T.C. Memo.' 2012-179

T.C. Memo.' 2012-179

UNITED ST TES TAX COURT

YOLANDA WELCH, Petitioner y.

COMMISSIONER OF INTERNAL REVENUE, Respondent

JOHN WELCH, Petitioner y.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6742-09, 7036-09.

Filed June 28, 2012.

Beverly L. Winstead and G. Emeka Obinna Onwezi, for petitioners.

Erin R. Hines, for respondent.

SERVED JUN 2 8 2012

-2MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Chief Judge: These cases were consolidated for purposes of

trial, briefing, and opinion. Pursuant to separate notices of deficiency respondent

determined the following deficiencies and penalties under section 6662:1

Yolanda Welch

Docket No. 6742-09

TYE Dec. 31

Deficiency

Penalty

Sec. 6662

2005

2006

$2,444

25,444

--$5,088

John Welch

Docket No. 7036-09

TYE Dec. 31

Deficiency

Penalty

Sec. 6662

2006

$17,214

1$3,442

IFollowing trial, with leave of the Court respondent amended his answer to

assert, with respect to petitioner John Welch's 2006 tax year, an increased

deficiency of $20,651 and an increased sec. 6662 penalty of $4,130. The increases

were due to respondent's reclassifying Mr. Welch's filing status from head of

household to married filing separately.

Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) for the years at issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. All monetary amounts have been rounded

to the nearest dollar.

-3After a concession by Mr. Welch,2 the issues we will decide are: (1)

hether petitioner.Yolanda Welch ha a sufficient basis in petitioners' S

corporation, Respira Medical, Inc. (Réspira), to be entitled to claim passthrough

losses for 2005 and 2006; (2) whether petitioner John Welch had a sufficient basis

iii Respira to be entitled to claim a passthrough loss for 2006; (3) whether Mr.

Welch was entitled to claim head of liousehold status on his 2006 Federal income

tax return; and (4) whether petitioners are liable for accuracy-related penalties for

2þ06.

FINDINGS OF FACT

When they filed their petitions, petitioners resided in Maryland. They

níarried,on April 14, 2001, and residêd together at all relevant times. Mr. Welch

has a B.S. in business administration. Ms. Welch graduated from high school and

took some college-level courses but did not complete a degree program.

In March 2001 petitioners started Respira, an S corporation that provides

respiratory and home healthcare services and durable medical equipment. Ms.

Welch is Respira's chief executive officer and an 80% shareholder. Mr. Welch is

11espira's president and a 20% shareholder.

2Mr. Welch stipulated that for 2006 he had $3,375 of income from a State

tax refund.

-4Ms. Welch's Alleged Loans to Respira

Ms. Welch asserts that before and during the years at issue she borrowed

from Dr. Steven Levenson over $600,000 and that she lent all these funds to

Respira.3 All these funds, however, were either paid directly by Dr. Levenson to

Respira or else represent amounts that he charged to his credit card as payments of

Respira's expenses. Dr. Levenson wrote no checks to Ms. Welch, nor did he

otherwise make any payments to her with regard to the alleged loans. Ms. Welch

contributed no personal funds to Respira. Respira did not execute a loan

agreement or any notes evidencing any loans from Ms. Welch.

Between October 18, 2001, and November 12, 2003, Ms. Welch signed 27

promissory notes in favor of Dr. Levenson. The notes are for varying amounts that

total $598,197. The notes have various maturity dates, none more than a year after

the date of execution, and generally state an interest rate of 5% per annum. The

notes were secured by receivables owed to Respira; Ms. Welch did not offer any

personal collateral.

From March 2003 to May 2005 Respira made some payments directly to Dr.

Levenson in satisfaction of some of the promissory notes between Ms. Welch and

3Ms. Welch had a preexisting relationship with Dr. Levenson as they had

worked together at a hospital and he had served as her mother's doctor.

-'5 Dr. Levenson. Ms. Welch reported no interest income or constructive dividends

ith respect to these payments.

On May 21, 2007, Dr. Levenson filed suit in Baltimore County Circuit

Court against both Ms. Welch and Respira. He alleged that between 2000 and

2006 he had lent $656,461 to Ms. Welch and $50,000 to Respira. Dr. Levenson

further alleged that as of May 2005 hé had been repaid $135,400 of the amount he

lent to Ms. Welch and Respira but that the payments had stopped as of May 20,

2005. By settlement agreement and rëlease dated June 23, 2008, Ms. Welch

agreed to execute a new note to Dr. Levenson for $600,000 and Respira agreed to

execute a note to Dr. Levenson for $50,000.4 The record does not indicate

conclusively whether these new notes were ever actually executed or whether Ms.

Welch made any payments as a result of the lawsuit.

1

. Welch's Alleged Loans to or on Behalf of Respira

Mr. Welch claims that between 2002 and 2006 he lent Respira $121,800 by

charging some of Respira's expenses on his personal credit cards; by transferring

funds from his section 401(k) account; arid by writing personal checks directly to

ldespira, to Respirã's vendors and service providers, and to Ms. Welch to provide

4The record does not indicate why the aggregate amounts of these new notes

ekceeded the aggregate amounts of loans from Dr. Levenson that, according to his

complaint, remained unpaid.

-6her with funds to pay Respira's bills while he was traveling. Reggie Palmore, who

was Respira's chief fmancial officer from mid-2002 to mid-2005, recorded some

payments made by Mr. Welch in Respira's books as shareholder loans? Mr.

Palmore did not usually ask for an invoice, bill, receipt, or other source

documentation to verify the amount or nature of the expenses before he recorded

the loans.

Between January 2004 and September 2006 Mr. Welch received from

Respira nonpayroll payments totaling $31,099, of which $16,434 was paid in

2006.

Respira's Books

Respira's trial balance as of December 31, 2005, listed a $7,358 shareholder

loan from Mr. Welch and a $60,848 shareholder loan from Ms. Welch. The 2005

trial balance listed Mr. Welch's equity contribution as $3,530 and Ms. Welch's

equity contribution as $14,119.

SMr. Welch claims that between 2002 and 2006 he charged $25,295 of

Respira's expenses on his personal credit cards. He also claims that between 2001

and 2005 he wrote checks to Respira totaling $49,900. He claims that between

September 2002 and January 2003 he wrote Mr. Palmore checks totaling $12,743

for accounting and financial services that Mr. Palmore performed for Respira. Mr.

Welch also claims that between 2002 and 2006 he personally paid some of

Respira's vendors by writing them checks on his personal checking account; these

checks totaled $20,637, of which $3,100 were written in 2006. -

Respira's balance sheet as of ecember 31,'2006, listed liabilities of $8,844

"Due to Minority Shareholder" and $66,349 "Due to Majority Shareholder".' The

2006 balance sheet also listed $3,530 of common stock held by the minority

s areholder and $14,119 held by the majority shareholder.7 Respira's 2006

recapitulation of payroll register showed gross payroll of $161,636 for Mr. Welch

and $116,427 for Ms. Welch.

ax Returns

On Forms 1120S, U.S. Income Tax Return for an S Corporation, Respira

reported net operating losses of $50,294 for 2005 and $683,059 for 2006.8 On

their separate individual Federal income tax returns for 2005 and 2006, petitioners

reported their pro rata shares of these net operating losses. More particularly, for

2005 Ms. and Mr. Welch claimed passthrough losses from Respira of $40,235 and

6Ms. Welch, as an 80% shareh lder, is Respira's majority shareholder. Mr.

Welch, as a 20% shareholder, is Reslsira's minority shareholder. Shareholder

loans were reported consistently on Respira's 2006 trial balance, which listed

$8,844 as "Due To Shareholder: Shareholder Loan - John" and $66,349 as "Due

To Shareholder: Shareholder Loan - Maria".

Stock ownership was reported consistently on Respira's 2006 trial balance,

vbhich listed Mr. Welch's "equity" c ntributions as $3,530 and Ms. Welch's as

$14,119.

8For 2004 Respira reported ordinary business income of $11,387. The

rpcord does not include Respira's tax returns for years before 2004.

-8$15,768, respectively.9 For 2006, Ms. and Mr. Welch claimed passthrough losses

from Respira of $546,447 and $136,612, respectively.

On Schedule L, Balance Sheets Per Books, in its Forms 1120S for taxable

years 2004 through 2006, Respira reported these beginning and ending balances

for "Loans from shareholders":

-

Year

Beginning balance

Ending balance

2004

2005

2006

$505,844

409,431

68,205

$409,431

68,205

75,193

For these same years, Respira reported 1;hese beginning and ending balances

for "Mortgages, notes, bonds payable in 1 year or more":

Year

Beginning balance

Endina balance

2004.

2005

2006

$355,288

490,064

493,553

$490,064

493,553

711,373

For each of the taxable years 2004 through 2006, on Schedule L Respira

reported "Capital stock" in the unchanging amount of $17,649.

90n her 2003 Federal income tax return Ms. Welch claimed a $1,751

nonpassive loss from Respira and also reported a $424,031 unallowed passive loss

from Respira. Ms. Welch did not file a tax return for 2004. .

Ms. Welch filed her 2005 and 2006 Federal income tax returns claiming

n arried filing separately filing status. Mr. Welch filed his 2005 and 2006 Federal

income tax returns claiming head of líousehold status.1°

Someone named Monique Booker, whom petitioners assert is a certified

piiblic accountant but who is otherwise unidentified in the record, signed as the

p eparer of Respira's 2005 and 2006 Forms 1.120S as well as of Ms. and Mr.

Welch's individual Federal income tax returns for these years."

Notice of Deficiency

By notice of deficiency respondent disallowed Ms. Welch's claimed

p ssthrough losses for 2005 and 2006 and imposed an accuracy-related penalty for

1°The parties stipulated that Mr. Welch filed a Federal income tax return for

taxable year 2006 as married filing separately. That stipulation is clearly contrary

to the facts that we have found are established by the record, and we shall

diisregard it. See Cal-Maine Foods, Iñc. v. Commissioner, 93 T.C. 181, 195

(1989). The record establishes, and e have found, that Mr. Welch filed his 2006

return with head of household filing status.

"Mr. Palmore prepared Mr. and Ms. Welch's individual Federal income tax

returns for 2002 and 2003. He also prepared Respira's Federal income tax returns

for 2002 and 2003. Although Mr. Palmore testified that he "thought" he also

prepared petitioners' and Respira's returns for 2004, all the 2004 returns were

signed by preparer Ms. Booker, who also prepared Ms. Welch's individual Federal

iñcome tax returns for 2005 and 2006 and Mr. Welch's individual Federal income

t x returns for 2005 and 2006. Ms. ooker also prepared Respira's Federal

iúcome tax returns for 2005 and 2006.

- 10 2006. By notice of deficiency respondent disallowed Mr. Welch's claimed

passthrough loss for 2006 and imposed an accuracy-related penalty for 2006.

OPINION

Generally, the Commissioner's determinations in a notice of deficiency are

presumed correct, and the taxpayer has the burden of proving that the

determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Section 7491(a)(1) provides that if, in any court proceeding, a taxpayer

introduces credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer's proper tax liability, the Commissioner shall have the

burden of proof with respect to that issue. Credible evidence is evidence the Court

would find sufficient upon which to base a decision on the issue in the taxpayer's

favor, absent any contrary evidence. See Higbee v. Commissioner, 116 T.C. 438,

442 (2001). Section 7491(a)(1) applies, however, only if the taxpayer complies

with all substantiation and recordkeeping requirements under the Code and

cooperates with the Commissioner's reasonable requests for witnesses,

information, documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B).

Petitioners argue that the burden should shift to respondent because

petitioners "produced checks, deposit slips, bank statements, and corroborating

testimony during trial" and "cooperated with Respondent at every stage of these

- 11 proceedings, including the audit." WÑ are not persuaded, however, that petitioners

c¢mplied with substantiation and recordkeeping requirements as necessary to shift

the burden of proof under section 7491(a). As discussed in more detail below,

although petitioners offered some documentary evidence and testimony, it is

insufficient to establish their bases in Respira and thus their entitlement to losses,

lVloreover, petitioners did not maintain contemporaneous records of their bases in

Respira, did not provide complete records to evidence alleged loans from Dr.

Levenson, and did not provide complete records to substantiate business expenses

Mr. Welch allegedly incurred on Respira's behalf. Accordingly, the burden of

pi.oof does not shift to respondent under section 7491(a) with respect to any

factual issue relating to petitioners' bases in Respira.

I. Petitioners' Passthrough Losses From Respira

Generally, an S corporation shareholder determines his or her tax liability

by taking into account a pro rata sharë of the S corporation's income, losses,

deductions, and credits. Sec. 1366(a)(1). The shareholder may not take into

account, however, S corporation lossës and deductions for any taxable year in

e cess of the shareholder's adjusted asis in the S corporation stock and debt.

- 12 Sec. 1366(d)(1)." Section 1367 provides that a shareholder's basis is increased

for items of income passed through to the shareholder under section 1366(a)(1)

and decreased (but not below zero) by losses and deductions passed through to the

shareholder under section 1366(a)(2).

A shareholder may increase his or her basis in an S corporation if he or she

makes an economic outlay to or for the benefit of the S corporation. Goatcher v.

United States, 944 F.2d 747, 751 (10th Cir. 1991); Estate of Leavitt v.

Commissioner, 875 F.2d 420, 422 (4th Cir. 1989), aff'a 90 T.C. 206 (1988). An

economic outlay for this purpose is an actual contribution of cash or property by

the shareholder to the S corporation or a transaction that leaves the S corporation

indebted to the shareholder. Sec. 1366(d)(1); Estate of Leavitt v. Commissioner,

875 F.2d at 423.

When a shareholder obtains a personal loan and transfers some or all of the

loan proceeds to the S corporation, he or she has made an economic outlay and is

entitled to increase his or her basis in the S corporation in an amount equal to the

amount transferred to the S corporation. Oren v. Commissioner, 357 F.3d 854,

858 (8th Cir. 2004), aff'a T.C. Memo. 2002-172; Prashker v. Commissioner, 59

"Any disallowed loss or deduction may be carried forward indefinitely and

claimed when and to the extent that the shareholder increases his or her basis in

the S corporation. See sec. 1366(d)(2).

- 13 T.C. 172, 176 (1972); Miller v. Commissioner, T.C. Memo. 2006-125. By

contrast, when an S corporation shareholder is only indirectly liable for a

corporate debt, that shareholder has nbt transferred any cash or property to the S

corporation or created corporate indebtedness owed to him or her until and to the

extent the shareholder actually pays the debt. Raynor v. Commissioner, 50 T.C.

762, 770-771 (1968). The key question is whether the corporation is "indebted to

the shareholder for the shareholder's own money." Oren v. Commissioner, 357

Fl3d at 858.

In order to deduct a loss from an S corporation, a taxpayer must establish a

basis in the S corporation and that it has not'been reduced to zero because of

I

lòsses ölaimed in years predating the year at issue. Hogan v. Commissioner, T.C.

Memo. 1999-365; see Arnold v. Commissioner, T.C. Memo. 2003-259; Guerrero

v. Commissioner, T.C. Memo. 2001-44 ("[E]ven assuming that the checks were

evidence of direct loans from petitioners, there is no evidence that the loans were

outstanding on December 31, 1992, r that the amounts had not already been used

in claiming 1990 or 1991 flowthrough losses."); Briggs v. Commissioner, T.C.

Memo. 2000-380. A taxpayer who fails to prove that he or she has a basis in an S

corporation is considered to have a zero basis in that corporation. Thomson v.

Commissioner, T.C. Memo. 1983-279, aff'd without published opinion, 731 F.2d

- 14 889 (11th Cir. 1984). Thus, petitioners have the burden of proving both that they

made economic outlays and that they had sufficient bases in Respira as of the

close of 2005 and 2006 to absorb the claimed losses.

Petitioners claim to have made loans to Respira that gave rise to bases

sufficient to support at least part of their claimed passthrough losses from Respira.

Ms. Welch alleges that she made loans to Respira by contributing funds she

received as personal loans from Dr. Levenson. On brief she claims that as of

yearend 2005, she had $521,061 of basis in Respira--far more than enough to

support the $40,235 passthrough loss that she claims for 2005. And she claims

that as of yearend 2006, she had a basis of $480,826 in Respira and so should be

entitledito that much of the $546,447 passthrough loss that she claimed on her

2006 return."

Similarly, Mr. Welch alleges that he made loans to Respira by paying some

of Respira's expenses with his personal credit card, paying vendors and service

providers on behalf of Respira by personal check, writing personal checks to

Respira to provide cash for the company, and writing personal checks to Ms.

Welch to allow her to pay some of Respira's expenses. He also alleges that he lent

"Effectively, then, Ms. Welch concedes that $65,621 of her claimed 2006

passthrough loss is suspended because of insufficient basis.

- 15 Respira funds that he obtained by cashing out his retirement account. On brief, he

asserts that as of yearend 2006 he had a basis of $80,868 in Respira and so should

be entitled to that amount of the $136,612 passthrough loss that he claimed on his

2006 return.14

Even if we were to assume, for the sake of argument, that petitioners made

loans to Respira in the amounts claimed--an assumption that respondent

vigorously disputes-they have failed to show that as of the relevant dates (yearend

2005 and 2006 for Ms. Welch and yearend 2006 for Mr. Welch) they had any

remaining bases in Respira. In the first instance, it is impossible to reconcile

petitioners' asserted bases as of yearend 2005 and 2006 with Respira's books and

tax returns." The wide, unexplained|gulf between petitioners' asserted bases and

14Effectively, then, Mr. Welch concedes that $55,744 of his claimed 2006

passthrough loss is suspended because of insufficient basis.

"For instance, Respira's trial balance for yearend 2005, consistent with

Ilespira's 2005 tax return, shows only a $60,848 shareholder loan from Ms. Welch

and a $7,358 shareholder loan from Mr. Welch. For yearend 2006 Respira's trial

balance, consistent with Respira's 2006 tax return, shows a $66,349 shareholder

loan from Ms. Welch and an $8,844 shareholder loan from Mr. Welch. Although

the small increases in shareholder loans from yearend 2005 to yearend 2006 might

suggest additional loans that might s¼pport a small basis for 2006, Ms. Welch has

not asserted any basis from loans in 2006; we deem her to have waived any such

argument. Similarly, although Respira's books show that Mr. Welch's shareholder

loan balance increasêd by $1,486 in 2006, we are unwilling to attach much

significance to this consideration in the absence of corroborating evidence

(continued...)

.

- 16 the information found in Respira's books and tax returns casts significant doubt on

the,reliability of petitioners' assertions. Moreover, although Respira's books and

tax returns might suggest some relatively small amount of shareholder loans

outstanding as of yearend 2005 and 2006, petitioners have not demonstrated

whether and to what extent any bases attributable to even these relatively small

amounts of outstanding shareholder loans might have been depleted pursuant to

section 1367 by net operating losses that Respira might have incurred since its

creation in 2001.16 Additionally, petitioners' figures are inconsistent with other

%...continued)

as to any such increase, particularly considering that during 2006 Mr. Welch

received $16,434 in nonpayroll payments from Respira and the evidence does not

establish that he lent Respira any greater amount in 2006. Respira's books also

show small equity contributions for Ms. Welch ($14,119 for yearend 2005

and 2006) and Mr. Welch ($3,530 for yearend 2005 and 2006). Petitioners have

not asserted, however, that they have any bases in Respira attributable to anything

other than loans. Respira's tax returns also show significant, increasing balances

for yearend 2005 and 2006 for "Mortgages, notes, bonds payable in less than 1

year". But the evidence does not suggest that these short-term liabilities represent

loans to petitioners; to the contrary, Respira's books suggest that these short-term

obligations represent mainly, if not entirely, amounts that Respira owed to third

parties for operating expenses.

"This concern gains added significance in the light of the fact that for 2003

Respira appears to have reported a net operating loss of over $400,000. The

record does not establish whether Respira had a net operating profit or loss for

years before 2003.

- 17 evidence, leading us to doubt the credibility of their figures." Finally, petitioners

admit that during Respira's early years they did not consistently keep

contemporaneous records of basis. For these various reasons: petitioners have

fàiled to persuade us that they had aný bases in Respira as of the relevant yearend

dates. Accordingly, we sustain re 541pondent's

disalloùrance of petitioners' claimed

passthrough losses from Respira.

II. Mr. Welch's Filing Status

In his amendment to answer, respondent asserted an increased deficiency

ahd accuracy-related penalty on the Ároimd that Mr. Welch is not entitled to head

of household filing status, as Mr. Welch claimed on his 2006 income tax return.

1(espondent has the burden of proof ith respect to this increase in deficiency.

See Rule 142(a)(1).

To qualify as a head of hoùsehold, an individual generally must be

unmarried at the close of the taxable year. Sec. 2(b)(1). Under certain

circumstances, in determining proper filing status, a married taxpayer may be

treated as unmarried if he or she lives apart from his or her spouse during the last

For instance, Respira's tax r¢turns for 2004, 2005, and 2006 report a total

net repayment of shareholder loans of $430,651; however, petitioners' basis

figures indicate total repayments of only $160,565 of shareholder loans from 2001

through 2006.

- 18 six months of the taxable year, provided that certain other requirements are met.

Secs. 2(c), 7703(b). Additionally, a taxpayer is not considered married if he or she

is legally separated from his or her spouse pursuant to a decree of divorce or

separate maintenance. Sec. 2(b)(2)(A). The determination of whether a taxpayer

is married is made at the close of the taxable year. Sec. 7703(a)(1).

The parties stipulated that petitioners married on April.14, 2001, and that

they were still married as of June 9, 2010. Mr. Welch testified that he and Ms.

Welch resided together during 2004, 2005, and 2006. Petitioners filed separate

Federal tax returns for taxable year 2006.using the same mailing address, and both

petitioners received correspondence from respondent at this address. On her 2006

Federal tax return Ms. Welch indicated that she was married to John Welch. The

preponderance of the evidence convinces us that Mr. and Ms. Welch were married

and resided together throughout 2006. Accordingly, Mr. Welch is not entitled to

head of household filing status for 2006, and we sustain respondent's assertion of

an increased deficiency in this regard.

III. Accuracy-Related Penalties

Section 6662(a) imposes a 20% penalty on any portion of an underpayment

that is attributable to, among other thirigs, negligence or·disregard of rules or

regulations. Sec. 6662(b)(1). Negligence is the lack of due care or.failure to do ,

- 19 what a reasonable and.ordinarily prudent person would do under the same

circumstances. Neelv v. Commissioner, 85 T.C. 934, 947 (1985). Negligence

includes any failure to make a reasonable attempt to comply with the provisions of

the internal revenue laws and also includes any failure by the taxpayers to keep

adequate books and records or to substantiate items properly. Sec. 1.6662-3(b),

Income Tax Regs.

Under section 7491(c), respondent bears the burden of production with

respect to petitioners' liability for the section 6662(a) penalties. This means that

rëspondent "must come forward withisufficient evidence indicating that it is appropriate to impose the relevant penalty." See Higbee v. Commissioner, 116

T.C. at 446. Respondent has met his burden of production with respect to the

section 6662(a) penalties, as he has provided evidence of petitioners' negligence,

as discussed below.

Taxpayers are responsible for keeping adequate records and substantiating

items properly. Benson v. Commissioner, T.C. Memo. 2004-272; sec. 1.66623(b)(1), Income Tax Regs. Petitioners admitted at trial that they did not

consistently keep contemporaneous records to reflect their bases in Respira.

Furthermore, petitioners failed to produce records or any evidence supporting their

- 20 position that they had bases sufficient to deduct their claimed losses in Respira.

Petitioners were negligent in failing to keep accurate records.

No penalty shall be imposed under section 6662(a) with respect to any

portion of an underpayment if it is shown that there was reasonable cause and that

the taxpayer acted in good faith. Sec. 6664(c). This determination is made on a

case-by-case basis, taking into account all facts and circumstances. Sec. 1.66644(b)(1), Income Tax Regs. Factors considered include the extent of the taxpayer's

efforts to assess his or her proper tax liability, reliance on the advice of a

professional, and the taxpayer's education, sophistication, and business

experience. Sec. 1.6664-4(b)(1), (c)(1), Income Tax Regs.

For a taxpayer's reliance on the advice of a professional to be reasonable, he

or she must prove by a preponderance of evidence that: (1) the adviser was a

competent professional who had sufficient expertise to justify reliance; (2) the

taxpayer provided the adviser with.necessary and accurate information; and (3) the

taxpayer actually relied in good faith on the adviser's judgment. Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d

Cir. 2002). "A taxpayer cannot avoid its duty to file accurate returns by shifting

responsibility to its bookkeeper or its employee when the taxpayer makes an

inadequate effort to see that the books and records are being kept correctly."

L-21-

Tietig v. Commissioner, T.C. Memo. 2001-190, aff'd, 57 Fed. Appx. 414 (11th

Cir. 2003); see also Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).

Petitioners contend that they are not liable for the accuracy-related penalties

that respondent has determined for their 2006 tax years because they acted in good

faith and reasonably relied on Mr. Palmore and Ms. Booker for their basis

calculations. Mr. Palmore, however, did not prepare petitioners' or Respira's

2006 tax returns; he left Respira in mid-2005 and testified that he has not been in

charge of petitioners' books since then. We are not persuaded that petitioners

relied upon Mr. Palmore for their basis calculations for 2006, and it is not apparent

to what extent they relied upon Ms. Booker, who signed their returns. Moreover,

on this record we are unable to find that Ms. Booker was a competent professional

with expertise to justify reliance. Petitioners did not call Ms. Booker to testify as

to her experience or the preparation of the returns.- See Petzoldt v. Commissioner,

92 T.C. 661, 685-686 (1989) (drawing negative inference from failure of potential

witness to testify). Nor did petitioneï s present any other evidence showing Ms.

Booker's experience or qualifications.

Further, petitioners failed to establish that they provided all necessary and

accurate information with respect to all items reported on their 2006 tax returns, .

such that it can be said that the incorrect returns resulted from error on their

- 22 accountant's part. See, e.g., Westbrook v. Commissioner, 68 F.3d 868, 881 (5th

Cir. 1995), af£g T.C. Memo. 1993-634; Ma-Tran Corp. v. Commissioner, 70 T.C.

158, 173 (1978); Deihl v. Commissioner, T.C. Memo. 2005-287. To the contrary,

petitioners acknowledged that they did not keèp contemporaneous basis records to

reflect their investment in Respira, especially during the company's early years.

Although we acknowledge that the determination of a taxpayer's basis in an S

corporation's stock and indebtedness is a fairly complicated subject, see Hogan v.

Commissioner, T.C. Memo. 1999-365, and although.petitioners lack expertise in

this regard, failure to keep required records weighs heavily against a finding of

reasonable cause. Statutory complexity alone does not make for reasonable cause.

See Edgar v. Commissioner, 56 T.C. 717, 762-763 (1971); Ellwest Stereo Theatres

of Memphis, Inc. v. Commissioner, T.C. Memo. 1995-610.

Moreover, a portion of the accuracy-related penalty against Mr. Welch is

attributable to his claiming head of household filing status for 2006 even though

we have found that he and Ms. Welch were married and resided together

throughout 2006. Mr. Welch has not expressly advanced any reasonable cause

defense with respect to this issue, and we are not persuaded that he acted with

reasonable cause or in good faith in this regard.

- 23 Accordingly, we sustain respondent's imposition of accuracy-related

penalties against both petitioners for 2006.

To reflect the foregoing,

Decisions will be entered

for respondent.