                        T.C. Memo. 2006-156



                      UNITED STATES TAX COURT



         RONALD A. AND CAROL J. LEHRER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2381-04.                   Filed July 31, 2006.



     John Gigounas and Edward B. Simpson, for petitioners.

     Margaret A. Martin, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax and accuracy-related penalties

under section 6662(a)1 for 1999, 2000, and 2001 (the years at


     1
      All section references are to the Internal Revenue Code
(Code) for the years at issue, and all Rule references are to the
                                                   (continued...)
                                - 2 -

issue).   For 1999, respondent determined a $650,411 deficiency

and a $130,082 accuracy-related penalty.     For 2000, respondent

determined a $1,013,341 deficiency and a $202,668 accuracy-

related penalty.    For 2001, respondent determined a $1,240,280

deficiency and a $247,936 accuracy-related penalty.

     The parties have resolved all issues regarding the

substantial deficiencies, and petitioners have conceded that

respondent has met his burden of producing evidence that

petitioners substantially understated their income tax for each

of the years at issue.    The sole issue for decision is whether

petitioners had reasonable cause for, and acted in good faith

with respect to, their understatements of income tax for the

years at issue.    We find that they did not.

                          FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in Byron,

California, at the time they filed the petition.

     Ronald A. Lehrer (petitioner) has a high school education

and has never taken any business or tax courses.     He formed

Lehrer & Sons Construction Co. (the construction business) as a

sole proprietorship around 1995, soon after becoming a licensed


     1
      (...continued)
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -

contractor.    Mary Ann Irussi, a local accountant, prepared tax

returns for petitioners for 1995 and 1996, the years the

construction business began operations.    The gross revenues from

the construction business ranged from $2.5 million to $3 million,

and petitioners owed about $45,000 in Federal and State income

taxes each year Ms. Irussi prepared returns for petitioners.

     Petitioner was not satisfied with Ms. Irussi’s services for

several reasons.    Petitioner stated that he wanted a return

preparer who would be more responsive to his needs, timely answer

his questions, and reduce his income tax liability.    Petitioner

did not check with any local accountants or professional return

preparers.    Instead, a relative told petitioner that a tax

preparer named Anthony Borrelli from St. Louis, Missouri, would

reduce petitioners’ taxes.    Petitioner contacted Mr. Borrelli by

telephone a few times, and the two spoke for approximately one-

half hour each time.    Mr. Borrelli mentioned Code provisions, and

petitioner assumed Mr. Borrelli was familiar with them.

Petitioner hired Mr. Borrelli without determining whether he had

the education, experience, or credentials to prepare returns

professionally.    Petitioner never asked Mr. Borrelli to provide

references or information regarding Mr. Borrelli’s credentials or

experience.

     Mr. Borrelli prepared returns for petitioners for the years

at issue.    Mr. Borrelli provided petitioners with a tax organizer
                                - 4 -

he requested they complete.   Petitioners completed the tax

organizer and sent all their records to Mr. Borrelli as

requested.   Petitioners reported gross revenues from the

construction business of approximately $3.5 million in 1999,

$2.7 million in 2000, and $3.4 million in 2001 on Schedules C,

Profit or Loss from Business.   Additionally, petitioner was day

trading during the years at issue.      Petitioners reported a

$44,004 net gain in 1999, a $313,715 net loss in 2000, and a

$377,079 net loss in 2001 from petitioner’s day trading on

Schedules D, Capital Gains and Losses.      The returns reported a

zero income tax liability for 1999, a $1,523 income tax liability

for 2000 (entirely offset by a claimed earned income credit of

$2,353), and a $2,325 income tax liability for 2001.

     Petitioner said “alarm bells did go off” when the returns

Mr. Borrelli prepared resulted in such reduced tax liabilities

compared to those on the returns Ms. Irussi had prepared.

Petitioners spent only minutes in reviewing the returns

Mr. Borrelli prepared.   They focused exclusively on determining

whether a refund or tax was due and where they needed to sign.

In addition, petitioners failed to notice that a $53,000 gain

from the sale of real property, for which they had provided

documentation to Mr. Borrelli, was omitted from the return for

1999.   Petitioners did not question how Mr. Borrelli managed to

reduce their income tax liability despite consistent gross
                               - 5 -

revenues from the construction business in the millions of

dollars.

     Petitioner began to question Mr. Borrelli’s tax preparation

methods only in 2001.   Petitioner asked another accountant, Ed

Lampe, to review the return for 2000 that Mr. Borrelli had

prepared.   Mr. Lampe informed petitioner that a few things on the

return caused him concern about Mr. Borrelli.   The return

reported not only did petitioners owe no taxes, but that

petitioners were claiming an earned income credit, despite the

$2.7 million Schedule C gross revenues.   Petitioner became

concerned about Mr. Borrelli after hearing from Mr. Lampe, but

petitioner did not fire Mr. Borrelli at that time.

     Unbeknownst to petitioners, Mr. Borrelli was arrested and

charged in 2002 for filing fraudulent tax returns.   In November

2002, respondent sent a letter to petitioners notifying them that

they were under audit for the years at issue.   Petitioners relied

on Mr. Borrelli to represent them, but they ultimately fired him

in November 2003 because of his mishandling of the audit.     Mr.

Borrelli has been serving a 33-month prison sentence for crimes

relating to filing fraudulent returns since May 2004.

     Respondent sent petitioners statutory notices of deficiency

dated November 26, 2003, for the years at issue.   Respondent

determined increases in petitioners’ taxable income of $1,664,834

in 1999, $2,508,952 in 2000, and $3,056,833 in 2001.    Respondent
                              - 6 -

also determined that accuracy-related penalties applied because

of the substantial understatements of income tax.

     Petitioners timely filed a petition with this Court.

                              OPINION

     Petitioners have conceded that they substantially

understated their income tax under section 6662(a) and (b)(2) for

each of the years at issue.   The sole issue remaining is whether

petitioners had reasonable cause for, and acted in good faith

with respect to, the understatements.   Petitioners argue that

they reasonably relied on Mr. Borrelli, and therefore the

accuracy-related penalties under section 6662 do not apply.

     The taxpayer bears the burden of proving there was

reasonable cause for an understatement of income tax and that he

or she acted in good faith with respect to the understatement.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001); sec. 1.6664-

4(a), Income Tax Regs.   The determination of whether the taxpayer

acted with reasonable cause and in good faith depends on the

pertinent facts and circumstances, including the taxpayer’s

efforts to assess his or her proper tax liability, the knowledge

and experience of the taxpayer, and the reliance on the advice of

the professional.   Sec. 1.6664-4(b)(1), Income Tax Regs.

Reasonable cause has been found when a taxpayer selects a

competent tax adviser, supplies the adviser with all relevant

information, and consistent with ordinary business care and
                              - 7 -

prudence, relies on the adviser’s professional judgment as to the

taxpayer’s tax obligations.   Sec. 6664(c); United States v.

Boyle, 469 U.S. 241, 250-251 (1985); Estate of Young v.

Commissioner, 110 T.C. 297, 317 (1998); Am. Props., Inc. v.

Commissioner, 28 T.C. 1100 (1957), affd. 262 F.2d 150 (9th Cir.

1958).   To establish reasonable cause, the taxpayer must prove by

a preponderance of the evidence that:    (1) The adviser was a

competent professional who had sufficient expertise to justify

the taxpayer’s reliance on him or her, (2) the taxpayer provided

necessary and accurate information to the adviser, and (3) the

taxpayer relied in good faith on the adviser’s judgment.

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002); Bowen v. Commissioner,

T.C. Memo. 2001-247.

     Petitioners hired Mr. Borrelli after a relative’s

recommendation and a few telephone conversations in which Mr.

Borrelli cited some Code provisions.    Petitioners introduced no

evidence regarding Mr. Borrelli’s credentials or his experience

in preparing tax returns.   Mr. Borrelli was not called as a

witness at trial.   In short, petitioners failed to introduce any

credible evidence that Mr. Borrelli was a competent tax adviser

with sufficient expertise to justify their reliance.

     We now turn to whether petitioners provided necessary and

accurate information to Mr. Borrelli.   Petitioners sent Mr.
                              - 8 -

Borrelli the tax organizer he requested every year and

additionally sent all supporting documentation requested.    We

find that petitioners provided Mr. Borrelli with the necessary

and accurate information to prepare their income tax returns.

     Finally, we address whether petitioners relied in good faith

on Mr. Borrelli’s advice.   Petitioner stated he wanted a return

preparer who would be more readily available and more responsive

to his questions.   Yet he chose Mr. Borrelli, who lives in St.

Louis, Missouri, without evaluating any local northern California

alternatives.

     We find that petitioners failed to perform the due diligence

that a reasonably prudent person would perform before hiring an

income tax return preparer.   Petitioner did little to investigate

Mr. Borrelli’s qualifications before hiring him.    Petitioner did

not determine whether Mr. Borrelli was a CPA or had relevant

education and experience.

     Although petitioner may have graduated only from high

school, he has been managing a construction business generating

millions of dollars in revenues for several years, and he

personally engaged in hundreds of thousands of dollars of day

trading during the years at issue.    Petitioners’ income tax

liability went from more than $40,000 a year when Ms. Irussi

prepared returns for them to essentially zero when Mr. Borrelli

prepared the returns.   Yet the gross revenues from the
                              - 9 -

construction business remained consistent.    Petitioners offered

no explanation for the reduced income tax reported on the returns

other than the change in return preparer.    We cannot excuse a

taxpayer who makes little or no effort to discern whether the

person the taxpayer has chosen to prepare a return is competent

to give tax advice.   We find that petitioners did not act in good

faith in relying on Mr. Borrelli’s advice.

     Accordingly, we find that petitioners did not have

reasonable cause for, nor did they act in good faith with respect

to, the understatements of income tax.    We therefore sustain

respondent’s determination that petitioners are liable for the

section 6662(a) penalty for each of the years at issue.

     To reflect the foregoing and the concessions of the parties,


                                           Decision will be entered

                                      under Rule 155.
