TAX COURT OPINION

Case: Oladosu T. Oseni-Olalemi & Francisca E. Olalemi
Docket Number: 10198-10
Judge: Kroupa
Opinion Type: bench
Filed: 06/22/2011
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 OLADOSU T. OSENI-OLALEMI FRANC I S CA E . OLAL EMI , & Petitioners, KVC v. Docket No. 10198-10 COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of transcript of June 9, 2011, containing her oral rendered in this case. findings of fact and opinion the above case before Judge Diane L. Kroupa on the pages of the In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. June 22, 2011 SERVED Jun 30 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion By Judge Diane L. Kroupa June 9, 2011 Olalemi v. Commissioner Docket No.: 10198-10 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted in section 7459(b) and Rule 152. All section references are to the Internal Revenue Code as amended and in effect in 2007, and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner husband represented himself, and Donna Herbert appeared on behalf of respondent. Respondent determined a $20,189 Federal income tax deficiency against petitioners for 2007 and determined petitioners were liable for a $1,638 accuracy-related penalty under section 6662 for 2007. Petitioner wife failed to appear for trial and also failed to sign the stipulation of facts. We therefore shall grant respondent's oral motion to dismiss this case as to petitioner Francisca E. Olalemi for failure to prosecute. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 There are only two issues for decision after the parties' concessions. The first issue is whether respondent properly calculated petitioners' Federal income tax liability (tax liability) for 2007. We hold respondent did. The second issue is whether petitioners are liable for the accuracy-related penalty. We hold they are. FINDINGS OF FACT Some of the facts have been stipulated and they are so- found. The stipulation of facts and accompanying exhibits are incorporated by this reference. Petitioners resided in Fresno, California at the time they filed the petition. Petitioners filed a return for 2007 that they had paid a preparer to prepare. Petitioners claimed two sons as dependents on the tax return despite having only one son. Moreover, one of the sons claimed on the tax return was petitioner husband's brother. Petitioners also claimed one daughter on the tax return despite having two daughters. They reported almost $250,000 of wages and $16,000 of an early distribution from a retirement account. Respondent notified petitioners that they failed to report various kinds of income based upon information respondent received from third-party Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 payors on Forms W-2 and 1099s. Petitioners paid another preparer to prepare an amended return for 2007. Petitioners admitted on the amended return that they had failed to report $2,500 in gambling income, $23 in dividends, $2,749 in wages and $44,000 in retirement account distributions. In 2007, petitioners received $60,000 in early retirement distributions rather than the $16,000 they reported on the original return. Petitioners also determined on From 5329, entitled additional taxes on early retirement account distributions, attached to the amended return that only $33,400 of the $60,000 retirement account distribution was subject to the additional tax under section 72(t) while the remaining amount qualified for higher education expenses and other expenses. Petitioners erroneously reported this additional tax of $3,340 as a credit on the amended return rather than additional tax. The amended return also sought credit for the $12,000 amount withheld from the $60,000 retirement account distribution that had not been claimed on the original return. Respondent has yet to process the amended return as petitioners' account for 2007 was under examination. OPINION The parties have conceded and resolved all Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 issues other than the computation of tax and the liability of petitioners for the accuracy related penalty under section 6662(a). We now turn to the two issues still in dispute. We begin with the fundamental principle of tax litigation that the Commissioner's determinations in the deficiency notice are presumed correct and taxpayers bear the burden to establish those determinations are incorrect. See Rule 142(a), Welch v. Helvering, 290 U.S. 111, 115 (1933). First, we decide whether respondent erroneously calculated petitioners' Federal income tax liability for 2007. Petitioners have the burden of proof on this issue. See Rule 142(a). The burden to proof only shifts to respondent under specific situations. See ec. 7491. Petitioners have not offered any credible evidence that respondent made an error in computing the tax liability for 2007. The only error the Court finds is that petitioners erroneously claimed the $3,340 as a credit rather than the additional tax under section 72(t). Both parties agree that $3,340 is due from the early retirement account distribution. The parties also agree that petitioners' account has yet to be credited with the $12,000 withheld from the early retirement account distribution in 2007. We Heritage Reporting Corporation (202) 628-4888 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 accordingly sustain respondent's determination there is a tax deficiency for 2007. We next address whether petitioners are liable for the accuracy-related penalty under section 6662 for substantial understatement of tax. A substantial understatement is one which exceeds the greater of ten percent of the tax required to be shown on the return or $5,000. Sec. 6662(a). Taxpayers are liable for the accuracy-related penalty for any portion of an underpayment attributable to negligence or disregard of rules and regulations. Secff 6662(a) and (b) (1). Negligence has been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances. Negligence often takes the form of an understatement of income. See Healey v. Commissioner, T.C. Memo. 1996-260, and cases cited therein. Petitioners admit that they failed to report $50,000 of income from -various sources including gambling income, dividends, wages and early retirement distributions. Accordingly, respondent has met his burden of production. See Higbee v. Commissioner, 116 T.C. 438 (2001), sec. 7491(c). Petitioners claim that they relied on their tax preparer to prepare an accurate return. The accuracy-related penalty under section 6662 does not Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 apply if petitioners can establish, based on all the facts and circumstances, that there was a reasonable cause for the underpayment and that they acted in good faith. See sec. 6664-4(a); sec. 1.6664-4(b) (1), Income Tax Regs. Taxpayers bear the burden of proof as to reasonable cause and willful neglect. Higbee v. Commissioner, supra at 447. Petitioners have failed to show reasonable cause for the underpayments on their returns, and have not shown that they acted in good faith with respect to any portion of the underpayments. They simply seek relief from the penalties by casting all responsibility on their tax return preparer. Generally, the duty of filing returns cannot be avoided by placing responsibility on a return preparer. Loftus v. Commissioner, T.C. Memo. 1992- 266. In limited situations, however, reasonable cause for negligence due to return preparer mistakes may be established if the taxpayers show that they provided the return preparer with complete and accurate information, that an incorrect return was the result of the preparer's mistake and the taxpayers in good faith relied on the advice of a competent return preparer. Id. Even if taxpayers meet these requirements, taxpayers still have a duty to read and Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 review the return to make sure that all income items are included. Id. Petitioners have not established the elements for relief from penalties on account of the return preparer's errors. Moreover, the Court finds that petitioners did not review their returns. Petitioners are intelligent, gainfully employed individuals. Petitioner husband is a well paid manager for McDonald's and his wife is a registered nurse. They earned income in excess of $250,000 for 2007. Petitioners have the basic acumen needed to review the returns before they signed them. Petitioners did not even exercise the care required to identify the sexes of their children, whom they claimed as dependents on their returns. Petitioners' failure to review their own return reflects that petitioners completely abdicated their duty to file a correct return by closing their eyes to facts that they could have discerned. See id. We cannot excuse taxpayers who make little or no effort to discern whether their tax return is accurate. Accordingly,: we find that petitioners did not have reasonable cause for, nor did they act in good faith with respeet to, the understatement of income tax. We therefore sustain respondent's Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 determination that petitioners are liable for the section 6662(a) accuracy-related penalty for 2007. To reflect the foregoing, we shall enter a decision for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 9:59 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888