T.C. Mem o. 2 01 5- 23 0

UNITED STAT ES TAX COURT CARLOS V. YGUICO AND JENNIFER C. YGUICO, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 97 80 -1 4. Fi le d No ve m be r 30 , 20 15 . Carl os V. Ygu ic o andJen ni fer C . Ygu ic o, p ro ses e. Ray M. Cam

p, J r., forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION LAUBER, Ju dg e: The In te rn al Rev enue Serv ic e (IR S o r res po nd en t) d et erm in eda de fic ie nc y

in pe ti ti on ers ’ 20 11 Fed eral in co m e ta x o f $2 9,4 16 an d a n accu racy-rela te d p en al ty of $5 ,88 3 p ur su an t t o s ect io n 6 66 2( a). The d efi ci en cy 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 (co nt in ue d...)-2 -

[* 2] res ul te d fr om

pe ti ti on ers ’ fai lu re t o re po rt d is tri bu ti on s o f $8 0,6 85 fro m qu al ifi edret ire m en t ac co un ts an d a n a dd it io na l t ax of $ 8,0 69 un de r se ct io n 7 2( t) fo r ear ly w it hdrawal . Befo re tria l the parti es subm it te d ast ip ul at io n o f se tt le d is su es in whi chpe ti ti on ers co nc ed edth e en ti re d efi ci en cy as d et erm in edby res po nd en t. The on ly rem ai ni ng is su e is whet he r pe ti ti on ers are l iabl e fo r th e accu racy-rela te d p en al ty. W e h ol d t ha t the y are. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s an d t he att ach edex hi bi ts are i nc or po rat edby thi s re fere nc e. Pet it io ne rs res id edin Cal ifo rn iawhen th ey fil edth ei r pe ti ti on . Pet it io ne r hu sb an d i s an att orne y with apra ct ic e fo cu se d o n re al est at e. Dur in g 2 00 9 h e b ecame an equi ty partne r in a law firm . Peti ti on ers th erea fte r be ga n t o s ee l arg e in crea se s i n t he ir t ax li ab il it ie s, wh ic h t he y were n otalwa y s ab le to pa y

ti m el y . By

20 11 th ey

oweda si gn ifi can t am ou ntof t ax -rel at edde bt . To h el p d is ch arg e th is de bt , pet it io ne rs durin g 2 01 1 wi th dr ew $8 0,6 85 fro m qu al ifi edret ire m en t ac co un ts th ey he ldat M erri ll Ly

nc h. Th ey

rece iv edFo rm s 10 99 -R, Dis tri bu ti on s Fr om Pen si on s, An nu it ie s, Re ti rem en t o r Pro fit -Sh ari ng (...co nt inue d) 1 fo r th e y ear i n i ss ue , andall Ru le refe ren ces are t o t he Tax C ou rt R ul es of P ract ic e an d P ro cedur e. W e ro un d a ll m on et ary am ou nt s t o the ne ares t d ol lar.-3 -

[* 3] Pl an s, IRAs, In su ran ce Co nt ract s, et c., refl ect in g t he am ou nt s wi th dr awn . The Fo rm s 1 09 9- R in di cat edth atth es e d is tri bu ti on s wer e ear ly w ithd rawal s. Jo sé C. Gui co pre pa redpe ti ti on ers ’ 20 11 tax return. Mr . Gui co ha d pr ep aredpe ti ti on ers ’ ta x re turn s fo r m an y y ears an d i s a c lo se fri en d o f pe ti ti on ers . Mr. Gu ic o was fam il ia r wit h t he ir f in an ci al si tu at io n a ndwas a ware t ha t the y were us in g fu nd s fr om

th ei r ret ire m en t ac co un ts to pa y th ei r ta x l iabi li ti es . Pet it io ne r wife ha nd le d t he fam il y ’s fin an ci al affa irs . Her us ua l p ract ic e was to co ll ectall do cum en ts rel ev an t t o p rep arat io n o f th ei r ta x re tu rn , su chas Fo rm s W-2, Wage an d Tax Sta te m en t, an d p la ce the m ina zi pl oc k b ag as s he rece iv edth em . Whe n Ap ril 15 ap pr oa ch ed , sh e wou ldtak e th e zi pl oc k b ag to Mr. Gui co , who wou ldus e th e en cl os eddo cu m en ts to pre pa re the return. Aft er pr ep ari ng th e return, M r. Gui co wou ldge ne ral ly dis cu ss with p et it io ne rs th e to ta l am ou ntof t ax du e an d the n fi le th ei r return e le ctro ni cal ly. Pet it io ne rs were awar e th atth e 2 01 1 wi th dr awal s fr om th ei r ret ire m en t ac co un ts rep res en te d t ax ab le in co m e. They als o u nd ers to odth atan y Fo rm s 1 09 9- R th ey rece iv edwere re le va ntto pre parat io n o f th ei r 20 11 return andsh ou ldha ve be enpro vi de d t o M r. Gui co . Alth ou gh pe ti ti on ers cred ib ly test ifi edth atth e Fo rm s 10 99 -R were th e type o f do cu m en ts th atpe ti ti on er wi fe wo ul d n orm al ly hav e p ut in th e zi pl oc k b ag , pet it io ne rs di d n otclo se ly revi ew th es e d oc um en ts an d c ou ld-4 -

[* 4] no t t es ti fy

cat eg or ic al ly tha t the y

actua ll y supp li edth e Fo rm s 1 09 9- R to Mr. Gui co . Mr. Gu ic o d idno t t es ti fy at t ria l. The Co urt re cei ve d i nt o e vi de nc e fo r im pe ach m en t p ur

po se s a s worn s ta te m en t b y Mr. Gu ic o, wh ic h p et it io ne rs ha d s up pl ie d t o the IRS b efo re tria l. Inth atst at em en t M r. Gui co av ers th athe di d n otrecal l s eei ng th e Fo rm s 1 09 9- R am on g t he do cu m en ts furni sh edby pet it io ne r wife . On t he ir t im el y

fil ed20 11 tax return, p et it io ne rs di d n otrep ort the $8 0,6 85 of di st rib ut io ns fro m

th ei r qu al ifi edret ire m en t ac co un ts or the $8 ,06 9 a dd it io na l ta x i m po se d b y sec ti on 72 (t) . Mr. Gui co pre pa redth is return v ery cl os e to th e fil in g d ead li ne an d fi le d i t el ect ro ni cal ly. Pet it io ne rs di d n otrev ie w th e co m pl et ed 20 11 return b efo re i t was fil edor a t an y ti m e aft erwar ds . On Fe brua ry

3, 2 01 4, re sp on de ntm ai le d p et it io ne rs a no ti ce o f de fic ie nc y refl ect in g a n i nc reas e in tax ab le in co m e attri bu tabl e to th e ret ire m en t p la n d is tri bu ti on s, a 1 0% a dd it io na l t ax , andanaccu racy-rela te d p en al ty und er s ect io n 6 66 2( a). Pet it io ne rs ti m el y

pe ti ti on edth is Co urt.

OPINION 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 ta nt 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 ta n--5 -

[* 5] ti al ” if

itex ceed s t he 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 it y of a n i nd iv idua l fo r an y

pe na lt y . See Hig be e v . Com m is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). The n ot ic e o f de fic ie nc y de te rm in ed , and pe ti ti on ers ha ve co nc ed ed , an u nd ers ta te m en t o f in co m e ta x o f $2 9,4 16 . This am ou ntco m fo rtabl y

ex ceed s b oth $ 5,0 00 an d 1 0% o f th e to ta l t ax requi redto be sh own on pe ti ti on ers ’ 20 11 return. Re sp on de ntha s t hu s carri edhi s b ur de n o f pr oduc ti on by dem on st rat in g a“ subs ta nt ia l und ers ta te m en t o f in co m e ta x.” See se c. 74 91 (c). Sect io n 6 66 4( c)(1 ) pr ov id es th atth e acc ur acy-rela te d p en al ty sha ll no t b e im po se d wi th res pe ctto an y po rti on of a n u nd erp aym en t “ if i t i s s ho wn t ha t the re was a reas on ab le cau se forsu ch po rti on an d t ha t the tax pay er ac te d i n g oo d fa it h” with re sp ectto it . Once t he Co m m is si on er h as carr ie d h is bu rd enof p ro du ct io n, th e ta xp ay 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 it h. Hi gb ee, 11 6 T.C. at44 6- 44 7. The de ci si on as t o wh ethe r th e ta xp ay er ac te d wi th reas on ab le cau se an d i n go odfai 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 c irc um st an ces . See s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Ci rcu m st an ces-6 -

[* 6] th atm ay

si gn al reas on ab le cau se an d g oo d fa it h “ in cl ud e anho ne stm is un de rst an di ng of f

actor l aw th atis reas on ab le in li 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.” Ib id .

“ Rea so nabl e cau se ” m ay

be sh own by dem on strat in g re li an ce o n t he advi ce of a co m pe te nttax pro fes si on al . Sec. 1 .66 64 -4 (b )(1 ), (c), In co m e Tax Reg s. To jus ti fy su ch rel ia nc 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) . The rel ia nc e d efen se is no t av ai labl e “ if t he ta xp ay er fa il s t o d is cl os e a fac t tha t * * * [he ] kn ows , or re as on ab ly sho ul d kno w, to be rel ev an t t o t he pro pe r ta x t reat m en t o f anit em .” Ib id . The t axpa y er m us t th eref or e es tabl is h tha t h e supp li edth e return p rep arer“ with a ll ne ces sa ry in fo rm at io n a nd[th at ] th e in co rrec t re tu rnwas ares ul t o f th e p rep arer ’s m is ta ke s.” W ei s v . Comm is si on er, 9 4 T.C. 4 73 , 48 7 (1 99 0) (ci ti ng Pes si n v . Comm is si on er, 59 T.C. 47 3, 4 89 (19 72 )). 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 the ret ire m en t p la n wi th dr awal s b ecau se th ey rel ie d o n M r. Gui co to pre pa re the ir t ax return a ccu rat el y . W e fi ndth is arg um en t u np ers ua si ve fortwo reas on s. Fi rs t, pe ti ti on ers di d n otest ab li sh th atth ey supp li edMr. Gu ic o wi thall th e in fo rm at io n ne ed edto pre pa re anaccu rat e return. Al th ou gh th ey tes ti fie d t ha t the y

saw t he Fo rm s 1 09 9- R, th ei r te st im on y reg ard in g t he de li ve ry

of t ho se Fo rm s t o M r. Gui co-7 -

[* 7] was li m it edto th ei r ge ne ral pra ct ic es whenga th eri ng tax do cu m en ts . They di d n otcat eg or ic al ly test ify tha t the y supp li edhi m

with the se Fo rm s. Mr . Gui co di d n ottes ti fy

at t ria l, an d t he Co urt re cei ve d i nt o e vi de nc e a s worn s ta te m en t b y hi m st at in g t ha t h e d idno t re cal l s eei ng th e Fo rm s 1 09 9- R am on g t he do cu m en ts pr ov id edby pet it io ne r wife . Und er the se cir cu m st an ces , pet it io ne rs ha ve no t ca rrie d t he ir b ur de n o f pr ov in g t ha t M r. Gui co was s up pl ie d wi th all th e p ert in en t fact s wh enhe pre pa redth ei r 20 11 return. Seco nd , eve n i f pe ti ti on ers pro vi de d M r. Gui co with a ll th e n eces sary 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 Mr . Gui co fil editele ctro ni cal ly. Pet it io ne rs rece iv edret ire m en t d is tri bu ti on s i n e xc es s o f $8 0,0 00 an d und ers to odth atth es e d is tri bu ti on s were t ax ab le . Suc h d is tri bu ti on s ar e rep orte d o n l in es 15 an d 1 6 o f Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return. Hadpe ti ti on ers m ad e ev ena cu rs ory rev ie w of th ei r 20 11 return, the y

wou ldha ve see n “ zero ” o n l in es 15 an d 1 6 andreal iz ed th atth e return was in co rrec 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 it y

forit s ac cu racy to t he ir a cco un ta nt . See St ou gh v. Co m

m is si on er, 1 44 T.C. __ , __(sl ip op . at 2 8) (Ju ne 2, 2 01 5) ; W oo 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. 6 54 , 66 2 (1 98 7) (fi nd in g n o re as on ab le cau se wher e-8 -

[* 8] rev ie w of re tu rnwou ldha ve rev eal edom is si onof d iv id en d i nc om e); Mag il l v. Co m m is si on er, 7 0 T.C. 4 65 , 47 9- 48 0 (1 97 8) (“ Eve n i f al l d at a is furni sh edto th e p rep arer , th e ta xp ay er s ti ll ha s a dut y to readth e return a ndm ak e su re al l in co m 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 , Deci si on wil l b e en te redfor res po nd en t.