                                      STEPHEN G. WOODSUM AND ANNE R. LOVETT, PETITIONERS v.
                                          COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 18934–09.                       Filed June 13, 2011.

                                                  In 2006 Ps received gain of $3.4 million upon the termi-
                                               nation of a ‘‘swap’’ transaction. P–H was personally involved
                                               in terminating the transaction and received from the payor a
                                               Form 1099–MISC, Miscellaneous Income, that reported the
                                               payment. Ps retained a firm with a lawyer and a certified
                                               public accountant to prepare their 2006 income tax return. Ps
                                               gave to the firm all the 160-plus information returns they had
                                               received from third-party payors, including the Form 1099–
                                               MISC reporting the $3.4 million. The 115-page return that
                                               the firm prepared reported $29.2 million of adjusted gross
                                               income but omitted the $3.4 million from the swap trans-
                                               action. Ps signed and filed the return. The IRS determined a
                                               deficiency of tax (which Ps conceded and paid) and an
                                               accuracy-related penalty under I.R.C. sec. 6662(a), which Ps
                                               dispute on grounds of ‘‘reasonable cause’’ under I.R.C. sec.
                                               6664(c)(1). Held: Ps’ reliance on their return preparer did not
                                               constitute reasonable cause for their omission of the $3.4 mil-
                                               lion income item.

                                           David H. Hopfenberg, for petitioners.
                                           Patrick F. Gallagher, for respondent.

                                                                                                                                   585




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                                      586                136 UNITED STATES TAX COURT REPORTS                                     (585)


                                                                                  OPINION

                                        GUSTAFSON, Judge: This case is before the Court pursuant
                                      to section 6213(a) 1 for redetermination of an accuracy-
                                      related penalty of $104,295 that the Internal Revenue
                                      Service (IRS) determined against petitioners Stephen G.
                                      Woodsum and Anne R. Lovett for tax year 2006, pursuant to
                                      section 6662(a). The issue for decision is whether petitioners
                                      had ‘‘reasonable cause’’ under section 6664(c)(1) for omitting
                                      $3.4 million of income from their joint 2006 Federal income
                                      tax return.

                                                                               Background
                                        The parties submitted this case fully stipulated, pursuant
                                      to Rule 122. We incorporate by this reference the stipulation
                                      of facts filed December 6, 2010, and the associated exhibits.
                                      Petitioners’ backgrounds
                                        Petitioners Stephen G. Woodsum and Anne R. Lovett are
                                      married. At the time they filed their petition, they resided in
                                      New Hampshire.
                                        Ms. Lovett received a bachelor of arts degree from Yale
                                      University in 1977, and the stipulated record shows nothing
                                      more about her background. Mr. Woodsum received a bach-
                                      elor of arts degree from Yale University in 1976 and a mas-
                                      ter’s in management from the Kellogg School of Management
                                      at Northwestern University in 1979. Mr. Woodsum is the
                                      founding managing director of Summit Partners, a private
                                      equity investment firm founded in 1984.
                                        Petitioners are not tax experts. But Mr. Woodsum is finan-
                                      cially sophisticated, and he has a basic understanding of the
                                      taxation of interest income, dividend income, and income
                                      from the sale of stocks and bonds.
                                      The swap transaction
                                        In 1998 Mr. Woodsum signed an agreement that undertook
                                      a financial transaction that the parties describe as a ‘‘ten
                                      year total return limited partnership linked swap’’ (and that
                                      we refer to herein as ‘‘the swap’’). In entering into this trans-
                                        1 Except as otherwise noted, all section references are to the Internal Revenue Code of 1986

                                      (26 U.S.C.), as amended and in effect for the year at issue, and all Rule references are to the
                                      Tax Court Rules of Practice and Procedure.




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                                      (585)                        WOODSUM v. COMMISSIONER                                        587


                                      action, Mr. Woodsum was advised by attorney David H.
                                      Hopfenberg (who, as we show below, supervised the prepara-
                                      tion of the tax return for the year at issue). Mr. Woodsum
                                      originally entered into the swap with the London Branch of
                                      Bankers Trust Company, but Bankers Trust was succeeded
                                      in its interest in the swap by Deutsche Bank. The parties’
                                      stipulation explains the swap as follows:
                                        21. The Swap required * * * [Deutsche Bank] to pay Petitioners the
                                      value of the Reference Fund less the Calculation Amount on the Termi-
                                      nation Date.
                                        22. The Reference Fund was Spring Point Partners, L.P., a Delaware
                                      Limited Partnership.
                                        23. According to the terms of the Swap, the Specified Interest in the Ref-
                                      erence Fund was ‘‘a limited partnership interest in the Reference Fund
                                      that would result from a capital contribution to such Reference Fund of
                                      USD 2,612,156 on December 31, 1997, if one were to be made.’’
                                        24. The Swap required Petitioners to make quarterly payments to * * *
                                      [Deutsche Bank] based upon the product of the Notional Amount (as
                                      adjusted) times the USD–LIBOR–BBA rate plus 1.50% (the ‘‘LIBOR Pay-
                                      ments’’). The agreement further required the Petitioners to provide Collat-
                                      eral to * * * [Deutsche Bank].

                                         After the end of every calendar quarter, petitioners
                                      received account statements with respect to the swap
                                      showing the total appreciation or depreciation in the value of
                                      their interest. They began receiving these quarterly reports
                                      at least as early as December 31, 2003 (when petitioners’
                                      interest had appreciated to $5,816,401), and until March 31,
                                      2006 (when petitioners’ interest had appreciated to
                                      $6,368,506). On their returns for the tax years preceding
                                      2006, petitioners reported income and deductions relating to
                                      the collateral and LIBOR payments in connection with the
                                      swap.
                                         The swap’s ten-year term was apparently scheduled to end
                                      in early 2008, but Mr. Woodsum believed that the reference
                                      fund was not performing as well as it should. He therefore
                                      informed Deutsche Bank in writing on February 3, 2006, of
                                      his intention to terminate the swap effective March 31, 2006.
                                      The net payout to petitioners in connection with the termi-
                                      nation of the swap was $3,367,611.50, all of which, the par-
                                      ties agree, was taxable income to petitioners. Mr. Woodsum
                                      discussed the termination with Mr. Hopfenberg before it took
                                      place, and Mr. Hopfenberg advised Mr. Woodsum when the




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                                      588                136 UNITED STATES TAX COURT REPORTS                                     (585)


                                      swap had been terminated. After the end of 2006, Deutsche
                                      Bank issued to petitioners a Form 1099–MISC, Miscellaneous
                                      Income, reporting ‘‘Other income’’ of $3,379,611 2 from the
                                      termination of the swap, and a Form 1099–INT, Interest
                                      Income, reporting $60,291.69 of ‘‘Interest income’’.
                                      Petitioners’ income in 2006
                                         In 2006 petitioners received adjusted gross income totaling
                                      almost $33 million (including the $3.4 million from termi-
                                      nating the swap). Petitioners’ payors reported that income to
                                      petitioners and to the IRS on more than 160 information
                                      returns, e.g., Schedules K–1 and Forms 1099, including the
                                      Deutsche Bank Forms 1099–MISC and 1099–INT.
                                         The $3.4 million reported on Deutsche Bank’s Form 1099–
                                      MISC was not the largest amount reported on the information
                                      returns that petitioners received for 2006. However, if the
                                      $3.4 million from Deutsche Bank had been included on peti-
                                      tioners’ 2006 return, it would have been the third largest
                                      long-term capital gain amount reported as a line item on
                                      Schedule D, Capital Gains and Losses.
                                      Preparation of petitioners’ 2006 return
                                         For 2006 petitioners filed 27 State income tax returns and
                                      a joint Federal income tax return.
                                         To prepare their 2006 Federal income tax return, peti-
                                      tioners hired Venture Tax Services, Inc. (‘‘VTS’’), a niche firm
                                      specializing in tax work for private equity and hedge funds
                                      as well as such funds’ general partners. VTS employed Mr.
                                      Hopfenberg, whom petitioners had retained for investment
                                      and tax advice since 1996. As of 2006, Mr. Hopfenberg had
                                      more than 20 years of tax compliance and consulting experi-
                                      ence, including employment in the tax departments of major
                                      accounting firms. For VTS’s preparation of petitioners’ 2006
                                      return, Mr. Hopfenberg acted as reviewer. The VTS employee
                                      charged with actually preparing the return was a Massachu-
                                      setts certified public accountant (‘‘C.P.A.’’) who similarly had
                                      more than 20 years of tax compliance experience, including
                                      employment with major accounting firms.
                                        2 The Deutsche Bank Form 1099–MISC shows an amount of $3,379,611, but the parties have

                                      stipulated that the net payout (and the taxable income) was $3,367,611.50. The discrepancy is
                                      not explained in the record. For purposes of discussion in this Opinion hereafter, we round the
                                      number to $3.4 million.




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                                      (585)                        WOODSUM v. COMMISSIONER                                         589


                                        Petitioners provided to VTS all 160-plus information
                                      returns, including the Deutsche Bank Form 1099–MISC
                                      reporting $3.4 million from the termination of the swap and
                                      Form 1099–INT reporting $60,291.69 of interest income. VTS
                                      duly scanned the Form 1099–MISC into its records for use in
                                      preparing the return.
                                        The Form 1040, U.S. Individual Income Tax Return, that
                                      VTS prepared for petitioners was 115 pages long. The return
                                      did report the $60,291.69 of interest income that petitioners
                                      received from Deutsche Bank. However, for reasons the
                                      record does not show, 3 the return that VTS prepared did not
                                      include the $3.4 million that Deutsche Bank paid and
                                      reported. If the $3.4 million had been included on the return,
                                      that amount would have appeared on Schedule D as a dis-
                                      tinct line item in Part II, ‘‘Long-Term Capital Gains and
                                      Losses—Assets Held More Than One Year’’. But, again, it
                                      was not reported on the return that VTS prepared.
                                      Review and signing of petitioners’ 2006 return
                                         Petitioners had obtained an extension of the due date for
                                      filing their 2006 return. As a result, the return was due
                                      October 15, 2007. At 11 a.m. on that date, petitioners met
                                      with Mr. Hopfenberg to discuss several subjects, including
                                      their return. At that meeting Mr. Hopfenberg turned the 115
                                      pages of the return and discussed various items of income
                                      and deduction with Mr. Woodsum. Petitioners characterize
                                      this as their ‘‘perform[ing] more than a cursory review of the
                                      return.’’ However, the parties have stipulated that peti-
                                      tioners do not recall—
                                         • which specific items of income and deduction were dis-
                                      cussed at the meeting, or
                                         • the amount of time they spent reviewing the return, or
                                         • the amount of time they spent reviewing the Schedule D
                                      and the attachments and statements thereto.
                                        During the discussion of the return, Mr. Woodsum did not
                                      compare or match the items of income reported on the Form
                                      1040 and its schedules with the information returns that the
                                      third-party payors had provided. Consequently, petitioners
                                        3 In their briefs petitioners seem to imply that the omission was the result of mistake or over-

                                      sight by the C.P.A. who prepared the return. However, the stipulation does not state the reason
                                      for the omission, and because petitioners chose to submit the case under Rule 122, they did not
                                      call the C.P.A. as a witness. Thus, we do not know why the $3.4 million was omitted.




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                                      590                136 UNITED STATES TAX COURT REPORTS                                        (585)


                                      failed to make sure that all their income items were reported
                                      on the return that VTS had prepared.
                                        Petitioners signed the return on that same day—October
                                      15, 2007. We assume that, when they did so, petitioners were
                                      unaware of the omission of the $3.4 million. 4
                                        The IRS received Deutsche Bank’s Form 1099–MISC
                                      reporting the $3.4 million, compared it with petitioners’
                                      return, and determined a deficiency in tax of $521,473 and
                                      an accuracy-related penalty under section 6662(a) of
                                      $104,295. Petitioners agreed to the assessment of tax in the
                                      amount determined by the IRS. As a result, their tax due,
                                      which they reported as $3,719,454, was actually $4,240,927.
                                      Petitioners paid the tax deficiency plus interest.
                                        However, petitioners filed their petition in this Court dis-
                                      puting the accuracy-related penalty. The parties jointly sub-
                                      mitted the case fully stipulated under Rule 122.

                                                                                Discussion
                                      I. The relevant law
                                           A. Accuracy-related penalty under section 6662(b)(2)
                                        Section 6662(a) and (b)(2) imposes an ‘‘accuracy-related
                                      penalty’’ of 20 percent of the portion of the underpayment of
                                      tax attributable to any substantial understatement of income
                                      tax. 5 By definition, an understatement of income tax for an
                                      individual is substantial if it exceeds the greater of $5,000 or
                                      10 percent of the tax required to be shown on the return.
                                      Sec. 6662(d)(1). Under section 7491(c), the Commissioner
                                      bears the burden of production and must produce sufficient
                                      evidence that the imposition of the penalty is appropriate in
                                         4 Petitioners argue in their brief that ‘‘Neither the tax advisor nor the Petitioners noticed that

                                      the tax preparer failed to include the Deutsche Bank 1099–MISC which showed income of
                                      $3,379,611.00 on the return’’; but no evidence in the record explicitly asserts that petitioners
                                      were unaware of the omission. The closest assertion is the parties’ stipulation that ‘‘Petitioners
                                      relied upon Venture Tax Services to prepare their 2006 tax return and include all of the items
                                      relating to the over 160 information returns provided to Venture Tax Services on said return.’’
                                      For purposes of this Opinion, we interpret this stipulation in the manner most favorable to peti-
                                      tioners—an approach admittedly at odds with the fact that they have the burden to prove rea-
                                      sonable cause and good faith, as we show below.
                                         5 Under section 6662(b)(1), the accuracy-related penalty is also imposed where an under-

                                      payment is attributable to the taxpayer’s negligence or disregard of rules or regulations; and
                                      respondent argues that petitioners’ omission of the income reflects negligence. However, as we
                                      show below, respondent has demonstrated that petitioners substantially understated their in-
                                      come tax for 2006. Thus, we need not consider whether, under section 6662(b)(1), it is also true
                                      that petitioners were negligent or disregarded rules or regulations.




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                                      (585)                        WOODSUM v. COMMISSIONER                                        591


                                      a given case. Higbee v. Commissioner, 116 T.C. 438, 446
                                      (2001). Once the Commissioner meets this burden, the tax-
                                      payer must come forward with persuasive evidence that the
                                      Commissioner’s determination is incorrect. Rule 142(a);
                                      Higbee v. Commissioner, supra at 447.
                                           B. Reasonable cause under section 6664(c)(1)
                                        A taxpayer who is otherwise liable for the accuracy-related
                                      penalty may avoid the liability if he can show, under section
                                      6664(c)(1), that he had reasonable cause for a portion of the
                                      underpayment and that he acted in good faith with respect
                                      to that portion. 6 The pertinent regulation provides:
                                      The determination of whether a taxpayer acted with reasonable cause and
                                      in good faith is made on a case-by-case basis, taking into account all perti-
                                      nent facts and circumstances. * * * Generally, the most important factor
                                      is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax
                                      liability. Circumstances that may indicate reasonable cause and good faith
                                      include an honest misunderstanding of fact or law that is reasonable in
                                      light of all of the facts and circumstances, including the experience, knowl-
                                      edge, and education of the taxpayer. An isolated computational or
                                      transcriptional error generally is not inconsistent with reasonable cause
                                      and good faith. * * * Reliance on * * * professional advice * * * con-
                                      stitutes reasonable cause and good faith if, under all the circumstances,
                                      such reliance was reasonable and the taxpayer acted in good faith. * * *
                                      [26 C.F.R. sec. 1.6664–4(b)(1), Income Tax Regs.]

                                      Whether the taxpayer acted with reasonable cause and in
                                      good faith thus depends on the pertinent facts and cir-
                                      cumstances, including his efforts to assess his proper tax
                                      liability, his knowledge and experience, and the extent to
                                      which he relied on the advice of a tax professional.
                                      II. Application of the law to petitioners
                                           A. Substantial understatement
                                        The undisputed tax deficiency attributable to petitioners’
                                      omitted income is $521,473. That amount is obviously in
                                      excess of $5,000. That amount is also in excess of ‘‘10 percent
                                        6 There are other defenses to the penalty that petitioners do not invoke here; i.e., section

                                      6662(d)(2)(B) provides that an understatement may be reduced, first, where the taxpayers had
                                      substantial authority for their treatment of any item giving rise to the understatement or, sec-
                                      ond, where the relevant facts affecting the item’s treatment are adequately disclosed and the
                                      taxpayers had a reasonable basis for their treatment of that item. Neither of those defenses is
                                      applicable here, where petitioners admit that the income was taxable and simply allege an inad-
                                      vertent omission from the return.




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                                      592                136 UNITED STATES TAX COURT REPORTS                                     (585)


                                      of the tax required to be shown on the return’’, sec.
                                      6662(d)(1), because the correct tax liability, which petitioners
                                      have conceded, is $4,240,927. Petitioners’ understatement of
                                      tax was therefore ‘‘substantial’’ for purposes of section
                                      6662(d)(1). Consequently, respondent has carried the burden
                                      of production that section 7491(c) imposes.
                                         The accuracy-related penalty is mandatory; the statute
                                      provides that it ‘‘shall be added’’. Sec. 6662(a). Petitioners
                                      bear the burden of proving the defense of reasonable cause
                                      and good faith. See Higbee v. Commissioner, supra at 446.
                                           B. Reasonable cause and good faith
                                           1. Reliance on professional advice
                                        For purposes of section 6664(c), a taxpayer may be able to
                                      establish reasonable cause and good faith (and thereby avoid
                                      the accuracy-related penalty of section 6662) by showing his
                                      reliance on professional advice. 26 C.F.R. sec. 1.6664–4(b)(1).
                                      As we stated in Neonatology Associates, P.A. v. Commis-
                                      sioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.
                                      2002):
                                      for a taxpayer to rely reasonably upon advice so as possibly to negate a
                                      section 6662(a) accuracy-related penalty determined by the Commissioner,
                                      the taxpayer must prove by a preponderance of the evidence that the tax-
                                      payer meets each requirement of the following three-prong test: (1) The
                                      adviser was a competent professional who had sufficient expertise to jus-
                                      tify reliance, (2) the taxpayer provided necessary and accurate information
                                      to the adviser, and (3) the taxpayer actually relied in good faith on the
                                      adviser’s judgment. * * *

                                         Seeking to meet these standards, petitioners assert (1) that
                                      VTS and its attorney and C.P.A. were competent and experi-
                                      enced professionals, (2) that petitioners provided VTS with
                                      the necessary and accurate information, i.e., the Form 1099–
                                      MISC reporting the $3.4 million, and (3) that petitioners
                                      relied on VTS to prepare the return and report the $3.4 mil-
                                      lion—all of which the parties have stipulated. However, for
                                      purposes of proving reliance on professional advice, these
                                      assertions miss the mark.
                                         The IRS’s regulations define ‘‘advice’’ as follows:
                                        (2) Advice defined.—Advice is any communication, including the opinion
                                      of a professional tax advisor, setting forth the analysis or conclusion of a
                                      person, other than the taxpayer, provided to (or for the benefit of) the tax-




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                                      (585)                        WOODSUM v. COMMISSIONER                                        593


                                      payer and on which the taxpayer relies, directly or indirectly, with respect
                                      to the imposition of the section 6662 accuracy-related penalty. Advice does
                                      not have to be in any particular form. [26 C.F.R. sec. 1.6664–4(c)(2).]

                                      A premise only implicit in petitioners’ position is that their
                                      return preparer’s unexplained omission (i.e., the omission of
                                      what Mr. Woodsum knew to be includable as a substantial
                                      income item on their return) constituted ‘‘advice’’ to exclude
                                      that item. However, the fact that the regulation defines
                                      ‘‘advice’’ broadly enough to include ‘‘any communication’’,
                                      whether or not ‘‘in any particular form’’, provides no grounds
                                      for reliance by petitioners: In United States v. Boyle, 469 U.S.
                                      241 (1985), where the taxpayer knew or should have known
                                      of the applicable filing deadline, he lacked reasonable cause
                                      for his attorney’s untimely filing of his return; similarly,
                                      since petitioners knew their Form 1099 income should have
                                      been included, they lack reasonable cause for their preparer’s
                                      failure to include the income.
                                         In order to constitute ‘‘advice’’ within the definition of the
                                      regulation, the communication must reflect the adviser’s
                                      ‘‘analysis or conclusion’’. The taxpayer must show (in the
                                      words of Neonatology Associates, 115 T.C. at 99 (emphasis
                                      added)) that he ‘‘relied in good faith on the adviser’s judg-
                                      ment.’’ Petitioners present no testimony of the preparer (nor
                                      any other evidence) to show that the income was omitted
                                      from the return because of any ‘‘analysis or conclusion’’ or
                                      ‘‘judgment’’ by VTS that the income was not taxable. When
                                      the Supreme Court discussed the ‘‘reasonable cause’’ defense
                                      in Boyle, it characterized the relevant professional role as
                                      giving ‘‘substantive advice’’, 469 U.S. at 251, and contrasted
                                      that professional function with things that ‘‘require[ ] no spe-
                                      cial training’’, id. at 252. No ‘‘special training’’ was required
                                      for Mr. Woodsum to know that the law required him to
                                      include on that return an item of income that he had
                                      received and that Deutsche Bank had reported on Form
                                      1099. The including of that income on their tax return is
                                      what petitioners say they intended when they handed over
                                      their information returns to VTS.
                                         Petitioners make no suggestion that VTS gave them ‘‘sub-
                                      stantive advice’’ to omit the $3.4 million or that petitioners
                                      relied on any such substantive advice. On the contrary, peti-
                                      tioners stipulated that they ‘‘relied upon Venture Tax Serv-




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                                      594                    136 UNITED STATES TAX COURT REPORTS                                     (585)


                                      ices to prepare their 2006 tax return and include all of the
                                      items relating to the over 160 information returns provided
                                      to Venture Tax Services on said return’’. (Emphasis added.)
                                      There is no evidence that when VTS instead omitted the $3.4
                                      million, it thereby was exercising ‘‘analysis’’ or ‘‘judgment’’ or
                                      was making a professional recommendation to petitioners;
                                      rather, it was failing, in that specific instance, to carry out
                                      petitioners’ general instruction. In signing the return thus
                                      erroneously prepared, petitioners were not deliberately fol-
                                      lowing substantive professional advice; they were instead
                                      unwittingly (they contend) perpetuating a clerical mistake.
                                      The defense of reliance on professional advice has no applica-
                                      tion here.
                                            2. Return preparer’s error
                                        More pertinent to this case is the principle, quoted above,
                                      that ‘‘[a]n isolated computational or transcriptional error
                                      generally is not inconsistent with reasonable cause and good
                                      faith.’’ 26 C.F.R. sec. 1.6664–4(b)(1). However, petitioners fail
                                      to place their understatement within the category of ‘‘com-
                                      putational or transcriptional error[s]’’ because they provided
                                      no evidence to explain the nature of or the reason for VTS’s
                                      omission of the $3.4 million. It may be (and petitioners seem
                                      to expect the Court to assume) that the omission was the
                                      result of the C.P.A.’s oversight of one Form 1099 amid 160
                                      such forms, but no actual evidence supports that character-
                                      ization. The omission is unexplained, and since petitioners
                                      have the burden to prove reasonable cause and good faith,
                                      this evidentiary gap works against their defense.
                                        Even if we assume that the $3.4 million omission was an
                                      innocent oversight by the return preparer, the reasonable
                                      cause defense is unavailing here. Taxpayers sometimes do
                                      avoid the accuracy-related penalty by showing that their
                                      understatement was the result of a return preparer’s error.
                                      See, e.g., Thrane v. Commissioner, T.C. Memo. 2006–269, 92
                                      T.C.M. (CCH) 501. 7 However, as we stated in Metra Chem
                                           7 In   Thrane,
                                      The erroneous income figure for Windsor ($414,845) appeared only on a worksheet to the Sched-
                                      ule E attached to petitioner’s Form 1040. That figure required a further offsetting adjustment
                                      before being reported on the face of the Schedule E as $378,428. Thus, only a rather detailed
                                      tracing through the Schedule E worksheet would have alerted petitioner to the error at issue.
                                      * * * [92 T.C.M. (CCH) at 503.]




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                                      (585)                        WOODSUM v. COMMISSIONER                                           595


                                      Corp. v. Commissioner, 88 T.C. 654, 662 (1987) (citations
                                      omitted):
                                         As a general rule, the duty of filing accurate returns cannot be avoided
                                      by placing responsibility on a tax return preparer. As the petitioners have
                                      noted, this Court has declined to sustain the addition to tax under section
                                      6653(a) in cases in which the taxpayer relied in good faith on the advice
                                      of a tax expert. However, a close examination of these cases reveals that
                                      they raised questions as to the tax treatment of complex transactions and
                                      that the position taken on the returns with respect to such items had a
                                      reasonable basis.
                                         This case presents no such difficult issues. Ronald Laroche simply failed
                                      to report over $10,000 in cash dividends which he received from corpora-
                                      tions controlled by him. Richard Laroche similarly failed to report over
                                      $6,800 in such dividends. The unreported dividends constituted over 21
                                      percent of Ronald and Beverly Laroche’s gross income for 1977 and over
                                      20 percent of Richard and Shirley Laroche’s gross income for such year.
                                      We believe that such a substantial underreporting of income would not
                                      have gone unnoticed if the petitioners had made even a cursory review[8]
                                      of their returns. Under such circumstances, the petitioners may not shift
                                      responsibility for the accuracy of their returns to their accountant.

                                      However complex the swap may have been in its creation
                                      and its operation, its termination resulted in Deutsche
                                      Bank’s issuing to petitioners a standard and uncomplicated
                                      Form 1099–MISC that, petitioners admit, should have
                                      resulted in a distinct and identifiable entry on Schedule D of
                                      their return. Like Metra Chem, ‘‘This case presents no such
                                      difficult issues.’’ Id.
                                         ‘‘Even if all data is furnished to the preparer, the taxpayer
                                      still has a duty to read the return and make sure all income
                                      items are included.’’ Magill v. Commissioner, 70 T.C. 465,
                                      479–480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981). 9 We do
                                      not hold that a taxpayer must duplicate the work of his
                                      return preparer, or that any omission of an income item in
                                      In this case, however, the facts are quite different, in that the $3.4 million figure on the Form
                                      1099–MISC should simply have appeared as a distinct and visible entry on Schedule D.
                                         8 We thus observed in Metra Chem that a ‘‘cursory review’’ would have disclosed the under-

                                      reporting in that case. Petitioners attempt to construe this passage in the Metra Chem Opinion
                                      as announcing a rule that the reasonable cause defense requires only a ‘‘more than cursory re-
                                      view’’. Metra Chem does not state this low standard. As we explain below, what is required for
                                      ‘‘reasonable cause’’ is that the taxpayer conduct a review the purpose of which is to ‘‘make sure
                                      all income items are included.’’ Magill v. Commissioner, 70 T.C. 465, 479–480 (1978), affd. 651
                                      F.2d 1233 (6th Cir. 1981).
                                         9 See also Bailey v. Commissioner, 21 T.C. 678, 687 (1954) (‘‘The duty of filing accurate returns

                                      cannot be avoided by placing responsibility upon an agent. The fact that petitioner told the per-
                                      son who made up the partnership return about the sale of leasehold interests totaling $83,500
                                      cannot excuse his failure to read the return and ascertain the inclusion of this item.’’).




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                                      596                136 UNITED STATES TAX COURT REPORTS                                     (585)


                                      a return prepared by a third party is necessarily fatal to a
                                      finding of reasonable cause and good faith on the taxpayer’s
                                      part. Rather, for purposes of this Opinion, we assume that
                                      the reasonable cause defense may be available to a taxpayer
                                      who conducts a review of his third-party prepared return
                                      with the intent of ensuring that all income items are
                                      included, and who exerts effort that is reasonable under the
                                      circumstances, but who nonetheless fails to discover an omis-
                                      sion of an income item.
                                         Mr. Woodsum, however, makes no showing of a review
                                      reasonable under the circumstances. He personally ordered
                                      the termination that gave rise to the income; he received a
                                      Form 1099–MISC reporting that income; that amount should
                                      have shown up on Schedule D as a distinct item; but it was
                                      omitted. The parties stipulated that petitioners’ ‘‘review’’ of
                                      the defective return was of an unknown duration and that it
                                      consisted of the preparer’s turning the pages of the return
                                      and discussing various items. Petitioners understated their
                                      income by $3.4 million—an amount that was substantial not
                                      only in absolute terms but also in relative terms (i.e., it
                                      equaled about 10 percent of petitioners’ adjusted gross
                                      income). A review undertaken to ‘‘make sure all income items
                                      are included’’ (in the words of Magill)—or even a review
                                      undertaken only to make sure that the major income items
                                      had been included—should, absent a reasonable explanation
                                      to the contrary, have revealed an omission so straightforward
                                      and substantial.
                                         In evaluating reasonable cause, ‘‘the most important factor
                                      is the extent of the taxpayer’s effort to assess the taxpayer’s
                                      proper tax liability.’’ 26 C.F.R. sec. 1.6664–4(b)(1). But peti-
                                      tioners do not recall how much time they spent reviewing the
                                      return, how much time they spent reviewing Schedule D, or
                                      which income items they reviewed; and they recall that they
                                      did not compare or match the items of income reported on
                                      the return with the information returns they had received.
                                      They have thus failed to prove the ‘‘most important factor’’—
                                      i.e., ‘‘the taxpayer’s effort’’. Petitioners did not fulfill their
                                      duty to review the return that VTS had prepared.
                                         Mr. Woodsum terminated the swap ahead of its set termi-
                                      nation date because his watchful eye noted that it was not
                                      performing satisfactorily as an investment. That is, when his
                                      own receiving of income was in question, Mr. Woodsum was




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                                      (585)                        WOODSUM v. COMMISSIONER                                          597


                                      evidently alert and careful. But when he was signing his tax
                                      return and reporting his tax liability, his routine 10 was so
                                      casual that a half-million-dollar understatement of that
                                      liability could slip between the cracks. We cannot hold that
                                      this understatement was attributable to reasonable cause
                                      and good faith.
                                         To reflect the foregoing,
                                                                           Decision will be entered for respondent.

                                                                               f




                                        10 By way of analogy, 26 C.F.R. sec. 1.6664–4(b)(1) suggests that an error on a corporate re-

                                      turn, arising from ‘‘data compiled by the various divisions of a multidivisional corporation’’, may
                                      result from reasonable cause ‘‘provided the corporation employed internal controls and proce-
                                      dures, reasonable under the circumstances, that were designed to identify such factual errors.’’
                                      Petitioners here lacked ‘‘controls and procedures, reasonable under the circumstances’’.




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