                          RECOMMENDED FOR FULL-TEXT PUBLICATION
                               Pursuant to Sixth Circuit Rule 206
                                     File Name: 06a0075p.06

                   UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT
                                   _________________


                                                   X
                            Petitioner-Appellant, -
 GLENN A. MORTENSEN,
                                                    -
                                                    -
                                                    -
                                                        No. 05-1344
          v.
                                                    ,
                                                     >
 COMMISSIONER OF INTERNAL REVENUE,                  -
                            Respondent-Appellee. -
                                                   N
                      On Appeal from the United States Tax Court.
                  No. 25991-96—Stanley J. Goldberg, Tax Court Judge.
                                  Argued: February 3, 2006
                            Decided and Filed: February 28, 2006
                Before: MERRITT, MARTIN, and GILMAN, Circuit Judges.
                                     _________________
                                          COUNSEL
ARGUED: Terri A. Merriam, PEARSON-MERRIAM, Seattle, Washington, for Appellant.
Annette Wietecha, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. ON BRIEF: Terri A. Merriam, Wendy S. Pearson, PEARSON-MERRIAM, Seattle,
Washington, for Appellant. Annette Wietecha, Richard Farber, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee.
                                     _________________
                                         OPINION
                                     _________________
        BOYCE F. MARTIN, JR., Circuit Judge. This is an appeal from the United States Tax
Court’s decision upholding the Commissioner’s determination that Mr. Mortensen is liable for a
section 6662(a) negligence penalty of $784 for the taxable year 1991. The penalty stems from
Mortensen’s deductions on his tax return based on his investment in cattle breeding partnerships
established by Walter J. Hoyt III. The Hoyt Partnerships have generated litigation across the
country, see e.g., River City Ranches #1, 85 T.C.M. (CCH) 1365, 1371, 2003 WL 21205284, and
culminated in Mr. Hoyt’s fraud conviction and prison sentence of twenty years. Specifically
regarding the taxable year 1991, the Commissioner issued a Notice of Final Partnership
Administrative Adjustment regarding the deductions and made a computational adjustment on
Mortensen’s return. This changed Mortensen’s claimed loss of $16,720 on the partnership to
income of $4,421 and consequently increased Mortensen’s tax liability from $724 to $4,642, an
increase of $3,918. Section 6662(a) permits a negligence penalty of 20% of the underpayment. The
Tax Court found that Mortensen did not carry his burden in proving that the Commissioner’s


                                               1
No. 05-1344                Mortensen v. Commissioner                                                               Page 2


assessment was erroneous or that Mortensen did what a reasonably prudent person would have done
under the circumstances. Thus, the Tax Court affirmed the Commissioner’s imposition of the
negligence penalty under section 6662(a). Mortensen appeals. For the following reasons, we
AFFIRM the Tax Court’s decision upholding the negligence penalty.
                                                            I.
       The history of these partnerships is complex. Courts have described the partnerships in
varying degrees of detail. See Bales v. Commissioner, 58 T.C.M. (CCH) 431, 1989 WL 123005;
Mekulsia v. Commissioner, 389 F.3d 601 (6th Cir. 2004); Adams v. Johnson, 355 F.3d 1179 (9th Cir.
2004). Additionally, the Tax Court below provided an excellent description of the partnerships.
Mortensen v. Commissioner, T.C.M (RIA) 2004-279, 2004 WL 2900972. We therefore only
summarize the salient facts.
        Mr. Hoyt’s father was a prominent breeder of Shorthorn cattle and in the late 1960s began
promoting cattle breeding partnerships. When Hoyt’s father died in 1972, Hoyt and other family
members took over the partnerships and from 1971 through 1998, Hoyt organized, promoted, and
operated more than one hundred cattle breeding partnerships. Hoyt acted as the tax matters partner
on each of the partnerships that were subject to the Tax Equity & Fiscal Responsibility Act of 1982.
See 26 U.S.C. § 6231(a)(7); Pub. L. No. 97-248, §§ 402-406, 96 Stat. 324. Hoyt was also the
general partner and was responsible for the preparation of the tax returns for each partnership and
he typically signed and filed each return. In addition, Hoyt operated tax return preparation
companies that prepared most of the investors’s individual tax returns. The relevant return,
Mortensen’s 1991 return, was prepared and signed by Hoyt. Hoyt was also a licensed enrolled
agent, meaning that he was authorized, like a lawyer or CPA, to represent taxpayers and argue in
proceedings before the Internal Revenue Service. See 26 C.F.R. § 601.502; Adams, 355 F.3d at
1182 (“Hoyt was accredited by the IRS as an enrolled agent, thereby permitting Hoyt to prepare
federal income tax returns for the partnership and to represent the partners in dealings with the
IRS.”). At the culmination of the IRS’s investigation, Hoyt and others were indicted for certain
federal crimes — though not tax crimes — and a trial was held in Oregon. The district court
described Hoyt’s crime as “the most egregious white collar crime committed in the history of the
State of Oregon.” Hoyt was found guilty on all     counts, sentenced to twenty-years imprisonment,
and ordered to pay restitution of $102 million.1
       Mortensen is college educated with a degree in engineering and during the relevant years was
employed as a field engineer. At the time he invested in the partnerships, he had no significant
investment experience and no experience with farming or cattle. Mortensen first learned of the Hoyt
Partnerships from a co-worker in late 1985 or early 1986 and along with four or five co-workers,
requested an informational packet from the Hoyt organization. Mortensen received this packet
which included various promotional materials prepared by the Hoyt organization. These materials
provided rationales for why the partnerships were good investments and why the tax savings were
legitimate. The main document was titled “Hoyt and Sons — The 1,000 lb. Tax Shelter,” and
explained how the partnerships were designed to provide profits to partners over time. This
document emphasized that the primary return on investment would be tax savings. See also Adams,
355 F.3d at 1181-82 (“Each partner was expected to benefit from the partnership in two ways. First,
Hoyt assigned to each partner part of his cattle operation’s expenses, which the partners were able


         1
           At sentencing, the district court stated the following: “[T]he victims in this case were not people that got into
this as a matter of personal greed. That the victims in this case were truly victimized by a person who is capable of the
greatest deceit — deceitful practices, who deceived everyone around him, including those closest to him . . . [I]t is my
strongest recommendation that those remaining cases that remain open be resolved by denying the tax shelter, but to
eliminate any penalties, or any interest that may have accumulated.” JA 684. Mortensen has pointed to the district
court’s statement as support for his claims.
No. 05-1344           Mortensen v. Commissioner                                                    Page 3


to claim as a tax deduction, lowering their tax liability on income from other sources. Second, in
later years the partnerships were expected to produce a profit as each partnership liquidated the
livestock that it had been assigned.”).
        The 1,000 lb. Tax Shelter document contained various statements regarding the purported
legality of the tax savings. After explaining the tax benefits, it stated: “Now, can you feel good
about not paying taxes, and feeling like you were not, somehow, abusing the system, or doing
something illegal?” Another section devoted to a discussion of IRS audits stated that the
partnerships would be “branded an ‘abuse’ by the Internal Revenue Service and will be subject to
automatic” and “constant audit.” The document further compared the IRS to children, included a
cartoon depicting the IRS as a Native American preparing to attack the “HS ‘Circle of Wagons,’”
and stated that IRS employees did not have the “proper experience and training” or “working
knowledge of concepts required by the Internal Revenue Code” to properly evaluate the Hoyt
Partnerships.
       Another section titled “Tax Aspects” contained a “warning” for investors:
       Out here, tax accountants don’t read brands, and our cowboys don’t read tax law.
       If you don’t have a tax man who knows you well enough to give you specific
       personal advice as to whether or not you belong in the cattle business, stay out. The
       cattle business today cannot be separated from tax law any more than cattle can be
       separated from grass and water. Don’t have anything to do with any aspect of the
       cattle business without thorough tax advice, and don’t waste much time trying to
       learn tax law from an Offering Circular.
(emphasis added). Despite its own warning, the circular devoted several pages to explaining the tax
benefits of the Hoyt Partnerships and explained why investors should trust only Hoyt’s organization
to prepare their individual tax returns.
       It is the recommendation of the General Partner, as outlined in the private placement
       offering circular, that a prospective Partner seek independent tax advice and counsel
       concerning this investment . . . The Limited Partners should then authorize the Tax
       Office of W.J. Hoyt Sons to prepare their personal returns . . . Then you have an
       affiliate of the Partnership preparing all personal and Partnership returns and
       controlling all audit activity with the Internal Revenue Service . . . Then, all Partners
       are able to benefit from the concept of “Circle the Wagons,” and no individual
       Partner can be isolated and have his tax losses disallowed because of the
       incompetence or lack of knowledge of a tax preparer who is not familiar with the
       law, regulations, format, procedures, and operations concerning the Partnership that
       are required to protect the Limited Partners from Internal Revenue audits . . . If a
       Partner needs more or less Partnership loss any year, it is arranged quickly within the
       office, without the Partner having to pay a higher fee while an outside preparer
       spends more time to make the arrangements.
(emphasis added). The document further warned that an audit or disallowance of the deductions by
the Commissioner could take away all or some of the tax benefits and that there would be a
possibility that investors would have to pay back the tax savings plus interest and penalties.
         Mortensen testified that prior to investing, he conducted an investigation into the
partnerships. Specifically, Mortensen testified that after receiving the informational packet from the
Hoyt Partnerships, he mailed the packet to his father so that his father could show the information
to a tax attorney. Mortensen testified that his father told him that “[t]he attorney looked over it and
he said there was nothing illegal.” Mortensen testified that he did not know the attorney’s name,
No. 05-1344                 Mortensen v. Commissioner                                                          Page 4


what research or investigation the attorney conducted, or essentially any other information that his
father told him.
        Mortensen also testified that one of his co-workers decided to contact the IRS for
information before investing in the partnerships. The co-worker allegedly told Mortensen that “there
was no indication from the IRS that there was anything wrong with Hoyt or anything like that.”
Another co-worker traveled to California “to go to [Hoyt’s] offices and also . . . to at least one ranch
to be sure that it was a viable business and that there was actually people running a business and
there was actually cows involved.”
         In July 1986, Mortensen invested in a Hoyt Partnership named Durham Genetic Engineering
1986-1. In December, Mortensen signed several documents related to the partnership, including
documents that assigned Hoyt power of attorney and gave Hoyt the ability to sign notes on
Mortensen’s behalf. Mortensen also signed a document expressing his intent to make a capital
contribution to and become a limited partner by purchasing units valued at $75,000. Mortensen
testified that at the time he made the investment, he believed that it would produce a profit and
provide retirement income. Mortensen also believed that he would be liable on the promissory
notes, but believed that cattle existed that could be sold to cover the debt.
        On Mortensen’s 1986 return, the first year of his investment, he reported wage income of
$43,112, interest income of $3,126, a partnership loss of $27,170 and an investment credit of
$17,412. This led to a zero tax liability. He later filed an amended return, listing the same wage and
interest income, but now a partnership loss of $141,260. Mortensen then filed a Form 1045,
Application2 for Tentative Refund, based on a carryback of a claimed net operating loss of $98,148
from 1986. Net operating losses may be carried back three years, and Mortensen did so, resulting
in a zero tax liability3 for 1983, 1984, and 1985 and the refund of $4,821, $7,517, and $6,210 for
those years.
        Starting with this first return and Form 1045 in 1986 and through the 1991 return, Hoyt or
a member of the Hoyt organization prepared Mortensen’s tax forms. Mortensen signed the returns
without knowing how the Hoyt-related items were calculated. He knew only that Hoyt or a member
of the Hoyt organization had entered the items on Schedules K-1 and on his return and he assumed
their correctness. Mortensen never had his returns reviewed by an accountant, lawyer, or anyone
else outside the Hoyt organization prior to signing and filing them.
         Throughout the years of Mortensen’s involvement in the Hoyt Partnerships, his investment
was transferred between various partnerships without him taking any action. Mortensen testified
that he believed that Hoyt was using his power of attorney to do the necessary paperwork. He also
testified that he believed one of the reasons for the changes was to maximize tax savings. Hoyt did
not provide Mortensen with any type of verification when changes were made or any
acknowledgment that his name was taken off promissory notes signed on his behalf.
       During the years of his investments, Mortensen made substantial cash payments to the Hoyt
organization. These payments totaled approximately $83,000 and included the remittance of his tax
refunds, the payment of quarterly and monthly installments on his promissory notes, special
“assessments” imposed by the partnership, and contributions to purported individual retirement



         2
            The $98,148 reflects the excess partnership losses greater than the amount necessary to zero out Mortensen’s
tax liability for 1986.
         3
             Mortensen did, nevertheless, have to pay the alternative minimum tax of $855 in 1984 and $992 in 1985.
No. 05-1344               Mortensen v. Commissioner                                                              Page 5


account plans maintained by the Hoyt organization. In4return, Mortensen received only nominal
amounts of his contributions back from the partnership.
       For the first time, by letter dated May 23, 1988, the Commissioner notified Mortensen that
partnerships SGE 84-2’s taxable year 1987 was under review. This letter stated in part:
         Our information indicates that you were a partner in the above partnership during the
         above tax year. Based upon our review of the partnership’s tax shelter activities, we
         have apprised the Tax Matters Partner that we believe the purported tax shelter
         deductions and/or credits are not allowable and, if claimed, we plan to examine the
         return and disallow the deductions and/or credits. The Internal Revenue Code
         provides, in appropriate cases, for the application [of various penalties].
A similar letter dated May 9, 1989, notified Mortensen that another of his Hoyt Partnerships was
under review with respect to taxable year 1988.
       In late 1988 and mid-1989, Mortensen contacted the IRS regarding the status of his 1987
refund. By letter, the Commissioner notified Mortensen that his 1984 through 1988 returns were
being audited.
       Mortensen received additional notices from the Commissioner related to various
partnerships, including DSBS 87-C, the partnership at issue in Mortensen’s 1991 tax return.5 These
notices were dated August 21, 1989, May 21, 1990, August 13, 1990, February 19, 1991 (two
notices), February 3, 1992, and February 18, 1992.
        In 1989, Hoyt sent investors a copy of the Tax Court’s opinion in Bales v. Commissioner,
58 T.C.M. (CCH) 431, 1989 WL 123005. Hoyt claimed that the opinion was proof of the legality
of the partnerships. Mortensen testified that he did not read the entire opinion, but understood its
basics, and relied upon information from Hoyt in interpreting the opinion.
        Sometime in the early 1990s, Mortensen began attending monthly meetings of Hoyt partners
that were held near his home. At these meetings, the investors would discuss various issues
pertaining to the partnerships with other partners, including partners who had visited the ranches.
Based on his attendance at these meetings, Mortensen considered himself “actively aware of the
proceedings of the business,” and believed that he was materially participating in the partnership.
       In January 1992, the Commissioner mailed Hoyt investors a letter regarding the application
of 26 U.S.C. § 469, the passive activity loss limitation provision. In response, Hoyt mailed his
investors a letter setting forth arguments as to why Hoyt investors materially participated in their
investments within the meaning of section 469. This letter asserted that the Commissioner was
incorrect and that the investors should do whatever necessary to materially participate in their
investments at least 100 to 500 hours per year, depending on the circumstances. Hoyt stated that
time spent recruiting new investors and time spent “reading and thinking about these letters” counted
toward the material participation requirement.

         4
          Mortensen’s brief states that: “Petitioner received $31,586.83 of his claimed refunds. He paid a total of
$83,218.43 to the Hoyt partnerships from 1987 through 1997 for the entire investment period. Thus, Petitioner’s net
investment after taxes exceeded $50,000.00. It is not expected that Petitioner will ever be able to collect the money Hoyt
stole from him.” Brief of Appellant at 19.
         5
          The underlying partnership adjustment in this case was made with respect to claimed deductions based on
expenses for Durham Shorthorn Breeding Syndicate 1987-C or DSBS 87-C. Although Mortensen’s 1991 return takes
deductions based on investment in this partnership, there are no documents in the record pertaining to any investment
by Mortensen in the partnership.
No. 05-1344           Mortensen v. Commissioner                                                Page 6


        By letter dated February 11, 1992, the Commissioner mailed the investors a response stating
that “[i]n Mr. Hoyt’s letter misleading and/or inaccurate premises were made which may directly
affect you and your decision-making process in filing your 1991 individual tax return.” The letter
went on to state that Hoyt had provided his investors with rulings and court cases superseded by
section 469 and were no longer relevant. The letter further informed investors that, contrary to
Hoyt’s claims, time spent “reading and thinking” about the letters did not count as material
participation in their investments. The letter concluded by stating that the Commissioner
“recommend[s] you consider having an independent accountant or attorney review this matter with
you.”
       Whenever Mortensen received any correspondence from the Commissioner, he would send
copies to the Hoyt organization. Mortensen took no other action and never sought independent
advice from an accountant or attorney.
        Mortensen also received from Hoyt, numerous documents claiming to show the legitimacy
of the partnerships and the legality of the tax claims made by the organization. The Hoyt
organization would portray IRS employees as incompetent and claimed that they were engaging in
unjust harassment of the Hoyt investors. Mortensen testified that he trusted these documents and
believed and relied upon what the Hoyt organization told him. He did not, however, seek
independent advice.
       After the February 18, 1992 notice from the Commissioner regarding the examination of
various partnerships that Mortensen was involved in, the Commissioner froze the refunds that
Mortensen had claimed on his 1987 and 1988 returns. Nevertheless, on April 22, 1992, before filing
his 1991 tax return, Mortensen signed another series of documents evidencing his intent to invest
in another partnership known as SGE 84-2.
         On his 1991 tax return, Mortensen reported wage income of $48,405, interest income of
$4,512, loss from partnership SGE 84-2 of $39,160, loss from DSBS 87-C of $16,720, capital gain
of $13,003, farm income of $4,824, IRA deduction of $2,000, adjusted gross income of $12,864, and
a total tax liability of $724. The losses from the two partnerships were reported on Schedules K-1.
The capital gain and IRA deduction are derived from SGE 84-2. Mortensen attached a material
participation statement claiming to have spent 121 hours during 1991 working in various Hoyt-
related activities. Hoyt signed the return as preparer on June 18, 1992, and Mortensen signed it on
July 26.
        The Commissioner ultimately issued a Notice of Final Partnership Administrative
Adjustment to Mortensen with respect to DSBS 87-C that disallowed various deductions claimed
on his return for 1991. Mortensen did not challenge the disallowance of the deductions. Therefore,
the Commissioner made a computational adjustment against Mortensen changing his claimed DSBS
87-C loss of $16,720 to income of $4,421. This increased Mortensen’s tax liability by $3,918. The
Commissioner then assessed a 20% penalty pursuant to section 6662(a) based on the determination
that Mortensen is liable for negligence or disregard of rules or regulations with respect to the amount
of underpayment resulting from the DSBS 87-C computational adjustment.
        Mortensen challenged the Commissioner’s assessment of the 6662(a) penalty for negligence
in the United States Tax Court. Special Trial Judge Goldberg held a trial where Mortensen was the
only witness to testify. After trial, the court issued a detailed forty-three page opinion upholding
the Commissioner’s determination. The court determined that Mortensen “was negligent in signing
the power of attorney forms and in entering into the investment.” Mortensen v. Commissioner,
T.C.M (RIA) 2004-279, 1756. The court further concluded that Mortensen was “negligent in 1991
in claiming the Hoyt partnership loss at issue in this case; namely, the $16,720 loss from DSBS 87-
C.” Id. at 1757. The court rejected Mortensen’s reasonable cause and good faith defenses as
No. 05-1344           Mortensen v. Commissioner                                                Page 7


objectively unreasonable. Id. at 1757-1760. In sum, and “[o]n the basis of the record before the
Court, [it] conclude[d] that petitioner’s actions in relation to the Hoyt investment constituted a lack
of due care and a failure to do what a reasonable or ordinarily prudent person would do under the
circumstances.” Id. at 1762. The court found Mortensen negligent with respect to entering into the
investment and negligent with respect to claiming the DSBS 87-C loss on his return. Id. Mortensen
now appeals to this Court.
                                                  II.
       The only issue on appeal is whether the Tax Court erred in upholding the Commissioner’s
imposition of the 6662(a) penalty for the tax year 1991.
       A. Standard of Review
        Mortensen did not challenge the Commissioner’s disallowance of the various deductions.
The only challenge is to the assessment of the negligence penalty pursuant to section 6662(a). “We
review the factual findings of the Tax Court in this regard under the clearly erroneous standard.”
Pasternak v. Commissioner, 990 F.2d 893, 902 (6th Cir. 1993) (citing Leuhsler v. Commissioner,
963 F.2d 907, 910 (6th Cir. 1992)); see also Roberson v. Commissioner, 142 F.3d 435, *5 (6th Cir.
1998) (unpublished) (“We reverse the Tax Court’s factual finding that [the taxpayer] acted
negligently . . . only if the Tax Court clearly erred.”). The Commissioner’s decision to impose the
negligence penalty is presumptively correct and the taxpayer has the burden of proving that he did
not act negligently and that he did what a reasonably prudent person would have done under the
circumstances. Pasternak, 990 F.2d at 902 (citing Skeen v. Commissioner, 864 F.2d 93, 96 (9th Cir.
1989)). The Tax Court’s finding that a taxpayer failed to meet his burden of proving due care is a
finding of fact that this Court reverses only if clearly erroneous. Pasternak, 990 F.2d at 902.
       B. Negligence
        A taxpayer is not required to be perfect for this would be an unrealistic expectation. Even
tax specialists cannot be perfect. The Code is complex. Reasonable minds can differ over tax
reporting and sometimes the IRS disallows certain transactions. Every time a transaction is
challenged or disallowed, the taxpayer is not liable for penalties. Only those taxpayers who fail to
meet the applicable standard of care — to do what a reasonable taxpayer would do under the
circumstances — can be slapped with negligence penalties and interest. Again, perfection is not
required, but when the predators are circling, no reasonable ostrich sticks its head in the sand. See
American Ostrich Association: Fact or Fiction, available at
http://www.ostriches.org/factor.html#head (stating that ostriches do not stick their heads in the
sand). The ostrich that does pays the penalty.
        This Court has defined negligence as “lack of due care or failure to do what a reasonable and
ordinarily prudent person would do under the circumstances.” Id. (quoting Leuhsler, 963 F.2d at
910). Negligence also includes “any failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code.” Roberson, 142 F.3d at *4. Negligence is strongly
indicated when a “taxpayer fails to make a reasonable attempt to ascertain the correctness of a
deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to
be ‘too good to be true’ under the circumstances.” Treas. Reg. § 1.6662-3(b)(1)(ii). Thus, we judge
Mortensen’s conduct against that of the reasonable and ordinarily prudent person.
       In applying the negligence standard, the Tax Court determined that Mortensen was negligent
both in entering into the investment and in reporting the losses for 1991. The Tax Court cited
Mortensen’s decision to grant Hoyt the authority to sign promissory notes on his behalf up to
$75,000, as well as the authority to control the investments without any sort of confirmation or
consultation. The court faulted Mortensen for placing his trust entirely with the promoters of the
No. 05-1344           Mortensen v. Commissioner                                                Page 8


investment and concluded that he did not adequately “investigate either the legitimacy of the
partnerships or the implications of the promissory notes.” Mortensen, T.C.M (RIA) 2004-279, 1756.
This trust continued throughout, despite the constant switching of investments from partnership to
partnership and without Mortensen ever inquiring about or knowing the status of promissory notes
signed on his behalf. Id.
         The Tax Court noted that from 1986 through 1991, Mortensen used the partnerships to report
a total federal income tax liability of $4,349 on income totaling $290,149. Mortensen further filed
the Form 1045 purporting to completely eliminate his tax liabilities for the three years prior to his
investment in the partnerships and resulting in a requested refund of $18,548. Id. These large tax
benefits were based solely on advice received from Hoyt and Mortensen never questioned the
amounts on the returns and never had the returns reviewed by an independent tax professional. Id.
      The Tax Court also noted that the initial Hoyt promotional materials included various
warnings and advised Mortensen to consult with an independent tax advisor. The court stated that
Mortensen’s
       failure to inquire is especially notable with respect to petitioner’s 1986 return and
       amended return. In preparing petitioner’s amended return for that year, the Hoyt
       organization prepared a statement in which it was claimed that petitioner’s
       partnership interest had been switched from DGE 86-1 to SGE 84-2. At that time,
       however, petitioner had signed partnership agreements and other documents
       pertaining only to SGE 86; the investment documents in the record show that
       petitioner did not invest in SGE 84-2 until April 1992.
Id. Moreover, in the first year of his investment, Mortensen was given a loss allocation of $141,260
and did not question these amounts even though they purported to eliminate his tax liability for 1982
through 1986. Id. Thus, the court found that Mortensen should have been on notice from the
beginning that something was amiss or that the tax savings were “too good to be true” and should
have sought independent advice.
        With regard to the 1991 return, the Tax Court noted that Mortensen did not know how the
reported losses were derived and knew only that Hoyt reported them on Mortensen’s Schedules K-1
and his return. Id. at 1756-57. Mortensen “claimed these losses despite the fact that [the
Commissioner] had been warning [Mortensen], at least since May 1988, that there were potential
problems with the tax claims being made on both the partnership returns and on [Mortensen]’s
returns. Prior to signing his 1991 return, [Mortensen] had received at least 12 separate letters from
[the Commissioner] alerting [him] to suspected problems or alerting [him] to reviews that had been
commenced with respect to various Hoyt partnerships in which he was involved.” Id. at 1757.
Despite these warnings, Mortensen did not further investigate the partnership losses and did not seek
outside guidance before claiming them in full on his 1991 tax return. Id. Based on this, the Tax
Court concluded that Mortensen was “negligent in 1991 in claiming the Hoyt partnership loss at
issue in this case; namely, the $16,720 loss from DSBS 87-C.” Id.
       C. Mortensen’s Defenses to the Negligence Penalty
         Section 6664(c)(1) states that the section 6662(a) penalty is not imposed “with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such portion.” According to the Treasury
Regulations, “[t]he determination of whether a 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.”
Treas. Reg. § 1.6664-4(b)(1). The most important factor in making this determination is the extent
of the taxpayer’s effort to ascertain his proper tax liability.
No. 05-1344              Mortensen v. Commissioner                                                           Page 9


        Pursuant to section 6664(c)(1), Mortensen claims that he reasonably investigated and relied
on others who similarly investigated. The Supreme Court has held that good faith reliance on
professional advice concerning the tax laws may be a defense to negligence. United States v. Boyle,
469 U.S. 241, 250-51 (1985). In order for reliance on professional tax advice to be reasonable,
however, the advice must generally be from a competent and independent advisor unburdened with
a conflict of interest and not from promoters of the investment. Pasternak, 990 F.2d at 903
(“Although petitioners argue that they relied on advice of ‘financial advisors, industry experts, and
professionals,’ the purported experts were either promoters themselves or agents of the promoters.
Advice of such persons can hardly be described as that of ‘independent professionals.’”); Barlow
v. Commissioner, 301 F.3d 714, 723 (6th Cir. 2002) (noting “that courts have found that a taxpayer
is negligent if he puts his faith in a scheme that, on its face, offers improbably high tax advantages,
without obtaining an objective, independent opinion on its validity”); Illes v. Commissioner, 982
F.2d 163, 166 (6th Cir. 1992) (finding negligence where taxpayer relied on person with financial
interest in the venture); Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994); Ryback v.
Commissioner, 91 T.C. 524, 565, 1988 WL 92157 (1988) (sustaining negligence penalty where
taxpayers relied solely on advice of persons not independent of investment promoters). In addition,
the taxpayer must demonstrate that any expert opinion relied upon was rendered by the expert with
knowledge of the pertinent facts necessary to render such advice. Barlow, 301 F.3d at 724
(“[R]eliance must be reasonable and the taxpayer must show that the accountant had all the
necessary information to make an informed decision.”) (citations omitted).
        Mortensen first claims reasonable reliance based on information provided by Hoyt and
representatives of the Hoyt organization. As the above citations demonstrate, however, essentially
all courts have found reliance on the promoters of the investment insufficient to support a good faith
defense. Secondly, as the Tax Court found, there is no evidence that Mortensen ever sought advice
regarding his deductions, but rather, when he received his Schedule K-1 and tax returns, assumed
that they were correct. Even assuming that Mortensen received and relied upon advice from the
Hoyt organization, “Mr. Hoyt and his organization created and promoted the partnership, they
completed petitioner’s tax return, and they received the bulk of the tax benefits from doing so. For
petitioner to trust Mr. Hoyt or members of his organization for tax advice and/or to prepare his
return under these circumstances was inherently unreasonable.” Mortensen, T.C.M (RIA) 2004-279,
1758.6
        Mortensen further points to Hoyt’s “enrolled agent” status and claims that he reasonably
relied upon a person certified by the IRS to practice before it. Enrolled agents are required to pass
an exam given by the IRS demonstrating their competence prior to being accredited as enrolled
agents. As we stated earlier, Hoyt was an enrolled agent, accredited by the IRS to prepare federal
tax returns for the partnerships and to represent partners in proceedings before the IRS. See also
Adams, 355 F.3d at 1182. Enrolled agent status is certainly relevant in proceedings before the
Service. A taxpayer’s reliance on an enrolled agent’s advice, however, does not insulate the
taxpayer from negligence penalties. An enrolled agent is not a representative of the IRS, but is
merely an individual authorized to appear before the Service. Much like a taxpayer’s reliance on
an attorney or an accountant, reliance on an enrolled agent is a factor we may consider in
determining the reasonableness of a taxpayer’s actions, but in circumstances such as these, where
the enrolled agent is also the promoter of the investment, any purported reliance is of little to no
value.



         6
          Mortensen also argues that he relied upon tax professionals hired by the Hoyt organization. The Tax Court
found no evidence to indicate that Mortensen relied on any of these professionals and no indication of what details or
advice they allegedly provided. Moreover, these tax professionals are also affiliated with the Hoyt organization as
promoters. We see no error in this finding.
No. 05-1344           Mortensen v. Commissioner                                               Page 10


        Aside from his reliance on persons with a conflict of interest, Mortensen also claims to have
made a pre-investment investigation and points to it as sufficient to support his reasonable cause
claim. As part of this investigation, Mortensen points to three actions: (1) reliance on the opinion
of his father’s tax attorney, (2) reliance on his co-worker’s alleged contact with the IRS, and
(3) reliance on his co-worker’s trip to the Hoyt offices. The Tax Court assumed the veracity of
Mortensen’s claims, but nevertheless, rejected Mortensen’s claim that he “reasonably relied upon
any advice from a tax professional concerning the Hoyt investment.” Mortensen, T.C.M (RIA)
2004-279, 1758. We find no error in the Tax Court’s conclusion.
        Mortensen first claims that he relied on his father’s tax attorney. The crux of this claim is
that Mortensen mailed his father the informational packet he initially received from Hoyt and his
father gave it to a tax professional to review. According to Mortensen’s testimony, his father told
him that “[t]he attorney looked over it and he said there was nothing illegal.” Id. The Tax Court
found that Mortensen’s testimony on this point was “vague and lacked any degree of detail.” Id.
Mortensen was unable to explain what information the tax professional relied upon, did not know
his name (or even if it was a tax accountant or tax lawyer), and had no written statement from the
professional. In sum, the Tax Court found “that petitioner did not reasonably rely on any advice that
he received from the professional through his father because any such advice was not provided by
someone who had all the necessary information to make an informed decision, and because the
advice was conclusory and did not address any of the specific risks involved in an investment,
including the tax risks.” Id. at 1758-59. The Tax Court’s conclusion is in-line with this Court’s
decisions. In Barlow, this Court held that the taxpayer “failed to show [that he] acted reasonably
or that [the tax professional] had all the information to make an informed decision.” Barlow, 301
F.3d at 724. In Roberson, this Court likewise rejected the taxpayer’s claim where he could not
demonstrate the tax preparer’s knowledge of or expertise in the particular investment field or that
the preparer made any “investigation of the bona fides of the investment.” Roberson, 142 F.3d at
*5. Moreover, this Court rejected Roberson’s reliance on accountants who prepared his tax returns
for two years “because they neither evaluated the merits of the claimed tax credits and deductions,
nor made any inquiries into the bona fides of the investment.” Id. Thus, there is no support for the
conclusion that the Tax Court clearly erred in rejecting Mortensen’s purported reliance on the
alleged tax professional.
        Mortensen next points to his co-worker’s alleged contact with the IRS. This co-worker
apparently told Mortensen that “there was no indication from the IRS that there was anything wrong
with Hoyt or anything like that.” Mortensen, T.C.M. (RIA) 2004-279, 1758. The Tax Court found
that “the record is completely devoid of any detail concerning what information he provided to the
IRS or what information he received in return.” Id. at1759. Finally, Mortensen claims that another
co-worker traveled to a Hoyt ranch to confirm that there were actually cows and an operating
business. With regard to this factor, the Tax Court found that “there has been no suggestion that this
coworker had any background in cattle ranching or was otherwise qualified to investigate the Hoyt
organization.” The Tax Court’s decision to reject these two purported good faith reliance claims is
likewise consistent with this Court’s case law. See, e.g., Leuhsler, 963 F.2d at 910 (holding that
even unsophisticated investors cannot escape a negligence penalty by claiming reliance on the
advice of those who are not professional investment counselors). Again, there is no evidence that
the Tax Court clearly erred in its conclusion.
        The Tax Court further found that even if Mortensen did rely on these individuals, this
reliance was five years before the 1991 return at issue. In the intervening time, Mortensen took
large deductions nearly wiping out his tax liability from 1983 through 1992. According to the Tax
Court, “in light of the large losses claimed by the partnerships, the discrepancies in the partnerships
in which petitioner was involved, and the continuous warnings being sent by [the Commissioner],”
Mortensen’s reliance “was unreasonable under the circumstances.” Mortensen, T.C.M. (RIA) 2004-
279 at *33-34; see also Pasternak, 990 F.2d at 903 (stating that “a reasonably prudent person would
No. 05-1344                 Mortensen v. Commissioner                                                                Page 11


have asked a tax advisor if this windfall were not ‘too good to be true’”); Brown v. Commissioner,
43 T.C.M. (CCH) 1322, 1324, 1982 WL 10532 (“To anyone . . . not incorrigibly addicted to the ‘free
lunch’ philosophy of life, the entire scheme had to have been seen as a wholly transparent sham.”).
In these circumstances, a reasonable taxpayer would not, as Lyndon Johnson once said, act like a
prairie rabbit in a hailstorm and just hunker down until it passes. Mortensen did, and the district
court did not clearly err in so finding.
        Finally, Mortensen argues that an “average” taxpayer would have been unable to uncover
the fraud perpetrated by Hoyt. The Tax Court did not reject this assertion, but made clear that the
issue is not whether Mortensen could or should have uncovered the fraud, but whether he was
negligent in “not adequately investigating the partnership and/or seeking qualified independent
advice concerning it.” Mortensen, T.C.M. (RIA) 2004-279 at *34. We agree. The law does not
require taxpayers to uncover anything and everything that the Service, with all of its resources, finds
problematic, sometime down the line. At issue here are tax laws designed to encourage taxpayers
to be informed and to be in compliance with the laws; the negligence penalties are not designed to
punish reasonable mistakes. The issue is not whether a taxpayer is wholly successful in determining
the tax legitimacy of a desired    investment, but whether he is negligent for not reasonably
investigating in the first place.7
         It is also relevant to point out the warnings in the initial Hoyt promotional materials that
Mortensen ignored. One document was titled “Hoyt and Sons — The 1,000 lb. Tax Shelter.”8 The
documents emphasized that the main return on investment was tax savings. The documents posed
the question whether the investors could feel good about not paying taxes and if they could feel like
they were not abusing the system. The documents informed investors up front that the partnerships
would be “branded an ‘abuse’ by the Internal Revenue Service and will be subject to automatic” and
“constant audit.” A warning was given in the “Tax Aspects” section of the documents stating that
“If you don’t have a tax man who knows you well enough to give you specific personal advice as
to whether or not you belong in the cattle business, stay out . . . Don’t have anything to do with any
aspect of the cattle business without thorough tax advice, and don’t waste much time trying to learn
tax law from an Offering Circular.” Despite these statements, Mortensen’s investigation into the
tax aspects was minimal to the extent it existed at all. The Tax Court therefore did not clearly err
in its determinations.
        Mortensen’s most credible claim is that he had reasonable cause for the underpayment
because of the Tax Court’s opinion in Bales v. Commissioner. Bales addressed individual investors
in Hoyt partnerships for the taxable years 1974-1979. The Commissioner had asserted various
deficiencies for underpayment of taxes based on deductions for partnership losses. The Tax Court
began the opinion by stating that “[t]he 26 dockets which were tried are test cases for petitioners in
similar partnerships.” Bales, 58 T.C.M. (CCH) at 432. The case specifically involved ten issues for
decision regarding the appropriateness of the transactions and the deductions and held that the
partnerships should be respected for tax purposes and deductions to the extent of the investors’s
investment were permissible. After the decision, Hoyt sent Mortensen and other investors a copy
and his summary, touting it as proof of the partnerships’ legitimacy.


         7
          Mortensen also claims that an “honest mistake of fact” excuses him from a negligence penalty under section
6664(c)(1) (excusing “an honest misunderstanding of fact or law that is reasonable in light of all the facts and
circumstances, including the experience, knowledge and education of the taxpayer”). The Tax Court found that this
claim does not alter the conclusion that Mortensen was still negligent in investigating or seeking independent advice.
Thus, the claimed honest mistake is insufficient to carry the burden of proving reasonable cause.
         8
             Interestingly, Hoyt later mailed a letter to his investors stating that “[t]he position of your partnership is that
it is not a tax shelter,” because tax shelters “are never recognized for Federal income tax purposes.” Mortensen, T.C.M.
(RIA) 2004-279, 1753. The IRS then informed the investors that not all tax shelters were illegal.
No. 05-1344              Mortensen v. Commissioner                                                          Page 12


        The Tax Court below rejected Mortensen’s reliance on Bales. The court reasoned that “Bales
involved different investors, different partnerships, different taxable years, and different issues than
those underlying the present case.” Mortensen, T.C.M. (RIA) 2004-279, 1761. The court then
found that Mortensen failed to establish that he relied on Bales to support his deductions. According
to the Tax Court, there was no evidence that Mortensen personally relied upon the decision, as
opposed to relying on Hoyt’s interpretation of the decision. Because the Tax Court had already
concluded that reliance on Hoyt was unreasonable, any reliance on him for an interpretation of Bales
was likewise unreasonable. The Tax Court further re-asserted that “Bales involved different
investors, different partnerships, different taxable years, and different facts.” Id. Moreover, the
court noted that not all of the deductions claimed by the investors were permitted, but rather only
those to the extent of their investments. Id. Further, the court noted that in Durham Farms #1 v.
Commissioner, 79 T.C.M. 2009, aff’d 59 Fed. Appx. 952 (9th Cir. 2003), it found that by the early
1980s, the Hoyt organization’s management and record keeping practices changed dramatically.
Mortensen, T.C.M. (RIA) 2004-279, 1761.
         Although we believe it to be a closer case on this issue, we cannot conclude that the Tax
Court clearly erred by finding Mortensen’s claimed reliance on Bales insufficient to defeat the
penalty. Nevertheless, the Tax Court’s decision in Bales does lend some support to Mortensen’s
claim. At the outset of the Bales opinion, the court stated that the case was a “test case[] for
petitioners in similar partnerships.” Bales, 58 T.C.M. (CCH) at 432. The taxable years were 1974-
1979, well prior to Mortensen’s investment, but assuming he did read the opinion, as he testified that
he did, there are many statements in the opinion that could arguably support a reasonable cause
defense. First, the Tax Court stated that “[t]he Hoyt cattle operation, which encompasses the
partnerships’ cattle, is surely one of the top Shorthorn seedstock operations in the United States.”
Id. at 445. The Tax Court further stated that the Commissioner “has not offered sufficient evidence
to show that this was anything but a first class purebred Shorthorn operation.” Id. at 446. Later in
the opinion, the Tax Court noted that, given the partnerships’ structure, “it would have been quite
possible for Jay Hoyt to manipulate things to his own advantage. Yet there is no indication that he
did so. 9In fact, the evidence in the record shows that he ran the operation for the investors’
benefit.” Id. at 448. The court then concluded that “these transactions clearly had economic
substance. Accordingly, the transactions will not be disregarded as shams.” Id. at 449.
        The court did account for the fact that “[a]t first glance, it appears that this is a package of
tax benefits. With a minimum of investment, petitioners were able to claim large deductions from
the activity. They did this by purportedly personally assuming partnership debt. Petitioners had no
expertise in the area. The assets were very high priced. And, the promoter of the investments also
prepared the investors’ personal tax returns.” Id. Nevertheless, the court did not disregard the
transactions as shams, but did note that “[a]fter trial, petitioners conceded that the assumption of
debt and loss allocations was impermissible. The deductions petitioners are still claiming are limited
to the extent of their investments . . . There is no doubt that tax savings play an important role in
these investments. Yet there are profits to be made independent of tax savings. There is a real
chance that petitioners will profit from capital appreciation.” Id. 449-50.
        Although we find the Tax Court’s analysis of Bales lacking — in an otherwise well-reasoned
and well-written opinion — we ultimately agree that Mortensen has failed to carry his burden. In
support of Mortensen’s claim, we note that the Bales court stated at the outset that Bales was a test
case of similar partnerships. Further, the Tax Court below relied upon Durham Farms #1 where the
court noted that the Hoyt partnerships’ records deteriorated in the early 1980s. Durham Farms #1,

         9
         The finding here is likely correct. Subsequent opinions have concluded that the problems and fraud in the
Hoyt operations began in the early 1980s. Thus, the evidence that the Tax Court reviewed for 1974-79 likely
demonstrated a first class operation, which later allowed Hoyt to create and promote so many partnerships based on his
family name.
No. 05-1344             Mortensen v. Commissioner                                                       Page 13


however, was issued by the Tax Court in 2000, and Mortensen’s negligence penalty is for 1991.10
The Tax Court also based its decision on the fact that Mortensen said he relied more on Hoyt’s
interpretation of the case and did not entirely understand Bales when he read it. The very beginning
of the opinion, however, mentions that Bales was a test case. The opinion clearly states that the
partnerships were “first class,” that they should be respected for tax purposes, and deductions to the
extent of basis were permitted. Even an uneducated investor could certainly understand these
statements. Further, the Bales court did not express concern with the fact that Hoyt prepared all of
the investors’s tax returns, nor did it express concerns with the form of the partnerships. Mortensen
testified that he read and understood the basics of the opinion — which, to nearly anyone who reads
it, would appear to be a positive endorsement of the partnerships.
         Of course, although good faith reliance on professional tax advice — and, in this case, an
opinion of the Tax Court — may be a defense to negligence, Boyle, 469 U.S. at 250-51, “[r]eliance
on professional advice, standing alone, is not an absolute defense to negligence, but rather a factor
to be considered,” Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff’d. 904 F.2d 1011 (5th Cir.
1990), aff’d. 501 U.S. 868 (1991). Even reliance on a judicial opinion must be reasonable under the
circumstances. The Bales opinion, though having significant similarities, also has, as the Tax Court
wrote, various differences. Business operations are fluid and a court’s opinion or approval of
transactions for a certain period does not stamp them as legitimate for all time. Nor does the Bales
opinion have any preclusive effect on the Commissioner’s ability to challenge deductions for other
years. And finally, Bales did not address any of the partnerships that Mortensen was invested in
(and it is unclear whether Mortensen himself would have known what partnerships he was invested
in anyway). If, based upon the Bales opinion, Mortensen had sought independent professional
advice or, perhaps, a private letter ruling from the IRS, his reliance might be more justified.
        In sum, Mortensen relies heavily on Bales as reasonable cause for his underpayment of taxes.
The Commissioner counters that, even if Mortensen relied on Bales, a reasonable taxpayer would
have sought independent professional advice concerning the case’s applicability to his particular
partnership investments. Both Mortensen and the Commissioner make strong arguments based on
Bales. The case does provide Mortensen with some support for his reasonable cause argument.
Balanced against the other issues, however, specifically the absence of any records substantiating
the claimed deductions, the large deductions with a small investment, warnings about seeking
independent counsel, and constant warnings from the Commissioner himself, there is a sufficient
basis for the Tax Court’s decision that a reasonable taxpayer after Bales would still have sought
independent counsel. Additionally, although not addressed by the Tax Court, Bales held that the
taxpayers could take deductions only to the extent of their basis. Mortensen took more than
$300,000 in partnership loss deductions on an investment of approximately $83,000 between 1986-
1991. The amount of deductions, therefore, would not comply with Bales.
                                                      III.
       Finally, we note again that the Tax Court’s finding that a taxpayer failed to carry his burden
of proving his reasonable care is reversed only if clearly erroneous. Although, at least with regard
to Bales, it may be a closer case than the Tax Court found below, we cannot conclude that the Tax
Court’s decision is clearly erroneous. AFFIRMED.




        10
          To the extent that the Tax Court below meant that the shoddy records beginning in the early 1980s should
have put Mortensen on notice of a problem, it did not explain, nor does the Commissioner on appeal, how or why
Mortensen should have recognized a problem.
