T.C. Memo. 2010-83

UNITED STATES TAX COURT

ROBERT & LINDA WHITMARSH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27480-07. Filed April 20, 2010.

Robert & Linda Whitmarsh, pro sese.

Kevin W. Coy, for respondent.

MEMORANDUM OPINION

COHEN, Judge: Respondent determined a deficiency of $27,247

in petitioners’ 2003 Federal income tax, and an accuracy-related

penalty of $5,449.40 under section 6662(a). After concessions,

the issue for decision is whether petitioners are liable for the

accuracy-related penalty under section 6662(a).
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All section references are to the Internal Revenue Code for

the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure. 

Background

This case was submitted fully stipulated under Rule 122, and

the stipulated facts are incorporated as our findings by this

reference. Petitioners resided in California at the time the

petition was filed.

Petitioners each owned a 50-percent share in Sign Arts

Products Corp. and were employees of Sign Arts Products Corp. at

all relevant times.

In December 1998, Sign Arts Products Corp. enrolled in the

IDP Corporate Benefit Services, Inc., Multiple Employer Welfare

Benefit Plan and Trust (the IDP Plan). The IDP Plan provided

life insurance to employees of enrolled employers. Sign Arts

Products Corp. contributed to the IDP Plan on petitioners’ behalf

from 1998 until 2003. The IDP Plan used those contributions to

purchase insurance on petitioners’ lives from Western Reserve

Life Assurance Co. of Ohio (Western Reserve). Beginning in 2002,

Washington Trust Bank held the Western Reserve policies as

trustee of the trust which formed part of the IDP Plan. 

In December 2003, the IDP Plan distributed the Western

Reserve policies to petitioners. On December 31, 2003, the IDP

Plan terminated.
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The Internal Revenue Service (IRS) received a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reflecting

petitioners’ receipt of $86,555 of income from the distribution

of the Western Reserve policy insuring Mr. Whitmarsh’s life. The

IRS also received a Form 1099-R reflecting petitioners’ receipt

of $18,683 of income from the distribution of the Western Reserve

policy insuring Mrs. Whitmarsh’s life. 

Petitioners completed their joint Federal income tax return

for 2003 on October 15, 2004, and timely filed it. Petitioners’

return was prepared and signed by an accountant. On their Form

1040, U.S. Individual Income Tax Return, petitioners reported

“Pensions and annuities” totaling $105,238, and $31,749 as the

“Taxable amount”. Petitioners reported a “total tax” of $81,842. 

In the supplemental information petitioners filed with their

return, petitioners stated the following regarding the Forms

1099-R amounts: “These amounts should have been reported with

taxable amounts [to Mr. and Mrs. Whitmarsh] of $22,182 and

$9,567, respectively. Corrected 1099Rs will be issued by the end

of October 2004 with the correct taxable amounts.” The taxable

amounts that petitioners listed on the return correspond to the

net surrender values of the Western Reserve life insurance

policies insuring petitioners as of December 10, 2003, as

reported in a letter from Western Reserve dated September 16,
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2004, to petitioners’ insurance agent. Washington Trust Bank

later issued revised Forms 1099-R to petitioners, reporting

$22,181.50 of income to Mr. Whitmarsh and $9,566.94 of income to

Mrs. Whitmarsh.

Petitioners concede that the deficiency in Federal income

tax determined in the notice of deficiency is correct.

Discussion

Petitioners contest the imposition of an accuracy-related

penalty under section 6662(a). Section 6662(a) and (b)(1) and

(2) imposes a 20-percent accuracy-related penalty on any

underpayment of Federal income tax attributable to a taxpayer’s

negligence or disregard of rules or regulations, or a substantial

understatement of income tax. Section 6662(d)(1)(A) defines

“substantial understatement of income tax” as an amount exceeding

the greater of 10 percent of the tax required to be shown on the

return or $5,000.

Under section 7491(c), the Commissioner bears the burden of

production with regard to penalties and must come forward with

sufficient evidence indicating that it is proper to impose

penalties. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). 

However, once the Commissioner has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalties are inappropriate because of

reasonable cause or substantial authority. Id. at 446-447. 
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Petitioners’ underpayment of tax is a substantial

understatement of income tax. On their Form 1040, petitioners

reported $81,842 as the total tax. They now concede that there

was a deficiency of $27,247. The deficiency is greater than

$5,000 and than 10 percent of the amount of tax required to be

shown on the return. Respondent’s burden of production has been

met.

The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith. 

Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. The

decision as to whether a taxpayer acted with reasonable cause and

in good faith is made on a case-by-case basis, taking into

account all of the pertinent facts and circumstances, including

the taxpayer’s experience, knowledge, and education. Sec.

1.6664-4(b)(1), Income Tax Regs. “Generally, the most important

factor is the extent of the taxpayer’s effort to assess the

taxpayer’s proper tax liability.” Id. “A taxpayer’s reliance on

erroneous information reported on a Form W-2, Form 1099, or other

information return indicates reasonable cause and good faith,

provided the taxpayer did not know or have reason to know that

the information was incorrect.” Id. Reliance on professional

advice may constitute reasonable cause and good faith, but only

if, under all the circumstances, such reliance was reasonable. 
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Hansen v. Commissioner, 471 F.3d 1021, 1032 (9th Cir. 2006),

affg. T.C. Memo. 2004-269; Freytag v. Commissioner, 89 T.C. 849,

888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991); sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioners could not rely on the revised Forms 1099-R

simply because they believed that the initial Forms 1099-R were

incorrect. It was not reasonable for petitioners to rely on

revised figures that substantially reduced their income without

explanation and justification of the revision. Although the

record is unclear as to when the revised Forms 1099-R were

issued, petitioners stated in the attachment to their tax return

that revised Forms 1099-R would be issued “by the end of October

2004”. Absent more detailed information regarding the

circumstances, we cannot conclude that petitioners acted

reasonably in relying on Forms 1099-R that had not yet been

issued at the time they filed their return. 

Petitioners argue that they have no background in tax law,

and that they relied on Western Reserve, their insurance broker,

and their accountant in preparing their Federal income tax

return. They claim that “The original 1099’s did show 100%

taxable, but when questioned, the insurance company changed to

the taxable amount that was claimed on our return.” 

Petitioners fail to address a number of important issues. 

First, they have failed to provide or identify evidence that they
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reasonably relied on their insurance broker for Federal income

tax advice, or that their insurance broker was a competent

professional with sufficient expertise in the relevant tax laws. 

See Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99

(2000), affd. 299 F.3d 221 (3d Cir. 2002). Second, petitioners

have failed to provide evidence that they reasonably relied on

their accountant’s advice. They claim that their accountant

relied on the revised Forms 1099-R issued by the insurance

company, but those forms were neither issued by the insurance

company nor in hand when the return was filed. There is no

evidence of petitioners’ accountant’s qualifications or that

petitioners provided their accountant with all the information

necessary to determine the proper tax treatment of the

distribution. See Neonatology Associates, P.A. v. Commissioner,

supra at 99; ASAT, Inc. v. Commissioner, 108 T.C. 147, 176

(1997); Estate of Goldman v. Commissioner, T.C. Memo. 1996-29. 

Petitioners may not avoid liability for an accuracy-related

penalty under section 6662(a) simply by showing that their

Federal income tax return was prepared by someone else. See

Estate of Goldman v. Commissioner, supra (citing Bagur v.

Commissioner, 66 T.C. 817, 823-824 (1976), remanded on other

grounds 603 F.2d 491 (5th Cir. 1979)). Third, the Forms 1099-R

were issued by Washington Trust Bank, not by Western Reserve as

petitioners claim, and there is no evidence that Western Reserve
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provided petitioners with any tax advice. Finally, although

Washington Trust Bank did eventually provide the revised Forms

1099-R corresponding to the amount that petitioners reported on

their Form 1040, petitioners have not provided any context for

the revision. Petitioners claim that Washington Trust Bank

modified the Forms 1099-R “when questioned”, but petitioners do

not say who questioned Washington Trust Bank or what those

questions were. There is no evidence that Washington Trust Bank

provided petitioners with tax advice.

The only evidence petitioners offer to prove that they

relied on professional advice is the revised Forms 1099-R

reported by Washington Trust Bank and petitioners’ accountant’s

signature on petitioners’ Form 1040. Petitioners have failed to

prove that they acted with reasonable cause and in good faith

under section 6664.

For the reasons explained above,

Decision will be entered

for respondent.