T.C. Memo. 1998-83

UNITED STATES TAX COURT

ROBERT G. RUCKMAN AND JULIE RUCKMAN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 976-95. Filed February 25, 1998.

C. Page Hamrick III, for petitioners. 

William Henck, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes and an accuracy-related penalty

as follows:

Accuracy-Related Penalty

Year Deficiency Sec. 6662(b)(1)

1989 $6,006 --

1990 6,728 --

1991 12,884 $1,520
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1Respondent made determinations with respect to petitioners'

wholly owned S corporation, Robert Ruckman, Inc., at the

shareholder level, as provided for in sec. 301.6241-1T(c)(2),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3002 (Jan. 30,

1987). The parties have not disputed this aspect of the

determination.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

After concessions, the issues for decision are: (1) Whether

amounts paid for certain truck dispatch services performed by

petitioners are attributable to petitioners' wholly owned S

corporation or to petitioner Julie Ruckman and thus subject to

self-employment tax; (2) whether petitioners are entitled to

depreciation deductions in the amount of $12,285 for each of the

years 1990 and 1991; and (3) whether petitioners are liable for

an accuracy-related penalty under section 6662(b)(1) for failing

to report certain income in 1991.1

FINDINGS OF FACT

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.

Petitioners Robert G. Ruckman (Mr. Ruckman) and Julie

Ruckman (Mrs. Ruckman) are husband and wife who resided in

Leivasy, West Virginia, at the time their petition was filed. 
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Petitioners filed joint Federal income tax returns for the years

at issue. 

Petitioners formed Robert Ruckman, Inc. (Ruckman, Inc.), as

a West Virginia corporation in 1980 and were each 50-percent

shareholders during the years at issue. Mr. Ruckman served as

president and Mrs. Ruckman as secretary and treasurer. During

the years in issue, Ruckman, Inc., operated a trucking business

with a fleet of four to five trucks used for hauling freight for

customers. Ruckman, Inc., maintained an office in a spare room

in petitioners' residence. Ruckman, Inc., filed Federal income

tax returns on Forms 1120S as an S corporation for the years in

issue. 

Mrs. Ruckman performed the "office work" for Ruckman, Inc.,

including keeping the books and records and other administrative

duties, such as securing appropriate permits for truck hauling. 

Although Mr. Ruckman had initially driven trucks for Ruckman,

Inc., he ceased doing so after a heart attack in 1986 and

thereafter performed maintenance work for the company and various

other duties, as discussed below. 

During the years at issue, Ruckman, Inc., provided hauling

services to Bennett Logging, Inc. (Bennett Logging), a logging

and trucking business run by Gordon Bennett. Since Mr. Bennett

also drove a truck for Bennett Logging and did not maintain an

office, he was unable to devote sufficient attention to the

dispatching duties entailed in running a trucking business, in
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petitioners' view. At various times during either 1987 or 1988,

petitioners and Mr. Bennett discussed having petitioners perform

the dispatch services that were required in the operation of the

trucking business of Bennett Logging. Such dispatch services

consisted of procuring loads to be hauled, scheduling pickup and

delivery, assigning loads to particular trucks, verifying

delivery, answering drivers' questions about truck mechanical

problems, giving drivers instructions regarding proper loading of

unusual commodities, arranging for required licensing for transit

of trucks through various jurisdictions and similar

administrative matters, and billing. Dispatch services sometimes

entailed on-site visits to customers, but consisted primarily of

office work involving paperwork and telephoning. 

Sometime between 1987 and 1989, petitioners began performing

dispatch services for Bennett Logging and continued to do so

during the years at issue. Mrs. Ruckman performed most, but not

all, of the dispatch services. Mr. Ruckman fielded drivers'

calls regarding mechanical problems and proper loading and made

the on-site visits to customers that were required. Mrs. Ruckman

generally did the remainder. The Ruckmans' two adult children

also occasionally assisted during the years in issue.

As required by then-applicable Interstate Commerce

Commission regulations, the contract between Ruckman, Inc., and

Bennett Logging for hauling services was written. There was no
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written agreement with Bennett Logging regarding the dispatch

services performed by petitioners. 

For each of the years in issue, Bennett Logging issued Forms

1099 to Ruckman, Inc., for the amounts paid for hauling services. 

With respect to the dispatch services performed by petitioners,

Bennett Logging issued Forms 1099 to Mrs. Ruckman personally 

covering the amounts paid for such services in each of the years

in issue. The checks for dispatch services were made out to Mrs.

Ruckman personally and were deposited into petitioners' personal

bank account, rather than the corporate bank account. 

Petitioners did not draw any salary or wages from Ruckman,

Inc., during the years in issue. 

The amounts that Bennett Logging paid with respect to

dispatch services performed by petitioners totaled $43,009 and

$31,162 in 1989 and 1990, respectively. For 1989 and 1990,

Ruckman, Inc., reported the respective amounts on its Federal

income tax returns, Forms 1120S. 

With respect to 1991, petitioners reported the amounts paid

by Bennett Logging with respect to dispatch services they

performed on Schedules C and SE of their joint return, Form 1040,

as Mrs. Ruckman's net earnings from self-employment as a

dispatcher. Also with respect to 1991, Happy Trucking, Inc.

(Happy Trucking), a corporation owned by Mr. Bennett and Mr.

Ruckman, issued a Form 1099 to Ruckman, Inc., for both dispatch
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and hauling services. The dispatch services portion of the

payments was $18,063, which was deposited into petitioners'

personal bank account. Petitioners conceded that neither

Ruckman, Inc., nor petitioners reported the $18,063 in payments

for dispatch services from Happy Trucking on their Federal income

tax returns for 1991. 

Mrs. Ruckman maintained both Ruckman, Inc.'s and

petitioners' financial records during the years at issue. She

kept spreadsheets listing income and expenses on handwritten

columnar pads. For each of the years in issue, Mrs. Ruckman

delivered the spreadsheets, bank account information, and Forms

1099 to Stanley Adkins, a certified public accountant, in order

for Mr. Adkins to prepare Federal income tax returns for

petitioners and for Ruckman, Inc. Mr. Ruckman relied on Mrs.

Ruckman to manage petitioners' and Ruckman, Inc.'s financial

records and did not participate in these matters to any

significant degree. 

In June 1991, Mrs. Ruckman was diagnosed with cancer and

underwent surgery in that month and again in July 1991. Mrs.

Ruckman then commenced radiation and chemotherapy treatments in

August 1991. The radiation treatments lasted through September

1991 and the chemotherapy through March 1992. These treatments

required almost daily trips to Roanoke, Virginia, and prevented

Mrs. Ruckman from performing her regular work. Mr. Ruckman and
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2Mr. Ruckman testified, and petitioners on brief sought a

finding of fact to which respondent did not object, that Ruckman,

Inc., initially received $37,000 from its insurance company, and

later an amount bringing the total settlement to $48,000, as a

result of the damage to the truck. With respect to the time of

receipt, the record establishes that $37,000 of the insurance

proceeds was received in 1990. Respondent so determined in the

notice of deficiency, and petitioners nowhere dispute it. The

record is not entirely clear as to when the additional $11,000 in

insurance proceeds, which brought the total to $48,000, was

received. Petitioners' proposed finding of fact is that the

insurance company "later" settled for a total payment of $48,000

after initially paying $37,000. Given that the accident occurred

in May of 1990, and the significance of the truck and the dollar

amounts involved to Ruckman, Inc.'s business, the likelihood is

great that the remaining insurance proceeds were received before

the end of 1990, more than 7 months later. We accordingly find,

in the absence of any further evidence, that all insurance

proceeds were received in 1990.

3Respondent so determined in the notice of deficiency, and

petitioners have not disputed this figure.

petitioners' two adult children took over Mrs. Ruckman's normal

duties during the period of her cancer treatments. 

In 1986, Ruckman, Inc., purchased a 1986 Freightliner truck

for $86,000 and began to depreciate it over a 7-year period using

the straight line method. In May 1990, the truck was involved in

an accident and sustained substantial damage, rendering it

inoperable. As a consequence of the damage to the truck,

Ruckman, Inc., initially received $37,000 in insurance proceeds

in 1990 and later an additional $11,000, bringing the total

received to $48,000 in that year.2 Ruckman, Inc.'s adjusted

basis in the truck at the close of the year preceding the year of

the accident (12/31/89) was $42,576.3 Petitioners considered the
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4The parties appear to be in agreement that these amounts,

if income of Ruckman, Inc., would not be subject to selfemployment tax under sec. 1401 when passed through to

petitioners. Cf. Ding v. Commissioner, T.C. Memo. 1997-435.

truck to be repairable. They kept the truck and title thereto,

intending to repair it, but it was not repaired or further used

after the accident. The truck was not scrapped or used as a

source for parts. The truck was not transferred to a scrap

account, but instead kept on the depreciation schedule of

Ruckman, Inc., which took depreciation expenses of $12,285 in

each of the years 1990 and 1991 with respect to the truck. 

OPINION

1. Dispatch Income

Respondent determined that amounts paid by Bennett Logging

for dispatch services in 1989 and 1990 were incorrectly reported

as income by Ruckman, Inc., for those years and instead were

required to be reported on petitioners' returns as selfemployment income of Mrs. Ruckman, subject to self-employment

tax. Petitioners contend that these amounts were properly

reported as Ruckman, Inc.'s income.4 Similarly, respondent

determined that $18,063 paid by Happy Trucking in 1991 for

dispatch services was unreported and should have been reported on

petitioners' returns as self-employment income of Mrs. Ruckman. 

Petitioners concede that $18,063 in income was received but not

reported in 1991, but contend that this amount should be reported

as income of Ruckman, Inc.
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On brief, respondent argues that the facts of this case

demonstrate that the payments from third parties for dispatch

services were received by Mrs. Ruckman as income from a "separate

business" from that of Ruckman, Inc., and the payments are

therefore attributable to her and subject to the self-employment

tax imposed by section 1401. As legal authority for his

position, respondent cites Commissioner v. Culbertson, 337 U.S.

733 (1949), suggesting that the assignment of income doctrine is

at issue in this case. Respondent further cites Joseph Radtke,

S.C. v. United States, 712 F. Supp. 143 (E.D. Wis. 1989), affd.

per curiam 895 F.2d 1196 (7th Cir. 1990), and Spicer Accounting,

Inc. v. United States, 918 F.2d 90 (9th Cir. 1990), for the

proposition that we should "determine the economic reality"

presented by the facts and circumstances of this case. 

We do not believe that Radtke and Spicer provide a coherent

theory for sustaining the deficiency determined with respect to

self-employment taxes. Those cases involve the

recharacterization of S corporation dividends as wages subject to

employment taxes imposed by sections 3111 and 3301. The notice

of deficiency in the instant case does not seek to recharacterize

dividends from Ruckman, Inc., as wages of Mrs. Ruckman subject to

employment taxes, but instead proceeds on the quite different

theory that Mrs. Ruckman earned these amounts directly,

subjecting them to self-employment tax, and that petitioners'

efforts to attribute such income to their wholly owned
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5In their petition, petitioners make the further assertion

that for the years in issue they were "not themselves engaged in

business other than as employees of the corporation [Ruckman,

Inc.]". Perhaps sensing some of the difficulties of that

position, petitioners on brief do not anywhere use the term

"employee" to characterize their relationship with Ruckman, Inc.

6See, e.g., United States v. Basye, 410 U.S. 441, 449

(1973); Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949);

Lucas v. Earl, 281 U.S. 111, 114-115 (1930).

corporation are unavailing under the facts of this case.

Petitioners cite no legal authority and argue that the issue

in this case is entirely a question of fact. They maintain that

the dispatch services were performed pursuant to contracts which

the service recipients had with Ruckman, Inc., not with Mrs.

Ruckman individually; that Mrs. Ruckman did not and could not

perform all of the specific duties encompassed in providing

dispatch services; that both Mr. Ruckman and Mrs. Ruckman, as

well as their two adult children on occasion, actually performed

the dispatch services, but only through and on behalf of Ruckman,

Inc., using the corporation's facilities to do so.5

We believe the parties' dispute requires us to decide

whether Ruckman, Inc., or one or both of petitioners was the true

earner of the dispatch income. We agree in part with respondent

that the assignment of income doctrine6 is raised herein or, more

specifically, the recurrent issue of determining the true earner

of income as between a corporation and its service-performing

agent or shareholder. In these circumstances, because two

important income tax principles compete--namely, income must be
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taxed to its true earner, Commissioner v. Culbertson, supra at

739-740; Lucas v. Earl, 281 U.S. 111, 114-115 (1930), and a

validly organized and operated corporation's existence must be

recognized for tax purposes, Moline Properties, Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943)--a determination of

the true earner requires a more refined inquiry than merely

pointing to the actual performer of the services. Johnson v.

Commissioner, 78 T.C. 882, 890-891 (1982), affd. without

published opinion 734 F.2d 20 (9th Cir. 1984). Instead, we must

determine, as between the corporation and its service-performing

agent or shareholder, who controls the earning of the income. 

Id. at 891, and cases cited therein. A two-part test must be

satisfied before the corporation, rather than its serviceperforming agent or shareholder, will be considered to control

the earning of the income. First, the service provider must be

the employee of the corporation, whom the corporation has the

right to direct and control in some meaningful sense. Second,

there must exist between the corporation and the service

recipient a contract or similar indicium recognizing the

corporation's controlling position. Haag v. Commissioner, 88

T.C. 604, 611 (1987), affd. without published opinion 855 F.2d

855 (8th Cir. 1988); Johnson v. Commissioner, supra at 891; see

also Leavell v. Commissioner, 104 T.C. 140, 151-152 (1995).

On the basis of the evidence in this case, we do not believe

that petitioners can meet either component of the test. First,
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7We note that the focus of our analysis in Leavell v.

Commissioner, 104 T.C. 140 (1995), was whether an employment

relationship existed between the service provider taxpayer and

the service recipient, on the theory that only a service provider

who is an independent contractor with respect to the service

recipient retains the right to grant control over his services to

an intermediate entity. Id. at 149-150. In the instant case,

however, it has not been argued, nor do we believe there is any

evidence to suggest, that either petitioner was an employee of

Bennett Logging or Happy Trucking, the recipients of the dispatch

services. Thus, petitioners retained the capacity to grant

control of their dispatch services to Ruckman, Inc., and our

analysis concerns whether they did so under the two-part test.

as to whether Mrs. Ruckman (or Mr. Ruckman) was an employee of

Ruckman, Inc., whom the corporation had the right to direct and

control in some meaningful sense, we believe the available

evidence overwhelmingly supports the conclusion that no

employment relationship existed between Ruckman, Inc., and either

petitioner insofar as the provision of dispatch services was

concerned.7 We note first that there was no written contract of

employment between Ruckman, Inc., and either petitioner from

which we might discern control, and the available extrinsic

evidence indicates that Ruckman, Inc., did not have control. 

Ruckman, Inc., did not pay any salary or wages to either

petitioner with respect to the dispatch services or otherwise. 

Payment for the dispatch services was made by checks payable to

Mrs. Ruckman personally, and these checks were deposited into

petitioners' personal banking account, not the corporate account. 

Thus, at no point did Ruckman, Inc., have custody or control of

the remuneration for the dispatch services. Cf. Gordon v.

Commissioner, T.C. Memo. 1993-10 (checks issued to taxpayer
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8The other payments received in 1991 for dispatch services,

from Happy Trucking, were not reported on either petitioners' or

Ruckman, Inc.'s return.

9We note that as officers of Ruckman, Inc., petitioners may

have been employees of the corporation pursuant to sec.

3121(d)(1). However, the services they may have rendered in

their capacity as officers are distinguishable from the dispatch

services rendered to third parties, with which we are here

concerned. See Idaho Ambucare Ctr., Inc. v. United States, 57

F.3d 752, 755-756 (9th Cir. 1995); Rev. Rul. 82-83, 1982-1 C.B.

151. 

personally and taxpayer's personal use of proceeds support

conclusion that taxpayer rather than his corporation was true

earner). Perhaps most telling, although the dispatch payments

from Bennett Logging were reported as income on Ruckman, Inc.'s

returns in 1989 and 1990, the same payments were reported in 1991

on petitioners' joint return as Mrs. Ruckman's self-employment

income as a dispatcher. Petitioners have not asserted, nor is

there any evidence to suggest, that there was any change in the

contractual relationships among Bennett Logging, petitioners, or

Ruckman, Inc., between 1990 and 1991.8 We believe the conclusion

is inescapable that petitioners ignored the corporate existence

of Ruckman, Inc., with respect to the earning of income from

dispatch services. For these same reasons, we do not believe the

evidence can support a finding that either petitioner acted as 

an agent of Ruckman, Inc., with respect to the earning of the

dispatch income. Accordingly, we conclude that Ruckman, Inc.,

did not have the right to direct and control either petitioner in

any meaningful sense with respect to the dispatch income.9
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As for the second prong of the test, namely, that there must

exist between the corporation and the person using the services a

contract or similar indicium recognizing the corporation's

controlling position, we believe the substantial weight of the

evidence indicates that the service recipients, Bennett Logging

and Happy Trucking, did not recognize Ruckman, Inc., as having a

controlling position with respect to the dispatch services. 

Again, there was no written contract for dispatch services

between Ruckman, Inc., and either Bennett Logging or Happy

Trucking. Bennett Logging's checks for dispatch services were

made out to Mrs. Ruckman personally. For the 3 years at issue,

Bennett Logging issued Forms 1099 to Mrs. Ruckman personally with

respect to the payments for dispatch services, while in the same

years it issued Forms 1099 to Ruckman, Inc., with respect to

payments for hauling services. Cf. Zadan v. Commissioner, T.C.

Memo. 1993-85 (Forms 1099 issued to taxpayer personally support

conclusion that taxpayer rather than his corporation was true

earner). At trial, the parties jointly stipulated a written

statement of Gordon Bennett, as president of Bennett Logging, in

which he asserts that the "administration" of the trucking branch

of Bennett Logging, and subsequently of Happy Trucking, which he

further describes as consisting of the services that have been

characterized herein as dispatch services, "was the

responsibility of Robert Ruckman, Inc." and that "Due to an

error, 1099's were issued to Julie Ruckman." The statement is
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10We note also that Mr. Bennett's statement offers no

explanation to account for the fact that Bennett Logging's checks

for dispatch services were made out to Mrs. Ruckman personally. 

dated approximately 1 month before the trial of this case. 

Although respondent did not pose a hearsay objection to the

statement, we nonetheless accord greater weight to the

contemporaneous actions of Bennett Logging, in which a

distinction was maintained in the preparation of Forms 1099 as

between payments to Ruckman, Inc., for hauling services, and

payments to Mrs. Ruckman personally for dispatch services.10

Happy Trucking did issue a Form 1099 to Ruckman, Inc., rather

than Mrs. Ruckman, for dispatching services in 1991, although the

Happy Trucking payments were not reported by either Ruckman,

Inc., or petitioners. To the extent that dispatch payments were

reported in 1991, they were reported by petitioners on Schedule C

of their joint return, as the self-employment income of Mrs.

Ruckman. On balance, we conclude that the manner in which the

service recipients generally paid and, for tax purposes,

accounted for the payments for dispatch services negates the

proposition that they recognized Ruckman, Inc.'s controlling

position with respect to earning income from the dispatch

services.

Petitioners argue that they always considered themselves to

be conducting all business activities, including the provision of

dispatch services to third parties, only through Ruckman, Inc.,
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11Petitioners' argument that the dispatch services were

performed using the corporation's facilities boils down to the

claim that the corporation's office, a spare room in their

residence, and the corporation's office equipment were used. 

There is no evidence, and we very much doubt, that Ruckman, Inc.,

held title to petitioners' residence. There is likewise no

evidence of the ownership of the office equipment.

using Ruckman, Inc.'s facilities.11 Mrs. Ruckman testified that

she did not consider it significant that payment checks and Forms

1099 with respect to dispatch services were issued to her

personally rather than to Ruckman, Inc., in particular because

the payments were being reported as income of their corporation,

and passed through to them. Although petitioners may have some

frustration with the formalities here, the fact remains that the

corporation--which is, itself, a mere legal fiction--never had

even transitory control of the funds that petitioners would have

us attribute to it. Moreover, there are more than formalities at

stake here. By treating the payments for dispatch services as

earned by their corporation, which paid them no salaries,

petitioners treated income that was from their personal services

as subject to neither employment nor self-employment taxes. On

the basis of the evidence, we conclude that the income from

dispatch services is not attributable to Ruckman, Inc.

Respondent determined that the dispatch income was earned by

Mrs. Ruckman personally. Petitioners allege error because the

dispatch services were not all rendered solely by Mrs. Ruckman. 

Although we have found that Mr. Ruckman performed a portion of

the dispatch services, we do not believe this fact demonstrates
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error in respondent's determination. All checks for dispatch

services were made out to Mrs. Ruckman, and all Forms 1099 were

issued to Mrs. Ruckman, except one for 1991 prepared by Happy

Trucking. Moreover, petitioners took the position on their 1991

return that the dispatch income was earned by Mrs. Ruckman

personally. We thus conclude that Mrs. Ruckman controlled the

earning of the dispatch income that was paid by Bennett Logging

in 1989 and 1990, and by Happy Trucking in 1991, notwithstanding

any assistance given her by Mr. Ruckman, or by the Ruckmans'

adult children.

Finally, respondent made a determination that the income

determined to be attributable to Mrs. Ruckman was subject to the

tax on self-employment income under section 1401. Other than to

claim that the dispatch income was attributable to Ruckman, Inc.,

petitioners have not addressed respondent's determination under

section 1401. We accordingly sustain it.

2. Truck Depreciation

 In the notice of deficiency, respondent disallowed

depreciation deductions in the amount of $12,285 for each of the

years 1990 and 1991 that had been taken by Ruckman, Inc., with

respect to the 1986 Freightliner truck and instead determined

that the corporation sustained a casualty loss in the amount of

$5,576 in 1990, the year in which the truck was wrecked. The

casualty loss was computed as the excess of Ruckman, Inc.'s

adjusted basis as of the close of the year preceding the year of
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the accident ($42,576) over what respondent determined to be the

insurance proceeds ($37,000).

Petitioners contend that the disallowance of the

depreciation deductions was erroneous because there was no

"retirement" of the asset within the meaning of section 1.167(a)-

8, Income Tax Regs., which defines retirement as "the permanent

withdrawal of depreciable property from use in the trade or

business". Petitioners argue that because Ruckman, Inc.,

continued to hold title to the truck and Mr. Ruckman intended to

repair it, the truck was not permanently withdrawn from use. As

a result, petitioners contend that Ruckman, Inc., was entitled to

continue taking the same depreciation deductions in 1990 and 1991

as had been taken in previous years, without regard to the

truck's wrecked condition or, impliedly, the insurance proceeds

received.

We disagree. Ruckman, Inc.'s adjusted basis in the truck at

the close of the year preceding the accident was $42,576. As a

consequence of the damage to the truck, Ruckman, Inc., initially

received $37,000 in insurance proceeds in 1990, and later an

additional $11,000, bringing the total received to $48,000 in

that year. Given that Ruckman, Inc., received insurance proceeds

of $48,000 as compensation for damage to a truck with an adjusted

basis of $42,576, on which no repairs had been made or attempted

either in the remaining 7 months in 1990 or in 1991, we conclude

that petitioners were not entitled to the depreciation deductions
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they claimed for 1990 and 1991. Rather, receipt of the insurance

proceeds without repair to the truck required Ruckman, Inc., to

make a downward adjustment to its basis in the truck under

section 1016. Indeed, the insurance proceeds received by

Ruckman, Inc., exceeded its basis in the truck, which would

preclude any casualty loss as a result of the accident and would

instead ordinarily produce taxable gain. However, because

respondent has not sought to amend the pleadings to assert an

increased deficiency, we will sustain the determination that

petitioners sustained a casualty loss of $5,576 in 1990.

3. Negligence

Respondent determined that petitioners were liable for an

accuracy-related penalty pursuant to section 6662(b)(1) on the

basis of their failure to report $18,063 in dispatch income for

1991 that was received from Happy Trucking and reported on a Form

1099 issued to Ruckman, Inc. Respondent argues that petitioners

are liable for the accuracy-related penalty under section

6662(b)(1), which imposes the penalty on the portion of an

underpayment which is attributable to "Negligence or disregard of

rules or regulations." Petitioners argue that the penalty should

not apply because the omission from reported income, which they

concede occurred, resulted from Mrs. Ruckman's incapacitation due

to illness.

"Negligence" for these purposes includes "any failure to

make a reasonable attempt to comply with the provisions of [the
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Internal Revenue Code]". Sec. 6662(c). Under the regulations,

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. 

However, the accuracy-related penalty will not be imposed with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith. Sec. 6664(c)(1). The determination of whether there was

reasonable cause and good faith "is made on a case-by-case basis,

taking into account all pertinent facts and circumstances." Sec.

1.6664-4(b)(1), Income Tax Regs.

The taxpayer's mental and physical condition, as well as

sophistication with respect to the tax laws, at the time the

return was filed have been considered in determining whether the

negligence penalty should apply. Gray v. Commissioner, T.C.

Memo. 1982-392; see also Carnahan v. Commissioner, T.C. Memo.

1994-163 (mentally incapacitated and disabled taxpayer was not

liable for various additions to tax including negligence), affd.

without published opinion 70 F.3d 637 (D.C. Cir. 1995).

It was Mrs. Ruckman who maintained the books and financial

records for both Ruckman, Inc., and petitioners personally, and

who provided the information to and consulted with petitioners'

accountant for purposes of his preparation of the tax returns of

Ruckman, Inc., and petitioners. Mr. Ruckman testified credibly 

that he understood very little regarding petitioners' financial
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12The signature dates on Ruckman, Inc.'s 1991 tax return and

on petitioners' personal joint return for that year indicate that

both returns were signed in March 1992.

records or tax returns, that he relied on Mrs. Ruckman for these

matters, and that he has done so for some time. The testimony of

petitioners' accountant corroborates the foregoing.

In 1991, the only year in which an omission of income

occurred, Mrs. Ruckman was diagnosed with cancer, underwent

surgery twice, and commenced radiation and chemotherapy

treatments that extended through March 1992, when the 1991 tax

returns for Ruckman, Inc., and petitioners were completed.12

With respect to this period, and the failure to report the Happy

Trucking dispatch income, Mrs. Ruckman testified that "I didn't

know for a couple of years really how much had gotten away from

me, because I didn't know that I wasn't capable of what I was

trying to do." As to Mr. Ruckman, we assess his responsibilities

with respect to the omitted income in light of his established

practice of relying on his wife for record keeping and the

undoubted impact on him of having a spouse battling a lifethreatening illness during the period. In the circumstances of

this case, we conclude that petitioners acted in good faith and

had reasonable cause in failing to report the income at issue. 

Accordingly, we will not sustain respondent's determination of

the accuracy-related penalty under section 6662(b)(1).

Decision will be entered

under Rule 155. 
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