Expert's advice eliminates negligence penalty.

• Author: Goldberg, Michael J.
• Position: Brief Article

A recent case held that a taxpayer's reasonable reliance on a tax professional was sufficient to avoid the negligence penalty under Sec. 6653(a) (Chamberlain, 5th Cir., 1995). The Chamberlains had invested in a partnership and deducted their 1% share of the partnership's loss. They sought a tax expert's advice, who told them that there was "a good faith, supportable position " that would justify the deduction. The transaction generating that loss was subsequently held (in other tax litigation) to be a sham. In disallowing the loss, the IRS assessed enhanced interest against the Chamberlains; the finding that the transaction was a sham made it a tax motivated transaction under then Sec. 6653(a). That section (which is now Sec. 6662(c)) provided for a 5% penalty on an underpayment if any part of the underpayment was due to negligence. The Tax Court affirmed both the enhanced interest and negligence penalty assessments.

The Fifth Circuit reversed the negligence penalty. It began its analysis by stating that once the Service assesses the negligence penalty, the taxpayer has the burden of disproving negligence. Under prior cases, negligence includes a "failure to reasonably attempt to comply with the tax code, including the lack of due care or the failure to do what a reasonable or ordinarily prudent person would do under the circumstances."

The court noted prior decisions supporting a taxpayer's reasonable reliance on professional advice as a defense to...