                         T.C. Memo. 2010-273



                      UNITED STATES TAX COURT



          THOMAS AND DEBORAH MCINTYRE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 24581-07, 21997-08.    Filed December 13, 2010.



     Terri A. Merriam, Jaret R. Coles, and Adam J. Blake,1 for

petitioners.

     Nhi T. Luu, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:    These consolidated cases are affected items

proceedings stemming from petitioners’ involvement in Hoyt cattle

partnerships almost twenty years ago.    Petitioners claimed Hoyt


     1
      Jaret R. Coles and Adam J. Blake both filed motions to
withdraw as petitioners’ counsel. We granted both motions.
                                  -2-

partnership losses totaling $826,337 on the returns for 1994 and

1996 (the relevant years).   After concessions2 the sole issue is

whether petitioners are liable for the section 6662 accuracy-

related penalties for those years.3     Rather than raise a

substantive defense, petitioners raise a procedural argument.

They argue they should not be held liable for the penalties

because they argue the penalties are based on invalid returns.

We find petitioners are liable for the penalties.

                          FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in Colorado

at the time they filed the petition in docket No. 24581-07.

They resided in Missouri at the time they filed the petition in

docket No. 21997-08.

Petitioners’ Background

     Petitioner husband (petitioner) has a bachelor’s degree in

business management with a minor in finance from Texas Tech.    He

has held various business-related positions, including manager of

a savings and loan company, mortgage banker and part owner of a




     2
      Petitioners concede they are liable for the sec. 6662
accuracy-related penalty for 1995.
     3
      All section references are to the Internal Revenue Code in
effect for the relevant years.
                                 -3-

temporary staffing business.    Petitioner sold his interest in the

temporary staffing business for a substantial amount in 1994.

Petitioners’ Investment With Hoyt

     Petitioner learned about the Hoyt organization4 in 1994.      He

attended a seminar on investing in the stock market and he

anticipated having funds to invest.    Another seminar attendee,

who had previously invested with Hoyt, informed petitioner of the

Hoyt investment opportunity.

     Petitioner paid the Hoyt organization $50 for promotional

materials pertaining to the cattle partnerships.    The materials

focused heavily on the investors’ “tax savings.”    One of the

documents described the investment several times as a “tax

shelter,” which petitioner admits was a “red flag” that warranted

further investigation.   The promotional materials also warned

that a change in tax laws or an Internal Revenue Service (IRS)

examination could subject the investor to penalties and interest

on the Federal tax liability.   Petitioner did not consult with a


     4
      Jay Hoyt organized and promoted to numerous investors, and
operated as a general partner, a total of almost 100 cattle-
breeding partnerships between 1971 and 1992. He also formed
partnerships to help manage or operate aspects of the Hoyt
organization that included preparing tax returns for each
investor. We determined in 2000 that Hoyt cattle operations
lacked economic substance. Durham Farms #1, J.V. v.
Commissioner, T.C. Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th
Cir. 2003). The Commissioner subsequently removed all Hoyt
income and deductions from the investor partnership returns, and
then he made computational adjustments to the individual
partners’ returns following the respective partnership
proceedings.
                                  -4-

tax consultant, attorney or any other independent adviser before

investing with Hoyt.

     Petitioner discussed the Hoyt cattle partnerships with Jay

Hoyt and Dave Barnes5 by telephone.     Petitioner believed that Jay

Hoyt’s certification as an enrolled agent meant that the Hoyt

cattle operations were legitimate.      Petitioner never met,

however, with anyone from the Hoyt organization in person, nor

did he visit any of the Hoyt ranches.      He spoke with only one of

the two or three references the Hoyt organization provided.        The

reference merely confirmed everything that petitioner had been

told about the Hoyt investment.

     Petitioner orally informed the Hoyt organization in 1995 of

his decision to invest in the cattle partnerships.      The Hoyt

organization sent petitioner paperwork, but petitioner does not

recall what documents, if any, he signed.      Petitioner did not

have any adviser or attorney review the paperwork.

     Petitioners paid the Hoyt organization $122,217 in 1996.6

They were partners in Durham Genetic Engineering 1986-2 (DGE 86-

2), Durham Genetic Engineering 1986-3 (DGE 86-3), Durham Genetic




     5
      Dave Barnes was an employee of the Hoyt organization. See
Keller v. Commissioner, T.C. Memo. 2006-131, affd. in part and
reversed in part 556 F.3d 1056 (9th Cir. 2009).
     6
      This amount includes the $50 payment petitioners made for
the promotional materials.
                                 -5-

Engineering 1986-4 (DGE 86-4), and Shorthorn Genetic Engineering

1990-1 (SGE 90-1) in 1996.

Petitioners’ Returns for the Relevant Years

       Petitioners had their personal accountant prepare their

individual Federal income tax return for each of the relevant

years.    These accountant-prepared documents did not include any

Hoyt partnership items.    Petitioners then submitted the

accountant-prepared documents to the Hoyt organization for the

addition of Hoyt partnership items, including losses.    The Hoyt

organization added the Hoyt losses to the documents and attached

Schedules K-1, Partner’s Share of Income, Credits, Deductions,

etc., before returning them to petitioners for filing with the

IRS.    These Hoyt-prepared returns and Schedules K-1 were the only

documents petitioners ever received from the Hoyt organization

after they “invested.”    Petitioners never contacted the Hoyt

organization to request, nor were they ever given, copies of the

partnership returns for any of their Hoyt investments.

       Petitioners filed with the IRS what the Hoyt organization

directed them to file as a return for 1996 (the 1996 filing).

The 1996 filing included a Form 1045, Application for Tentative

Refund, which attached a Form 1040, U.S. Individual Income Tax

Return, for 1996 and Schedules K-1 for the Hoyt partnerships for

1996.    Petitioners signed the Form 1045 under penalty of perjury

but did not sign the attached Form 1040.    Petitioners mailed the
                                 -6-

1996 filing via certified mail from Hempstead, Texas.    They

claimed Hoyt partnership losses totaling $862,337 on the Form

1040.    This amount of partnership losses was almost seven times

the amount petitioners had “invested” with the Hoyt organization

that year.    The partnership losses reduced petitioners’ tax

liability for 1996 to $392 and generated a $680,181 net operating

loss that petitioners carried back to 1994.    Petitioners

submitted a $392 check with the 1996 filing as payment of the tax

liability for 1996.

     Respondent processed the 1996 filing as a return for 1996

and a net operating loss carryback to 1994.    Respondent accepted

the $392 check as payment for the 1996 tax liability.

Respondent issued and mailed to petitioners a $269,499 refund for

1994.7

     Petitioners filed no other return for 1996.8

The Deficiency Notice

     Decision documents were entered in Hoyt partnership

proceedings for taxable year 1996.     Respondent made computational

adjustments to petitioners’ tax liabilities for each of the years



     7
      Petitioners had reported a $1,055,125 tax liability on the
original return for 1994.
     8
      Petitioners attempted to file on Apr. 15, 2002, an amended
return for 1996 that did not report any Hoyt losses or income.
The amended return is irrelevant, however, because it was filed
almost five years after the original 1996 return had been
processed.
                                  -7-

1994 through 1996 that were based on the decisions entered in the

partnership proceedings.     Respondent disallowed portions of

petitioners’ distributive shares of losses from the partnerships,

resulting in a $64,256 underpayment of Federal income tax for

1996.     Respondent also disallowed the net operating loss

carryback for 1994 and determined a $269,196 underpayment for

that year.     Respondent determined petitioners were liable for a

section 6662(a) accuracy-related penalty for each of the three

years.     Respondent issued petitioners affected items notices for

the deficiencies and penalties at issue.     As previously

mentioned, petitioners concede they are liable for the accuracy-

related penalty for 1995.     The penalties are $53,839.20 for 1994

and $9,306.20 for 1996.

                              Discussion

     The sole issue for decision9 is whether petitioners are

liable for the accuracy-related penalties10 for 1994 and 1996.



     9
      We have already determined that we have no jurisdiction
over respondent’s computational adjustments of the deficiencies
in these affected items proceedings. See McIntyre v.
Commissioner, T.C. Memo. 2009-305.
     10
      A taxpayer is liable for an accuracy-related penalty for
any portion of an underpayment attributable to, among other
things, a substantial understatement of income tax. Sec. 6662(a)
and (b)(2). There is a substantial understatement of income tax
if the amount of the understatement exceeds the greater of either
10 percent of the tax required to be shown on the return, or
$5,000. Sec. 6662(d)(1)(A); sec. 1.6662-4(b)(1), Income Tax
Regs. Respondent has met his burden of production with respect
to petitioners’ substantial understatement of income tax.
                                -8-

Petitioners acknowledge that they did not act reasonably or in

good faith as a defense against the penalties.11   They conceded

after trial that they have not established reasonable cause or

good faith.   See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C.

438, 446 (2001); sec. 1.6664-4(a), Income Tax Regs.    Instead

petitioners argue that they are not liable for the accuracy-

related penalties for 1994 and 1996 because of a procedural

defect.   They argue that the 1996 filing respondent processed was

an invalid return.   They claim that the Form 1040 included with

the 1996 filing is invalid because it is unsigned.12   Petitioners

argue that, by extension, they cannot be held liable for the

penalties for 1994 because those penalties are attributable to a

net carryback from the unsigned Form 1040.


     11
      The accuracy-related penalty under sec. 6662(a) does not
apply to any portion of an underpayment if the taxpayer proves
that there was reasonable cause for his or her position and that
he or she acted in good faith with respect to such portion. Sec.
6664(c)(1); Higbee v. Commissioner, 116 T.C. 438, 446 (2001);
sec. 1.6664-4(a), Income Tax Regs. The determination of whether
a taxpayer acted with reasonable cause and in good faith depends
on the pertinent facts and circumstances, including the
taxpayer’s efforts to assess his or her proper tax liability, the
knowledge and experience of the taxpayer, and the reliance on the
advice of a professional. Sec. 1.6664-4(b)(1), Income Tax Regs.
The taxpayer bears the burden of proving reasonable cause.
Higbee v. Commissioner, supra at 446.
     12
      Petitioners also argue that the 1996 return is invalid
because they were not partners in any Hoyt partnerships in 1996.
We held in our previous opinion, McIntyre v. Commissioner, supra,
that we lack jurisdiction in this affected items proceeding to
consider petitioners’ status as partners in 1996 because it is a
partnership item to be addressed, if at all, at the partnership
level. Accordingly, we will not consider petitioners’
partnership-level argument in this affected items proceeding.
                                 -9-

     First and foremost, petitioners’ argument regarding the

validity of the 1996 filing confuses the issue.13    Respondent

properly processed the entire 1996 filing as a return for 1996 and

a net carryback to 1994.    We distinguish this case from the cases

deciding whether sufficient information was provided by the

taxpayer for the Commissioner to compute the correct tax liability

for the year at issue.   See Commissioner v. Lane-Wells Co., 321

U.S. 219 (1944) (unsigned return that discloses no information

relating to a taxpayer’s income not a return); Germantown Trust

Co. v. Commissioner, 309 U.S. 304, 308 (1940) (incorrect form

nevertheless constituted a return because it contained all the

data from which a tax could be computed and assessed although it

did not purport to state any amount due as tax); Richardson v.

Commissioner, 72 T.C. 818, 823-824 (1979) (unsigned return Form

1040 with attachments containing frivolous arguments did not

constitute a tax return).

     Moreover, we disagree that the 1996 filing was invalid.

Petitioners signed the Form 1045 included in the 1996 filing under

penalty of perjury.   Petitioners also submitted payment of the

$392 tax liability reported on the 1996 filing.     Respondent



     13
      Petitioners also attempt to distance themselves from the
Hoyt organization by challenging the validity of the 1996 filing.
They argue that they were duped by Hoyt and that the 1996 filing
was made without their consent. Hoyt did not file the return on
petitioners’ behalf, however. The return was mailed from
petitioners’ home in Hempstead, Texas, rather than from any of
the Hoyt office locations.
                                -10-

accepted the 1996 filing and properly processed it as the return

for 1996 and a refund claim for 1994.    Consistent with this

processing, respondent accepted the $392 check for liability and

issued petitioners the $269,499 refund for 1994.    Petitioners

cannot now argue that the 1996 filing was invalid as a defense

against the penalties.   Furthermore, petitioners have failed to

establish that they otherwise filed a valid return for 1996.

     Petitioners have not raised a valid partner-level defense

against the penalties.   As petitioners have conceded, their

actions constituted a lack of due care and failure to do what a

reasonable or prudent person would have done.    We accordingly

sustain respondent’s determination that petitioners are liable for

the accuracy-related penalties for the relevant years.

     In reaching our holding, 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 and petitioners’ concessions,


                                          Decisions will be entered

                                      for respondent.
