Olsen v. Comm'r ( 2011 )

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.
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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.
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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.
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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.
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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
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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.
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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.