MCKEE v. COMMISSIONER

T.C. Summary Opinion 2005-34

UNITED STATES TAX COURT

RONALD C. MCKEE AND ANITA L. MCKEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8729-04S. Filed March 29, 2005.

John D. Maxey, for petitioners.

Jeremy L. McPherson, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1 The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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For the taxable year 2001, respondent determined a

deficiency in petitioners’ Federal income tax in the amount of

$5,574 and an accuracy-related penalty under section 6662(a) in

the amount of $860.

Petitioners concede that they are liable for the deficiency

in income tax as determined by respondent. Thus, the only issue

for decision by the Court is whether petitioners are liable for

the accuracy-related penalty on that deficiency. We hold that

they are.

Background

This case was submitted fully stipulated under Rule 122. We

incorporate by reference the parties’ stipulation of facts and

accompanying exhibits.

Petitioners resided in Roseville, California, at the time

that their petition was filed with the Court.

A. Petitioner Ronald C. McKee’s Commission Income

Petitioner Ronald C. McKee (Mr. McKee) worked as a car

salesman for Autocar Inc. of Roseville (Autocar), California,

from 1998 through May 2001. Mr. McKee was paid on a commission

basis for his services as an employee of Autocar.

From January through May 2001, Mr. McKee received a paycheck

from Autocar every 2 weeks, along with a pay stub showing his

wages for the 2-week period and his “year-to-date” wages.
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For 2001, Autocar paid to Mr. McKee total wages in the

amount of $21,666.2 For that year, Autocar issued to Mr. McKee

two Forms W-2, Wage and Tax Statement.3 On the first such Form

W-2 (first W-2), Autocar reported wages paid to Mr. McKee in the

amount of $7,891; on the second such Form W-2 (second W-2),

Autocar reported wages paid to Mr. McKee in the amount of

$13,775. Mr. McKee received the first W-2; however, he did not

receive the second W-2.

Petitioners timely filed a joint Federal income tax return

for 2001. On their return, petitioners reported wages from

Autocar in the amount of $7,891, as reflected on the first W-2,

and they attached to their return a copy of that W-2.

Petitioners did not report, on their 2001 return, wages from

Autocar in the amount of $13,775, as reflected on the second W-2.

Petitioners did not compare the $7,891 of wages reported on

the first W-2 with the total “year-to-date” wages reported on the

final pay stub for 2001 from Autocar. Indeed, petitioners did

not look at the first W-2; rather, they placed it in a tax folder

provided by petitioners’ income tax return preparer and then

forwarded that folder to the preparer.

2
All monetary amounts are rounded to the nearest dollar.
3
The record does not disclose why Autocar would have
issued two Forms W-2 to Mr. McKee for the same taxable year.
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After the 2001 return had been prepared by petitioners’

income tax return preparer, petitioners did not compare the

$7,891 of wages reported on the return with the total “year-to-

date” wages reported on the final pay stub for 2001 from Autocar.

B. Petitioners’ Other Income

In 2001, Mr. McKee also received wages in the amount of

$6,921 from Cypress Home Loan Corporation of Roseville,

California. Petitioners properly reported these wages on their

2001 return.

In 2001, petitioner Anita L. McKee received wages in the

amount of $33,316 from Roseville Joint United High School.

Petitioners properly reported these wages on their 2001 return.

In 2001, petitioners received interest income in the amount

of $2,126. Petitioners properly reported this income on their

2001 return.

Finally, in 2001, Mr. McKee received taxable distributions

from retirement plans in the aggregate amount of $17,783.

Petitioners properly reported these distributions on their 2001

return.

C. Petitioners’ Reported Tax Liability

On their 2001 return, petitioners reported income tax in the

amount of $7,122.

D. Respondent’s Notice of Deficiency

Respondent determined a deficiency in petitioners’ income
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tax for 2001 based on petitioners’ failure to report on their

return for that year wages received by Mr. McKee from Autocar in

the amount of $13,775. In a Stipulation of Settled Issues,

petitioners conceded that they are liable for the deficiency in

income tax as determined by respondent.

Respondent also determined an accuracy-related penalty under

section 6662(a) based on petitioners’ failure to report the

aforementioned wages. In this regard, respondent determined that

the underpayment is attributable to (1) negligence or disregard

of rules or regulations and/or (2) a substantial understatement

of tax.

Discussion

A. Substantive Law

Section 6662(a) imposes a penalty equal to 20 percent of any

underpayment of tax that is attributable to either (1) negligence

or disregard of rules or regulations or (2) a substantial

understatement of income tax. See sec. 6662(a), (b)(1) and (2).

The term “negligence” includes any failure to make a

reasonable attempt to comply with the Internal Revenue Code.

Sec. 6662(c). The term “disregard” includes any careless,

reckless, or intentional disregard. Id.; sec. 1.6662-3(b)(2),

Income Tax Regs.

An understatement of income tax is “substantial” if it

exceeds the greater of 10 percent of the tax required to be shown
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on the return, or $5,000. Sec. 6662(d)(1)(A). As relevant

herein, an “understatement” is defined as the excess of the tax

required to be shown on the return over the tax actually shown on

the return. Sec. 6662(d)(2)(A).

The accuracy-related penalty does not apply to any portion

of an underpayment if it is shown that there was reasonable cause

for the taxpayer’s position and that the taxpayer acted in good

faith with respect to that portion. Sec. 6664(c)(1); sec.

1.6664-4(b), Income Tax Regs.; see United States v. Boyle, 469

U.S. 241, 242 (1985). The determination of whether a taxpayer

acted with reasonable cause and in good faith is made on a case-

by-case basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of a taxpayer’s effort to assess

the taxpayer’s proper tax liability for such year. Id.

B. Burden of Production and Burden of Proof

By virtue of section 7491(c), the Commissioner has the

burden of production with respect to the liability of any

individual for any penalty. “[F]or the Commissioner to meet his

burden of production, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty.” Higbee v. Commissioner, 116 T.C. 438, 446

(2001). Once the Commissioner meets the burden of production,

the taxpayer must come forward with persuasive evidence that the
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Commissioner’s determination is incorrect. Id. Typically, the

taxpayer would be obliged to prove that he or she acted with

reasonable cause and in good faith. See sec. 6664(c)(1); see

also Higbee v. Commissioner, supra at 448-449; sec. 1.6664-

4(b)(1), Income Tax Regs.

The Commissioner may satisfy his burden of production for

the accuracy-related penalty based on negligence or disregard of

rules or regulations by showing that the taxpayer failed to

report a significant amount of income shown on an information

return the accuracy of which is not in dispute. See sec. 1.6662-

3(b)(1)(i), Income Tax Regs.; cf. Owens v. Commissioner, T.C.

Memo. 2002-253 n.11, affd. in part 67 Fed. Appx. 253 (5th Cir.

2003). The Commissioner may satisfy his burden of production for

the accuracy-related penalty based on substantial understatement

of income tax by showing that the understatement on the

taxpayer’s return satisfies the definition of “substantial”.

E.g., Graves v. Commissioner, T.C. Memo. 2004-140; Janis v.

Commissioner, T.C. Memo. 2004-117.

C. Analysis

The record demonstrates that petitioners failed to report

wage income in the amount of $13,775. The record also

demonstrates that the understatement of income tax on

petitioners’ return attributable to such unreported income was
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substantial within the meaning of section 6662(d)(1)(A).4

Accordingly, we hold that respondent satisfied his burden of

production for the accuracy-related penalty based on both

negligence or disregard of rules or regulations and substantial

understatement of income tax.

We turn now to whether petitioners acted with reasonable

cause and in good faith, within the meaning of section

6664(c)(1), so as to escape liability for the accuracy-related

penalty (whether based on negligence or disregard of rules or

regulations, or on a substantial understatement of income tax).

The numbers in this case speak for themselves. Thus,

petitioners failed to report over 63 percent of the wages

received by Mr. McKee from Autocar ($13,775/$21,666). Compared

to wages received by Mr. McKee from both of his employers,

petitioners failed to report over 48 percent of Mr. McKee’s wages

($13,775/$28,587). Compared to wages received by petitioners

from all three of their employers, petitioners failed to report

over 22 percent of their total wages ($13,775/$61,903). Compared

to income received by petitioners from all sources, petitioners

failed to report over 16 percent of their total income

($13,775/$81,812).

4
The $5,574 understatement of tax exceeds $5,000 and is
43.9 percent of the tax required to be shown on petitioners’
return ($12,696; i.e. $7,122 + $5,574).
 - 9 -

Petitioners seek to negate the impact of the foregoing by

arguing that they did not receive the second W-2 from Autocar and

by professing reliance on their tax preparer to prepare an

accurate return.5 Yet, petitioners did not compare the $7,891 of

wages reported on the first W-2 from Autocar with the total

“year-to-date” wages reported on the final pay stub from Autocar.

Indeed, petitioners did not even look at the first W-2.

Furthermore, after the 2001 return had been prepared by the

preparer, petitioners did not compare the $7,891 of wages

reported on the return with the total “year-to-date” wages

reported on the final pay stub from Autocar.

We have consistently held that blind reliance on a return

preparer is not a defense; rather, the taxpayer is generally

required to review the return before signing and filing it.

E.g., Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987);

Bronson v. Commissioner, T.C. Memo. 2002-260; Osborne v.

Commissioner, T.C. Memo. 2002-11; Bilzerian v. Commissioner, T.C.

Memo. 2001-187. Furthermore, we cannot conceive of any reason

why these principles should not apply in the present case.

If Mr. McKee had even looked at the first W-2 from Autocar,

he would have been alerted to the fact that the W-2 included only

about one-third of his income from Autocar. See and compare sec.

5
It should be recalled that the second W-2 from Autocar
reported wages paid to Mr. McKee in the amount of $13,775.
 - 10 -

1.6664-4(b)(2), Example (3), Income Tax Regs. Indeed, if Mr.

McKee had compared the first W-2 from Autocar with his final pay

stub from Autocar, he would have known that the W-2 included only

about one-third of his income from Autocar. And, if Mr. McKee

had reviewed his return, he would have been alerted to the fact

that his wages from Autocar were understated for the year. In

short, it simply cannot be said in this case that the error on

petitioners’ return was the result of the preparer’s mistake

based on otherwise complete and correct information provided by

petitioners. See Pessin v. Commissioner, 59 T.C. 473, 489

(1972).

D. Conclusion

Under the circumstances of this case, we are unable to

conclude that petitioners acted with reasonable cause and in good

faith within the meaning of section 6664(c)(1). Accordingly,

petitioners are liable for the accuracy-related penalty under

section 6662(a) as determined by respondent in the notice of

deficiency.

We have considered all of the other arguments made by

petitioners and, to the extent that we have not specifically

addressed them, we find them to be without merit.

Reviewed and adopted as the report of the Small Tax Case

Division.
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To give effect to our disposition of the disputed issue, as

well as the parties’ Stipulation of Settled Issues,

Decision will be entered

for respondent.