T.C. Summary Opinion 2009-130
UNITED STATES TAX COURT
KENNETH JAMES HOPSON AND LINDA S. HOPSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25584-08S. Filed August 25, 2009.
Kenneth James Hopson and Linda S. Hopson, pro sese.
Katherine Lee Kosar, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioners’ Federal
income tax of $21,954, as well as an accuracy-related penalty
under section 6662(a) of $1,956, for 2006.
Petitioners concede that they are liable for the deficiency
in income tax as determined by respondent.2 Thus, the only issue
for decision is whether petitioners are liable for the accuracy-
related penalty. We hold that they are.
Background
None of the facts have been stipulated by the parties.
Petitioners resided in the State of Ohio when the petition was
filed.
In 2006 petitioner, Kenneth James Hopson (Mr. Hopson),
received distributions from two accounts with the Ohio Public
Employees Retirement System of $42,501 and $18,381, for a total
of $60,882. The funds were attributed to Mr. Hopson’s employment
with the State of Ohio and the City of Cleveland. Mr. Hopson is
no longer employed with the State or city; he requested a full
2
Respondent acknowledges that petitioners are entitled to
a credit of $12,176, which amount represents withholding that was
not claimed by petitioners on their return. However, we note
that the determination of a statutory deficiency does not take
such withholding into account. See sec. 6211(b)(1). Such
withholding, however, does reduce the underpayment upon which the
accuracy-related penalty is based. See sec. 6664(a)(1)(B); sec.
1.6664-2(d), Income Tax Regs.
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distribution of the account values in order to satisfy a home
equity loan and pay off credit card debt. Before these
distributions Mr. Hopson had not received any payments from these
accounts, and he will not receive any future payments because the
accounts now have zero balances. Mr. Hopson received a Form
1099-R, Distributions from Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for each
of the distributions.
Petitioners prepared their tax return for 2006 using tax
return preparation software. Mr. Hopson usually takes the lead
on tax return preparation and has been using tax return
preparation software since the 1980s to prepare returns. He
completed the software’s interview process, which required him to
enter the information necessary to generate the return. During
this process Mr. Hopson did not enter the information from the
Forms 1099-R. He stated that he knew petitioners received the
income, but he inadvertently omitted it from the return. The
software program ran an error check of the information entered by
Mr. Hopson and did not detect any mistakes. The software
generated a joint Federal income tax return that Mr. Hopson
printed, but neither he nor Mrs. Hopson reviewed it for accuracy.
The return was timely filed with the IRS, listing petitioners’
total income as $88,488 and total tax of $6,515.
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Discussion
Section 6662(a) and (b)(2) imposes a penalty equal to 20
percent of the amount of any underpayment attributable to a
substantial understatement of income tax.3 An understatement of
income tax is “substantial” if the understatement exceeds the
greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). The term “understatement”
means 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).
Section 6664 provides an exception to the imposition of the
accuracy-related penalty if the taxpayer establishes that there
was reasonable cause for the understatement and that the taxpayer
acted in good faith with respect to that portion.4 Sec.
6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. The determination
of whether the taxpayer acted with reasonable cause and in good
faith is made on a case-by-case basis, taking into account the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
3
In the notice of deficiency respondent determined the
accuracy-related penalty on the basis of sec. 6662(d), a
substantial understatement of income tax. At trial respondent
argued that petitioners were also negligent. The record makes
clear that respondent determined the penalty on the basis of sec.
6662(d), and a determination of a substantial understatement is
sufficient to impose the penalty. See sec. 6662(b); Fields v.
Commissioner, T.C. Memo. 2008-207. Therefore, we need not
examine the negligence issue.
4
The substantial authority and adequate disclosure
provisions of sec. 6662(d)(2)(B) do not apply to the facts before
us.
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Tax Regs. Generally, the most important factor is the extent of
the taxpayer’s effort to assess the proper tax liability for such
year. Id.
With respect to a taxpayer’s liability for any penalty,
section 7491(c) places on the Commissioner the burden of
production, thereby requiring the Commissioner to come forward
with sufficient evidence indicating that it is appropriate to
impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-
447 (2001). Once the Commissioner meets his burden of
production, the taxpayer must come forward with persuasive
evidence that the Commissioner’s determination is incorrect. See
id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933).
The Commissioner may satisfy his burden of production for
the accuracy-related penalty on the basis of a 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, affd. 220 Fed.Appx. 601 (9th Cir. 2007); Janis v.
Commissioner, T.C. Memo. 2004-117, affd. 461 F.3d 1080 (9th Cir.
2006), affd. 469 F.3d 256 (2d Cir. 2006). Respondent satisfied
his burden of production because the record demonstrates that
petitioners failed to include the distributions in their gross
income, thereby causing petitioners to substantially understate
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their income tax for 2006, i.e., the understatement of $21,954
exceeds the greater of 10 percent of the tax required to be shown
on the return (i.e., $2,847) or $5,000. See sec. 6662(d)(1)(A);
Higbee v. Commissioner, supra at 447-449. Accordingly,
petitioners bear the burden of proving that the accuracy-related
penalty should not be imposed. See sec. 6664(c)(1); Higbee v.
Commissioner, supra at 446.
Petitioners have not met their burden of persuasion with
respect to reasonable cause and good faith. Mr. Hopson admitted
that he received both Forms 1099-R for the distributions and that
he knew they constituted income. After using tax return
preparation software for nearly 20 years, he simply filed the
return that was generated by the software without reviewing it.
The omission of the distributions resulted in the failure to
report over 40 percent of petitioners’ total income for the year.
Granted this was a one-time event, but petitioners nevertheless
had a duty to review their return to ensure that all income items
were included. See Magill v. Commissioner, 70 T.C. 465, 479-480
(1978), affd. 651 F.2d 1233 (6th Cir. 1981). Petitioners were
not permitted to bury their heads in the sand and ignore their
obligation to ensure that their tax return accurately reflected
their income for 2006. In the end, reliance on tax return
preparation software does not excuse petitioners’ failure to
review their 2006 tax return.
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Under the facts and circumstances, 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
6662(a) as determined by respondent in the notice of deficiency.
Conclusion
We have considered all of the arguments made by petitioners,
and, to the extent that we have not specifically addressed them,
we conclude that they are without merit.
To reflect the foregoing,
Decision will be entered
for respondent.