                                  T.C. Memo. 2014-175



                            UNITED STATES TAX COURT



           TERRY L. WRIGHT AND CHERYL A. WRIGHT, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 30957-09.                             Filed August 28, 2014.



      Terry L. Wright and Cheryl A. Wright, pro sese.

      Christopher S. Kippes, for respondent.



                              MEMORANDUM OPINION


      FOLEY, Judge: The issues for decision, relating to 2002 (year in issue), are

whether petitioners are liable for an income tax deficiency and a section 6662(a)

accuracy-related penalty.1


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                        -2-

[*2]                                Background

       During the year in issue, Terry Wright was a professional investor. Mr.

Wright and his wife, Cheryl, owned 100% of Cyber Advice, LLC (Cyber Advice).

In December 2002, Cyber Advice purchased a euro put option and, several days

later, assigned it to a charity (transaction).2 On its 2002 Form 1065, U.S. Return

of Partnership Income, Cyber Advice reported a short-term capital loss of over $3

million relating to the transaction.3 The tax effects flowed through to petitioners,

who reported a short-term capital loss of approximately $3 million on their 2002

Form 1040, U.S. Individual Income Tax Return.

       The law firm of Larry C. Fedro & Associates, P.A. (Fedro law firm), issued

Cyber Advice a tax opinion relating to the transaction.4 The opinion stated that



       1
       (...continued)
Revenue Code in effect relating to the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
       2
     Additional facts relating to the transaction are set forth in Wright v.
Commissioner, T.C. Memo. 2011-292.
       3
       Relying on Greene v. United States, 79 F.3d 1348 (2d Cir. 1996), Cyber
Advice took the position that, pursuant to sec. 1256(g)(2), the euro put option was
a “foreign currency contract” that terminated upon its assignment to the charity
pursuant to sec. 1256(c).
       4
      The tax opinion was dated December 20, 2002, but was issued to Cyber
Advice in March 2003.
                                         -3-

[*3] Cyber Advice’s tax treatment of the transaction was “more likely than not” to

be “upheld by a court if * * * challenged by the IRS and fully litigated on the

merits”. At the time the Fedro law firm issued the opinion, the firm’s principal,

Larry C. Fedro, did not have significant experience relating to the taxation of

foreign currency options. In preparing the tax opinion, the Fedro law firm

reviewed a copy of unsigned investor representations and an engagement letter.

The opinion stated that the Fedro law firm relied upon certain “representations and

advice” provided to it by Cyber Advice and that the opinion could not be relied on

if such representations and advice were “inaccurate in any material respect, or

* * * prove not to be authentic”. In a March 9, 2003, letter to Cyber Advice

transmitting the tax opinion, Mr. Fedro wrote that “[w]hile we are furnishing you

the opinion letter, please be advised that the opinion letter may not be relied upon

(and is not otherwise released) unless and until we have * * * the Investor

Representations fully executed by you”.

      In 2002, petitioners’ estate tax attorney was Frank O. Hendrick III and their

accountant was John Carpentier. Neither Mr. Hendrick nor Mr. Carpentier had

significant experience relating to the taxation of foreign currency options. Prior to

the time Cyber Advice engaged in the transaction, Mr. Hendrick conducted limited

research relating to the transaction and failed to read all of the tax opinion. He
                                          -4-

[*4] prepared petitioners’ 2002 Form 1040 and advised them that the tax opinion

set forth a reasonable position consistent with the Internal Revenue Code.

      In October 2009, respondent issued petitioners a notice of deficiency

determining that they were liable for a $603,093 income tax deficiency relating to

2002. In addition, respondent determined that petitioners had substantially

understated their income tax and were liable, pursuant to section 6662(a) and

(b)(2), for a $120,619 accuracy-related penalty. On August 1, 2011, the Court

filed respondent’s motion for partial summary judgment, pursuant to which

respondent sought judgment that petitioners’ euro put option was not a “foreign

currency contract” within the meaning of section 1256(g)(2). The Court, pursuant

to Wright v. Commissioner, T.C. Memo. 2011-292, issued an order granting

respondent’s motion. The parties submitted to the Court, fully stipulated pursuant

to Rule 122, the issue of whether petitioners are liable for a section 6662(a)

accuracy-related penalty.

                                      Discussion

      In their brief, petitioners address only their liability relating to a section

6662(a) accuracy-related penalty and do not further contest the 2002 income tax

deficiency. Accordingly, respondent’s deficiency determination is sustained

pursuant to our opinion in Wright.
                                         -5-

[*5] Petitioners contend they relied, reasonably and in good faith, on the Fedro

law firm’s tax opinion and thus are not liable for a penalty.5 Petitioners failed to

establish reasonable cause and good-faith reliance on the Fedro law firm’s tax

opinion and did not make a reasonable effort to assess their tax liability. See sec.

1.6664-4(b)(1), (c)(1), Income Tax Regs. Mr. Fedro lacked the requisite tax

expertise to justify petitioners’ reliance. See Neonatology Assocs., P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

Moreover, the Fedro law firm required, but petitioners did not provide, signed

investor representations. See id. The Fedro law firm informed petitioners that

“the opinion letter may not be relied upon (and is not otherwise released) unless

and until we have * * * the Investor Representations fully executed by you.”

Petitioners’ reliance on the tax opinion was accordingly unreasonable. See sec.

1.6664-4(b)(1), Income Tax Regs. Furthermore, petitioners failed to establish that

they relied upon either Mr. Hendrick’s or Mr. Carpentier’s advice. See sec.

1.6664-4(c)(1), Income Tax Regs. We note that neither adviser had relevant


      5
       Respondent has established that petitioners’ understatement of income tax
was substantial because it exceeded 10% of the tax required to be shown on the
return and was an amount greater than $5,000. See sec. 6662(d)(1)(A).
Accordingly, respondent has met his burden of production and petitioners bear the
burden of proving a defense to the penalty. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001).
                                         -6-

[*6] experience sufficient to justify petitioners’ reliance. See Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. at 99.

      Finally, petitioners contend that the Fedro law firm’s tax opinion was,

pursuant to section 6662(d)(2)(B), substantial authority for their understatement.

The Fedro law firm based its opinion that a foreign currency option constitutes a

foreign currency contract primarily on its interpretation of section 1256. This

interpretation, however, was not well reasoned and ignored the plain language of

the statute. See Summitt v. Commissioner, 134 T.C. 248, 264-265 (2010) (stating

that “[i]t is clear that, as originally enacted in 1982, section 1256(g)(1) applied

only to forward contracts”, that it is “also clear” that the 1984 amendment to

section 1256(g)(2) did not bring foreign currency options within the definition of

foreign currency contracts, and that “[t]he statute’s plain language is dispositive”);

sec. 1.6662-4(d)(3)(ii), Income Tax Regs. Accordingly, the Fedro law firm’s tax

opinion did not constitute, nor did it rely upon, substantial authority. See sec.

1.6662-4(d)(3)(ii) and (iii), Income Tax Regs.

      Contentions we have not addressed are irrelevant, moot, or meritless.
                                 -7-

[*7] To reflect the foregoing,


                                             Decision will be entered for

                                       respondent.
