T.C. Sum m ary Opi ni on 20 16 -3 2

UNITED STAT ES TAX COURT

JOHN J . SW EENEY AND DONNA L. SW EENEY, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 75 10 -1 5S . Fi le d J ul y 5, 2 01 6.

Jo hn J. Swee ne y

an d Do nn a L. Sween ey , pro ses e. Patric k F . Gall ag he r, fo r res po nd en t.

SUMM ARY OPINION LAUBER, Ju dg e: Thi s ca se was h eardpu rs ua ntto th e p ro vi si on s o f se ct io n 74 63 of t he Int ern al Rev enue Co de ineffec t wh enth e p et it io n was fil ed . Pur su 1

All st atut ory

refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) ineffe ct 1 fo r th e ta x year atis su e. W e ro un d a ll do ll ar am ou nt s t o t he ne ares t d ol lar.- 2 -

an t t o s ect io n 7 46 3( b) , th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. The Int ern al Rev enue Serv ic e (IR S o r res po nd en t) s en t p et it io ne rs a no ti ce of de fic ie nc y

for 20 12 de te rm in in g atax de fic ie nc y of $ 10 ,55 5 anda pe na lty of $2 ,11 1 u nd er s ect io n 6 66 2( a) an d (b )(2 ). The p art ie s s ub m it te d b efo re tria l a st ip ul at io n o f fac ts inwhi chpe ti ti on ers co nc ed edth atth ey ha d re cei ve d $ 31 ,49 6 of un rep orte d i nc om e dur in g 2 01 2 a ndinwhi chres po nd en t co nc ed edth atpe ti ti on ers were en ti tl edto cert ai n a dd it io na l d educ ti on s. Th es e co nc es si on s g en erate d arev is edtax de fic ie nc y of $ 7,2 83 , whi chth e p art ie s h av e st ip ul at edto be co rrect . After the se co nc es si on s, the on ly iss ue rem ai ni ng forde ci si on is whet he r pe ti ti on ers are l iabl e fo r anaccu racy-rela te d p en al ty in the rev is edam ountof $ 1,4 56 . W e co nc lu de th atth ey

are. Bac kg ro un d W e in co rp or at e th e st ip ul at io n o f fac ts an d t he rel at edex hi bi ts by thi s re feren ce. Pet it io ne rs res id edinMas sa ch us et ts when th ey fil edth ei r ti m el y

pe ti ti on with t hi s C ou rt. Jo hn J. Swee ne y

(pe ti ti on er) fi ni sh edhi gh sch oo l an d h ada ta le ntfor sal es . Abo ut25 y ears ag o h e b eg anto sp eci al iz e in th e sa le of l on g- te rm care in su ran ce, worki ng pri nc ip al ly from hi s h om e. Thi s ty

pe of i ns ur an ce i s o ffer edby num ero us- 3 -

un de rwri te rs , andpe ti ti on er wo rk edwith h is cli en ts to de ci de whi chpro du ctwas be stforth em . If a cl ie ntpu rch as eda lo ng -te rm -car e in su ran ce p ro du ct , th e und erwri te r wou ldpa y

co m m is si on s t o p et it io ne r fo r as lo ng as t he po li cy rem ai ne d i n fo rce. The un de rwri te rs typic al ly repo rte d t he se co m m is si on pa ym en ts to pe ti ti on er an d th e IRS on Fo rm s 1 09 9- MIS C, Mi sc el lane ou s In co m e. Pet it io ne r al so rece iv ed wag e in co m e fro m

on e o r m or e und erwri te rs . The und erwri te rs rep orte d t hi s wag e in co m e to pe ti ti on er an d t he IRS o n F orm s W-2, Wage an d Tax Sta te m en t. Dur in g g oo d years p et it io ne r earn edsubs tant ia l co m m is si onin co m e an d of te n re cei ve d F orm s 1 09 9- MIS C fro m as m an y as 1 2 d iff

eren t u nd erwri te rs . His bu si ne ss de cl in edsi gn ifi can tl y du rin g t he 20 08 -2 01 0 re ces si on as f in an ci al ly st rap pe d c on su m ers cu t b ackonin es se nt ia l p ur ch as es . This fal lo ff caus edpe ti ti on ers to en du re fi na nc ia l s tre ss . They lo stth ei r ho m e in 20 11 an d m ov edth ree ti m es du rin g t he en su in g year. They file d fo r ba nkrupt cy in20 12 an d re cei ve d a di sc ha rg e in 20 13 . Fo r 20 12 pe ti ti on er re cei ve d aFo rm W -2 fro m

Genwo rthNort h Am eri ca rep orti ng wage s o f $8 5,3 42 . Peti ti on er wi fe, a nur se , recei ve d aFo rm W -2 fro m Jo rd anHos pi ta l re po rti ng wage s o f $6 9,2 51 . Peti ti on ers ti m el y fil edFo rm

10 40 ,- 4 -

U.S. Ind iv idua l In co m e Tax Return, fo r 20 12 , correct ly repo rti ng on li ne 7 co m bi ne d wag es of $ 15 4,5 93 . Pet it io ne rs in cl ud edinth ei r return aSch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , rep orti ng in co m e an d e xp en se s o f pe ti ti on er’s i ns ur an ce s al es bu si ne ss . Peti ti on er the re re po rte d g ro ss rece ip ts of $ 4,2 07 fro m in su ran ce s al es an d t ot al ex pe ns es of $ 11 ,62 6. Th is pro du ceda rep orte d l os s o f $7 ,41 9. The IRS re cei ve d F orm s 1 09 9- MIS C fro m fou r pa y or s re po rti ng th atth ey ha d p ai d p et it io ne r du rin g 2 01 2 c omm is si on s o r ot he r in co m e in th e fo ll owi ng am ount s: Payor Am ou nt

Gen worth Life I ns . Co. $3 ,26 6 Jo hn Hanc oc k Li fe In s. Co . 3,8 52 Med Am eri ca In s. Co . 3,5 74 Sp eci al ty Plan ne rs , Inc . 25 ,01 1 Tot al 35 ,70 3 Bec au se of t he m is m at chbe twee n t he se am ou nt s an d p et it io ne r’s rep orte d Sch edul e C g ro ss rece ip ts , th e IRS sel ect edpe ti ti on ers ’ 20 12 return fo r ex am ina ti on . In a t im el y

no ti ce o f de fic ie nc y

th e IRS de te rm in edth atpe ti ti on ers ha d om itte d S ch edul e C g ro ss rece ip ts of $ 31 ,49 6 (i .e., $3 5,7 03

! $4 ,20 7) . Peti ti on ers- 5 -

co nc ed e th atth is ad

jus tm en t i s co rrec t an d t ha t p et it io ne r rec ei ve d u nr ep orte d in co m e o f $3 1,4 96 fro m

th e fo urpa y or s l is te d abo ve . At tria l p et it io ne rs ackno wled ge d t ha t the y ha d re cei ve d b y

m ai l the two Fo rm s W-2 re po rti ng th ei r wag e in co m e fo r 20 12 . Butth ey tes ti fie d t ha t, b ecau se of th ei r freque ntm ov es du rin g 2 01 2, the y ha d n otrece iv edall of t he Fo rm s 1 09 9- MIS C rep orti ng pe ti ti on er’s co m m is si on in co m e. Pet it io ne r te st ifi edth athe ke pt reco rd s fo r hi s i ns ur an ce-s al es bu si ne ss bu t s ai d t ha t the se reco rd s co ns is te d m ai nly of ex pe ns es . He tes ti fie d t ha t k eep in g t rackof h is co m m is si on in co m e “ was im po ss ib le ” b ecau se th e ch eck s arriv edinsm al l an d v ari ab le am ou nt s. Pet it io ne rs ha d t he ir 2 01 2 re tu rnpre pa redby a pro fes si on al return p rep arer with wh om

th ey ha d alen gt hy relat io ns hi p. Th ey m etwith h im

to rev ie w th e retu rnbe fo re i t was fil ed . Peti ti on ers ackno wled ge d a t tria l tha t the y di d n otcare fu ll y ex am in e th e am ou nt s o f in co m e an d l os s s ho wn o n t hi s re tu rn . Peti ti on er adm it te d t ha t h e th ou gh t h e h adm ad e a p ro fitfro m hi s i ns ur an ce-s al es bu si ne ss du rin g 2 01 2, b uthe di d n otqu es ti on th e p rep arerab ou t the lo ss of $ 7,4 19 sh own on li ne 12 of t he Fo rm

10 40 . Neithe r pe ti ti on er co ul d e xp la in ho w th e $ 4,2 07 of gr os s re cei pt s re po rte d o n t he Sch edul e C was de riv ed . Thatam ou ntbe ars no rel ati on sh ip to any

nu m be r onan y

of t he Fo rm s 1 09 9- MIS C, an d p et it io ne r- 6 -

ackno wled ge d t ha t the rep orte d g ro ss rece ip ts of $ 4,2 07 “ co ul dn ’t po ss ib ly be rig ht .” Dis cu ss io n The Co de im

po se s a 2 0% p en al ty upo n t he po rti on of a ny un de rp aym en t o f ta x t ha t i s at tri bu tabl e (am on g o th er thi ng s) to “ [a]ny subs tant ia l u nd ers ta te m en t o f in co m e ta x.” Sec. 6 66 2( a), (b )(2 ). An u nd ers ta te m en t o f in co m e ta x i s “ subs tanti al ” if itex ceed s the gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh own on th e return. Se c. 66 62 (d )(1 )(A). Und er s ect io n 7 49 1( c) the Co m m is si on er b ears th e b ur de n o f pr oduc ti on with re sp ectto th e li ab il ity of a n i nd iv idua l fo r an y

pe na lty . See Hig be e v . Com m is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). The u nd ers ta te m en t o f in co m e ta x i n t hi s cas e equa ls th e st ip ul at edde fic ie nc y of $ 7,2 83 ; tha t am ou ntex ceed s $ 5,0 00 , whi chis gre at er tha n 1 0% o f $2 4,4 93 , th e ta x re qu ire d t o b e sh own on pe ti ti on ers ’ 20 12 return. Re sp on de ntha s thu s ca rri edhi s b ur de n o f pr oduc ti on by dem on st rati ng a “ subs tant ia l u nd ers ta te m en t o f in co m e ta x.” See s ec. 7 49 1( c). The sec ti on66 62 pe na lty do es no t ap pl y

to an y po rti on of a n u nd erp aym en t

“ if i t i s s ho wn tha t the re was a reas on ab le cau se forsu chpo rti on an d tha t the tax pa y er ac te d i n g oo d fa ith” with re sp ectto it . Sec. 6 66 4( c)(1 ). The t ax pa y er b ears th e b ur de n o f pr ov in g re as on ab le cau se an d g oo d fa ith. Hi gb ee, 1 16 T.C. at 4 46 -- 7 -

44 7. Th e d eci si on whet he r th e ta xp ay er ac te d wi threas on ab le cau se an d i n g oo d fai th is m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d ci rcu m st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Gen eral ly, th e m os t i m

po rta ntfact orinde te rm in in g t he ex is te nc e o f “reaso nabl e cau se ” is th e ta xp ay er’s eff ort t o a sc ert ai n h is or h er t ax li ab il ity co rrec tl y . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Re as on ab le cau se canbe sh own by goo dfai th rel ianc e o n t he advi ce o f a qua li fie d t ax pro fes si on al . Id. p aras . (b) (1 ), (c). To jus ti fy su chrel ianc e, “ [t]he advi ce m us t b e b as edup on all pe rti ne ntfact s an d ci rcu m st an ces .” Id . par a. (c)( 1) (i) . Oth er co nd it io ns th atm ay si gn al reas on ab le cau se an d g oo d fa ith “ in cl ud e anho ne stm is un de rs tand in g o f fac t o r la w th atis reas on ab le inli gh t o f al l the fact s an d c irc um st an ces , in cl ud in g t he ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er.” Id . par a. (b )(1 ). W e fi ndth atpe ti ti on ers di d n otm ak e a g oo d- fai th effo rt t o a sc ert ai n t he ir 20 12 tax li ab il ity

co rrec tl y . Peti ti on er h adop erat edhi s i ns ur an ce-s al es bu si ne ss fo r 25 y ears , andhe rece iv edco m m is si onin co m e an nu al ly. He rece iv ed$3 5,7 03 of co m m is si on in co m e dur in g 2 01 2, yet he in ex pl ic ab ly repo rte d o nl y 12 % of t hi s su m . His a ll eg edno nr ecei ptof the Fo rm s 1 09 9- MIS C is no t a d efen se ; m an y tax pa y ers rece iv e ta xabl e in co m e fo r whi chFo rm s W-2 an d F orm s 1 09 9- MIS C are no t p ro vi de d, b utth ey

are n ev erthe le ss ob li ga te d t o re po rt s uc h i nc om e. See, e.g .,- 8 -

Ash m or e v . Comm is si on er, T.C. Mem o. 2 01 6- 36 , at * 15 (Fo rm W -2 ); De nn is v. Co m m is si on er, T.C. Mem o. 1 99 7- 27 5, 7 3 T.C.M . (CCH) 3 06 1, 3 06 3- 30 64 (Fo rm 10 99 -MI SC); Du Po ux v. Co m m is si on er, T.C. Mem o. 1 99 4- 44 8, 6 8 T.C.M . (CCH) 66 7 (F orm s W-2 an d 1 09 9- MIS C). Hadpe ti ti on er k ep t ac cu rat e rec or ds of hi s b us in es s i nc om e an d e xp en se s, wh ic h s ect io n 6 00 1 re qu ire d h im to do , no nrece ip t o f th e Fo rm s 1 09 9- MIS C wou ldno t h av e m at te red . Pet it io ne rs co nt en d t ha t the y ha d re as on ab le cau se forfai li ng to rep ort $3 1,4 96 of c ommis si on in co m e b ecau se th ey rel ie d o n t he ir r eturn p rep are t o p repa re the ir t ax return a ccu rat el y . This arg um en t i s u np ers ua si ve fortwo reas on s. Fi rs t, p et it io ne rs di d n otest ab li sh th atth ey supp li edth ei r pr ep arerwith a ll th e in fo rm at io n- -s pe ci fic al ly, accu rat e rec or ds of p et it io ne r’s in su ran ce-s al es bu si ne ss --n eed edto pre pa re a co rrec t re tu rn . See s ec. 1 .66 64 -4 (c)( 1) (i) , Inc om e Tax Reg s. Seco nd , eve n i f pe ti ti on ers ha d p ro vi de d t he ir p rep arerwith a ll ne ces sa ry in fo rm at io n, the y

di d n otactreas on ab ly becau se th ey fai le d t o re vi ew th e co m pl et edreturn b efo re i t was fil ed . Had p et it io ne rs m ad e ev ena cu rs ory rev ie w of th atreturn, the y

wou ldha ve see n alo ss of $ 7,4 19 on li ne 12 , wher eas pe ti ti on er be li ev edth athi s i ns ur an ce-s al es bu si ne ss ha d b eenpro fit ab le . Andth ey wou ld ha ve see n g ro ss rece ip ts of o nl y $4 ,20 7 o n S ch edul e C, whi chpe ti ti on er ad m it te d- 9 -

“ co ul dn ’t po ss ib ly be ri gh t.” Hav in g d ecl in edto rev ie w th ei r own return, p et iti on ers m ay

no t s hi ft r es po ns ib il ity

forit s ac cu racy to the ir a cco un tant . See St ou ghv. Co m

m is si on er, 1 44 T.C. 30 6, 3 22 -3 23 ( 20 15 ); Woo ds um v. Co m m is si on er, 1 36 T.C. 58 5, 5 95 -5 96 (20 11 ); M etra Ch em Co rp . v. Co m

m is si on er, 8 8 T.C. 65 4, 6 62 (19 87 ) (fi nd in g n o re as on ab le cau se wher e rev ie w of re tu rnwou ld ha ve rev eal edom is si on of d iv id en d i nc om e); Mag il l v . Comm is si on er, 7 0 T.C. 46 5, 4 79 -4 80 (19 78 ) (“ Eve n i f al l d at a is furni sh edto th e p rep arer , th e ta xp ay er st il l h as a du ty to re adth e return a ndm ak e su re al l i nc om e it em s ar e in cl ud ed .”), aff’d, 6 51 F.2d12 33 (6t h C ir. 1 98 1) . To re fle ctth e fo reg oi ng , An ap pr op ria te de ci si on wil l b e en te red .