BROWN v. COMMISSIONER

T.C. Summary Opinion 2002-91

UNITED STATES TAX COURT

SONJA AND DAVID BROWN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11395-01S. Filed July 16, 2002.

Sonja and David Brown, pro se.

Douglas S. Polsky, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.

1

Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

years at issue.

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Respondent determined deficiencies of $5,137 and $3,080 in

petitioners' Federal income taxes, respectively, for 1999 and

2000; an addition to tax for 1999 in the amount of $35 under

section 6651(a)(1); and penalties under section 6662(a) in the

amounts of $1,027 and $616 for 1999 and 2000, respectively.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners'

legal residence was Albuquerque, New Mexico.

The issues for decision are: (1) Whether petitioners are

entitled to itemized deductions for charitable contributions and

unreimbursed employee business expenses, and (2) whether

petitioners are liable for the accuracy-related penalties under

section 6662(a). In addition, the Court considers the

applicability of section 6673(a) to the facts of this case.2

Petitioners were both employed during the 2 years in

question. Mr. Brown (petitioner) was employed by a furniture

rental company, and Mrs. Brown was employed by the Department of

Veterans Affairs, an agency of the United States. They reported

2

Respondent determined that petitioners failed to

include in income, for 1999, $14 in interest reported by a bank

in which petitioners had an interest-bearing account.

Petitioners conceded this adjustment at trial. The sec.

6651(a)(1) addition to tax for 1999 was also conceded by

petitioners at trial.

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combined wages of $75,905 and $81,855, respectively, for 1999 and

2000.

Prior to the years at issue, petitioners' Federal income tax

returns were prepared by a commercial tax preparation service.

For the 2 years in question, however, petitioners' returns were

prepared by Robin Beltran upon the recommendation of several of

petitioners' friends.3 Petitioners had never previously claimed

itemized deductions on their Federal income tax returns. For

each year in question, Mr. Beltran advised petitioners that no

documentation was necessary to substantiate their claimed

itemized deductions. The itemized deductions claimed on the

returns were arbitrarily determined by Mr. Beltran.

For each of the years in question, petitioners claimed

itemized deductions on a Schedule A, Itemized Deductions, of

their Federal income tax return. For 1999, petitioners claimed

itemized deductions totaling $27,702, of which $19,755 was

disallowed by respondent. For 2000, petitioners deducted

$27,892, of which $11,028 was disallowed by respondent.

Petitioners, nevertheless, were allowed itemized deductions for

both years, since the total of their other claimed and allowed

deductions exceeded the standard deduction under section 63(c).

3

The Court notes that this case is one of numerous cases

heard by the Court involving tax returns prepared by Mr. Beltran,

which essentially involve the same deductions at issue here.

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For the 2 years at issue, the disallowed deductions consisted of

charitable contributions, job expenses, and other miscellaneous

deductions.

The disallowed deductions consisted of the following amounts

claimed on petitioners' returns:

1999 2000

Charitable contributions

Cash $5,744 $3,900

Noncash 413 $ 6,157 2,000 $5,900

Unreimbursed employee expenses* 14,217 6,785

Tax preparation fees* 900 --

*Before deduction of the sec. 67(a) limitation.

At trial, petitioners alleged that their actual charitable

contributions for the 2 years in question approximated the

amounts claimed on their returns; however, they admittedly

included in these numbers the approximate value of gifts to

members of their respective families and friends for birthdays,

graduations, weddings, and holidays. For 2000, the noncash gifts

included a BMW vehicle that petitioners donated to their former

minister, which they intended to be a gift to him personally and

not a gift to his church.

The manner in which Mr. Beltran prepared petitioners' tax

returns for the 2 years at issue was described by petitioner as

follows:

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When we sat down with our preparer * * *, he did his

figuring, came up with these numbers. He came up with the

number. We said, Now, will we need to provide

documentation? He said, That's not necessary, based on –-

and he pulled out * * * what looked like part of the Tax

Code or something out of the tax book there or manual, and

he showed us certain column, certain section, paragraph,

whatever. It states right here that documentation's not

necessary.

We said, Okay, that looks good to us. We didn't have

anything to –- we didn't have any reason to doubt him,

because before moving into our house in '99, we never

claimed itemized deductions. We had nothing to go off of

other than paying the IRS every year, going to H&R Block:

Here you go; how much do we owe; fine.

Petitioners presented no documentary information at trial

that would establish that they made any qualifying charitable

contributions during the 2 years at issue.

Although petitioners claimed (and the Court has no reason to

doubt their testimony) that they generously "gave" during the 2

years in question, the generosity to which their benevolence was

intended included gifts to family and friends, such as for

birthdays, weddings, and graduations, as opposed to donations to

qualified organizations. Sec. 170(c). Such gifts are not

deductible as charitable contributions under section 170(a) and

(b). Moreover, the tax return for the year 2000, which included

the donation of a BMW motor vehicle, did not include the IRS Form

8283, Noncash Charitable Contributions, which is required under

section 1.170A-13(b)(3), Income Tax Regs., relating to deductions

in excess of $500 for charitable contributions of property other

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than money. Moreover, the Court is satisfied from the record

that the amounts deducted as charitable contributions on

petitioners' returns were arbitrarily determined by the return

preparer. On this record, the Court sustains respondent on the

disallowed charitable contribution deductions for 1999 and 2000.

The claimed deductions for unreimbursed employee business

expenses related to the use of petitioner's personal vehicle in

connection with his employment. Petitioner never sought

reimbursement for such expenses from his employer. He did not

maintain a log or other contemporaneous record documenting the

use of his vehicle.4 The amounts claimed as deductions on the

returns were also arbitrarily determined by the return preparer.

The deductions cannot be allowed for the reason that, under

section 274(d) and the regulations thereunder, vehicle expenses

are subject to strict substantiation rules that require "adequate

records" through either an account book, diary, statement of

expense, or similar record, as well as documentary evidence to

establish each element of an expenditure. Sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.

6, 1985). No records were presented at trial to substantiate

these expenses; consequently, respondent is sustained on the

4

The Court notes that the $14,217 of unreimbursed

employee expenses represented 45.5 percent of petitioner's wages

for 1999. The same category of expenses for 2000 represented

21.3 percent of his wages.

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disallowance of the employee business expense deductions. All

other expenses petitioners incurred that would be deductible as

itemized deductions, such as, for example, the tax preparation

fee for 1999, while allowable, would not exceed 2 percent of

petitioners' adjusted gross income under section 67(a). Thus,

none of the itemized deductions on Schedule A of petitioners'

returns for job expenses and other miscellaneous deductions are

deductible. Respondent, therefore, is sustained on this issue.

Petitioners contend they should be absolved of liability for

the section 6662(a) penalties because they relied on the

representations of their return preparer.

The Court is satisfied that petitioners knew that the

amounts deducted on their tax returns for charitable

contributions and employee business expenses were false. They

even asked their return preparer whether they needed

documentation to substantiate the amounts deducted, which

indicates to the Court that petitioners had reason to doubt

whether they could deduct such amounts.

Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer's negligence or disregard of rules or regulations. Sec.

6662(a) and (b)(1). Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

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Revenue Code and disregard consists of any careless, reckless, or

intentional disregard. Sec. 6662(c). The courts have refined

the Code definition of negligence as a lack of due care or

failure to do what a reasonable and prudent person would do under

similar circumstances. Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989). Section 1.6662-3(b)(1),

Income Tax Regs., provides that "Negligence is strongly indicated

where * * * a taxpayer fails to make a reasonable attempt to

ascertain the correctness of a deduction * * * on a return which

would seem to a reasonable and prudent person to be 'too good to

be true' under the circumstances".

An exception applies when the taxpayer demonstrates (1)

there was reasonable cause for the underpayment, and (2) the

taxpayer acted in good faith with respect to the underpayment.

Sec. 6664(c). Whether the taxpayer acted with reasonable cause

and in good faith is determined by the relevant facts and

circumstances. The most important factor is the extent of the

taxpayer's effort to assess the proper tax liability.

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-

4(b)(1), Income Tax Regs. Under section 1.6664-4(b)(1), Income

Tax Regs., "Circumstances that may indicate reasonable cause and

good faith include an honest misunderstanding of fact or law that

is reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

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taxpayer." Moreover, a taxpayer is generally charged with

knowledge of the law. Niedringhaus v. Commissioner, 99 T.C. 202,

222 (1992). Although a taxpayer is not subject to the addition

to tax for negligence where the taxpayer makes honest mistakes in

complex matters, the taxpayer must take reasonable steps to

determine the law and to comply with it. Id.

Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence where the taxpayer

reasonably relied on the advice of a competent professional.

Sec. 1.6664-4(b)(1), Income Tax Regs.; see sec. 6664(c); Freytag

v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011

(5th Cir. 1990), affd. 501 U.S. 868 (1991). However, reliance on

a professional adviser, standing alone, is not an absolute

defense to negligence; it is only one factor to be considered.

In order for reliance on a professional adviser to relieve a

taxpayer from the negligence penalty, the taxpayer must establish

that the professional adviser on whom he or she relied had the

expertise and knowledge of the relevant facts to provide informed

advice on the subject matter. Freytag v. Commissioner, supra at

888.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer. They

knew that the items at issue were false and expressed their

reservations to Mr. Beltran. The answers he gave them should

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have raised other questions. Petitioners clearly did not make a

reasonable effort to determine whether the representations of Mr.

Beltran were correct. They did not consult other tax

professionals to verify the accuracy of the returns prepared by

Mr. Beltran or the representations he made to them regarding

their deductions. The Court is satisfied from the record that

Mr. Beltran knew, or had reason to know, all the relevant facts

upon which, had he been a qualified professional, he could have

accurately advised petitioners on the amount of their allowable

deductions. Mr. Beltran listed unrealistic amounts as deductions

on petitioners' returns. The Court is further satisfied that

petitioners knew they were required under the law to substantiate

deductions claimed on their returns. The questions they raised

with Mr. Beltran and the answers he gave them should have

prompted them to look beyond and ascertain the accuracy of his

representations. Petitioners, therefore, made no effort to

assess their tax liabilities correctly. On this record, the

Court sustains respondent on the section 6662(a) accuracy-related

penalties for the years in question.

Section 6673(a) authorizes the Court to require a taxpayer

to pay to the United States a penalty not exceeding $25,000 when,

in the Court's judgment, proceedings have been instituted or

maintained by the taxpayer primarily for delay or where the

taxpayer's position in the proceeding is frivolous or groundless.

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The Court considers petitioners' claim that they should not be

liable for the deficiencies and penalties to be frivolous and

groundless. Petitioners knew, or should have known, that a

substantial portion of the itemized deductions at issue was false

and could not be sustained. Petitioners knew that they could

deduct only amounts that they had actually paid. They made no

attempt to determine the qualifications of their return preparer

and, moreover, did not seek other professional advice to satisfy

the concerns they had over the returns prepared by Mr. Beltran.

Petitioners cited no legal authority to the Court that, under

similar facts, would exonerate them from the penalties under

section 6662(a).

The function of this Court is to provide a forum to decide

issues relating to liability for Federal taxes. Any reasonable

and prudent person, under the facts presented to the Court,

should have known that petitioners' claimed deductions could not

have been sustained, and petitioners knew that. This Court does

not and should not countenance the use of this Court as a vehicle

for disgruntled litigants to proclaim the wrongdoing of another,

his return preparer, as a basis for relief from penalties that

were determined by respondent on facts that clearly are not

sustainable. Golub v. Commissioner, T.C. Memo. 1999-288.

Petitioners, therefore, have interfered with the Court's function

to the detriment of other parties having cases with legitimate

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issues for the Court to consider. Petitioners have caused

needless expense and wasted resources, not only for the Court,

but for its personnel, respondent, and respondent's counsel.

Under these circumstances, the penalty under section 6673 is

warranted, and petitioners will be ordered to pay a penalty of

$500 to the United States under section 6673(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.