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Issue 2. Negligence
The second issue is whether petitioners are liable for the
addition to tax for negligence under section 6653(a)(1) for 1988.
Petitioners dispute the negligence addition to tax claiming they
are not knowledgeable about tax matters and relied on an
accountant. We disagree. Freeman, the accountant who prepared the
original returns for petitioners, knew all of the facts surrounding
the transactions with Robert and informed petitioners that the
losses never could be deducted. Not satisfied with Freeman’s
advice, petitioners later went to accountant White who advised
petitioners that the loss could be claimed.
Section 6653(a)(1) provides that if any part of an
underpayment of tax is the result of negligence or intentional
disregard of rules or regulations, 5 percent of the underpayment is
added to the tax. 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).
Petitioners--both experienced attorneys--undoubtedly took a
keen interest in a possible deduction of the magnitude involved in
this case. Freeman advised petitioners against taking a theft
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