TAX COURT OPINION

Case: Eirkus & Iduma M. Bailes
Docket Number: 9719-07S
Judge: Colvin
Opinion Type: bench
Filed: 03/18/2009
Pages: 10

UNITED STATES TAX COURT Washington, D .C . 2021 7 ANTONIO GUBLET AND SUSIE BRUBAKER, Petitioners, v . Docket No . 26476-07S COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Lewis R . Carluzzo at Los Angeles, California, on February 13, 2009, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . March 18, 2009 SERVED Mar 19 2009 3 1 Bench Opinion by Special Trial Judge Lewis R . Carluzz o 2 Gublet & Brubaker v . Commissioner Docket no . 26476-07L 3 February 13, 200 9 4 The Court has decided to render oral findings of 5 fact and opinion in this case, and the following represents 6 the Court's oral findings of fact and opinion . The ora l 7 findings of fact and opinion shall not be relied upon as 8 precedent in any other case . 9 This proceeding for the redetermination of a 10 deficiency is a small tax case conducted pursuant to the 11 provisions of section 7463 of the Internal Revenue Code of 12 1986, as amended, . and . Rules 170 through 175 of the Tax Court 13 Rules of Practice and Procedure . 14 This bench opinion is made pursuant to th e 15 authority granted by section 7459(b) of the Internal Revenue 16 Code of 1986, . as amended, and Rule 152 of the Tax Cour t 17 Rules of Practice and Procedure . 18 Hereinafter in this bench opinion, unles s 19 otherwise specified, section references are to the Internal 20 Revenue Code of 1986, as amended, in effect for 2005 . Rule 21 references are to the Tax Court Rules of Practice an d 22 Procedure . 23 Antonio Gublet and Susie Brubaker appeared pro 24 sese . Aely K . Ullrich appeared on behalf of respondent . 25 In a notice of deficiency dated September 17, Heritage Reporting Corporatio n (202) 628-4888 1 2007, respondent determined a $31,233 deficiency i n 4 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 petiti on ers' 2005 Federal income tax and imposed a $6,08 5 sectio n 6662(a) accuracy-related pe nalty . Petitioners no w agree to the deficiency, which has been paid . The issue fo r decisi on is whether petitioners are liable for the sectio n 6662(a ) accuracy-related penalty . The resolution of th e issue depends upon whether petition ers acted in good fait h and had reasonable cause for the un derpayment of tax, or an y portio n of it, required to be shown on their 2005 join t Federa l income tax return . Some of the facts have been stipulated and are s o found . Petitioners are and were at all times relevant here , marrie d to each other . They filed a timely joint 200 5 Federal income tax return . At the time the petition wa s filed they resided in California . During 2005, petitioners were employed in th e entert ai nment industry as partners in Tony Clark Production s (the p ar tnership) . Their income from the partnership an d other sources varied from year to y ear . For 2005, eac h petiti on er received a Form K-1 from the partnership . Th e Form K -1 shows $84,491 as the partn er's distributive shar e of the partnership's income, and the other Form K-1 show s that p artner's distributive share o f the partnership' s income a s $84,490 . Only the income shown on the former For m 25 K-1 is included in the income repor ted on petitioners' 200 5 Heritage Reporting Corporation (202) 628-4888 5 1 return . 2 As a result of certain medical problems 3 experienced by Susie Brubaker during 2005, she was 4 unemployed for a time during that year and receive d 5 unemployment compensation totaling $10,345 . The unemployment 6 compensation is not reported on Petitioners' 2005 return . 7 The medical problems experienced by Susie Brubaker during the times relevant to the issue here in dispute are 9 well documented in the record, and we see little point in 10 highlighting those problems by describing them in detail in 11 this bench opinion . Suffice it to state that the nature of 12 her problems caused her not only physical suffering, but 13 emotional suffering for her and her husband as well . 14 Petitioners' 2005 return was prepared by a paid 15 income tax return preparer that Petitioners had used for 16 several years prior to the year in issue . Typically , 17 Antonio Gublet assumed responsibility for Petitioners' 18 Federal income tax matters, and he met with the return 19 preparer from year to year, as he did in connection with the 20 preparation of Petitioners' 2005(cid:127)return . The $178,50 0 21 adjusted gross income reported on their 2005 return doe s 22 not, as noted above, include the income shown on one of the 23 Forms K-1 or the unemployment compensation received by Susie 24 Brubaker during 2005 . According-to an explanation tha t 25 petitioners received from their tax return preparer, the Heritage Reporting Corporatio n (202) 628-4888 -f 6 1 omissions were due to an error made by a computer-based tax 2 return preparation program . 3 Petitioners' 2005 return includes a Schedule C, 4 Profit or Loss From Business . The items reported on that 5 return -- strike that -- the items reported on tha t 6 Schedule C appear to relate to the trade of business of the 7 partnership . The main trade or business listed on tha t 8 Schedule C is shown as Tony Clark Productions . Neither 9 party could explain the relationship between the partnership 10 and the "business" to which the items reported on th e 11 Schedule C relate . 12 Antonio Gublet reviewed the return after it was 13 prepared, but due to the medical problems his wife was 14 experiencing at the time, his focus was not what it should 15 have been . He did not detect that the income shown on one 16 of the Forms K-1 and the unemployment compensation (th e 17 omitted items) had not been included in the income reported 18 on the return . 19 As noted, Petitioners now agree that the omitted 20 items should have been included in their 2005 income . Also 21 as noted, they have paid the deficiency that results from 22 the omissions . However, they challenge the imposition o f 23 the section 6662(a) accuracy-related penalty upon the ground 24 that their reliance on the return as prepared by thei r 25 return preparer and the emotional distress each was Heritage Reporting Corporatio n (202) 628-4888 4. 1 experiencing at the time caused what should be considered 7 2 now as an honest mistake . 3 Let's go off the record . 4 (OFF THE RECORD ) 5 COURT REPORTER : We are back on record . 6 THE COURT : Respondent disagrees and points out 7 that the omitted items constitute about one-third of th e 8 income earned by Petitioners during 2005 . Respondent also 9 points out that a taxpayer has an obligation to carefully 10 review a return prepared by a paid income tax retur n 11 preparer and suggests that even a "cursory" review of thei r i 12 return would have revealed the omitted items . 13 The thoroughness of the discussion of the 14 applicable law contained in respondent's pretrial memorandum 15 allows for only the following brief summary of th e 16 controlling principles . 17 In general, and as relevant here, section 6662(a) 18 provides that if any portion of the underpayment of ta x 19 required-to be shown on the taxpayer's return is due t o 20 negligence or disregard of rules or regulations, or if the 21 underpayment of tax is a substantial understatement o f 22 income tax, then "there shall be added to .the tax an amount 23 equal to-20% of the portion of the underpayment of tax" . 24 Sec . 6662(a), (b) (1) & (2), (c) and (d) . Respondent 25 advances both grounds for the imposition of the section Heritage Reporting Corporatio n (202) .628-4888 8 1 6662(a) accuracy-related penalty here in dispute . 2 For Federal income tax purposes, negligence i s 3 defined as the lack of due care or the failure to do what a 4 reasonable and ordinarily prudent person would do under, the 5 circumstances . Needy v . Commissioner , 85 T .C . 934, .94 7 6 (1985) . Negligence includes the failure to make a 7 reasonable attempt to comply with the provisions of the 8 internal revenue laws . Sec . 6662(c) ; sec . 1 .6662-3(b)(1), 9 Income Tax Regs . Disregard includes any careless, reckless, 10 or intentional disregard of rules or regulations . Sec . 11 6662(c) ; sec . 1 .6662-3(b)(2), Income Tax Regs . According to 12 Respondent, the entire underpayment of tax required to b e 13 shown on Petitioners' 2005 return is due to negligence . 14 Respondent also argues that the penalty should be 15 imposed because the underpayment of tax is a substantial 16 understatement of income tax . Sec . 6662(a)(2), (d) . In 17 this case the manner in which the underpayment of tax and 18 the understatement of income tax are computed varies 19 slightly from the manner in which the deficiency is 20 computed, but the variance is a distinction without a 21 difference for our purposes . See Secs . 6211(a) , 22 6662(d)(2)(A) and 6664(a) . We proceed as though all ar e 23 computed the same and note that the understatement of tax is 24 a substantial understatement of tax within the meaning o f 25 section 6662(d) . If only for that reason we are satisfied Heritage Reporting Corporatio n . (202) 628-4888 9 1 that Respondent has met his burden of production with 2 respect to the imposition of the section 6662(a ) 3 accuracy-related penalty . Sec . .7491(c) ; Higbee v . 4 Commissioner , 116 T .C . 438, 447 (2001) . 5 The accuracy-related penalty does not apply with 6 respect to any portion of an underpayment if it is shown 7 that there was reasonable cause for such portion and that 8 taxpayer acted in good faith with respect to such portion . 9 Sec . 6664(c)(1) . The determination of whether Petitioner s 10 acted with reasonable cause and in good faith depends upon 11 the pertinent facts and circumstances . Sec . 1 .6664-4(b)(1), 12 Income Tax Regs . The burden to establish that they acted in 13 good faith rests with Petitioners . Higbee v . Commissioner , 14 supra . 15 According to Petitioners, their reliance upon 16 their return preparer during a time when medical problems 17 generated much emotional distress and distraction s 18 establishes their good faith and reasonable cause for the 19 underpayment . Considering the circumstances at the time, 20 and, the unusual manner in which the return was prepared, we 21 agree with Petitioners, but only with respect to the omitted 22 income reported on the Form K-l . As we view the matter , 23 when the return was reviewed, even during a period of high 24 emotional distress, it should have been noted that the line 25 designated for unemployment compensation was obviously left Heritage Reporting Corporatio n (202) 628-4888 1 0 1 blank . The omission of the Form K-l income is hardly 2 obvious, even from a careful review of .the return . 3 We understand Respondent's point regarding the 4 relative portion of Petitioners' income that the omitted 5 items represent, but we find that argument to be somewhat 6 undermined by the manner in which Petitioners wer e compensated from year to year . Petitioners are liable for a section 6662(a ) 9 accuracy-related penalty for 2005, but only as computed on 10 the underpayment of tax attributable to the omission of the 11 unemployment compensation . 12 To reflect the foregoing, and the agreemen t 13 between the parties on other adjustments, decision will be 14 entered under Rule 155 . 15 This concludes the Court's oral findings of fact 16 and opinion in this case . 17 (Whereupon, at 9 :15 a .m, the bench opinion in the 18 above-entitled matter was concluded . ) 19 // 2 0 21 // 22 // 2 3 24 // 25 Heritage Reporting Corporation (202) 628-4888 2 P R O C E E D I N G S 2 (9 :02 a .m . ) 3 THE CLERK : Recalling from the Calendar, Docke t 4 No . 26476 - 07S, Antonio Gublet and Susie Brubaker . 5 (Whereupon , a bench opinion was rendered in the 6 above - entitled matter . ) 7 8 9 10 11 12 13 14 15 16 17 / / 18 19 20 21 / / 22 // 23 // 24 // 25 Heritage . Reporting Corporation (202) 628-4888