                         T.C. Memo. 2011-27



                       UNITED STATES TAX COURT



           STEPHEN L. AND CINDY C. FLETCHER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 23968-07, 23969-07,     Filed January 31, 2011.
                 23970-07, 23971-07.



     Chaya Kundra and Heather L. Bravi, for petitioners.

     Erin R. Hines, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:    The sole issue for decision in these

deficiency cases is whether petitioners are liable for the

accuracy-related penalty under section 66621 in the following

amounts:


     1
      All section references are to the Internal Revenue Code.
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                                           Penalty
                      Year                Sec. 6662

                      1988                 $8,222
                      1990                  1,952
                      1991                  2,735
                      1992                  5,880

     The accuracy-related penalty arises from an adjustment of

flowthrough losses that were reported on petitioners’ 1991 and

1992 Federal income tax returns and then carried back to 1988 and

1990.   These adjustments are the result of petitioners’

involvement in cattle breeding and sheep breeding partnerships

organized and promoted by Walter J. Hoyt III.         From 1971 through

1992 Mr. Hoyt organized and promoted cattle breeding and sheep

breeding partnerships (collectively referred to as the Hoyt

partnerships).

                             FINDINGS OF FACT

     Petitioners resided in Maryland when they filed the

petitions in these consolidated cases.        Mr. and Mrs. Fletcher

both completed high school.      Neither has had any training or

experience in accounting or tax return preparation.        Both were

raised in farming communities.

     Mr. Fletcher learned of the Hoyt partnerships through a

coworker while employed in Florida.        Petitioners subsequently

received brochures and promotional materials about the Hoyt

partnerships.    In 1991 petitioners purportedly invested in the

Hoyt partnerships, specifically Durham Farms #3 (Durham Farms)
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and Washoe Ranches #6 (Washoe Ranches).    Petitioners never signed

any partnership documents such as subscription agreements for

either Durham Farms or Washoe Ranches, nor have they ever visited

any of the properties related to the Hoyt partnerships.

     Before becoming involved in the Hoyt partnerships,

petitioners engaged the services of Frank Sutton, a certified

public accountant, located in Kinston, North Carolina, to prepare

their 1988 and 1989 Federal tax returns; petitioners used H & R

Block to prepare their 1990 return.    At trial Mr. Fletcher

maintained he had consulted with both Mr. Sutton and H & R Block

regarding the Hoyt partnerships, but his testimony was vague and

not credible in this regard.   Neither Mr. Sutton nor H & R Block

provided petitioners with a prospectus about the Hoyt

partnerships.

     Once petitioners became investors, the Hoyt partnerships

offered them the tax preparation services of Laguna Tax Service

(Laguna) to prepare their Federal tax returns.    Beginning with

the 1991 return Laguna played an important role in facilitating

petitioners’ alleged investment in the Hoyt partnerships because

their initial payment was funded by refunds, resulting in claimed

losses on the 1991 return and carryback losses to their 1988 and

1990 years.   As a result of carrying the 1991 loss back,

petitioners claimed refunds for 1988 and 1990 of $41,113 and

$9,762, respectively, on a Form 1045, Application for Tentative
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Refund, which was prepared by Laguna, signed by petitioners, and

filed in September 1992.     The Form 1045 adjusted income initially

reported on petitioners’ 1988 and 1990 returns.

     On May 22, 1992, petitioners signed a Form 1040, U.S.

Individual Income Tax Return, for 1991, and on April 15, 1993,

petitioners signed a Form 1040 for 1992.     Both returns were

prepared by Laguna.

     In October 1992 petitioners were issued refunds claimed on

their Form 1045.   On July 6, 1992, petitioners were issued a

refund of $9,221 for 1991.    On or about November 9, 1993,

respondent mailed petitioners a letter indicating that he had

reduced the amount of petitioners’ refund for 1992 attributable

to their investment in the Hoyt tax shelter.     Petitioners were

not issued any refund for 1992.

     On July 24, 2007, respondent issued a notice of deficiency

(notice) to petitioners for their 1988 tax year.     The notice

determined a section 6662(a) penalty attributable to disallowed

partnership losses for Durham Farms and Washoe Ranches as

reported on petitioners’ 1991 tax return and carried back to 1988

via Form 1045.   On July 24, 2007, respondent issued a notice for

1990 which reflected that petitioners were liable for a section

6662(a) penalty attributable to disallowed losses for Durham

Farms and Washoe Ranches as reported on their 1991 tax return and

carried back to 1990 via Form 1045.      On July 24, 2007, respondent
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issued a notice for 1991 to petitioners which also determined a

section 6662(a) penalty attributable to disallowed losses for

Durham Farms and Washoe Ranches reported on their 1991 Form 1040.

Finally, on July 24, 2007, respondent issued a notice for 1992

and likewise determined a section 6662(a) penalty attributable to

disallowed losses for Durham Farms and Washoe Ranches reported on

petitioners’ 1992 Form 1040.

     On August 27, 2008, petitioners made payments to respondent

of $38,413, $9,762, $13,678, and $29,400 for the 1988, 1990,

1991, and 1992 years, respectively, with respect to the

underlying tax liability.   Petitioners stipulated that they will

not challenge computational adjustments made as a result of the

underlying TEFRA partnership proceedings for Durham Farms or

Washoe Ranches.   However, for the years at issue, the penalties

are affected items which must be resolved at the partner level.

Cf. sec. 6221 (effective for years after Aug. 5, 1997).    On

October 17, 2007, petitioners timely filed petitions disputing

respondent’s determinations of penalties.

                                OPINION

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

penalty on an underpayment of tax required to be shown on a

return if the underpayment is attributable to a taxpayer’s

negligence or disregard of rules or regulations or substantial

understatement of income tax.    Section 6662(d)(1)(A) defines a
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substantial understatement of income tax as a tax understatement

that exceeds the greater of 10 percent of the tax required to be

shown on the taxpayer’s tax return or $5,000.

     Section 6662(c) defines negligence as including any failure

to make a reasonable attempt to comply with the provisions of the

internal revenue laws.   Negligence has also been defined as the

failure to exercise due care or the failure to do what a

reasonable and prudent person would do under the circumstances.

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

includes any failure by the taxpayer to keep adequate books and

records or to substantiate items properly.     Sec. 1.6662-3(b)(1),

Income Tax Regs.

     Courts deciding a taxpayer’s liability for a negligence

penalty generally look both to whether the underlying investment

was legitimate and to whether the taxpayer exercised due care in

the position taken on the return.      Sacks v. Commissioner, 82 F.3d

918, 920 (9th Cir. 1996), affg. T.C. Memo. 1994-217.     When an

investment has such obviously suspect tax claims as to put a

reasonable taxpayer under a duty of inquiry, a good faith

investigation of the underlying viability, financial structure,

and economics of the investment is required.     Roberson v.

Commissioner, T.C. Memo. 1996-335, affd. without published

opinion 142 F.3d 435 (6th Cir. 1998).
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     Section 6664(c)(1) provides an exception to the accuracy-

related penalty if it shown that the taxpayer had reasonable

cause and acted in good faith.    Sec. 6664(c)(1); sec. 1.6664-

4(b)(1), Income Tax Regs.   The decision as to whether the

taxpayer acted with reasonable cause and good faith depends upon

all the pertinent facts and circumstances.     Higbee v.

Commissioner, 116 T.C. 438, 448 (2001); see sec. 1.6664-4(b)(1),

Income Tax Regs.

     Relevant factors include the taxpayer’s efforts to assess

his proper tax liability, including the taxpayer’s reasonableness

and good faith reliance on the advice of a professional such as

an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.     Reliance

on the advice of a professional tax adviser can be a defense to

the negligence penalty but does not necessarily demonstrate

reasonable cause and good faith.     United States v. Boyle, 469

U.S. 241, 250-251 (1985).   Respondent has carried the threshold

burden of production under section 7491(c), and petitioners bear

the burden of proving reasonable cause with respect to reliance

on the advice of a tax professional and must establish:     (1) That

the tax professional was competent and had expertise in the area

at issue; (2) that petitioners provided the tax professional with

all the necessary and accurate information; and (3) that
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petitioners relied upon the opinion of the tax professional in

good faith.   See United States v. Boyle, supra; Tash v.

Commissioner, T.C. Memo. 2008-120.

     Respondent argues that petitioners’ underpayments were

attributable to substantial understatements of income tax within

the meaning of section 6662(d).    Respondent also argues that

petitioners’ underpayments were attributable to negligence or

disregard of rules or regulations.       Finally, respondent argues

that petitioners have not established that they had reasonable

cause for the underpayments under section 6664(c).       Petitioners

counter that they acted with reasonable cause.       Petitioners

viewed the Hoyt partnerships as an investment in an agricultural

industry with which they were familiar and contend that they had

reasonable cause and acted in good faith in relying on advice

from their accountants.

     Petitioners placed their trust entirely with the Hoyt

organization’s personnel and did not seek the advice of

independent tax professionals.    Mr. Fletcher testified as to

alleged conversations with the preparer of a prior tax return,

Mr. Sutton, about the Hoyt organization, but the testimony was

neither specific nor credible.    At one point Mr. Fletcher

testified that Mr. Sutton warned him about IRS scrutiny of the

Hoyt organization.   However, if Mr. Fletcher actually had a

conversation with Mr. Sutton, he did not investigate this warning
                                 - 9 -

concerning the IRS’ scrutiny of Hoyt tax shelters.         Petitioners

did not receive any written opinions in support of their

investment in the Hoyt partnerships from any independent tax

professional.

     Petitioners cite their familiarity with farming, but they

have established no efforts to verify the alleged Hoyt breeding

activities.

     The record consistently reflects that petitioners funneled

large sums of money to the Hoyt partnerships in 1992 with funds

generated by carrying back fictitious losses from 1991.        The

substantial losses petitioners claimed warranted additional

scrutiny into the legitimacy of the transactions.

     In sum, petitioners have not established that they had

reasonable cause or acted in good faith when they claimed the

purported losses.   They did not question the amended returns

completed by Laguna.   Rather, they negligently pursued an

aggressive tax position by asserting fictitious losses as part of

their scheme with the Hoyt organization.       Accordingly, we sustain

respondent’s determination that petitioners are liable for the

accuracy-related penalty for negligence for the years in issue.

     To reflect the foregoing,


                                              Decisions will be entered

                                         for respondent.
