Court Opinion

ID: 4338908
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:08:43.970677+00
Date Added: 2024-06-11T14:46:57.408903
License: Public Domain

T.C. Summary Opinion 2011-131

                     UNITED STATES TAX COURT

                  KURT C. OLSEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 11658-10S.             Filed November 23, 2011.

     Kurt C. Olsen, pro se.

     Elizabeth K. Wickstrom, for respondent.

     ARMEN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any

     1
        Unless otherwise indicated, all subsequent 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.
                                 - 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 wife received 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

the form.
                              - 3 -

     Petitioner usually takes the lead in preparing the couple’s

joint Federal income tax returns.   He prepared the couple’s joint

income tax return for 2007 using tax return preparation software.

Because he had never dealt with a Schedule K-1 in the past,

petitioner upgraded his tax preparation software to a more

sophisticated version as a precaution to ensure proper treatment

of the unfamiliar form.

     Using the upgraded software’s interview process, petitioner

correctly entered the name and tax identification number of the

trust, properly reporting the source of income.   While

transcribing the remaining information, however, he made a data

entry error that prevented the amount of interest income from

being correctly displayed on Schedule E, Supplemental Income and

Loss, of his Federal tax return.    Petitioner reviewed the Federal

tax return before filing, including using the verification

features in his tax preparation software, but did not discover

the error.

                           Discussion

     Section 6662(a) and (b)(2) imposes a penalty equal to 20

percent of the amount of any underpayment attributable to a

substantial understatement of income tax.2   An understatement of

income tax is “substantial” if the understatement exceeds the

     2
        In the notice of deficiency respondent determined the
accuracy-related penalty on the basis of sec. 6662(d), a
substantial understatement of income tax.
                                  - 4 -

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 to 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. Helvering, 290 U.S.
111, 115 (1933).

     The Commissioner may satisfy his burden of production 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 definition of

“substantial”.   E.g., Graves v. Commissioner, T.C. Memo. 2004-

140, affd. 220 Fed. Appx. 601 (9th Cir. 2007); Janis 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 petitioner 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 of proving 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 preparation 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 inconsistent with a finding
                                 - 6 -

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

acted with 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

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.
                                - 7 -

correctly identified the trust as the source of the interest

income.   Petitioner also correctly entered the trust’s tax

identification number into the software program.      He did not bury

his head in the sand and ignore his obligation to check the

accuracy of his tax return.    Instead, petitioner reviewed the

information he entered using his tax preparation software upon

completion of the software’s interview process.      Despite his best

efforts, however, petitioner failed to discover that the amount

of the interest income did not appear on the final version of his

tax return that was filed.

     Under the unique facts and circumstances of this case, we

hold that petitioner acted with reasonable cause and in good

faith within the meaning of section 6664(c)(1).      Accordingly,

petitioner is not liable for the accuracy-related penalty under

6662(a) as determined by respondent in the notice of deficiency.

                              Conclusion

     We have considered all of the arguments made by respondent,

and, to the extent that we have not specifically addressed them,

we conclude that they are without merit.

     To reflect our disposition of the disputed issue, as well as

the parties’ concessions,

                                             Decision will be entered

                                        under Rule 155.