TAX COURT OPINION

Case: Kurt C. Olsen
Docket Number: 11658-10S
Judge: Armen
Opinion Type: summary
Filed: 11/23/2011
Pages: 7

T . C . Summary Opinion 2011-131 UNITED TATES TAX COpRT KURT C. OLSEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 11658-10S. Filed November 23, 2011. Kurt C. Olsen, pro se. ji ? Elizabeth K. Wickstrom, for respondent. ARMEN, Special Trial Judge: This ca:se was heard pursuant to the provisions of section 7463 of the Internal Rèvenue Code in effect when the petition was filed.1 Pursuant to. section 7463 (b) , the decision to be ntered is nqt reviewable by any 1 Unless otherwise indfcated, all s 1bsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. O NOV 2 3 2011 - 2 - other court, and this opinion shall not be treated as precedent for any other case. Respondent determined a deficiency in petitioner's Federal income tax of $9,297 and an accuracy-related penalty under section 6662(a) of $1,859 for 2007. After concessions by both parties, the only issue for decision is whether petitioner is liable for.the accuracy-related penalty. We hold that he is not. Background Some of the facts have been stipulated by the parties and they are so found., Petitioner resided in the State of California when the petition was filed. Petitioner works as a patent attorney for the Department of Energy at a national laboratory, holds a Government security clearance, and is subject to detailed and periodic background investigations. In 2007, petitioner's wife received interest income.from a trust created by her mother's estate. The funds were attributable to litigation resolved in favor of the estate. As.a beneficiary of the trust, petitioner's(cid:16)042wifereceived a Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., reporting the interest income. Prior to this instance, the couple had never received a Schedule K-1 and were, unfamiliar with thelform. Petitioner usually take the lead ir prepa ing the couple's oint Federal income tax ret rns . He. pre ared t he. couple' s joint income tax return for 2007 u ing tax return pre aration software. Because he had never dealt w th a Schedule K-1 n the. past, petitioner upgraded his tax >reparation sof twar to a more sophisticated version as a p ecaution to ensure proper treatment of the unfamiliar form. Using. the upgraded soft are's interview pr cess, petitioner correctly entered the name a d tax identificaticn number of the trust, properly reporting th source of ïncome. .While transcribing .the remalning i formation, 1owever, .he made a data entry error that prevented the amount of intere t income from being correctly displayed on Schedule E, Supple ental Income and Loss, of his Federal tax ret rn. Petiti ner re iewed the Federal tax return before filing, in luding usin the v rification features in his tax preparat on software, but d d not discover the error. , . I iscussion Section 6662 (a) and (b) (2) imposes a penal y equal to 20 percent . of the amount of any underpayment attri table to a substantial understatement o income .tax. An nderstatement of income tax is "substantial" f the under tatemei t exceeds the 2 In the notice of def ciency respohdent etermined the accuracy-related penalty on phe basis of sec . 6662 (d) , a substantial understatement of income tax. greater of 10 percent of the tax required to be- shown on the return or $5,000. Sec. 6662(d) (1) (A). The term "understatement" means the excess of the tax required to be shown on the.return over the tax actually shown on the return. Sec. 6662 (d) (2) (A) . Section 6664 provides an exception tos the imposition of the accuracy-related penalty if the taxpayer establishes that there was reasonable cause for the understatement and that the taxpayer acted in good faith with respect to that portion.3 Sec. 6664 (c) (1); sec. 1.6664-4 (a), Income Tax Regs. The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case=by-case basis, taking into account the pertinent facts and circumstances. - 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 proper tax liability for such year. Id with respect to a taxpayer's liability for any penalty, section 7491(c) places on the Commissioner the burden of production, thereby requiring; the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446- 447 (2001). Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive 3 The substantial authority and adequate disclosure provisions of sec. 6662(d) (2) (B) do' not apply to the facts before us. - 5 - evidence that the Commissioner' s determination is incorrect . See id. at 447; see also Rule 142(a); Welch v. Helve ing, 290 U.S. 111, 115 (1933) . The Commissioner may satisfy his burden of roduction for the accuracy-related penalty on the basis of a substantial understatement of income tax by showing that the understatement on the taxpayer's return satisfies the definitiori of "substantial". E.g., Graves, v. Commissioner, T.C. Memo. 2004-- 140, affd. 220 Fed. Appx. 601 (9th Cir. 2007); Jánis v. Commissioner, T.C. Memo. 2004-117, affd. 461 F.3d 1080 (9th Cir. 2006), affd. 469 F.3d 256 (2d Cir. 2006). Respondent satisfied his burden of production because the record demonstrates that petitioner failed to include the Schedule K-1 interest income in the couple's gross income, thereby causing petitîoner to substantially understate the. couple's income tax for 2007. See sec. 6662 (d) (1) (A) ; Higbee v;. Commissioner, supra at 447-449. Accordingly, petitioner bears the burden iof proting that the accuracy-related penalty should not be imposed. See sec. 6664 (c) (1); Higbee v. Commissioner, supra at 446. We hold that petitioner has satisfied his burden of proof . This Court has observed that "Tax pdeparation software is only as good as the information one inputs into it." Bunney v. Commissioner, 114 T. C. 259, 267 (2000) . An isolated transcription error, however, is not inconsistentî with a finding of reasonable cause and good faith. Sec. 1.6664-4 (b) (1), Income Tax Regs. We found petitioner to be forthright and credible, and we credit ·his testimony at trial. .We conclude that he made·an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax return preparation software..4 It is clear that his mistake was isolated as he correctly reported the'source of the income, and he did not repeat any similar error.in preparing his tax return. The most important factor ,in deciding whether a taxpayer. actedmwith reasonable cause and in good faith is the extent of the taxpayer's effort.to assess the proper tax liability. Sec. 1.6664-4 (b) (1), Income Tax Regs. Prior to;2007, petitioner never received a Schedule K-1. The interest income reported on the Schedule K-1 was not associated with any of petitioner's (cid:16)042 investments. Instead, the income was derived from litigation proceeds received by his mother-in-law's estate. Petitioner acted reasonably in upgrading his tax preparation software to a more.sophisticated version in order.to aid in properly reporting the income on the unfamiliar Schedule K-1 that his wife.received. See Thompson v: Commissioner, T.C. Memo. 2007-174. Petitioner 4 We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return. correctly identified the tru t as the so rce of the interest income. Petitioner also cor ectly entered the t rust's tax identification number into t e software rogram. He did not bury his head in the sand and ign re his obligation· t o check the accuracy of his tax return. Instead, petitione reviewed the information he entered using his tax pre aratio software upon completion of the sof tware ' s interview p ocess . Despite his best . efforts, however, petitioner failed to d scover that the amount of the interest income did n t appear on the fiñal version of his tax return that was filed. Under the unique facts nd circumst nces o this case, we · hold that petitioner acted with reasonab e caus and in good faith within the meaning of section 6664 (c) (1) . Accordingly, petitioner is not liable for the accurac relatéd penalty under 6662 (a) as determined by res ondent- in tl e noti e of deficiency. Conclusion We have considered all f the argum nts ma e by respondent, and, to the extent that we have not specificall addressed them, we conclude that they are wi hout merit . To reflect our disposition of the d sputed issue, as well as the parties' concessions, Ibecision will be entered under Rule 155.