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T.C. Memo. 2019-84

UNITED STATES TAX COURT

MARTIN A. KAPP, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 18468-11L, 18470-11L.

Filed July 9, 2019.

P and his employees prepared thousands of tax returns and/or

schedules for mariner taxpayers for the taxable years 2000 through

2006. The tax returns and schedules consistently claimed expense

deductions for meals and incidental expenses using revenue

procedures permitting taxpayers to deduct the cost of meals and

incidental expenses paid or incurred without the need to substantiate

the amount. It was standard operating practice of marine companies

(deep sea, tugboat, offshore, offshore oil rig, and marine ferry) to

provide meals at no cost to mariners. Some of P's mariner clients

were involved in litigation in this Court relating to the deductibility of

meals and incidental expenses. While the Court held that mariner

taxpayers were entitled to deduct incidental expenses incurred while

at sea, this Court did not hold that they were entitled to deductions for

meals, the cost of which they did not incur. Johnson v.

Commissioner, 115 T.C. 210 (2000); Westling v. Commissioner, T.C.

Memo. 2000-289.

SERVED Jul 09 2019

-2[*2]

P claimed a full victory in the Johnson and Westling cases and

indicated in websites and advertisements that mariners could use

revenue procedures to deduct the cost of meals even if furnished by

the employer. P and his employees continued to prepare returns and

schedules claiming such deductions. Beginning in November 2003

and into 2004 the IRS investigated P's return preparation practices.

There was a series of meetings between P and his counsel and IRS

representatives. P was advised in writing in the spring of2005 by his

counsel that there was little if any authority which would permit a

mariner taxpayer to use the revenue procedures to deduct the cost of

meals furnished by the employer. Despite this advice, P continued to

prepare returns and schedules claiming such deductions and

continued to assert in public domains that mariner taxpayers could

qualify for a meal deduction in such circumstances.

The United States filed a complaint in April 2006 seeking an

injunction "to restrain and enjoin * * * [P] from preparing federal

income tax returns based on the mariner tax deduction". In August

2007 the U.S. District Court for the Central District of California

granted the Government's motion for summary judgment, holding

that P be permanently enjoined pursuant to I.R.C. sec. 7407 and that

the so-called mariner tax deduction was illegal and in violation of

I.R.C. sec. 6694. The order related to the period Jan. 1, 2000, through

Aug. 20, 2007. In compliance with the order of the U.S. District

Court to provide a list of persons or entities for whom he prepared

returns (or portions of a return) asserting or claiming the position that

mariners may claim a tax deduction for meals provided without cost,

P filed a 117-page client list naming more than 5,000 taxpayers.

P appealed the entry of permanent injunction, and the U.S. Court of

Appeals for the Ninth Circuit affirmed the decision of the U.S.

District Court. United States v. Kapp, 564 F.3d 1103 (9th Cir. 2009).

After the permanent injunction, this Court issued two additional

opinions relating to P's mariner clients. The Court again made clear

that the Opinion in Johnson addressed the issue that a mariner

taxpayer could not deduct the cost of meals furnished by the

employer. Zbylut v. Commissioner, T.C. Memo. 2008-44; Balla v.

Commissioner, T.C. Memo. 2008-1 8.

-3[*3]

In June 2008 the IRS assessed I.R.C. sec. 6701 penalties based

on 5,193 tax returns and/or schedules prepared by P for the period

2000 through 2006. The IRS issued lien and levy notices, and P

submitted a written request for a CDP hearing. P challenged the

penalties at the hearing. After notices of determination were issued, P

filed a timely petition challenging the penalties determined for the

taxable years 2000 through 2006. The Court dismissed as to taxable

years 2000 and 2001 for lack ofjurisdiction. Therefore, the penalties

at issue are based on 5,167 tax returns and/or schedules P prepared

for taxable years 2002 through 2006.

IIeld: R has satisfied his burden of proving that P prepared tax

returns for the years in issue with knowledge that the returns and/or

schedules prepared would result in understatements of tax.

Held, further, R's determination is sustained to the extent that

relevant returns were made part of this record.

Robert B. Martin, Jr., for petitioner.

Norah Demirjian, Halvor R. Melom, and Daniel V. Triplett, Jr., for

respondent.

CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION . . . . . . . . . . . . . . . . . . 6

FINDINGSOFFACT ............................................... 8

II.

III.

IV.

Petitioner's Education and Professional History. . . . . . . . . . . . . . . . . 8

Petitioner's Practice and Mariner Clients Generally. . . . . . . . . . . . . . 9

The Johnson and Westling Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

IRS Guidance After the Johnson and Westling Cases . . . . . . . . . . . 16

Revenue Procedures for the Years in Issue. . . . . . . . . . . . . . . 16

-4[*4]

VI.

Chief Counsel Advice............................... 18

Petitioner's Actions After the Johnson and Westling Cases. . . . . . . 19

Communications With Ric Hulshoff. . . . . . . . . . . . . . . . . . . . 19

Communications With Mariner Clients . . . . . . . . . . . . . . . . . 20

Websites..........................................21

Articles...........................................23

Documents Created for Mariner Clients . . . . . . . . . . . . . . . . . 27

Marine Company Industry Practices . . . . . . . . . . . . . . . . . . . . . . . . . 29

Cheramie Marine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Matson Navigation C0............................... 31

Dann Ocean Towing ................................ 32

Mariner Edward Roach.............................. 34

Edison Chouest Offshore (ECO). . . . . . . . . . . . . . . . . . . . . . . 35

VII. Petitioner's Conversations With Charles Comeaux . . . . . . . . . . . . . 36

VIII. Petitioner's Income Tax Return Preparation Practices for Years in

Issue.................................................. 38

IX.

XI.

Income Tax Return Preparation Practices Generally . . . . . . . 38

Supplemental Sailor Travel Schedules . . . . . . . . . . . . . . . . . . 39

Mr. Roach's Income Tax Returns for 2004 Through 2006 . . 40

TheIRSInvestigation .................................... 42

Examining Officer Tiffany Sim. . . . . . . . . . . . . . . . . . . . . . . . 42

Revenue Agent George Campos . . . . . . . . . . . . . . . . . . . . . . . 44

Draft Interoffice Memorandum. . . . . . . . . . . . . . . . . . . . . . . . 52

Petitioner's Website Posting During the Investigation. . . . . . 53

Civil Case and the Permanent Injunction . . . . . . . . . . . . . . . . . . . . . 55

CivilComplaint.................................... 55

Petitioner's Actions After the Complaint Was Filed . . . . . . . 57

Depositions ....................................... 57

PermanentInjunction................................ 59

Compliance With the Permanent Injunction and Amended Returns .62

Client List ........................................ 62

Amended Income Tax Returns ........................ 63

Letterto Michael Pahl............................... 64

XII. Appeal to the Court of Appeals for the Ninth Circuit. . . . . . . . . . . . 65

XIII. The Balla and Zbylut Cases Before the Tax Court . . . . . . . . . . . . . . 66

Balla v. Commissioner .............................. 66

Zbylut v. Commissioner ............................. 69

-5[*5]

XIV. Penalty Assessment ...................................... 71

XV. Income Tax Returns in the Record .......................... 72

XVI. CDPHearingandPetition................................. 74

OPINION........................................................75

Procedural Matters....................................... 75

Evidentiary Objections .............................. 76

Admissibility of Civil Penalty Approval Form. . . . . . . 76

Respondent's Relevancy Objections . . . . . . . . . . . . . . 83

II.

Petitioner's Relevancy Objection . . . . . . . . . . . . . . . . . 84

Petitioner's Motions To Strike ....... . ............. . . . 85

Appendix1 .................................. 88

Appendix2 .................................. 88

Collection Review and Section 6701(a) . . . . . . . . . . . . . . . . . . . . . . 91

Collection Due Process.............................. 92

Section6701 Penalty................................ 96

Burden of Proof............................... 97

Aiding, Assisting, or Preparing With Knowledge of Use

of Document . . . ..... . . . . ....... . . . . . . ........ 99

Knowledge ................................. 100

Understatement of Liability . . . . . . . . . . . . . . . . . . . . 109

APPENDIXA.................................................... 116

APPENDIXB.................................................... 120

APPENDIX C.................................................... 122

-6[*6]

MEMORANDUM FINDINGS OF FACT AND OPINION

PANUTHOS, Special Trial Judge: These consolidated cases are before us

for review of two determinations by the Internal Revenue Service (IRS or

respondent)¹Office of Appeals (Appeals Office) following two collection due

process (CDP) hearings conducted pursuant to sections 6320(b) and (c) and

6330(b) and (c).2 Petitioner (also referred to as Mr. Kapp) seeks review of the

determinations by the IRS to uphold two notices of Federal tax lien filing (lien

notices) and a notice of proposed levy to collect section 6701 penalties related to

tax returns and tax documents petitioner prepared for his clients for tax years

¹TheCourt uses the term "IRS" to refer to administrative actions taken

outside of these proceedings. The Court uses the term "respondent" to refer to the

Commissioner of Internal Revenue, who is the head of the IRS and is respondent

in these cases, and to refer to actions taken in connection with these cases.

2Unless otherwise indicated, section references are to the Internal Revenue

Code (Code) in effect at all relevant times, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

-7[*7] 2002, 2003, 2004, 2005, and 2006.3 Petitioner timely petitioned this Court

with respect to each notice of determination.4

The issue before the Court is whether and to what extent the collection

action should be sustained. Since petitioner did not present collection alternatives,

the only real issue is whether petitioner is liable for section 6701 penalties for tax

years 2002, 2003, 2004, 2005, and 2006 (years in issue).5

The section 6701 penalties for the tax years in issue are as follows:

3Although sec. 6701 does not require a penalty to be assessed for a

particular taxable year, the IRS has a general practice of identifying an assessment

of a sec. 6701 penalty with the year that the tax document in issue was submitted

to the Govemment. See Chief Counsel Advice 201531015 (July 31, 2015).

4On July 14, 2011, the IRS issued to petitioner a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330, upholding the

notice of Federal tax lien filing for taxable years 2001, 2002, 2003, 2004, 2005,

and 2006. In response to this notice petitioner filed a petition on August 9, 2011,

commencing the case at docket No. 18470-11L. Also on July 14, 2011, the IRS

issued to petitioner a second Notice of Determination Concerning Collection

Action(s) Under Section 6320 and/or 6330, upholding the notice of proposed levy

for taxable years 2002, 2003, 2004, 2005, and 2006. In response to this notice

petitioner filed a petition on August 9, 2011, commencing the case at docket No.

18468-11L. On July 23, 2012, the parties filed a joint motion to consolidate the

cases for trial, briefing, and opinion, which the Court granted on August 1, 2012.

5The Court previously granted respondent's unopposed motion to dismiss

for lack ofjurisdiction and to strike as to the taxable years 2000 and 2001 in the

case at docket No. 18468-11L, as well as respondent's motion to dismiss for lack

ofjurisdiction and to strike as to the taxable year 2000 in the case at docket No.

18470-11L. Therefore, the sec. 6701 penalties for petitioner's taxable years 2000

and 2001 are not in issue in either case.

-8[*8]

Year

Amount

2002

$100,000

2003

105,000

2004

1,822,000

2005

1,785,000

2006

1,355,000

Total

5,167,000

FINDINGS OF FACT

Some of the facts have been stipulated, and we incorporate the stipulation of

facts by this reference. Petitioner resided in California when he timely filed the

petitions.

Petitioner's Education and Professional History

Petitioner graduated from Pierce College with an associate's degree in 1969

and from California State University, Northridge, with a bachelor of science

degree in 1972. In 1983 petitioner became licensed as a certified public

accountant (C.P.A.) and was still licensed at the time of trial.

Petitioner worked as an office auditor for the IRS for less than a year.

Petitioner also taught college-level accounting and Federal income taxation

-9[*9] classes at Pepperdine University and Los Angeles City College for 13 years.6

Petitioner considered himself an expert, particularly with respect to tax issues for

transportation workers. He came to this conclusion on the basis of self-study, not

because he had taken any specific course or received any specialized certification.

II.

Petitioner's Practice and Mariner Clients Generally

Petitioner focused his income tax return practice on transportation workers,

including airline pilots and railroad workers. Sometime before November 2000

petitioner began offering income tax preparation services through "Martin A.

Kapp, C.P.A., E.A., An Accountancy Corporation". As of February 2004

petitioner employed 10 people whom he also directly supervised; these employees

were income tax return preparers and clerical workers.7

6It is unclear when petitioner was an office auditor or when he began or

stopped teaching, but the record indicates that he was teaching in 1989.

7Petitioner supervised and approved the work of his employees. If a

document was created by petitioner's office, it was either created by or approved

by him. For the sake of simplicity, we will refer to all relevant tax documents as

the work of petitioner, but some of the documents and other materials referenced

in this opinion may have been created by one of his employees and then approved

by him.

- 10 [*10] Petitioner began preparing income tax returns for mariners8 in

approximately 1993. Petitioner prepared income tax returns for several types of

mariners: (1) deep sea sailors (sometimes referred to herein as oceangoing or

deep-ocean sailors), (2) tugboat mariners (sometimes referred to herein as tug and

barge or tug/barge sailors), (3) offshore mariners, (4) offshore oil rig workers, and

(5) marine ferry drivers. Deep sea mariners usually work on vessels making

transcontinental trips or deep sea trips and are at sea for long periods. Tugboat

mariners work on tugboats that haul barges, and some of them return to port more

frequently than deep sea mariners. Offshore mariners travel hundreds of miles to

offshore locations and typically travel on extended overnight trips. Offshore oil

rig workers work on oil rigs in the Gulf of Mexico. Marine ferry drivers

repeatedly drive a ferry on a set route with one or more stopping points; some trips

last less than a day and others are longer, overnight trips.

As of 2006 petitioner's mariner client base broke down roughly as follows:

(1) 75% were deep sea mariners, (2) 18% were tugboat mariners, (3) 5% were

offshore mariners, (4) 1% were offshore oil rig workers, and (5) 1% were marine

ferry drivers.

8Petitioner used the terms "mariner" and "sailor" interchangeably

throughout his business advertisements, articles and website posts. Consequently,

both tenus are used herein.

- 11 [*11] III.

The Johnson and Westling Cases

Petitioner's mariner clients included Marin Johnson and Jim Westling, each

of whom had a case before the Court regarding deductions for unreimbursed

employee business meals (meal expenses) and incidental expenses (incidental

expenses). See Johnson v. Commissioner, 115 T.C. 210 (2000); Westling v.

Commissioner, T.C. Memo. 2000-289, 2000 WL 1310659.

During 1994 and 1996 Mr. Johnson resided in the State of Washington and

worked as a mariner for Crowley American Transport, Inc. He was a deep sea

mariner and captain of a vessel that transported military vehicles and equipment to

various destinations in the United States and around the world. Mr. Johnson

would work aboard the vessel for approximately four months at a time and then

take two months of vacation. Mr. Johnson's schedule required that he work

continuously for long periods on the vessel and eat and sleep on the vessel while

working.

During 1996 Mr. Westling resided in the State of Washington and worked

as a mariner for Silver Bay Logging, Inc. He was captain of a tugboat that

transported barges in and around Alaska. Mr. Westling would work on the

tugboat for 30 days at a time, and his schedule required that he eat and sleep

- 12 [*12] aboard the tugboat while working. Mr. Westling worked and traveled on the

tugboat for 307 days in 1996.

Mr. Johnson's and Mr. Westling's employers provided each of them with

lodging and meals without charge while they worked on their respective vessels.

Mr. Johnson and Mr. Westling each purchased "personal" items such as hygiene

products and safety equipment while on board because these items were not

provided by their employers. Neither Mr. Johnson nor Mr. Westling was

reimbursed by his employer for purchasing these items, nor did either mariner

retain receipts for these purchases.

Petitioner prepared (1) Mr. Johnson's amended Federal income tax return

for taxable year 1994 and his Federal income tax return for taxable year 1996 and

(2) Mr. Westling's Federal income tax return for taxable year 1996. For each

client's 1996 Federal income tax return° petitioner claimed miscellaneous itemized

deductions for unreimbursed employee business meals and incidental expenses,

computed by using the full Federal per diem rates for the meals and incidental

expenses (M&IE rate) referenced in Rev. Proc. 96-28, 1996-1 C.B. 686,

9Mr. Johnson's 1994 amended Federal income tax return claimed a

deduction for only incidental expenses; the miscellaneous itemized deduction did

not include meal expenses.

- 13 [*13] superseding Rev. Proc. 94-77, 1994-2 C.B. 825,¹°multiplied by the number

of days traveling for work. Petitioner attached to each return schedules he had

prepared reflecting the travel destinations for work, determined by the various

ports to which each mariner had traveled while aboard the vessel and the number

of days traveling.

The IRS determined that neither Mr. Johnson nor Mr. Westling was entitled

to deduct any of the unreimbursed employee business meals or incidental expenses

reported for 1996. Mr. Johnson and Mr. Westling each separately petitioned the

Tax Court, and their cases were consolidated for the purpose of trial and briefing.

At trial the IRS asserted the following: (1) each taxpayer did not have a tax home

and thus could not deduct the claimed expenses as "away from home"

unreimbursed employee business traveling expenses under section 162;" (2) each

¹°Forover two decades the Commissioner has issued revenue procedures

which specify the Federal travel regulations M&IE rate as the amount that a

taxpayer may deduct in lieu of substantiating the actual cost of meals and

incidental expenses paid or incurred while traveling for work. See Rev. Proc. 9038, 1990-2 C.B. 363, amplifying, clarifying, and modifying Rev. Proc. 89-67,

1989-2 C.B. 795, and subsequent revisions.

"Sec. 162(a)(2) allows a deduction for ordinary and necessary expenses

paid or incurred in carrying on a trade or business, including traveling expenses

(including amounts expended for meals and lodging) while away from home in

pursuit of a trade or business. See Commissioner v. Flowers, 326 U.S. 465 (1946).

Sec. 162 does not, however, allow a taxpayer to deduct travel expenses

(continued...)

- 14 [*14] taxpayer did not prove that he actually incurred the claimed expenses and

testimony alone is insufficient proof of same; and (3) each taxpayer could not use

the revenue procedures to ascertain the deductible amounts of these expenses

because they do not apply when only incidental expenses are incurred. At the trial

each taxpayer testified that he had paid incidental expenses while working and that

he could not provide receipts to substantiate his purchases.

On September 15, 2000, the Court filed opinions in the cases of Johnson v.

Commissioner, 115 T.C. 210, and Westling v. Commissioner, 2000 WL 1310659.

In each opinion the Court held that because the taxpayer traveled continuously for

his work and did not have a principal place of employment, his personal residence

was his tax home; thus for tax purposes, he was "away from home" while working

aboard his vessel. Additionally, the Court held that (1) each taxpayer was entitled

to use the M&IE rates set forth in the revenue procedures to compute his

deductible amount of incidental expenses because he had credibly testified that he

paid those expenses and had substantiated the time, place, and business purpose as

"(...continued)

attributable to personal, living, or family expenses. See sec. 262. Deductions for

travel expenses are also subject to the strict substantiation requirements of sec.

274(d), which requires that a taxpayer substantiate by adequate records (or

sufficient evidence to corroborate the taxpayer's own statement) the amount, time,

place, and business purpose of an expense.

- 15 [*15] required by section 274(d) and that (2) each taxpayer could not compute

deductions using "the full M&IE rates" because "[w]e do not read the revenue

procedures to allow a taxpayer to use the full M&IE rates when he or she incurs

only incidental expenses." Johnson v. Commissioner, 115 T.C. at 224-227. Thus,

each taxpayer could deduct only incidental expenses and could not deduct meal

expenses that he had not incurred. Id. at 227.

In Johnson v. Commissioner, 115 T.C. at 226 n.8, the Court also stated that

Rev. Proc. 90-60, sec. 6.03, 1990-2 C.B. 651, 655, does not apply

because petitioner was never responsible for the cost of his meals.

Moreover, the fact that 41 C.F.R. sec. 301-7.12(a)(2) (1994 & 1996)

provides explicitly that the M&IE rate must be reduced when the

Government provides an employee with meals at no charge counters

petitioner's argument that we should not reduce the M&IE rates to

take into account his employer-provided meals. [Emphasis added.]

The Court further stated that "petitioner has not specified the dollar amounts

which he actually paid for any of his incidental expenses", and thus he could not

deduct actual costs or take advantage of the exception set forth in Notice 95-50,

1995-2 C.B. 333 (no receipts are required for expenditures of less than $75 which

are incurred after October 1, 1995). Johnson v. Commissioner, 115 T.C. at 228 &

n.11.

In Westling v. Commissioner, 2000 WL 1310659, at *3, the Court stated

that "[u]nder the precedent of Johnson" Mr. Westling "is entitled to deduct the

- 16 [*16] incidental expense portion of the applicable M&IE rates for his points of

travel as set forth on his schedule." The opinion did not hold that the taxpayer

could deduct the cost of meals furnished by the employer.

Petitioner did not represent the taxpayer in either the Johnson or the

Westling case before the Court.¹²Petitioner read the opinions shortly after they

were released on September 15, 2000.

IV.

IRS Guidance After the Johnson and Westling Cases

Revenue Procedures for the Years in Issue

The Commissioner issues revenue procedures which specify, among other

things, that an employee traveling away from home for business may use the

M&IE rate from the Federal travel regulations to compute the deductible amount

of unreimbursed employee business meals and incidental expenses paid or

incurred. See Rev. Proc. 90-38, 1990-2 C.B. 363, amplifying, clarifying, and

modifying Rev. Proc. 89-67, 1989-2 C.B. 795, and succeeding revenue

procedures. As previously mentioned, petitioner relied on Rev. Proc. 96-28,

supra, when preparing the income tax returns for Mr. Johnson and Mr. Westling.

The Court discussed the updated revenue procedure in its opinions. See Johnson

¹²AttorneysSteven R. Stolar and Kristina S. Keller represented Mr. Johnson

and Mr. Westling in their cases before the Court. It does not appear that petitioner

is or was admitted to represent clients before the Court.

- 17 [*17] v. Commissioner, 115 T.C. at 217-225; Westling v. Commissioner, 2000

WL 1310659, at *2.

After the Johnson and Westling opinions the Commissioner continued to

update these revenue procedures annually, but the relevant provisions remained

substantially the same from 2000 to 2006. See Rev. Proc. 2000-39, 2000-2 C.B.

340; Rev. Proc. 2001-47, 2001-2 C.B. 332; Rev. Proc. 2002-63, 2002-2 C.B. 691;

Rev. Proc. 2003-80, 2003-2 C.B. 1037; Rev. Proc. 2004-60, 2004-2 C.B. 682;

Rev. Proc. 2005-10, 2005-1 C.B. 341; Rev. Proc. 2005-67, 2005-2 C.B. 729; Rev.

Proc. 2006-41, 2006-2 C.B. 777.

As relevant here, for taxable years 2002 through 2006 these revenue

procedures state the rules under the Code for deducting ordinary and necessary

business expenses for meals incurred while traveling away from home (as set forth

in sections 162 and 274(d) and the regulations) and then provide rules

promulgated by the Commissioner for deducting "deemed substantiated"

unreimbursed employee business travel expenses, including for meals, paid or

incurred by employees. The revenue procedures include an option for the taxpayer

to use the M&IE rate to calculate the deduction for meals and/or incidental

expenses instead of substantiating the amounts paid or incurred. Petitioner read

each revenue procedure on or shortly after its release.

- 18 [*18] B.

Chief Counsel Advice

In Chief Counsel Advice (CCA) 200242038 (Oct. 18, 2002), the IRS

analyzed incidental expenses claimed by mariners, including the application of the

Johnson and Westling cases to mariner taxpayers claiming deductions for meals

and incidental expenses:

The claims of mariners who claim either the full federal per

diem amount (lodging plus meals and incidental expenses) or the full

federal M&IE amount under the purported authority of Johnson and

Westling are without merit. The holdings in those cases limited the

taxpayers to the federal per diem rate for incidental expenses only,

using the rates specified in the Federal Travel Regulations.

Therefore, any amount claimed in excess of the IE rates in the Federal

Travel Regulations is facially defective, and should be disallowed.

In CCA 200343025 (Oct. 24, 2003), the IRS analyzed the ramifications of

the holding of the Johnson Opinion and addressed the following issues:

(1) whether Notice 95-50, supra, affects the requirement to maintain records to

substantiate a travel expense under section 274 and (2) deductibility of incidental

expenses incurred while aboard a "ship in the middle of the ocean". Regarding the

Notice 95-50 issue, the IRS stated that Notice 95-50, supra, does not affect the

substantiation requirements of section 274(d) that require a taxpayer to keep

adequate records, prepared contemporaneously, to establish the amount, time,

- 19 [*19] place, and business purposes of expenditures. See CCA 200343025 (Oct.

24, 2003). Petitioner read each CCA shortly after it was released.

Petitioner's Actions After the Johnson and Westling Cases

Communications With Ric Hulshoff

On October 25, 2000, shortly after the release of the Johnson and Westling

opinions, petitioner sent a letter to Ric Hulshoff, counsel for respondent in those

cases, requesting a face-to-face meeting with Mr. Hulshoff "as the IRS's Legal

Spokesman during these Tax Cases" and with "the L.A. Appeals Officers available

to attend" to discuss the ramifications of the Johnson and Westling cases.¹³The

following is an excerpt from petitioner's letter to Mr. Hulshoff:

My office has * * * spoken to most of the labor unions for

merchant sailors who also predict several thousand amended tax

returns could be requested of my office over the next year as a result

of these decisions. * * *

I believe this requested meeting is needed to help both of us

avoid unnecessary audit confrontations and unnecessary refund

delays for taxpayers qualifying for these travel deductions. We both

realize that just because the Tax Court allowed me to use your Notice

95-50 (which states no travel receipts under $75 per incident is

required) along with your various Travel Revenue Procedures (which

also state these travel deductions are "deemed substantiated") does

¹³Itis unclear from the record what communications, if any, petitioner had

with Mr. Hulshoff before he sent the letter dated October 25, 2000.

- 20 [*20] not automatically mean every individual IRS Service Center Auditor

or local IRS Office Auditor is going to immediately understand or

comply with the Court's ruling.

I expect this face-to-face meeting will satisfy your Appeals

Officers' concerns that I am indeed correctly applying the Tax

Court's Interpretations of both IRS Notice 95-50 and your various

Travel Revenue Procedures. I believe I can establish to your comfort

level that I am now including a correct day-by-day breakdown for

each sailor's travel showing the correct table-provided daily

incidental rates along with an employer letter stating no per diem

allowances were provided.

After receipt of this letter Mr. Hulshoff telephoned petitioner and during a

brief conversation informed him that it was against IRS policy to meet with an

interested party after a Tax Court case. Petitioner sent a similar letter dated

November 22, 2000, repeating his request for a face-to-face meeting to discuss the

Johnson and Westling cases. Petitioner did not specifically mention claiming

meals expense deductions for his mariner clients in either letter to Mr. Hulshoff.

After this second letter Mr. Hulshoff again telephoned petitioner and informed him

that the IRS would not conduct such a meeting with him.

Communications With Mariner Clients

After the Johnson and Westling opinions were released, petitioner began

advising his tugboat mariner clients and some of his other mariner clients that they

- 21 [*21] were allowed to claim meals expense deductions even if meals were

provided by their employers.

Websites

In 2001 petitioner created websites at www.mkappepa.com and

www.sailortax.com (which redirected to www.mkappepa.com) that advertised and

promoted his services to mariners by asserting that he could obtain large income

tax refunds for them. In these representations petitioner discussed the Johnson

and Westling cases, asserting that he successfully sued the IRS in the Tax Court

- 22 [*22] and won "his cases".¹4 Petitioner continued to maintain these websites

through 2007.

Sometime before February 2004 a document titled "Article Available on

More Favorable Mariner Tax Treatment" was posted on petitioner's websites.

This document asserted that petitioner had "won a tax court ruling that can result

in more beneficial tax treatment to merchant mariners" and that the average tax

savings for mariner taxpayers "has been between $2,000 and $2,500".

¹'Petitionerreferred to Johnson v. Commissioner, 115 T.C. 210 (2000), and

Westling v. Commissioner, T.C. Memo. 2000-289, as "my" decisions in multiple

internet posts. In a post entitled "What do Merchant Sailors Need to Provide Us to

Get These Rather Large Travel Deductions?", petitioner wrote:

The Tax Court was very clear in both of my decisions to

properly take full advantage of these "deemed substantiated" travel

deductions, my office needs a full-year "Ports of Call Statement"

* * * In any case, a Sea Time Letter generated by your employer (or

possibly generated by the Ship's Captain) showing the specific days

worked and the specific vessel you worked aboard is the only other

item required to claim these wonderful travel deductions.

Remember--these were the only items of "proof" that I showed the

Tax Court with Jim Westling's case * * *

In a series of bullet points in the same post stating his professional background,

petitioner claimed to have "[s]uccessfully [s]ued IRS in U.S. Tax Court using this

Rev. Proc. and the other 'Deemed Substantiated' Travel Rev Proc's on behalf of

both Marin I. Johnson 115 T.C. 16 and Jim L. Westling T.C. Memo. 2000-289".

In a separate post entitled "What About Tug Boat/Barge Mariners?", petitioner

stated: "My first article in the October/November 2001 issue of 'Professional

Mariner' Magazine describes in considerable detail why I won twice in Tax

Court".

-23 [*23] D.

Articles

After the Johnson and Westling cases, petitioner wrote and published

several articles discussing the application of these cases to mariner taxpayers,

including the following.

Petitioner's magazine article titled "Tax breaks for mariners" was published

in the October/November 2001 edition of Professional Mariner magazine and was

available on Professional Mariner Online (the website for Professional Mariner

magazine). In a discussion of the impact of the Johnson and Westling cases on the

income tax deductions available to mariners, petitioner wrote:

[T]he exciting news for mariners is that two U.S. Tax Court decisions

last year settled the legal issue of allowing mariners to claim an

almost unlimited amount of travel deductions while working away

from home, without ever having to show the IRS any receipts, just

like other transportation workers.

Before these cases, the legal issue of mariners claiming travel

deductions while underway had not been discussed in any Tax Court

cases prior to World War I, and the conventional wisdom was that

sailors could not claim travel expenses since meals and lodging are

provided at no cost. * * *

The Tax Court's 30-page Johnson decision left no room for doubt that

every qualified mariner can claim incidental expenses by using the

published incidental rates, and they can also claim other legitimate

- 24 [*24] travel deductions without having to keep any receipts for expenses

under $75 per IRS Notice 95-50. To make these two court victories

even sweeter, IRS management has formally agreed to comply fully

and follow these Tax Court decisions. No longer can an individual

IRS auditor decide to challenge these court decisions and demand to

see travel receipts from anyone.

The Tax Court also specifically allowed my sea captains to

claim all of their time aboard the ships, not just the days they spent in

port. The court also agreed that these travel deductions have been

legally available since 1927 when Congress first allowed travel

incidental deductions.

[Emphasis added.]

Petitioner's magazine article titled "Tug & Barge Sailors Entitled to Tax

Deductions for Food" was published in the April/May 2002 edition of

Professional Mariner magazine. In a discussion of deductions for meals and

incidental expenses available to tugboat mariners, petitioner asserted:

While the thrust of my recent article * * * dealt with sailors

working aboard oceangoing containerships, where all lodging and

meals were assumed to be completely provided, tug and barge sailors

are commonly provided a food allowance for the boat that may

average only $10 per day.

In 2000 the U.S. Tax Court in Washington ruled in behalf of

two of my clients, Capt. Marin Johnson and Capt. Jim Westling, over

the issue of mariners claiming automatic travel deductions without

receipts while underway. Please remember both the IRS and the Tax

Court now allow travel deductions per my two Tax Court decisions

covering any unreimbursed lodging, meals and/or incidental

expenses. If meals are not routinely provided at the full IRS meal

- 25 [*25] rate, you are allowed to claim this meal rate for each port you visit.

This "deemed substantiated" meal rate fluctuates from city to city.

For tax purposes, the situation of sailors receiving a $10-a-day

cash food allowance is not legally equivalent to those "having their

meals provided by their employer."

Other sailors must shop for their entire crew's groceries at a

specific supermarket with a company-provided food voucher and are

given the same $10-per day food allowance per sailor. In both of

these scenarios, you may claim the full, daily, government-allowed

meal rate, less your per diem allowance. For example, if you are

working in New York Harbor and receive a $10-per-day food

allowance, you are allowed to claim $46 (New York rate) minus $10.

That equals $36 per working day.

[Emphasis added.]

Petitioner also asserted that mariner taxpayers claiming these deductions could

expect to decrease their tax liability by $2,000 to $3,000.

Petitioner's magazine article titled "Transportation industry tax savings:

special tax benefits for pilots and mariners" was published on August 1, 2002, in

The National Public Accountant magazine. Petitioner discussed the Johnson and

Westling cases, writing:

[T]he U.S. Tax court settled the legal issue of allowing mariners to

claim an almost unlimited amount of travel deductions while working

away from home, without having to produce any receipts, the same as

for other transportation workers. Previously, conventional wisdom

was that sailors could not claim travel expenses since meals and

- 26 [*26] lodging are provided at no cost. We proved that the law allows a

travel deduction for lodging, meals, and/or incidental expenses.

The Tax Court's decision left no room for doubt that every

qualified mariner can claim incidental expenses by using the

published incidental rates. They also can claim other legitimate travel

deductions without having to keep any receipts for expenses under

$75 per IRS Notice 95-50.

[Emphasis added.]

Petitioner's article titled "Beware of magic numbers when tabulating your

tax deductions" was published in the February/March 2003 edition of Professional

Mariner magazine and was available on Professional Mariner Online. In a

discussion about deductions for meals and incidental expenses available to

mariner taxpayers on their Federal income tax returns he wrote:

$38 per day is the standard domestic (continental United

States) transportation meal rate. This $38 per-day meal rate is only

legally available to tug/barge sailors and is not available to deepocean sailors. Oceangoing sailors typically have their meals provided

by their employers, while tug/barge sailors typically receive only a $8

to $11 per-day grocery allowance. Oceangoing sailors can claim

more than $38 per day easily, but this $38 rate is for meals, and deepocean sailors qualify for incidental expenses, not meals.

Oceangoing sailors--remember your meals are normally

provided, and claiming this additional meal deduction is considered

to be double dipping.

- 27 -

[*27] *

Besides, tug/barge sailors using this $38 rate still need to

reduce this figure by the $8 or $11 daily grocery allowance provided

by their employers.

There is no set limit as to the amount of claimed travel deductions-but only if you properly attach travel documents that clearly establish

your specific travel dates and specific travel locations. Both deepocean and tug/barge sailors that use my office to compute their

qualified travel deductions seem to be averaging between $40 and

$60 per day, without receipts.

[Emphasis added.]

Documents Created for Mariner Clients

In late 2001 or 2002 petitioner wrote a document titled "What Do Merchant

Sailors Need to Provide Us to Get These Rather Large Travel Deductions" that

was provided to clients.¹5 In this document petitioner asserts:

The Tax Court was very clear in both of my decisions to

properly take full advantage of these "deemed substantiated" travel

deductions, my office needs a full-year "Ports of Call Statement"

hopefully signed and/or stamped by the Ship's Captain. This "Ports

of Call Statement" needs shows [sic] All Ports Visited By The Ship

During the Entire Year--Port Arrived Date--Port Departed Date.

If your ship visited more than one port in a day--just choose one

(hopefully the one with the higher per diem rate). Try also to make

this Statement look as "Official" as possible. My office will then

¹sItappears that this document was mailed to some clients, and it also may

have been posted on petitioner's websites.

- 28 [*28] attach a copy of this statement to each and every sailor's return we

process from your ship.

In any case, a Sea Time Letter generated by your employer (or

possibly generated by the Ship's Captain) showing the specific days

worked and the specific vessel you worked aboard is the only other

item required to claim these wonderful travel deductions.

Remember--these were the only items of "proof" that I showed the

Tax Court with Jim Westling's case, and Jim is a Tug Boat Captain

and did not have any U.S. Coast Guard Discharge Papers.

In April or May 2002¹6petitioner wrote a document titled "What about

tugboat/barge mariners?" in which he discussed the implication of the Johnson

and Westling opinions on the tax returns of tugboat/barge mariners. Petitioner

wrote:

Please remember both the IRS & the U.S. Tax Court allow travel

deductions covering any unreimbursed lodging, meals, and/or

incidental expenses. If meals are not routinely provided, you are

allowed to claim the full meal rate for the location of travel. * * *

For tax purposes, any employee who is either directly or

indirectly given a $10/day cash food allowance is not legally

equivalent to "having their meals provided by their employer."

***

The combination of winning twice in U.S. Tax Court the legal

right for all qualifying merchant sailors to claim an almost unlimited

¹6Thedocument states: "Be sure to read my followup article now

appearing in the current April/May 2002 'Professional Mariner' magazine

specifically dealing with tug & barge sailors!"

- 29 [*29] amount of travel deductions all without receipts and my two recently

published articles in "Professional Mariner Magazine" is causing a

large increase in new business to my accounting firm. * * *

And Yes, these "deemed substantiated" travel deductions

also apply to those sailors working in the Great Lakes Area, all

inland waterways, those servicing Gulf Coast oil rigs, in addition

to those working in deep water.

VI.

Marine Company Industry Practices

Cheramie Marine

At least one of petitioner's mariner clients¹7worked for Cheramie Marine

during the years in issue. Cheramie Marine is a shipping company that hauls

supplies, fuel, water, groceries, and incidentals to offshore drilling rigs and

production platforms in the Gulf of Mexico. During the years in issue Cheramie

Marine employed between 40 and 60 mariners and operated approximately

10 vessels: three crew boats and seven supply vessels. Each vessel carried four

crewmembers who each worked a shift lasting 28 days.

¹7InAugust 2007 petitioner provided the U.S. Department of Justice (DOJ)

and the U.S. District Court for the Central District of California with a list of each

client for whom he had prepared an income tax return or portion of a return which

asserted or relied "on a position that mariners may claim tax deductions for meals

that were provided to them without cost" (client list). We will discuss the client

list in further detail infra p. 62.

- 30 [*30] While the crew was aboard the vessel, a crewmember would prepare and

serve to the crew three meals a day (breakfast, lunch, and dinner) and would also

make meals available for those who worked nighttime shifts. Every 28 days when

a vessel made a crew change, the crew would compile a list of groceries and

submit it to the Cheramie Marine main office, which ordered the groceries and

paid the grocery store. During the relevant years Cheramie Marine had a grocery

budget of approximately $250 per vessel per week. Cheramie Marine did not

charge employees for groceries or meals.

From 1977 to 1992 Dino Cheramie worked for a crew boat company jointly

owned and operated by his father and brother before founding Cheramie Marine in

1992, where he served as the chief executive officer. According to Mr. Cheramie,

providing meals to mariners has been "a standard procedure" in the marine

industry since at least 1977 when he started his career. At the time of trial Mr.

Cheramie was not aware of any marine company that did not provide free meals to

mariners while they were working aboard a vessel.

- 31 [*31] B.

Matson Navigation Co.

At least two of petitioner's clients¹³worked for Matson Navigation Co.

(Matson) during the years in issue. Matson is a steamship company that has routes

from Washington State to California and to Hawaii and has a service that provides

travel to China. From 2002 to 2006 Matson operated between 12 and 16 vessels,

including steamships and diesel vessels. Each vessel carried between 20 and 35

crewmembers. The lengths of the routes for Matson's vessels varied depending on

their destinations. For example, the voyage on the Hawaii route lasted two weeks,

while the voyage on the China route lasted 35 days. While the vessels were at sea,

the mariners could not leave the ship. Additionally, when a vessel arrived in port,

the mariners aboard were not allowed to leave the ship until 5 p.m. or 6 p.m.

Each of Matson's vessels had a galley kitchen in which meals were prepared

for employees. The steward's department for each vessel was in charge of meals.

The chief steward prepared the meal plans and a grocery list, and Matson ordered

and paid for the groceries. The steward's department then prepared these

groceries for meals. Each vessel provided employees aboard with three meals a

¹ªPetitioner'sclient Raymond Zbylut worked for Matson during 2002.

Petitioner prepared Mr. Zbylut's income tax return for 2002. We discuss Mr.

Zbylut's case before the Court infta pp. 69-71. Zbylut v. Commissioner, T.C.

Memo. 2008-44.

- 32 [*32] day (breakfast, lunch, and dinner) and kept food in the refrigerator overnight

for those who had to work late or worked the night shift. Union contracts dictated

the types of food that Matson could serve to employees and also dictated that

Matson had to provide at least three food options at each meal. Meals were served

buffet style, and there was no limit as to how much an employee could eat.

Matson did not charge employees for the groceries or the prepared meals, and the

value of meals was not included in Forms W-2, Wage and Tax Statement,

provided to employees.

Donna Simon Schlanker was the payroll manager during the relevant years,

a position she held for approximately 16 years. At the time of trial Ms. Schlanker

was the purchasing manager and had worked for Matson for 23 years. She was

not aware of any marine shipping company that did not provide free meals to

mariners while they were working.

Dann Ocean Towing

At least one of petitioner's clients worked for Dann Ocean Towing (Dann)

during the years in issue. Dann is a family-owned tugboat company that tows

vessels, including barges and ships, along the east and west coasts of the United

States and the Gulf of Mexico and occasionally to foreign countries. During 2002

- 33 [*33] through 2006 Dann operated seven or eight tugboats and employed between

60 and 80 mariners.

Mariners were typically on work schedule rotations that had them aboard

the tugboat for 40 days and then off for 20 days, although some would choose to

extend and stay for longer periods. While mariners were on these rotations, they

were generally required to stay aboard the vessel.

Each Dann tugboat had a galley kitchen or a similar space in which meals

were prepared which was equipped with a stove, a range, a microwave, a

refrigerator, a freezer, and a storage space for dry goods. Each Dann tugboat also

had a dining area for the employees. The procedure for meal preparation for each

voyage was that one mariner was designated the cook and would take inventory of

the food in the kitchen and then make a list of groceries for the voyage. After the

captain or mate reviewed and approved the grocery list, the cook would purchase

the groceries for the voyage. The cook prepared all meals and provided them to

mariners while they were aboard the tugboat. Dann paid for the groceries and did

not charge employees for groceries or the meals provided.

Mr. Waller was the general manager for Dann during the relevant years.

According to Mr. Waller, providing meals to mariners aboard the tugboat is "the

normal policy of the way we've been doing business ever since I've been

- 34 [*34] employed there. We provide the food for the crew members while they're

onboard." At the time of trial Mr. Waller had worked for Dann for almost 23

years.

Mariner Edward Roach

Edward Roach was petitioner's client during the years in issue and worked

for Central Gulf during taxable years 2004, 2005, and 2006. Mr. Roach attended

and graduated from the Massachusetts Maritime Academy. In 1967 he began

working as a seaman and then became an officer and licensed merchant mariner in

1968.

Mr. Roach worked as a mariner in various positions for approximately 10

companies over 40 years, first as third mate, then second mate, then chief mate,

then briefly as captain, and then finally as chief mate before retiring in

approximately 2008. He worked on a tugboat for 10 years. He also worked on a

number of other types of vessels during his career, including freight bulk ships,

container ships, tankers, passenger cargo ships of various sizes, and bulk vessels.

At the time of trial Mr. Roach was performing some work as a consultant for the

merchant mariner industry.

Throughout his career as a mariner Mr. Roach would stay on the ship for

periods of one to six months. On each vessel on which Mr. Roach worked there

- 35 [*35] was a galley where food was prepared by his employer's steward's

department, and three meals were served a day (breakfast, lunch, and dinner).

Additionally, food was usually left in the refrigerators and available for people

who worked through the night shift or who otherwise wanted to eat late at night or

early in the morning. Meals were provided "all the time * * * in port or at sea".

All of Mr. Roach's employers paid for the groceries used in preparing the meals,

and they did not charge him for groceries or the meals served aboard the vessel.

Additionally, Mr. Roach had "never heard of any" marine company that did not

provide free meals to its employees while they were working aboard a vessel.

During the relevant years when Mr. Roach's vessel was in port he "normally

stayed onboard" and would eat the meals provided by his employer. Mr. Roach

did not pay meal expenses while working aboard a vessel at any time during the

relevant years when the vessel was at sea or in port.

Edison Chouest Offshore (ECO)

At least one of petitioner's mariner clients worked for ECO during the years

in issue. ECO provides supply vessels for offshore oil and gas drilling, operating

mainly in the Gulf of Mexico and Louisiana. During the relevant years ECO

operated approximately 150 vessels and employed approximately 3,500 mariners.

The typical schedule for a mariner was to be aboard the vessel for 28 days, during

- 36 [*36] which time they were generally required to stay aboard the vessel, and then

they were off the vessel for 14 days.

During 2002 through 2006 ECO provided meals for all its mariner

employees while they were aboard the vessels. ECO had a grocery budget of

$8.50 per day per employee per vessel; this budget determined how much each

ECO vessel could spend on groceries for a voyage. Each ECO vessel had a

kitchen and a cook who prepared and served three meals per day (breakfast, lunch,

and dinner) to all of its mariner employees while they were working. Each ECO

employee could eat as much as he desired during a meal. The captain and/or the

cook of a vessel would select groceries that were used to prepare the meals, and

the grocery store would send the invoices directly to ECO for payment. ECO paid

for all of the groceries and did not charge its employees for the groceries or for the

meals.

VII.

Petitioner's Conversations With Charles Comeaux

Charles Comeaux is a C.P.A. and was the chief financial officer (CFO) for

ECO during the years in issue. At the time of trial Mr. Comeaux had worked for

ECO for 35 years and was its CFO for 27 years. As CFO Mr. Comeaux managed

ECO's accounting department in addition to working on its finances and tax

planning.

- 37 [*37] Mr. Comeaux first heard of petitioner in approximately 2002 when an ECO

employee informed him that petitioner was preparing income tax returns for

mariners and claiming deductions for meal expenses. Mr. Comeaux told the ECO

employee that he believed that the deduction was improper. Petitioner

subsequently called Mr. Comeaux a few times requesting a list of ECO's mariner

employees, which Mr. Comeaux refused to provide.

During these telephone conversations Mr. Comeaux explained to petitioner

that he believed it was improper for ECO employees to claim deductions for meal

expenses because ECO provided all employees with meals, at no charge, while

they were working. Mr. Comeaux then consulted with ECO's tax professional, a

tax partner with the accounting firm Ernst & Young LLP (E&Y), who agreed with

Mr. Comeaux that these deductions were improper. Subsequently, Mr. Comeaux

and the E&Y tax partner had a telephone conference with petitioner, during which

they explained to him why they believed that the above-mentioned deductions

were improper. During these telephone conversations petitioner was aware of the

E&Y tax partner's credentials and that Mr. Comeaux was ECO's CFO and a

C.P.A.

- 38 [*38] VIII. Petitioner's Income Tax Return Preparation Practices for Years in

Issue

As previously mentioned (1) approximately three-fourths of petitioner's

clients were mariners, and he prepared income tax returns for mariner taxpayers

for taxable years 2002 through 2006 and (2) after the Johnson and Westling

opinions were released in 2000, petitioner began advising his tugboat mariner

clients and some of his other mariner clients that they were allowed to claim

deductions for meal expenses even if meals were provided by their employers.

Income Tax Return Preparation Practices Generally

When preparing income tax returns for his mariner clients, petitioner did not

question each mariner client about whether his or her employer provided meals

while he or she was working. Petitioner did not meet all of his mariner clients in

person before signing their income tax returns. Petitioner did not have a document

reflecting the meal policy for each company that employed his mariner clients.

Petitioner also did not keep a written record of the meal policies of the companies

employing his mariner clients, nor did he have a record of any companies that

purportedly did not provide their mariner employees with meals while working.

- 39 [*39] B.

Supplemental Sailor Travel Schedules

For the years in issue petitioner prepared income tax returns for clients that

claimed deductions on Schedule A, Itemized Deductions. For at least some of his

mariner clients petitioner attached to their income tax returns a statement variously

titled "Supplemental Sailor Travel Schedule" or "Supplemental Tug/Barge Sailor

Travel Schedule" (travel schedule or travel package). See infm Appendix A.

These travel schedules included, among other things, a calculation of the

deduction claimed on Schedule A, line 20, Unreimbursed employee expenses--job

travel, union dues, job education, etc., computed using the number of days the

vessel was traveling, the location(s) of travel of that vessel, and the applicable

OCONUS and CONUS" M&IE rates for each location. The travel schedules

contained the following sentence (or a substantially similar sentence) in their first

body paragraph: "This travel package format was completed in conjunction with

the CPA firm that prevailed with both Marin Johnson ('Johnson') Jim Westling

[sic] T.C. Memo. 2000-289 ('Westling') Tax Court Mariner decisions discussed

below". At least some of the travel schedules also contained the following or a

"OCONUS is an acronym for "outside the continental United States", and

CONUS is an acronym for "continental United States".

- 40 [*40] similar assertion: "This travel package format has already been legally

endorsed by the U.S. Tax Court in Washington D.C." See infra Appendix A.

Petitioner typically attached additional documents in support of the travel

schedule, including (1) the "Ports of Call" travel schedule for the vessel(s) on

which the taxpayer worked and traveled during the year and (2) documents from

the U.S. Coast Guard reflecting the taxpayer's travel while aboard the vessel(s)

during the year. Petitioner also attached authorities which he asserted supported

his position, including a copy of the Johnson Opinion and a copy of the relevant

revenue procedure for the year in issue.

Petitioner provided two types of services for a mariner client: (1) preparing

the entire Federal income tax return, including the travel schedule, or (2) preparing

only the travel schedule. Petitioner provided the latter service for approximately

3% of his clients. Petitioner typically charged a mariner client $595 to prepare an

income tax return and $295 to prepare a travel schedule.

Mr. Roach's Income Tax Returns for 2004 Through 2006

Mr. Roach learned of petitioner's income tax return preparation services

through his articles in mariner magazines and an article written for his union

newspaper and was aware of him because he was well known among mariners for

"soliciting tax preparation for seamen for a while." Mr. Roach was initially

- 41 [*41] skeptical that he could deduct meal expenses because he had "never paid for

any meals on any ships in 40-something years", but he was eventually convinced

that the meal expense deduction was legitimate after reading some of petitioner's

articles and other materials in which he asserted that he had won the Johnson and

Westling cases. Mr. Roach contacted petitioner's office in 2004 or 2005 and hired

petitioner to prepare his 2004 income tax return.

Petitioner prepared and timely filed Mr. Roach's individual income tax

returns for taxable years 2004, 2005, and 2006. While these returns were being

prepared Mr. Roach "never had a conversation" with petitioner; instead, one of

petitioner's employees would ask Mr. Roach questions and request paperwork.

While his returns for the relevant years were being prepared, Mr. Roach called

petitioner's office several times and would "get as far as his secretary", who would

then refer him to one of petitioner's employees. Mr. Roach was not allowed to

speak with petitioner. It does not appear that petitioner's employees questioned

Mr. Roach about whether he paid for meals while working aboard the vessel

during the relevant years.

Mr. Roach's income tax returns for the years 2004, 2005, and 2006 claimed

deductions for meals and incidental expenses (computed using the full M&IE rate

on the basis of locations of travel) on Schedule A, line 20, of $4,014, $4,126, and

- 42 [*42] $4,484, respectively. These amounts included meal expenses while Mr.

Roach was at sea and when his vessel was in port. For each of these years Mr.

Roach was subject to the alternative minimum tax (AMT).

IX.

The IRS Investigation

Examining Officer Tiffany Sim

In November 2003 Examining Officer (EO) Tiffany Sim sent a letter to

petitioner informing him that he was the target of an IRS investigation for "tax

shelter promotion" and requesting to schedule an appointment. On December 1,

2003, petitioner called EO Sim to discuss the investigation. Also on December 1,

2003, petitioner sent a nine-page letter to EO Sim in which he asserted that he

wants to provide "legal background into these travel deductions" and stated that

his position on the so-called mariner tax deduction (MTD) is supported by the

relevant authorities and the Tax Court and that the IRS does not oppose his

position. In the same letter, he acknowledged receipt of EO Sim's letter dated

November 21, 2003, and wrote:

After reading the above quotes taken from your 15 Travel

Revenue Procedures, Notice 95-50, your Travel Publication 463, and

my two U.S. Tax Court decisions it is easy to understand why some

other tax preparers throughout the country may be claiming excessive

travel deductions for their 'Transportation Industry Employees.' But

not me. * * * Every sailor return I prepare requires the compilation

and attachment of between 40 and 150 pages of Court Required

- 43 [*43] documentation. The manual preparation time required to put all of

this paperwork together could take someone 30 to 40 hours just to put

together one tax return. Whenever I receive either emails or phone

calls from other preparers or sailors I stress upon them the legal

requirement to properly substantiate their travel claims. I personally

have heard several tax preparers tell me they routinely just slap a

large travel claim onto a Schedule 2106 without ever bothering to

follow the substantiation requirements established by my two Tax

Court decisions. * * *

I believe this letter and attachments should be sufficient to

relieve you of any concerns about my tax practice being involved

with 'Tax Shelter Schemes.' I am not. As I have indicated in this

letter, both the U.S. Tax Court and your agency agreed with my legal

logic. I find it very ironic that someone like myself who has

proved themselves twice in Tax Court with out any legal

objections from the IRS, and who has always followed the

documentation policy approved by the Tax Court, should now be

subjected to your agency's intimidating harassment.

Subsequently, petitioner hired a Los Angeles based tax attorney (petitioner's LA

attorney) to represent him during the IRS investigation.

On February 26, 2004, EO Sim interviewed petitioner, asking a number of

questions about (1) his personal history, business, and professional history, (2) his

business practices and the size of his business, and (3) the promotional documents

he distributed for his business. During the interview petitioner declined to answer

the following questions: "Have you sought advice from a tax attorney, a CPA,

- 44 [*44] and/or an Enrolled Agent, regarding tax issues of any of your products or

clients? If so who, with whom have you consulted?"

Petitioner prepared a letter titled "Why is IRS Harassing Me for Twice

Winning in U.S. Tax Court?" addressed to EO Sim and others dated March 2,

2004, as a followup to the February 26 interview and to discuss the IRS

investigation. Petitioner referenced and included text almost identical to that used

in his December 1, 2003, letter:

As I have indicated in both letters, both the U.S. Tax Court and

your agency agreed with my tax logic and legal authority. I find it

very ironic that someone like me who has proved himself correct

twice in Tax Court openly stated the IRS lost on every legal issue,

I should now be subjected to this type of IRS' intimidating

harassment.

Revenue Agent George Campos

In May 2004 the IRS investigation was assigned to Revenue Agent (RA)

George Campos, who investigates tax promoters and abusive tax return preparers.

RA Campos met with petitioner and/or petitioner's LA attorney several times

during 2004. Petitioner provided copies of sample returns, travel schedules, client

files, and a client list. During a meeting with RA Campos in August 2004

petitioner asserted that "he had asked some of his taxpayers, namely like the

captain" whether they were provided meals aboard the ship, and "they had told

- 45 [*45] him * * * that they did not provide any meals." When RA Campos inquired

whether petitioner had questioned his mariner clients' employers about whether

meals were provided at no charge, petitioner asserted that "no, he didn't need to do

that because he trusted his taxpayers, what they were telling him."

After performing research and reviewing the information and files provided

by petitioner, on January 10, 2005, RA Campos left a voicemail message for

petitioner's LA attorney informing him that petitioner was still under

investigation. Petitioner prepared a letter addressed to RA Campos dated February

14, 2005, about the ongoing IRS investigation. Petitioner discussed his "legal

understanding" of the Johnson and Westling opinions, the relevant revenue

procedures, and Notice 95-50, supra. Petitioner asserted among other things, "I

have prevailed twice in Tax Court without the IRS offering any opposing

arguments to my presented legal understanding of federally allowed travel

deductions". Petitioner also responded to RA Campos' "concern that you found

no written documentation in my client files as to my inquiry with my mariner

clients into their incurred incidental travel expenses", asserting that although his

office questions mariner clients about their incidental expenses, "[t]here is nothing

in the law that requires me to write down every single aspect of an oral

- 46 [*46] conversation between my office and my clients." It is unclear from the

record whether petitioner sent this letter to RA Campos.2°

In March 2005 RA Campos held a meeting with petitioner and petitioner's

LA attorney, during which RA Campos informed them that he had contacted a

number of shipping companies, all of which had stated that the companies provide

all meals at no cost to their mariner employees while they are working. During

this meeting RA Campos explained to petitioner why his argument about tugboat

mariners receiving a grocery allowance2¹was incorrect and informed petitioner

that an expense that was not paid or incurred may not be deducted and thus was

not allowed under the Code. During this meeting petitioner also asserted that

under 46 U.S.C. sec. 10303 (2000), meals provided to mariners must "total at least

3100 calories/day" and be nutritionally balanced. According to petitioner, since

the purported $8 to $10 per day grocery allowance is not sufficient to meet these

requirements, "the food provided is not considered a meal" for tax purposes. RA

2°In September 2006 petitioner testified that he could not recall whether he

had sent the letter and that "sometimes what I will do is I will draft letters and not

send them because new information comes to light".

2¹Thisrefers to petitioner's position, as reflected in his aforementioned

articles, that tugboat mariners receive a grocery allowance and that they can

deduct as meal and incidental expenses the difference between the M&IE rate and

the purported grocery allowance.

- 47 [*47] Campos explained to petitioner that there is no reference in the Code to a

calorie requirement or nutritional value in deciding whether an employer has

provided meals to an employee.

Petitioner's LA attorney prepared an 11-page letter to RA Campos, signed

and dated May 2, 2005, asserting petitioner's good-faith belief that the positions

petitioner recommended to his tax return clients were correct and based on his

reasonable understanding of the applicable law. This letter also states the reasons

petitioner should not be the subject of any penalties or proceedings under sections

6700 and 6701, as follows:

Mr. Kapp maintains that barge and/or tugboat mariners are entitled to

the difference between the value of whatever food was provided and

the standard Federal per diem rate for meals and incidentals expenses

("M&IE") rate.

We are not aware of any Court opinions explicitly rejecting Mr.

Kapp's position (neither Johnson nor Westling directly addresses this

issue in their holdings and any statements in the Courts' opinions that

seem to speak on this issue are, at best, non-binding dicta of the Tax

Court), and this issue of whether barge and tugboat mariners are

entitled to deduct the difference between the value of meals provided

and the standard M&IE remains unaddressed in all other federal case

law.

Petitioner's LA attorney also asserted, among other things, that before publishing

one of his articles in Professional Mariner magazine, petitioner sent a copy of this

- 48 [*48] letter to Mr. Stolar, who "was quite familiar with the mariner travel

deduction area, since he was the attorney who successfully litigated the Johnson

and Westling decisions. Mr. Stolar reviewed the article and agreed with its

content. He also suggested to * * * forward a copy of the article to IRS National

Office." Petitioner reviewed and approved this letter before it was sent to RA

Campos. RA Campos received and read this letter.

On May 24, 2005,22 petitioner's LA attorney sent another letter to RA

Campos regarding petitioner's case. He wrote:

Last Wednesday, May 18, 2005 I had a telephone conversation

with IRS Counsel * * * concerning Mr. Kapp's case. We briefly

discussed the facts and circumstances * * *

I also told * * * [IRS Counsel] that although Mr. Kapp does not

necessarily agree with the position you articulated for the first time at

our meeting last month, regarding meals deductions for mariners on

tugboats and barges, he has agreed to cease claiming meal deductions

as he has done previously, pursuant to his good faith understanding of

the law.

RA Campos received and read this letter but did not respond to it in writing;

instead he responded to petitioner's LA attorney orally.

22The parties stipulated another letter dated July 27, 2005. The July 27 letter

is nearly identical to the May 24 letter except for the date. The parties did not

clarify why petitioner's LA attorney would send another version of the May 24

letter or whether he actually sent the July 27 letter.

- 49 [*49] Subsequently petitioner's LA attorney requested a meeting with RA

Campos, asserting that petitioner was going to stop preparing income tax returns

for mariner taxpayers claiming deductions for meal expenses. RA Campos and

petitioner's LA attorney met on June 23, 2005, and during this meeting

petitioner's LA attorney "asked if it's possible that we can handle this quietly and

* * * if we [the IRS] interview one of his clients * * * just interview one of them".

RA Campos would not agree to these requests. Petitioner's LA attorney sent RA

Campos a followup letter dated June 24, 2005, summarizing the meeting, in which

he states:

During the meeting you stated that the government believes a

position Mr. Kapp is taking on returns he prepares for tugboat and

barge mariners is incorrect. * * * You further stated that Mr. Kapp

has "promoted" this position through various activities, including

statements on his website. As I have previously informed you, Mr.

Kapp has reviewed his website since learning of the investigation and

made substantial changes to it. We believe the website, as it is

currently constituted, gives a fair and accurate depiction of the tax

issues affecting tugboat and barge mariners.

If, however, the Internal Revenue Service believes that Mr.

Kapp should make additional changes to his website, please call me

to discuss these changes. Mr. Kapp wants to make sure that his

website is accurate in every way.

On August 12, 2005, RA Campos and his manager Ruth Huberman held a

meeting with petitioner. During this meeting petitioner reasserted his positions

- 50 [*50] that (1) tugboat mariners who receive a grocery allowance should be

allowed to deduct the difference between the M&IE rate and the grocery

allowance and (2) the purported grocery allowance does not provide mariners with

3,100 calories per day and is not a qualifying meal for tax purposes. RA Campos

again explained that a taxpayer could not deduct an expense not paid or incurred

and that a calorie requirement was not a consideration in deciding whether meals

were provided by an employer. During this meeting petitioner asserted that "it

doesn't matter if * * * [mariners] receive a meal or not, they're still entitled to a

deduction."

On August 12, 2005, petitioner sent a letter to RA Campos titled

"Post 8-12-05 Meeting Letter". Petitioner discussed his conversation with RA

Campos in the letter, asserting among other things that during the meeting

I also told you that I had stopped claiming meal deductions since late

March awaiting further guidance from your office.

With you [sic] statement to me that you now understand why I

am claiming meals for merchant sailors, I can only assume that you

[are] now more comfortable with me claiming meals for mariners. If I

am misunderstanding that you are now comfortable with me claiming

meals for mariners, send me a written response. Without a written

response by August 25*, I will assume all is now OK and will start

claiming meals again for my mariners.

- 51 [*51] The August 2005 meeting was the last meeting between RA Campos and

petitioner for the investigation.

RA Campos concluded that petitioner should be enjoined from claiming

meal deductions for his mariner clients. RA Campos prepared a written injunction

referral dated December 20, 2005, in which he discussed the background of

petitioner's case, his research and various discussions with petitioner, petitioner's

"legal logic" for his positions, and petitioner's inability to provide support for his

positions. RA Campos wrote that petitioner "relied on oral testimony from his

mariner clients who told him that they did not consider the food provided as

meals. Mr. Kapp, however, stated that he failed to contact the shipping companies

and inquire as to the industry practice of grocery allowance." Under the section

"Harm to Government", RA Campos wrote that petitioner "continues to actively

participate in the preparation of federal tax returns that falsely claim the mariner's

deduction which leads to either an overstated refund or substantially reduced tax

liability." RA Campos also wrote that petitioner "continues to express his belief

that his method and his interpretation of the tax code is correct and continued to

prepare returns * * * as usual, even though he was explained the position of the

IRS before the 2004 filing due date (4/15/05) and 'had agreed to cease claiming

meal deductions as he had done previously'".

- 52 [*52] C.

Draft Interoffice Memorandum

In 2005 an associate at the firm of petitioner's LA attorney wrote a 12-page

draft interoffice memorandum dated April 18, 2005, addressed to petitioner's LA

attorney, summarizing his "preliminary thoughts." The associate analyzed

petitioner's position on meal deductions for mariners, reviewed the sources cited

by petitioner and RA Campos, and systematically explained why petitioner's

positions were not supportable by caselaw or IRS administrative sources.

The following is an excerpt from the associate's draft interoffice

memorandum:

I * * * have concluded that the IRS pronouncements cited by

Mr. Campos support his conclusion, but little if any authority relied

upon by Mr. Kapp supports the position he takes. The central

problem these mariners face is that there is no evidence that they

incurred or reasonable [sic] expected to incur expenses for their own

meals while aboard the vessel, therefore they cannot benefit from the

Revenue Procedures deeming certain expenses substantiated.

Although the Court does not explicitly say so, a fair reading of

Johnson is that the Court denied the meal deduction portion of the

M&IE rate, because meals were provided * * *

Lastly, a plain reading of Rev. Proc. 2004-60 leads me to the

conclusion that the per diem rate for meals can only be used if an

employee pays for or incurs meal expenses. * * *

- 53 -

[*53] *

The materials cited by Mr. Kapp do not justify his conclusion.

As explained above, Johnson (and for that matter Westling), at best,

support an incidental expense deduction, but add little in the context

of meal deduction. Not only do they not provide support for his

position, they seemingly contradict it. Moreover, any arguments

raised in the Trial Briefs submitted by Mr. Kapp in those cases, but

not adopted or addressed by the Court in its opinion, are merely

positions of the taxpayer and nothing more.

The above analysis does not foreclose the possibility that Mr.

Kapp could ultimately be successful on the issue before a judge. I

have not seen any Court opinions squarely addressing the exact issue

presented here, and it may be one of first impression. Also, additional

factual development should take place before a more definitive

position can be taken. However, it appears to me that the weight of

authority favors the government on the issue.

Petitioner read the draft interoffice memorandum on or shortly after April 18,

2005. Petitioner did not receive a written legal opinion from another private

attorney about his position on meal expense deductions for mariners.

Petitioner's Website Posting During the Investigation

In late December 2005 or early January 2006 petitioner posted on his

websites a document titled "A Few Words of Guidance about this Website from

My Office and the IRS".23 Petitioner asserts that "[i]t has been recently brought to

23In this document petitioner asserts: "The U.S. Patent Office has just

(continued...)

- 54 [*54] the attention of my Tax Office and to some IRS Personnel that a small

minority of viewers to this website are either misunderstanding or intentionally

miscalculating the allowable travel deductions available to qualifying taxpayers."

Petitioner then discusses a number of what he describes as "Common

Misstatements and Misunderstanding Regarding My Clients' Johnson & Westling

Tax Court Decisions" (misunderstandings) and then for each provides what he

asserts is the correct answer, titled the "Better Approach". One of the

misunderstandings that petitioner lists is that "[t]he Tax Court prohibited Johnson

& Westling from claiming a meal deduction, and thus, no mariners are to be

allowed a meal deduction." In the corresponding "Better Approach" petitioner

asserts that "My tax office unilaterally and specifically limited my clients' tax trial

to just demanding incidental expenses because eacch of the now 18 IRS Travel

Revenue Procedures already allows meals. The Tax Court in Johnson again

agreed with my office that meals could also be claimed by all qualified mariners."

This statement in "Better Approach" was clearly contrary to advice that the

petitioner received from his counsel regarding legal support for his positions.

23(...continued)

officially awarded our tax office [12-20-05] with a U.S. Patent".

- 55 [*55] X.

Civil Case and the Permanent Injunction

Civil Complaint

In early 2006 the DOJ sent petitioner a letter informing him that it was

considering filing a lawsuit and providing him an opportunity to call and discuss

the case.24 The DOJ attached to this letter a copy of the complaint it planned to

file. Petitioner received and read the letter, but he did not contact the Government

m response to it.

On April 7, 2006, the DOJ filed a complaint on behalf of the United States

against petitioner in the U.S. District Court for the Central District of California,

Western Division, commencing No. CV 0602136 GPS (PJWx) (civil case). The

United States filed suit under sections 740725 and 7408 (actions to enjoin specified

conduct related to tax shelters and reportable transactions) "to restrain and enjoin

Kapp from preparing federal income tax returns based on the mariner tax

24Respondent asserts in his opening brief that the letter was dated February

7, 2006. A copy of this letter was not made a part of the record.

25Under sec. 7407, a District Court may enjoin a tax return preparer who has

engaged in several types of conduct, including conduct subject to penalty under

sec. 6694 or "any other fraudulent or deceptive conduct which substantially

interferes with the proper administration of the Internal Revenue laws". Sec.

7407(a) and (b)(1)(A), (D).

- 56 [*56] deduction described below, or on other unrealistic positions." The United

States described the "mariner's tax deduction" as follows:

18. Even though the mariners were not charged for, and did not

pay for, the meals provided by their employers, Kapp prepared and

filed returns that claimed a "mariner's tax deduction" or business

expense deduction, calculated with reference to the number of days

the mariner was on board a vessel and a per diem allowance.

19. On information and belief, the mariners told Kapp (or

provided documentation to him advising) how many days they were

on a boat, and Kapp then multiplied that number by the per diem.

Kapp then subtracted a $10 a day fee for the amount of "groceries"

purportedly provided by the employer. The result was entered on

Schedule A attached to the mariners' Form 1040 and claimed as an

unreimbursed employee business expense for federal tax purposes.

The complaint states, among other things, that in August 2004, February

2005, and May 2005, "federal courts in Louisiana and Alabama permanently

enjoined several return preparers who had prepared federal income tax returns

based on the mariner tax deduction" and that DOJ had issued a prior press release

on August 24, 2004, about these cases, stating that "in the typical case, the

preparers prepared returns claiming business expense deductions for meals or

other incidentals that were provided to the mariners without charge by their

employers."

- 57 [*57] B.

Petitioner's Actions After the Complaint Was Filed

In April or May 2006, shortly after the complaint was filed, petitioner sent

an email titled "The left hand of the government does not seem to know what the

right hand is doing" to approximately 15 of his clients. He asserted that the DOJ

and the IRS were ignoring the authorities that allow mariners to deduct meal

expenses while working aboard their ships and had not interviewed or questioned

him about his positions. Notably, he wrote: "These government attorneys did

not realize the IRS published position for the last 17 years (1990 thru 2006) is

to allow mariners to claim meals. Surprised? So were these government

attorneys when they finally let me direct them to look at the IRS Website."

Petitioner referred to the revenue procedures and the Federal travel regulations he

had been citing for his legal authorities in support of this assertion.

Depositions

Petitioner was deposed for the civil case during three separate sessions on

September 25, December 12, and December 13, 2006, respectively.

During the deposition counsel for the United States questioned petitioner

about, among other things, his interpretation of the relevant revenue procedures,

and he testified that the requirement that a taxpayer pay or incur an expense to

claim a deduction is "waived by these revenue procedures." See infira

- 58 [*58] Appendix B. He also testified that (1) he was aware that it was industry

practice for the employers of his deep sea mariner clients and employers for some

of his other mariner clients, including tugboat mariners, to provide them with all

daily meals, including breakfast, lunch, and dinner, while working aboard the

vessels; and (2) he continued to prepare income tax returns for mariner taxpayers

claiming deductions for meal expenses after the complaint was filed and as of the

deposition date.

During the deposition petitioner also testified that his email to clients sent in

April or May 2006 included some misstatement of facts and misrepresentations;

for example, he did speak to IRS representatives who asked him questions about

the so-called mariner tax deduction (i.e., EO Sims and RA Campos, who

interviewed him) and he did not direct Government attorneys to look at the IRS

website to prove his position on that deduction.

Petitioner subsequently testified that he generally did not require his

mariner clients to provide documents showing whether meals were provided by

their employers, nor did he question them about whether meals were provided. He

further testified that from March to August 2005 he did not prepare any income

tax returns for clients. Following a meeting with RA Campos in August 2005,

wherein he explained his position, he indicated that on the basis of that interaction

- 59 [*59] he "was left with the distinct understanding from * * * [RA Campos] that at

that point, the Government understood what I was doing and was comfortable."

Permanent Injunction

Cross-motions for summary judgment were filed relating to whether

petitioner "should be permanently enjoined from preparing returns that claim

deductions for mariners who receive free meals from their employers (the

'mariner's tax deduction' or 'MTD')." In his declaration submitted in opposition

to the Government's motion for summary judgment, petitioner asserted that he had

stopped the practice of claiming the mariner tax deduction, as promised in his

letter dated May 24, 2005, but that he had recently resumed claiming it on behalf

of his mariner clients on the basis of the alleged approval of RA Campos. Mr.

Kapp wrote:

I had a long meeting with IRS Agent George Campos on August 12,

2005, during which I reviewed my legal position with him in detail

* * * At the end of the meeting, Mr. Campos sort of threw his arm

around me and stated "Now I understand." Since Mr. Campos at no

time during or after the * * * meeting stated that he disagreed with

my position, or that my position was frivolous, I interpreted Mr.

Campos'[s] statement as an endorsement of my legal position * * *

United States v. Kapp, 564 F.3d 1103, 1111 (9th Cir. 2009). On July 2, 2007, the

District Court heard argument on the parties' cross-motions for summary

judgment.

- 60 [*60] By order dated August 20, 2007, the District Court denied petitioner's

motion and granted the Government's motion. The District Court analyzed

petitioner's position under sections 162 and 274(d), the Johnson and Westling

cases, and the various other authorities petitioner cited, concluding that "[c]ontrary

to Defendant's [petitioner's] allegations, the MTD is not allowable under the Tax

Code". The District Court also concluded that petitioner's actions violated section

6694.

As shown above, the MTDs were illegal and Defendant

therefore violated § 6694. However, the Treasury regulations provide

a safe harbor where the preparer's position had a realistic possibility

of being sustained on the merits * * *

In light of the analysis in the previous section, there was no

realistic possibility that the MTD deductions would be sustained.

Defendant's position could be even considered frivolous given the

clear illegality of the MTDs under Johnson. The burden therefore

shifts to Defendant to show that he acted in good faith in promoting

the MTDs.

As discussed in the previous section, none of the authorities

Defendant relies upon offers credible support for his position that

mariners are entitled to M&IE deductions for expenses they never

incurred. Moreover, a "reasonable accountant" would have realized

that statements made in one particular case * * * cannot simply be

taken "at face value," as Defendant suggests, but must be interpreted

with respect to relevant authority on the subject. Defendant's

selective interpretation and reliance on these authorities in the face of

IRS statements to the contrary was not in good faith.

- 61 [*61] Because the District Court concluded that the Government was entitled to an

injunction under section 7407, it did not opine about whether an injunction was

appropriate under section 7408.

Also on August 20, 2007, the District Court filed a judgment and permanent

injunction against petitioner, restraining and enjoining him from a broad range of

activities relating to preparing income tax returns for mariner taxpayers, including

preparing income tax returns or documents to be used "in connection with any

material matter arising under the internal revenue laws" (i.e., income tax returns

and other tax documents) that claim the MTD. The District Court also ordered

him to (1) within 21 days, "provide a list of all persons or entities for whom he

prepared returns (any portion of a return, amended returns, or refund claims),

which assert or rely on the position that mariners may claim tax deductions for

meals that were provided to them without cost" from January 1, 2000, through

August 20, 2007, the date of the judgment; (2) post a link to the District Court's

order on his websites; and (3) explain to his clients that the District Court had held

that he had incorrectly advised them about the MTD.

- 62 [*62] XI.

Compliance With the Permanent Injunction and Amended Returns

Client List

In late August or September 2007 petitioner called RA Campos because "he

was reviewing the returns to ensure that the ones that he was going to give were

the ones that * * * had the meal deductions on the returns. So he was ensuring

that he was giving * * * the right ones" on the client list that he had to provide

pursuant to the permanent injunction.

On September 20, 2007, petitioner filed with the District Court and served

on the DOJ a client list with a certificate of compliance signed under penalty of

perjury, statmg m part:

(a) With respect to tax returns prepared for the tax years 20042006, I have submitted to Plaintiff a list of all persons or entities for

whom I have prepared returns (or any portion of a return, amended

returns or refund claims) which asserted or relied upon the position

that mariners may claim tax deductions for meals that were provided

to them without cost. In preparing such list, I have made a good faith

examination of my client files and tax returns * * * I believe in good

faith that any inadvertent omissions * * * would constitute less than

2% of the entire list submitted.

(b) With respect to tax returns prepared prior to 2004, it is the

practice of my office to retain copies of client tax returns and records

for only a three year period. Accordingly, my office records * * * are

incomplete. I have personally conducted an extensive and good faith

examination * * * and I have included on the list * * * those

taxpayers who may have asserted said tax deduction on their returns

for whom I was able to locate relevant records for the period 2000-

- 63 [*63] 2003. However, there may be other taxpayers * * * for which I have

no records.

The 117-page client list reflects the names, taxpayer identification numbers,

addresses, and tax years of clients for whom petitioner prepared individual income

tax returns for taxable years 2000 through 2006; for many of these clients, he

prepared income tax returns for multiple years. As relevant here, the client list

reflects 100 clients for 2002 and 105 clients for 2003 for which Mr. Kapp "may

have asserted said tax deduction on their returns". The client list also reflects that

for taxable years 2004 through 2006 Mr. Kapp prepared the following number of

"returns (or any portion of a return, amended returns or refund claims) which

asserted or relied upon the position that mariners may claim tax deductions for

meals that were provided to them without cost":

Year Number of clients

2004

1,822

2005

1,785

2006

1,355

Amended Income Tax Returns

After the District Court entered the judgment and permanent injunction

against him, petitioner went through his client list and client files and for an

estimated 2,000 mariner clients he prepared amended income tax returns on which

- 64 [*64] he removed a deduction for meals on Schedule A, line 20. He sent the

amended returns to his mariner clients, informing them of the injunction and

suggesting that they file the amended returns. He did not charge his clients for

preparing the amended returns and let each client ultimately decide whether to file

any amended return(s).

Letter to Michael Pahl

The attorney who handled petitioner's case before the District Court sent a

letter dated November 7, 2007, to Michael Pahl, an attorney with the DOJ who

prosecuted petitioner in the civil case. Petitioner's attorney wrote:

This will confirm the telephone conversation we had on Friday,

November 2, 2007. As I advised, Mr. Kapp is in the process of filing

amended tax returns for mariners whose names appeared on the list of

clients specified in the Permanent injunction. In the course of doing

so, Mr. Kapp has discovered that some names were included on the

client list that should not have been. For example, some of the

mariners whose names appeared on the list actually incurred meal

expenses while traveling away from home on their vessels * * * In

addition, it appears * * * that some of the amended tax returns filed

by Mr. Kapp * * * also included mariners who had actually incurred

meal expenses and whose returns need not have been amended.

During our conversation, I advised you of the foregoing, and

that an amended list would in all likelihood be prepared and served

on the Department of Justice and filed with the court.

There is nothing in this record indicating that petitioner provided the DOJ or

the District Court with an amended client list. It also does not appear that he

- 65 [*65] provided any updated information or amended filings to the DOJ or the

District Court with respect to the above-mentioned amended returns.

XII. Appeal to the Court of Appeals for the Ninth Circuit

Petitioner appealed the District Court's entry of a permanent injunction to

the Court of Appeals for the Ninth Circuit. The parties presented argument on

December 10, 2008. On May 4, 2009, the Court of Appeals filed Kapp, 564 F.3d

1103, affirming the District Court's decision in its entirety. The Court of Appeals

held, as relevant here: (1) "Because Kapp claimed deductions on behalf of

mariners who did not pay or incur meal expenses, he prepared returns that

understated liability"; (2) each of petitioner's positions with respect to deep sea

mariner clients and tugboat mariner clients was unreasonable; and (3) petitioner

was not entitled to rely on the good-faith defense to the section 6694 penalty

because he did not reasonably rely on the advice of other tax preparers. E at

1110; see infra Appendix C.

With respect to the good-faith defense to the section 6694 penalty,

petitioner asserted that he sought advice from a number of individuals when

writing his articles, including a General Services Administration employee and

private attorneys, but the Court of Appeals concluded that he did not prove that

(1) they qualified as tax preparers and (2) they were "aware of all of the relevant

- 66 [*66] facts underlying the returns he filed claiming the mariner's deduction."

Kapp, 564 F.3d at 1113. Further, the Court of Appeals affirmed that "the IRS

attorneys contacted by Kapp informed him that they could not officially comment

on his articles, and that there was no procedure to set up a meeting to provide

advice specific to his situation." R Notably, the court concluded that petitioner's

"counsel during the investigation, the only attorneys who appear to have analyzed

his position in light of all the relevant facts, concluded that he was not entitled to

claim the deduction." R; see also infra Appendix C.

XIII. The Balla and Zbylut Cases Before the Tax Court

After the permanent injunction, the Court issued two opinions involving

petitioner's mariner clients and specifically addressing his position regarding

tugboat mariners, Balla v. Commissioner, T.C. Memo. 2008-18, 2008 WL 343334,

and Zbylut v. Commissioner, T.C. Memo. 2008-44, 2008 WL 539018.

Balla v. Commissioner

Jozsef Balla, a merchant mariner, was employed by Hornbeck Offshore

Operators (Hornbeck) and worked on a tugboat during taxable years 2002 and

2003. Hornbeck provided Mr. Balla with meals and lodging without charge while

he was assigned to a vessel and on active status. Hornbeck did not provide Mr.

- 67 [*67] Balla with a per diem cash allowance for work-related meals or incidental

expenses.

Petitioner prepared Mr. and Mrs. Balla's Forms 1040, U.S. Individual

Income Tax Return, for taxable years 2002 and 2003 electing the filing status of

"married filing joint return". As relevant here, for each year Mr. and Mrs. Balla

claimed a deduction for meals and incidental expenses on Schedule A, line 20,

computed using the M&IE rate set forth in the revenue procedures. The

"Supplemental Tug/Barge Sailor Travel Schedule" computed the deduction for

2002 as follows:

Number of

travel days

Port of destination

OCONUS M&IE

rate by city

Total

Guayama <San Juan», Puerto Rico

$75

$6,000

Arecibo <San Juan>, Puerto Rico

2,925

Guayaquil, Ecuador

2,508

St. Croix, Virgin Islands

1,900

Mayaguez <Other>, Puerto Rico

1,881

San Juan, Puerto Rico

1,350

Aguirre <San Juan», Puerto Rico

300

Yabaccoa <Other>, Puerto Rico

285

Total Sailor Travel Costs Allowed per OCONUS Rates

17,149

LESS EMPLOYER PROVIDED REIMBURSEMENTS

(2,852)

Sailor Travel Allowance in Excess of Reimbursements

14,297

- 68 [*68] Using the same methodology, the Ballas claimed a deduction for meals and

incidental expenses or "Sailor Travel Allowance in Excess of Reimbursements" of

$14,776 on their 2003 Schedule A, line 20. Petitioner attached to each of the

Ballas' 2002 and 2003 Forms 1040 the following documentation purporting to

support the deduction: (1) authorities on which they relied in support of their tax

position; (2) a port list for the vessel on which Mr. Balla was stationed during the

year; and (3) a schedule listing ports to which Mr. Balla traveled during the year.

He did not provide receipts, other documentation, or explanations to substantiate

the amounts or business purpose of the expenses claimed.

The IRS issued notices of deficiency to the Ballas for taxable years 2002

and 2003 disallowing a number of deductions, including the deductions for meals

and incidental expenses for each year. The Ballas timely petitioned the Tax Court.

Petitioner's office assisted the Ballas with the filing of their petition.

On January 31, 2008, the Court filed its opinion at T.C. Memo. 2008-18

upholding, as relevant here, the IRS' determination disallowing the Ballas'

claimed MTD for 2002 and 2003. Relying on the Johnson Opinion, the Court held

that (1) under sections 162 and 274 and the section 274 regulations, a taxpayer is

not entitled to deemed substantiated deductions for meals if he did not incur or pay

any meal expenses and (2) the Federal travel regulations require that the M&IE

- 69 [*69] rate be adjusted for meals provided to Government employees by the

Government (but not less than the amount allowed for incidental expenses) and

that since the revenue procedures apply the M&IE rate for non-Government

employees, under the regulation a taxpayer must decrease the M&IE rate to

account for meals provided by the taxpayer's employer. Balla v. Commissioner,

2008 WL 343334, at *5-*6. The Court also stated that the Ballas "argue that this

issue is novel to the Court. We disagree. * * * [W]e explicitly stated in Johnson v.

Commissioner, supra at 227: 'We do not read the revenue procedures to allow a

taxpayer to use the full M&IE rates when he or she incurs only incidental

expenses.'" Id. at *6.

Zbylut v. Commissioner

Raymond Zbylut, a merchant mariner, was employed as a temporary

employee by American Ship Management, LLC (American Ship), and Matson to

work on tugboats during 2002. American Ship and Matson each provided meals

without charge to Mr. Zbylut while he was assigned to a vessel and on active

status. Neither American Ship nor Matson provided Mr. Zbylut with a per diem

cash allowance for work-related meals or incidental expenses.

Petitioner prepared Mr. and Mrs. Zbylut's 2002 Form 1040 electing the

filing status of "married filing joint return" and claiming on Schedule A, line 20, a

- 70 [*70] deduction for meals and incidentals expenses of $9,455, computed using the

M&IE rates for Mr. Zbylut's various ports of destination for 2002 multiplied by

the number of days traveling. Petitioner attached (1) tax authorities on which his

clients relied in support of their tax position; (2) a port list for the vessels on

which Mr. Zbylut was stationed during the year; and (3) a schedule listing ports to

which Mr. Zbylut traveled during the year. Neither petitioner nor the taxpayers

provided receipts, other documentation, or explanations to substantiate the

amounts or business purpose of the expenses claimed.

The IRS issued to the Zbyluts a notice of deficiency for taxable year 2002

disallowing a number of deductions, including the above-mentioned $9,455

deduction. The Zbyluts timely petitioned the Tax Court. Petitioner's office

assisted the Zbyluts with the filing of their petition.

On February 27, 2008, the Court filed the opinion at T.C. Memo. 2008-44

upholding, as relevant here, the IRS' determination disallowing the MTD. Similar

to the holding in Balla v. Commissioner, T.C. Memo. 2008-18, the Court applied

Johnson v. Commissioner, 115 T.C. at 227-228, and reached the holding that

(1) under sections 162 and 274 and the relevant section 274 regulations, a taxpayer

is not entitled to deemed substantiated deductions for meals if he did not incur or

pay any meal expenses and (2) the Federal travel regulations require that an M&IE

- 71 [*71] rate be adjusted for meals provided to Government employees by the

Government (but not less than the amount allowed for incidental expenses) and

that since the revenue procedures apply the M&IE rate for non-Government

employees, under the regulation a taxpayer must decrease the M&IE rate to

account for meals provided by the taxpayer's employer. Zbylut v. Commissioner,

2008 WL 539018, at *3-*5.

XIV. Penalty Assessment

RA Campos used the client list petitioner provided in September 2007 to

compute the section 6701 penalty, imposing a $1,000 penalty for each income tax

return which petitioner stated he had prepared for taxable years 2000 through

2006, a total of 5,193 returns.

Additionally, RA Campos compiled an internal list from the IRS database of

approximately 5,000 taxpayers whose returns petitioner prepared for taxable years

2000 through 2006 and which claimed a Schedule A unreimbursed employee

expense deduction. RA Campos compared this list with petitioner's client list and

found that petitioner's client list had more income tax returns because it included

approximately 35 to 50 returns for which petitioner had prepared only the travel

schedule for the client. A copy of this internal list was not made a part of the

record.

- 72 [*72] In May 2008 RA Campos made the initial determination to assert section

6701 penalties totaling $5,193,000 for taxable years 2000 through 2006 against

petitioner. This number included $5,167,000 in penalties for the years in issue on

the basis of the 5,167 tax returns identified for taxable years 2002 through 2006.

RA Campos generated a civil penalty approval form and had the penalties

approved and the form signed by his immediate supervisor on June 16, 2008. The

IRS assessed the section 6701 penalties on July 14, 2008.

XV. Income Tax Returns in the Record

The client list identifies 5,167 separate returns for tax years 2002 through

2006, inclusive, for which petitioner applied the MTD.26 Because of the

Government's return retention policy, respondent was not able to find all of the

returns on the client list for the tax years in issue. Respondent was able to find

4,377 income tax returns and amended income tax returns27 (for which petitioner

prepared either the entire return or solely the travel schedule) for taxable years

2002 through 2006 using the client list. The parties stipulated an exhibit which

26The client list identifies an additional 26 tax returns for taxable years 2000

and 2001, years which are not in issue.

27The amended tax returns are relevant here in that they include an attached

copy of the original Schedule A showing the MTD originally claimed for each

client.

- 73 [*73] consists of electronic copies of these 4,377 tax documents plus an additional

three tax documents for taxable year 2001, a year which is not in issue. See supra

note 5. For some of these returns, the travel schedule is not attached to the copy

included in the record, but a travel schedule was attached to the original return

when it was filed.

Of the 4,377 returns in the record related to the years in issue, respondent

has conceded that 930 returns included both a Form 1040 and a Form 1040X,

Amended U.S. Individual Income Tax Return, for the same taxpayer for the same

tax year.28 This leaves 3,447 individual tax returns in the record for the years in

issue that consist of either a Form 1040 or a Form 1040X for the same taxpayer for

an individual year that claim the MTD. The parties stipulated these 3,447 tax

returns in the record as follows:

Tax year

Original

returns

Amended

returns

Travel

schedules

Total

2002

-0-

2003

-0-

2004

452

194

685

2005

1,405

151

1,583

28The record includes three tax returns relating to tax year 2001, which is

not in issue in this case. It is unclear whether the three tax returns would have an

understatement if the MTD is removed.

-74[*74]

2006

1,020

119

1,168

Total

2,888

250

309

3,447

Of the 3,447 returns or schedules identified above, respondent has conceded

that only 3,221 tax documents reflect an understatement if the MTD is removed.

The remaining 229 returns do not have an understatement because of either the

operation of the AMT or the taxpayer's claiming the standard deduction instead of

the itemized deduction when filing his or her return.

XVI. CDP Hearing and Petition

The IRS issued a Notice of Intent to Levy and Notice of Your Right to a

Hearing (levy notice), dated August 28, 2008, and two lien notices, dated August

14, 2008, to collect the section 6701 penalties. On September 11, 2008, petitioner

submitted a written request for a CDP hearing in response to the lien notices,

asserting that he is not liable for the section 6701 penalties assessed. Petitioner

also timely submitted a written request for a CDP hearing in response to the levy

notice in which he asserted that he is not liable for the section 6701 penalties

assessed.

By letter dated April 26, 2011, Settlement Officer (SO) Alicia Flores

notified petitioner and his representative Robert B. Martin that a CDP hearing was

scheduled for May 26, 2011, and explained that petitioner would have to submit

- 75 [*75] financial information with supporting documentation and bank records if he

wanted to be considered for collection alternatives. On May 26, 2011, Attorney

Martin participated in the CDP hearing via telephone for all three notices with SO

Flores. During the hearing Attorney Martin informed SO Flores that petitioner

was not interested in seeking collection alternatives and that he would wait for the

notices of determination and challenge the penalties before the Tax Court.

Petitioner did not submit the financial information and documentation requested in

SO Flores's letter before, during, or after the hearing. As indicated supra note 4,

notices of determination were issued on July 14, 2011.

In his timely filed petitions, petitioner asserts only that "[t]he Commissioner

erred in his determination that petitioner is subject to penalties under Code section

6701 in the aggregate amount of $5,193,000".

OPINION

Procedural Matters

Before we address the substantive issues presented in these cases, we first

address some procedural matters.

- 76 [*76] A.

Evidentiary Objections

Admissibility of Civil Penalty Approval Form29

At trial petitioner objected to the admission into the record of a copy of the

Civil Penalty Approval Form, Workpaper #: 300-1 (penalty approval form), and

accompanying Form 2866, Certificate of Official Record, dated June 21, 2017,

related to the penalties at issue.

Petitioner objects to the admission of the penalty approval form on four

grounds: (1) that the penalty approval form constitutes hearsay, (2) that

production of the penalty approval form was untimely as it was not produced as

part of a Freedom of Information Act (FOIA) request from August 2008, (3) that

production of the penalty approval form was untimely because it was not produced

at least 14 days before trial in accordance with this Court's standing pretrial order,

and (4) that the authenticity of the form is questionable because the "initials on the

proffered [p]enalty [a]pproval [f]orm * * * do not match the initial signature of the

'reviewer' on the forms that were in the administrative file" as stipulated. We will

address each objection herein.

29We limit our discussion here as to the question of admissibility and discuss

infra pp. 93-95 the questions of appropriate supervisory approval and verification.

- 77 [*77] Petitioner's principal argument is that the penalty approval form is offered

as proof of managerial approval under section 6751(b)(1) and is therefore

inadmissable as hearsay. Petitioner further contends that the hearsay exception in

rule 803(8) of the Federal Rules of Evidence for a record of public office does not

apply. Respondent contends that the penalty approval form is not hearsay because

it falls under an exception in rule 803(6) of the Federal Rules of Evidence. We

agree with respondent.

Pursuant to rule 803(6) of the Federal Rules of Evidence, records of

regularly conducted activity are not excluded as hearsay if the following

conditions are satisfied:

(A) the record was made at or near the time by--or from

information transmitted by--someone with knowledge;

(B) the record was kept in the course of a regularly conducted

activity of a business, organization, occupation, or calling, whether or

not for profit;

(D) all these conditions are shown by the testimony of the

custodian or another qualified witness, or by a certification that

complies with Rule 902(11) or (12) or with a statute permitting

certification; and

(E) the opponent does not show that the source of information

or the method or circumstances of preparation indicate a lack of

trustworthiness.

- 78 [*78] Rule 902(11) of the Federal Rules of Evidence provides that certified

domestic records of regularly conducted activity are self-authenticating if they

meet the requirements of rule 803(6)(A)-(C) as shown "by a certification of the

custodian or another qualified person that complies with a federal statute or a rule

prescribed by the Supreme Court." The Court has examined the penalty approval

form and finds it is a record kept in the ordinary course of a business activity as

shown by the Form 2866. See Fed. R. Evid. 803(6), 902(11).

Petitioner next argues that the penalty approval form should not be admitted

into the record because it was not included in an earlier FOIA request made to the

IRS. On August 14, 2008, petitioner submitted an FOIA request to the IRS for

"copies of the administrative files pertaining to the penalty charged against the

preparer under section 6701, for the years 2000 through 2005". Respondent

objects to petitioner's argument on the ground that it is misleading. Respondent

argues that petitioner's FOIA request was for documents related only to tax years

2000 through 2005. The penalty approval form also covers tax year 2006, which

is outside the scope of the FOIA request. Respondent contends that the document

would not have been included in the response to the FOIA request for this reason.

We have held that FOIA establishes an orderly procedure for enforcement

of the act through the commencement of an action in the U.S. District Courts, see

- 79 [*79] 5 U.S.C. sec. 552(a)(4)(B) (2012), and therefore FOIA matters do not affect

issues before this Court, Davis v. Commissioner, 65 T.C. 1014, 1024 (1976);

Bennett v. Commissioner, T.C. Memo. 1997-505, 1997 WL 695368, at *2; Maple

v. Commissioner, T.C. Memo. 1990-567. Therefore, this Court will not undertake

to implement the provisions of FOIA and will not consider FOIA requests in

deciding the admissibility of evidence.

Petitioner further objects to admission of the penalty approval form because

it was provided to petitioners via email on June 15, 2017, 11 days before the trial

held on June 26, 2017. Thus, it was not exchanged at least 14 days before trial as

required by the Court's standing pretrial order (14-day rule). Respondent asserts

that the penalty approval form was properly authenticated and exchanged with

petitioner immediately following a conference call on June 15, 2017. Respondent

contends, and petitioner has not denied, that petitioner raised the supervisory

approval requirement of section 6751(b) for the first time on that conference call.

For this reason, respondent asserts that petitioner was not prejudiced by receipt of

the penalty approval form fewer than 14 days before trial.

The Court's standing pretrial order provides that one possible sanction for

violating the 14-day rule is the exclusion of evidence that was not exchanged in

accordance with that requirement. See Rule 131(b) ("Unexcused failure to comply

- 80 [*80] with any * * * [standing pretrial] order may subject a party or a party's

counsel to sanctions.). The 14-day rule is intended to allow the opposing party

opportunity to review evidence to prepare any challenge or rebuttal. Kornhauser

v. Commissioner, T.C. Memo. 2013-230, at *9 n.4 (citing Dunn v. Commissioner,

T.C. Memo. 1988-45), afCd, 632 F. App'x 421 (9th Cir. 2016).

In weighing the appropriate sanction for violation of the 14-day rule, the

Court considers whether the opposing party was prejudiced by the failure. See

Thompson v. Commissioner, T.C. Memo. 2011-291, 2011 WL 6382704, at *2 n.8;

Morris v. Commissioner, T.C. Memo. 2008-65, 2008 WL 704208, at *1, aff'd, 431

F. App'x 535 (9th Cir. 2011). In Morris v. Commissioner, 2008 WL 704208,

at *l, for example, we concluded that the Commissioner was prejudiced because

the taxpayer's records were discovered at trial to be full of errors and the

Commissioner had insufficient time to review the proffered documents. We also

consider why a party failed to comply with the standing pretrial order, and absent

good cause, we do not hesitate to enforce the 14-day rule. See Rodriguez v.

Commissioner, T.C. Memo. 2017-173, at *6 (citing Kaplan v. Commissioner, T.C.

Memo. 2016-149, at *9-*10).

- 81 [*81] Respondent claims that petitioner has not been prejudiced by his providing

the penalty approval form 11 days before trial rather than the full 14 days as

ordered. We agree.

This Court issued its Opinion in Graev v. Commissioner (Graev III), 149

T.C. 485 (2017), supplementing and overruling in part 147 T.C. 460 (2016), on

December 20, 2017. The Court recognizes that there have been a number of

developing legal issues in flux since that Opinion was issued. Following the

issuance of Grave III, this Court has allowed the record to be reopened posttrial in

a number of cases for the purpose of admitting evidence of appropriate

supervisory approval where it was available. See, e.g., Dorval v. Commissioner,

T.C. Memo. 2018-167, at *16-*17 (allowing the admission because the evidence

was not cumulative, was material to the penalty issue in the case, and probably

would change the outcome); Householder v. Commissioner, T.C. Memo. 2018136, at *26-*27. Such holdings by the Court were in the interest ofjustice both

because the respective record in each case was closed before the issuance of Graev

III and because the taxpayers in each case did not raise section 6751(b) as an issue

before trial. Dorval v. Commissioner, at *17; Householder v. Commissioner,

at *26-*27.

- 82 [*82] Although the Graev III Opinion had been issued before the commencement

of trial in these cases, petitioner similarly did not raise section 6751(b) as an issue

until the conference call 11 days before trial, at which time the evidence of

approval was promptly produced. We conclude that petitioner was not prejudiced

by respondent's production of the document 11 days before trial.

Finally, petitioner asserts that the initials on the penalty approval form do

not match Ms. Huberman's signature on other documents in the record,

presumably as a means of questioning the authenticity of the document. We

disagree. At trial RA Campos testified that the original penalty approval form was

initialed by his supervisor and that the initials found on the copy of the document

were authentic. RA Campos' basis for identifying Ms. Huberman's signature was

his personal experience of seeing her sign documents many times. We find his

testimony persuasive. In contrast, petitioner has offered no substantive evidence

that the disputed document or RA Campos' testimony is somehow unreliable.

For the aforementioned reasons, we will admit the penalty approval form

into evidence under rule 902(11) of the Federal Rules of Evidence.

- 83 [*83]

Respondent's Relevancy Objections

The stipulation of facts includes three exhibits proffered by petitioner.

Respondent objected to these exhibits on the grounds that they are not relevant.

The first exhibit is a copy of the trial transcript in the consolidated trial of

Johnson and Westling dated Tuesday, May 2, 2000 (trial transcript). Evidence is

relevant if it has any tendency to make the existence of any fact that is of

consequence to the determination of the action more or less probable than it would

be without the evidence. Fed. R. Evid. 401. Relevant evidence is generally

admissible unless specifically barred by the U.S. Constitution, a Federal statute,

another Federal Rule of Evidence, or other rules prescribed by the Supreme Court.

Fed. R. Evid. 402. The trial transcript for the Johnson and Westling cases is

relevant because it provides additional background on the respective taxpayers,

petitioner's preparation of their tax returns, and their cases before this Court. Each

of these points is relevant to petitioner's knowledge of the law surrounding the

MTD. Therefore, we overrule respondent's relevance objection and receive the

trial transcript into evidence.

The remaining exhibits are letters that relate to a petitioner's FOIA request

covering materials the IRS used to train its employees in understanding and

implementing Federal travel regulations for travel-related expenses. The second

- 84 [*84] exhibit is a copy of an unsigned letter dated January 24, 2011, from the law

firm which handled petitioner's FOIA request (petitioner's FOIA attorney) to the

"Internal Revenue Service Disclosure Scanning Operation". The third exhibit is a

letter dated February 17, 2011, from Disclosure Specialist Christi Hardee to

petitioner's FOIA attorney. We sustain respondent's relevance objections with

respect to each exhibit for the same reason that we concluded FOIA requests were

not of consequence to our conclusion as to the admissibility of the penalty

approval form. M supra pp. 78-79.

Petitioner's Relevancy Objection

As a part of the stipulations in these cases respondent submitted a letter

from petitioner's LA attorney to RA Campos dated May 24, 2005. Petitioner

objects to this exhibit as irrelevant and/or immaterial. The contents of the letter

relate to opinions and advice given to petitioner by his counsel and petitioner's

understanding of the law and the IRS' position on the law surrounding meal

deductions for tugboat mariners as of May 2005. The opinions, advice, and

discussions with the IRS on these matters in 2005 are relevant and material to

petitioner's motives and knowledge of the tax law. This is clearly a fact that is of

consequence to the determination of the action within the meaning of rule 401 of

the Federal Rules of Evidence. Under these circumstances we conclude that the

- 85 [*85] exhibit is relevant. We overrule petitioner's relevance objection and receive

the exhibit into evidence.

Petitioner's Motions To Strike

On October 26, 2017, respondent filed his simultaneous opening brief

(respondent's opening brief). As an attachment to respondent's opening brief,

respondent included two appendixes. Appendix 1 is described within the brief as

"an Excel spreadsheet using the records in evidence identifying the 1,088 amended

returns prepared by petitioner, resulting in an understatement". Appendix 2 is

described within the brief as "an Excel spreadsheet using the records in evidence

to identify 2,133 returns that result in an understatement after the MTD is

removed."

On January 5 and February 20, 2018, petitioner filed posttrial motions

(collectively, petitioner's motions to strike) under Rules 52 and 143(c) requesting

that the Court strike both appendixes from respondent's opening brief on the

grounds that they constitute new evidence that was not previously made a part of

the record. On January 23 and March 16, 2018, respondent filed objections to

petitioner's motions to strike.

Petitioner asserts that neither the 24-page Appendix 1 nor the 66-page

Appendix 2 was the subject of a stipulation, offered as evidence at trial, or

- 86 [*86] otherwise a part of the record in these cases. Petitioner further asserts that

both appendixes represent new evidence which respondent attached to his brief.

Respondent objects to petitioner's motions to strike on the basis that all of the

documents (namely the tax returns, amended tax returns, and tax schedules that

petitioner prepared for his mariner clients) relied upon to create Appendixes 1

and 2 are in the record and the appendixes "serve only to illustrate respondent's

arguments, setting out in summary format evidence that is already in the case

record." In sum, respondent asserts that the appendixes should not be considered

new evidence but rather guides to assist the Court in reviewing the voluminous

case evidence.

Summaries, calculations, and other statements in a party's brief or

documents attached to a party's brief do not constitute admissible evidence, and

this Court will not consider them. See Rule 143(c); Evans v. Commissioner, 48

T.C. 704, 709 (1967), aff'd per curiam, 413 F.2d 1047 (9th Cir. 1969); Perkins v.

Commissioner, 40 T.C. 330, 340, 1963 WL 1368 (1963); Mears v. Commissioner,

T.C. Memo. 2013-52; Sandberg v.Commissioner, T.C. Memo. 2011-72.

Rule 1006 of the Federal Rules of Evidence provides that a proponent may

use a summary, chart, or calculation to prove the content of voluminous writings

that cannot be conveniently examined in court. Normally the proponent of a

- 87 [*87] summary will present a proper foundation as to the correctness of such a

summary exhibit. For example, a Government agent can present summary

testimony and documents, typically at the end of a trial, to support computations in

a bank deposits analysis. See, e.g., United States v. Soulard, 730 F.2d 1292, 1300

(9th Cir. 1984) (holding that summary charts are not to be admitted in evidence or

used by the jury during deliberations but can be used as "testimonial aids" during

the agent's testimony and during closing arguments). Rule 1006 of the Federal

Rules of Evidence presumes that the summary document will not be offered as

independent evidence by the proponent and that opposing counsel will have an

opportunity to cross-examine the proponent as to the accuracy of the underlying

evidence in the record and any analysis supporting the evidence. See United

States v. King, 616 F.2d 1034, 1041 (8th Cir. 1980) ("Where charts which fairly

summarize the evidence are used as an aid in understanding the testimony already

introduced and the witness who prepared the charts is subject to cross-examination

with all documents used to prepare the summary, the use of charts is proper."

(citing Gordon v. United States, 438 F.2d 858, 877 (5th Cir. 1971))). We address

each of respondent's appendixes to decide whether to grant petitioner's motions to

strike.

- 88 [*88]

Appendix 1

Appendix 1 consists of five columns which give the following information

in relation to each of the 1,088 amended returns in the evidence: name of

taxpayer, tax year, tax form, the first Bates page number of Exhibit 83-J where the

return appears, and an alleged understatement of tax.

Petitioner contends that respondent provided no explanation regarding how

he arrived at the amount of each understatement. Respondent contends that all

information in Appendix 1 is "gleaned from the individual amended tax returns

contained in Exhibit 83-J" and thus is just a summary of what the returns reflect.

Appendix 2

Appendix 2 consists of 12 columns giving the following taxpayer

information for each of the 2,133 original tax returns in evidence:

Taxpayer name;

Beginning Bates page number (for Exhibit 83-J showing the first

page of the return in question);

MTD claimed on travel statement;

Total travel days;

Incidental rate (allowed by the applicable revenue procedure);

New incidental amount after removal of MTD;

- 89 [*89] G.

Adjusted amount (MTD removed from the return);

Original taxable income (as reported on retum);

Adjusted taxable income (as calculated by respondent after MTD

removal);

New tax (as calculated by respondent after MTD removal);

Old tax (as reported on return); and

Understatement (as calculated by respondent and based on the

difference between the old tax and the new tax).

As with Appendix 1, petitioner contends that Appendix 2 is not a summary

of anything in the tax returns in evidence. Respondent contends that the

spreadsheet in Appendix 2 is merely a guidance document summarizing

information from the tax returns in evidence.

Respondent did not present a summary witness to explain the calculations

nor provide petitioner the opportunity to test the correctness of the calculations.

Appendix 2 would require additional calculations and analysis. By respondent's

own admission, the calculations require a series of steps to identify items on a

return, separating not so clearly identified calculations of tax on the basis of

identification and assumptions, applying the Code and revenue procedures with

respect to some of the items, and comparing the original and amended returns.

- 90 [*90] Specifically, the information in columns F, G, I, J, and L of Appendix 2 are

computations relating to 2,133 returns that respondent makes for the first time in

his opening brief. Column F requires application of the incidental rate found in

the applicable revenue procedure multiplied by the number of travel days reflected

in each taxpayer's return. Column G requires calculation of a deduction based on

the incidental rate calculated in column F. Column I shows respondent's proposed

adjusted taxable income for each taxpayer, including the MTD adjustment, while

column J shows the total tax computed using column I and the appropriate tax

table for the tax year in issue.3° Finally, the alleged understatements in column L

are computed by subtracting the tax reported on each original return from

respondent's proposed tax due (column J - column K).

The foundation for the analysis, calculations, and conclusions could have

been presented through a summary witness and summary document. Petitioner

would have had an opportunity to review and test the accuracy of the analysis and

calculations and compare the summary document to the returns in the record.

Petitioner was denied that opportunity, and the Court likewise did not have a full

and fair opportunity to consider the summary presented with a proper foundation.

3°The Court notes that Appendix 2 does not include a column showing the

tax year for each return. These calculations would further require the appropriate

tax tables for the years in issue, none of which are included in the record.

- 91 [*91] As indicated, rule 1006 of the Federal Rules of Evidence anticipates that the

proponent of a summary document will provide a proper foundation through a

qualified witness. Such a foundation might assist the Court in providing an

explanation and analysis of the calculations included in the summary. Respondent

failed to do this.

As respondent did not provide the numerous calculations and analysis

before or at trial, petitioner did not have an opportunity to review Appendix 1 or

Appendix 2 for accuracy. Because the summaries were not properly made part of

the record, the Court agrees with petitioner that the information in Appendixes 1

and 2 may not be considered. Consequently, petitioner's motions to strike

Appendixes 1 and 2 will be granted, and these documents are deemed stricken.

II.

Collection Review and Section 6701(a)

The primary issue for the Court to decide, in the context of this collection

review proceeding, is whether petitioner is liable for a penalty for aiding and

abetting an understatement of tax liability pursuant to section 6701(a). We briefly

discuss the collection review proceeding and then discuss the elements of section

6701(a).

- 92 [*92] A.

Collection Due Process

The Secretary3¹is authorized to collect tax by levy upon property and

property rights of a taxpayer liable for taxes if such person fails to pay those taxes

within 10 days after notice and demand for payment is made. Sec. 6331(a). A

"tax" may include the liability for a section 6701 penalty. See sec. 6671(a); see

also Blaga v. Commissioner, T.C. Memo. 2010-170, 2010 WL 3023961, at *4.

Before the Secretary may levy upon the taxpayer's property, the Secretary must

first notify the taxpayer in writing of the intent to levy, sec. 6331(d)(1), and the

taxpayer's right to a CDP hearing, sec. 6330(a)(1). If a taxpayer makes a timely

request for a hearing, the hearing shall be held before an impartial officer or

employee of the Appeals Office. Sec. 6330(b).

This Court has jurisdiction under section 6330(d) to review the

Commissioner's administrative determinations. Section 6330(d)(1) does not

prescribe the standard of review that this Court should apply in reviewing an IRS

administrative determination in a CDP case; the general parameters for such

3¹Theterm "Secretary" means "the Secretary of the Treasury or his

delegate", sec. 7701(a)(11)(B), and the term "or his delegate" means "any officer,

employee, or agency of the Treasury Department duly authorized by the Secretary

of the Treasury directly, or indirectly by one or more redelegations of authority, to

perform the function mentioned or described in the context", sec.

7701(a)(12)(A)(i).

- 93 [*93] review are set by caselaw. Where the underlying tax liability is not at issue

we review the determination for abuse of discretion. Sego v. Commissioner, 114

T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000). Where

the underlying tax liability is properly at issue, we review that issue de novo.

Sego v. Commissioner, 114 T.C. at 610. When the Court conducts a de novo

review of the underlying liability, we review all determinations not involving the

underlying liability for abuse of discretion. Gardner v. Commissioner, 145 T.C.

161, 183 (2015), aff'd sub nom. United States v. Gardner, 704 F. App'x 720 (9th

Cir. 2017); Craig v. Commissioner, 119 T.C. 252, 260 (2002). An abuse of

discretion occurs if the Appeals Office exercises its discretion "arbitrarily,

capriciously, or without sound basis in fact or law." Woodral v. Commissioner,

112 T.C. 19, 23 (1999).

The parties agree that petitioner's underlying liabilities for tax years 2002

through 2006 are properly at issue. Accordingly, we review de novo petitioner's

liability for the section 6701 penalties. See Goza v. Commissioner, 114 T.C. at

181; see also Williams v. Commissioner, 131 T.C. 54, 58 n.4 (2008).

During an Appeals Office CDP hearing the Appeals officer must "obtain

verification from the Secretary that the requirements of any applicable law or

administrative procedure have been met." Sec. 6330(c)(1). Respondent issued

- 94 [*94] two Notice of Determination Concerning Collection Action(s) Under

Section 6320 and/or 6330, each dated July 14, 2011. In the notices of

determination, respondent confirmed that the requirements of all applicable law

and administrative procedure had been met. As indicated, we review this

verification requirement for abuse of discretion. See Gardner v. Commissioner,

145 T.C. at 183; Craig v. Commissioner, 119 T.C. at 260. This Court will review

the Appeals officer's verification under section 6330(c)(1) without regard to

whether the taxpayer raised it at the Appeals hearing. Hoyle v. Commissioner,

131 T.C. 197, 202-203 (2008), supplemented by 136 T.C. 463 (2011).

For penalties under section 6701, respondent's burden of production

includes the burden of producing evidence establishing that the penalties were

"personally approved (in writing) by the immediate supervisor of the individual

making such determination" as required by section 6751(b). See Graev III, 149

T.C. at 492-493. The section 6701 penalties do not fit either of the statutory

exceptions to this supervisory approval requirement. They are not additions to tax

under section 6651, 6654, or 6655. Sec. 6751(b)(2)(A). Additionally the record is

clear that the penalties were not automatically calculated through electronic

- 95 [*95] means.32 Sec. 6751(b)(2)(B). This Court has held that section 6751(b)

requires written approval of the initial penalty determination before the date when

the taxpayer is sent written notification of the penalties proposed. Clay v.

Commissioner, 152 T.C. __ (Apr. 24, 2019); see also Chai v. Commissioner, 851

F.3d 190, 221 (2d Cir. 2017), aff'g in part, rev'g in part T.C. Memo. 2015-42.

Respondent has submitted for the record copies of the penalty approval

form for the penalties at issue as well as forms showing the computations for

miscellaneous penalties for each year at issue, each with a certificate establishing

that the forms were a part of the administrative record. Each document displays

the initials RH. RA Campos testified that the initials on the penalty approval form

were those of Ruth Huberman, RA Campos' supervisor, and that the form was a

part of the administrative record.33 Ms. Huberman signed the penalty approval

form on June 16, 2008, before the IRS assessed the section 6701 penalties on

32At trial RA Campos testified that he had personally calculated the

penalties. We find his testimony on this issue persuasive.

33Ms. Huberman signed the form as "Group Manager". However, Internal

Revenue Manual pt. 20.1.1.2.3 (1), (12) (Feb. 22, 2008) specified that the approval

must be by the "immediate supervisor", as required by sec. 6751(b). The

presumption of regularity, see Walker v. Commissioner, T.C. Memo. 2018-22, at

*19 n.6, warrants the presumption that Ms. Huberman was the immediate

supervisor.

- 96 [*96] July 14, 2008. See Clay v. Commissioner, 152 T.C. at __ (slip op. at 45).

RA Campos' testimony was persuasive.

In Blackburn v. Commissioner, 150 T.C. 218, 223 (2018), we held that the

existence of a penalty approval form in the record was sufficient to establish the

settlement officer's verification of assessments when the administrative record

reflects compliance with administrative procedures. See Humiston v.

Commissioner, T.C. Memo. 2019-9, at *7-*8. On the basis of the record we

conclude respondent has met his burden of production under section 6751(b)(1).

Accordingly, we are satisfied that respondent has met the verification

requirements.

Section 6701 Penalty

In 1982 Congress enacted three new assessable penalties, codified in

sections 6700-6702, and rules applicable to those penalties, codified in section

6703. See Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248,

secs. 320, 322, 324, 326, 96 Stat. at 611-613, 615-617; S. Rept. No. 97-494

(Vol. 1), at 266-267, 270-271, 275-279 (1982), 1982 U.S.C.C.A.N. 781, 10141025. Section 6701 provides for the imposition of a penalty on any person who

- 97 [*97] aids and abets another person in understating his or her tax liability. Section

6701(a) provides as follows:

Sec. 6701(a) Imposition of Penalty.--Any person-(1) who aids or assists in, procures, or advises with respect to,

the preparation or presentation of any portion of a return, affidavit,

claim, or other document,

(2) who knows (or has reason to believe) that such portion will

be used in connection with any material matter arising under the

internal revenue laws, and

(3) who knows that such portion (if so used) would result in an

understatement of the liability for tax of another person,

shall pay a penalty with respect to each such document in the amount

determined under subsection (b).

Section 6701(b)(1) provides that the amount of the penalty imposed by

section 6701(a) shall be $1,000.

Burden of Proof

The Commissioner bears the burden of proving that a taxpayer is subject to

a section 6701 penalty. Sec. 6703(a). Most Courts of Appeals that have resolved

the burden issue have adopted the preponderance of the evidence standard rather

than the more stringent clear and convincing evidence standard for the

- 98 [*98] Government's burden of proof under section 6701.34 See Barr v. United

States, 67 F.3d 469-470 (2d Cir. 1995); Mattingly v. United States, 924 F.2d 785,

787 (8th Cir. 1991); Mitchell v. United States (In re Mitchell), 109 B.R. 434

(Bankr. W.D. Wash. 1989), amended by 109 B.R. 441 (Bankr. W.D. Wash. 1990),

a_f[d, 1990 WL 142016 (W.D. Wash. Aug. 31, 1990), rev'd on other grounds, 977

F.2d 1318 (9th Cir. 1992). But see Carlson v. United States, 754 F.3d 1223, 1229

(11th Cir. 2014) (finding that section 6701 requires proof of fraud by the tax

return preparer, and thus the Government was required to prove the preparer's

liability by clear and convincing evidence). Since we conclude that there is clear

and convincing evidence satisfying the provisions of section 6701, we need not

and do not opine as to the proper burden of proof.

34Clear and convincing evidence is "that measure or degree of proof which

will produce in the mind of the trier of facts a firm belief or conviction as to the

allegations sought to be established. It is intermediate, being more than a mere

preponderance, but not to the extent of such certainty as is required beyond a

reasonable doubt as in criminal cases. It does not mean clear and unequivocal."

Scharringhausen v. Commissioner, T.C. Memo. 2012-350 at *34 (quoting Ohio v.

Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990)); see also Waits v. Frito-

Lay, Inc., 978 F.2d 1093, 1105 (9th Cir. 1992) ("Clear and convincing evidence

means evidence sufficient to support a finding of 'high probability.'" (quoting

Mock v. Mich. Millers Mut. Ins. Co., 5 Cal. Rptr. 2d 594, 610 (Ct. App. 1992))).

- 99 [*99]

Aiding, Assisting, or Preparing With Knowledge of Use of

Document

The first element of section 6701(a) requires that the person to be penalized

must aid, assist in, procure, or advise with respect to "the preparation or

presentation of any portion of a return, affidavit, claim, or other [tax] document".

The second element requires that the person know or have reason to believe that

such portion of a document will be used in connection with a material matter

arising under the internal revenue laws.

The Court considers these two requirements. Petitioner is a licensed C.P.A.

who prepared and/or assisted in the preparation of tax returns for mariner clients.

The record reflects that petitioner repeatedly gave advice to his clients regarding

deductions for meals which were provided without cost to them. Petitioner

prepared tax returns and/or schedules claiming such deductions for hundreds of

taxpayers during the years in issue. Petitioner was very public in the

advertisement and promotion of his tax preparation services. He expressed the

clear view that mariners could properly claim deductions for meals irrespective of

whether they expended any of their own funds for the meals. Petitioner prepared

the tax returns or portions of tax returns (the mariner schedules) fully knowing and

for the express purpose of their submission to the IRS. There is no serious doubt

- 100 [*100] that the submissions were intended to be used in connection with a material

matter arising under the internal revenue laws. The Court concludes that the first

two elements of section 6701(a) have been satisfied.

We now consider the third element of section 6701(a): that the person

described in subsections (a) and (b) know that the "portion of a return" (if used)

would result in an understatement of tax. This subsection has two integral parts:

(1) the knowledge requirement and (2) the understatement requirement.

Knowledge

The clear direction in section 6701(a)(3) requires a finding that the person

preparing or presenting the portion of the return have knowledge that the

document (if used) would result in an understatement of tax. Congress has clearly

distinguished the scienter requirement of section 6701 from that in other statutes,

e.g., section 6694(b) and section 7206(2). The discussion in Sansom v. United

States, 703 F. Supp. 1505, 1509-1510 (N.D. Fla. 1988), is instructive in this

regard:

In enacting Section 6701 Congress sought to fill a gap in the

civil penalty provisions in the Internal Revenue Code. * * *

Despite the obvious relation of section 6701 to other penalties

in the Internal Revenue Code, Congress distinguished Section 6701

- 101 [*101] by proscribing "knowing" conduct, rather than "willful" conduct, as

in the other penalty provisions. For example, the criminal penalty

requires that the tax preparer "wilfully" prepare a fraudulent return or

tax-related document. 26 U.S.C. § 7206(2). Under that standard, the

government must show a "voluntary, intentional violation of a known

legal duty." United States v. Bishop, 412 U.S. 346, 360 * * * (1973);

s e United States v. Damon, 676 F.2d 1060, 1063 (5th Cir. 1982).

Section 6694 authorizes imposition of civil penalties on income

tax preparers. Section 6694(a) imposes a $100 penalty for negligent

or intentional disregard of revenue rules and regulations. Negligence

for such a penalty is a "lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances." Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), cert. denied, 389 U.S. 1044 * * * (1968). * * *

Section 6694(b) allows a $500 penalty per return for "willful"

attempts to understate tax liability with respect to any return or claim

for refund. 26 U.S.C. § 6694(b). * * *

The plain text of section 6701 ("knows") indicates that actual knowledge is

necessary. The Government must establish that the tax preparer "knows" the use

of the return or other document will result in an understatement of tax liability.

"[A]ctual knowledge is a higher standard than the 'willfulness' standard utilized in

other statutes. Simply put, 'know' requires knowledge--awareness of the facts and

the ultimate result of the conduct." Carlson v. United States, 754 F.3d at 1229

(quoting Sansom, 703 F. Supp. at 1510); see also Mattingly, 924 F.2d at 791;

Warner v. United States, 698 F. Supp. 877, 882 (S.D. Fla. 1988).

- 102 [*102] Petitioner was the preparer of the schedules for Marin Johnson (1994 and

1996) and for Jim L. Westling (1996). Deficiency determinations for each case

were considered by this Court. The question in Johnson was whether the taxpayer,

a merchant seaman, could deduct meals and incidental expenses. The Court

concluded in a published Opinion filed September 15, 2000, that the taxpayer

(1) could use revenue procedures to ascertain the amount of deductible incidental

expenses and (2) could not use the revenue procedures to deduct the cost of meals

which were furnished by the taxpayer's employer. Johnson v. Commissioner, 115

T.C. at 227-228. The taxpayer in Westling, a tugboat captain, also claimed

deductions for meals and incidental expenses. Meals were furnished by the

taxpayer's employer at no cost. In a Memorandum Findings of Fact and Opinion

filed the same date as Johnson, the Court concluded that the taxpayer could deduct

the incidental expense portion using the revenue procedures. The opinion did not

hold that the taxpayer could use the revenue procedures to deduct meal expenses

he did not incur and in fact were for meals furnished by his employer. Westling v.

Commissioner, 2000 WL 1310659, at *2-*3.

As indicated, the Johnson and Westling cases were decided in 2000, two

years before the first tax year at issue in these cases. From 2000 forward,

petitioner was aware that this Court did not "read the revenue procedures to allow

- 103 [*103] a taxpayer to use the full M&IE rates when he or she incur[red] only

incidental expenses." Johnson v. Commissioner, 115 T.C. at 227. The record

reflects that petitioner read both the Johnson and Westling opinions shortly after

their release on September 15, 2000. Petitioner further testified that he was

involved in the examination of the Johnson and Westling returns, the

administrative appeals, and the decision to litigate the issues before the Tax Court.

He also testified that he was involved in preparing the cases for trial. After the

Johnson and Westling opinions were released, petitioner produced advertisements

in both professional magazines and on his business websites indicating that the

taxpayers had won their respective cases. Petitioner also created documents for

his clients in which he discussed the implication of the cases for future years' tax

returns. In his article "Tug & Barge Sailors Entitled to Tax Deductions for Food"

found in the April/May 2002 edition of Professional Mariner magazine, petitioner

stated that the Federal Government allowed travel deductions "per [his] two Tax

Court decisions". Likewise, in petitioner's client document "What Do Merchant

Sailors Need to Provide Us to Get These Rather Large Travel Deductions" from

late 2001 or 2002, he once again asserted the cases were "my decisions".

While the record is unclear as to the extent of petitioner's involvement in

the Johnson and Westling litigation, petitioner's testimony of his direct

- 104 [*104] involvement highlights the inconsistency of his statements, advertisements,

and promotions, suggesting as declared outright in a document entitled "What

about tug boat/barge mariners?" that he had "won twice in Tax Court". See supra

note 14. Given petitioner's assertion of his involvement in the litigation of those

two cases, there is no doubt that he clearly knew how this Court decided the issues

relating to claimed deductions of mariner expenses.

Petitioner was also aware of and had read a series of revenue procedures

issued by the Commissioner, beginning with Rev. Proc. 90-38, supra. This

revenue procedure and its successors outlined the use of the M&IE rate while

traveling away from home to deduct "deemed substantiated" unreimbursed meals

and or incidental expenses as appropriate. Petitioner further asserts that he

discussed the application of several of these revenue procedures with their IRS

authors.35 petitioner seemed to suggest that representatives of the IRS sought his

advice on implementation of some of the revenue procedures. His testimony is not

credible, particularly after the Johnson and Westling opinions were issued.

Further, petitioner was aware of and had read CCA 200242038 (Oct. 18, 2002)

35Petitioner asserts that he talked with Beverly A. Baughman, principal

author of Rev. Proc. 90-60, 1990-2 C.B. 651; Edwin B. Cleverdon, principal

author of Rev. Proc. 96-64, 1996-2 C.B. 427, and Rev. Proc. 97-59, 1997-2 C.B.

594; John L. Trevey, Jr., principal author of Rev. Proc. 2001-47, 2001-2 C.B. 332;

and Christian Wood, principal author of Rev. Proc. 2004-60, 2004-2 C.B. 682.

- 105 [*105] and CCA 200343025 (Oct. 24, 2003), each of which addressed the fact that

mariners who received free meals while working aboard a ship could claim

deductions for incidental expenses of $3 per day and could not claim deductions

for meals provided by their employers.

Petitioner's knowledge of the law regarding deductions for meal expenses

was confirmed by a series of articles he arranged to publish in professional

magazines aimed at mariners and on his website beginning in 2001. In particular,

petitioner's article "Beware of magic numbers when tabulating your tax

deductions", published in the February/March 2003 edition of Professional

Mariner magazine, expressly warned oceangoing sailors to "remember your meals

are normally provided, and claiming this additional meal deduction is considered

to be double dipping."

Despite this warning petitioner sometimes provided contrary advice. For

example, petitioner espoused a distinction for tug and barge sailors. In an article

appearing in the April/May 2002 issue of Professional Mariner magazine,

petitioner advised tug and barge sailors that they were in a unique situation for tax

purposes because they were "commonly provided a food allowance for the boat

that may average only $10 per day" in contrast to the jobs of oceangoing sailors

aboard container ships "where all lodging and meals were assumed to be

- 106 [*106] completely provided". See supra pp. 23-24. In an article from the

February/March 2003 edition of Professional Mariner magazine, petitioner

detailed the specifics of the purported distinction, advising tug and barge sailors

that they could use the full M&IE rate so long as they reduced it by the amount of

the "grocery allowance" provided by their employers. See supra pp. 25, 28-35, 45.

As shown by evidence in the record, the "grocery allowance" actually refers

to the industry description of grocery budgets for the food provided aboard

vessels. The testimony of industry witnesses reflects that shipping companies

generally provided three full meals per day for all of their mariner employees

while they were aboard the vessels. See supra pp. 28-35. The testimony of Mr.

Roach, one of petitioner's mariner clients who worked for approximately 10

shipping companies over the course of his multidecade career, is particularly

strong on this point. In his testimony Mr. Roach stated that he had "never paid for

any meals on any ships in 40-something years" and "never heard of any" marine

company that did not provide free meals to its employees while they were working

aboard a vessel. See supra pp. 33-34, 39-40.

Petitioner's knowledge of this industry standard is evidenced by multiple

telephone conversations between himself and Mr. Comeaux, the CFO of ECO.

During these phone conversations Mr. Comeaux explained to petitioner that he

- 107 [*107] believed deductions for meal expenses were improper for his employees

because ECO provided all employees with meals at no charge while they were

working aboard the company's vessels. See supra pp. 35-36.

Finally, in 2005 an associate of petitioner's LA attorney prepared a 12-page

draft interoffice memorandum addressed to petitioner's LA attorney summarizing

his "preliminary thoughts" regarding the legality of petitioner's position on meal

deductions for mariners. The associate concluded that petitioner's positions were

not supportable by caselaw or IRS administrative resources. Petitioner read the

draft interoffice memorandum on or shortly after April 18, 2005. See supra pp.

51-52.

Petitioner testified that he had "numerous clients" for which meals were

provided but for various reasons "they bought their own * * *. Some of them have

dietary restrictions. I have some mariners that, for example, keep kosher. These

ships don't keep--don't have kosher food on board; therefore, they have to buy

their own and bring them aboard. Others have medical conditions where they

have--they can only eat certain items, or have allergies, and therefore, they will

bring their own food aboard." However, petitioner did not provide any

documentary or other evidence to support these claims. To the contrary, petitioner

testified that he did not always ask mariner clients whether meals were provided

- 108 [*108] and did not keep a record of clients who allegedly paid for their own meals.

At the time of preparation of the returns or preparation of the travel schedules,

petitioner did not keep records reflecting the meal policy for each company that

employed his mariner clients and did not make it a practice to ask his mariner

clients about special circumstances pertaining to why they may or may not have

paid some expenses for meals.

Instead, petitioner routinely asked each client how many days he or she was

on a vessel. Petitioner then multiplied the number of days worked by the full

M&IE rate. Petitioner would then reduce the M&IE deduction by an amount

designated as a "grocery allowance"36 purportedly provided by the client's

employer. This "grocery allowance" was an amount designated by the employer

and allocated to the employee. Petitioner then prepared a return or schedule

claiming a deduction for the balance of the M&IE rate. This tax treatment was

erroneous because a substantial portion of the balance of the M&IE claimed

deduction represented the cost of meals which petitioner's client would not have

36As discussed supra pp. 25, 28-35, 45, the "grocery allowance" is an

accounting device used by shipping companies to track the grocery budgets for the

food provided aboard ships in the industry. The grocery allowance is used to

purchase food to cook and serve meals to mariners in the industry; the grocery

allowance is not distributed to the mariners individually. Mariners are generally

provided three full meals per day while they are aboard the vessels.

- 109 [*109] paid for in the usual course of employment. Each of petitioner's client's

M&IE deduction should have been limited to a deduction for incidental expenses

incurred while working aboard the vessel as fully described in Johnson and

Westling.

Despite this extensive history as fully discussed herein, petitioner continued

to advise claiming deductions for meal expenses on tax returns and schedules for

mariners who had not incurred them. We conclude that petitioner had knowledge

that the preparation of tax documents claiming meal expense deductions for his

mariner clients, where those clients had not incurred meal expenses, had the

potential to result in understatements of tax.

Understatement of Liability

With the "knowledge" element satisfied, the question arises whether

the Government must establish that the use of the document will result in an

"understatement".

In Golletz v. United States, No. 90 C 5666, 1991 WL 66371, at *3 (N.D. Ill.

Apr. 19, 1991), a tax preparer argued that the Government had not proven that an

understatement existed as a result of documents he had prepared. Mr. Golletz

argued that section 6701 established a condition precedent that there must be an

actual understatement of tax before liability attaches. His argument rested on the

-110[*110] fact that his clients had not filed the returns that he prepared in their

original form and so ultimately there was no understatement. The Court held to

the contrary, stating that the phrase "if so used" implies that no such condition

precedent exists. M

[T]he intent of Congress was to impose liability for the act of aiding,

assisting, procuring, or advising in a prohibited manner regardless of

whether any document is ever filed that would result in an

understatement of taxes. Kuchan [v. United States], 679 F. Supp.

* * * [764,] 769 [(N.D. Ill. 1988)]. Section 6701 punishes conduct

intended to result in tax code violations without regard to whether the

underlying violation ever actually occurs. M

Golletz, 1991 WL 66371, at *3. Thus, the penalty applies where a tax document

would have caused the harm "if so used," whether or not the taxpayer ever files an

understated return. See 4; see also Bailey v. United States, 117 F.3d 1424 (9th

Cir. 1997); Kuchan, 679 F. Supp. at 769. Following Golletz, it is clear that a

client need not ñle a tax document resulting in an understatement in order for

section 6701 to apply; a tax preparer needs only to have prepared one.

Petitioner argues that respondent has not met his burden because respondent

has not determined a specific dollar amount of understatement for each tax return

or document in evidence. We conclude that the plain text of section 6701 does not

create the burden of proving a specific understated amount. The statute merely

requires that respondent prove petitioner knew that the tax documents he produced

- 111 [*111] would result in understatements. Respondent has provided clear and

convincing evidence that petitioner consistently and deliberately acted to create

tax documents that he knew would deprive the Government of tax. M supra

pp. 99-109. Petitioner systematically claimed meal expenses on tax documents for

mariners who had not incurred them, ignoring numerous revenue procedures, the

decisions in Johnson and Westling, and the advice of his own counsel. Through

the production of those documents, petitioner acted to create an understatement of

tax on each potential client tax return. Petitioner produced a list of tax returns and

other tax documents where he had improperly calculated the applicable M&IE

rate. Respondent then used those documents to determine the penalties.

The reasoning presented in United States v. Stinson, 729 F. App'x 891 (11th

Cir. 2018),

239 F. Supp. 3d 1299 (M.D. Fla. 2017), is instructive to these

cases.37 In Stinson, the U.S. Court of Appeals for the Eleventh Circuit discussed

the requirements for enjoining an individual from engaging in conduct subject to a

penalty under section 6701. Id. at 896-897. The court held that injunctive relief

was appropriate where the individual had engaged in the proscribed conduct and

37While the legal proceeding in United v. Stinson, 729 F. App'x 891 (1 lth

Cir. 2018),

239 F. Supp. 3d 1299 (M.D. Fla. 2017), involved an action to

enjoin a preparer, the discussion portion of the opinion provides helpful legal

analysis.

-112[*112] that an injunction was necessary to prevent recurrence of the conduct. Id.

The court found injunctive relief appropriate because the tax preparer in question

had violated section 6701 by "filing tax returns on behalf of taxpayer customers

that claimed improper Schedule A deductions (including improper unreimbursed

employee expenses and fake charitable contributions), inflated and sometimes

completely fabricated Schedule C business expenses, and inaccurately calculated

eligibility for the EITC." Stinson, 239 F. Supp. 3d at 1323. Consequently, the

court found "that the Government had presented sufficient circumstantial

evidence, beyond mere inaccuracies in tax returns," during the District Court trial

to show that the return preparer "knowingly and deliberately stated inaccurate

amounts on tax returns in order to maximize customers' tax refunds" and that the

evidence was overwhelming that the return preparer "knew he was preparing and

filing [F]ederal tax returns designed to understate his customers' tax liabilities."

Stinson, 729 F. App'x at 897.

Here, as in Stinson, the entirety of the record weighs against petitioner. As

in Stinson, in 2007 the District Court, as affirmed by the Court of Appeals for the

Ninth Circuit, filed a judgment and

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