TAX COURT OPINION

Case: Stephen G. Woodsum & Anne R. Lovett
Docket Number: 18934-09
Judge: Gustafson
Opinion Type: reported
Filed: 06/13/2011
Pages: 20

136 T.C. No. 29 UNITED STATES TAX COURT TEPHEN G. WOODSUM AND ANNE R. LOVETT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 18934-09. Filed June 13, 2011. In 2006 Ps received gain of $3.4 million upon the transaction. P-H was the 160-plus information returns they had that reported the payment. « Ps retained a firm termination of a "swap" personally 'nvolved in terminating the transaction and received fr Income, with a lawyer and a certified public accountant prepare theii- 2006 income tax return. mPs gave to the firm all received from third-party payors, Form 1099-MISC reporting the .$3.4 million. page return that million of adjusted gross income but omitted the $3.4 million from the swap transaction. the return. ( hich Ps co ceded and paid) and an accuracy-relat-ed penalty unde giounds of slec . 6664 (c) (1) . The IRS determined a deficiency of tax I . R . C . sec . 6 62 (a) , which Ps dispute on the firm prepared reported $29.2 including the The 115- the payor a Form 1099-MISC, Miscellaneous to Ps signed and filed " easonable cause" under I.R.C. -2- Held: reliance on their return preparer did not constitute reasonable cause for their omissión of the $3 . 4 million income it em . Ps' David H. Hopfenberg, for petitioners. Patrick F. Gallagher, for respondent. OPINION GUSTAFSON, Judge: This case is before the Court pursuant to section 6213 (a)1 for redetermination of an accuracy-related penalty. of $104,295 that the Internal Revenue Service (IRS:) determined against petitioners Stephen G. Woodsum and Anne R. Lovett for tax year 2006, pursuant to section 6662 (a) . The issue for deci"sion is "whether petitioners had "reasonÀble "cau e under section 6664 (c) (1) for omitting $3.4 million of income from their joint 2006-Federal income tax retuèn. Background The parties submitted this case fully stipulat ed pursuant to Rule 122. - We incorporate by this reference the stipulation*of facts filed December 6, a 2010, and the associated exhibits x p as otherwise noted,, all section references a to the Internal Reventie Code of 1986 (26 U.S.C.) , as' amend d and in effect issue, and all Rule referenceå are to the Tax Court Rules of Practice and Procedure . for the year at Petit idneïas' backgrounds -3- Petitioners Stephen G. tWoodsúm and Anne P Lovettiare married. At-the time they filed their petition,a they resided in New Hampshire . Ms. Lo'vett received a bachelor of arts degree from Yale Univërsity in 1977, and the stipulated record shows nothing more about" her backgròtind. Mr./Woodsum received a bachelor of arts degree from YaleaUn'iversity in 1976 and a master's insmanagement from the Kellogg School of Management at - Northwestern University in 1-979. Mr. Woodsum is, the founding managing director of, Summit Partrers, a private ee;[uity investment firm founded in 1984. Petitioners are not tax experts. But Mr Woodsum is finarcially sophi~sticated," and he has a basic understanding of t'he taxation 'of i.nterest income, dividend income',vand -income - from the sale ofastócksaand bonds. 7 The swap tiarisaction n 1998"Mr. Woodsum signed; an agreement athat -undertook a financial transaátion that the parties describe as a ".ten year to'tal return lim ted partnership linked swap" (and that we refer to here'in as "the'*swap")". In entering intos this transaction, Mr. Wootisum was advisedsby attorney David H. Hopfenberg ,(who,a as we show below, supervised the preparation of thestax return .for the year at issue ) . 'Mr; Woodsum woriginally entered into the swap with the*Ilondori Branch of Bankers ETrust Company, but ,Bankers Trust was succeeded in its interest in the swap by Deutsche Bank The parties' stipulation exylains the swap as follows: 21. The Swap required *i * * [Deutsche Bank] to pay Petitioners the value of Calculation Amount on the Termination Date. the Reference Fund less the 22. , a Delaware Limited Partnership . The" Reference Fund was Spring P,oint Partners, L . P . 23. According to the terms of the Swap, the Spebified in, the Refekence Fund,was "a limited partnership Interest interest in the Reference Fund that would result from' a capital contribution to such Reference Fund-of USD.2,612,156 on December 31, 1997, if one were to be made." 24. The Swap required Petitioners to make qÊarterly -[Deutsche Bank] based upon the ,product of payments to *s * the National Amount rate, plus l'. 50% (the "LIBOR Payments".) . The agreement further required the Petitioners to provide Collateral * [Deutsche Bank) . * * to * (as adjusted) times the USDaLIBORyBBA After the end of every; calendar quarter, petitioners receiired account statements with respect to the swap showing the total appreciation or depreciation in the value of their - interest. They began receiving these quarterly reports at least as early as December 31, 2003 (when petitioners' ,interest 'had appreciatedsto- $57816,401), and until March:31, 2006 (when petitioners' i-nterest had appreciated to $6 /368, 506) . on otheir returns for the tax years preceding 2006,- petitioners reported incomé and deductions relating to the collateral and IBOP paymehts in.connection "with -the swap. The Swap' s ten-year term was apparently scheduled to en ini early 2008, but Mr. Woodsum believed that the reference fund was -5- not er'forming as well as -it should. - He therefore informed Deut che ank n writing" on February 3, 2006, of his intention to terminate the swap effective Maich 31, 2006 The net payout to petit ioners i*n connection with the' termination of the swap was $3,3Š7,is11.50, all of which, the parties ag ee, wasitaxable income to petitioners . Mr. Wpodsum discussed the termination withiMr. Hopfenberg before it took place, and Mr. Hopfenberg adviåed Mr. Woodsum when the swap" had been terminated.: s After. the end óf 42006', Deutsahe Bank iss'ued, to petitioners a Form 1099/MISC, Miscellaneous Income, lepotting "Other income" of $3,3§ 9,6112 from the termihätion ofs the swap, ánd a Form21099-INT, ·Interest Indåme, r~eporting $60,291.69 of "Interest income" Petitioners' inchme in 006 Iir 2006 pet fóners deceuréd adjusted g oss indome totaling almost $3î inillion '(including"tihe $3.4 mill'ion from terminating the away) . "Peti ioners't payörs reported that income to petitioriers an'd o thé IRS on more than 160 information-returns, e.g. Schedåleä 1 and Forme 1099 including the Deutsche Bank Forms ]O992ÌvjISC nci 1099-INT. The Deutsche Bank Form 1099-MISC shows an amount of $3, 379, 611, b t ÈËÊ pareies have stipulated that (and the taxable income) was $3,367,611.50. not explained in the record. Opinion hereafter, we round the number to $3.4 million. the net payout The discrepancy is For purposes of discussion iñ*this -6- The $3.4 million reported -on Deutsche Bank's Form.1099-MISC was not the largest amount reported on the informations returns that petitioners received foi 2006, However, if the $3.4 million from Deutsche Bank had been, included on petitioners' 42006 return it would have been the third largest long-term capital gain amount reported as as line item on Schedule D,, Capital Gains and Losses. Preparation of petitioners' 2006 return For 2006 petitioners filed 21 State income tax returns and a joint Federal income tax return. To prepare theire 2006 Federal income tax ret-urn, petiti ners hired Nenture Tax Services, Inc . ( "ŸTS") , « as niche f irm specializing in tax work foi- private equity and hedge funds as well as such funds' deneral partners VTS employed Mr. Hopfenberg, whom petitioners had retained for-inves,tment and tax advice since 1996. As of 2006, Mr. Hopfenberg had more th n 20 years of tax compliance and consulting experience, including employment in the tax departments of major, accounting firms For VTS's preparation of petitioners's2006 return, Mr. Hopfenberg acted as reviewer. The VTS employee -charged with actually prèparing the return was a Massachusetts certified public accountant ("C.P.A.") who similarly-had more than 20 years of tar compliance experience, including employment- with "majoi- focounting 7- Petiti'oners provided to VTS all 160 plus information retu nst including the Deutsche Bank. Form 1099-MISC reporting÷ $3 . 4 mil] ion f rom "the termination of the swap - and Form 1099 - INT repo tingi $607291.Ë9 of interest income. TVTS duly scanned.the Form 1099-MISC into its records for use in'preparing the return. The Form 10 0, U.S- Individual Income Tax Return, that VTS prep4red for petitioners was 115 pages long. The return did - repo t the $60,2 1.69 of interest income- that petitioners received from De tsche Bank. However, for reasons -the record does not- show t he return- that VTS prepai-ed did-not include the $3.4 mi'llion tha Deutsche Bank paid and reported. 3 If the $3.4 million had been included on tihe return, that famount would have appearedlon Schedule D as a distincta lineaitem in: Part II, "Long-Term Capi'tal Gains and Losses--Assets -Held More Than One Year" . ' But', again,a i't was not reported on4the return that VTS prepared. Review "and esigning of petitionerse2006- return Petitioners had obtained an extension of the due sdate for filing thëir 2Ò06 return. As a result,, the return was due Octo er 15, 2007 At 11 a.th.don that date, petitioners met with In their b ie s petitioners seem to in ply th'at the omi~ssion was the result of niistake or oversight by the C.P.A. who prepared the return. HowÅver, for the omission and because petitioners chose to submit case under Rule i22, Thus; we do not the stipulation does not - state the reason the tliey did not call the C.P.A. as a'witness. now why the $3.4 million was omitted. -8- 191- Mr. Hoþfenberg to discuss several subjects including thei;c Žeturn. At that meeting Mr. Hopfenberg turned sthe .115 pages of the return and discussed various, items of income and deduction withe Mr. Woodsum., Petitioners characterize this as their "perform[ing] more than a cursory .revi:ew of the return." However the parties have stipúlated that petitioners do not recall- e • • • which specific items of income and deduction were discussed at ,the -meeting, or the amount of, time theyespent revzewing the return or the amount of time they spent reviewing the Schedule D and the attachments and statements thereto e During the discussion of the return, Mr. Woodsum didanot: compare or match the items of income reported on the Form 1040- and its - schedules with the information returns that the t-hird-party payors had provided. Consequently, petitioners f ailed to ;make - sure that all their income items were reported, on the retu n hat VTS shad -prepared Petitioners signed the return on that same day--October 15, '2007. We assume that, when they did so, petitioners were unaùare of the omission of the $3.4 million. Petitioners argue in their brief that "Neither the tax advisor nor the Petitioners noticed that to include the Deutsche «Bank 1099:-MTSC which oshowed indome sof $3,37/9,611.00 on the return"; but no'evidence in the record the ,tax preparer failed 4 (continued . . ) The IRS received Deutsche Bank' s Form 1099-MISC. teporting the $3.4 milii'on, compared Nith petitioners'è feturn; and detei-miríed a deficiency'in tak of $521;473 and an accuracy± « relat ed penalty under - section 6662 (a) i of $104, 295 g Petitioners agreeE tolthe assessment of tax in the amount"determined by the IRS. As'a renilt, their tax due awhich they reported as 433T19,454, was ctually $4,240,927. Petitioners paid the tax de f i c iéncy pius htieresti. a - However, pe iti*dnets filed'theirspetition iri this Court disputing the accuracy-related perialty. The parties ointly submitted the dase fully stipulated under Rule 122 I." - Thë relevan law Discussion A . Accuracy related penalty -under sectión 6662 (b) (2) . Section 666 (a) and (b) (2) imposes an "accuracy-related penalty' of 20 pércent of the portion of the underpayment of tax . conùinued ) ( .C. itily asserEs that petitioners were unaware of the omission. expli The clósest 'assertion is -the parties' stipulation t hat "Petitioners -relied upon Venture Tax Services to prepare their 2006 tax 'ret-urn and include all' of ·the items relating-to the over 160 information returns provided toiventure Tax services.on said return. " stipulation in the manner most approach admïtte ily at' odds with the-fact that they have the burden to prove- reasonable cause and good faith, as we show below. For purposes Tof ethis Opinion, sweginterpret this a favorable to petitioners--an -10- attributable to any substantial -understatement of income taž.5 By definition, an understatemënt of .ncome tax for an individual is substantial if .it exceeds the greater of $5,000'or 10 percent of -theatax required to-be shown on the return.- Sec 6662(d) (1) . Under section 7491(c), the Commissioner bears the, bui-den ofs , production and must produce sufficient evidence that the impoáition of . the penalty is appropriate in a,given case. Higbee v. Cominissionee, 116 T.C. 438, 446 (2001) Once the Commissioner meets this burden, the- taxpayer must -come forward with.persuasive evidence that the Commissioner' s determination is incorrect . Rule 142 (a) ; Higbee v. Commissioner,, supra sat 447. B. Reasonable cause under section 6664 (c) (1) A taxpayer who is otherwise liable for the accu acy-related penalty may avoid the liability if, he can show, under section 6664 (c) (1) , that hemhad" reasonable cause for a portion of the underpayment and that he acted in good faith with respect to that portion.' The pertinent regulation provides: SUnder section 6662 (b) (1) , the accuracy-related penalty is is attributable tor thet t alão imposed where an underpayment taxpayer's negligence or disregard of rules orsregulations; and respondent argues - that petitioners' omiss ion of ref lects negligence . However , as zwe i show below, demonstratéd that petitioners substantially understated their incóme tax for 2006. section 6662 (b) (1) , neglinent or disregarded rules ,or regulations Thus, we need not "consider whether, under it is also true that petitionérs were the income respondent has "There are other defenses, to the penalty that petitioneis do not *invoke here ; 'i . e . , section 6662 (d) (2) (B) provides that ,an a (continùed. . . ) -11- * * * Generally, the most the taxpayer's effort taking into account all pertinent i The determination ofawhether a taxpayer acted with reasonable cause and in good faith is made on a case-by-caee basis, facts and circumstances. important factor is the extent of to assess the taxpayer's proper tax liability: Circumstances that may indicatie 'reasonable" cause and good faith include an honest misunderstanding of fact or law that and circumstances, and education of computational or transcriptional error generally is not inconsisten with reasonable cause and good faith a * constitutes reasonable cause and good faith if , under all the taxþayer acted in good fai'th. the "facts including the experience, knowledge, the cir umstances, such reliance was reasonable and is reasonable"int l'ight oftall of * Relia ce on * * * professional advice * the taxpayer. i Ana isolated * , * * - a 26 C F . R . sec . ' 1 6664 -4 (b) (1) ncome Tax Regs . Whether the e taxpayer acted uth reasonable cause and in good faith: thus depends on the pértinenît facts and circumstances including his efforts to assess his "proper tänliability, his knowledge and exþerience, and he extent to which he relied onethe advice of a ta'x Nrofessional Application of t hea law to petitioners A. Siibstantiala understat'ement The undisputåd tax deficiency attributable torpetitioners'r omitted income is 4521,473. AThat amóunt is obviously in excess ( . . . continûe~d) undå séatement mAy be' reduced, first 9Ëere the taxpayerschad substäntial EuthErity for their treatment of any item giving rise tô themunderstat ment or, second, where täe relevant affecting the itäm'á treatment are adequañely disclosed and the taxpa ers ha'd a item. Neither of petit on'ers admi an in dvertent o ission from the return. those defenses is appl*icable heref where that the income was taxable and simp'ly allege easonablé basis foNtheir treatment df faats' that -12- of $5, 000 . That amount i.s also in excess of "10 percent ,of the tax required to be shown on the return", sec. 6662(d) (1),- because the correct tax liability, which petitioners have conceded, is $4,240,927. Petitioners' understatement of tax was therefore "substantial" for purposes of section 6662 (d),(1) . Consequently, respondent has carried the burden of,production that - section 7491(c) imposes. The accuracy-related penalty is mandatory; the. statute provides that it "shall be added" . Sec . 6662 (a) . , Petitioners bèar the burden of proving the defense of reasonable cause and good faith. See Higbee v. Commissioner,. supra at 446 B. . - Reasonable cause and, good" faith 1. Reliance on professional advice For purposes of section 6664 (c) , a taxpayer may be _able to establish reasonable cause and good faith (and thereby ,avoid the accuracy-related penalty of, section 6662).by showing his reliance on professional advice. 26 C.F.R. sec. 1.6664-4(b) (1). As we stated in Neonatology Associates, P.A. v. Commissioner, 115 T.C. 41, 99 (2000) , affd. 299 F.3d 221 (3d Cir.- 2002) : for a taxpayer to rely reasonably upon advice so as -possibly to negate a section 6662 (a) accuracy-related penalty, determined by the Commissioner, , the taxpayer must pr'ove by a pieponderance of requirement of adviser was a competent professional who had sufficient expèrtise to justify reliance, necessary and accurate 'information to the adviser,' and (3) adviser ' s judgment . the taxpayer actually relied in good faith on the the evidence that the taxpayer meets eicli the following'th~ree-¡$rong test: (1) The * (2) the taxpayer provided * * * -13- Seeking to meet these standards petitiòners assert " (1) that VTS ånd its attorneyrand CEP.A.* were competent and experi-enced professionals, "(2) that petitioners provided VTS with, the necessaky and accubate information, i e , the Form-1099-MISC repotting the $3.4 million, and 3) that petitioners relied on VTS to?þrepare "the return and report the $544 million"--alle of which the parties have stiþulated. NHowever, for purposes of pzoving reliance on professional~ advice, these -assertions miss the nark. The IRS'sangulatfons define "advice" as fòllows: (2) Adèice defined>.--Advice is any communication,' including the opinion of a professional setting for h the 'analysis *or- conclusion of a persong other than he taxpayer, provided to (or for the benefit of) relies, dir ctly or indirectly, -with respect iniposition bf penalty. Advice does not have to be in any particular form. the laxpayeraand on which the: taxpayer to the the sectiona6662 accuracy-related tax advisor, a 26- C.F.R. sec . 1. 6664-4 ("c) (2) .3 A prentise only implicit in petiti'oners' þosition is 'that theik return preparer?"s unexplained omission (i.e. , the omtission of hat Mr. Woodsum knew to be includable as a substantial incóae item on their return) constitet~ed "advicè" to ekcludé that item. However, the fact that the reguldt¯ion defines "advice" broadly enough to include "any communication", whethlek or not "ïn any partïcular form", provides rió groûads afor reliance' by pet itioners: - In United Statea v. Boyle, 469 U.S. 241 (1985), where the taxpayer knew or -14- should' have known of the applicable filing deadline, she lacked reasonable . cause for his attorney' s untimely f iling of - his return;. similarly, since petitioners knew their Form 1099 income should have been included, they- lack reasonable cause for theiy preparer's failure to include the income. » In order to constitute "advice", within the definition of the regulation; -the communication must reflect the adviser'ss "analysis: or conclusion" . The taxpayer must show, (in the ewords of Neonatology Associates, 115 T.C. at 99 (emphasis added)) that he "relied in good faith on the adviser's judgment. ' Petitioners present- nEO testimOny Of the preparer (nor any other evidence) to show that the income was -omitted from the return because of any "analysis or conclusion" or 'judgment" by VTS that the "income was not taxable . When, the Supreme Court discussed the '"reasonable cause" defense in Boyle, it characterized the relevant professional role ,as ágivings "substantive advice", & at 251, and contrasted that professional function with things .that. "requïre [] no special training", id. sat 252. No "special training" was red[uired «for-Mr. Woodsum ,to know that the law requifed hiin to include on that - return an- item of , income that «he had :received and that Deutsche Bank. had reported on Form ;1099 y The sincluding of that income òn their -tax return:is what petitioners-say they intended-when they handed over their information returns to VTS. -15- Petitioñers Iñake' not suggestion that VTS gave tihems : "subåtantive advice" to-omitithe'$3.4 millionaar that petitioners relied on- aÅy~such ,substantive âdvice . On the 'contrary; petit:.I.onerE stipulateda that. they "relièd upon VenturesTax Services to prep re their ,2006 tãx return and include all of -the items i-elati'ng t the over 160 information returns provided to Vent re Tax Serv ces on said return". (Emphasia added3) There is nc ev'idence that when VTS instead omitted the $3 ..4 million, it th'e'rejby was 'exe cising "analysis" ora"judgment" ,or was making a profelssional recommendation te petitioners; rather, it was failiing in that specific instance> to carry-out petitioners!» . geneual instruct i.on. In signing the return thus erroneously prepared, pètiti ners w'ere not deliberätely following;substantive prof essional advice;--they- weie instead unwirttingly a (they 'contend) perpetuating a clerical mistake. The defense of r-eliance on professional advice has no application here. 2. Return preparer's error More pertinent to this case is the principle,~ quoted above, that "ata]n isolated computational or transcriptional error ; generally is not inconsistent with reasonable cause and good faith." 26 C.F R. Sec. 1.6664-4(b) (1),. However, spetitioners fail to place their understatement within the category, of "comp tational. or transcriptional error [s]" because they prosvided no evidence to explain the nature of or the reason for VTS's -16- omission of the $3.4 million. It may be (and petitioners seem to expect. the Court to assume) thatethe omissions was the result sof the C.P.A-.'s oversight of one Form 1099 amid 160 such fornis, but no actual evidence supports:that characterization. The,omiásion is tunexplained, and since petitioners have the burden to prove reasonable cause and good faith, this evidentiary gap works against their defense: Even if we assume that the-.$3.4-million omission was an innocent oŸersight by the return preparer, the reasonable cause defense is unavailing, here Taxpayers sometimes do avoid the accuracy-related penalty by showing that their understatement was the result of , a return preparer ' s error . Sees e . g .-, Thrane v . Commissioner, T.C.: Memo. 2006-269, 92 T.C.M. (CCH) =501. However, as we stated in Metra Chem Corp. v. Commissioner, 88 T . C .3 654 , 662 (198'7) (citationssomitted) : 'In Thrane, The erroneous income figure for Windsor apþeated only on a worksheet to petitioner' s Form 104 0 .- That f igure required a fuí-ther offsetting adjustment befor'e being reporte on the face of rather detailed tracing througli the Schedule E worksheet would have alerted petitioner to the error at issue the Schedule E as $3'78, 428 - Thus, only a to 'the Schedule E attached ($414,845) * * * (CCH) at 503. 92 T.C.M. quite different, Form 1099-MISC should simplyrhave appeared äs a distinct and visible entry on Schedule D. in that the $3.4 million figure on the sIn this case, however, the facts are As a general rùle, the duty, of filingiaccurate -17- returns cannot be avoided by placing responsibility on a tax return preparer. ? As* the petitioners have noted, as declined to sustain the addition to tax thih Court under secti n 6653(a) relied in g od faith on the advice of a tax expert. However, a' close examinatiornof-theses cases reveals that they raised questions as to the tax treatment of complex tžansactions and that the position, taken on thea e returns with respect basis in cases in which:thes taxpayer- to such items had a reasonable This .case presents ,no such difficult issues-. Ronald Laro he simply failed to report over $10, 000 in cash dividends which he received, from corporations a controlled by him. Richard Laroche similarly failed to report over $6,800 -in such dividends. dividends c nstituted over 21 percent of Ronald and Beverly Lar che's gross; income for 1977 and over 20 percent of Richard and Shirley Laroche' s gross income for such year. underreport ng of if the peti their returns. Under. such circumstances, petitioners mayenot shift responsibility for the accuracy of their returns to their accountant . income would not have gone unnoticed ioners had-made even a cursory review"" of We believe ethatt such a asubstantial The unreported the However complex the swap may have been in its creation and its operation, its termination resulted in Deutsche Bank's issuing to petitioners a standard and unaomplicated Form 1099-MISC that, petitioners admit, should have resulted in a distinct and We thus observed iÊ Metra 'Chem t-hats a' "cursory review" would have disclèsed the underreporting in that case . Petitioners atteÃtpt to constrùe this passage in the Metra Chem Opinion as annouþcing a rule that the reasonable cause defense requires önly a 'more than cursory review". Metra Chem does not state <this low-standard. - As we sexplain below, what -is required for "reasonable cause" purpose of which is tc "make sure alleincome items are included." Magill v." Commissioner F .2de 1233 (6t n C r.¯ 1-98]e) . is that "the taxpayer .conducts a review the .4797480 (1978) , affd. 651 70 T.C. 465:, -18- identifiable entry on Schedule D of their return. Like Métra Chem, "This case presents no such difficult, issues". Id "Even if all data is furnished to' the preparer the taipayer still has a duty to read the return and make sure a 1 incoše items - are included . " Magill i v. Commissioner, 70 T 3. C. 466, 479-480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981) .9 We do not hèld" that a taxpayer must duplicate the work of his return preparer, or that any omission of an income item in a return prepared by a third partylis nécessarily fatal to a findínc of reasonable cause and good faith on the taxpayer's part·. Rather for purposes of, this opinion, we assume that the-reasonablè cause defense may be available to a taXpayer who conducts a review of his third--party preyared return with the intent of ensuring that all income items are included, and uho exerts ef fort that is reasonable under the circumstances, but who nonetheless fails to discover an omission of an income item. Mr. Woodsum, however, makes no showing of a review reasonable under the circumstances. He personally ordered the termination that gave rise to the income he received a Form-1099-MISC reporting sthat income; that: amount. should have "See also Bailev v."Commissioner, 21 T.C. 678, 687 (1954) ("The duty of «filing accurate returns cannot be avoided by placing responsibility upon .an agent a The fact that petitioner told the pežson who made. up the partnership return about of to read the return and ascertain the inclusion of this item") . the sale leasehold interests totaling $83,500 cannot:excuse his failu,re -19- shown uþ on Schedule D as a distinct item; but fit was omitted. The parties stipulated that petitioners' "rev.iew" of t he defective return was of än únknown duration and, that it· consisted of ethe preparer lurning the p'ages of the:return and, discussing various items . ?etitioners understated their income by $3.4 million--an amount that was 'substantial not only in absolute terms bùt also iu'relatiire težms c(i.e it equaled about 10 percent of p itioners' ladjùsted gross income)e.e A review undertaken to "makes sure all income items are included", (in the- words of Magill) or even a review undertaken only to make sure that the maior income items had been .included--should, absent a reasonable explanation to the contrary, have revealed an omission so straightforward and substantial. In evaluating reasonable cause, "the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liabi ity." 26 C.F.R. sec. 1.6664-4(b) (1) . But petitioners do n t recall how much time they spent reviewing the returh, how much time they spent reviewing Schedule D, or which incomè items they reviewed; and they recall that they did _no_t.. compa:ge or match the items of income reported on the return with the information returns they had received. They have thus failed to prove the "most importants f actor" - -i . e . "the tgxpayer' s effort". -Petitioners-did not fulfill their duty to review the return thats MTS tad prepared. -20- Mr. Woodsum'terminated the swap aheadaof its set stermination date because his watchful eye noted that it was not performing satisfactorily as ian investment . That is, when his own-receiving of income was in question, "Mr. Woodsum was evidently alert and careful. But twhen he-was signing»his tax return andyreporting his tai liability; his routine" was so casual that at hal.fi- million-dollar understatement of that liability could slip between the cracks . We cannot hold that this understatement was attributable to reasonable cause and good faith. To reflect the foregoing, Decision will be entered for respondent. y way of analogy, 26 C F.R. sec. 1.6664-4(b) (1) suggests that an error on a corporate return, arising from "data compiled by the various divisions of a multidivisional corporation"', may result from reasonable cause "provided the corporation employed internal controls and procedures,' reasonable under the circumstances, that were designed to identify such factual errors." Petitioners here lacked "controls: and pfocedures reasonable under the circumstances".