                        T.C. Memo. 2001-295



                      UNITED STATES TAX COURT



                 DOYCE D. GENTRY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10967-97.                  Filed November 6, 2001.


     Charles E. Hammond, for petitioner.

     Dennis R. Onnen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined the following

deficiencies, late-filing additions, and accuracy-related

penalties with respect to petitioner’s Federal income tax:
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                                             Accuracy-related
                          Addition to Tax        Penalty
     Year    Deficiency   Sec. 6651(a)(1)      Sec. 6662(a)

     1991     $17,939         $4,497             $3,588
     1992       1,395            329                379


     Petitioner has conceded the deficiencies.    The only issues

remaining for decision are the late-filing additions and

accuracy-related penalties.

     We uphold respondent’s determinations of late-filing

additions.   We uphold respondent’s determinations of accuracy-

related penalties, other than the portion of the penalty for 1991

attributable to petitioner’s failure to report income of a sole

proprietorship received during the period August 1 through

November 14, 1991, which income was erroneously included on a

corporate return.

                          FINDINGS OF FACT

     Most of the facts have been stipulated and are so found.

The stipulation of facts and the related exhibits are

incorporated by this reference.

     Petitioner is liable for deficiencies in Federal income tax

for the years 1991 and 1992 in the amounts of $17,939 and $1,395,

respectively.

     The filing deadline for petitioner’s 1991 Federal income tax

return was April 15, 1992, and for petitioner’s 1992 Federal

income tax return was April 15, 1993.   Petitioner filed his
                               - 3 -

Federal income tax returns for 1991 and 1992 on August 11, 1994,

and March 21, 1994, respectively--much more than 5 months after

their respective due dates.

     Petitioner understated the proper tax due on his Federal

income tax return for 1991 by $17,939 and for 1992 by $1,395.

This constituted an understatement of the proper tax due of

approximately 97 percent for 1991 and 70 percent for 1992.

     Tesco Driveaway, Inc. (Tesco), was incorporated under the

laws of the State of Missouri on November 15, 1991.     Prior to the

incorporation, petitioner operated the Tesco business as a sole

proprietorship.

     Prior to August 1, 1991, petitioner asked his personal and

business accountant, Dal Livingood, owner of Diversified

Management Services, to prepare the necessary documentation to

incorporate Tesco.   At petitioner’s direction, Mr. Livingood

prepared and submitted incorporation papers for Tesco to the

Missouri secretary of state on or about August 1, 1991.

     The Missouri secretary of state returned the incorporation

papers unfiled due to some defect.     Mr. Livingood remedied the

defect in the incorporation papers, obtained petitioner’s

signature on the revised incorporation papers, and resubmitted

them.   The Missouri secretary of state accepted the resubmitted

documents, and Tesco was incorporated on November 15, 1991.

     Petitioner failed to include on Schedule C of his 1991 tax
                                 - 4 -

return $32,755 of income attributable to the Tesco business

during the period August 1 through November 14, 1991.   This

income was erroneously included on Tesco’s corporate return

rather than petitioner’s individual return due to an error made

by his accountant.    Petitioner was not aware of the error at the

time he filed his 1991 Federal income tax return.

     Petitioner resided in Kansas City, Missouri, when he filed

his petition.

                                OPINION

Issue 1.   Late-Filing Additions Under Section 6651(a)(1)

     Section 6072(a)1 requires an individual income tax return to

be filed by “the 15th day of the fourth month following the close

of the calendar year”, unless an extension to file is obtained.

Petitioner submitted no evidence to suggest that he requested, or

that respondent granted, an extension to file either the 1991

return or the 1992 return.2   Petitioner did not timely file his

tax returns for 1991 or 1992.

     Under section 6651(a)(1), there shall be imposed on an

individual taxpayer who fails timely to file an income tax return


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       Sec. 6161(a)(1) allows the Secretary, upon timely request,
to grant an extension of time of up to 6 months to file a return.
Because these returns were filed so late, the maximum additions
would apply even if an extension of 6 months had been obtained.
                               - 5 -

an addition to tax of 5 percent of the tax due for each month or

partial month of the delinquency, not to exceed 25 percent,

“unless it is shown that such failure is due to reasonable cause

and not due to willful neglect”.   Since both returns were filed

more than 5 months after the due date, the maximum penalty of 25

percent would apply, unless the delay was the result of

“reasonable cause” and not “willful neglect”.

     Petitioner bears the burden of proving that the delay

resulted from “reasonable cause” and not “willful neglect” where

the addition to tax was determined in the notice of deficiency,

as it was here.3   Rule 142(a); Bebb v. Commissioner, 36 T.C. 170,

173 (1961); Comey v. Commissioner, T.C. Memo. 2001-275; Smith v.

Commissioner, T.C. Memo. 1984-114; Dritz v. Commissioner, T.C.

Memo. 1969-175, affd. 427 F.2d 1176 (5th Cir. 1970); see also

Welch v. Helvering, 290 U.S. 111 (1933) (presumption of

correctness given to Commissioner’s determinations in notice of

deficiency).

     Petitioner offered no evidence to meet his burden of proof.

Indeed, the only relevant testimony concerning this issue was


     3
      In 1998, Congress enacted sec. 7491(c), which places the
burden of production on the Secretary in connection with any
determination of penalties or additions to tax. Sec. 7491(c)
applies only to court proceedings arising in connection with
examinations commenced after July 22, 1998. Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001, 112 Stat. 726. The notice of deficiency in this case
was issued on Feb. 26, 1997, which conclusively establishes that
the examination was commenced before July 22, 1998.
                                - 6 -

petitioner’s admission that he knows now, and knew in 1991, that

his returns were due on April 15 following the tax year.

     Petitioner’s only apparent theory for avoiding liability

for the late-filing additions is that he relied on his accountant

to make sure his returns were timely filed.    However, the Supreme

Court made it clear in United States v. Boyle, 469 U.S. 241, 249-

50 (1985), that a taxpayer cannot avoid late-filing additions to

tax merely by showing that he relied on an agent to file his tax

return.    Petitioner also failed to introduce any evidence to show

that the delay was caused by his accountant’s neglect, as opposed

to petitioner’s own neglect.

     Therefore, we hold that petitioner is liable for the late-

filing additions to tax as determined by respondent.

Issue 2.   Accuracy-Related Penalty Under Section 6662

     Section 6662(a) imposes a 20-percent penalty on the

underpayment of tax attributable to, among other things, the

taxpayer’s “negligence”, sec. 6662(b)(1), or “substantial

understatement of income tax”, sec. 6662(b)(2).    Negligence is

defined to include the “failure to make a reasonable attempt to

comply” with the tax laws.   Sec. 6662(c).   A “substantial

understatement” is an understatement for the taxable year

exceeding the greater of 10 percent of the proper tax, or $5,000.

Sec. 6662(d)(1)(A).

     Petitioner’s tax return for 1991 showed tax due of $468.
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Thus, petitioner’s admitted understatement of $17,939 greatly

exceeded both 10 percent of the proper tax due4 and $5,000.     The

understatement thus constitutes a “substantial understatement”.5

         Petitioner’s tax return for 1992 showed tax due of $596.

Respondent’s accuracy-related penalty for 1992 was attributable

solely to the negligence provision of section 6662(b)(1).6

         Petitioner has introduced no evidence to dispute

respondent’s determination that petitioner’s 1991 understatement

was “substantial” within the meaning of the statute, or that

petitioner was negligent in connection with his 1992

understatement.     However, petitioner argues that no accuracy-

related penalty should be imposed under section 6664(c)(1), which

provides:

         No penalty shall be imposed under this part 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.


     4
      The proper tax due consists of the $17,939 understatement
plus the $468 in tax shown on 1991 return, for a total of
$18,407. The understatement represents more than 97 percent of
the proper tax due.
     5
      Respondent did not assert in the notice of deficiency that
the 1991 penalty was also being imposed on the alternative
grounds of negligence.
     6
      Petitioner’s admitted understatement of $1,395 for 1992
represents more than 10 percent of the proper tax due. The
proper tax due consists of the $1,395 understatement plus the tax
shown on the return of $596, resulting in a proper tax due of
$1,991. The understatement thus represents more than 70 percent
of the proper tax due, but does not exceed $5,000.
                                 - 8 -

     We must therefore determine whether it was appropriate to

impose the “substantial understatement” penalty for 1991 and the

“negligence” penalty for 1992.

     a.   Accuracy-Related Penalty for 1991 With Respect to
          $32,755 of Income Reported by Corporation for Period
          Prior to Formation

     The testimony of the witnesses at trial and the parties’

briefs focused on the portion of the 1991 accuracy-related

penalty relating to income erroneously reported by Tesco.

Respondent and petitioner agree that petitioner failed to include

on Schedule C of his 1991 tax return $32,755 of income

attributable to the Tesco business for the period August 1

through November 14, 1991.   Petitioner contends, however, that

this income was erroneously included on Tesco’s corporate return

due to an error of fact or law by his accountant.   Respondent, in

the notice of deficiency, admitted that the income was

erroneously allocated to Tesco rather than entirely omitted:

     It is determined that Schedule C net income of
     $32,755.00 for the period of August 1, 1991 through
     November 14, 1991 was improperly omitted from the
     return. You reported the net income from this period
     on the corporate return of Tesco Driveaway Co., Inc.
     However, Tesco Driveaway Co., Inc. was not
     incorporated until November 15, 1991 and therefore
     did not exist until that date. Per your books the
     net income for the period of August 1, 1991 through
     November 14, 1991 is $32,755.00. Therefore, your
     taxable income is increased $32,755.00 for 1991.

     Respondent argues that petitioner knew or should have known

that the State of Missouri had rejected Tesco’s incorporation
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papers long before petitioner filed his 1991 individual income

tax return.   Respondent notes the 1992 and 1993 fiscal year

corporate returns of Tesco, which petitioner signed, recite the

incorporation date as November 15, 1991.   Respondent also notes

that petitioner re-signed the incorporation papers after they

were returned by the State of Missouri due to a defect.

Respondent asks us to infer that petitioner’s prior knowledge

that the Missouri secretary of state had rejected the

incorporation papers equals knowledge that an error was made in

the allocation of income between petitioner’s individual and

Tesco’s corporate return.   We disagree.

     Even if petitioner knew that the incorporation papers had

been rejected, respondent did not show that petitioner knew both

that the $32,755 of income had been included in the corporate

return and excluded from his individual return, and that the

State of Missouri’s rejection of the incorporation papers

required petitioner, as a legal matter, to include the income

that was earned during the gap period on his individual return.

     Petitioner testified without contradiction that he relied

on his accountant to prepare proper tax returns.   His accountant

knew all the facts regarding the rejected incorporation papers

because he is the one who submitted them, received them back

unfiled, and then fixed and resubmitted them.   Yet, even at the

time of trial, the accountant thought the income during the gap
                              - 10 -

period had been applied to petitioner’s individual return.

     The evidence in the record persuades us that petitioner did

not know, at the time he filed his 1991 individual income tax

return, of his accountant’s error in applying the income from

August 1 through November 14, 1991, to Tesco’s corporate return

rather than his individual return.     Moreover, the circumstances

are sufficiently confusing and uncertain to constitute reasonable

cause for the error.   Petitioner has met his burden of

establishing that the understatement for 1991 was due to

reasonable cause (an error by his accountant in the allocation of

income between his individual and corporate return during the

formation gap), and that he acted in good faith with respect to

such portion by reasonably relying on his accountant’s expertise.

     There is no evidence in the record to suggest that

petitioner actually knew of the accounting error at the time he

filed his 1991 individual return.    Nor is there any evidence to

suggest that petitioner took unfair advantage of the Government

or received any net financial benefit from the erroneous

allocation of the income.   On the contrary, the evidence suggests

that this was an innocent error caused by a series of mistakes

inadvertently made by petitioner’s accountant.    In these

circumstances, we conclude that no accuracy-related penalty

should be imposed in connection with the $32,755 of income

erroneously omitted from petitioner’s 1991 individual income tax
                                 - 11 -

return and included in Tesco’s corporate return.7

         b.   Accuracy-Related Penalty on Other 1991 Items and 1992
               Items

      Petitioner offered no evidence or argument to excuse the

other errors made in his 1991 and 1992 returns.8      Petitioner’s

mere reliance on his accountant to prepare correct returns is not

“reasonable cause”.      Sec. 1.6664-4(b)(1), Income Tax Regs.

(“Reliance on * * * the advice of a professional tax advisor

* * * does not necessarily demonstrate reasonable cause and good

faith”).      As in Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173

(1978), “No evidence was presented to show the Court that * * *

[petitioner] supplied the accountant with the correct information

or that the filing of the incorrect returns was the result of the

accountant’s error.”      Petitioner has failed to meet his burden of

proving that the remaining errors were the result of “reasonable

cause” or that he acted in “good faith” with respect to them.         We

uphold respondent’s determination that petitioner is liable for

the accuracy-related penalty on the portion of the 1991

deficiency attributable to the other items and on the 1992

deficiency in its entirety.



     7
      In a separate case before this Court concerning Tesco,
docket No. 10966-97, the Commissioner has already reduced Tesco’s
liability by the $32,755 which was erroneously included in
Tesco’s return for its fiscal year ending July 31, 1992, and
which is now being charged to petitioner in the case at hand.
     8
      See supra note 3.
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After giving effect to petitioner’s concessions,


                             Decision will be entered

                        under Rule 155.
