                  T.C. Memo. 2010-82



                UNITED STATES TAX COURT



AILEEN YAT MUK LAM AND SHAOPING CHANG, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13302-08.             Filed April 19, 2010.



     R determined tax deficiencies and accuracy-related
penalties pursuant to sec. 6662(a), I.R.C., for Ps’
2004 and 2005 tax years. The parties stipulated Ps’
deficiencies for 2004 and 2005.

     Held: Ps are liable for sec. 6662(a), I.R.C.,
accuracy-related penalties for 2004 and 2005.



Aileen Yat Muk Lam and Shaoping Chang, pro sese.

Nathan C. Johnston, for respondent.
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             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:    This case is before the Court on a petition

for redetermination of deficiencies.    After concessions, the sole

issue left for decision is whether petitioners are liable for

section 6662(a)1 accuracy-related penalties for tax years 2004

and 2005 of $1,013.80 and $867.80, respectively.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the

stipulations, with accompanying exhibits, are incorporated herein

by this reference.    At the time the petition was filed,

petitioners resided in California.

     During 2004 and 2005 Aileen Yat Muk Lam (Ms. Lam) operated a

real estate business and reported its income and expenses on

Schedule C, Profit or Loss From Business.    Respondent issued a

deficiency notice on February 25, 2008, determining that

petitioners were liable for Federal income tax deficiencies of

$5,069 for 2004 and $4,339 for 2005.    The notice of deficiency

also determined that petitioners were liable for section 6662(a)

accuracy-related penalties for 2004 and 2005 of $1,013.80 and

$867.80, respectively.




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue.
                                - 3 -

     Petitioners’ 2004 and 2005 joint Forms 1040, U.S. Individual

Income Tax Return, were prepared by Ms. Lam using TurboTax.      In

2004 and 2005, she reported expenses related to her real estate

business as well as unrelated losses on a single Schedule C for

each taxable year.    Adjustments to this schedule resulted in most

of petitioners’ deficiencies and primarily stemmed from the fact

that respondent disallowed petitioners’ reported rental losses

and recharacterized the trading losses as capital losses.      The

rental losses were disallowed under section 280A because the

property was used for personal use, as her father lived in the

rental property rent free.2   The trading losses were allowable

only as capital losses and were moved to Schedule D, Capital

Gains and Losses.    Similar adjustments were made for 2005.

     On June 2, 2008, petitioners filed a timely petition with

this Court arguing that they were not liable for the section

6662(a) accuracy-related penalties for 2004 and 2005.    The

parties filed a stipulation of settled issues in which

petitioners conceded that they were liable for the tax

deficiencies determined in respondent’s notices of deficiency for

both the 2004 and 2005 tax years.    The stipulation left

unresolved petitioners’ liability for the section 6662 penalties.


     2
      Sec. 280A generally disallows a deduction with respect to a
dwelling unit if it is used by the taxpayer, or by a member of
the taxpayer’s family, as a residence. Under sec. 280A(d)(3)(A)
a taxpayer is not treated as using a dwelling unit as a residence
if the unit is rented to a family member at a fair rental price.
                                 - 4 -

A trial on the penalty issues was held on June 18, 2009, in Los

Angeles, California.

                                OPINION

I. Burden of Proof

     Under section 7491(c), respondent bears the burden of

production with respect to petitioners’ liability for the section

6662(a) penalties.    This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.”    See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).

     Respondent has met the section 7491(c) burden of production

with respect to the accuracy-related penalty, as explained below.

The Court ultimately finds unavailing petitioners’ argument that

they are not liable for the accuracy-related penalty for 2004 and

2005 because they acted with reasonable cause by making

consistent mistakes using TurboTax to prepare their 2004 and 2005

joint Federal income tax returns.

II. Accuracy-Related Penalty

      Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b).       Respondent asserts that one

or both of two causes justify the imposition of the penalty for

each year:    a substantial understatement of income tax and

negligence.    Sec. 6662(b)(1) and (2).    The Court infers
                               - 5 -

respondent is aware that the deficiency for 2005, of less than

$5,000, is too small to serve as the basis on which to impose a

penalty for substantial understatement.

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

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

respect to the underpayment.   Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

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

     There is a “substantial understatement” of income tax for

any tax year where the amount of the understatement exceeds the

greater of (1) 10 percent of the tax required to be shown on the

return for the tax year or (2) $5,000.    Sec. 6662(d)(1)(A).

However, the amount of the understatement is reduced to the

extent attributable to an item (1) if there is or was substantial

authority for the taxpayer’s treatment thereof, or (2) with

respect to which the relevant facts were adequately disclosed on

the taxpayer’s return or an attached statement and there is a

reasonable basis for the taxpayer’s treatment of the item.      See

sec. 6662(d)(2)(B).   There is no substantial authority for the

tax positions taken on petitioners’ tax returns.    Petitioners did

not adequately disclose on either return or in a statement
                               - 6 -

attached to either return, the relevant facts affecting their

treatment of any item in question, nor is there a reasonable

basis for such treatment.

     Section 6662(a) also imposes a penalty for negligence or

disregard of the rules or regulations.   Under this section

“negligence” is “any failure to make a reasonable attempt to

comply with the provisions of this title”.   Sec. 6662(c).    Under

caselaw, “‘Negligence is a lack of due care or the failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.’”   Freytag v. Commissioner, 89 T.C. 849, 887

(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.

1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).

     There is a substantial understatement of income tax for

petitioners’ 2004 return.   For their 2004 tax year, petitioners

reported no tax liability on their joint Federal income tax

return.   On the basis of the stipulations, petitioners’ tax

liability for 2004 was $5,069, a $5,069 understatement.

     The amount of petitioners’ 2005 deficiency is insufficient

to justify a finding of a substantial understatement of income

tax under section 6662(d)(1)(A).   However, respondent also claims

that petitioners were negligent in the preparation of their 2004

and 2005 federal income tax returns and that accordingly the
                                 - 7 -

section 6662(a) penalty should be imposed for 2005 as well.         At

trial respondent argued that petitioners did not seek the help of

a tax professional, consult the Internal Revenue Service (IRS),

visit the IRS’ Web site, or otherwise read any instructions for

filing a Schedule C and thus petitioners did not behave

reasonably in filing their 2004 and 2005 tax returns.

      At trial Ms. Lam repeatedly argued that petitioners

consistently filled out their tax returns using TurboTax and that

she consistently confused capital gains and losses with ordinary

income and expenses.   Although the Court concludes the errors in

petitioners’ tax preparation were made in good faith, petitioners

have not established that they behaved in a manner consistent

with that of a prudent person.    Before the trial petitioners

stipulated that they did not consult a tax professional or visit

the IRS’ Web site for instructions on filing the Schedule C.

     We do not accept petitioners’ misuse of TurboTax, even if

unintentional or accidental, as a defense to the penalties on the

basis of the facts presented.    See, e.g., Bunney v. Commissioner,

114 T.C. 259 (2000).   But see Thompson v. Commissioner, T.C.

Memo. 2007-174 (where, on the entire record, the Court did find

that the taxpayer behaved reasonably in obtaining software to aid

in the preparation of his return).       At trial Ms. Lam did not

attempt to show a reasonable cause for petitioners’ underpayment

of taxes. Instead, she analogized her situation to that of the
                                 - 8 -

Secretary of the Treasury, Timothy Geithner.   Citing a Wikipedia

article, Ms. Lam essentially argues that, like Secretary

Geithner, she used TurboTax, resulting in mistakes on her taxes.

In short, it was not a flaw in the TurboTax software which caused

petitioners’ tax deficiencies.    “Tax preparation software is only

as good as the information one inputs into it.”    Bunney v.

Commissioner, supra at 267.   Because petitioners have not “shown

that any of the conceded issues were anything but the result of

[their] own negligence or disregard of regulations”, they are

liable for the section 6662(a) penalties.    Id.

      The duty to file an accurate tax return generally cannot be

avoided by shifting responsibility to a tax return preparer.

See, e.g., Pritchett v. Commissioner, 63 T.C. 149, 174 (1974).

However, reliance upon the advice of a tax professional may

establish, if warranted by the facts and circumstances,

reasonable cause and good faith for the purpose of avoiding a

section 6662(a) penalty.   See United States v. Boyle, 469 U.S.

241, 250 (1985) (“Courts have frequently held that ‘reasonable

cause’ is established when a taxpayer shows that he reasonably

relied on the advice of an accountant or attorney”).   Such

reliance, “standing alone” does not serve as an “absolute defense

to negligence”; it is merely “a factor to be considered.”

Freytag v. Commissioner, supra at 888; see also Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd.
                                 - 9 -

299 F.3d 221 (3d Cir. 2002).   However, Ms. Lam did not rely on a

professional preparer, but used TurboTax and stipulated to

preparing her own returns without a tax professional.

     Respondent has satisfied the burden of production with

respect to the section 6662(a) penalties.    Petitioners’

understatement of tax on their 2004 return is substantial under

section 6662(d)(1)(A) because it exceeds $5,000 and is greater

than 10 percent of the amount required to be shown on their

return.   Petitioners’ 2004 and 2005 returns were both filed

negligently.   The burden is therefore on petitioners to prove

that they acted with reasonable cause and in good faith.    We find

that petitioners failed to carry their burden.

III. Conclusion

      Accordingly, the Court sustains respondent’s determination

that petitioners are liable for the section 6662(a) accuracy-

related penalties for their 2004 and 2005 tax years.    The Court

has considered all of petitioners’ contentions, arguments,

requests, and statements.   To the extent not discussed herein, we

conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
