                         T.C. Memo. 2010-168



                       UNITED STATES TAX COURT



               ESTATE OF RALPH ROBINSON, DECEASED,
             JAMES ROBINSON, EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20941-07.              Filed August 2, 2010.



     Tommy K. Cryer, for petitioner.

     Nick G. Nilan and Catherine Campbell, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $380,514 deficiency

in the Federal estate tax of the Estate of Ralph Robinson (the

estate) and a $76,103 accuracy-related penalty under section
                                 - 2 -

6662(a).1   The estate has conceded the entire deficiency.   The

sole issue for decision is whether the estate is liable for the

accuracy-related penalty on account of negligence or disregard of

rules or regulations.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Ralph Robinson (decedent)

was a resident of Washington State when he died at the age of 91

on October 5, 2003.   James Robinson (James), decedent’s son and

executor of the estate, also resided in Washington State when the

petition was filed.

     Decedent, a widower, suffered from Alzheimer’s disease.       In

1999 decedent executed a durable power of attorney naming his

daughter Carol Robinson (Carol) attorney-in-fact and giving Carol

control of his assets.   Decedent’s will also named Carol personal

representative of the estate.2    At Carol’s request, James became

co-personal representative.   James assumed responsibility for

decedent’s estate planning.




     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the date of
decedent’s death, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
     2
        In the case that Carol could not act as personal
representative, the will named James alternate personal
representative.
                                - 3 -

     James is a computer programmer.    He does not have a college

degree.    He completed only one basic accounting course and has

never taken any tax courses.

     James prepared his own income tax returns until the early

1980s, when he acquired two rental properties.    It became

increasingly difficult for James to prepare his own tax returns,

so he hired a former Internal Revenue Service (IRS) employee,

James Haley (Mr. Haley), to prepare them on his behalf.    Mr.

Haley prepared James’ returns until Mr. Haley passed away in 1995

or 1996.

     James looked for another income tax return preparer.     By

that time, James had sold, or would soon sell, the rental

properties and had become involved in a sales job selling soap.

He thought the new activities involved “a lot of paperwork” and

consequently did not want to prepare his own tax returns.     A

friend, Tom Monforton (Mr. Monforton), whom James considered a

successful businessman, recommended John Schlabach (Mr.

Schlabach) to prepare James’ returns.    Mr. Schlabach had prepared

Mr. Monforton’s tax returns, and Mr. Monforton believed Mr.

Schlabach was very competent.

     In 1996 or 1997 James visited Mr. Schlabach’s office, where

he noticed Mr. Schlabach’s “Enrolled Agent”3 plaque on the wall.


     3
        The IRS grants enrolled agent status to “an applicant who
demonstrates special competence in tax matters by written
                                                   (continued...)
                                 - 4 -

Following this visit, James hired Mr. Schlabach to prepare his

income tax returns.     Before hiring him, however, James informed

Mr. Schlabach that he did not want to take any risky tax

positions.     From about 1997 through 2007, Mr. Schlabach prepared

James’ income tax returns.

     A few years after their initial meeting, James noticed that

Mr. Schlabach’s business cards included the phrase “Estate

Planning”.     When James asked Mr. Schlabach if he was expanding

into estate planning, he informed James that he was certified in

this area and had always provided such services.

         James eventually hired Mr. Schlabach to provide estate

planning services for decedent.     Decedent, who had worked as a

lumber mill saw filer, amassed a sizable estate during his

lifetime.     Decedent had previously expressed his desire to

minimize his estate tax liability and to avoid probate after the

considerable amount of time it took to probate his brother’s

estate.     Mr. Schlabach’s estate plan for decedent included (1) a

living trust, (2) a transfer of real estate into a trust, and (3)

a charitable foundation.




     3
      (...continued)
examination administered by, or administered under the oversight
of, the Director of the Office of Professional Responsibility
and who has not engaged in any conduct that would justify the
censure, suspension, or disbarment of any practitioner”. 31
C.F.R. sec. 10.4(a) (2009). The IRS disbarred Mr. Schlabach from
practicing before the IRS in 2001. 2002-2 C.B. 419, 420.
                               - 5 -

     On Mr. Schlabach’s advice, James and Carol established the

Ralph Kitson Robinson Living Trust (living trust) in September

2002.4   James and Carol were appointed cotrustees of the living

trust.   Carol transferred decedent’s brokerage account to the

living trust.   Decedent’s primary residence was also transferred

to the living trust.   James understood the values of the assets

in the living trust would be included in the value of the gross

estate and subject to estate tax but agreed to establish a living

trust to avoid probate.

     Subsequently, Mr. Schlabach advised James that decedent

could exclude the value of six vacant residential lots (Everett

real estate) from the value of decedent’s gross estate by

transferring the properties to a trust.   In July 2003 Carol

executed a quitclaim deed and conveyed the Everett real estate to

the Alden Granville Trust, Laurel Durkee, Trustee.   James was

under the impression that transferring the Everett real estate to

a “pure trust” was a legal means of avoiding the estate tax.

     After decedent’s death, Mr. Schlabach informed James that

the value of decedent’s estate appeared to exceed the applicable




     4
        The living trust’s purposes were to (1) receive and
manage assets for decedent’s benefit during decedent’s lifetime,
and (2) manage and distribute such assets upon decedent’s death.
Upon decedent’s death, the trust was to pay for caregivers and
expenses that came due after death (e.g., funeral expenses).
After payment of expenses, the assets were to be distributed in
equal shares to James and Carol.
                                - 6 -

exclusion amount.5   On the basis of this assessment, Mr.

Schlabach advised James to establish and transfer assets to a

charitable trust to reduce the value of the estate below the

exclusion amount.    Mr. Schlabach explained that this strategy

would eliminate any estate tax liability while creating an entity

that could be used to make charitable gifts.

     In November 2003 James and Carol established the Robinson

Foundation, purportedly as a section 4947(a)(1) nonexempt

charitable trust.    The Robinson Foundation appointed James and

Carol cotrustees.6   James then transferred assets from the living

trust to the Robinson Foundation.7

     To support his recommendations in planning the estate,

especially those pertaining to the Robinson Foundation, Mr.

Schlabach showed James legal forms and printed out cases and

portions of the Code for James to read.    James read the statutes

and cases but did not completely understand them.    When Mr.


     5
        The applicable exclusion amount, or unified credit, is in
effect the maximum value of the taxable estate that can be
exempted from the imposition of the Federal estate tax. Sec.
2010(a). The applicable exclusion amount for 2003 was $1
million. Sec. 2010(c).
     6
        Under provisions of the trust, James and Carol had
authority to distribute income and/or principal to charitable
organizations. In 2004 they each received $2,500 a month as
trustees.
     7
        Mr. Schlabach prepared Form 990-PF, Return of Private
Foundation, for years 2005, 2006, and 2007, but the Robinson
Foundation never requested tax-exempt status. James signed each
Form 990-PF.
                                 - 7 -

Schlabach explained the statutes and each case pertinent to Mr.

Schlabach’s position, James found that Mr. Schlabach’s

explanations were logical and supported the estate plan.

     James also hired Mr. Schlabach to prepare the estate’s Form

706, United States Estate (and Generation-Skipping Transfer) Tax

Return, because Mr. Schlabach had been involved in structuring

decedent’s estate.     Mr. Schlabach requested information and

documentation from James.     James disclosed everything he knew

that could be pertinent to the estate and everything that Mr.

Schlabach requested.    James, however, was not aware of, and

consequently did not provide Mr. Schlabach, information on

brokerage and bank accounts owned by decedent with assets

totaling $64,077.     James reviewed and signed the Form 706.

         In preparing the Form 706, Mr. Schlabach did not include

the accounts totaling $64,077 and the assets in the Alden

Granville Trust (i.e., the Everett real estate) in the value of

decedent’s gross estate.8    The estate claimed a $941,000


     8
        Decedent was the beneficiary of the Alden Granville Trust
until the time of his death. Sec. 2036(a) requires inclusion in
the gross estate of the value of any property transferred by a
decedent (except in the case of a bona fide sale for full and
adequate consideration) if the decedent has retained for his life
the enjoyment of, or the right to income from, the property.
Additionally, the value of the gross estate includes the value of
any interest transferred by the decedent, the enjoyment of which
was subject at the date of the decedent’s death to change by
virtue of the decedent’s retention of the power to alter, amend,
revoke, or terminate the transfer, or where such power was
relinquished during the 3-year period ending with the decedent's
                                                   (continued...)
                              - 8 -

charitable contribution deduction for transfers made to the

Robinson Foundation.9

     In the notice of deficiency, the IRS determined the value of

the Everett real estate on the date of death was $242,900 and

included that amount in the value of decedent’s gross estate.

The IRS also disallowed the $941,000 charitable contribution

deduction.

     James conceded all issues stated in the notice of deficiency

except for the accuracy-related penalty.   After the IRS issued

the notice of deficiency, the parties agreed that the additional

assets totaling $64,077 omitted from the Form 706 should have

been included in the value of decedent’s gross estate.10

                              OPINION

     Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for additions to tax and penalties.   “The


     8
      (...continued)
death. Sec. 2038(a)(1).
     9
        Following Mr. Schlabach’s advice, James erroneously
believed he had the power to make charitable contributions on
behalf of the estate. Neither the will nor the living trust,
however, directed any transfers for the benefit of the Robinson
Foundation or any charitable organization. The parties agree
that as the will did not have a provision allowing James to make
charitable contributions, the values of assets transferred from
the living trust into the Robinson Foundation should not have
been deducted from the value of the gross estate.
     10
        The IRS did not determine a deficiency relating to the
$64,077 in additional assets in the notice of deficiency.
                                - 9 -

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.      Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).      The Commissioner,

however, does not have the obligation to introduce evidence

regarding reasonable cause or substantial authority.      Higbee v.

Commissioner, supra at 446-447.      Once the Commissioner has met

his burden of production, the taxpayer must come forward with

evidence sufficient to persuade a court that the Commissioner’s

determination is incorrect.    Id.

     Pursuant to section 6662(a) and (b)(1), a taxpayer may be

liable for a penalty of 20 percent on the portion of an

underpayment of tax due to negligence or disregard of rules or

regulations.   The term “negligence” in section 6662(b)(1)

includes any failure to make a reasonable attempt to comply with

the Code and any failure to keep adequate books and records or to

substantiate items properly.   Sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.   Negligence is “strongly indicated” where the

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”.      Sec. 1.6662-3(b)(1)(ii),

Income Tax Regs.   “Disregard” means any careless, reckless, or
                               - 10 -

intentional disregard.   Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs.   We find that respondent has met his burden of

production.

     The accuracy-related penalty does not apply with respect to

any portion of an underpayment if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion.   Sec. 6664(c)(1).   The

determination of whether a taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The most

important factor is the extent of the taxpayer’s effort to assess

his or her proper tax liability.   Id.   “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.

     Good faith reliance on the advice of an independent,

competent professional as to the tax treatment of an item may

constitute reasonable cause.   Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 98-99 (2000), affd. 299 F.3d 221 (3d

Cir. 2002); sec. 1.6664-4(b), Income Tax Regs.; see also United

States v. Boyle, 469 U.S. 241, 250 (1985).   “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
                              - 11 -

reasonableness of a taxpayer’s actions”.   Mortensen v.

Commissioner, 440 F.3d 375, 388 (6th Cir. 2006), affg. T.C. Memo.

2004-279.11

     A taxpayer’s reliance must be in good faith and demonstrably

reasonable.   Ewing v. Commissioner, 91 T.C. 396, 423 (1988),

affd. without published opinion 940 F.2d 1534 (9th Cir. 1991);

Freytag v. Commissioner, 89 T.C. 849, 888-889 (1987), affd. 904

F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).     In such a

case, a taxpayer will be entitled to rely upon a competent

expert’s advice, even if the advice should prove to be erroneous.

Jackson v. Commissioner, 86 T.C. 492, 539 (1986), affd. on other

issues 864 F.2d 1521 (10th Cir. 1989); Brown v. Commissioner, 47

T.C. 399, 410 (1967), affd. per curiam 398 F.2d 832 (6th Cir.

1968).

     This Court has stated that reasonable cause and good faith

are present where the record establishes by a preponderance of

evidence that:   (1) The taxpayer reasonably believes that the

professional upon whom the reliance is placed is a competent tax

adviser who has sufficient expertise to justify reliance; (2) the


     11
        In Mortensen v. Commissioner, T.C. Memo. 2004-279, affd.
440 F.3d 375 (6th Cir. 2006), we found the taxpayer’s reliance on
the enrolled agent to have little or no value because, inter
alia, the enrolled agent was also the creator and promoter of the
investment. The enrolled agent in Mortensen received the bulk of
the tax benefits from promoting the investment and preparing the
taxpayer’s returns and therefore had a serious conflict of
interest and was not an independent adviser. We find the facts
in this case to be distinguishable from the facts in Mortensen.
                              - 12 -

taxpayer provides necessary and accurate information to the

adviser; and (3) the taxpayer actually relies in good faith on

the adviser’s judgment.   Estate of Lee v. Commissioner, T.C.

Memo. 2009-84 (citing Neonatology Associates, P.A. v.

Commissioner, supra at 99).

     James is unsophisticated in tax matters.   Even with respect

to his personal income taxes, he has almost always relied on the

guidance of others.   He has not had any formal training in

accounting or taxation.   Before hiring Mr. Schlabach, James told

Mr. Schlabach that he was not inherently a risk-taker.   James

indicated to Mr. Schlabach that he wanted everything to be

“covered and legal” and “not be called into question.”

     James believed Mr. Schlabach was competent in estate

planning because he was an enrolled agent who knew “how to file

each and every return that the IRS has” and had to pass a minimum

competency test to be approved to practice before the IRS.      He

credibly testified that he did not know Mr. Schlabach had been

disbarred.

     James also believed Mr. Schlabach had estate planning

expertise because Mr. Schlabach’s business card included the

phrase “Estate Planning” and he could cite the Code.

Additionally, Mr. Schlabach told James that he was certified and

had always provided estate planning services.

     On the basis of the foregoing and the fact that Mr.

Schlabach prepared James’ income tax returns for about 11 years
                              - 13 -

without incident, James was reasonable in believing that Mr.

Schlabach was a competent estate tax adviser as well.

     We find James provided Mr. Schlabach all relevant financial

data in his possession needed to determine the correct amount of

estate tax.

     We find James relied on Mr. Schlabach in good faith.    Before

James hired Mr. Schlabach to prepare the Form 706, Mr. Schlabach

had been involved in planning the estate, and James believed he

had done more than an acceptable job.    When James hired Mr.

Schlabach to prepare the Form 706, he believed it was more

logical and responsible than hiring another tax return preparer

who had no knowledge of the estate.

     James relied on Mr. Schlabach for many years without

incident and continued to trust Mr. Schlabach’s explanations and

advice.   We conclude James reasonably and in good faith relied on

Mr. Schlabach.   We hold that the estate is not liable for the

accuracy-related penalty.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
