1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

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

(continued...)

T.C. Memo. 1996-272

UNITED STATES TAX COURT

TOMMY L. AND PATRICIA A. HOBSON, Petitioners v. COMMISSIONER OF

INTERNAL REVENUE, Respondent

Docket No. 3640-94 Filed June 12, 1996.

Tommy L. and Patricia A. Hobson, pro se.

George W. Bezold, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, Judge: Respondent determined a deficiency in

petitioners’ Federal income tax for taxable year 1990 in the

amount of $10,229, an addition to tax under section 6651(a) in

the amount of $2,087, and an accuracy-related penalty under

section 6662(a) in the amount of $2,045.03.1
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1(...continued)

Procedure.

After concessions by the parties, the issues for our

decision for the taxable year 1990 are:

(1) Whether petitioners received a taxable distribution

from Mrs. Hobson’s retirement plan, and if so, whether

petitioners are liable for the additional tax under section 72(t)

for an early distribution from such plan. We hold that the 1990

distribution was taxable, and petitioners are subject to the

additional tax under section 72(t). 

(2) Whether petitioners are liable for an addition to tax

under section 6651(a) for failure to timely file their 1990

income tax return. We hold that they are not.

(3) Whether petitioners are liable for an accuracy-related

penalty under section 6662(a) due to a substantial understatement

of income tax. We hold that they are. 

FINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly. The stipulation of facts and attached exhibits are

incorporated herein. Petitioners resided in Milwaukee,

Wisconsin, at the time the petition was filed. Petitioners filed

a joint Federal income tax return for taxable year 1990 on

October 28, 1991. All references to petitioner in the singular

refer to Patricia A. Hobson. 
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Petitioner was employed by the Oster Division of Sunbeam

Corporation (Oster) until it went out of business in 1990. It is

unclear from the record the exact dates of petitioner’s

employment. At some time during 1990, petitioner received a

lump-sum distribution in the amount of $26,513 from the Oster

Division Sunbeam Employees Profit Sharing Plan (Plan). In 1990,

the Plan was “qualified” within the meaning of section 401(a). 

Petitioner had not attained the age of 55 in 1990. The

distribution was not rolled over into an individual retirement

account or other qualified retirement plan and was not reported

on petitioners' income tax return for the taxable year 1990. 

Petitioners have four children; one child has multiple

sclerosis and is confined to a wheelchair. Petitioners care for

Mrs. Hobson's father who suffered a stroke and has had both legs

amputated. Petitioner's father lives with petitioners. Mr.

Hobson is employed in a minimum security prison for women. Due

to the location of Mr. Hobson's job, petitioners lived separately

for sometime during 1990.

OPINION

Issue 1. Plan Distribution

The first issue for our decision is whether a distribution

from petitioner's profit sharing plan in 1990 is includable in

income, and, if so, whether petitioners are liable for the 10-

percent tax on an early distribution from petitioner's plan under

section 72(t). Section 402(a)(1) provides the general rule that
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unless otherwise provided, any amount paid or distributed from an

employee's trust described in section 401(a) is includable in the

recipient's gross income for the year of receipt in the manner

provided under section 72. These statutes apply to petitioner's

distribution.

Section 72(t) provides:

(1) Imposition of additional tax.--If any taxpayer

receives any amount from a qualified retirement plan 

* * *, the taxpayer's tax * * * for the taxable year in

which such amount is received shall be increased by an

amount equal to 10 percent of the portion of such

amount which is includible in gross income.

Section 72(t)(2) provides for certain exceptions to the

general rule contained in paragraph (1). Petitioner, however,

provided no evidence to suggest that she fit within any of these

enumerated exceptions. The legislative history suggests that one

of the reasons for enacting section 72(t) was to deter the use of

retirement savings for nonretirement use. H. Rept. 99-426

(1985), 1986-3 C.B. (Vol. 2) 1, 728-729; S. Rept. 99-313 (1986),

1986-3 C.B. (Vol. 3) 1, 612-613. Petitioner received an early

distribution from her profit sharing plan in taxable year 1990,

and petitioners' having failed to show that any of the exceptions

found in section 72(t)(2) apply, we find that petitioners are

liable for the 10-percent additional tax pursuant to section

72(t) as determined by respondent. See Aronson v. Commissioner,

98 T.C. 283 (1992).
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Issue 2. Section 6651(a) Addition to Tax for Delinquency

The next issue for our decision is whether petitioners are

liable for the addition to tax under section 6651 for failure to

timely file their 1990 joint Federal income tax return. Section

6651(a)(1) imposes an addition to tax in an amount equal to 5

percent of the amount required to be shown as tax on a return for

each month or fraction thereof for which a return is delinquent,

not to exceed 25 percent in the aggregate. The addition to tax

under this section does not apply if the taxpayer establishes

that the failure to timely file was due to reasonable cause and

not due to willful neglect. The burden of proof is on

petitioners to show the failure is due to reasonable cause and

not willful neglect. Rule 142(a).

Based upon review of the record in the instant case, we find

that petitioners have met their burden of showing that their

failure to timely file their return for 1990 was due to

reasonable cause and not due to willful neglect. Petitioners

testified that, in addition to caring for a sick child and

invalid parent, they lived apart during 1990 due to Mr. Hobson's

job, which separation caused a great deal of marital problems. 

Petitioners argue that, as a result of their difficulties during

the taxable year at issue, their failure to timely file their

return was due to reasonable cause. We agree. Accordingly,
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petitioners are not liable for the addition to tax under section

6651 for taxable year 1990 as determined by respondent. 

Issue 3. Section 6662 Substantial Understatement

Respondent determined that petitioners are liable for the

section 6662(a) penalty for 1990. Section 6662(a) imposes an

accuracy-related penalty in an amount equal to 20 percent of the

underpayment of tax attributable to one or more of the items set 

forth in section 6662(b). In the notice of deficiency,

respondent based the determination of the section 6662(a) penalty

on petitioners' underpayment being due to a substantial

understatement. See sec. 6662(b)(2). A "substantial

understatement" occurs when an understatement exceeds the greater

of $5,000 or 10 percent of the amount of tax required to be shown

on a return. Sec. 6662(d)(1)(A). An "understatement" means the

excess of the amount of the tax required to be shown on a return

over the amount of tax imposed which is shown on the return,

reduced by any rebate (within the meaning of section 6211(b)(2)). 

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

The accuracy-related penalty under section 6662(b)(2) does

not apply with respect to any portion of an underpayment if it is

shown that there was reasonable cause for such portion and that

petitioners acted in good faith with respect to such portion. 

Sec. 6664(c)(1). The determination of whether petitioners acted
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with reasonable cause and in good faith depends upon the

pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income

Tax Regs. The most important factor is the extent of the

taxpayers' effort to assess their proper tax liability for the

taxable year. Id. Although we found that petitioners' failure

to timely file their 1990 return was due to reasonable cause, we

find that the record fails to establish that petitioners acted

with reasonable cause and in good faith in assessing whether

petitioner's distribution from her profit sharing plan was

taxable. Petitioners offered no evidence that they made a good

faith effort to assess their proper tax liability. Based on this

record, we conclude that petitioners are liable for the section

6662 accuracy-related penalty as determined by respondent.

To reflect the foregoing,

Decision will be entered

under Rule 155.