Reliance On A "Professional" As "Reasonable Cause" To Prevent Penalties

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Tax Attorney Alvin S. Brown, Alvin Brown & Associates, Uses The Recent Case of Todd,II v. Commissioner To Illustrate How Courts Will Negate Penalties For "Reasonable Cause" When Taxpayers Use Professionals To Prepare Their Tax Returns

In the recent case of TODD, II v. COMM.,110 AFTR 2d 2012, 08/16/2012, the U.S. Court of Appeals for the 5th Circuit found that the Taxpayer did not provide "reasonable cause" for the abatement of penalties under 26 U.S.C. § 6662(a)–(b). As noted by the Court, the penalty shall not be imposed “if it is shown that there was a reasonable cause for [any portion of an underpayment] and that the taxpayer acted in good faith with respect to such portion.”Id. at § 6664(c)(1). The Taxpayers used a CPA to prepare their tax return and argued that they relied on the advice of a professional adviser and additionally that such reliance was valid due to “the quality and objectivity of the professional advice which they obtained.”Bemont Invs., L.L.C. ex. rel. Tax Matters Partner v. United States , 679 F.3d 339, 349 [109 AFTR 2d 12-1922] (5th Cir. 2012). The Court noted that Taxpayer taxpayer bears the burden of proof on a “reasonable cause” defense; see also Neonatology Assocs. P.A. v. Commissioner, 115 T.C. 43, 100 (2000) The mere fact that a certified public accountant has prepared a tax return does not mean that he or she has opined on any or all of the items reported therein, aff'd, 299 F.3d 221 [90 AFTR 2d 2002-5442] (3d Cir. 2002). Therefore, the Court did not prevent the imposition of the § 6662 penalty.

For a discussion of “reasonable cause” in more detail, see A discussion of The responsibility to file returns and pay tax when due rests upon the taxpayer and cannot be delegated; in general, the taxpayer must bear the consequences of any negligent errors committed by its agent. Logan Lumber Co. v. Commissioner, 365 F.2d 846, 854 [18 AFTR 2d 5475] (5th Cir. 1966); Pritchett v. Commissioner, 63 T.C. 149, 173-175 (1974); Abernathy v. Commissioner, T.C. Memo. 1992-237 [1992 RIA TC Memo ¶92,237]. There is a well-recognized, albeit narrow, exception to this rule. When the taxpayer selects a competent tax adviser and supplies him with all relevant information, it is consistent with ordinary business care and prudence to rely upon his professional judgment as to the taxpayer's tax obligations. United States v. Boyle, supra at 250-251; Commissioner v. American Association of Engrs. Employment, Inc., 204 F.2d 19 [43 AFTR 894] (7th Cir. 1953); Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769, 771 [38 AFTR 1223] (2d Cir. 1950). In order to qualify for this exception the taxpayer must demonstrate that: (1) Its tax adviser or return preparer had sufficient expertise to justify reliance, Zabolotny v. Commissioner, 97 T.C. 385, 401-402 (1991), affd. in part and revd. in part on other grounds 7 F.3d 774 [72 AFTR 2d 93-6314] (8th Cir. 1993); cf. Patin v. Commissioner, 88 T.C. 1086, 1129- 1131 (1987), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 [63 AFTR 2d 89-821] (6th Cir. 1989), affd. without published opinion 865 F.2d 1264 (5th Cir. 1989), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 [63 AFTR 2d 89-531] (9th Cir. 1989), affd. without published opinion sub nom. Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988); Hoffman v. Commissioner, T.C. Memo. 1982- 380 [¶82,380 PH Memo TC], (2) the taxpayer provided necessary and accurate information, Coldwater Seafood Corp. v. Commissioner, 69 T.C. 966, 974 (1978); cf. Pessin v. Commissioner, 59 T.C. 473, 489 (1972), and (3) the taxpayer actually relied in good faith on the tax adviser's or return preparer's judgment, New York State Association. of Real Estate Bds. Group Ins. Fund v. Commissioner, 54 T.C. 1325, 1336 (1970); Kenner v. Commissioner, T.C. Memo. 1974-273 [¶74,273 PH Memo TC].

Actual reliance on the tax advice of an independent, competent professional may negate a finding of negligence, see, e.g., United States v. Boyle, 469 U.S. 241, 250 [55 AFTR 2d 85-1535], 105 S.Ct. 687, 692 [55 AFTR 2d 85-1535] (1985), the reliance itself must be objectively reasonable in the sense that the taxpayer supplied the professional with all the necessary information to assess the tax matter and that the professional himself does not suffer from a conflict of interest or lack of expertise that the taxpayer knew of or should have known about. See Treas. Reg. § 1.6664-4(c); Ellwest Stereo Theatres, Inc. v. Comm'r, T.C. Memo. 1995610 [1995 RIA TC Memo ¶95,610], 70 T.C.M. (C.C.H.) 1655; see also Zfass v. Comm'r, 118 F.3d 184, 189 [79 AFTR 2d 97-3188] (4th Cir. 1997). See also

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Alvin S. Brown, Esq.
575 Fifth Ave., 8th Floor
New York, NY 10022-8511

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