                              T.C. Memo. 2015-222



                        UNITED STATES TAX COURT



       RANDY STEINBERG AND BETINA STEINBERG, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent

                   JON M. NISSLEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 28810-13, 28865-13.            Filed November 19, 2015.



      Ward R. Nyhus, Jr., for petitioners.

      Cassidy B. Collins and Katherine Holmes Ankeny, for respondent.



                          MEMORANDUM OPINION


      NEGA, Judge: These cases have been consolidated for purposes of trial,

briefing, and opinion. Respondent determined a deficiency in petitioners Randy

Steinberg and Betina Steinberg’s Federal income tax of $254,520 and an accuracy-
                                         -2-

[*2] related penalty under section 6662 of $50,904.1 Respondent determined a

deficiency in petitioner Jon M. Nissley’s Federal income tax of $20,014 and an

accuracy-related penalty under section 6662 of $4,003. The issues for decision are

whether (1) Kelmark Tow, LLC (Kelmark), Mr. Steinberg’s and Mr. Nissley’s

wholly owned limited liability company, sustained an $800,000 loss in tax year

2009 with respect to a towing contract with the City of Los Angeles, and (2)

whether petitioners are liable for section 6662 accuracy-related penalties for tax

year 2009.

                                     Background

      All of the facts in these cases, which the parties submitted under Rule 122,

have been stipulated by the parties and are so found except as stated below. All

petitioners resided in California when they filed their petitions.

Petitioners’ Towing Business

      Mr. Steinberg and Mr. Nissley are both members of Kelmark. Mr.

Steinberg owns a 90% interest in the profits and losses of Kelmark whereas Mr.

Nissley owns a 10% interest.




      1
       All section references are to the Internal Revenue Code (Code) in effect for
the year at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure. All monetary amounts are rounded to the nearest dollar.
                                        -3-

[*3] Official Police Garages (OPGs) in the City of Los Angeles are regulated

through a contract process. In 2005 Kelmark purchased a towing contract,

Agreement No. C-106804, from Nissley Corp. for $1,200,000 in a transaction in

which Kelmark acquired all of the assets constituting Nissley Corp. towing

business. No other intangibles apart from the towing contract were purchased as

part of the transaction. The towing contract was effective as of June 28, 2004.

The Los Angeles City Council (city council) approved the sale and transfer of the

contract to Kelmark on November 24, 2004, and Kelmark placed the contract in

service on January 1, 2005.

      Upon the purchase of the towing contract, Kelmark obtained the sole and

exclusive right to operate the OPG for the Southeast Area of the Los Angeles

Police Department (LAPD). The contract provided for a five-year term ending on

June 27, 2009. At the end of the five-year term, the City of Los Angeles could, at

its sole option, extend the towing contract for an additional five-year term.

      On February 22, 2008, the city council drafted a motion proposing that the

city reexamine its system of OPGs. The original OPG model had been created in

the 1940s and paired each LAPD division with one OPG. Due to growth in the

city and the LAPD over the preceding decades, the divisional concept of OPGs

had become outdated. In the mid-1980s non-law-enforcement traffic officers
                                       -4-

[*4] separated from the LAPD and began to operate under the Department of

Transportation (DOT). The DOT and the LAPD work closely with one another,

but they have separate command structures and boundaries. The February 22,

2008, motion directed the LAPD to provide recommendations as to how the city

could improve the current OPG system so as to better serve the changing

boundaries of the DOT and the LAPD.

      The Board of Police Commissioners responded to the city council via letter

on June 19, 2008. The Board of Police Commissioners recommended that the city

council direct the city attorney to draft the necessary amendments to the Los

Angeles Municipal Code to establish permanent OPG geographic boundaries. On

August 12, 2008, the city council concurred with the recommendation of the

Board of Police Commissioners.

      Amending the city’s Municipal Code to establish permanent OPG

boundaries necessitated the drafting of new OPG contracts. The Board of Police

Commissioners recommended that, rather than entering into new five-year

contracts with existing contractors, the city council extend the existing OPG

contracts for a period of 180 days in order to prevent an interruption of OPG

services. On December 4, 2009, the Mayor of the City of Los Angeles transmitted

the Board of Police Commissioner’s request to the city council. The city council
                                        -5-

[*5] did not adopt the Board of Police Commissioner’s recommendation until

February 12, 2010. The February 12, 2010, adoption of the recommendation had

the effect of retroactively changing the expiration date of Kelmark’s towing

contract from June 27 to December 27, 2009.2 In the meantime, on December 8,

2009, the Board of Police Commissioners notified Kelmark in writing that (1) its

first five-year term had expired, and (2) if Kelmark wished to be considered for a

second five-year term, it needed to submit a written request for renewal to the

Board of Police Commissioners no later than February 15, 2010.

      On April 9, 2010, the city council approved an ordinance that amended the

Los Angeles Municipal Code and established permanent OPG boundaries. The

ordinance became effective on June 1, 2010. The city council and Kelmark

executed a first amendment to Agreement No. C-106804 (Amendment to

Agreement No. C-106804) on June 8, 2010, that stated, inter alia, that (1) on May

26, 2010, the city council had approved the exercise of the option to extend

Kelmark’s contract for an additional five-year term, (2) the term of Agreement No.

C-106804 had expired on December 27, 2009, and (3) both parties agreed to


      2
       The date that is 180 days from June 27, 2009, is actually December 24,
2009. However, all documentation relating to the 180-day extension refers to
December 27, 2009, as the new expiration date of Kelmark’s towing contract, and
we will treat it as such.
                                        -6-

[*6] extend the term of Agreement No. C-106804 to June 26, 2014. The

Amendment to Agreement No. C-106804 includes a ratification clause which

states: “If [Kelmark’s] services were required prior to the execution of this

Amendment, and services were performed in accordance with the terms and

conditions of this Amendment, they are hereby ratified.”

      Despite the upheaval surrounding OPGs across the city, Kelmark was the

only provider of towing services for the LAPD in the Southeast Area and was the

only operator of the Southeast Area OPG during 2009. Kelmark continued to

operate the Southeast Area OPG during the entire taxable year ending December

31, 2009. Kelmark submitted monthly summary reports to the Board of Police

Commissioners for each month of tax year 2009. The monthly reports included

information on the number of vehicles impounded, stored, released, or sold during

each calendar month of 2009.

Tax Returns Relating to Tax Year 2009

      Kelmark timely filed its Form 1065, U.S. Return of Partnership Income, for

tax year 2009. On August 18, 2011, Kelmark filed an amended Form 1065 for tax

year 2009. The amended Form 1065 increased Kelmark’s deduction for Other

Deductions: Amortization Expense from $240,000 on the originally filed return to

$880,000.
                                        -7-

[*7] Mr. and Mrs. Steinberg timely filed a joint Form 1040, U.S. Individual

Income Tax Return, for tax year 2009. Mr. Nissley also timely filed a Form 1040

for tax year 2009. On May 12, 2011, Mr. Nissley filed a Form 1040X, Amended

U.S. Individual Income Tax Return, for tax year 2009.3 On October 11, 2011, Mr.

and Mrs. Steinberg filed a Form 1040X for tax year 2009. The Forms 1040X

increased Mr. Nissley’s and the Steinbergs’ shares of passthrough losses from

Kelmark pursuant to amended Schedules K-1, Partner’s Share of Income,

Deductions, Credits, etc., received from the partnership.

      On May 3, 2013, respondent issued Kelmark a Form 4605-A, Examination

Changes--Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic

International Sales Corporations, for tax year 2009 that disallowed $800,000 of

Kelmark’s claimed deductions for Other Deductions: Amortization Expense. On

September 12, 2013, respondent issued a notice of deficiency for tax year 2009 to

Mr. and Mrs. Steinberg that disallowed a deduction for passthrough losses of


      3
        The parties stipulated that Mr. Nissley filed a Form 1040X on May 12,
2011, but Kelmark did not file an amended Form 1065 until August 18, 2011.
Although it may seem anomalous that Mr. Nissley amended his personal income
tax return to account for an increased share of partnership losses before Kelmark’s
filing of an amended return to increase partnership losses, stipulations are
generally treated as conclusive admissions. Rule 91(e). Since the order in which
Mr. Nissley and Kelmark filed amended returns is not relevant to the Court’s
decision in this matter, we ignore the discrepancy in the stipulated filing dates.
                                         -8-

[*8] $720,000 from Kelmark and determined an accuracy-related penalty under

section 6662. On September 12, 2013, respondent issued a notice of deficiency

for tax year 2009 to Mr. Nissley that increased State income tax refunds received

by $11,250,4 disallowed a deduction for passthrough losses of $67,655 from

Kelmark, and determined an accuracy-related penalty under section 6662.

                                      Discussion

I.    Burden of Proof for Deficiencies in Income Tax

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

taxpayer bears the burden of proving otherwise. Rule 142(a); see Welch v.

Helvering, 290 U.S. 111, 115 (1933). However, because our conclusions are

based on the preponderance of evidence, we need not decide whether petitioners

or respondent bears the burden of proof. See Knudsen v. Commissioner, 131 T.C.

185, 189 (2008).

II.   Applicable Law

      Deductions are a matter of legislative grace. Deputy v. du Pont, 308 U.S.

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Taxpayers must comply with specific requirements for any deductions claimed.




      4
          Respondent conceded this issue in a stipulation signed January 21, 2015.
                                         -9-

[*9] See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial

Ice Co. v. Helvering, 292 U.S. at 440.

      Section 165(a) provides that a taxpayer may deduct any loss sustained

during the taxable year that is not compensated for by insurance or otherwise.

Individual taxpayers may deduct only certain losses, including, inter alia, losses

incurred in a trade or business or in a transaction entered into for profit although

not connected with a trade or business. Sec. 165(c). In general, a loss is

deductible only for the year in which it is sustained. Sec. 1.165-1(d)(1), Income

Tax Regs. To be allowable as a deduction, the loss must be evidenced by closed

and completed transactions, fixed by identifiable events, and, except for disaster

losses, actually sustained during the taxable year. Id. para. (b). Further, only a

bona fide loss is allowable as a deduction. Id. Substance and not mere form

governs in determining whether a taxpayer has suffered a deductible loss. Id.

      Section 197(a) allows a taxpayer an amortization deduction with respect to

any section 197 intangible. Section 197 intangibles include any license, permit, or

other right granted by a governmental unit or an agency or instrumentality thereof.

Sec. 197(d)(1)(D). Generally, a taxpayer must amortize the adjusted basis of the

section 197 intangible ratably over a 15-year period beginning with the month in

which the intangible was acquired. Sec. 197(a).
                                         - 10 -

[*10] III.   Parties’ Arguments

      The parties agree that Agreement No. C-106804 is a section 197 intangible

that must be amortized over a 15-year period.5 However, they disagree as to

whether petitioners suffered passthrough losses under section 165 in tax year 2009

when the contract lapsed on either June 27 or December 27, 2009, and was not

amended until June 8, 2010. We briefly summarize the parties’ arguments here.

      A.     Petitioners’ Argument

      Petitioners argue that since the express terms of Agreement No. C-106804

state that it must terminate on June 27, 2009, the contract became worthless in

2009 and they are therefore entitled to loss deductions under section 165 for tax

year 2009 equal to the remaining basis in the contract. Petitioners argue that State

or local law determines property rights and ask the Court to take judicial notice of

Los Angeles Municipal Code sec. 80.77.4, which limits the duration of OPG

contracts to a five-year term. Petitioners argue that general rules of contract

interpretation require the Court to ascertain the intent of the parties from the plain

      5
        Sec. 197(e)(4)(D) excludes from the definition of a sec. 197 intangible any
right under a contract if such right has a fixed duration of less than 15 years but
only if such right is not acquired in a transaction (or series of related transactions)
involving the acquisition of assets constituting a trade or business or a substantial
portion thereof. Since Kelmark purchased the five-year contract from Nissley
Corp. in a transaction in which Kelmark acquired all of the assets constituting
Nissley Corp.’s towing business, sec. 197(e)(4)(D) does not apply.
                                        - 11 -

[*11] language of the contract itself. Since the plain language of the contract and

city law require termination of the contract after five years, petitioners argue that

Kelmark and the City of Los Angeles intended for the contract to terminate in

2009. For support of their argument that the contract became worthless in 2009,

petitioners argue that the contract had no commercial value after its termination in

June 2009. Petitioners cite the definition of “fair value” as defined by the

Financial Accounting Standards Board and “fair market value” as defined in

section 20.2031-1(b), Estate Tax Regs.

      B.     Respondent’s Argument

      Respondent argues that notwithstanding the interim period between the

expiration of the original contract and the signing of the amendment, petitioners

did not, in substance, sustain uncompensated passthrough losses. Respondent

cites section 1.165-1(b), Income Tax Regs., which provides that “[s]ubstance and

not mere form shall govern” in determining whether a taxpayer has suffered a loss.

Like petitioners, respondent also urges us to consider rules of contract

interpretation, arguing that (1) the city’s option to renew was part of a larger

contract, (2) substantial performance applies to the time periods stated in the

contract, and (3) general rules governing the construction and operation of

contracts should override the rules of offer and acceptance.
                                         - 12 -

[*12] Respondent argues that the contract did not become worthless in 2009

because (1) Kelmark continued to enjoy the same benefits of towing for the

Southwest Area OPG after the towing contract expired by its own terms on June

27, 2009, (2) the city delayed extending the towing contract to include details of

the new OPG ordinance in all existing OPG contracts, and Kelmark was not at risk

of losing its OPG contract, (3) the city was not required to exercise its option to

extend the contract before the expiration of the initial term, (4) the city did in fact

exercise its option to extend, first with a temporary extension and then with an

amendment to the initial contract, and (5) the terms of the amendment reflect the

intentions of Kelmark and the city to include the interim period as part of the

towing contract.

      Respondent notes that the amendment extended the terms of the contract

until June 26, 2014, which is five years after the original term expired on June 27,

2009. Respondent argues that if the parties did not intend to include the interim

period in the towing contract, the amendment would have provided for a five-year

term beginning on the date the amendment was signed on June 8, 2010.

Additionally, respondent notes the ratification clause in the amendment that

explicitly ratified acts performed during the interim period to include them within

the terms of the towing contract. Further, respondent argues that the Court must
                                       - 13 -

[*13] consider the original contract and the amendment as one agreement because

the amendment incorporated the original contract into its terms. Finally,

respondent notes that financial accounting and tax accounting have different

objectives, and regardless of the contract’s value for financial accounting

purposes, petitioners are not entitled to a deduction under section 165 for tax

purposes.

IV.   Analysis

      Whether Kelmark’s towing contract became worthless in tax year 2009 is

partly a question of fact. See, e.g., Boehm v. Commissioner, 326 U.S. 287, 293

(1945) (whether corporate stock became worthless during a given year is a

question of fact); Favia v. Commissioner, T.C. Memo. 2002-154 (worthlessness

and taxable year in which a security becomes worthless are questions of fact). The

requirement that losses be deducted for the year in which they are sustained calls

for a practical rather than a legal test. Lucas v. Am. Code Co., 280 U.S. 445, 449

(1930). Substance and not mere form governs in determining whether a taxpayer

has suffered a deductible loss. Sec. 1.165-1(b), Income Tax Regs. A taxpayer is

entitled to a loss deduction under section 165 for an asset that has become

worthless, even if the taxpayer does not take steps to abandon the asset. Echols v.

Commissioner, 950 F.2d 209, 211 (5th Cir. 1991), denying reh’g to 935 F.2d 703,
                                        - 14 -

[*14] rev’g and remanding 93 T.C. 553 (1989). The test for worthlessness is both

subjective and objective: “a subjective determination by the taxpayer of the fact

and the year of worthlessness to him, and the existence of objective factors

reflecting completed transaction(s) and identifiable event(s) in the year in

question”. Id. at 213.

      Petitioners urge us to focus only on the provisions of the original contract

regarding termination in tax year 2009. We disagree that the original contract

language is dispositive of whether petitioners sustained passthrough losses in

2009. Both the Code and caselaw require that we consider all facts and

circumstances surrounding Kelmark’s towing contract with the City of Los

Angeles.

      When we consider Kelmark’s conduct in conjunction with the original

contract, the amendment to the contract, and the Los Angeles Municipal Code, it is

clear that Kelmark did not, in substance, suffer a loss in 2009 even if the contract

expired in form. Kelmark continued to enjoy the benefits of the towing contract

even after it initially expired on June 27, 2009, and subsequently expired after the

180-day extension on December 27, 2009. It continued to operate the Southeast

Area OPG, and no other party provided towing services for the LAPD in the

Southeast Area during any part of 2009. Kelmark also continued to provide
                                        - 15 -

[*15] monthly summary reports to the LAPD for the Southeast Area OPG. In

short nothing material occurred in 2009 that changed the relationship Kelmark

maintained with the LAPD in the Southeast Area or the City of Los Angeles. This

fact favors a finding that the contract was neither subjectively worthless in

petitioners’ eyes nor objectively worthless given the surrounding facts and

circumstances. See Echols v. Commissioner, 950 F.2d at 213.

      Further, we must consider the original contract in conjunction with the

amendment, which clearly amends and extends Agreement No. C-106804. The

plain language of the amendment evidences an intent by Kelmark and the City of

Los Angeles to include the interim period within the amendment’s terms. Not

only does the amendment call for an additional five-year term that ends exactly

five years after the expiration date of the original contract, the amendment also

includes a clause that specifically ratifies services that Kelmark performed before

the execution of the amendment. The fact that the original contract includes no

such ratification clause indicates that the signatories to the amendment added it to

specifically recognize the interim period.

      Petitioners urge us to consider State and local law in determining the

property rights under the contract. While they are correct that State law controls

in determining the nature of the legal interest a taxpayer has in property, see, e.g.,
                                       - 16 -

[*16] Aquilino v. United States, 363 U.S. 509, 513 (1960), petitioners do not cite

any applicable California State laws or caselaw to support their argument that the

contract became worthless in 2009. Petitioners cite only Los Angeles City

Municipal Code sec. 80.77.4, requiring OPG contracts to be awarded for a fixed

five-year term as support for their argument that the original contract became

worthless after five years. In fact Los Angeles City Municipal Code sec. 80.77.4

further convinces us that Kelmark and the city intended to include the interim

period within the terms of the amendment. Otherwise the amendment would have

created a term of shortly over four years rather than a five-year term as required by

city law.

      We also agree with respondent that a contract’s value for financial

accounting purposes does not determine its value for Federal income tax

accounting purposes. Financial and tax accounting have vastly different

objectives. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-543 (1979)

(“The primary goal of financial accounting is to provide useful information to

management, shareholders, creditors, and others properly interested; * * * [t]he

primary goal of the income tax system, in contrast, is the equitable collection of

revenue. * * * [A]ny presumptive equivalency between tax and financial

accounting would be unacceptable.”).
                                        - 17 -

[*17] Petitioners also cite the definition of fair market value under section

20.2031-1(b), Estate Tax Regs., arguing that the contract had no commercial value

because, inter alia “[t]here were no remaining rights to tow or store * * * [and it]

could not be assigned for value”. In contrast to their assertion, Kelmark did in fact

retain the rights to tow and store vehicles during all of 2009 as evidenced by the

fact that only Kelmark provided towing services for the LAPD in the Southeast

Area, and Kelmark was the sole operator of the Southeast Area OPG. Further,

Kelmark’s rights to tow and store vehicles in 2009 were ratified by the ratification

clause in the Amendment to Agreement No. C-106804. Petitioners’ argument that

the contract “could not be assigned for value” is a red herring considering that (1)

the city council has final approval over the assignment of towing contracts and (2)

during 2009, the city council intentionally did not enter into new towing contracts

because of the impending changes to the Los Angeles Municipal Code. In sum,

we disagree that application of the willing buyer/willing seller standard under

section 20.2031-1(b), Estate Tax Regs., would render the contract valueless in

2009.

        Moreover, to be deductible, a loss must be evidenced by closed and

completed transactions. Sec. 1.165-1(b), Income Tax Regs. There was no closed

and completed transaction between petitioners and the City of Los Angeles in
                                       - 18 -

[*18] 2009. As previously stated, Kelmark continued to enjoy the benefits of a

contractual relationship with the City of Los Angeles during the entirety of 2009.

The fact that the amendment was not signed until 2010, after the debate about

setting permanent OPG boundaries had been resolved, clearly shows that there

was no closed and completed transaction that would support finding that Kelmark

suffered a loss in 2009. See, e.g., Nicolazzi v. Commissioner, 79 T.C. 109, 131-

132 (1982) (finding no closed and completed transaction in 1976 where taxpayer

purchased a lottery lease in 1976 and did not exercise a put option until 1977),

aff’d, 722 F.2d 324 (6th Cir. 1983). Accordingly, we find that Kelmark’s contract

with the City of Los Angeles did not become worthless in 2009, and petitioners

are not entitled to deductions under section 165 equal to the then-remaining

unamortized basis in the contract.

V.    Section 6662 Accuracy-Related Penalties

      Generally, the Commissioner bears the burden of production with respect to

any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). To meet that burden, the Commissioner

must come forward with sufficient evidence indicating that it is appropriate to

impose the relevant penalty. Higbee v. Commissioner, 116 T.C. at 446. However,

once the Commissioner has met the burden of production, the taxpayer bears the
                                        - 19 -

[*19] burden of proving that the penalty is inappropriate. See Rule 142(a); Higbee

v. Commissioner, 116 T.C. at 446-449.

      Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of any

portion of an underpayment that is attributable to, inter alia, negligence or

disregard of rules or regulations, or to any substantial understatement of income

tax. Respondent argues that petitioners should be liable for the section 6662(a)

and (b)(1) and (2) penalties because their underpayments are due to substantial

understatements of their 2009 Federal income tax and because petitioners acted

negligently and disregarded rules and regulations by claiming loss deductions

under section 165 to which they were not entitled. Because we conclude that

petitioners acted negligently in claiming loss deductions under section 165 to

which they were not entitled, we need not consider whether their underpayments

are due to substantial understatements of their 2009 Federal income tax.

      Section 6662(c) defines negligence as any failure to make a reasonable

attempt to comply with the provisions of the internal revenue laws. The term

“disregard” includes any careless, reckless, or intentional disregard. Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs. Negligence is indicated where a taxpayer

fails to make a reasonable attempt to ascertain the correctness of a deduction,

credit or exclusion on a return that would seem to a reasonable and prudent person
                                         - 20 -

[*20] to be “too good to be true” under the circumstances. Sec. 1.6662-3(b)(1)(ii),

Income Tax Regs. A disregard of rules or regulations is “careless” if the taxpayer

does not exercise reasonable diligence to determine the correctness of a return

position that is contrary to the rule or regulation. Id. subpara. (2).

      We agree with respondent that petitioners were negligent and disregarded

rules and regulations when they claimed loss deductions under section 165 on

their amended 2009 Federal income tax returns. Section 165 allows deductions

only for “bona fide” losses, and substance and not mere form governs in

determining whether a loss is deductible. Sec. 1.165-1(b), Income Tax Regs. At

the time petitioners filed the amended returns in which they claimed the loss

deductions under section 165, Kelmark had already entered into the amendment

with the City of Los Angeles that extended the terms of the towing contract for an

additional five-year period. As previously discussed at length, Kelmark continued

to enjoy the benefits of the towing contract during the interim period, and, in

substance, it suffered no loss during tax year 2009. Claiming a deduction for a

loss under section 165 when no loss has actually occurred would seem to be “too

good to be true” to a reasonable and prudent person, and petitioners acted

negligently in failing to ascertain the correctness of the deductions. Further,

petitioners were careless when they did not exercise reasonable diligence to
                                          - 21 -

[*21] ascertain whether their claimed loss deductions were contrary to the

requirement that only bona fide losses are allowed as deductions under section

165. See sec. 1.165-1(b), Income Tax Regs. Respondent has met his burden of

production to show that petitioners were negligent and disregarded rules and

regulations by claiming loss deductions to which they were not entitled.

      Section 6664(c)(1) provides that taxpayers may avoid a penalty for any

portion of an underpayment under section 6662 if they are able to demonstrate that

there was reasonable cause for such portion and that the taxpayers acted in good

faith with respect to such portion. Reasonable cause and good faith are

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 taxpayers’ efforts to assess their proper tax liabilities. Id.

      Reliance on professional advice may constitute reasonable cause and good

faith, but “it must be established that the reliance was reasonable.” Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011

(5th Cir. 1990), aff’d, 501 U.S. 868 (1991). We have previously held that the

taxpayer must satisfy a three-prong test to be found to have reasonably relied on

professional advice to negate a section 6662(a) accuracy-related penalty: (1) the

adviser was a competent professional who had sufficient experience to justify the
                                        - 22 -

[*22] 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. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),

aff’d, 299 F.3d 221 (3d Cir. 2002).

      Petitioners do not meet two of the requirements laid out in Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. at 99. Petitioners argue that they relied

on certified public accountants to prepare both their 2009 individual Federal

income tax returns and Kelmark’s 2009 partnership tax return. While we take

petitioners at their word that they relied in good faith on their preparers’ judgment,

petitioners have not established that the preparers were competent professionals

with sufficient experience to justify relying on their advice. Petitioners did not

provide any information about the individuals who prepared their 2009 individual

Federal income tax returns or Kelmark’s 2009 partnership tax return. Apart from

the preparers’ names being listed as paid preparers on the returns, the Court has no

information about these individuals because their names, backgrounds, and

expertise were not mentioned or detailed in the record. Moreover, petitioners have

not established what information was given to the preparers. In sum, the record

establishes that petitioners do not qualify for relief from any portions of the

section 6662 penalties on the basis of the defense of reasonable reliance.
                                      - 23 -

[*23] In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                               Decision will be entered for

                                     respondent in docket No. 28810-13.

                                               Decision will be entered under

                                     Rule 155 in docket No. 28865-13.
