T.C. Summary Opinion 2006-182
UNITED STATES TAX COURT
HENRY BRODERICK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1814-05S. Filed November 9, 2006.
Henry Broderick, pro se.
Brian E. Derdowski, Jr., for respondent.
NIMS, Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect at the
time the petition was filed. The decision to be entered is not
reviewable by any other court, and this opinion should not be
cited as authority. Respondent determined a deficiency of
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$12,392 in petitioner’s Federal income tax for 2002, and a
$2,478.40 penalty under section 6662(a). Unless otherwise
indicated, all section references are to sections of the Internal
Revenue Code in effect for 2002, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Henry R.
Broderick, and his spouse, Denise F. Broderick, filed a joint
Federal income tax return for 2002, and respondent’s notice of
deficiency is addressed to both of them. However, only Henry
(petitioner) filed a petition in response thereto. Petitioner
resided in New Jersey when he filed his petition.
There is a confused state of the record in this case; some
of the facts have been stipulated and are so found.
Petitioner is the sole shareholder of Woodside Consulting,
Inc. (Woodside), a corporation which petitioner considers to be
taxable as a small business corporation consistent with
subchapter S of the Internal Revenue Code. For the taxable year
2002, Woodside filed an untimely tax return on Form 1120S, U.S.
Income Tax Return for an S Corporation. The return reflects that
for 2002, Woodside had gross receipts of $2,956 and an ordinary
loss of $29,000. Petitioner’s items from Woodside are
essentially uncoordinated with his Form 1040, U.S. Individual
Income Tax Return, items; so we have dealt with both returns as a
single unit. Respondent concedes that petitioner erroneously
indicated on Schedule E, Supplemental Income and Loss, of his
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2002 Form 1040 that he received $29,000 of income from Woodside
and instead agrees that petitioner received income in the amount
of $2,956, as shown on the Woodside Form 1120S and duplicated on
Schedule C, Profit or Loss From Business, of petitioner’s Form
1040.
Primarily on Schedule C of his Form 1040, but in other parts
of the return as well, petitioner also reported $2,956 of gross
income from Woodside but claimed a loss of $30,012, rather than
the $29,000 loss claimed on the Woodside Form 1120S.
Respondent made adjustments to petitioner’s income in the
total amount of $74,964. The adjustments included the $29,000
increase in petitioner’s income which, as stated above,
respondent has conceded.
Petitioner failed to substantiate any of the alleged
business deductions, or $17,805 in Schedule A itemized
deductions, claimed on his Form 1040; so we sustain respondent’s
disallowance of these items.
Respondent determined an accuracy-related penalty pursuant
to section 6662(a), based upon one or more of the following
elements of the penalty: (1) Negligence or disregard of rules
and regulations, or (2) substantial understatement of income tax.
Under section 7491(c), respondent has the burden of production
with respect to any penalty. Respondent has carried this burden
of production.
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Under section 6662, a penalty may be applied in the amount
of 20 percent of an underpayment that is attributable to
negligence or disregard of rules or regulations, or any
substantial understatement of income tax. Sec. 6662(a) and (b).
Generally speaking, a substantial understatement of income tax
exists where the amount of tax required to be shown on the return
for the taxable year, less the amount of tax shown on the return
(the understatement), exceeds the greater of 10 percent of the
tax required to be shown on the return or $5,000. Section
6662(d)(1). An exception exists where a taxpayer shows that
there was reasonable cause for the understatement and that the
taxpayer acted in good faith with respect to the understatement.
In this case, petitioner’s Form 1040 states total tax due on
line 61 to be zero. The Form 1040 also claimed an overpayment in
the amount of $6,045. (A substantial amount of tax actually paid
is an amount withheld on $54,936 attributable to Denise from
DEFENSE FINANCE & ACTG SERV, as shown on a Form W-2, Wage and Tax
Statement, attached to the Form 1040.) Thus, any deficiency in
this case greater than $5,000 is a substantial understatement
that merits a penalty under section 6662(a). Petitioner has not
introduced evidence to support a finding of reasonable cause.
Petitioner blames defects in his income tax return on software
that he claims to have used in preparing the Form 1040 return.
Such a program is only an aid for preparation of a return and
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depends on careful entry of accurate information, which
petitioner manifestly failed to do. Petitioner admits that he
has the education to prepare and review his income tax return,
and that he had an opportunity to review his return prior to
filing it. Accordingly, petitioner’s use of software in
preparing his return does not constitute reasonable cause for the
errors in his return or for the deficiency in this case. The
amount of the substantial understatement penalty determined by
respondent will be modified to reflect the adjustments in
petitioner’s taxable income contained herein.
The deficiency in this case is also attributable to
negligence as defined in section 6662(c). The regulations
clarify that “The term ‘negligence’ includes any failure to make
a reasonable attempt to comply with the provisions of the
internal revenue laws or to exercise ordinary and reasonable care
in the preparation of a tax return. ‘Negligence’ also includes
any failure by the taxpayer to keep adequate books and records or
to substantiate items properly.” Sec. 1.6662-3(b), Income Tax
Regs. Thus, petitioner’s claims of deductible expenses, which
petitioner has not substantiated with any credible documentation,
support the imposition of the penalty under section 6662(a) on
the basis of negligence, even if the computation which will be
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required under Rule 155 reflects a deficiency of less than 10
percent of the tax required to be shown on the return or $5,000,
and we so hold.
To reflect the foregoing,
Decision will be entered
under Rule 155.