                     T.C. Summary Opinion 2011-94



                       UNITED STATES TAX COURT



    DAVID H. ZATZ AND JOAN CASSIDY O’HOLLAND, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12618-10S.             Filed July 19, 2011.



     Pattie S. Christensen, for petitioners.

     Richard W. Kennedy, for respondent.



     SWIFT, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1 Pursuant to section 7463(b), the




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

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

     Respondent proposed deficiencies and penalties with respect

to petitioners’ 2000, 2001, 2002, and 2003 Federal income taxes

as follows:

                                                Penalty
              Year          Deficiency        Sec. 6662(a)

              2000           $6,785             $1,357
              2001           66,079             13,216
              2002           62,172             12,434
              2003           26,801              5,360

     Petitioners conceded that the proposed tax deficiencies were

correct and paid the proposed deficiencies before the issuance of

the notice of deficiency.   The only issue before us is whether

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

penalties due to negligence or substantial understatement of

income tax.

                             Background

     This case has been fully stipulated under Rule 122, and the

stipulated facts are so found.

     At the time of filing the petition, petitioners resided in

Utah.

     David H. Zatz (petitioner) owned 100 percent of Crossways

Corp. (Crossways), a lucrative Utah corporation engaged in the

business of managing condominiums.       Before the establishment of
                                - 3 -

the various other entities described below, Crossways paid

petitioner a substantial salary for his personal services,

apparently as president and chief executive officer.2

     In 2000 petitioner contacted a number of financial planners

to obtain tax advice.    For a fee of $30,000 petitioner hired

Hewlett Brothers Financial (HBF), a Utah financial advisory firm

owned by John Hewlett.

     HBF presented to petitioner a plan to reduce his Federal

income and employment taxes and Utah State income taxes under

which his salary each year from Crossways would be reported not

just by him; rather, his salary would be divided and reported in

part by him and in part by other entities that would be formed

and effectively controlled by him (the plan).

     Also, under the plan petitioner (and possibly his wife)

would transfer to the other entities (to be set up and controlled

by him) ownership of a number of personal assets (e.g., home,

cars, airplane, and sailboats), and expenses relating to these

assets would be deducted as business expenses.

     Larry Cox (Cox), a Utah licensed certified public accountant

(C.P.A.), and Miles Lignell (Lignell), a Utah attorney, both

apparent employees of HBF and not working independently of HBF,

prepared certain financial, legal, and tax documents for the



     2
      The record does not reflect petitioner’s exact title and
responsibilities with Crossways.
                               - 4 -

entities that petitioner would form.   At some point petitioner

questioned Cox and Lignell about the legitimacy of the purported

tax benefits of the plan.   Cox and Lignell “assured” petitioner

that the plan was within the law.

     In its promotional materials or presentations to petitioner

HBF also represented that the strategy proposed in the plan had

been reviewed with approval by “prominent and prestigious

accounting and law firms” and that the Internal Revenue Service

(IRS) “blesses” the HBF “process”.

     No copy of any independent accounting or legal opinion

relating to the plan was offered into evidence.   HBF’s

representation that the IRS blesses the HBF strategy was false.

     Although petitioner interviewed other financial advisers

before formally engaging HBF,3 petitioners relied solely upon the

advice of Cox and Lignell in deciding to implement the plan.

     In 2000 petitioner adopted HBF’s plan and formed the related

entities, and nominal ownership of a number of petitioners’

personal assets apparently was transferred to the related

entities.

     In 2000, 2001, 2002, and 2003, relating to and in

compensation for petitioner’s personal services for Crossways,

Crossways paid salaries or commissions of $156,667, $439,099,


     3
      The record does not disclose the names of any other
financial, tax, or other professionals from whom petitioners
sought advice, nor what advice, if any, was received.
                               - 5 -

$469,999, and $417,500, respectively.   As explained, under the

HBF plan the above amounts were split among petitioner and the

related entities, reported accordingly, and offset by large

personal expenses of petitioner’s that were claimed as business

expenses of the related entities.

     Of the total above salary or commission amounts Crossways

paid with respect to petitioner’s services in 2000, 2001, 2002,

and 2003, approximately 33, 78, 75, and 70 percent, respectively,

were offset by the claimed expenses.

     To prepare their 2000, 2001, 2002, and 2003 Federal income

tax returns, petitioners hired FPG Business Services (FPG), an

independent accounting firm unrelated to HBF.   Apparently,

petitioners relied on HBF to provide FPG with the financial data

required to file petitioners’ Federal income tax returns, and FPG

prepared petitioners’ tax returns on the basis of information HBF

provided.

     Petitioners discussed the tax returns with FPG and were told

that the returns accurately reflected the financial data that HBF

had provided.   Petitioners did not seek advice from FPG as to the

legitimacy of the plan under Federal tax law.

     On audit respondent recast the salaries or commissions paid

by Crossways with respect to petitioner’s services as income

received solely by petitioner, disallowed the business expense

deductions claimed by the various entities that had been formed,
                                   - 6 -

reallocated legitimate deductions to petitioners’ individual tax

returns, and proposed the tax deficiencies and section 6662(a)

accuracy-related penalties set forth above.

       Before the issuance of a notice of deficiency, petitioners

agreed with and paid the tax deficiencies.     The only matter in

dispute is respondent’s determination of the section 6662(a)

accuracy-related penalties.

                              Discussion

       Section 6662(a) authorizes respondent to impose a 20-percent

penalty for negligence or substantial understatement of income

tax.    Sec. 6662(b)(1) and (2).    For the purposes of section 6662,

negligence is defined as the failure to exercise the due care of

a reasonable and ordinarily prudent person under like

circumstances.    Neely v. Commissioner, 85 T.C. 934, 947 (1985).

A substantial understatement of income tax is defined as an

understatement of tax that exceeds the greater of 10 percent of

the tax required to be shown on the return or $5,000.     Sec.

6662(d)(1)(A).

        Petitioners agree with the tax deficiencies for 2000

through 2003.    Accordingly, respondent has met his burden of

production, and the burden of proof is on petitioners to show

that the section 6662(a) accuracy-related penalty does not apply

for any year.    See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).
                                - 7 -

     Section 6664(c)(1) provides a defense to the section 6662(a)

accuracy-related penalty where the taxpayer establishes that

there was reasonable cause for a portion of an underpayment and

that the taxpayer acted in good faith with respect to such

portion.   The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the facts and circumstances,

including the taxpayer’s efforts to assess his proper tax

liability, the knowledge and experience of the taxpayer, and

reliance on the advice of a tax professional.    Sec. 1.6664-

4(b)(1), Income Tax Regs.

     Reasonable cause may be established where a taxpayer relies

on the advice of a competent tax adviser even where the advice

was wrong.   See Hatfried, Inc. v. Commissioner, 162 F.2d 628, 635

(3d Cir. 1947), affg. in part and revg. in part a Memorandum

Opinion of this Court; Girard Inv. Co. v. Commissioner, 122 F.2d

843, 848 (3d Cir. 1941).    However, the adviser must be a

competent professional with sufficient expertise to justify the

taxpayer’s reliance, the taxpayer must have provided necessary

and accurate information to the adviser, and the taxpayer must

have actually relied in good faith on the adviser.    Neonatology

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

299 F.3d 221 (3d Cir. 2002); Sklar, Greenstein & Scheer, P.C. v.

Commissioner, 113 T.C. 135, 144-145 (1999).
                                - 8 -

       Petitioner claims that his reliance on C.P.A. Cox and

Attorney Lignell was in good faith and should establish

reasonable cause.

       We look first to determine whether Cox and Lignell had

sufficient expertise to justify petitioner’s reliance.

Petitioner emphasizes that both Cox and Lignell were licensed in

their fields.    Being licensed as an accountant or attorney,

however, is only a minimum requirement to practice as an attorney

or accountant and by itself does not establish expertise in tax

law.

       Relying on assurances of professionals may demonstrate good

faith, but only when the professionals are acting independently

from the entity promoting the claimed benefits.    Van Scoten v.

Commissioner, 439 F.3d 1243, 1253 (10th Cir. 2006), affg. T.C.

Memo. 2004-275; Mortensen v. Commissioner, 440 F.3d 375, 387 (6th

Cir. 2006), affg. T.C. Memo. 2004-279; Rybak v. Commissioner, 91

T.C. 524, 565 (1988).    The evidence does not indicate that Cox

and Lignell were providing advice to petitioner independently of

HBF.    See Mortensen v. Commissioner, supra at 387.   Advice from

otherwise qualified professionals with an interest in the

transaction “is better classified as sales promotion.”     Vojticek

v. Commissioner, T.C. Memo. 1995-444.    The conflict of interest

inherent in the relationships between HBF and Cox and Lignell
                                - 9 -

should have caused petitioner to seek advice from an independent

adviser.

       Petitioner points to a brochure of HBF which purports to

list the qualifications of Cox and Lignell.    However, this self-

serving HBF brochure is not sufficient evidence to establish that

Cox and Lignell in fact were qualified and independent tax

experts on whose advice petitioner reasonably relied.    Both

worked for HBF.    Their testimony was not presented to us.

       We conclude that petitioner’s reliance on Cox and Lignell

does not constitute reasonable cause.

       Petitioners argue that they relied on the advice of FPG--an

independent tax preparer--to prepare their Federal income tax

returns.    Petitioners emphasize that FPG had no association with

HBF.    However, reliance on a second professional’s advice is

subject to the same test discussed above.    See Addington v.

Commissioner, 205 F.3d 54, 59 (2d Cir. 2000), affg. Sann v.

Commissioner, T.C. Memo. 1997-259; Collins v. Commissioner, 857

F.2d 1383, 1386 (9th Cir. 1988), affg. Dister v. Commissioner,

T.C. Memo. 1987-217.

       It appears that FPG was not provided the complete and

accurate information necessary to prepare accurately petitioners’

Federal income tax returns.    As has been stated:   “The mere fact

that a certified public accountant has prepared a tax return does

not mean that he or she has opined on any or all of the items
                              - 10 -

reported therein.”   Neonatology Associates, P.A. v. Commissioner,

supra at 100.   The details of the discussions petitioners had

with representatives of FPG are not in the record, and there is

no evidence that petitioners either asked FPG to conduct a

meaningful review of the plan or that FPG did so on its own.     FPG

represented to petitioners that the returns were correct only

according to the financial data HBF provided.      FPG did not claim

that the plan HBF established was proper; FPG simply stated that

the returns accurately reflected data HBF provided.

     Petitioner appears to be a successful businessman and

should not have implemented HBF’s plan without consulting

independent tax or legal counsel.

     Petitioners pursued what appears to have been a patently

improper tax avoidance scheme which they have conceded was

improper.   Petitioners have not established reasonable cause for

the accuracy-related penalties.

     We sustain respondent’s determination of the section 6662(a)

accuracy-related penalty for each of the years in issue.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
