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property and deducted mortgage interest attributable to the
period after they sold the property to Haq. With respect to
their 1992 and 1993 tax years, petitioners claimed substantial
losses with regard to the San Jose property without
substantiation. With respect to their 1994 tax year, petitioners
claimed substantial Schedule C losses without establishing that
they were engaged in a trade or business, and without adequate
substantiation for the expenses claimed.
On brief, petitioners argue that they are not liable for the
negligence penalty because they properly relied in good faith on
a paid income tax preparer, providing her with all relevant tax
return information for the tax years in issue. Reliance on the
advice of a professional tax adviser does not necessarily
demonstrate reasonable cause and good faith. See sec. 1.6664-
4(b)(1), Income Tax Regs. All facts and circumstances must be
taken into account. See sec. 1.6664-4(c)(1), Income Tax Regs.
Reliance may not be reasonable or in good faith if the taxpayer
knew or should have known that the adviser lacked knowledge in
the relevant aspects of Federal tax law. See id. The advice
must be based upon all pertinent facts and the applicable law;
these requirements are not met if the taxpayer fails to disclose
facts that the taxpayer knows, or should know, are relevant to
the proper tax treatment of an item. See sec. 1.6664-4(c)(1)(i),
Income Tax Regs. The advice must not be based on unreasonable
factual or legal assumptions. See sec. 1.6664-4(c)(1)(ii),
Income Tax Regs.
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