-20- of deficiency with respect to all other matters. Petitioners claim, however, that they were not negligent, that they reasonably relied on the advice of experts, and that there was substantial authority for their position. Sections 6653(a)(2) and 6653(a)(1)(B) impose an addition to tax of 50 percent of the interest on the portion of an underpayment of tax attributable to negligence or intentional disregard of rules or regulations. Negligence is defined as the failure to exercise the due care that a reasonable, prudent person would exercise under similar circumstances. Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v. Commissioner, 85 T.C. 934, 947 (1985). Reliance on professional advice, by itself, is not an absolute defense to negligence. A taxpayer first must demonstrate that his reliance was reasonable. Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991). Here, petitioners failed to do so. Petitioner engaged in sham transactions. Petitioner participated in the backdating of documents and in highly questionable transactions. A prudent person would not have believed that these purported transactions served a purpose other than tax avoidance. We conclude that petitioners were negligent and did not reasonably rely on the advice of experts. Consequently, petitioners are liable for the additions to tax under sectionsPage: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
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