                        T.C. Summary Opinion 2013-100



                        UNITED STATES TAX COURT



      GARY W. ANDERSEN AND LINDA C. ANDERSEN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24326-12S.                     Filed December 9, 2013.



      Gary W. Andersen and Linda C. Andersen, pro sese.

      Craig A. Ashford and Scott Lewis (student), for respondent.



                             SUMMARY OPINION


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

provisions of section 7463 of the Internal Revenue Code in effect when the
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petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined a deficiency in petitioners’ 2010 Federal income tax

of $7,907 and an accuracy-related penalty of $1,223 pursuant to section 6662(a)

and (d) on the basis of a substantial understatement of income tax.

      After a concession by petitioners,2 the sole issue remaining for decision is

whether they are liable for the accuracy-related penalty. We hold that they are not.

                                       Background

      Some of the facts have been stipulated, and they are so found. We

incorporate by reference the parties’ stipulation of facts and accompanying

exhibits.

      Petitioners resided in Utah at the time that the petition was filed.

      Petitioners have been married for 47 years and have filed joint Federal

income tax returns throughout their married life. Before their marriage, petitioners

filed separate returns as single individuals. Overall, petitioners have a 50-year


      1
        Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the year in issue. All Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
          Petitioners concede that they are liable for the deficiency in tax.
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history of filing timely returns, all of which have been accepted as filed by the

Internal Revenue Service with the sole exception of their return for the year in

issue.

         In 2010 Mr. Andersen was employed by Levelor Kirsch, a subsidiary of

Newell Window Furnishings, Inc. He received a fixed salary with a potential for

bonuses, creating the possibility for his income to fluctuate from year to year.

         In 2010 Mrs. Andersen was employed as a registered nurse on a part-time

basis. She typically worked three to four shifts per month but could be (and was)

called for additional shifts as needed. For the year she earned $28,446. Although

Mrs. Andersen had intended to retire by 2010, she decided to work for another

year or so in order to increase her future Social Security benefits.

         Petitioners regard their tax situation as fairly complex, as they receive

income from multiple sources, including two subchapter S corporations that lease

farmland out of State. Petitioners worry about their ability to prepare accurate tax

returns; accordingly, for many years, including 2010, petitioners have hired a

certified public accountant (C.P.A.) to assist them in the preparation of their

returns.

         Petitioners are aware of the importance of recordkeeping, and for many

years they have maintained a system for keeping track of documents that will be
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needed to prepare their returns. Thus, when petitioners received in the mail a tax

document such as a Form W-2, Wage and Tax Statement, Form 1098, Mortgage

Interest Statement, Form 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or Schedule

K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., they would briefly

review it and then place it in a dedicated tax file, along with other tax-relevant

documents that they collected throughout the year. In February or March

petitioners would meet with their C.P.A. and furnish him with their tax file. Once

the return had been prepared, petitioners would again meet with the C.P.A. to

review the return.

      Over the course of her career, Mrs. Andersen was accustomed to receiving a

Form W-2 in paper form. However, for 2010, the payroll agent for her employer

discontinued issuing Forms W-2 in paper form, opting instead for the first time to

make them available electronically on the Internet. Mrs. Andersen did not receive

notice from either her employer or her employer’s payroll agent about this change,

nor did she receive a paper copy of her Form W-2 from her employer or her

employer’s payroll agent.
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      In collecting and organizing their tax documents incident to the preparation

of their 2010 return, petitioners did not realize that they lacked a Form W-2 for

Mrs. Andersen’s employment.

      Petitioners retained Curtis Trader, a C.P.A., to prepare their 2010 Federal

income tax return. Mr. Trader had prepared petitioners’ tax returns since 2005,

and they had confidence in him. Mr. Trader held a master of accountancy in tax

degree from Brigham Young University, and he had been practicing as an

accountant for nearly 20 years and as a C.P.A. for most of that period.3

      In or around February 2011 petitioners furnished Mr. Trader with all of their

tax documents except for a Form W-2 for Mrs. Andersen. Mr. Trader had

previously spoken with Mrs. Andersen about her retirement plans, and he was

under the impression that she had already retired, a matter that he had recorded in

his client notes. His impression was later strengthened by the fact that among

petitioners’ tax documents was a Form 1099-R, reporting a modest distribution

from a nonemployer payor. Mr. Trader was not therefore surprised by the absence

of a Form W-2, and he did not inquire about the matter. As a result, Mr. Trader




      3
     At the time of trial, Mr. Trader was also chair of the Utah Tax Review
Committee, a position to which he had been appointed by the Governor of Utah.
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did not include Mrs. Andersen’s wage income on line 7 of petitioners’ return, nor

did he include her tax withholding as a credit on line 61.

      As was customary, Mr. Trader met with petitioners to review the 2010 tax

return before it was signed and filed. As part of this process, petitioners’ 2010

return was compared with their 2009 return to check for any major deviations in

income or apparent discrepancies. The adjusted gross income on each of these

returns was within $1,000 of the other, and there were no anomalies in items of

income or otherwise. As a consequence, neither Mr. Trader nor petitioners

noticed the absence of either Mrs. Andersen’s wage income or her tax withholding

on the 2010 return.

      Petitioners signed and timely filed the 2010 return. On it, they reported

wages of $87,631 and total income (also adjusted gross income) of $153,225.

After reducing total tax due of $21,372 by withholding, estimated tax payments,

and a making work pay credit, they claimed a modest overpayment, which they

applied to their 2011 estimated tax.

      In September 2012 respondent issued petitioners a notice of deficiency,

determining a deficiency of $7,907 attributable to Mrs. Andersen’s unreported

wages. In the notice respondent also determined an accuracy-related penalty

under section 6662(a) on the basis of a substantial understatement of income tax.
                                         -7-

      On the day that they received the notice of deficiency, petitioners, perplexed

that their return should be questioned by the Internal Revenue Service, telephoned

Mr. Trader and faxed him the notice. Mr. Trader promptly reviewed the notice,

confirmed with petitioners that Mrs. Andersen had in fact received wages in 2010,

and explained to them that their return had failed to report those wages. At that

point, within one week of receiving the notice of deficiency, petitioners paid in

full the deficiency and the interest thereon. Thereafter, petitioners timely filed a

petition for redetermination with this Court, challenging only the accuracy-related

penalty.

                                     Discussion

      Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to

20% of the amount of any underpayment of tax that is attributable to any

substantial understatement of income tax. By definition, an understatement is the

excess of the tax required to be shown on the tax return over the tax actually

shown on the return. Sec. 6662(d)(2)(A). An understatement of income tax is

“substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be

shown on the return. Sec. 6662(d)(1)(A).

      With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the
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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 evidence that the Commissioner’s

determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).

      In the instant case respondent determined the accuracy-related penalty on

the basis of a substantial understatement of income tax. See sec. 6662(d). Here

the understatement of $7,907, which is attributable to the omission from income of

Mrs. Andersen’s wages, exceeds $5,000, which amount is greater than 10% of the

tax required to be shown on petitioners’ return. Thus, respondent has satisfied his

burden of production under section 7491(c). As a result, petitioners now bear the

burden to show that they should not be liable for the penalty. See Higbee v.

Commissioner, 116 T.C. at 446-447.

      Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty with respect to any portion of an underpayment if the taxpayer

establishes that there was reasonable cause for such portion, and the taxpayer

acted in good faith with respect to such portion. The decision as to whether the

taxpayer acted with reasonable cause and in good faith is made on a case-by-case
                                        -9-

basis, taking into account the pertinent facts and circumstances, including the

taxpayer’s knowledge, education, and experience, as well as the taxpayer’s

reliance on professional advice. Thomas v. Commissioner, T.C. Memo. 2013-60;

sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is the

extent of the taxpayer’s effort to assess his or her proper tax liability. Humphrey,

Farrington & McClain, P.C. v. Commissioner, T.C. Memo. 2013-23; sec. 1.6664-

4(b)(1), Income Tax Regs.

      Admittedly, this is an exceptionally close case. However, after weighing all

the evidence, and in particular the testimony of the witnesses, we think the balance

shifts in petitioners’ favor.

      At trial both Mr. Andersen and Mrs. Andersen testified. We found their

testimony to be straightforward and fully credible. They readily admitted that they

had made a mistake. When crossed-examined by respondent’s counsel, they were

not defensive or argumentative, but rather direct and forthright. In short,

petitioners struck us as trustworthy individuals who play by the rules and who take

their Federal tax responsibilities very seriously. Apart from our impression of

their demeanor, this is demonstrated by the fact that petitioners have a 50-year

history of filing timely returns, all of which have been accepted as filed by the
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Internal Revenue Service with the sole exception of their return for the year in

issue.

         That petitioners acted with reasonable cause and in good faith is also

demonstrated by the fact that for many years petitioners have hired a C.P.A. to

prepare their returns. Although petitioners regard their tax situation as too

complex to prepare accurate returns themselves, they actively participate in the

return preparation process by maintaining a system to keep track of relevant tax

records and by reviewing their completed returns with their C.P.A.

         Petitioners’ failure to notice the absence of a Form W-2 for Mrs. Andersen

was an oversight on their part. However, the oversight was at least partially

understandable given both the number of petitioners’ tax documents and the fact

that Mrs. Andersen never received from either her employer or her employer’s

payroll agent a paper copy of a Form W-2, something that she had previously

received throughout her career. Nor had Mrs. Andersen received notification from

either of those parties that the payroll agent had discontinued issuing Forms W-2

in paper form in favor of making electronic copies available on the Internet.

         Petitioners also failed to notice, when they reviewed their return with Mr.

Trader, that Mrs. Andersen’s wages were not included on line 7. But when, as part

of the review process, petitioners and Mr. Trader compared the 2010 return with
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the 2009 return, the parties noted the similarity of the amounts of income and the

absence of any anomaly, thereby suggesting that no error had occurred. Indeed,

the difference between the amounts of income reported on petitioners’ 2010 and

2009 returns was less than $1,000, or two-thirds of one percent of their 2009

income, a difference that would not ordinarily give rise to any suspicion that

income had not been fully reported.

      Mention should also be made of Mr. Trader, a highly credentialed tax

professional. Although petitioners do not seek to shift responsibility to him, as

they readily admit that they inadvertently failed to furnish him with a Form W-2

for Mrs. Andersen’s wages, we are convinced that if Mr. Trader had not proceeded

on a mistaken impression about Mrs. Andersen’s retirement, the income would

never have gone missing from the return.4

      Finally, indicative of petitioners’ good faith is the fact that on the very day

that they received the notice of deficiency they contacted Mr. Trader and faxed

him a copy for an explanation of why there should be any deficiency in their tax.

Then, as soon as petitioners learned that their return had omitted Mrs. Andersen’s


      4
        At trial we found Mr. Trader to be forthright and credible. He readily
admitted that he knew that Mrs. Andersen had been employed in the past but
assumed that she had retired on the basis of statements of intent she made before
petitioners furnished him with their 2010 tax file.
                                         - 12 -

wages, and within a week of receiving the notice, petitioners paid the deficiency in

full, together with applicable interest. To us, these actions bespeak

petitioners’ commitment to fulfilling their tax obligations and their good faith.

                                      Conclusion

      Clearly, petitioners made a mistake. But we think it was an honest mistake

and not of a type that should justify the imposition of the accuracy-related penalty.

In short, we think that petitioners’ diligent efforts to keep track of their tax

information, hiring a C.P.A. to prepare their tax return, reviewing their return with

the C.P.A. when it was completed, and prompt payment of the deficiency upon

receipt of the notice of deficiency, together with the other facts and circumstances

discussed above, represent a good-faith attempt to assess their proper tax liability.

Accordingly, we hold that petitioners have carried their burden with respect to the

reasonable cause and good faith exception under section 6664(c)(1) and that

petitioners are therefore not liable for the accuracy-related penalty under section

6662(a). See Humphrey, Farrington & McClain, P.C. v. Commissioner, T.C.

Memo. 2013-23; sec. 1.6664-4(b)(1), Income Tax Regs. In so holding we have

considered all of the arguments advanced by respondent, and, to the extent not

expressly addressed, we conclude that those arguments do not support a result

contrary to that reached herein.
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In order to give effect to the foregoing,


                                                 Decision will be entered for

                                           respondent as to the deficiency in tax

                                           and for petitioners as to the accuracy-

                                           related penalty.
