Prudhomme v. Comm'r ( 2008 )

T.C. Memo. 2008-83
UNITED STATES TAX COURT
RICHARD A. AND CATHY G. PRUDHOMME, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6680-06. Filed April 3, 2008.
William A. Roberts and Kyle Coleman, for petitioners.
Alvin A. Ohm, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined a $576,728 deficiency in
petitioners’ Federal income tax for 2003 and determined that
petitioners were liable for a $28,565.70 addition to tax for
failure to file a timely return under section 6651(a)(1), a $64.98
addition to tax for failure to pay estimated taxes under
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section 6654, and a $115,345.60 accuracy-related penalty under
section 6662.1
After concessions,2 two issues remain for decision. The first
issue is whether petitioners are liable for an addition to tax
under section 6651(a)(1) for failure to file timely their income
tax return, and the second issue is whether petitioners are liable
for the accuracy-related penalty under section 6662(a). We hold
that petitioners are liable for the addition to tax for failure to
file timely and the accuracy-related penalty.
FINDINGS OF FACT
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioners resided in Texas at
the time they filed their petition.
Petitioners Richard A. and Cathy G. Prudhomme (Mr. and Mrs.
Prudhomme) started Bronco Oilfield Services, Inc. (Bronco) in 1981.
Bronco provided services, rentals, and equipment for the oil
industry. Cathy G. and Richard A. Prudhomme owned 55 and 45
percent, respectively, of Bronco. Petitioners sold Bronco, a C
corporation, through a broker in 2003.
1
All section references are to the Internal Revenue Code in
effect for the year at issue.
2
Petitioners paid the $576,728 underpayment of tax on Nov. 28,
2005, before respondent issued the deficiency notice on Jan. 5,
2006. Although they originally disputed the deficiency and the
addition to tax for failure to pay estimated taxes in their
petition, petitioners eventually conceded both issues. We have
jurisdiction over the addition to tax for failure to file a timely
return and the penalty. See, e.g., Estate of Di Rezza v.
Commissioner, 78 T.C. 19, 30 (1982).
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Petitioners have high school educations. They successfully
ran Bronco for many years. Mr. Prudhomme worked in the field, and
Mrs. Prudhomme ran the office. Mrs. Prudhomme managed the clerical
staff and prepared the company’s financial information for their
accountants. In this capacity, she assisted with the preparation
of Bronco’s general ledgers. The accountants contacted Mrs.
Prudhomme with questions regarding Bronco’s finances and
petitioners’ personal finances.
Petitioners hired Jon Hurt’s (Mr. Hurt) accounting firm to
prepare their 2003 individual and Bronco’s corporate income tax
returns. Alice Vaughan (Ms. Vaughan) and Dwayne Whitley (Mr.
Whitley) worked as accountants and return preparers for Mr. Hurt.
Ms. Vaughan had prepared corporate and individual returns for
petitioners for many years before 2003. Although Ms. Vaughan
prepared Bronco’s corporate return for 2003, Mr. Hurt signed the
return for 2003 as the preparer.3 Mr. Whitley prepared
petitioners’ individual Federal income tax return for 2003, and Mr.
Hurt signed as the preparer. Mrs. Prudhomme knew that Mr. Whitley,
and not Ms. Vaughan, prepared petitioners’ individual income tax
return for 2003.
Petitioners provided their accountants with limited
information from which to prepare the individual return for 2003.
Petitioners did not cause Bronco to issue Forms 1099-DIV, Dividends
and Distributions, reflecting the proceeds from the sale of Bronco,
3
Bronco’s corporate returns are not at issue in this case.
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and they did not provide information about the dividends and Bronco
sale to Mr. Whitley. Petitioners did not consult Mr. Whitley, Mr.
Hurt, or Ms. Vaughan about any aspect of the Bronco sale before it
occurred.
Mr. Whitley was vaguely aware that petitioners had sold Bronco
but knew very little else about the transaction. Mr. Whitley was
not familiar with the Form 1120, U.S. Corporation Income Tax
Return, for Bronco. Petitioners did not provide Mr. Whitley with
their bank statements. Petitioners provided their accountants with
Bronco’s general ledger, which Mrs. Prudhomme had prepared and
maintained. They also provided their brokerage statement from
Morgan Stanley.
Mrs. Prudhomme’s involvement with respect to filing the
return was limited to picking up the tax return from the preparer
on the day that she signed and mailed it. When she picked up the
return, she asked Mr. Hurt whether any tax was due, looked to line
72 to confirm that nothing was due, and then signed and mailed the
return. Mrs. Prudhomme did not check to see whether all items of
income, including the income from the sale of Bronco, were reported
on the return.
Mr. Prudhomme did not read or sign the return. Mrs. Prudhomme
signed Mr. Prudhomme’s name on the return in addition to her own
name.
Petitioners’ initial filing deadline for their individual
income tax return for 2003 was April 15, 2004. They applied for
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and received two extensions. Their extended return filing date was
October 15, 2004. Petitioners’ tax return for 2003 was postmarked
October 27, 2004, 12 days beyond the extended filing date.
Respondent received the return on October 29, 2004.
Petitioners’ late-filed return for 2003 reported a tax due of
$431,568, based on their reporting $2,194,666 of adjusted gross
income. Petitioners deposited $406,579, $2,000,000, and $3,900,000
from the sale of Bronco into their personal bank accounts during
2003. Petitioners failed to report $3.2 million in dividend income
and $450,000 of long-term capital gain from the sale of Bronco.
Petitioners’ income tax liability for 2003 was $1,008,296, and not
$431,568, the amount they reported. Respondent determined that
petitioners were liable for a $28,565.70 addition to tax for late
filing and a $115,345.60 accuracy-related penalty.
OPINION
Addition to Tax for Failure To File
We first address the penalty for failure to file timely.
Respondent determined that petitioners were liable for a $28,565.70
addition to tax under section 6651(a)(1) for failure to file a
timely return.
An addition to tax is due for failure to file a tax return on
or before the specified filing date unless it is shown that such
failure is due to reasonable cause and not due to willful neglect.
Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985).
The addition to tax equals 5 percent of the tax reported as due but
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remaining unpaid on the return filing date if the failure to file
timely is for 1 month or less. Sec. 6651(a)(1).
The Commissioner has the burden of production with respect to
additions to tax. Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
438, 446 (2001). To meet this burden, the Commissioner must
produce sufficient evidence establishing that it is
appropriate to impose the additions to tax. See Higbee v.
Commissioner, supra at 446-447.
Petitioners’ income tax return for 2003 was due April 15,
2004. They applied for and received two extensions making October
15, 2004, the extended filing date. The envelope containing
petitioners’ tax return for 2003 was postmarked October 27, 2004,
12 days late, and respondent received it on October 29, 2004.
Petitioners concede that this evidence is sufficient to carry
respondent’s burden of production.
Petitioners bear the burden of proof with respect to whether
there was reasonable cause for their late filing. Id. at 446.
Petitioners argue that they are not liable for the addition to tax
because respondent failed to prove willful neglect. The taxpayer,
however, has the burden of proving both (1) that the failure did
not result from willful neglect, and (2) that the failure was due
to reasonable cause. United States v. Boyle, supra at 245 (quoting
section 6651(a)(1)); see sec. 7491(c).4 A taxpayer wishing to
4
Sec. 7491(c), which postdates United States v. Boyle, 469
U.S. 241 (1985), does not relieve a taxpayer of the burden of proof
(continued...)
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demonstrate reasonable cause must show the exercise of ordinary
business care and prudence in spite of the late filing. United
States v. Boyle, supra at 246; Crocker v. Commissioner, 92 T.C.
899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Income tax returns are among the types of documents that are
considered to be delivered on the postmark date only if the
postmark falls within the prescribed period, or on or before the
prescribed date, for the filing of the return. Sec. 7502(a).
Unavoidable postal delay may fall within the meaning of reasonable
cause. United States v. Boyle, supra at 243 n.1, 248 n.6.
Mrs. Prudhomme testified that she mailed the return on October
15, 2007. This contradicts the postmark date on the envelope in
which the return was mailed. Petitioners argue on brief that the
post office failed to postmark and send the item for 12 days.
Petitioners offer no evidence to support this claim other than
making the unsupported observation that October 15, 2004, is a busy
day for the U.S. Postal Service. Even if we found Mrs. Prudhomme’s
testimony and explanation credible, this would not render the
return timely. The envelope in which the return was mailed bore a
postmark date that was after the last day for filing the return.
The return is thus untimely as a matter of law. See, e.g., Drake
v. Commissioner, 554 F.2d 736 (5th Cir. 1977); Hendley v.
Commissioner, T.C. Memo. 2000-348. We therefore hold that
4
(...continued)
or production respecting such defenses as reasonable cause. Higbee
v. Commissioner, 116 T.C. 438, 446 (2001).
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petitioners did not show that their failure to file timely was due
to reasonable cause. Accordingly, respondent’s determination that
petitioners are liable for the addition to tax under section
6651(a)(1) for failure to file timely is not in error.
Accuracy-Related Penalty
We turn now to respondent’s determination that petitioners are
liable for the accuracy-related penalty under section 6662.
Respondent has the burden of production under section 7491(c) and
must come forward with sufficient evidence that it is appropriate
to impose the penalty. See Higbee v. Commissioner, supra at 446-
447.
A taxpayer is liable for an accuracy-related penalty in the
amount of 20 percent for any part of an underpayment attributable
to, among other things, a substantial understatement of income tax.
See sec. 6662(a) and (b)(2); sec. 1.6662-2(a)(2), Income Tax Regs.5
There is a substantial understatement of income tax if the amount
of the understatement exceeds the greater of 10 percent of the tax
required to be shown on the return, or $5,000. See sec.
6662(b)(2), (d)(1)(A); sec. 1.6662-4(a) and (b)(1), Income Tax
Regs.
5
Respondent determined in the alternative that petitioners
were liable for the accuracy-related penalty for negligence or
disregard of rules or regulations under sec. 6662(b)(1) for the
years at issue. Because respondent has proven that petitioners
substantially understated their income tax for the year at issue,
we need not consider whether petitioners were negligent or
disregarded rules or regulations.
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Petitioners argue that respondent failed to meet his burden of
production under section 7491(c). We disagree. Petitioners paid
the $576,728 deficiency before respondent issued the notice of
deficiency. Petitioners conceded the underpayment at trial and on
brief. The deficiency was sufficiently large to meet the statutory
threshold for a substantial understatement of tax. Petitioners
reported $431,568 of income tax on the tax return for 2003 but
should have reported $1,008,296 of tax. Their $576,728
understatement exceeds 10 percent of the tax required to be shown
on the return.
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for the taxpayer’s position and that the
taxpayer acted in good faith with respect to that portion. See
sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs. Taxpayers bear
the burden of proof with respect to whether they acted in good
faith and whether there was reasonable cause for the underpayment
giving rise to the accuracy-related penalty. Higbee v.
Commissioner, 116 T.C. at 446.
The determination of whether the taxpayers had reasonable
cause for, and acted in good faith with respect to, an underpayment
of tax is made on a case-by-case basis, considering all the
pertinent facts and circumstances. Williams v. Commissioner, 123
T.C. 144, 153 (2004); Higbee v. Commissioner, supra at 448; sec.
1.6664-4(b)(1), Income Tax Regs. One pertinent factor is whether
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the underpayment is attributable to reliance on the advice of a
professional tax adviser that was reasonable under all the facts
and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Another
important factor is the extent of the taxpayer’s effort to assess
his or her proper tax liability. Williams v. Commissioner, supra
at 153; sec. 1.6664-4(b)(1), Income Tax Regs. We address these
factors in turn.
1. Petitioners’ Reliance on a Professional Tax Adviser
We first consider whether it was reasonable for petitioners to
rely on Mr. Hurt or Mr. Whitley.
Reasonable cause can exist when a taxpayer selects a competent
tax adviser, supplies that adviser with all relevant information,
and, consistent with ordinary business care and prudence, relies on
the adviser’s professional judgment as to the taxpayer’s tax
obligations. See sec. 6664(c); Lehrer v. Commissioner, T.C. Memo.
2006-156. Reliance on the advice of a professional tax adviser
does not, standing alone, absolve a taxpayer of responsibility for
an underpayment of tax. United States v. Boyle, 491 U.S. at 251;
Deihl v. Commissioner, T.C. Memo. 2005-287. Rather, it is a factor
to be considered when an underpayment results from reliance on such
advice. United States v. Boyle, supra at 251; Deihl v.
Commissioner, supra.
Even if a taxpayer establishes that a competent tax adviser
has been selected, the adviser was provided with the relevant
information, and the taxpayer relied on the adviser’s professional
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judgment, the taxpayer remains responsible for reading and
reviewing the return to verify that all income items are included.
Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Loftus
v. Commissioner, T.C. Memo. 1992-266. Generally, the
responsibility to file accurate returns and pay tax when due rests
upon the taxpayer and cannot be delegated. Pritchett v.
Commissioner, 63 T.C. 149, 173-175 (1974). The taxpayer may have
to bear the consequences of any negligent errors committed by his
or her agent. Id.
Petitioners contend that their reliance on Mr. Hurt and Mr.
Whitley insulates them from liability for the accuracy-related
penalty. We are not persuaded, however, that petitioners acted
reasonably and in good faith. Petitioners provided their
accountants with insufficient information to accurately and
properly prepare their returns.
Petitioners did not fully inform Mr. Whitley, their return
preparer, of the pertinent details of their finances, including the
details of the sale of Bronco. We note that Mr. Whitley prepared
the return for 2003, and Mr. Hurt reviewed and signed it, yet
neither noticed the omission of the Bronco sales proceeds from
income. Mr. Whitley testified that he had only a “vague” notion of
petitioners’ sale of Bronco. Petitioners did not cause the
issuance of Forms 1099-DIV for the dividends they received from
Bronco. Petitioners did not provide their accountants with bank
statements or personal books and bank records for the year. Other
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than Bronco’s general ledgers (which were provided to Ms. Vaughan,
but not Mr. Whitley) and certain information from Morgan Stanley
that did not reveal the Bronco sale, petitioners failed to provide
relevant information to their return preparer.
2. Petitioners’ Efforts To Assess the Proper Tax Liability
We next address the extent of petitioners’ efforts to assess
their proper tax liability. Generally, the most important factor
in determining whether taxpayers had reasonable cause for, and
acted in good faith with respect to, their underpayment of tax is
the extent of their efforts to assess their proper tax liability.
Williams v. Commissioner, supra at 153; Compaq Computer Corp. &
Subs. v. Commissioner, 113 T.C. 214, 226 (1999), revd. on other
grounds 277 F.3d 778 (5th Cir. 2001); sec. 1.6664-4(b)(1), Income
Tax Regs. Generally, the taxpayer who does not make sufficient
efforts to assess his or her proper tax liability has not acted
with reasonable cause and in good faith with respect to an
underpayment of tax. See Mailman v. Commissioner, 91 T.C. 1079,
1084-1085 (1988). Also, the taxpayer may be charged with knowledge
of Federal tax law. Niedringhaus v. Commissioner, 99 T.C. 202, 222
(1992).
Petitioners did not make adequate efforts to assess their
proper tax liability for 2003. They did not verify that all income
items were included on their return. Mr. Prudhomme failed to read
or sign the return. Mrs. Prudhomme explained that she asked Mr.
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Hurt whether they owed anything, looked to line 72, and then signed
the return without even glancing at anything else.
Petitioners portray themselves as unsophisticated taxpayers
who relied upon tax professionals to prepare their return.
Although they had high school educations, petitioners were very
successful business people. Mrs. Prudhomme had overseen the
clerical staff of Bronco for over 20 years. She was responsible
for and coordinated Bronco’s financial information with
petitioners’ accountants. Yet she did not make any effort to
determine whether all items of income were included on the return.
Moreover, if petitioners failed to understand the return, they
did not request clarification from their preparers. Mrs. Prudhomme
knew that different accountants prepared the corporate and
individual income tax returns for 2003. She also knew that her
longtime tax return preparer did not prepare the individual return
for 2003. Yet she failed to review the tax return or even ask
about the income from the sale of Bronco (petitioners’ single
largest transaction for the year). Even if we were able to find
that petitioners were ignorant of the tax law, their failure to
provide sufficient information to enable their accountants to
prepare their return properly cannot be ignored and has not been
adequately explained.
3. Conclusion
Petitioners’ efforts to assess their tax liability were
insufficient, and their behavior fell below the standard of
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reasonable care and good faith. Petitioners could not in good
faith rely upon their accountants’ advice or preparation of their
returns when they neither shared with their accountants the details
of their financial transactions nor made any effort to review the
return that their accountants prepared. Accordingly, we sustain
respondent’s determination of the section 6662 accuracy-related
penalty.
We have considered all the remaining arguments that the
parties made and, to the extent not addressed, we find them to be
irrelevant, moot, or without merit. Accordingly, we sustain
respondent’s determinations with respect to the addition to tax
under section 6651(a)(1) and the accuracy-related penalty under
section 6662.
To reflect the foregoing,
Decision will be entered for
respondent.