                    T.C. Summary Opinion 2002-99



                       UNITED STATES TAX COURT



         CHARLES M. FATTA AND MARY T. OLESKE, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 1177-01S.               Filed July 30, 2002.


     Charles M. Fatta and Mary T. Oleske, pro se.

     Douglas S. Polsky, for respondent.



     COUVILLION, Special Trial Judge:     This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1    The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.



     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
                              - 2 -


     Respondent determined deficiencies of $7,064, $8,723, and

$8,390 in petitioners' Federal income taxes, respectively, for

1997, 1998 and 1999, additions to tax under section 6651(a)(1) of

$364 and $963, respectively, for 1998 and 1999, and penalties

under section 6662(a) in the amounts of $1,413, $1,745, and

$1,678, respectively, for the 3 years at issue.   At trial, the

parties filed written stipulations that provided for settlement

of all issues except the additions to tax under section

6651(a)(1) and the penalties under section 6662(a).2



     2
          The adjustments in the notice of deficiency included
the disallowance of all the charitable contribution and other
miscellaneous expense deductions petitioners had claimed on
Schedule A, Itemized Deductions, for each of the years at issue.
As a result of these adjustments, the remaining claimed itemized
deductions for each year were less than the standard deduction
allowed under sec. 63(c); consequently, petitioners were allowed
the standard deduction in the notice of deficiency. In the
stipulations filed at trial, the parties agreed to petitioners'
entitlement to some charitable contribution and other
miscellaneous deductions for each of the years in question, thus
entitling petitioners to itemize their deductions in lieu of the
standard deduction. In the notice of deficiency, respondent
determined that petitioners failed to include $1,405 in capital
gains on their 1998 return. The parties agree that petitioners
realized capital gain income of $1,405 for 1998. Since
petitioners' return for 1998 did in fact include capital gain
income of $1,409, it appears that petitioners overreported this
income by the amount of $4. Respondent also determined in the
notice of deficiency that petitioners failed to report $437 in
dividend income on their 1999 return. In the stipulation,
petitioners agree to this adjustment. Finally, several items of
expenses claimed by petitioners on a rental real estate activity
for the 3 years in question were disallowed in the notice of
deficiency. In the stipulation, the parties agreed to the
amounts petitioners were entitled to as deductions for the 3
years at issue.
                               - 3 -


     Some of the facts were stipulated.   Those facts, with the

exhibits annexed thereto, are so found and are made part hereof.

Petitioners' legal residence at the time the petition was filed

was Albuquerque, New Mexico.

     With respect to the first issue, the additions to tax under

section 6651(a)(1) for 1998 and 1999, petitioners agreed that

their returns for these 2 years were not filed timely, and they

had not applied for or had been granted extensions for the filing

of their returns.   Although petitioners knew that their returns

had not been filed timely, they were not concerned because their

returns reflected overpayment of taxes.   Section 6072(a) provides

that income tax returns must be filed on or before the 15th day

of April following the close of the taxable year, subject to

exceptions not applicable here, unless the failure to file timely

is due to reasonable cause and not due to willful neglect.

Petitioners' belief at the time their returns were filed that

they had overpaid their taxes does not constitute reasonable

cause for the late filing.   E.g., Hintze v. Commissioner, T.C.

Memo. 2001-70.   Respondent, accordingly, is sustained on this

issue.

     With respect to the accuracy-related penalties under section

6662(a), petitioners contend they should be absolved of liability

for the penalties because they relied on their income tax return

preparer.   Petitioners' returns were prepared by Robin Beltran.
                               - 4 -


     Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer's negligence or disregard of rules or regulations.    Sec.

6662(a) and (b)(1).   Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and disregard consists of any careless, reckless,

or intentional disregard.   Sec. 6662(c).   The courts have refined

the Code definition of negligence as a lack of due care or

failure to do what a reasonable and prudent person would do under

similar circumstances.   Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989).    Section 1.6662-3(b)(1),

Income Tax Regs., provides that "Negligence is strongly indicated

where * * * a taxpayer fails to make a reasonable attempt to

ascertain the correctness of a deduction * * * on a return which

would seem to a reasonable and prudent person to be 'too good to

be true' under the circumstances".     An exception applies when the

taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c).   Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances.    The most important factor

is the extent of the taxpayer's effort to assess the proper tax

liability.   Stubblefield v. Commissioner, T.C. Memo. 1996-537;
                               - 5 -


sec. 1.6664-4(b)(1), Income Tax Regs.    Under section 1.6664-

4(b)(1), Income Tax Regs., "Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge and education of the taxpayer."    Moreover, a taxpayer

is generally charged with knowledge of the law.     Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992).    Although a taxpayer is

not subject to the penalty for negligence where the taxpayer

makes honest mistakes in complex matters, the taxpayer must take

reasonable steps to determine the law and to comply with it.       Id.

     Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence where the taxpayer

reasonably relied on the advice of a competent professional.

Sec. 1.6664-4(b)(1), Income Tax Regs.; see also sec. 6664(c);

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).    Reliance on a

professional adviser, standing alone, is not an absolute defense

to negligence; it is only one factor to be considered.    In order

for reliance on a professional adviser to relieve a taxpayer from

the negligence penalty, the taxpayer must establish that the

professional adviser on whom he or she relied had the expertise

and knowledge of the relevant facts to provide informed advice on

the subject matter.   Freytag v. Commissioner, supra at 888.
                               - 6 -


     On their tax returns for the 3 years at issue, petitioners

claimed itemized deductions and rental real estate expenses

substantially in excess of amounts they agreed to in the

settlement noted earlier.   In addition, petitioners failed to

report dividend income on their 1999 return.   With respect to the

expenses that were disallowed, the deductions claimed on

petitioners' returns were calculated by their return preparer

through the use of a formula in which the deductions claimed were

based on their income.   Petitioners knew that the deductions

claimed were not based on their books and records and also knew

that the amounts claimed could not be substantiated.    Petitioners

made no effort to determine whether the use of such a formula was

proper, nor did they make any effort to ascertain the

professional background and qualifications of their return

preparer, Mr. Beltran.   As noted above, in order to be relieved

of the negligence penalty, the taxpayer must establish that the

professional adviser on whom he or she relied had the expertise

and knowledge of the relevant facts to provide informed advice on

the subject matter.   While the Court is satisfied that

petitioners provided the necessary and relevant facts to their

return preparer, petitioners did not establish that their

preparer/adviser had the expertise to provide informed advice on

the matter of their tax deductions.    Petitioners knew, or should

have known, that they could only claim deductions that could be
                                - 7 -


substantiated.   They blindly accepted Mr. Beltran's

representations and took no steps to ascertain whether such

representations were correct.   The Court concludes that

petitioners made no effort to ascertain their correct tax

liability for the years in question.      Therefore, the Court

sustains respondent on the accuracy-related penalties under

section 6662(a).

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                        Decision will be entered

                                under Rule 155.
