Wayne Robert & Nanette Risley, Petitioner

T .,C . Summary Opinion 2009-172

UNITED STATES TAX COUR T

WAYNE ROBERT RISLEY AND NANETTE RISLEY, Petitioners V .

COMMISSIONER OF INTERNAL : REVENUE, Respondent Docket No . 10857-05S . Filed November 23, 2009 .

. Robert L . Risley , for petitioners .

Kevin--W .(cid:127) Coy and Kelly-R .''-Morrison-Lee, for respondent .

LARO, Judge : Petitioners(cid:127) .petitioned the Court to redetermine respondent's determination of deficiencies in and accuracy-related penalties related to their joint 2001, 2002, and 2003 Federal'income tax returns"(2001 return, 2002 return,, and 2003 return,' respectively ; collectively, subject returns) .

Petitioners filed their petition pursuant to the provisions o f section 7463 . 1 .This case is now before the Court on respondent's motion for summary judgment . We hold that respondent is entitled to .summar y judgment and shall enter a decision accordingly . -Pursuant to section 7463(b),-the decision to be . entered is not reviewable by any other court, and this 'opinion shall not be treated as precedent for any other case .

Backgroun d I .

Preliminarie s Petitioners are husband and wife ., They resided in, California when their petition was filed . They filed the subject returns jointly .

II .

Tax Shelte r Petitioners participated in a fraudulent tax shelter (tax shelter) promoted and sold by the(cid:127)National Audit Defense,Network (NADN) . The NADN advertised itself as a conglomerate of former Internal Revenue .Service agents,°enrolled agents, certifie d public accountants, and tax attorneys who could help U .S .

taxpayers pay no Federal income tax .° The ;NADN informed- .

petitioners that they could qualify{for significant tax .benefits-, by forming a Web 'site and then paying the NADN to modify the Web .-- 'Section references are to the applicable versions of the Internal Revenue Code . Rule references are to the Tax Court Rules of Practice and Procedure .

site, to comply with the Americans with,Disabilities Act of 1990 .

(ADA), Pub . .L . 101-336, sec . 302(a), 104 Stat . 355, codified at 42 . U .S .C . sec . 12182(a) (2006) . 'The ADA . general.ly_,provides that any person who owns, leases, or operates a,place, .of . publi c accommodation shall not discriminate, against,disabled individuals in the full and equal enjoyment„ .of,goods, :.services, .facilities, privileges,'= .advantages ; and accommodations of the place .-of public .

,'accommodation .

The NADNinformed ;petitioners that-they had to'pay the,,NAD N $2,4 .95 and issue to the NADN a,,$ .7,980 promissory note'as . .to each year in : which . they .-wanted . to participate in the,tax shelter .

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Payments on a note . .were to be .,made,; .fromuthe, .revenue .generated-by „ the Web site_or, if no revenue was generated, -8 . .years after th e note's making . The NADN informed petitioners that they could claim a $5,000 ..tax credit !;pursuant to `section-44 and deduct at- least $5,47,5 of . business expenses ..pursuant to section 162 fo r each year that they : participated in the-.tax' . shelter : The,NADN advised,petitioners that, it was not : providing them-(nor was it engaged .in"the rendering of) any legal, accounting, .,or other-` professional service and, ;-that .they should retain a "competent, .

professiona -l"if "they want ed any-legal advice or 'other expert- assistance with respect to the tax shelter , Petitioners-paid the `NADN .$2, 495 in ,each subject . year , participate (cid:127)in„the tax-shelter NP-etitioners'also signed at least .one $7,980 promissory note payable tothe NADN or to an affiliat e thereof III . TSublect Return s A .

2001 Retur n Petitioners prepared their 2001 return themselves .

Petitioners attached a 2001, Schedule . C, Profit or Loss From Business (Sole Proprietorship)', to their 2001 return reporting that petitioner Wayne R . Risley (Mr . Risley) operat'edran' "Electronic Shipping and Information Service" business during 2001 . The only item of'income or'expense reported on the 2001, Schedule C was a-$5,475 expense identified as " .Excess expenditures for modifications-made for disabled access to business" . Petitioners also attached a'2001`Form 8826, Disable d Access,Credit, to their 2001 return .' The 2001 Form 8826 reporte d that petitioners paid $10,475 in total eligible access expenditures during 2001 and=were claiming a $5,000 disable d access credit for 2001 . Petitioners claimed the $5,000 credit~on their 2001 return .

B .

2002 Return Petitioners prepared-their 2002 return themselves .

Petitioners attached a 2002 Schedule C to their 2002 `return reporting that .Mr . Risley operated an "Apple Electronic Shopping` .

& Information" business-during`2002 : . The only item of income o r expense reported on the 2002 Schedule :C was a-$5,475 expense identified as " Excess expenditures for modifications made for [sic]" . Petitioners also attached a 2002 Form 8826 to their 2002 return .. The 2002 Form 8826 reported that petitioners paid $10,475 in total eligible access expenditures during 2002, that petitioners had a current year disabled .acc .ess credit of $5,000, and that petitioners were claiming $611 of the $5,000 as an allowable disabled access credit for 2002 . Petitioners claimed the $611 credit on their 2002 return .

C .

2003 Retur n Petitioners' 2003 return was prepared by H&R Block .

Petitioners' 2003 return did not report any income or deductions as to the tax shelter . Petitioners attached a 2003 Form 8826 to their 2 .003 return . The 2003 Form 8826 reported that petitioners paid $5,000 in total eligible access expenditures during 2003 and that petitioners were claiming a $2,375 disabled access credit for 2003 . Petitioners claimed the $2,375 credit on their 2003 return .

IV .

Notice of Deficienc y Respondent issued petitioners a notice of deficiency as to the subject returns . Respondent determined in the notice of deficiency that petitioners were not entitled to any of the deductions or credits claimed as to the tax shelter . For the respective years, respondent determined deficiencies of $6,513.., 6 - $2,776, , and $2,712 .2 Respondent also determined accuracy-relate d penalties-under section 6662(a) and .(b) of $1,303, $5S⁵, and $542, respectively, for negligence orYdisregard of rules and regulations .

I .

Standard for Summary Judgmen t Discussion Summary judgment maybe granted with respect to any part o f the legal issues in controversyif the record before the-Court shows no genuine issue as to any material fact and that a decision may be . rendered as°a matter of law .

See Rule . 121(a) an d (b) ; . Craig v . Commissioner, , 119, T .C . 252, 259-.260 (2002) .

Respondent. bears the burden of proving ,the absence of any genuin e issue of material fact, . and all facts are viewed in the light .

most favorable to petitioners . . See Craig .v. Commissioner ,, supra .; at 260 . -Petitioners,- however, must do more than merely allege o r deny facts ; they must set forth "specific facts showing that there is a genuine issue for trial ." See Rule 121(d) ; Celotex , Corp . v . Catrett , 477 U .S . 317, 324 (1986) . . Petitioners-have failed to raise .any genuine issue of material fact under tha t standard , and this case 'is, ripe for summary judgment .

2These deficiencies total $11, 664, and petitioners' cash expenditures as to the tax shelter total $ 7,485 ($ 2,495 x 3) . Petitioners reportedly realized an economic gain of $4 , 179 from the tax shelter ($ 11,664_- $7,485 = $4,179) .

II .

Deficiencie s Petitioners make no claim that sections 44 and 162-actually allow them . to deduct or credit the items that they reported as to the tax shelter . Cf . Good v . Commissioner , T .C .,Memo . 2008-24 5 (holding on the merits that the taxpayers were not entitled t the section 162 expenses and disabled business credits reported, as to the tax shelter) . Petitioners' primary argument in challenging respondent's determination of the deficiencies=is .

that respondent is equitably estopped from assessing . against them any amount relating to the tax shelter . We disagree . Equitable estoppel is a judicial doctrine that .precludes a party from denying his or her acts or representations .which induced another .

to act to his or her detriment . See Hofstetter v . Commissioner ,

or his wrongful, misleading silence ; (2) an error in-a statement of fact and not in an opinion .or statement of law ; (3) ignorance of the true facts ; (4) a taxpayer's reasonable . reliance on the Commissioner's acts or statements ; and (5) adverse effects-of th e Commissioner's acts or statement . See' Norfolk S . Corp . v .,.

Commissioner , .104 T .C . 13, . 59-60 (1995) , , affd . 140 F .3d 240 (4th Cir . 1998) . Petitioners' failure to establish any one of these .

- 8 - _ five requirements means that their claim of equitable`estoppe d must .fail as well .

Petitioners have failed to establish on the part o f respondent either a false representation or a wrongful , misleading silence as to the taxshelter .3, To that end, we are unable to find as to the . tax shelter that respondent made any , representation (let alone any misrepresentation),to petitioners or otherwise wrongfully concealed from petitioners any materia l fact . Instead, the record . establishes (and we so find) tha t respondent had, .no contact with petitioners as to-the tax shelte r before his audit of the . subject returns and that petitioner s invested in the tax shelter separate and apart from any .,actio n taken °by respondent .

Petitioners argue that the statements of-the the`NADN' s workforce are imputed to respondent to the extent that thos e workers were 'registered with the Internal Revenue Service a s enrolled agents or-tax preparers . Petitioners also argue-tha t the tax shelter is imputed to .respondent because the NADN .

advertised that .it employed those workers as well as forme r Internal Revenue Service employees . We disagree on both counts .

The record does not establish,- nor do petitioners .claim, that .any., of the NADN',s workers also,were working for the .Internal Revenue ., -3 Given this failure, we need not and, do not address any of the other four requirements of equitable estoppel .

Service at the same time . Moreover, the mere fact that a former employee of the Internal Revenue Service, or an individual registered with the Internal Revenue Service as an enrolled agent I or a tax preparer, may have been affiliated with the NADN (and/or the tax shelter) does not estop respondent from challenging the legitimacy of the tax shelter . See Auto . Club of Mich . v .

Commissioner , 353 U .S . 180, 183-184 (1957) (holding that the .

Commissioner is usually not-estopped from, correctin g retroactively .a mistake of=law) ; see also . Martin's Auto Trimming, Inc . v . Riddell , 283 F .2d 503, 506 (9th Cir .

..1960) ; Schwalbach v .

Commissioner , 111 T .C . 215, 228 n4(1998) ; Fortuano v .

Commissioner , 41 T .C . 316, 323-324 (1963), affd . ;353 F .2d 429 .(3d Cir . 1965) . Nor do we believe, as petitioners argued, that respondent was sufficiently aware of the impropriety of the tax shelter through petitioners' filing of their 2001 return so that he is estopped from challenging any of the amounts that petitioners later claimed as to the tax shelters for 2002 and 2003 .

Petitioners also argue that the Government should bear the loss of-any Federal income taxes owed by them as to the tax shelter because respondent failed to inform petitioners that the tax .shelter was a. ."fraud" and'is in abetter position than they to recover the $7,485 that .they,paid to the NADN . We .disagree .

While petitioners consider it inequitable that they have to pay 10 - taxes as to the tax shelter when they have paid $7,485 to the NADN for what they now consider to be-a worthless investment, we know of no reason the Government should actas an insurer of that .

investment . Nor do we agree with petitioners that they are entitled for,the subject years-to-deduct the $7,485 as a .theft Joss under section 165 . While section 165 lets an individual deduct a theft loss in the year during which the individua l discovers the loss, see sec . 1.65(a) ., (c)(3), (e), the record doe s not establish that petitioners discovered any such theft los s during the subject years .

We hold that respondent is not estopped from disallowing the , claimed amounts . Accordingly,- .we sustain . respondent's determination of the deficiencies .

III .

; Accuracy-Related Penaltie s Respondent determined thatpetitioners(cid:127)are liable fo r accuracy-related .. penalties under section 6662(a) and (b) .(1) .- Section 6662(a) and (b)(1) imposes a penalty equal to 20 percen t of the portion of . an underpayment of tax attributable to a taxpayer's negligence or disregard of rules .or regulations .

Negligence connotes a lack of due care or failure to do wha t reasonable and prudent person would do under the circumstances .

See Allenr v . Commissioner,-92 T . .C . 1, 12 (1989), .affd . 925 F .2d 348,(9th .Cir . 1991) . An accuracy-related penalty is no t applicable to any portion of-an underpayment to .the extent that U the taxpayer : had .reasonable cause . for that ,!portion, .. and acted, .in good faith' with respect thereto .

:See 'sec :,- 6664(c)(1) .

Respondent bears the burden :. of :pro .duction' with respect to the .-applicability of . the accuracy-related penalties . ~ See .sec s.;,, 7491(c) . ,That burden requires .that .respondent,produce .sufficient .- evidence that it is appropriate(cid:127),to impose~-the-accuracy-related .

penalties ;:

. Se e Higbee v . Commissioner , .1116 , T-4 C :. 438, 446 (2001); . , Once respondent meets this burden , ;,-' the .burden .- of proof falls ;; upon .

petitioners,: See id . `at 4 47 . -,Petitioners ..-ma y= carry - their .burden .by proving that ; they were -not negligent ; i .e , that °they, ,made ~a, reasonable attempt to complywith-the'provisions-of :the Internal, .

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Revenue Code and,were not .-careless, reckless- or in intentional, disregard of'rules or regulations : Seesec .~6662(c) .

`Alternatively, petitioners 'may establish ; that-,their underpaymen t was attributable to reasonable .°cause and, .theiracting-in„goo d faith See sec . 6664 (c)(1 ) We conclude that respondent has metathis ..burden"of,production and that petitioners,have failed to° carry- their burden,xof .tiproof .

..

.The record establishes that petitioners claimed,rsign ficant , amounts of tax benefits to which-they neither were entitled nor had a reasonable claim . The'record does not establish tha t petitioners made a reasonable,attempt to comply with the provisions of the Internal Revenue Code, that petitioners' underpayment was . attributable to reasonable cause, or that petitioners abtedin good faith as to the underpayment .

Petitioners claim that the subject returns were prepared-an d reviewed by the NADN and that-theyw reasonably relied ..on .the NADN to prepare those returns correctly . We reject that claim a s factually and legally ;incorrect . As a . point of fact, petitioner s prepared their 2001 and 2002 returns themselves ; H&R Block .

prepared their 2003 return ; and the NADN informed petitioner s that it was not providing them with . any legal or othe r professional service and that they should retain a,competent professional if they wanted any legal'advice or other exper t assistance with .. respect to the'tax shelter . As a point of law , any such claimed reliance upon the NADN (if it in fact ha d occurred) would not be reasonable .in the setting of this cas e given-that-the NADN was :the -tax shelter' s, promoter ., Se e Neonatology Associates, P .A . v .~Commissioner , 115 T .C . 43, 98-9 9 (2000), affd . 299 F .3d 221 (3d Cir . 2002) .

We-hold that petitioners are-liable for the accuracy-relate d penalties .. respondent-determined . Accordingly, we sustai n respondent's determination as to those penalties .

IV .

Conclusio n We have considered all of petitioners' contentions and have concluded that those contentions not discussed herein are without merit . To reflect the foregoing, l An appropriate order and , decision will be entered for respondent .

C-

98. T .C . 695, 700 (1992) . The following requirements must b e -satisfied where, as here, equitable estoppel is asserted against the Commissioner : (1)- A false representation by the Commissioner .