                        T.C. Memo. 2009-91



                      UNITED STATES TAX COURT



           OTIS E. AND JUDY ROBERTSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 1616-06, 24391-06.    Filed April 29, 2009.



     Otis E. and Judy Robertson, pro sese.

     Mark H. Howard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined deficiencies in

petitioners’ income taxes, section 6651(a)(1)1 additions to tax,




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
the nearest dollar.
                                 - 2 -

and section 6662 accuracy-related penalties for 2001 and 2002 as

follows:

                                 Addition to Tax      Penalty
Year         Deficiency          Sec. 6651(a)(1)     Sec. 6662(a)

2001           $3,779                  $356                 $755
2002           57,753                14,438               11,551

       After concessions, the issues for decision are:2

       (1)   Whether petitioners had unreported long-term capital

gain of $44,549 in 2001 as a result of a distribution from

Quality Engine & Supply, L.L.C. (QES).     We hold they must

recognize long-term capital gain of $44,549;

       (2)   whether petitioners had unreported long-term capital

gain of $328,901 for 2002 as a result of a distribution by QES.

We hold they must recognize long-term capital gain of $200,000;




       2
      In the notice of deficiency for 2001 respondent determined
that petitioners failed to report $499 in interest income and
$517 in royalty income. Petitioners did not assign error to
these adjustments in their petition for 2001 and did not contest
these adjustments on brief or at trial. See Rule 34(b)(4). We
hold that petitioners have conceded these adjustments.
Respondent also determined that petitioners received $5,982 in
taxable Social Security benefits. Petitioners note that the
taxation of the Social Security benefits is a computational item
and do not otherwise contest this issue.
                               - 3 -

     (3)   whether petitioners are entitled to an ordinary loss

deduction of $63,512 for 2002 as petitioner husband’s

distributive share of loss from QES.     We hold petitioners are not

entitled to an ordinary loss deduction;

     (4)   whether petitioners are liable for additions to tax for

late filing under section 6651(a)(1) for 2001 and 2002.     We hold

they are liable; and

     (5)   whether petitioners are liable for section 6662

accuracy-related penalties for 2001 and 2002.     We hold they are

not liable with respect to QES items and are liable with respect

to conceded income amounts for 2001.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.     The stipulations of

facts and the accompanying exhibits are incorporated by this

reference.   Petitioners resided in South Carolina at the time

they filed the petitions in these consolidated cases.

     During 2001 and 2002 petitioners were the sole members of

QES, a limited liability company treated as a partnership for

Federal income tax purposes.   QES was engaged in the business of

car engine repair and restoration.     Petitioner husband started

QES with Terry Campbell (Mr. Campbell) in October 1990 with each

owning 50 percent of the company.    In October 1997 petitioners

purchased Mr. Campbell’s interest for $75,000.     Their agreement

included a covenant not to compete provision, with $50,000
                               - 4 -

payable at the time of the sale and $25,000 payable within 2

years.   Petitioners obtained a loan of $65,000 using their

residence as collateral to finance the purchase of Mr. Campbell’s

interest in QES.   Petitioners used the remaining loan proceeds to

purchase inventory for QES.   For 2001 QES reported that

petitioner husband owned a 51-percent profits and loss interest

and a 51-percent capital interest and petitioner wife owned a 49-

percent profits and loss interest and a 49-percent capital

interest.   For 2002 QES reported that petitioner husband and

petitioner wife each owned a 50-percent profits and loss interest

and a 50-percent capital interest.

     In February 1999 QES acquired two adjoining parcels of land

at 1312 Flint Street and 1304 Flint Street, Rock Hill, South

Carolina, for $50,000.   QES also paid $10,000 to a third party

who had an option to purchase the 1312 Flint Street parcel for

release and cancellation of the option.   QES obtained a $175,000

line of credit from National Bank of York County (National Bank)

to finance the purchase of the Flint Street properties and

construction costs for buildings on the properties (construction

loan).   The construction loan was secured with mortgages on the

Flint Street properties and petitioners’ personal residence.

Petitioners also personally guaranteed the construction loan.

When the construction loan matured on July 5, 1999, the parties

modified the terms of the loan to increase the line of credit to
                                 - 5 -

$250,000 and extend the maturity date to May 5, 2000.    QES used

the construction loan to refurbish a building at 1312 Flint

Street that was damaged by fire and to construct a building at

1304 Flint Street.    QES also moved a metal building that it had

purchased for $10,000 to the Flint Street location.    On April 28,

2000, QES obtained a loan of $301,500 from Bank of America (the

Bank of America loan) that QES used to repay the construction

loan of $251,934.    The Bank of America loan was secured by the

1304 and 1312 Flint Street properties, and petitioner husband

provided a personal guaranty.    The terms of the loan provided an

additional $301,500 line of credit for a maximum loan of

$603,000.

     On July 12, 2001, QES sold the 1312 Flint Street property

for $200,000.   The settlement statement reported net proceeds to

QES of $44,549 after payment of the Bank of America loan and

other expenses.   On July 23, 2001, petitioners deposited the

proceeds into a newly opened interest-bearing account in their

individual names with National Bank, which later became South

Carolina Bank & Trust of the Piedmont (SCBT).    QES filed a Form

1065, U.S. Return of Partnership Income, for 2001 that reported a

net loss of $32,000 from the sale of the 1312 Flint Street

property, computed as follows:
                               - 6 -

     Sale price                                 $200,000
     Less: Cost and other basis                  310,000
     Plus: Depreciation previously claimed        78,000

        Net loss                                  32,000

Petitioners did not claim the $32,000 loss on their 2001

individual return.   In the notice of deficiency for 2001

respondent determined that petitioners realized long-term capital

gain of $44,549 from the sale of property owned by QES and that

the net proceeds were distributed to petitioners during 2001.

     On June 28, 2002, QES sold the 1304 Flint Street property

for $275,000 and its business inventory and other assets for

$200,000 to Adkin Enterprises, L.L.C.   The settlement statement

for the 1304 Flint Street property reported net proceeds to QES

of $128,901 after payment of the Bank of America loan and other

expenses.   The settlement statement for the sale of inventory and

other business assets reported net proceeds of $200,000.    QES

received a check for $328,901 from the transactions.   On July 2,

2002, petitioners deposited $200,000 into a newly opened

interest-bearing account in the name of Quality Engine & Supply

Trust (QES trust account) with SCBT.    The remaining $128,901 in

proceeds was paid to Quality Engine, L.L.C., in the form of a

cashier’s check issued by SCBT on July 1, 2002.

     QES reported the 2002 sales on Form 4797, Sales of Business
                                 - 7 -

Property, as an asset sale occurring on June 30, 2002, for

$475,000.   The return reported a loss on the sale of $5,691

computed as follows:

     Sale price                                       $475,000
     Less: Cost and other basis                        514,000
     Plus: Depreciation previously claimed              33,309

        Net loss                                         5,691

     QES’s 2002 return reported an ordinary loss of $127,025

resulting primarily from operating expense deductions.

Petitioners claimed an ordinary loss on their 2002 individual

return of $63,512, attributable to petitioner husband’s

distributive share of the QES loss.      Petitioners did not claim a

loss deduction for petitioner wife’s distributive share.

Petitioners did not separately report the $5,691 loss from the

asset sale on their individual return.     In the notice of

deficiency for 2002 respondent disallowed the $63,512 ordinary

loss and determined that petitioners realized long-term capital

gain of $328,901 from the distribution of the 2002 proceeds or,

in the alternative, from the sales of their interests in QES.

     Petitioners’ 2001 return was due under extension on October

15, 2002, and they filed it on December 6, 2002.     Petitioners’

2002 return was due under extension on August 15, 2003, and they

filed it on December 24, 2003.    Petitioners’ 2001 and 2002

individual returns were prepared by Gregory T. Mayer, a tax

return preparer doing business as Legal Tax Newsletter, L.C.     Mr.
                               - 8 -

Mayer also prepared QES’s 2001 and 2002 partnership returns.

Petitioners provided their personal and business tax records to

Mr. Mayer with sufficient time for him to prepare the returns by

their April 15 due date.   Mr. Mayer informed petitioners that he

would not be able to prepare their returns on time and that

extensions were necessary.   Mr. Mayer passed away some time after

preparing petitioners’ 2003 return, which he dated May 13, 2005.

Many of QES’s and petitioners’ tax documents were in Mr. Mayer’s

office and were destroyed by his landlord following his death.

     During the time petitioners engaged Mr. Mayer to prepare

their returns, he was under investigation by the U.S. Department

of Justice in connection with his tax return preparation

activities.3   See United States v. Mayer, 91 AFTR 2d 2003-1730

(M.D. Fla. 2003) (granting a temporary restraining order against

Mr. Mayer and requiring him to provide a customer list).   In

March 2005 the U.S. District Court for the Middle District of

Florida entered an order enjoining Mr. Mayer from preparing any

tax forms that he knew would result in understatements of tax,

preparing false or fraudulent returns, and selling fraudulent tax

schemes, specifically identifying returns that asserted a section

861 argument (which relates to U.S. source income).   United

States v. Mayer, 95 AFTR 2d 2005-2033 (M.D. Fla. 2005).



     3
      The Court takes judicial notice of the District Court case
against Mr. Mayer.
                                - 9 -

Petitioners replaced him as their tax return preparer for the

2004 tax year.

                               OPINION

     Section 731(a) sets forth rules governing a partner’s gain

recognition on distributions from the partnership.       A partner

must recognize gain upon a distribution from the partnership to

the extent that the money (including marketable securities)

distributed exceeds the adjusted basis in the partner’s interest

in the partnership immediately before the distribution.       Sec.

731(a).   Any gain recognized under section 731(a) is considered

gain from the sale or exchange of the partnership interest of the

distributee partner.   Sec. 731(a).      In the case of a sale or

exchange of a partnership interest, gain recognized to the

transferor partner is generally treated as gain from the sale or

exchange of a capital asset.    Sec. 741.     To resolve the dispute

as framed by the parties, petitioners’ tax liabilities arising

from their ownership of QES requires a two-step analysis:       (1)

Whether petitioners received distributions from QES during 2001

and 2002; and (2) if they did, whether they had sufficient bases

in their QES interests for the distributions to be tax free.

A.   2001 Sale

     Respondent argues that petitioners received a distribution

from QES of the $44,549 net proceeds from the sale of the 1312

Flint Street property during 2001.       Respondent further argues
                                - 10 -

that the distribution is taxable long-term capital gain to

petitioners because they failed to substantiate their bases in

their QES interests.   Respondent contends that petitioners’

adjusted bases in their QES interests immediately before the

distributions were zero, citing the zero balances reported for

petitioners’ capital accounts on QES’s 2001 return.   Petitioners

argue that the proceeds were not distributed to them; rather,

they were used to pay QES’s liabilities.   Petitioners further

argue that the alleged payments of QES’s liabilities created

bases in their QES interests.    Petitioners contend that they had

a total basis in their QES interests as of December 31, 2001, of

$510,635 computed as follows:

          Loans from officers              $54,000
          Partner’s capital                333,663
          Payment of QES liabilities        37,972
          Purchase of Campbell interest     75,000
            and noncompete covenant
          Purchase of option                10,000

             Total adjusted basis          510,635

     Petitioners deposited the proceeds in a newly established

bank account opened in their individual names.   Petitioners

contend that $37,972 was withdrawn during 2001 to pay QES’s debt.

Although we generally find petitioner husband’s testimony to be

honest, petitioners have not produced sufficient documentation to

support his testimony.   Petitioners produced bank statements from

August 15, 2001, to December 15, 2002, showing 14 withdrawals

totaling $49,697.   The bank statements do not contain any
                               - 11 -

information regarding the recipients of the withdrawals or the

purposes of the purported expenditures.   Petitioners attached a

schedule to their posttrial brief listing some of the recipients

and the purposes of the expenditures.   However, this evidence is

not properly before the Court.   See Rule 143(b).   Petitioners

produced bank statements for 2003, 2004, and 2005 that also lack

sufficient information to determine the uses or recipients of the

funds.   We find that petitioners received a distribution from QES

of $44,549 from the 2001 proceeds.

     Petitioners must recognize income on the distributed

proceeds to the extent that it exceeds their adjusted bases in

their QES interests in 2001.   Sec. 731(a).   Petitioners have not

established that they had sufficient bases in their QES interests

for the distributions to be tax free.   Petitioners presented a

balance sheet for the year ending December 31, 2001, in support

of their computation of their bases in QES.   Petitioners did not

present any evidence to document the entries on the balance sheet

or any testimony concerning the balance sheet.   The purpose for

which the balance sheet was prepared is unclear, and the balance

sheet conflicts with QES’s 2001 return.   The 2001 return reported

total yearend liabilities of $416,903, but the balance sheet

reported total liabilities of $233,938.   Also, the 2001 return

reported no partner capital, but the 2001 balance sheet reported

capital of $333,663, with retained earnings of $204,742 and
                                - 12 -

withdrawals of retained earnings of $128,921.   The 2001 return

and the balance sheet also report differing amounts of total QES

assets.   Petitioners did not provide any explanation for these

discrepancies.   In addition, the balance sheet shows officer

loans, but there is no documentation for these loans.4

     Apart from the balance sheet, petitioners presented some

evidence of equipment contributed to QES, their capital account

near the time QES was formed, and the purchase of Mr. Campbell’s

interest in 1997.    The determination of a partner’s adjusted

basis in a partnership interest requires more information,

including annual distributive shares of partnership income and

losses and distributions made by the partnership since its

inception.   The record lacks information on petitioners’

distributive shares of income or loss and any distributions made

during the intervening years.    Without this information we cannot

determine whether petitioners’ bases in QES exceeded the

distribution.    The fact that petitioners did not claim their

reported $32,000 loss from the sale on their individual return

also suggests that they lacked bases in their QES interests.

Partners may deduct their distributive shares of loss only to the



     4
      Petitioners presented copies of five checks totaling
$13,800 from 2000 to 2002 from a personal bank account, made out
to QES with notations of loan to QES. The record lacks any other
documentation of the alleged loans from officers of $54,000. We
find that the net proceeds were not distributed to petitioners in
repayment of any loans.
                                - 13 -

extent of their bases in their partnership interests.     Sec.

704(d).    Accordingly, the entire $44,549 distribution is taxable

long-term capital gain as respondent determined.

     In the notice of deficiency for 2001 respondent determined

that petitioners realized long-term capital gain from the sale of

the 1312 Flint Street property by QES.     Section 702 subjects a

partner to tax on the partner’s distributive share of partnership

income when realized by the partnership regardless of whether

that income is actually distributed to the partner.     See Chama v.

Commissioner, T.C. Memo. 2001-253; sec. 1.702-1(a), Income Tax

Regs.     Gain from the sale of property should be recognized and

included in gross income.     Sec. 61(a)(3).   The amount of gain is

the excess of the amount realized from the sale over the adjusted

basis of the property.     Sec. 1001(a).   At trial respondent argued

that evidence relating to the bases of the assets sold by QES was

not relevant.     In his posttrial brief respondent generally

ignored the requirement that partners recognize gain on the sale

of assets by the partnership and instead sought to tax the

distribution of the proceeds.     Accordingly, we find that
                                - 14 -

respondent has waived the argument that petitioners are subject

to tax on QES’s sale of the 1312 Flint Street property.5

     The tax consequence to petitioners would be the same had

respondent sought to tax the gain QES realized on the sale of the

1312 Flint Street property.     Respondent reduced the amounts

realized on the sale by the amount of the Bank of America loan,

and petitioners have not established that QES had a basis in the

Flint Street properties in excess of the Bank of America loan

that would reduce the amount of long-term capital gain respondent

determined.    Petitioners presented voluminous records of the

construction costs of both the 1304 and the 1312 Flint Street

buildings.    However, the construction costs do not establish a

basis in the Flint Street properties in excess of the Bank of

America loan.

B.   2002 Sale

     Respondent determined that petitioners had unreported long-

term capital gain of $328,901 for 2002 as a result of a

distribution from QES of the net proceeds from the 2002

transaction.     Petitioners contend that the proceeds were not

distributed because they were used to pay QES’s outstanding



     5
      The tax effect to petitioners would be the same under
either argument. The $44,549 capital gain that petitioners would
recognize on the sale of the 1312 Flint Street property would
increase their bases in their QES interests. As a result
petitioners would not be taxed on the $44,549 distribution. Sec.
705(a).
                              - 15 -

liabilities.   Petitioners further contend that their total basis

in their QES interests at the end of 2002 was $646,551, which is

based on the above computation of the 2001 basis plus the payment

of QES’s liabilities of $132,916.

     Petitioner husband testified that the proceeds were used to

pay QES’s remaining liabilities after the disposition of QES’s

assets.   Petitioners produced bank statements from the QES trust

account for 2002 that show withdrawals of $178,202 and copies of

canceled checks that show the recipients of some of the

withdrawals and notations of the purpose of the payment.

Petitioners also attached a schedule to their posttrial brief

listing the recipients and purposes of the payments.6

Petitioners contend that $132,916 of these withdrawals was used

to pay QES’s liabilities, and thus concede that $45,286 was

distributed for personal or nonbusiness purposes, including a

downpayment on a residence in Arizona purchased on November 1,

2002, as rental property.   Petitioners erroneously included

$10,200 they transferred to Quality Vehicle Repair & Sales L.L.C.

(QVR), another of their business ventures, as withdrawals to pay

QES’s liabilities.   It appears from the record that QVR was

engaged in a line of business different from QES’s and was not a


     6
      As noted above, information contained in schedules attached
to posttrial briefs that was not presented at trial is not
properly before the Court. See Rule 143(b). The schedule lists
the purposes of expenditures paid from the QES trust account and
contains evidence that was not presented at trial.
                              - 16 -

continuation of QES’s business operations.7   The transfers to QVR

should be treated as distributed to petitioners.    We also

question whether certain other payments from the QES trust

account were used to pay QES’s liabilities, including:    (1) Four

withdrawals identified in the schedule as relating to the

purchase and/or repair of trucks, totaling $53,094.    There is no

evidence that the trucks were used in QES’s business; (2) three

payments identified as Visa travel, totaling $7,733.    There is no

evidence concerning whether the Visa account was business or

personal; (3) two withdrawals identified as relating to concrete,

totaling $1,447.   The notation on one check indicates that

petitioners used the concrete for a motor home.    There is no

evidence concerning the motor home and whether it was used for

business purposes; and (4) a withdrawal of $54,150 to SCBT for

the payment of a loan.   There is no documentation relating to an

unpaid business loan from SCBT to QES during 2002.    The above-

listed payments and the transfers to QVR represent $126,624 of

the $132,916 in alleged business-related withdrawals from the QES

trust account during 2002.   We cannot determine from the record


     7
      Petitioners reported a loss of $7,614 from QVR on Schedule
C, Profit or Loss From Business, of their 2002 return. The
return used an employer identification number (EIN) for QVR that
was different from the EIN used for QES. However, subsequent-
year partnership returns filed for QVR erroneously used QES’s
EIN. Petitioner husband stated that this mistake had been
corrected. Petitioners’ treatment of QVR does not affect our
determination that the 2002 sale was a disposition of QES’s
assets.
                               - 17 -

whether these amounts were used to pay QES’s liabilities.     We

also note that the record contains evidence that petitioners used

their business entities to pay personal expenses at various

times.    Under these circumstances, we find that the $200,000

deposited into the QES trust account was not used to pay QES’s

liabilities and was distributed to petitioners during 2002 for

their personal benefit.    As stated above, petitioners attempted

to present evidence of their bases in QES.     Petitioners failed to

establish that they had adjusted bases in their QES interests in

2002 so that the distribution is not subject to tax under section

731(a).    Accordingly, we hold that petitioners realized long-term

capital gain of $200,000 for 2002.

     Petitioners contend that QES used the $128,901 cashier’s

check to pay QES’s liabilities.    On its 2002 return QES reported

inventory and purchases of $425,000 and beginning-of-the-year

liabilities in excess of $600,000.      We recognize that the record

lacks specific information about the use of the cashier’s check.

However, we find petitioner husband’s testimony honest.     There is

no evidence to contradict his testimony.     Although we find the

amount deposited into the QES trust account was not used for

QES’s business purposes, it is unrealistic to assume that QES did

not have any outstanding liabilities after the 2002 transaction
                              - 18 -

and payment of the Bank of America loan.   Accordingly, we find

that the cashier’s check was not distributed to petitioners.8

     Petitioners characterize the 2002 transaction as a complete

disposition or sale of QES.   Respondent asserts that petitioners

would be taxable on the $328,901 proceeds for 2002 under this

alternative characterization of the transaction as a sale of

petitioners’ QES interests.   Petitioners structured the

transaction as an asset sale and reported the 2002 sale on QES’s

2002 return as a sale of business assets rather than reporting

the transactions on their 2002 individual return as a sale of

their QES interests .   Petitioners have not provided any reason

to disregard the form they chose. Accordingly, we hold that the

2002 transaction was not a disposition of their interests in QES.

C.   2002 Ordinary Loss Deduction

     For 2002 QES reported an ordinary loss of $127,025.   On

their 2002 individual return petitioners claimed a loss deduction

of $63,512, attributable to petitioner husband’s distributive



     8
      The 2002 sale included the sale of inventory, which might
properly result in ordinary income. See sec. 751(a). The notice
of deficiency determined petitioners realized long-term capital
gain for 2002 on the basis of the distribution from QES.
Respondent has not argued that any portion of the gain is taxable
as ordinary income. We determine that respondent has conceded
this characterization issue. Likewise, we treat respondent as
conceding any argument concerning petitioners’ gain recognition
from the sale of QES’s assets during 2002 for the reasons we
stated for the 2001 sale. Nor have petitioners proved that QES
had a total basis in the assets sold in excess of the Bank of
America loan.
                                - 19 -

share of QES’s ordinary loss.    A partner must take into account

his distributive share of each item of partnership income, gain,

loss, deduction, or credit.   Sec. 702(a); Vecchio v.

Commissioner, 103 T.C. 170, 185 (1994).     A partner may deduct his

or her distributive share of partnership loss only to the extent

of the partner’s adjusted basis in his or her partnership

interest at the end of the partnership taxable year in which the

loss occurred.   Sec. 704(d); Sennett v. Commissioner, 80 T.C. 825

(1983), affd. 752 F.2d 428 (9th Cir. 1985).    Respondent

disallowed the $63,512 loss deduction because petitioner husband

lacked sufficient basis in his QES interest to deduct his

distributive share of QES’s loss.    However, petitioners failed to

provide sufficient evidence for the Court to determine petitioner

husband’s adjusted basis in his interest in QES for 2002 because

there is no evidence in the record of partnership income, loss,

or distributions during the intervening years.      We find that

petitioners are not entitled to the $63,512 loss deduction for

2002.

D.   Section 6651 Additions To Tax

     Section 6651(a)(1) imposes an addition to tax for failure to

timely file a Federal income tax return by its due date with

extensions.   The addition is 5 percent of the tax required to be

shown on the return for each month, or fraction thereof, that the

return is late, not to exceed 25 percent.     Id.    The addition to
                                - 20 -

tax does not apply if the failure is due to reasonable cause, and

not to willful neglect.   Id.   Reasonable cause exists for a late

filing if the taxpayer exercised ordinary business care and

prudence but was nevertheless unable to file on time.      Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.    Factors   that

constitute “reasonable cause” include unavoidable postal delays,

death or serious illness of the taxpayer or an immediate family

member, or reliance on a competent tax professional in a question

of law of whether it is necessary to file a return.      McMahan v.

Commissioner, 114 F.3d 366, 369 (2d Cir. 1997), affg. T.C. Memo.

1995-547.   Reliance on a tax professional to file a return is

ordinarily not reasonable cause for late filing.      United States

v. Boyle, 469 U.S. 241, 252 (1985); Wyatt v. Commissioner, T.C.

Memo. 2008-253.   Respondent bears the initial burden of

production to introduce evidence that the return was filed late.

Sec. 7491(c). Petitioners bear the burden of proving that the

late filing was due to reasonable cause and not willful neglect.

Sec. 7491(a); Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

The parties stipulated that the 2001 and 2002 returns were filed

after their extended due dates.    Respondent has met his burden of

production.

     Petitioners contend that they had reasonable cause for their

late filings because the late filings were caused by hurricanes

in Florida, where their return preparer was during 2002 and 2003;
                              - 21 -

a tornado that hit the return preparer’s office; and the

extraordinary circumstances faced by the return preparer from the

Federal investigation of his business activities.    Petitioners’

suggestion that hurricanes caused the late filing is not

supported by the record or other fact.    Petitioners cite disaster

declarations issued by the Federal Emergency Management

Administration (FEMA) relating to Tropical Storms Allison and

Gabriel during 2001 for certain areas of Florida.9   Mr. Mayer’s

office was in Pinellas County, Florida.   The disaster

declarations did not cover Pinellas County.   Likewise, FEMA

issued a disaster declaration for Hurricane Isabelle, the alleged

cause for the late filing for 2002, covering the State of North

Carolina.   It did not cover any portion of South Carolina where

petitioners resided at the time of filing their 2002 return.

Moreover, petitioners’ 2002 return was due under extension on

August 15, 2003, more than a month before the FEMA declaration on

September 28, 2003.   Finally, petitioners did not provide any

evidence, except for petitioner husband’s statements, that a

tornado struck Mr. Mayer’s office during the years at issue.

     Petitioners provided their tax records to Mr. Mayer before

the April 15 due date for both years at issue, but Mr. Mayer

informed petitioners that he would need additional time to



     9
      The Court takes judicial notice of disaster declarations
made by FEMA.
                              - 22 -

prepare the returns and that extensions were necessary.

Unfortunately, at the time petitioners were not aware of the

legal troubles that Mr. Mayer faced relating to his tax return

preparation activities.   There is no evidence or allegation that

petitioners were connected in any way with Mr. Mayer’s alleged

illegal activities.   Petitioners relied on Mr. Mayer in good

faith to timely file their returns.    However, such reliance

cannot constitute reasonable cause for the late filings under the

bright line rule set forth by the Supreme Court in United States

v. Boyle, supra at 252.   Accordingly, we hold that petitioners

are liable for the section 6651(a) addition to tax for 2001 and

2002.

E.   Section 6662 Accuracy-Related Penalties

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

penalty on the portion of an underpayment of tax attributable to

(1) negligence or disregard of rules and regulations, or (2) a

substantial understatement of income tax.    Negligence is defined

as any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.    Sec. 6662(c); see Neely

v. Commissioner, 85 T.C. 934, 947 (1985).    Negligence includes

any failure by the taxpayer to keep adequate books and records or

to substantiate items properly.   Sec. 1.6662-3(b)(1), Income Tax

Regs.   A substantial understatement of income tax is defined as

an understatement that exceeds the greater of 10 percent of the
                              - 23 -

tax required to be shown on the return or $5,000.   Sec.

6662(d)(1)(A).

     The section 6662(a) penalty is not imposed with respect to

any portion of an underpayment as to which the taxpayer acted

with reasonable cause and in good faith.   Sec. 6664(c)(1); sec.

1.6662-3(b)(3), Income Tax Regs.   The determination of whether

the taxpayer acted with reasonable cause and in good faith is

made on a case-by-case basis, taking into account all pertinent

facts and circumstances, including the extent of the taxpayer’s

efforts to assess his or her proper tax liability, the taxpayer’s

education, knowledge, and experience, and the taxpayer’s

reasonable reliance on a tax professional.   Sec. 1.6664-4(b)(1),

Income Tax Regs.   Reasonable cause exists where a taxpayer relies

in good faith on the advice of a qualified tax adviser and the

taxpayer provided the adviser with all necessary and accurate

information.   See Neonatology Associates, P.A. v. Commissioner,

115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002).

     Petitioners substantially underreported their income for

2001 and 2002 as a result of income and loss items from QES.

Petitioners argue that they are not liable for the section 6662

penalties because they reasonably relied on their return

preparer, Mr. Mayer.   Petitioners are unsophisticated taxpayers

and have limited experience with the complicated partnership tax

concepts arising from their ownership of QES.   At the time
                              - 24 -

petitioners filed their 2001 and 2002 returns, they reasonably

believed that Mr. Mayer was a qualified tax professional with

sufficient education and experience to prepare QES’s and their

individual returns.   They were not aware of the Federal

investigation into Mr. Mayer’s activities or the temporary

restraining order against him.   They first learned of the extent

of Mr. Mayer’s legal troubles around the time of trial.    There is

no evidence that petitioners were in any way connected to Mr.

Mayer’s illegal activities.

     The deficiencies result from petitioners’ failure to prove

QES used the sale proceeds to pay liabilities and their failure

to substantiate their bases in their QES interests.    Petitioner

husband credibly testified that he provided Mr. Mayer with all

necessary and relevant information.    However, many of their

business records that were at Mr. Mayer’s office were destroyed

after his death.   This death significantly hindered petitioners’

ability to produce requested documentation during the audit of

their returns and to prepare for trial.    Nevertheless,

petitioners made their best efforts to provide whatever records

they had or could obtain from their banks.    Petitioners presented

voluminous records to document construction costs of the Flint

Street buildings and QES’s other liabilities in their attempt to

substantiate their bases in their QES interests.    Under these

circumstances, we do not find that petitioners’ failure to
                               - 25 -

provide additional records is negligent, as respondent argues.

See Pratt v. Commissioner, T.C. Memo. 2002-279.     Petitioners

reasonably and in good faith relied on Mr. Mayer to accurately

prepare their 2001 and 2002 returns.     We find that petitioners

are not liable for a section 6662 penalty for 2001 or 2002

arising from their ownership of QES.10

     Petitioners conceded that they failed to report $499 in

interest income and $517 in royalty income for 2001.     Petitioners

contend that these amounts were not reported on their 2001 return

because the forms reporting receipt of these amounts were lost.

Petitioners were aware of the accounts and their right to that

income.   Petitioners had a duty to review their return for

accuracy and could have easily discovered that this income was

not reported.    Their failure to report that income is due to

negligence.   Petitioners’ reliance on their return preparer does

not excuse their failure to report income that they should have

been aware of.    Petitioners also suggest that these amounts may

have been reported on QES’s 2001 return by mistake.     However, we

cannot determine from the record that these amounts were reported

on QES’s 2001 return.    We find that petitioners are liable for




     10
      Respondent contends, without proof, that petitioners may
have been involved in an abusive trust scheme. The evidence does
not support this allegation.
                               - 26 -

the section 6662(a) penalty for negligence with respect to the

underpayments resulting from the failure to report the interest

and royalty income for 2001.

     To reflect the foregoing,


                                      Decisions will be entered

                                 under Rule 155.
