If You Want to Claim Good-Faith Reliance

Jeffrey B. Yapp and Tamara A. Yapp, 2018 T. C. Memo. 147, filed 9/10/18, are looking at a $95K accuracy chop. While Judge Cohen does allow Jeff’s $120K legal fee deduction, as he was the sole member of the LLC when it paid the fee (he only sold off other membership interests thereafter, converting from disregarded to passthrough), Tamara’s probiotic start-up was just that. She gets a Section 195 throw-out of all her deductions.

Jeff had amended operating agreements and records showing when he paid the legal fees and when the rest of his crew came aboard. His claimed wages fail, because he has no canceled checks, no W-2s, no 1099-MISCs and no employment contracts.

Tamara is a nonstarter.

So the chop, somewhat diminished, is still in play, awaiting the Rule 155.

“According to petitioners, the penalties are not applicable because they relied upon their C.P.A. to report the Federal income tax liabilities shown on their joint returns.  Under certain circumstances a taxpayer’s reliance upon professional advice may establish the taxpayer’s reasonable cause and good faith with respect to an underpayment of tax.” 2018 T. C. Memo. 147, at p. 17. And all they have to do is show they told the pro the whole story, that the pro was competent, and that they relied in good faith. And “rely in good faith” means at least you glanced at the return and nothing jumped off the page.

But on the trial, Jeff and Tamara chop the ground out from under their CPA. Sound familiar, my CPA readers?

“T. Yapp testified at trial that they provided their C.P.A. with only the general ledgers that their bookkeeper kept to record income and expenses for [Jeff’s LLC], [Tamara’s LLC], and the Yapp household.

“Furthermore, J. Yapp admitted at trial that he approved the filing of the returns without fully reviewing them.  Had petitioners reviewed the returns, they would have noticed the numerous mistakes that they claim their C.P.A. made, such as selecting the wrong accounting method for reporting [Jeff’s LLC]’s taxable income in 2009, including personal expenses as part of [Tamara’s LLC]’s business deductions, and failing to continue to claim on the 2010 return depreciation deductions claimed for 2009.  The identified mistakes undermine any assumption that the preparer was a competent professional merely because he was a C.P.A.  Petitioners’ purported reliance on their C.P.A. does not establish that they acted with reasonable cause and in good faith.”  2018 T. C. Memo. 147, at pp. 17-18.