## Facts

- Alex and Tonja Oria filed joint federal income tax returns for 1999 and 2000.
- Alex Oria was president and sole shareholder of Medico Medical Services, Inc., controlled its finances, and signed all corporate checks.
- Oria hired a certified public accountant, Robert A. Loeser, to prepare both Medico’s corporate returns and the Orias’ personal returns.
- The Commissioner determined income tax deficiencies for 1999 and 2000 and asserted accuracy-related penalties under I.R.C. § 6662(a).
- The parties stipulated to settle all issues for 1999 (including penalties) and stipulated that the Orias’ 2000 taxable income would be increased by $313,804 as reported on their Form 1040.
- For 2000, the Orias claimed a $185,000 bad-debt deduction; they later conceded $70,000 was not allowable, the Commissioner agreed $120,000 was allowable, and the parties agreed the penalty applied to the underpayment attributable to the $65,000 disallowed portion.
- The remaining dispute concerned whether the § 6662(a) penalty applied to the underpayment attributable to the $313,804 stipulated increase in 2000 taxable income.
- The underreporting was tied to an accountant-devised approach that treated fictitious “payments” to the accountant as corporate entries credited to Oria, despite no actual transfers supporting the entries.
- When the accountant attempted to explain the mechanics and assumptions behind the approach, Oria refused to engage and dismissed the explanation as “mumbo jumbo numbers.”

## Issues

1. Whether the Orias were liable for the I.R.C. § 6662(a) accuracy-related penalty for the 2000 underpayment attributable to the $313,804 understatement of taxable income.
2. Whether the Orias established I.R.C. § 6664(c)(1) reasonable cause and good faith based on claimed reliance on their CPA.

## Decision

- The Tax Court held the Orias were liable for the § 6662(a) accuracy-related penalty on the underpayment attributable to the $313,804 understatement for 2000.
- The court rejected the Orias’ reasonable-cause and good-faith defense under § 6664(c)(1).
- The penalty also applied (by stipulation) to the underpayment attributable to the $65,000 disallowed portion of the 2000 bad-debt deduction.

## Legal Principles

- I.R.C. § 6662(a) imposes a 20% penalty on underpayments attributable to negligence or a substantial understatement of income tax.
- I.R.C. § 6664(c)(1) provides an exception where the taxpayer proves reasonable cause and good faith as to the underpayment.
- Reasonable cause and good faith are determined case by case, focusing on the taxpayer’s efforts to assess the proper tax liability.
- Reliance on a tax professional may support reasonable cause only if the taxpayer acts in good faith, provides accurate information, and does not ignore clear warning signs or deliberately avoid understanding the basis for significant tax benefits.
- A taxpayer’s education, business experience, and control over business finances may weigh against a claim of innocent reliance where the reporting depends on transactions the taxpayer is positioned to recognize as fictitious or questionable.

## Conclusion

The Tax Court sustained the accuracy-related penalty for 2000 on the underpayment attributable to the stipulated $313,804 increase in taxable income because the Orias did not show reasonable cause and good faith; Oria’s deliberate refusal to understand a plan grounded in fictitious entries defeated the reliance-on-CPA defense.


Oria v. Comm'r, T.C. Memo. 2007-226 (2007)