                  T.C. Summary Opinion 2009-122



                      UNITED STATES TAX COURT



                 JANET S. SMILEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8049-08S.              Filed August 4, 2009.



     Janet S. Smiley, pro se.

     Matthew A. Mendizabal, for respondent.



     GERBER, 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 other court, and



     1
      Unless otherwise indicated, all 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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this opinion shall not be treated as precedent for any other

case.

     Respondent determined a $5,400 income tax deficiency for

petitioner’s 2005 tax year and a section 6662(a) penalty of

$1,080.   The income tax deficiency was based on petitioner’s

failure to report two items of income.     Petitioner now agrees

that the items should have been reported, but she contends that

her actions were reasonable and that no section 6662(a) penalty

should apply to the portion of the underpayment attributable to

either income adjustment.   That penalty is the only issue

remaining for the Court’s consideration.

                            Background

     Petitioner resided in California at the time her petition

was filed.   She was employed before 2005 as a legal assistant and

performed both clerical and paralegal work.     Although petitioner

was licensed to practice law, she never practiced.     Petitioner

had no background in tax law and did little or no legal research

in performing her employment duties.     Before 2005 petitioner

became severely depressed and was unable to continue working.       At

the onset of her depression petitioner took several prescription

medicines for her condition.   The medication coupled with her

condition affected her judgment and thought processes throughout

the period under consideration.
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     Before 2005 petitioner applied for State of California

disability benefits and private group disability benefits from

her employer’s health plan.   She was granted benefits from both

the State and her employer’s plan.     For income tax purposes

petitioner reported only her employer’s plan benefits because it

was her understanding that, unlike the private benefits,

Government disability benefits were not taxable.

     During 2005 petitioner applied for Social Security

Administration (SSA) disability benefits.     She maintained

correspondence with the SSA in a separate folder.     Petitioner

maintained other folders, including a folder for information and

documents that she used in preparing her income tax return.

During 2005 petitioner received notice that she had been awarded

Social Security benefits.   She filed that notification in the

Social Security folder.

     During 2005 petitioner was paid $19,021 in Social Security

benefits, including retroactive 2004 benefits and 2005 benefits.

She also received a Form SSA-1099, Social Security Benefit

Statement, from the SSA, which she placed in her Social Security

folder.   The Form SSA-1099 contains several statements indicating

that a portion of Social Security benefits may be taxable.

Petitioner did not report any of the Social Security disability

benefits because of her understanding and belief that Federal

benefits for disability, like her State benefit, were not
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taxable.   Petitioner reported her private disability benefits for

2005, but she did not report either the State or Federal

disability benefits received in that year.

     For 2005 petitioner received a “1099 Consolidated Tax

Statement” (1099 statement) from her stockbroker.    The document

consisted of eight pages and contained petitioner’s income tax

information, including interest, tax-exempt municipal interest,

ordinary dividends, qualifying dividends, stock transactions, and

related materials.    The face or first page of the statement

listed amounts for ordinary dividends, qualified dividends,

investment expenses, and interest income.    Interest income of

$3,908.68 was listed.    The line showing the interest income

contained the following explanation:    “INTEREST INCOME NOT

INCLUDED IN IRS BOX 3”.    On that same page were three places that

were labeled “BOX 3”.    They were denominated “NONTAXABLE

DISTRIBUTIONS”; “INTEREST INCOME ON U.S. TREASURY OBLIGATIONS”;

and “OTHER INCOME.”

     Petitioner found the “INTEREST INCOME NOT INCLUDED IN IRS

BOX 3” language to be ambiguous and confusing, and she

interpreted it to mean that her interest income was not taxable.

Petitioner, however, did extract information from other parts of

the 1099 statement, including tax-exempt municipal interest,

which she reported on the correct part of her Form 1040, U.S.

Individual Income Tax Return.    The fifth page of the 1099
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statement made clear that the $3,908.68 in interest had been

received on petitioner’s behalf from various corporate

securities.

     Respondent’s computer matching capability revealed that

petitioner had not reported the Social Security disability

benefits and interest income, and she was notified by mail.

Shortly after petitioner received the notification from

respondent, she filed an amended 2005 income tax return, along

with payment, that reported the $3,908.68 of interest income and

the 2005 portion of her Social Security benefits.   Petitioner’s

failure to report the 2004 Social Security benefits was based on

her lack of understanding about tax accounting principles and,

more specifically, on the fact that she was a cash basis

taxpayer.

                          Discussion2

     Petitioner has conceded that the interest income and Social

Security benefits are taxable.    She contends, however, that her

failure to report these amounts was reasonable and that the

section 6662(a) penalty should not apply to her underpayment.

     Section 6662(a) and (b)(1) and (2) provides that a taxpayer

is liable for a 20-percent accuracy-related penalty on any



     2
      The parties did not raise any question about the burden of
proof or sec. 7491. Under that statute, respondent bears a
burden of production with respect to the accuracy-related
penalties determined under sec. 6662(a). See sec. 7491(c).
                                 - 6 -

portion of an underpayment of tax required to be shown on a

return attributable to, inter alia, (1) negligence or disregard

of the rules or regulations or (2) a substantial understatement

of income tax.     Negligence is defined as any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and the term “disregard” includes any careless,

reckless, or intentional disregard.      Sec. 6662(c).   Section

6664(c)(1) provides that the penalty under section 6662(a) shall

not apply to any portion of an underpayment if it is shown that

there was reasonable cause for the taxpayer’s position with

respect to that portion and that the taxpayer acted in good faith

with respect to that portion.     Higbee v. Commissioner, 116 T.C.

438, 448 (2001).     The determination of whether a taxpayer acted

with reasonable cause and in good faith within the meaning of

section 6664(c)(1) is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances.       Id.; sec.

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

the extent of the taxpayer’s effort to assess her proper tax

liability for the year.     Sec. 1.6664-4(b)(1), Income Tax Regs.

“Circumstances that may indicate reasonable cause and good faith

include * * * the experience, knowledge, and education of the

taxpayer.”   Id.
                               - 7 -

   We consider the two adjustments separately concerning whether

the accuracy-related penalty applies to the resulting

underpayment caused by each.

     With respect to petitioner’s failure to report $3,908.68 of

interest income, her explanation is that the language preceding

the amount shown on the 1099 statement was “ambiguous”.     We are

unable to find that petitioner’s explanation is reasonable under

the circumstances.   Petitioner, who prepared her own return,

sorted through this 1099 statement to find various amounts of

income, both taxable and tax exempt, and she placed the amounts

on various parts of her income tax return.   Petitioner’s

interpretation of the phrase “INTEREST INCOME NOT INCLUDED IN IRS

BOX 3" as meaning that the interest income was not reportable or

taxable is more wishful thinking than anything else.    Moreover,

we are unconvinced that the face of the 1099 statement was

ambiguous.   Accordingly, and considering all of the

circumstances, we hold that petitioner’s failure to report the

interest income was not reasonable, and petitioner is subject to

the section 6662(a) penalty on the resulting underpayment.

     With respect to petitioner’s failure to report $19,021 of

disability benefits, her explanation is that it was her

understanding and belief that, like State disability payments,

Federal disability payments were not subject to the income tax.

We are cognizant of the fact that before 2005 petitioner had
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received disability payments and correctly reported them; i.e.,

payments from employer’s health plan as taxable and payments from

the State of California as not taxable.   In addition, petitioner

was being treated by a doctor for a serious mental condition and

was taking various medicines that affected her judgment and

thinking processes.   She was involved in pursuing disability

claims with three different sources and had received various

correspondence from each, including the SSA.   It is clear that

she believed the disability payments from the SSA were not

taxable.   She filed correspondence and documents from the SSA in

a special folder on that subject, and she did not include any of

those documents in her separately maintained folder for tax-

related documents.

     When her failure to report was brought to her attention by

respondent, petitioner promptly filed an amended return including

interest and benefits, along with payment of the additional tax.

We note that petitioner did not understand tax accounting

principles; and in spite of the fact that respondent had

determined that she failed to report the $19,021, petitioner

included only the payments for 2005 on her amended return,

although all of the $19,021 had been received during 2005.

Petitioner’s testimony, actions, and the circumstances of this

case are persuasive and reflect that she made a reasonable and

good faith attempt to report her tax liability as it related to
                                 - 9 -

her disability payments.   Accordingly, we hold that petitioner is

not liable for a section 6662(a) penalty on the underpayment

caused by her failure to report Social Security benefits.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
