any factual issue relevant to ascertaining the taxpayer’s

tax liability and satisfies the requirements of section 7491(a)(2), the burden of proof

on any such issue shifts to the Commissioner. Sec. 7491(a)(1). Section 7491(a)(2)

requires a taxpayer to demonstrate that he complied with the substantiation

requirements, maintained all records required under the Code, and cooperated with

reasonable requests by the Secretary6 for witnesses, information, documents,




      5
       Credible evidence is evidence the Court would find sufficient upon which to
base a decision on the issue in the taxpayer’s favor, absent any contrary evidence.
See Higbee v. Commissioner, 116 T.C. 438, 442 (2001).
      6
       The term “Secretary” means “the Secretary of the Treasury or his delegate”,
sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer, employee,
or agency of the Treasury Department duly authorized by the Secretary of the
Treasury directly, or indirectly by one or more redelegations of authority, to perform
the function mentioned or described in the context”, sec. 7701(a)(12)(A)(i).
                                         -8-

meetings, and interviews. See also Higbee v. Commissioner, 116 T.C. 438, 440-

441 (2001).

      Petitioners argue that the burden of proof should shift to respondent under

section 7491(a) because they produced credible evidence and satisfied the

requirements of section 7491(a)(2).7 Respondent concedes that petitioners

cooperated with the Secretary with regard to all reasonable requests for information.

However, respondent argues that petitioners have not produced credible evidence as

required by section 7491(a)(1) or satisfied the remaining requirements of section

7491(a)(2).

      Petitioners produced only the audited financial statements for the Canadian

entities. Although the audited financial statements may have been a starting point

for calculating earnings and profits, petitioners did not offer credible evidence to

prove the adjustments required under U.S. tax law to calculate earnings and profits

or to prove what the current or accumulated earnings and profits of each entity were.

Petitioners did not introduce a corrected Form 1099-DIV8 or any other

      7
       On brief, petitioners contend only that they introduced credible evidence and
cooperated with all reasonable requests by the Secretary. Petitioners do not address
whether they complied with the substantiation requirements or maintained all
required records.
      8
          Mr. Juha requested a corrected Form 1099-DIV from Charles Schwab, but
                                                                     (continued...)
                                          -9-

records establishing that the distributions were returns of capital rather than

dividend distributions and did not offer any testimony from the entities or from an

expert witness regarding the proper calculation of earnings and profits for each

entity. We find that petitioners did not introduce credible evidence that, standing

alone, would be sufficient to convince this Court that the distributions from the

Canadian entities were returns of capital rather than dividend distributions, and

therefore, the burden of proof remains on petitioners.

      B.     Dividend Distributions in General

      Gross income includes all income from whatever source derived. Sec. 61(a).

“[A] distribution of property * * * made by a corporation to a shareholder with

respect to its stock” shall be treated as prescribed by section 301(c) . Sec. 301(a).

Section 301(c)(1) provides that a shareholder must include in gross income the

portion of the distribution that is a dividend (as defined by section 316(a)). Secs.

61(a)(7), 316(a); Hillsboro Nat’l Bank v. Commissioner, 460 U.S. 370, 392 (1983);

see also Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729-731 (1929).

Section 316 (a) defines a dividend as “any distribution of property made by a

corporation to its shareholders--(1) out of its earnings and profits accumulated after


      8
       (...continued)
Charles Schwab declined to issue one.
                                         - 10 -

February 28, 1913, or (2) out of its earnings and profits of the taxable year”.9 If all

or part of the distribution is not a dividend, that amount is a nontaxable return of

capital to the extent of the shareholder’s adjusted basis in the stock, sec. 301(c)(2),

and any amount in excess of the shareholder’s adjusted basis is taxable capital gain,

sec. 301(c)(3)(A).

      C.     Parties’ Arguments

      Petitioners contend that the distributions at issue constitute returns of capital

and not dividend distributions because the Canadian entities did not have sufficient

current or accumulated earnings and profits from which a dividend distribution

could be made for 2007. Petitioners rely solely on the entities’ audited financial

statements for taxable years ending December 31, 2006 and 2007, all of which were

prepared by independent auditors.10

      Respondent contends that all of the distributions from the Canadian entities

constitute taxable dividends that petitioners must include in gross income.


      9
       Sec. 1.316-1(a)(1), Income Tax Regs., provides that the term “dividend”
includes a distribution of property made by a foreign corporation to its shareholders.
      10
        Deloitte & Touche LLP prepared Canetic’s audited financial statements for
the directors of Penn West Energy Trust (Penn West). Canetic and Penn West
entered into a combination agreement on October 31, 2007, and closed the
combination agreement on January 11, 2008, with each Canetic unitholder
exchanging Canetic units for Penn West units.
                                         - 11 -

Respondent contends that the following items in evidence support this treatment:

(1) the Form 1099-DIV issued by Charles Schwab; (2) petitioners’ 2007 Form

1116, on which they reported $38,891 as taxable foreign source income for

purposes of claiming the foreign tax credit; and (3) news releases from the Canadian

entities directing U.S. shareholders to treat the distributions as taxable dividends

rather than returns of capital. Respondent also contends that the audited financial

statements do not purport to compute the entities’ earnings and profits under U.S.

tax principles and consequently are irrelevant.

      D.     Calculating Earnings and Profits

      As we have observed in prior cases, the calculation of earnings and profits11

is not easy or obvious. Anderson v. Commissioner, 67 T.C. 522, 527 (1976), aff’d,

583 F.2d 953 (7th Cir. 1978); HIE Holdings, Inc. v. Commissioner, T.C. Memo.

2009-130; see also Estate of Uris v. Commissioner, 605 F.2d 1258, 1265 (2d Cir.

1979), aff’g 68 T.C. 448 (1977); Commissioner v. Gross, 236 F.2d 612, 620-621

(2d Cir. 1956), aff’g 23 T.C. 756 (1955). There are several reasons for the

difficulty in making the calculation. For example, although section 1.312-6(a),

Income Tax Regs., provides that a corporation must compute earnings and profits

      11
       The Code does not define the term “earnings and profits”. See sec. 316(a);
Henry C. Beck Co. v. Commissioner, 52 T.C. 1, 6 (1969), aff’d per curiam, 433
F.2d 309 (5th Cir. 1970).
                                       - 12 -

using the same method of accounting employed in computing taxable income,

earnings and profits are not equivalent to taxable income.12 See Commissioner v.

Wheeler, 324 U.S. 542, 546 (1945); Jaques v. Commissioner, 935 F.2d 104, 107-

108 (6th Cir. 1991), aff’g T.C. Memo. 1989-673.

      Additionally, the regulations issued with respect to section 316 and section

312 require a number of adjustments to be made in calculating earnings and

profits. Section 1.316-1(a)(1)(ii), Income Tax Regs., provides that a corporation

computes earnings and profits as of the close of the taxable year when the

distribution was made, “without diminution by reason of any distributions made

during the taxable year.” Additionally, some items that are excluded from taxable

income must be included in the computation of earnings and profits.13 Certain items

deductible from taxable income may not be deducted in computing earnings




      12
       The rationale for the difference is that earnings and profits is a broad
concept, “which the tax law has utilized ‘to approximate a corporation’s power to
make distributions which are more than just a return of investment.’” Henry C.
Beck Co. v. Commissioner, 52 T.C. at 6.
      13
        Sec. 1.312-6(b), Income Tax Regs., requires a corporation to include in
earnings and profits income exempted by statute, income not taxable by the Federal
Government under the Constitution, and all income includable under sec. 61.
                                        - 13 -

and profits,14 but a corporation may deduct other items from earnings and items

deductible from taxable income may not be deducted in computing earnings

profits that it may not deduct in computing taxable income.15 Some items are

deductible from both taxable income and earnings and profits, but the amount or

timing of the deduction differs in computing the two figures.16




      14
        For example, a corporation must include in full dividends received from
another corporation in computing earnings and profits, although sec. 243 allows a
corporation to deduct up to 100% of the dividend received. Woods Inv. Co. v.
Commissioner, 85 T.C. 274, 280, n.13 (1985); sec. 1.312-11(a), Income Tax Regs.
Similarly, although a corporation may deduct from taxable income a net operating
loss incurred in a prior year, the corporation may not deduct the net operating loss
from the current year’s earnings and profits. Woods Inv. Co. v. Commissioner, 85
T.C. at 280, n.13; sec. 1.312-6(d), Income Tax Regs.
      15
         For example, in computing earnings and profits, a corporation may deduct
losses that are not deductible in computing taxable income. Divine v.
Commissioner, 500 F.2d 1041, 1053 (2d Cir. 1974), rev’g and remanding 59 T.C.
152 (1972); sec. 1.312-7(b)(1), Income Tax Regs.
      16
         For example, sec. 312(n)(2) provides that in computing earnings and profits,
corporations must capitalize and ratably deduct intangible drilling costs and mineral
exploration and development costs, although those costs may be deductible under
sec. 263(c). Sec. 312(n)(5) provides that in computing earnings and profits,
corporations must include in income all amounts received under installment sale
contracts, regardless of whether the income received is includable in taxable
income. The regulations also require corporations to treat the same items
differently. Sec. 1.312-6(c)(1), Income Tax Regs., provides that a corporation may
use percentage depletion to calculate a depletion deduction for income tax purposes,
but the corporation may only compute earnings and profits using depletion based on
cost.
                                        - 14 -

      Furthermore, a corporation’s earnings and profits are not necessarily equal to

the corporation’s net profit as determined using corporate financial accounting

principles. See Estate of Uris v. Commissioner, 605 F.2d at 1265; sec. 1.312-6(a),

Income Tax Regs.; see also Commissioner v. Wheeler, 324 U.S. at 546. In this

regard, the U.S. Court of Appeals for the Second Circuit has stated:

      We note, of course, that “earnings and profits,” a statutory concept,
      bears no exact relation either to taxable income or to earnings as
      determined by “corporate accounting concepts” in the given context. *
      * * Thus the amount of earnings or profits appearing on the
      corporation’s books is not determinative and perhaps not even prima
      facie evidence of earnings or profits for income tax purposes. * * *

Estate of Uris v. Commissioner, 605 F.2d at 1265. The U.S. Court of Appeals for

the Ninth Circuit, to which an appeal in this case would lie absent a stipulation to

the contrary, see sec. 7482(b)(1)(A), has held that in determining earnings and

profits, a court need not apply the same standard as applied in corporate accounting

practice, Commissioner v. Goldwyn, 175 F.2d 641, 643-644 (9th Cir. 1949), aff’g 9

T.C. 510 (1947). Furthermore, a corporation may engage in a transaction resulting

in a net loss for accounting purposes although the transaction does not reduce the

corporation’s earnings and profits. See H.H. Robertson Co. v. Commissioner, 59

T.C. 53, 59 (1972), aff’d without published opinion, 500 F.2d 1399 (3d Cir. 1974).

      To satisfy their burden of proof, petitioners needed to introduce credible

evidence showing that the Canadian entities did not have sufficient current or
                                         - 15 -

accumulated earnings and profits from which a dividend distribution could be made.

Petitioners introduced only the audited financial statements for the Canadian

entities, the testimony of Mr. Juha, and the testimony of Michael Paul Juha, Jr.

      None of the audited financial statements include a calculation of earnings and

profits for U.S. tax purposes. Although the audited financial statements may have

served as a starting point for the calculation of earnings and profits, petitioners did

not introduce any evidence as to how the audited financial statements translate to

earnings and profits for U.S. tax purposes. Petitioners called no expert witnesses

who could analyze the financial data on the audited financial statements and

calculate earnings and profits for tax purposes as opposed to financial accounting

purposes. Petitioners called no witnesses from any of the Canadian entities or from

the independent accounting firms that prepared the audited financial statements to

explain the financial data and translate that data into earnings and profits for tax

purposes.

      Mr. Juha testified that he believed that if the audited financial statements

showed a net loss, then any distributions made should be characterized as returns of

capital. Mr. Juha further testified that in preparing his return, he examined the

entities’ third quarter financial statements, and on the basis of his review, he
                                          - 16 -

decided how to characterize the distributions for Federal income tax purposes. If

the entity had a net loss on its third quarter financial statement, Mr. Juha testified

that he concluded that the entity would not have a profit for the year.

      Mr. Juha’s testimony at trial supports a conclusion that he erroneously

equated net income or loss with earnings and profits. An entity that has a net loss

for corporate financial accounting purposes does not necessarily have zero earnings

and profits. See Commissioner v. Wheeler, 324 U.S. at 546. In addition, although

petitioners introduced into evidence the audited annual financial statements, Mr.

Juha did not rely on the audited annual financial statements in preparing petitioners’

2007 return but instead relied on third quarter financial statements. Current year

earnings and profits are determined on the basis of the financial data for the entire

year, not on the basis of a partial taxable year’s results. See sec. 1.316-1(a)(1)(ii),

Income Tax Regs. Michael Paul Juha, Jr., stated as much when he informed Mr.

Juha that although the third quarter financial statements showed net losses, whether

the Canadian entities would show net profits would depend upon financial data for

the entire taxable year.
                                        - 17 -

      Both the Form 1099-DIV and the news releases from the Canadian entities17

confirm that the distributions were dividends. In addition, Charles Schwab denied

petitioners’ request for a corrected Form 1099-DIV. Although petitioners contest

the accuracy of the Form 1099-DIV, they introduced no credible evidence to

demonstrate that the characterization of the distributions as dividends on that Form

1099-DIV was incorrect.



      17
        Petitioners did not object to respondent’s introduction of news releases from
Penn West (on behalf of Canetic), Fording, True Energy, and Harvest Energy. All
of the news releases state that the distributions paid to U.S. shareholders will be
considered taxable dividend distributions under U.S. tax law. For example, the
news release issued by Penn West states:

      In consultation with its U.S. tax advisors, Penn West believes that
      * * * distributions paid to its individual U.S. unitholders will more
      likely than not be “qualified dividends” under the Jobs and Growth Tax
      Relief Reconciliation Act of 2003. * * * Provided the 2007 Canetic
      distributions are considered to be qualified dividends as noted above,
      Penn West has determined that 100 percent of these distributions paid
      during the year will be taxable for U.S. tax purposes as “qualified
      dividends” with no return of capital. [Emphasis added.]

The Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27,
sec. 302(a), 117 Stat. at 760, provides that “qualified dividend income” will be
taxed at preferential capital gains rates. Qualified dividend income includes
dividends received from either a domestic corporation or a qualified foreign
corporation. Id.

       Mr. Juha testified that he did not rely on the news releases in preparing
petitioners’ 2007 Federal income tax return because the news releases state that
they are not intended to constitute legal or tax advice.
                                         - 18 -

        Petitioners have failed to carry their burden of proving that the Canadian

entities did not have sufficient current or accumulated earnings and profits to

support dividend distributions in 2007. Moreover, the preponderance of the

evidence, including the Form 1099-DIV and the news releases showing that the

distributions were taxable dividend distributions to petitioners, supports a finding

that the distributions in question were dividends. We sustain respondent’s

determination.

II.     Section 6662(a) Penalty

        Section 6662(a) authorizes the Commissioner to impose a penalty on an

underpayment of tax that is attributable to negligence or disregard of rules or

regulations or any substantial understatement of income tax. Sec. 6662(a) and

(b)(1) and (2). Only one component of the section 6662(a) accuracy-related penalty

may be imposed with respect to any given portion of an underpayment, even if that

portion is attributable to more than one of the types of conduct listed in section

6662(b). New Phoenix Sunrise Corp. v. Commissioner, 132 T.C. 161, 187 (2009),

aff’d, 408 Fed. Appx. 908 (6th Cir. 2010); see also sec. 1.6662-2(c), Income Tax

Regs.
                                         - 19 -

      The Commissioner has the initial burden of producing evidence to support the

applicability of a section 6662(a) penalty. Sec. 7491(c). To meet this burden, the

Commissioner must come forward with sufficient evidence to show that it is

appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. at 446-

447. If the Commissioner satisfies his burden of production, the burden of

producing evidence shifts to the taxpayer, who must demonstrate by a

preponderance of the evidence that he or she is not liable for the penalty either

because the penalty does not apply or because the taxpayer qualifies for relief under

section 6664(c). Id.

      Respondent contends that petitioners are liable for the accuracy-related

penalty for 2007 because the underpayment of tax is attributable to one or more of

the following: (1) negligence or disregard of the rules or regulations; or (2) a

substantial understatement of income tax. We turn first to respondent’s contention

that the section 6662(a) penalty should be imposed because the underpayment was

attributable to negligence or disregard of the rules or regulations.

      For purposes of section 6662(a), negligence is defined as any failure to

make a reasonable attempt to comply with the provisions of the Code. Sec.

6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985) (negligence is

lack of due care or failure to do what a reasonable prudent person would do under
                                        - 20 -

the circumstances). Negligence is strongly indicated where a taxpayer “fails to

include on an income tax return an amount of income shown on an information

return, as defined in section 6724(d)(1)”. Sec. 1.6662-3(b)(1)(i), Income Tax Regs.

Section 6724(d)(1)(A)(ii) expressly includes information returns relating to

payments of dividends.

      Mr. Juha testified at trial that he received the Form 1099-DIV from Charles

Schwab before he filed petitioners’ 2007 Federal income tax return. Rather than

including the income shown on the Form 1099-DIV on petitioners’ tax return, Mr.

Juha ignored the Form 1099-DIV, estimated the Canadian entities’ earnings and

profits using incomplete financial information, and concluded that the distributions

were not dividends. We are satisfied that respondent introduced sufficient evidence

to satisfy his burden of production under section 7491(c) and to establish

petitioners’ negligence.

      On brief petitioners contend that they had a reasonable basis and acted in

good faith with respect to the underpayment. A taxpayer may avoid imposition of

the section 6662(a) penalty if the taxpayer demonstrates that he had a reasonable

basis for the underpayment and that he acted in good faith with respect to the

underpayment. Sec. 6664(c)(1); sec. 1.6662-3(b)(1), Income Tax Regs. Whether a

taxpayer had reasonable cause for, and acted in good faith with respect to, part or
                                          - 21 -

all of an underpayment is determined on a case-by-case basis, taking into account all

pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The

most important factor is the extent of the taxpayer’s effort to assess his or her proper

tax liability. Id. A taxpayer’s reliance on the advice of an independent, competent

professional may satisfy this requirement. Id. However, reliance is unreasonable

“when the taxpayer knew, or should have know, that the adviser lacked the requisite

expertise to opine on the tax treatment of the disputed item.” Neonatology Assocs.,

P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      Petitioners contend that they had a reasonable basis and acted in good faith

with respect to the underpayment because Mr. Juha relied on the audited annual

financial statements in preparing their 2007 tax return. However, Mr. Juha testified

at trial that he did not receive the audited annual financial statements until after he

submitted petitioners’ tax return. Mr. Juha did receive the Form 1099-DIV, which

he chose to ignore. Mr. Juha further testified that he estimated fourth quarter results

and the amount of the distributions taxable as dividends in determining petitioners’

tax liability. Mr. Juha did not contact the Canadian entities for additional

information or consult a competent professional who had the expertise to calculate

the current and accumulated earnings and profits of the Canadian entities.
                                          - 22 -

Petitioners did not have reasonable cause to ignore the Form 1099-DIV under these

circumstances.

         Alternatively, petitioners contend that they had a reasonable basis and acted

in good faith with respect to the underpayment because Mr. Juha relied on the

advice of Michael Paul Juha, Jr., in preparing petitioners’ tax return. Michael Paul

Juha, Jr., testified at trial that he has no tax or accounting expertise. Mr. Juha

acknowledged that Michael Paul Juha, Jr., has no expertise in tax or accounting but

testified that he relied on the information because of his father’s experience as an

investor. Petitioners’ reliance on the advice of Michael Paul Juha, Jr., was

unreasonable because he lacked the expertise necessary to calculate the earnings

and profits of the Canadian entities and to opine on the tax treatment of the

distributions. We conclude, therefore, that petitioners have failed to satisfy their

burden of proving that they are not liable for the section 6662 penalty.

         We have considered all the other arguments made by the parties, and to the

extent not discussed above, find those arguments to be irrelevant, moot, or without

merit.
                            - 23 -

To reflect the foregoing,



                                           Decision will be entered under

                                     Rule 155.
