The opinion
T.C. Summary Opinion 2002-152
UNITED STATES TAX COURT
SANFORD M. AND SALLY KIRSHENBAUM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10498-00S. Filed November 25, 2002.
Sanford M. Kirshenbaum, pro se.
John Aletta, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that 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, all subsequent section
references are to the Internal Revenue Code in effect for 1998,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 1998 in the amount of $12,338 and
an accuracy-related penalty under section 6662(a) in the amount
of $2,468.
After dismissal of petitioner Sally Kirshenbaum (Mrs.
Kirshenbaum),2 the issues for decision are as follows:
(1) Whether petitioner Sanford M. Kirshenbaum (petitioner)
received a taxable distribution of $49,997.15 from his Individual
Retirement Account (IRA). We hold that he did.
(2) Whether petitioner received taxable Social Security
benefits of $12,475. We hold that he did.
(3) Whether petitioner is entitled to IRA contribution
deductions of $4,000. We hold that he is not.
(4) Whether petitioner is liable for an accuracy-related
penalty under section 6662(a) due to a substantial understatement
of income tax. We hold that he is.
An adjustment to the amount of petitioner’s itemized
deductions is a purely mechanical matter, the resolution of which
is dependent on our disposition of the disputed issues.
2
Petitioner Sally Kirshenbaum did not appear at trial and
did not execute the stipulation of facts. Accordingly, the Court
will dismiss this action as to her. Rule 123(b). However,
decision will be entered against petitioner Sally Kirshenbaum
consistent with the decision entered against petitioner Sanford
M. Kirshenbaum as to the deficiency in tax and the accuracy-
related penalty.
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Background
Some of the facts have been stipulated, and they are so
found. Petitioners resided in Cranston, Rhode Island, at the
time that their petition was filed with the Court.
A. Petitioner and His Background
Petitioner was born on January 3, 1934, and he turned 64 in
1998.
Petitioner obtained a law degree from Boston University Law
School and also obtained a Masters of Law in Taxation in 1960
from the same university. From 1961 through 1965, petitioner
worked as an attorney in the Collection Litigation Division for
the Office of Chief Counsel in Boston, Massachusetts.
Thereafter, petitioner became a sole practitioner practicing
general law in the State of Rhode Island.
In 1980, petitioner was diagnosed with chronic depression
for which he received medical treatment. Petitioner’s medical
condition adversely affected his professional responsibilities
and, therefore, the Rhode Island Supreme Court placed petitioner
on inactive status by order dated September 17, 1992, due to his
“incapacity to continue to practice law”. See Iddings v.
McBurney, 657 A.2d 550, 552 (R.I. 1995).
Thereafter, petitioner was unable to continue in the
practice of law. As a result, petitioner began receiving
payments from the Social Security Administration in 1993, which
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continued through the taxable year in issue.
B. Petitioner’s Investment Strategy
Petitioner has maintained several IRAs with institutions
such as Fidelity Investments. As relevant herein, in 1997
petitioner became dissatisfied with the 8-percent return on his
IRA deposits with Fidelity Investments and, therefore, petitioner
orchestrated an arrangement between himself and Marlene Hope,
Inc. “to get out of Fidelity” in order to increase his investment
return. At trial, petitioner described his investment strategy
as follows:
Years back I had been doing some real estate, buying
and selling and mortgaging. I figured that’s the only
place I can get a job and go back to work. * * *
I came across what I thought was a good deal, a single
family house costing $52,450, and I found a tenant, a
Section 8[3] tenant, who needed five bedrooms. She
would gladly occupy the house, providing she got
approval from the Section 8 people in Providence. This
went through, and ultimately I bought the house for
$52,250. I gave a $2,600 deposit, and the balance of
$50,000 or thereabouts was to come from Fidelity.
I spoke to Fidelity about withdrawing this money. They
said as long as it doesn’t come into your hands you
could roll it over. I didn’t want to pay taxes on some
$50,000 in the state I was in then; have to pay taxes
on it and then not have it for the future. I relied on
them. The deal went through.
3
“Section 8” is a reference to sec. 8 of the United States
Housing Authority Act of 1937, ch. 896, 80 Stat. 888, as amended
by the Housing and Community Development Act of 1974, Pub. L. 93-
383, sec. 201(a), 88 Stat. 662, which is codified as 42 U.S.C.
sec. 1437f (2000). Generally, “Section 8” refers to assisted
public housing.
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* * * The problem was where was I going to put it? I
knew I couldn’t put it in my own hands. I didn’t want
to put it back into a mutual fund which was costing me
money every year for fees and everything else. I
decided I would buy this house and rent it to this
Section 8 woman.
* * * I withdrew * * * $49,997.15 * * * so it went from
Fidelity Insurance to the corporate account of Marlene
Hope, Inc.
* * * * * * *
I never touched any of that money. It never went
through my fingers at all.
1. Marlene Hope, Inc.
Marlene Hope, Inc. (MHI) was created in the 1970s and
subsequently incorporated in the State of Rhode Island as a for-
profit corporation.4 Petitioner’s daughter, Marlene Hope
Kirshenbaum5 (petitioner’s daughter), is the president and sole
shareholder of MHI.
MHI is engaged in the business of real estate purchasing,
selling and development, residential real estate management, and
real estate mortgaging. MHI maintains its corporate funds in an
account with First Bank & Trust Co. MHI filed a Form 1120-A,
U.S. Corporation Short-Form Income Tax Return, for the taxable
year 1997 reporting total income of $9,679, total deductions of
4
We note that MHI’s business address and telephone number
is the same as petitioner’s residential address and telephone
number.
5
On his 1998 Form 1040, petitioner claimed a dependency
exemption for Marlene Hope Kirshenbaum, who was born in 1961 and
resides with him.
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$9,750.96, and a zero tax liability. However, MHI did not file
an income tax return for the taxable years 1998, 1999, and 2000.
2. The Investment Property
On June 26, 1998, MHI entered into a “Single/Multi Family
Purchase and Sales Agreement” with Marianna Laliberte (seller) to
purchase a one-family cottage at 168 Veazie Street, Providence,
Rhode Island 02908 (Veazie property) for $52,250. MHI placed a
$2,600 deposit towards the purchase price and the parties
scheduled the closing date for July 14, 1998.
Pursuant to the Veazie property purchase agreement,
petitioner directed Fidelity Investments to wire transfer a
portion (i.e., $49,997.15) of one of his IRAs (Fidelity IRA) to
MHI’s corporate bank account at First Bank and Trust Co.
Fidelity Investments completed this transaction on July 8, 1998.
Fidelity Investments sent petitioner a 1998 Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., that reported a
gross distribution of $49,997.15 and a taxable amount of
$49,997.15.6
On July 14, 1998, MHI used petitioner’s Fidelity IRA
distribution to pay the Veazie property purchase price balance of
$49,650. The seller conveyed title to the Veazie property to
6
Petitioner does not suggest that Fidelity Investments
mistakenly issued a Form 1099-R that designated the Fidelity IRA
transfer incorrectly as an IRA distribution.
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MHI. MHI maintains the Veazie property as residential rental
property for assisted public housing.7 The local Housing
Authority pays MHI a monthly rent of $800 (housing payment). The
tenant also reimburses MHI directly for utility expenses at $300
per month (plus any excess amount).
3. Petitioner’s Veazie Property-IRA Arrangement
At trial, petitioner described his Veazie property-IRA
arrangement8 as follows:
PETITIONER: * * * [The housing payment] was all
designated as income from the Section 8 housing. * * *
[The housing payment] was designated as an IRA in my
account.
THE COURT: * * * How were you benefitting from
this then?
PETITIONER: I wasn’t.
* * * * * * *
THE COURT: Well, isn’t an eight percent return
better than no return at all? It sounds like you made
a gift to your daughter or this corporation?
PETITIONER: No, no, no. It’s designated as a
corporation that that money is mine eventually. * * *
THE COURT: But you’re telling us that this
arrangement was designed for your ultimate income
security?
7
The same Section 8 tenant has occupied the Veazie
property since MHI purchased it in 1998.
8
The phrase “Veazie property-IRA arrangement” and its
derivatives are intended only for narrative convenience to
describe the form of the disputed transaction and does not
connote the existence of an IRA for Federal income tax purposes.
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PETITIONER: That was my IRA, designated as my IRA.
THE COURT: Okay. Now at some point or other
presumably you would have need for your IRA, correct?
PETITIONER: * * * Instead of drawing it out from
Fidelity, I’m drawing it out from MHI.
* * * * * * *
PETITIONER: * * * in addition to the increase in
money received because of the rent from Fidelity if I
was making eight percent, I’m making ten or 12 here,
plus there’s a good share that when that property is
sold there will be a capital appreciation at least of
$10,000, so that was a good investment.
* * * * * * *
PETITIONER: * * * All I know is that it’s [the
agreement between petitioner and MHI] designated in the
corporate files and on that file that it’s my IRA.
* * * * * * *
PETITIONER: * * * We don’t have a written
agreement. If I set up something like this, she would
say okay, you’re the father. You do it. But, she has
no legal obligation to do anything that I say.[9]
9
Petitioner corroborates this description of the Veazie
property-IRA arrangement in his letter to the Internal Revenue
Service dated May 23, 2000, which stated, in part, as follows:
I was not pleased with the return I was getting from
Fidelity. On the Veazie Street investment, with a
purchase price of $52,250 invested, I, with the rental
income, am making over 18% per year in interest, and
have a good opportunity for capital gains when the
property is sold. This certainly is a lot better than
what I was getting at Fidelity. This whole transaction
is recorded in the corporate records as an IRA
investment from me.
The $2,252.85 difference between the purchase price of
$52,250.00 and the $49,997.15 transfer from Fidelity is
(continued...)
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C. Petitioner’s Form 1040
Petitioner and Mrs. Kirshenbaum filed a joint Form 1040,
U.S. Individual Income Tax Return, for 1998. Petitioner listed
his occupation as retired and Mrs. Kirshenbaum listed her
occupation as therapist.10
On the Form 1040, petitioner reported the following items:
Line 7. Wages, salaries, tips, etc. $45,504.70
Line 8a. Taxable interest 328.71
Line 10. Taxable refunds * * * 573.35
Line 13. Capital gain or (loss) (3,000.00)
[1]
Line 15a. Total IRA distributions $49,917.15
Line 15b. Taxable amount 0
Line 17. Rental real estate * * * (2,774.20)
[2]
Line 20a. Social security benefits 14,676.00
Line 20b. Taxable amount 0
Line 21. Other income 200.00
Line 22. Add * * * lines 7 through
21 * * * total income 40,832.56
Line 23. IRA deduction 4,000.00
Line 28. Self-employed health insurance
deduction 4,776.70
Line 32. Add lines 23 through 31a 8,776.70
Line 33. Subtract line 32 from
line 22 * * * adjusted gross income 32,055.86
Line 36. * * * itemized deductions * * * 30,458.37
Line 37. Subtract line 36 from line * * * [33] 1,597.49
Line 38. * * * total number of exemptions * * * 10,800.00
Line 39. Taxable income 0
Line 56. Total tax 0
1
Petitioner handwrote the word “Rollover” next to the amount of
$49,917.15.
2
Petitioner handwrote the word “Disability” next to the amount of
$14,676.
9
(...continued)
an additional IRA investment from me for the year 1998.
10
At the time of trial, Mrs. Kirshenbaum was 64 years old.
She has a Masters degree in education and works as a full-time
speech pathologist for the Pawtucket public school system.
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Petitioner attached to the Form 1040 a Form W-2, Wage and
Tax Statement, from the Pawtucket Public School System (Pawtucket
School) disclosing the payment of wages to Mrs. Kirshenbaum in
the amount of $45,504.70 during 1998. The Form W-2 indicated
that Mrs. Kirshenbaum contributed to an “ERS”11 and that she was
an active participant in a qualified retirement plan.
D. Respondent’s Deficiency Notice
In the notice of deficiency, respondent determined that
petitioner received a taxable IRA distribution of $49,997.15 on
the basis that petitioner did not roll over his IRA distribution.
Respondent also determined that petitioner received taxable
Social Security benefits of $12,475, which was not disability
income. In addition, respondent determined that both petitioner
and Mrs. Kirshenbaum were not entitled to IRA contribution
deductions because they did not substantiate their IRA
deductions. Finally, respondent determined that petitioners are
liable for an accuracy-related penalty due to a substantial
understatement of income tax.
Discussion
In general, the determinations of the Commissioner in a
notice of deficiency are presumed correct, and the burden is on
the taxpayer to show that the determinations are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
11
ERS stands for “Employee Retirement System”.
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section 7491(a)(1), however, the burden of proof shifts to the
Commissioner if, inter alia, the taxpayer first introduces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s liability for income tax.12 Higbee
v. Commissioner, 116 T.C. 438, 442 (2001). With respect to a
taxpayer’s liability for any penalty, however, section 7491(c)
places on the Commissioner the burden of production.
A. The IRA Distribution13
Generally, any amount paid or distributed out of an IRA is
includable in the recipient’s gross income as provided in section
72. Sec. 408(d)(1); sec. 1.408-4(a), Income Tax Regs. This rule
does not apply, however, to any amount distributed from an IRA to
the individual for whose benefit the account is maintained if the
entire amount is paid into an IRA for the benefit of such
individual not later than 60 days after the distribution. Sec.
408(d)(3); Schoof v. Commissioner, 110 T.C. 1, 7 (1998); sec.
1.408-4(b)(1), Income Tax Regs.
Moreover, Rev. Rul. 78-406, 1978-2 C.B. 157, provides that a
transfer of a participant’s IRA funds directly from one trustee
12
Sec. 7491(a)(1) is applicable to court proceedings
arising in connection with examinations commencing after July 22,
1998. See Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3001(a), (c)(1), 112 Stat. 685,
726, 727.
13
We assume, arguendo, that the Veazie property-IRA
arrangement is not a prohibited transaction under sec. 4975(c)
despite its specious characteristics. See sec. 408(e).
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bank to another trustee bank is not a rollover contribution
because no such funds were paid or distributed to the participant
and such funds are not within the direct control and use of the
participant.14 See Crow v. Commissioner, T.C. Memo. 2002-178;
Martin v. Commissioner, T.C. Memo. 1992-331, affd. without
published opinion 987 F.2d 770 (5th Cir. 1993). The revenue
ruling further states: “This conclusion would apply whether the
bank trustee initiates or the IRA participant directs the
transfer of funds.” Rev. Rul. 78-406, 1978-2 C.B. at 157-158.
In other words, the revenue ruling suggests that a trustee-to-
trustee transfer is tax free to the IRA owner without the need
for the transfer to qualify as a rollover contribution.
As relevant to the present case, an IRA is a trust created
or organized in the United States for the exclusive benefit of an
individual, but only if the written governing instrument creating
the trust meets certain statutory requirements. Sec. 408(a);
sec. 1.408-2, Income Tax Regs.; see Cobb v. Commissioner, 77 T.C.
1096, 1099 (1981), affd. 680 F.2d 1388 (5th Cir. 1982). Section
1.408-2(b), Income Tax Regs., specifically provides, in part,
that the instrument creating the trust must be in writing. See
Phelan v. United States, Civil Action No. 83-1997-Z (D.C. Mass.
1984) (deposit of funds in bank not sufficient to constitute an
14
We note that, although entitled to consideration,
revenue rulings are not precedent. Dixon v. United States, 381
U.S. 68, 73 (1965).
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IRA because bank’s acknowledgment did not meet the statutory
requirements of sec. 408).
In the petition, petitioner states that the IRA distribution
is not taxable because “the taxpayers’ demonstrated that they
intended to hold and administer the property acquired by the
rollover in such a manner as to comply with * * * [section
408(a)(2)] to the best of their ability.”15 At trial, petitioner
adamantly asserted that his Fidelity IRA was transferred directly
to his Veazie property-IRA via a trustee-to-trustee transfer and,
therefore, that the transfer was not taxable. We need not, and
do not, make a determination whether petitioner’s transaction was
either a rollover contribution or a trustee-to-trustee transfer
because we conclude that petitioner’s Veazie property-IRA is not
a valid IRA within the meaning of section 408(a).
In the present case, petitioner directed that his Fidelity
IRA distribution be transferred to his Veazie property-IRA. The
record is replete with petitioner’s conclusory and self-serving
testimony regarding the purported validity of his Veazie
property-IRA. However, petitioner candidly admitted at trial
that no such written agreement regarding his Veazie property-IRA
exists, but that such a designation exists in MHI’s corporate
15
Sec. 408(a)(2) provides: “The trustee is a bank (as
defined in subsection (n)) or such other person who demonstrates
to the satisfaction of the Secretary that the manner in which
such other person will administer the trust will be consistent
with the requirements of this section.”
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files. Petitioner’s purported designation, however, was not
buttressed by any written documentation. Thus, the lack of a
written governing instrument creating petitioner’s purported
Veazie property-IRA is fatal to his contention that he
established an IRA consistent with section 408(a)(2).16 The
statute and regulations are clear that a written governing
instrument is required to establish an IRA and, therefore,
without a written instrument, petitioner’s purported Veazie
property-IRA must fail to qualify as an IRA pursuant to section
408(a).
In view of the foregoing, we hold that petitioner received a
taxable IRA distribution of $49,997.15. Therefore, we sustain
respondent’s determination on this issue.
B. Social Security Benefits
Section 86 provides for the taxability of Social Security
benefits pursuant to a statutory formula. For tax purposes,
Social Security disability benefits are treated in the same
manner as other Social Security benefits. Sec. 86(d)(1); Thomas
v. Commissioner, T.C. Memo. 2001-120. Thus, if a taxpayer’s
modified adjusted gross income (MAGI) plus one-half of the
16
We do not regard petitioner’s statements regarding the
Veazie property-IRA as credible evidence within the meaning of
sec. 7491(a)(1). See Tokarski v. Commissioner, 87 T.C. 74, 77
(1986); see also Sykes v. Commissioner, T.C. Memo 2001-169.
Accordingly, we decide the issue before us without regard to the
general burden-shifting rule of sec. 7491(a)(1).
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taxpayer’s Social Security benefits exceeds a certain base amount
or an adjusted base amount, then a portion of the taxpayer’s
Social Security benefits is includable in gross income and
subject to Federal income tax. Sec. 86(a) through (d). The
includable portion, never exceeding 85 percent, varies according
to a formula set forth in section 86(a). As relevant in the
present case for a joint return, the base amount is $32,000 and
the adjusted base amount is $44,000. Sec. 86(c)(1)(B) and
(2)(B).
Petitioner contends that the payments he received from the
Social Security Administration were nontaxable disability
benefits. On the other hand, respondent contends in the notice
of deficiency that “We have no indication that the $14,676 was
disability income from Social Security.” We, however, need not
decide whether petitioner’s Social Security payments are properly
characterized as disability benefits.17 Assuming arguendo that
petitioner in fact received Social Security disability benefits,
our analysis of whether such payments are includable in
petitioner’s gross income remains unchanged. As stated above,
Social Security disability benefits are treated the same as other
Social Security benefits. Sec. 86(d)(1); Thomas v. Commissioner,
17
Our decision on this issue does not depend on which
party has the burden of proof. We note in passing, however, that
petitioner does not argue that sec. 7491(a) places the burden of
proof on the Commissioner here.
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supra.
Accordingly, because petitioner’s MAGI plus one-half of his
benefits exceeds the adjusted base amount, a portion of his
Social Security benefits is taxable. See sec. 86(a)(2), (c)(2).
Thus, we sustain respondent’s determination on this issue.
C. Petitioner’s IRA Deductions
As a preliminary matter, we note that deductions are
strictly a matter of legislative grace, and a taxpayer bears the
burden of proving his or her entitlement to the claimed
deductions.18 Rule 142(a)(1); see New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S.
111, 115 (1933); cf. sec. 7491(a)(2). Taxpayers are required to
maintain records sufficient to substantiate their claimed
deductions. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Generally, a taxpayer is entitled to a deduction for
qualified retirement contributions. Sec. 219(a); sec. 1.219-
1(a), Income Tax Regs. As relevant herein, section 219(e)
defines a qualified retirement contribution as “any amount paid
in cash for the taxable year by or on behalf of an individual to
an individual retirement plan for such individual’s benefit.”19
18
Because petitioner has not established that he fully
complied with the substantiation requirements of sec.
7491(a)(2)(A), we decide the issue before us without regard to
sec. 7491(a)(1).
19
Sec. 7701(a)(37) defines an individual retirement plan
as an individual retirement account described in sec. 408(a) and
(continued...)
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Also as relevant to the present case, the maximum allowable
deduction in any taxable year for a married individual is $2,000.
Sec. 219(c). The amount of the deduction, however, may be
limited where the taxpayer or the taxpayer’s spouse was, for any
part of the taxable year, an active participant in a qualified
retirement plan. Sec. 219(g)(1), (5)(A).
Petitioner contends that he and Mrs. Kirshenbaum each
contributed $2,000 to an existing traditional IRA for 1998.
Petitioner further claims that he is entitled to an IRA deduction
even if Mrs. Kirshenbaum is covered by the Pawtucket School’s
pension plan because Mrs. Kirshenbaum does not have any vested
rights in her pension plan. In addition, petitioner steadfastly
claims that he is entitled to an IRA deduction “whether it’s from
a rollover or from out of pocket.”
However, there is no evidence to support petitioner’s
contention that he or Mrs. Kirshenbaum made qualified retirement
contributions in 1998 other than his unsubstantiated allegations.
At trial, petitioner testified that he contributed to an existing
IRA, but he could not clearly articulate whether such
contribution was made to Fidelity Investments, another IRA
account, or some other qualified retirement account. Most
importantly, petitioner did not provide any substantiating
19
(...continued)
as an individual retirement annuity described in sec. 408(b).
See Cobb v. Commissioner, 77 T.C. 1096, 1099 (1981).
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records of his purported IRA contribution nor did he demonstrate
that he maintained such records. The same may be said regarding
any IRA that Mrs. Kirshenbaum may have maintained.
We conclude that petitioner failed to substantiate the
making of any qualified IRA contribution pursuant to section 219
and, therefore, is not entitled to IRA contribution deductions.
Thus, we sustain respondent’s determination on this issue.
D. Accuracy-Related Penalty
As previously mentioned, section 7491(c) places on the
Commissioner the burden of production with respect to a
taxpayer’s liability for any penalty.20 However, the taxpayer
still has the burden of proving that the Commissioner’s
determination of the accuracy-related penalty is erroneous. Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Higbee v.
Commissioner, 116 T.C. 438, 446-448 (2001); BJR Corp. v.
Commissioner, 67 T.C. 111, 131 (1976); Bebb v. Commissioner, 36
T.C. 170 (1961). Moreover, in evaluating evidence, the Court is
not bound to accept as gospel the unverified and undocumented
testimony of a taxpayer. Tokarski v. Commissioner, 87 T.C. 74,
77 (1986); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.
20
We hold that respondent satisfied the burden of
production under sec. 7491(a)(1) because the record shows that
petitioner failed to include certain items in income and claimed
deductions to which he was not entitled. Higbee v. Commissioner,
116 T.C. 438, 442 (2001).
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per curiam 540 F.2d 821 (5th Cir. 1976).
As relevant herein, section 6662(a) imposes an accuracy-
related penalty equal to 20-percent of an underpayment that is
due to a substantial understatement of income tax. See sec.
6662(a) and (b)(2). An individual substantially understates his
or her income tax when the reported tax is understated by the
greater of 10-percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). Tax is not understated to
the extent that the treatment of the item is (1) based on
substantial authority, or (2) relevant facts are adequately
disclosed in the return or in a statement attached to the return
and there is a reasonable basis for the tax treatment of such
item by the taxpayer. Sec. 6662(d)(2)(B).
Moreover, the accuracy-related penalty does not apply with
respect to any portion of an underpayment if it is shown that
there was reasonable cause for such portion and that the taxpayer
acted in good faith with respect to such portion. Sec.
6664(c)(1). 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 pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer’s effort to assess
the taxpayer’s proper tax liability for such year. Id.
Petitioner reported zero tax on his 1998 return. The amount
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required to be shown on the return was $12,338. Therefore,
petitioner understated his income tax in an amount greater than
$5,000 or 10-percent of the tax required to be shown on his
return.
Petitioner did not present any evidence or make any showing
as to why respondent’s penalty determination is in error.
Petitioner contends that he is not liable for the accuracy-
related penalty because he had a reasonable basis for the tax
items at issue and because he relied on the advice of a
representative of Fidelity Investments. Given petitioner’s legal
education and experience, petitioner did not have a reasonable
basis for the tax items at issue, especially in the absence of
substantiating records. Moreover, petitioner’s purported
reliance on a financial representative was not reasonable nor
prudent. See sec. 1.6662-4(c), Income Tax Regs.
The facts and circumstances of this case support the
imposition of an accuracy-related penalty under section 6662(a)
and (b)(2). Accordingly, we sustain respondent’s determination
on this issue.
E. Conclusion
We have considered all of the other arguments made by the
parties, and, to the extent that we have not specifically
addressed them, we conclude they are without merit.
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Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Order of Dismissal as to
Sally Kirshenbaum and
decision will be entered
for respondent.