                        T.C. Memo. 2007-158



                      UNITED STATES TAX COURT



  G. KIERSTEAD FAMILY HOLDINGS TRUST, ET AL.,1 Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   24183-05, 24184-05,     Filed June 19, 2007.
                   24185-05.



     Anthony V. Diosdi, for petitioners.

     Jeremy L. McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Petitioners in these consolidated cases are

G. Kierstead Family Holdings Trust, G. Kierstead Family Trust,

and Glenn E. and Carol L. Kierstead as individuals.    Before

     1
      Cases of the following petitioners are consolidated
herewith: Glenn E. and Carol L. Kierstead, docket No. 24184-05;
and G. Kierstead Family Trust, docket No. 24185-05.
                               -2-

trial, the parties stipulated that there are no deficiencies in

Federal income tax or penalties due from petitioners G. Kierstead

Family Holdings Trust or G. Kierstead Family Trust.       Respondent

determined Federal income tax deficiencies and penalties for

petitioners2 Glenn and Carol Kierstead as follows3:

     Year at Issue       Deficiency        Sec. 6662(a)

         2001             $40,410            $8,080
         2002              38,165             7,633
         2003              66,179            13,235

     The parties filed a stipulation of settled issues necessary

for a determination of the amount of the liability for the years

in question, other than applicable penalties.    Accordingly, the

only issue to be determined is whether petitioners Glenn and

Carol Kierstead are liable for accuracy-related penalties under

section 6662(a) for 2001, 2002, and 2003 (years at issue).4



                        FINDINGS OF FACT


     2
      Unless otherwise indicated, reference to “petitioners”
shall mean petitioners Glenn E. and Carol L. Kierstead as
individuals.
     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
     4
      The parties stipulated that petitioners are liable for
accuracy-related penalties under sec. 6662(a) for 2001, 2002, and
2003 for the portion of their deficiencies allocable to their
failure to include interest income in the amounts of $8,633,
$8,465, and $8,174, respectively.
                                 -3-

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference.      Petitioners resided in

Vacaville, California, when they filed this petition.      Petitioner

trusts both used addresses in Lansing, Michigan, on their Tax

Court petitions.

     In 1998, with the assistance of National Trust Services

(NTS), petitioners established the G. Kierstead Family Holdings

Trust and the G. Kierstead Family Trust.      Petitioner Glenn

Kierstead assigned all rights to his lifetime services and future

earnings to the trusts.   Petitioners deducted inter alia their

personal living expenses and depreciation of their residence on

Form 1041, U.S. Income Tax Return for Estates and Trusts, filed

for the years at issue.

     In early 2001, upon learning that one of the promoters of

NTS stole money from an investment promoted by NTS, petitioners

sought advice about the legality of the trusts from attorney

David Kallman.   Mr. Kallman provided petitioners with information

about the classification of business trusts for Federal income

tax purposes.    He advised petitioners to consult David Carter, an

attorney who is also a certified public accountant (C.P.A.)

regarding the income tax issues of the trusts.      At petitioners’

request, Mr. Kallman amended the terms of the trusts in July

2001.
                                  -4-

     Petitioners timely filed Federal individual as well as trust

income tax returns for the years at issue.    On September 28,

2005, separate notices of deficiency were sent to each party.     In

the notice of deficiency sent to petitioners Glenn and Carol

Kierstead, respondent determined that the trusts must be

disregarded for Federal income tax purposes.    Petitioners Glenn

and Carol Kierstead, as well as the two trusts, timely filed

petitions with the Court on December 22, 2005.

                                OPINION

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

of an underpayment attributable to a substantial understatement

of income tax.   While the Commissioner bears the initial burden

of production and must come forward with sufficient evidence

showing it is appropriate to impose an accuracy-related penalty,

the taxpayer bears the burden of proof as to any exception to the

penalty.   See sec. 7491(c); Rule 142(a); Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001).    In order to meet the burden of

proof, a taxpayer must present evidence sufficient to persuade

the Court that the Commissioner’s determination is incorrect.

Higbee v. Commissioner, supra at 447.     Petitioners concede that

respondent has met his burden of production.    However, they argue

that they are not liable for a portion of the section 6662(a)

penalties because they, in good faith, relied on the advice of

two competent tax professionals.
                                -5-

        An accuracy-related penalty is not imposed on any portion

of the understatement as to which the taxpayer acted with

reasonable cause and in good faith.   Sec 6664(c)(1).   Reliance on

the advice of a tax professional may constitute reasonable cause

and good faith, if under all the facts and circumstances the

reliance is reasonable and in good faith.     Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd.

299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c)(1), Income Tax

Regs.   To qualify for this exception, a taxpayer must prove by a

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

competent professional who had sufficient expertise to justify

reliance; (2) the taxpayer provided necessary and accurate

information to the adviser; and (3) the taxpayer actually relied

in good faith on the adviser’s judgment.     Neonatology Associates,

P.A. v. Commissioner, supra at 98-99.

     Petitioners contend that their reliance on attorneys Kallman

and Carter relieves them from the accuracy-related penalties.    We

disagree.   Respondent has not disputed that petitioners satisfied

part (2) of the 3-prong test.   Accordingly, the issue to be

determined is whether petitioners actually relied in good faith

on the advice of competent tax professionals possessing

sufficient expertise to justify their reliance.

     In 2001, petitioners consulted Mr. Kallman, an attorney with

24 years’ experience regarding the trusts.    Mr. Kallman does not
                                 -6-

hold himself out as a tax attorney, nor does he prepare tax

returns.    Mr. Kallman provided petitioners with limited tax

advice about the tax treatment of business trusts.    He also

provided general tax information that business expenses, but not

personal expenses, were allowed as deductions.    Mr. Kallman was

careful to qualify any tax advice by telling petitioners to

consult their tax attorney and accountant.    Therefore,

petitioners did not rely on Mr. Kallman’s advice in the

preparation and filing of their Federal individual and trust

income tax returns.

     On the advice of Mr. Kallman, petitioners consulted David

Carter, an attorney and C.P.A., regarding tax issues of the

trusts.    Petitioner Glenn Kierstead testified that Mr. Carter

“said he was very comfortable with [the trusts].”    Though

petitioners listed Mr. Carter as a potential witness, he did not

testify at trial.    Petitioners introduced no evidence as to Mr.

Carter’s qualifications as a tax expert other than Mr. Kallman’s

testimony that he was an attorney with a C.P.A. background.      No

evidence has been submitted of any specific tax advice provided

by Mr. Carter relating to petitioner’s assignment of lifetime

earnings to the trusts or the allowance of deductions for

personal expenses.    For these reasons, petitioners failed to

prove that Mr. Carter was a competent tax professional and that

petitioners were justified in relying on his opinion.
                                  -7-

     Because petitioners failed to prove they reasonably relied

on a competent tax professional, and because they failed to

assert any other basis for relief, we hold that petitioners

failed to prove that they had reasonable cause within the meaning

of section 6664(c).   Therefore, we find petitioners are liable

for accuracy-related penalties under section 6662(a) for the

years at issue.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,



                                        Decision will be entered

                                 under Rule 155 in docket No.

                                 24184-05.

                                        Decisions will be entered for

                                 petitioners in docket Nos. 24183-05

                                 and 24185-05.
