                          T.C. Memo. 2013-212



                    UNITED STATES TAX COURT



REGINALD SAMPSON AND GERVEL S. SAMPSON, a.k.a. GERVEL S.
 JONES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE,
                           Respondent



  Docket No. 26750-11.                       Filed September 9, 2013.



          Ps failed to report pass-through items from two S corporations
  on their original returns; instead they attached statements prepared by
  their tax return preparer promising to file amended returns on receipt
  of delinquent Schedules K-1, Shareholder's Share of Income,
  Deductions, Credits, etc., from the corporations. R determined I.R.C.
  sec. 6662(a) accuracy-related penalties. Ps claim that there can be no
  accuracy-related penalty on account of substantial understatements of
  income tax because (1) there exists substantial authority for their
  treatment of the corporate income and (2) they adequately disclosed
  all relevant facts affecting that tax treatment and there was a
  reasonable basis for that treatment. They also argue that they acted
  with reasonable cause and in good faith in failing to estimate and
  report income from the corporations.

        Held: No substantial authority supports Ps' treatment of the
  corporate income, nor did they adequately disclose that treatment.
                                        -2-

[*2]         Held, further, Ps have failed to show that they acted with
       reasonable cause and in good faith in failing to estimate and report
       income from the corporations.



       Shahen Hairapetian, for petitioners.

       Halvor R. Melom and Kathryn A. Meyer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


       HALPERN, Judge: Respondent determined accuracy-related penalties of

$7,589 and $17,508 with respect to petitioners' 2008 and 2009 joint Federal

income tax, respectively. We sustain the determination.

       Unless otherwise stated, section references are to the Internal Revenue Code

in effect for 2008 and 2009 (years in issue), and all Rule references are to the Tax

Court Rules of Practice and Procedure. We round all dollar amounts to the nearest

dollar.

                               FINDINGS OF FACT

Introduction

       Petitioners (separately, Dr. Sampson and Mrs. Sampson) were married

during 2008 and 2009. They resided in California when they filed the petition.
                                         -3-

[*3] They are calendar year taxpayers who, for the years in issue, made joint

returns of income.

      Dr. Sampson is a medical doctor. During the years in issue, he was the sole

shareholder of two S corporations, Montebello Medical Center, Inc. (Montebello),

and Reginald Sampson M.D., A Professional Corporation (Sampson PC) (together,

corporations). During the years in issue, Mrs. Sampson was a part-time employee

of Montebello.

      The corporations are both calendar year taxpayers, each filing a Form

1120S, U.S. Income Tax Return for an S Corporation.

Preparation of the Original Returns

      Bedig Araradian, a certified public accountant licensed in the State of

California, prepared all of the relevant returns for petitioners and the corporations.

Mr. Araradian has been preparing returns for Dr. Sampson and the corporations

for many years. He receives the information necessary to prepare the corporations'

tax returns from Dr. Sampson's administrator, who keeps general ledgers for both

corporations using a computer program, QuickBooks, which is available to Mr.

Araradian electronically. He also receives copies of the actual documents, such as

bank statements and payroll reports, underlying the entries in QuickBooks (source

documents), which he believes are necessary to verify the data in QuickBooks
                                         -4-

[*4] before he will prepare a tax return. For neither of the years in issue did either

corporation provide source documents to Mr. Araradian before the respective

dates on which their Forms 1120S for those years were due. The corporations'

Forms 1120S for those years were delinquent because, without source documents

Mr. Araradian would not prepare those returns.

      And since he had not prepared the corporations' returns by the dates on

which petitioners' 2008 and 2009 Forms 1040, U.S. Individual Income Tax Return

(together, original returns), were due, Mr. Araradian did not have the corporations'

Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc., from

which to enter pass-through items from the corporations on the original returns.

      Consequently, Mr. Araradian prepared the original returns omitting any

income or losses passed through to petitioners from the corporations. He told Dr.

Sampson in each case that he was making a statement on the return saying that

pass-through items from the corporations were not being included. The statement

that he made on each return is as follows:

          THE ENCLOSED TAX RETURN FOR REGINALD AND
      GERVEL SAMPSON DOES NOT INCLUDE THE K-1'S FROM
      MONTEBELLO MEDICAL CENTER, INC. * * * AND REGINALD
      SAMSPN [sic] MD A PROF CORP * * *. THE * * * [2008/2009]
      PERSONAL INCOME TAX RETURN FOR REGINALD AND
      GERVEL SAMPSON WILL BE AMENDED ONCE THE
      TAXPAYER RECEIVES THE * * * [2008/2009] K-1'S.
                                        -5-

[*5] The original returns did report other items. Petitioners claimed charitable

contribution deductions of $15,000 and $14,700 for 2008 and 2009, respectively.

They reported, overall, $34,330 and $34,246 of total tax liabilities for 2008 and

2009, respectively. Both returns also listed the names, employer identification

numbers, and S corporation status of Montebello and Sampson PC. Dr. Sampson

reviewed the original returns before he and Mrs. Sampson signed them. He knew

that they omitted pass-through items from the corporations. He was aware of the

statement on each original return that he was signing under penalties of perjury

and declaring that the returns "[were] true, correct, and complete." Petitioners

filed the original returns on October 19, 2009, and October 21, 2010, respectively.

      After filing the original returns, Mr. Araradian repeatedly asked Dr.

Sampson for the missing source documents. After many months, Dr. Sampson

ultimately provided all the needed documentation. Petitioners claim that the delay

was due to the renovations made in 2008 and 2009 at Montebello's offices.

Because of the renovations and because of a space shortage at the offices, some

records were moved into storage, making it difficult to find and retrieve the

missing source documents. Dr. Sampson participated to a limited extent in

providing the missing source documents to Mr. Araradian, but his attention was

primarily focused on his medical practice.
                                        -6-

[*6] Petitioners' Amended 2008 and 2009 Returns

      On October 27, 2010, respondent notified petitioners that their 2008 return

had been selected for examination, and on January 14, 2011, he notified them

similarly with respect to their 2009 return. Petitioners submitted 2008 and 2009

Forms 1040X, Amended U.S. Individual Income Tax Return (together, amended

returns), on January 3 and May 13, 2011, respectively. The amended 2008 return

differed from the original 2008 return in that petitioners reported an ordinary loss

of $3,019 from Montebello and ordinary income of $98,882 from Sampson PC.

The amended 2009 return differed from the original 2009 return in that petitioners

reported an ordinary loss of $41,229 from Montebello and ordinary income of

$281,854 from Sampson PC. Additionally, petitioners reduced their claimed

charitable contribution deductions from $15,000 to $8,185 and from $14,700 to

$800 for 2008 and 2009, respectively. Overall, the amended returns reported

increases in petitioners' total tax liabilities from $34,330 to $69,408 and from

$34,246 to $121,564 for 2008 and 2009, respectively.

      Montebello and Sampson PC filed delinquent 2008 and 2009 Forms 1120S

on January 4 and May 24, 2011, respectively, reporting income and loss amounts

consistent with what petitioners reported on the amended returns.
                                         -7-

[*7] Deficiencies

      On June 23, 2011, respondent made positive adjustments of $41,449 and

$91,882 (in both cases, including interest) to petitioners' 2008 and 2009 tax

liabilities, respectively. Specifically, for each year, respondent increased

petitioners' taxable income by Dr. Sampson's net pass-through income from the

corporations reported on the amended return, and he also disallowed certain

itemized deductions, including charitable contribution deductions. Petitioners

agreed to the assessment of resulting deficiencies, and they paid them.

      Thereafter, respondent determined the accuracy-related penalties under

section 6662 that are at issue and so notified petitioners. Petitioners assign error

to that determination.

                                     OPINION

I.    Introduction

      Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty

(penalty) equal to 20% of the portion of an underpayment of tax attributable to,

among other things, negligence or disregard of rules or regulations, or any

substantial understatement of income tax. Only one accuracy-related penalty may

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

portion is subject to the penalty on more than one of the grounds set forth in
                                         -8-

[*8] section 6662(b). New Phoenix Sunrise Corp. v. Commissioner, 132 T.C. 161,

187 (2009), aff'd, 408 Fed. Appx. 908 (6th Cir. 2010); sec. 1.6662-2(c), Income

Tax Regs.

      Although petitioners bear the burden of proof, see Rule 142(a), section

7491(c) imposes on respondent the threshold burden to produce evidence showing

that it is appropriate to apply the penalty here in question, see Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Petitioners' concessions may be taken

into account in determining whether respondent has carried his burden. See Diaz

v. Commissioner, T.C. Memo. 2012-280, at *9. If respondent carries his burden of

production, petitioners then bear the burden of proving any defense to the penalty,

such as having reasonable cause for any underpayment and acting in good faith.

See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 447-448.

II.   Substantial Understatement of Income Tax

      A.     Introduction

      Section 6662(d)(1)(A) defines a "substantial understatement of income tax"

as an understatement in an amount exceeding the greater of 10% of the tax

required to be shown on the return or $5,000. As pertinent, the term

"understatement" is defined as the excess of the amount of tax required to be

shown on the return over the amount shown. Sec. 6662(d)(2)(A). Section
                                         -9-

[*9] 6662(d)(2)(B) reduces the amount of an understatement by the portion of the

understatement for which (1) there is substantial authority for the taxpayer's tax

treatment of the item or (2) there is adequate disclosure of the relevant facts

affecting the item's tax treatment and there is a reasonable basis for the taxpayer's

treatment of the item.

      Petitioners concede that, barring the application of section 6662(d)(2)(B),

there was a substantial understatement of income tax for each of the years in issue.

That concession satisfies respondent's burden of production. See Higbee v.

Commissioner, 116 T.C. at 447. Petitioners argue, however, that the

understatement is reduced because (1) there exists substantial authority for

petitioners' treatment of their income from the corporations and (2) they

adequately disclosed the relevant facts affecting that tax treatment and there was

reasonable basis for that treatment. See sec. 6662(d)(2)(B).

      B.     Substantial Authority

             1.     Introduction

      Authority for purposes of determining whether there is substantial authority

for a taxpayer's treatment of an item includes the Internal Revenue Code,

regulations, and cases. Sec. 1.6662-4(d)(3)(iii), Income Tax Regs. In evaluating

whether a taxpayer's position regarding treatment of a particular item is supported
                                         - 10 -

[*10] by substantial authority, the weight of authorities in support of the taxpayer's

position must be substantial in relation to the weight of authorities supporting

contrary positions. Sec. 1.6662-4(d)(3)(i), Income Tax Regs. The substantial

authority standard is objective, and the taxpayer's belief that there is substantial

authority for his position is irrelevant in determining whether there is substantial

authority. Id. This Court has also noted in the past that "an authority is of little

relevance if it is materially distinguishable on its facts from the facts of the case at

issue." Antonides v. Commissioner, 91 T.C. 686, 702-703 (1988), aff'd, 893 F.2d

656 (4th Cir. 1990).

             2.     Petitioners' Argument

      Petitioners failed to report any pass-through items from the corporations on

the original returns; instead, they attached statements promising to file amended

returns upon receipt of the delinquent Schedules K-1. Eventually, they did file

amended returns. Petitioners argue that there is substantial authority for their

omitting pass-through items on the original returns since regulations provide that

an amount shown on a qualified amended return can reduce or eliminate an

underpayment. See sec. 1.6664-2(c)(2), Income Tax Regs. Even if we were to

disagree that the regulations are substantial authority for their treatment of the

corporate income, petitioners argue that their understatements should be reduced
                                         - 11 -

[*11] or even eliminated because, pursuant to section 1.6664-2(c)(2), Income Tax

Regs., the overall tax amounts shown on what they consider to be their returns

include the additional corporate income shown on their "qualified amended

return[s]", as that term is defined in section 1.6664-2(c)(3), Income Tax Regs.

      In support of their argument that there is authority for their decision to

attach disclosure statements to their original returns promising to file amended

returns later, petitioners also point to several cases involving additions to tax for

delinquent returns where we said that the taxpayers could have avoided the section

6651(a)(1) delinquency addition by filing a timely return (even if they lacked

sufficient data to make a complete and accurate return), correcting any errors by,

subsequently, filing an amended return.

             3.     Respondent's Argument

      Respondent disagrees that petitioners have shown substantial authority for

their omissions of pass-through items from the corporations on account of their

promises to file amended returns. Respondent points out that section 1.6664-

2(c)(2), Income Tax Regs., does not say that a taxpayer will be excused from the

section 6662(a) accuracy-related penalty if he merely promises to file an amended

return in the future; rather, he points out, the regulation provides a safe harbor for

a taxpayer who actually does file a "qualified amended return." Further, he argues
                                          - 12 -

[*12] that, for purposes of section 1.6664-2(c)(2) and (3), Income Tax Regs.,

petitioners' amended returns are not qualified amended returns because they were

filed after the date the Internal Revenue Service first contacted them in connection

with the examination of the original returns. See sec. 1.6664-2(c)(3)(A), (C),

Income Tax Regs. Respondent also argues that any authority that petitioners can

garner from the regulations is outweighed by the authority of cases "holding that

taxpayers have a duty to report income from all known sources." See, e.g., Metra

Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Heller v. Commissioner,

T.C. Memo. 1994-463, 1994 WL 510095, at *6, aff'd in part, remanded in part

without published opinion, 103 F.3d 138 (9th Cir. 1996). Similarly, respondent

argues that the cases petitioners cite discuss a different issue--the late-filing

addition to tax pursuant section 6651(a)(1)--and so do not represent substantial

authority for purposes of section 6662.

             4.     Discussion

      Respondent is correct on all counts. Section 1.6664-2(c)(2), Income Tax

Regs., does not say that a taxpayer will be excused from the accuracy-related

penalty if he merely promises to file an amended return in the future. Thus, the

regulation is not substantial authority for petitioners' omission of the corporations'

pass-through items from the original returns. Moreover, respondent is correct that
                                        - 13 -

[*13] petitioners' underpayments of tax are not reduced on account of the amended

returns, because neither amended return is a "qualified" amended return.

      As pertinent, section 1.6664-2(a)(1), Income Tax Regs., provides that, for

purposes of section 6662, the term "underpayment" means the amount of tax

imposed over the amount of tax shown by the taxpayer on his return. The term

"amount shown * * * by the taxpayer on his return" is defined by section 1.6664-

2(c)(2), Income Tax Regs., to include "an amount shown as additional tax on a

qualified amended return". Accordingly, if petitioners' amended returns constitute

"qualified amended return[s]", then the amounts shown on their 2008 and 2009

returns will increase, and their underpayments for the years in issue will be less.

Section 1.6664-2(c)(3), Income Tax Regs., provides in pertinent part:

      A qualified amended return is an amended return * * * filed after the
      due date of the return for the taxable year * * * and before the earliest
      of--

            (A) The date the taxpayer is first contacted by the * * * [IRS]
      concerning any examination * * * with respect to the return;

      *          *           *          *           *          *           *

            (C) In the case of a pass-through item * * * the date the pass-
      through entity * * * is first contacted by the IRS in connection with
      an examination of the return to which the pass-through item relates;
                                        - 14 -

[*14] Petitioners filed the 2008 and 2009 amended returns on January 3 and May

13, 2011, respectively. Those dates are several months after October 27, 2010,

and January 14, 2011, when, with respect to each original return, respectively,

respondent first contacted them concerning an examination. Accordingly,

petitioners' amended returns are not "qualified amended return[s]" within the

meaning of section 1.6664-2(c)(2) and (3), Income Tax Regs. They do not reduce

petitioners' underpayments of tax.

      Petitioners cite the following cases as substantial authority in support of

their position: Estate of Vriniotis v. Commissioner, 79 T.C. 298 (1982), Krzepina

v. Commissioner, T.C. Memo. 1993-356, 66 T.C.M. (CCH) 360, 364 (1993), and

Long v. Commissioner, T.C. Memo. 1978-171, 37 T.C.M. (CCH) 733 (1978).

Those cases involve the section 6651(a)(1) addition to tax for filing a delinquent

return, which addition can be avoided if the taxpayer can show that the

delinquency "is due to reasonable cause and not due to willful neglect". The

taxpayers therein failed to timely file returns, claiming, among other things,

reasonable cause based on the unavailability of pertinent information. On the facts

before us in each case, we rejected the taxpayer's defense, and we suggested that

the taxpayer would have avoided the section 6651(a)(1) delinquency penalty had

he timely filed a return reporting estimates, "based on the best information
                                       - 15 -

[*15] available", which he could correct by filing an amended return when he had

better information. Estate of Vriniotis v. Commissioner, 79 T.C. at 311; see also

Krzepina v. Commissioner, 66 T.C.M. (CCH) at 364; Long v. Commissioner, 37

T.C.M. (CCH) at 733. We are not here dealing with any filing delinquency, and

petitioners did not estimate their income from the corporations, even though they

had the data from QuickBooks to make an estimate. Thus, we fail to understand

how those cases help petitioners' position. They are not substantial authority

supporting petitioners' omission of pass-through items from the corporations.

             5.     Conclusion

      Accordingly, we find that petitioners' position is not supported by any

substantial authority.

      C.     Adequate Disclosure

      Adequate disclosure for purposes of section 6662 is made in one of two

ways. A disclosure is adequate either if the disclosure is made on a properly

completed form attached to the taxpayer's return, see sec. 1.6662-4(f)(1), Income

Tax Regs., or if the disclosure is permitted by annual revenue procedure or

otherwise to be made on the tax return itself and is made in accordance with the

applicable forms and instructions, see sec. 1.6662-4(f)(2), Income Tax Regs. If

the annual revenue procedure does not permit the disclosure of an item on the face
                                        - 16 -

[*16] of the return, disclosure is adequate only if the disclosure is made on a

properly completed Form 8275, Disclosure Statement, or Form 8275-R,

Regulation Disclosure Statement, attached to the taxpayer's return for the year the

disclosure applies. See sec. 1.6662-4(f), Income Tax Regs.; see also Vianello v.

Commissioner, T.C. Memo. 2010-17, 2010 WL 342905, at *11 (finding no

adequate disclosure where taxpayers disclosed the relevant information in a

footnote to Schedule C instead of in a Form 8275). Disclosure of a recurring item

must be made for each year in which the item is taken into account. Sec. 1.6662-

4(f)(3), Income Tax Regs.

      Generally, adequate disclosure in the case of items attributable to a pass-

through entity is made on a form attached to the entity's return. Sec. 1.6662-

4(f)(5), Income Tax Regs. Alternatively, a taxpayer may make an adequate

disclosure with respect to income from pass-through entities like S corporations by

filing two properly completed Forms 8275 or Forms 8275-R for each entity: "one

copy attached to the taxpayer's return * * * and the other copy filed with the

Internal Revenue Service Center with which the return of the entity is required to

be filed." Id. Petitioners complied with neither alternative.

      In Rev. Proc. 2008-14, 2008-1 C.B. 435, and Rev. Proc. 2010-15, 2010-7

I.R.B 404, applicable for 2008 and 2009 returns, respectively, the Commissioner
                                        - 17 -

[*17] has listed certain items for which the requirements for adequate disclosure

are less stringent. For items with respect to pass-through entities the disclosure

must be on the entity's return. See sec. 1.6662-4(f)(5), Income Tax. Regs. The

corporations' returns fail to qualify for this exception because they do not disclose

petitioners' failures to report items from the corporations. Nor, if it were relevant,

did petitioners make an adequate disclosure of pass-through items on their returns.

       D.      Conclusion

       Petitioners substantially understated their income tax on the original returns,

and barring proof of reasonable cause and good faith, petitioners are liable for the

section 6662(a) and (b)(2) 20% accuracy-related penalty for substantial

understatement of income tax for the years in issue.

III.   Penalty for Negligence or Disregard of Rules and Regulations

       Because we have found that petitioners substantially understated their

income tax on the original returns, we need not address petitioners' liability for the

section 6662(a) penalty on the ground of negligence or disregard of rules or

regulations.
                                         - 18 -

[*18] IV.     Reasonable Cause and Good Faith Defense

      A.     Introduction

      With exceptions not here relevant, a taxpayer may avoid a section 6662(a)

accuracy-related penalty by showing that he acted with reasonable cause and in

good faith. Sec. 6664(c)(1). Reasonable cause requires that the taxpayer exercise

"ordinary business care and prudence" as to the disputed item. United States v.

Boyle, 469 U.S. 241, 246 (1985). The term "good faith" has no precise definition

but means, among other things, (1) an honest belief and (2) the intent to perform

all lawful obligations. E.g., United States v. Hirschfeld, 964 F.2d 318, 322 (4th

Cir. 1992). Those determinations are made on a case-by-case basis, taking into

account all pertinent facts and circumstances, including the taxpayer's knowledge

and experience. Sec. 1.6664-4(b)(1), Income Tax Regs. "Circumstances that may

indicate reasonable cause and good faith include an honest misunderstanding of

fact or law that is reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the taxpayer." Id. The

most important factor is the taxpayer's efforts to assess the proper liability. Id.

      The duty of filing accurate returns generally cannot be avoided by placing

the responsibility on an employee or tax return preparer. See Metra Chem Corp. v.

Commissioner, 88 T.C. at 662; Slawek v. Commissioner, T.C. Memo. 1991-338,
                                        - 19 -

[*19] 1991 WL 134805, at *1 (finding no reasonable cause defense where

taxpayers blamed their employees and accountants for erroneous returns), aff'd

without published opinion, 972 F.2d 1332 (3d Cir. 1992). A taxpayer, however,

may demonstrate reasonable cause through good-faith reliance on the advice of an

independent professional, such as a tax adviser, a lawyer, or an accountant, as to

the item's tax treatment. Boyle, 469 U.S. at 251; Canal Corp. & Subs. v.

Commissioner, 135 T.C. 199, 218 (2010). To prevail, the taxpayer must show that

he: (1) selected a competent adviser with sufficient expertise to justify reliance,

(2) supplied the adviser with necessary and accurate information, and (3) actually

relied in good faith on the adviser's judgment. 106 Ltd. v. Commissioner, 136

T.C. 67, 77 (2011) (citing Neonatology Assocs., P.A. v. Commissioner, 115 T.C.

43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002)), aff'd, 684 F.3d 84 (D.C. Cir.

2012).

      The preparer's advice must be based on all pertinent facts and

circumstances. Crispin v. Commissioner, T.C. Memo. 2012-70, 2012 WL 858406,

at *10, aff'd, 708 F.3d 507 (3d Cir. 2013). Moreover, reliance on professional

advice is unreasonable and does not satisfy the Neonatology test where a taxpayer

knew or should have known that the suggested tax treatment was "too good to be

true". Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.; see also Gerdau Macsteel, Inc.
                                       - 20 -

[*20] v. Commissioner, 139 T.C. 67, 196 (2012) (citing Neonatology Assocs.,

P.A. v. Commissioner, 299 F.3d at 234 ("When * * * a taxpayer is presented with

what would appear to be a fabulous opportunity to avoid tax obligations, he should

recognize that he proceeds at his own peril.")).

      B.     Parties' Arguments

      Petitioners do not raise reasonable cause as a defense to the portions of their

underpayments due to the disallowance of their charitable contribution deductions.

They maintain that defense only with respect to the portions of their

underpayments resulting from their failure to report income from the corporations.

      Petitioners' principal argument is that they acted with reasonable cause and

good faith "by making a good faith effort to maintain income and expense

records". They rely on Bauer v. Commissioner, T.C. Memo. 2012-156. In Bauer,

the taxpayer was a moving man whose poor records were insufficient to

substantiate his claimed business expense deductions for contract-labor payments

but which, given the circumstances of his profession, indicated to us his good-faith

effort to maintain adequate books and records. That, we found, was sufficient to

avoid a section 6662(a) penalty for negligence or disregard of rules or regulations,

which we described as "including any failure to maintain adequate books and

records". Respondent argues that Bauer is inapposite.
                                       - 21 -

[*21] Alternatively, petitioners argue that they acted with reasonable cause and in

good faith "in relying * * * on the advice of * * * [Mr.] Araradian." They claim

that they satisfy the three prongs of the Neonatology test. The parties do not

dispute Mr. Araradian's competence or expertise (the first prong). The parties

disagree, however, about the other two prongs of the Neonatology test. First,

petitioners argue that they supplied their accountant with all the necessary and

accurate information via QuickBooks, to which Mr. Araradian had "unfettered"

access. Petitioners further argue that, because of the more than 20 years of

collaboration, they in good faith relied on Mr. Araradian's judgment.

      Respondent in turn argues that petitioners did not timely provide Mr.

Araradian with all the necessary available documentation about the pass-through

items from the corporations. Respondent also questions the good-faith reliance of

petitioners who, on the basis of the QuickBooks data as well as past experience,

knew that the original returns underreported their income but signed the returns

anyway. Employing the analysis in Metra Chem Corp. v. Commissioner, 88 T.C.

at 662, respondent further claims that petitioners did not rely on Mr. Araradian in

good faith because the issue here is simply their failure to report income and is not

an issue in connection with "some complex transaction".
                                        - 22 -

[*22] C.     Analysis

      We agree with respondent that Bauer v. Commissioner, T.C. Memo. 2012-

156, is inapposite. As stated supra section III. of this report, we do not rely on

negligence to sustain the accuracy-related penalty. We are, thus, not directly

concerned with the adequacy of petitioners' books and records as a defense to

negligence or disregard of rules or regulations, although we note in passing that

Dr. Sampson's records retrieval system appears not to have worked to provide Mr.

Araradian with the information he needed to timely complete the corporations' and

petitioners' returns. The question is whether petitioners had reasonable cause and

acted in good faith in not estimating and reporting income from the corporations,

which caused petitioners to underpay their 2008 and 2009 taxes.

      Petitioners have failed to convince us that, on the advice of Mr. Araradian,

they acted with reasonable cause and in good faith in failing to estimate and in

underpaying their tax. First, there is the question of what advice Mr. Araradian

gave petitioners. Mr. Araradian did not testify that he advised petitioners that they

need not estimate and report on their returns income from the corporations. He

testified that he told Dr. Sampson that he was making a statement on the return

saying that pass-through items from the corporations were not being included. We

give petitioners the benefit of the doubt and assume that they took Mr. Araradian's
                                       - 23 -

[*23] preparation of the returns without the pass-through items as at least an

implicit assurance that they need not estimate and report any income from the

corporations.

      Nevertheless, Dr. Sampson was an experienced taxpayer. He was aware of

the statement on each original return that he was signing under penalties of perjury

and declaring that the returns "were true, correct, and complete." He knew that,

with respect to pass-through items from the corporations, the original returns were,

to say the least, not complete. He knew that, in years past, he had reported

substantial income from the corporations. He had available to him the

QuickBooks from which he, or Mr. Araradian, could have estimated income from

the corporations. Petitioners have not convinced us that, even if they understood

Mr. Araradian to have been telling them that it was okay to omit income from the

original returns, they had a reasonable basis to do so and that they acted in good

faith in failing to estimate and report income from the corporations.

      D.     Conclusion

      Petitioners have failed to show that they acted with reasonable cause and in

good faith in failing to estimate and report income from the corporations.
                                     - 24 -

[*24] V.      Conclusion

      We sustain the section 6662(a) accuracy-related penalties respondent

determined.


                                                    Decision will be entered for

                                              respondent.
