T.C. Summary Opinion 2010-130
UNITED STATES TAX COURT
CHARLES FOWLER JACOBSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13309-09S. Filed September 7, 2010.
Charles Fowler Jacobson, pro se.
Nathan Hall, for respondent.
PANUTHOS, Chief 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. Pursuant to
section 7463(b), the decision to be entered is not reviewable by
any other court, and this opinion shall not be treated as
precedent for any other case. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
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effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a $28,886 deficiency in petitioner’s
2006 Federal income tax and an accuracy-related penalty of $5,777
pursuant to section 6662(a). After concessions,1 the sole issue
for decision is whether petitioner is liable for the accuracy-
related penalty.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Washington State.
In August 2006 petitioner retired from his longtime job as
an engineer. In September 2006 petitioner exercised his right to
employee stock options, which resulted in a same-day purchase and
sale of stock in his former employer’s company, Iridex Corp.
(Iridex). Petitioner used the gross proceeds from sale to buy a
truck and a fifth-wheel trailer for his planned travel across the
United States. In the months after his retirement, petitioner
visited family in Washington State and ultimately established
1
The parties agree that petitioner received $166,623.45 for
the sale of stock which had a basis of $79,956.50, resulting in a
short-term capital gain of $86,666.95. The parties also agree
that petitioner received $47,217 for the sale of stock which had
a basis of $19,184, resulting in a long-term capital gain of
$28,033. As a result of this agreement, the deficiency will be
less than that determined in the notice of deficiency.
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residence there in December 2006. In early 2007 petitioner
permanently vacated his California residence, and he began a
cross-country trip in early April 2007. Petitioner believed he
had all of his financial documents and information returns when
he set out on his trip. While traveling in Arizona petitioner
used tax preparation software to complete his Form 1040, U.S.
Individual Income Tax Return. Petitioner had some information
returns in his possession. Petitioner mailed his completed Form
1040 while in Arizona in April 2007.
On his original return petitioner did not report any short-
term capital gain transactions and reported a negligible cost
basis relating to long-term capital gain transactions. The
Internal Revenue Service (IRS) sent petitioner a letter
identifying omitted gross proceeds from short-term capital
transactions resulting in an increase in tax. Shortly
thereafter, petitioner obtained apparently missing information
from Iridex and filed an amended return in September 2008. On
his amended return petitioner included short-term capital gain
transactions and modified long-term capital gain transactions to
account for a higher cost basis. As indicated, the parties now
agree as to the gross proceeds and bases of the stock
transactions.
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The record indicates that petitioner made multiple attempts
to contact the IRS by telephone after receiving letters from the
IRS. In response to the IRS petitioner also submitted amended
returns2 to include omitted items; but because of his travel and
the limited availability of the IRS employee assigned to his
case, the communication was often delayed. Ultimately, a notice
of deficiency was issued and petitioner filed a petition with
this Court.
Discussion
As indicated, the parties have come to an agreement as to
the adjustments in the notice of deficiency except for the
application of the accuracy-related penalty.
Section 6662(a) and (b)(1) and (2) imposes a penalty equal
to 20 percent of any underpayment of tax that is attributable to
negligence or disregard of rules or regulations or to a
substantial understatement of income tax.3 The term “negligence”
includes any failure to make a reasonable attempt to comply with
the provisions of the internal revenue laws. Sec. 6662(c); sec.
2
There is one amended return in the record. Petitioner
asserts he prepared and submitted multiple amended returns.
3
Pursuant to the notice of deficiency, it would appear that
there is a substantial understatement of income tax. As
indicated, the parties have agreed to the basis, gross proceeds
from sale, and amount of capital gain. It is not clear whether
there remains a substantial understatement after the
recalculation of the deficiency. Given our conclusions as to
negligence, we need not decide whether the understatement is
substantial.
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1.6662-3(b)(1), Income Tax Regs. Negligence is strongly
indicated where a taxpayer fails to include on an income tax
return an amount of income shown on an information return.
Sec. 1.6662-3(b)(1)(i), Income Tax Regs.
Petitioner failed to include the gross proceeds shown on an
information return. Petitioner asserts that he either did not
receive the Form 10994 or misplaced it during the move and
preparation for his trip. The nonreceipt of a Form 1099 does not
convert taxable income into nontaxable income which need not be
reported. Vaughn v. Commissioner, T.C. Memo. 1992-317, affd.
without published opinion 15 F.3d 1095 (9th Cir. 1993).
A cursory review of the return should have revealed the
omission of the $166,000 in gross proceeds from a sale of stock.
The Schedule D, Capital Gains and Losses, included detailed long-
term capital gain information and showed acquisition dates before
2006. Petitioner knew he had bought and sold Iridex stock on the
same day in the year of his retirement, resulting in short-term
gain, and yet he made no entries for short-term capital gain.
Petitioner was negligent in failing to include the income from
his stock sales in 2006.
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
4
The record is unclear as to whether there was more than one
Form 1099 issued to petitioner.
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was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). Although
the Commissioner bears the burden of production under section
7491(c), the taxpayer bears the burden of proving reasonable
cause under section 6664(c). Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001). Respondent has met his burden of production
by showing that petitioner did not include the gross proceeds
from sale of stock on his 2006 income tax return.
The determination of whether the taxpayer acted with
reasonable cause and in good faith depends on the pertinent facts
and circumstances, including the taxpayer’s efforts to assess the
proper tax liability; the knowledge and the experience of the
taxpayer; and the reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance upon expert advice will not exculpate a taxpayer who
supplies the return preparer with incomplete or inaccurate
information. Lester Lumber Co. v. Commissioner, 14 T.C. 255, 263
(1950). Tax preparation software “is only as good as the
information one inputs into it.” Bunney v. Commissioner, 114
T.C. 259, 267 (2000). Reliance on a preparer or software is not
reasonable where even a cursory review of the return would reveal
inaccurate entries. See Pratt v. Commissioner, T.C. Memo. 2002-
279.
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We reject petitioner’s claimed reliance on tax preparation
software since he input incomplete information into the software.
Petitioner’s actions after he received letters from the IRS have
no bearing on whether he had reasonable cause for the
underpayment of tax on the original return. We therefore
conclude that petitioner did not have reasonable cause for and
did not act in good faith with respect to the underpayment.
To reflect the foregoing,
Decision will be entered
under Rule 155.