United States Tax Court

T.C. Summary Opinion 2023-17

CYNTHIA L. HAILSTONE AND JOHN LINFORD,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 8540-20S. Filed April 24, 2023.

—————

Cynthia L. Hailstone and John Linford, pro sese.

Michelle A. Monroy and Michael S. Hensley, for respondent.

SUMMARY OPINION

LEYDEN, Special Trial Judge: This case was submitted

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 other court, and this

Opinion shall not be treated as precedent for any other case.

In the notice of deficiency dated January 20, 2020, upon which 

this case is based, respondent determined a deficiency in petitioners’

federal income tax for 2017 of $21,910 and an accuracy-related penalty

under section 6662(a) of $4,382.

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Served 04/24/23
2

After concessions,2 the issues for decision are whether for 2017

(1) disability payments petitioner husband received are excludable from

petitioners’ income under section 105 and (2) petitioners are liable for

the accuracy-related penalty. The Court concludes that for 2017, after 

the application of section 6015(c) with respect to petitioner wife,

petitioner husband’s disability payments are not excludable from his 

gross income under section 105 and that petitioner husband is liable for

the accuracy-related penalty under section 6662(a).3

Background

Some of the facts have been stipulated and are so found. The

Stipulation of Facts and accompanying Exhibits are incorporated herein

by this reference. Petitioners resided in California when the Petition

was filed.

I. Petitioner Husband’s Disability Payments

On September 8, 2014, petitioner husband was hired to work for

an insurance agency and brokerage company. Petitioner husband sold

Medicare supplement plans and Medicare Advantage plans for the

company and did not sell disability insurance.

The company provided disability insurance for its employees, 

including petitioner husband. On June 1, 2011, the company purchased

a group disability policy from Principal Life Insurance Co. The policy

was amended effective December 1, 2013. Under that policy, as 

amended, the company’s employees were not required to contribute to

the policy premiums. Rather, the company was required to pay 100% of

2 Respondent concedes that petitioner wife qualifies for relief from joint and 

several liability under section 6015(c) because respondent did not meet his burden of 

proving that petitioner wife had actual knowledge of the unreported income. Petitioner 

husband did not challenge that respondent did not meet his burden of proof under 

section 6015(c). Respondent further concedes that petitioner husband did not receive 

unreported nonemployee income of $4,515 and that he is not liable for a 20% additional 

tax on a distribution of $2,891 from a health savings account.

3 Because the disability payments and accuracy-related penalty at issue in this 

case are attributable solely to petitioner husband and the parties conceded that 

petitioner wife is entitled to innocent spouse relief under section 6015(c), petitioner 

wife is not liable for either the deficiency due to the unreported disability payments or

the section 6662(a) accuracy-related penalty. See Treas. Reg. § 1.6015-3(d)(4)(i)(B)(1),

(iv)(B).
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the premiums. The policy allowed the company to have a covered 

employee pay 25% of the premiums if there were three or more insured

employees. However, the company did not choose this option.

Petitioner husband incurred an unidentified disability in

December 2014, and he filed a workers’ compensation claim on

December 11, 2014. Petitioner husband was terminated by the company

on November 17, 2015.

On May 30, 2017, Principal Life Insurance Co. approved

petitioner husband’s disability claim under the policy for the period of

December 18, 2014, through November 17, 2015. During 2017, and with

respect to his disability claim, petitioner husband received $105,000 of

disability payments from Principal Life Insurance Co. and a 2017 Form

W–2, Wage and Tax Statement, reporting those payments.

II. Petitioners’ 2017 Joint Federal Income Tax Return

Petitioners timely filed a joint federal income tax return for 2017.

They did not report the disability payments of $105,000 petitioner

husband received in 2017.

III. IRS Examination of Petitioners’ 2017 Tax Return

The Internal Revenue Service (IRS)4 examined petitioners’ 2017

tax return through its Automatic Underreporter (AUR) program. The

IRS issued a CP2000 Notice dated October 21, 2019, and proposed a

deficiency of $21,910 and an accuracy-related penalty of $4,382.

Petitioners did not respond to the CP2000 Notice.

Discussion

I. Burden of Proof

In general, determinations set forth in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that the 

4 The Court uses the term “IRS” to refer to administrative actions taken outside

of these proceedings. The Court uses the term “respondent” to refer to the

Commissioner of Internal Revenue, who is the head of the IRS and is respondent in

this case, and to refer to actions taken in connection with this case.
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determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).

Under section 7491(a), the burden of production may shift to the 

Commissioner if the taxpayer produces credible evidence with respect to 

any relevant factual issue and meet other requirements. Petitioners

have not argued that section 7491(a) applies, and therefore, the burden

of proof remains with them. See Higbee v. Commissioner, 116 T.C. 438,

442–43 (2001).

II. Disability Payments

The term “income” as used in the Internal Revenue Code means

income from any source, including any accretion to the taxpayer’s

wealth. See I.R.C. § 61(a); Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 429–30 (1955). The disability payments are includable in

income unless an exclusion applies.

Certain accretions to a taxpayer’s wealth are by statute

excludable from a taxpayer’s income, but those statutory exclusions are

narrowly construed. See, e.g., O’Gilvie v. United States, 519 U.S. 79

(1996); Commissioner v. Schleier, 515 U.S. 323, 328 (1995). Petitioner

husband asserts that the disability payments are excludable from gross

income under section 105 because although the company paid the

premiums for the disability insurance, the company could have allowed

him to do so.

Section 105 governs amounts received under accident and health

plans. See Dzioba v. Commissioner, T.C. Memo. 1989-203. While the

statutory framework is admittedly confusing, section 105 works as

follows. First, section 105(a) provides a more specific rule than the

general income inclusion rule under section 61 for when amounts

received by an employee through accident or health insurance for 

personal injuries or sickness are excludable from income.5 If a disability

payment under a disability insurance policy is not attributable to

contributions by an employer or paid by the employer and the payment

5 The Court assumes, without deciding, that the disability payments constitute 

an amount received by an employee through accident or health insurance for purposes 

of section 105(a).
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meets the requirement of section 105(c), then it is excludable from gross

income.

Specifically, section 105(a), “Amounts Attributable to Employer

Contributions,” provides as follows:

Except as otherwise provided in this section, amounts

received by an employee through accident or health

insurance for personal injuries or sickness shall be

included in gross income to the extent such amounts (1) are

attributable to contributions by the employer which were

not includible in the gross income of the employee, or

(2) are paid by the employer.

While petitioner argues that the policy allowed the company to

choose an option to permit an employee to pay part of the premiums, the

record is clear that the company did not choose that option and did not 

allow employees to pay any amount of the premiums. Rather, the record

shows that the policy premiums were paid by the company. Therefore,

under section 105(a) the amounts of the disability payments were paid

under a policy for which the contributions (premiums) were paid by the

company, and the exclusion under section 105(c) does not apply. Rather,

under section 61 the disability payments petitioner husband received in

2017 are includible in his gross income.

III. Accuracy-Related Penalty

Section 6662(a) and (b)(2) imposes an accuracy-related penalty

equal to 20% of the amount of any underpayment of tax required to be 

shown on a return that is attributable to any substantial

understatement of income tax. An understatement is “substantial” if it

exceeds the greater of $5,000 or 10% of the tax required to be shown on

the return. I.R.C. § 6662(d)(1)(A). Respondent has determined an

accuracy-related penalty on the basis of a substantial understatement

of income tax.

A. Burden of Production

The Commissioner bears the burden of production with respect to

an individual taxpayer’s liability for any penalty. I.R.C. § 7491(c);

Higbee, 116 T.C. at 446–47. Once the Commissioner meets his burden

of production, the taxpayer must come forward with persuasive evidence
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that the Commissioner’s determination is incorrect. See Rule 142(a);

Welch v. Helvering, 290 U.S. at 115.

The Court has held that substantial understatement penalties

determined by an IRS AUR computer program without human review

are “automatically calculated through electronic means” and thus are

exempt from the written supervisory approval requirement that

generally applies to such penalties. See Walquist v. Commissioner, 152

T.C. 61, 73 (2019). This exception includes returns processed through

the AUR program when the IRS issues a CP2000 notice to a taxpayer

and the taxpayer fails to respond to the notice. See Walton v.

Commissioner, T.C. Memo. 2021-40, at *9–10; Ball v. Commissioner,

T.C. Memo. 2020-152, at *12–13.

Respondent has asserted, and the record supports him, that the

accuracy-related penalty at issue was automatically calculated through

electronic means and, therefore, falls within the section 6751(b)(2)(B)

exception to the written supervisory approval requirement. Further, the

record shows an understatement of tax which meets the definition of a

substantial understatement of income tax. See I.R.C. § 6662(d). Thus,

respondent has met his burden of production with respect to the

accuracy-related penalty.

B. Reasonable Cause and Good Faith

A taxpayer may avoid a section 6662(a) penalty by showing that

there was reasonable cause for the underpayment and that the taxpayer

acted in good faith. I.R.C. § 6664(c)(1). This determination is made on

a case-by-case basis, taking into account all pertinent facts and

circumstances. Treas. Reg. § 1.6664-4(b)(1). In making that

determination, “the most important factor” is usually “the extent of the

taxpayer’s effort to assess the taxpayer’s proper tax liability.” Id.

Petitioner husband asserts that he should not be liable for the

penalty because he “did not feel that taxes were due on that disability

amount.” However, petitioner husband does not dispute that he

received the disability payments nor that he received the Form W–2 that

reported them. Petitioner husband did not rely upon a tax adviser or

accountant to prepare petitioners’ tax return. Rather, he used a

commercial tax return preparation software program. He testified that

he did not see a prompt for reporting the disability payments, and thus,

he did not report them.
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Based on the record the Court concludes that petitioner husband

did not have reasonable cause and did not act in good faith in not

reporting the disability payments. Accordingly, the Court finds that if 

the computations under Rule 155 establish that there is a substantial 

understatement of income tax for 2017 as a result of the Court’s holdings 

and respondent’s concessions, then petitioner husband has substantially 

understated the income tax and the imposition of the accuracy-related

penalty with respect to petitioner husband is sustained.

To reflect the foregoing,

Decision will be entered under Rule 155.