1999 Tax Ct. Memo LEXIS 473">*473 Decision will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, JUDGE: Respondent determined deficiencies in petitioners' Federal income tax and an addition to tax and a penalty as follows:
Addition to tax and penalty
_____________________________
Year Deficiency
____ 1999 Tax Ct. Memo LEXIS 473">*474 __________ _______________ _________
1994 $ 3,624 $ 7,035 $ 5,628
1995 5,150 2,431 2,567
After concessions, the issues for decision are:
1. Whether petitioners are liable for additions to tax for failure to file timely returns under
2. Whether petitioners are liable for an accuracy-related penalty for negligence under
References to petitioner are to Robert C. Watts. Section references are to the Internal Revenue Code in effect for the years at issue.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners lived in San Antonio, Texas, when they filed their petition.
Petitioner was an architect, and Mrs. Watts was a teacher during the years in issue. Petitioner worked very long hours during those years.
Petitioner's main client was the Church of the Latter Day Saints. He frequently traveled in Texas during the years in issue to oversee the building and renovation of churches.
Petitioners' daughter, Kaye, became seriously ill around May 1994. Petitioner frequently1999 Tax Ct. Memo LEXIS 473">*475 took her to see doctors in 1994 and 1995. She was briefly hospitalized three times in 1994 and 1995.
Petitioner's mother had a long illness in 1994 and 1995. Petitioner frequently took her to doctor's appointments and picked up her medications. He also met with contractors who repaired her house, and he sold her car. She was hospitalized several times in 1995, and petitioner stayed overnight with her in the hospital once. Petitioner's mother died on March 28, 1996. Petitioner was the executor of his mother's estate.
Petitioner's sister, Lorna Gail (Gail), moved to San Antonio in 1994 to help him care for their mother. However, Gail was seriously injured in a car accident on September 7, 1994, and could not help petitioner care for their mother.
Petitioner kept detailed records of his business receipts and deductions for 1994 and 1995, his business activities, and how he spent his time away from the business in 1994 and 1995. He had records that showed he had gross receipts from his business of $ 134,351.21 in 1994. However, he did not rely on these records when he prepared his 1994 return.
Petitioners received a Form 1099-C which showed1999 Tax Ct. Memo LEXIS 473">*476 that they had cancellation of indebtedness income of $ 18,067 for 1994. They did not report this amount in income on their 1994 return. Petitioners reported income from petitioner's architectural services on a Schedule C that they attached to their 1994 return. On it, petitioners reported gross receipts of $ 114,351.21 and a bad debt of $ 3,640. Petitioners had not included the $ 3,640 amount in income in any prior year.
Petitioners' 1994 return was due April 15, 1995. They applied for and got an extension to file their 1995 return on August 15, 1996. Petitioners filed their 1994 return 14 months late, on June 19, 1996. They filed their 1995 return 4 months late, on December 12, 1996.
Respondent determined that petitioners had income of $ 145,346 for 1994 and $ 93,680 for 1995 using the bank deposits method. Petitioners agreed to all of the adjustments relating to unreported income and overstated deductions made by respondent, except for the addition to tax for late filing and the accuracy- related penalty for negligence.
OPINION
A. WHETHER PETITIONERS HAD REASONABLE CAUSE FOR THEIR FAILURE TO FILE TIMELY RETURNS FOR 1994 AND 1995
Petitioners argue that they had reasonable cause to file their 1994 and 1995 returns late because petitioner's mother and petitioners' daughter had prolonged illnesses in 1994 and 1995, petitioner's sister was in a serious car accident in 1994, petitioner's mother died in March 1996, and petitioner traveled extensively for his architectural business.
Illness or incapacity of a taxpayer or illness of a member of his or her immediate family may be reasonable cause for late filing. See
Petitioners point out that the District Court in
Petitioners also rely on
B. WHETHER PETITIONERS ARE LIABLE FOR THE ACCURACY-RELATED PENALTY FOR NEGLIGENCE FOR 1994 AND 1995
Taxpayers are liable for a penalty equal to 20 percent of the part of the underpayment attributable to negligence or disregard of rules or regulations. See
Petitioners contend that they are not liable for the negligence penalty because two of the adjustments made by respondent, that is, the cancellation of indebtedness and Schedule C bad debt issues, were technical in nature. Petitioners contend that petitioner's1999 Tax Ct. Memo LEXIS 473">*481 errors on their returns were due to reasonable cause and not negligence because he was preoccupied with his mother's and daughter's health problems and his business travel. Petitioners also contend that respondent's use of the bank deposit method to determine petitioner's business gross receipts was not an accurate way to determine income. Finally, petitioners contend that the fact that petitioner did not rely on his business records does not mean that he negligently prepared petitioners' 1994 and 1995 returns. We disagree.
Petitioners' claim that they were not negligent because the cancellation of indebtedness issue was technical is belied by the fact that they received a Form 1099-C for 1994 reporting the cancellation of indebtedness income, yet they did not report the income or disclose on their 1994 return that they received the Form 1099-C. Similarly, petitioners cannot plead ignorance to the requirements for claiming bad debts since they availed themselves of its benefits. They did not consult an accountant. Petitioners' claim that they were not negligent because respondent's bank deposits method is inaccurate misses the mark since petitioners agreed to all of respondent's adjustments1999 Tax Ct. Memo LEXIS 473">*482 to gross income.
Petitioners point out that the taxpayers in
In Heasley, the U.S. Court of Appeals for the Fifth Circuit held that the unsophisticated taxpayers in that case were not required independently to investigate investment opportunities.
Finally, 1999 Tax Ct. Memo LEXIS 473">*483 Streber does not support petitioners' claim. In that case, the taxpayers relied on the advice of their attorney in treating joint venture income as a gift from their father. The U.S. Court of Appeals for the Fifth Circuit held that the taxpayers acted with reasonable care because of their youth and inexperience in business matters and the fact that they relied on their attorney. See
As stated above, petitioners did not have reasonable cause for their failure to file timely their 1994 and 1995 returns. We further conclude that petitioners are liable for the negligence penalty for 1994 and 1995.
To reflect the foregoing,
Decision will be entered for respondent.