                  T.C. Summary Opinion 2005-77



                     UNITED STATES TAX COURT



                 DANIEL F. MONTE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7388-04S.             Filed June 7, 2005.


     Daniel F. Monte, pro se.

     Jennifer S. McGinty, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to




     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2000,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                                - 2 -

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined an accuracy-related penalty under

section 6662(a) of $2,900 with respect to petitioner’s Federal

income tax for the taxable year 2000.

     The only issue for decision is whether petitioner is liable

under section 6662(a) for an accuracy-related penalty.    We hold

that he is not.

                             Background

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

found.    We incorporate by reference the parties’ stipulation of

facts, supplemental stipulation of facts, and accompanying

exhibits.

     At the time that the petition was filed, petitioner resided

in Buffalo, New York.

     Petitioner and his former spouse were married in August

1982.    They had three children from their marriage, born in

October 1983, March 1987, and June 1990.

     Petitioner has been a mortgage broker for more than 20 years

and is a senior vice president at a mortgage banking company.

During their marriage, petitioner’s former spouse was a

homemaker.

     At all relevant times, petitioner has maintained several

brokerage accounts, solely in his name, at First Albany Capital
                                 - 3 -

(First Albany).   In 1995, petitioner and his former spouse opened

college education funds with First Albany for the benefit of

their children (education accounts).       An investment manager

managed the education accounts and invested the funds solely in

mutual funds.   Any income earned in the education accounts was

reinvested in the respective education account.

     In 1999, petitioner deposited into the education accounts

the proceeds received from the sale of his mortgage banking

company in 1998 or 1999, which proceeds comprised most of the

balance in the education accounts.       Between 1995 and 1999, the

education accounts did not earn substantial dividends or capital

gains.   Petitioner and his former spouse did not make any

contributions to the education accounts in 2000.

     In 1999, petitioner moved out of the marital residence

located in East Aurora, New York (Aurora home), and moved to a

townhouse in Almond, New York.    Petitioner and his former spouse

divorced in July 2000.2   At the time of the divorce, the children

continued to reside with petitioner’s former spouse at the Aurora

home, and petitioner resided on Clarendon Place, Buffalo, New

York (Clarendon address).

     With respect to the children’s college education, a property

settlement and separation agreement pertaining to petitioner’s

divorce, stated in pertinent part:


     2
         In 2000, the children were ages 17, 13, and 10.
                               - 4 -

     The parties acknowledge that the children have a
     brokerage account located at First Albany which is
     maintained by the parties, same having a balance of
     approximately $350,000.00. It is the intention of the
     parties that this account be utilized for purposes of
     paying the children’s college education for 4
     consecutive years and that an inter vivos trust be
     established funded with the funds for the benefit of
     the children by 9/1/00. * * * The Husband shall make
     the day to day investment decisions regarding these
     funds, however, all major investment decisions shall be
     agreed upon by the parties. * * * Both parties shall
     receive all monthly statements for this account * * *.

Petitioner’s former spouse, however, established the Monte

Educational Trust in April 2002.

     During their marriage, the statements and Forms 1099, if

any, concerning the education accounts reflected petitioner’s and

his former spouse’s joint names and were addressed and mailed to

the Aurora home.3   After an acrimonious divorce, the statements

continued to reflect petitioner’s and his former spouse’s joint

names and to be addressed and mailed to the Aurora home.

     In 2000, petitioner contacted First Albany on several

occasions informing the company of an address change and

requesting that copies of the education account statements, as

well as his individual brokerage account statements, be mailed to

the Clarendon address.4   Pursuant to his request, petitioner


     3
        Although not specifically referenced in the record, it
appears that Form 1099-DIV, Dividends and Distributions, is the
relevant document.

     4
         Pursuant to petitioner’s change of address request, First
                                                    (continued...)
                                 - 5 -

received statements and Forms 1099 for 2000 pertaining to his

individual brokerage accounts; however, he did not receive any

statements or Forms 1099 for 2000 pertaining to the education

accounts.   Petitioner started receiving the education account

statements in September 2001.5

     In gathering the information for his 2000 Federal income tax

return, petitioner contacted both his financial adviser, Michael

Evereth (Mr. Evereth), and Mr. Evereth’s assistant at First

Albany to determine whether there were any Forms 1099 for the

education accounts because the mutual fund market in 2000

experienced unusual gains.   Petitioner was told that they would

look into the matter and furnish him with the Forms 1099, if any.

Petitioner never received any Forms 1099 for 2000 from First

Albany pertaining to the education accounts.6

     In addition to contacting First Albany directly, petitioner

contacted his former spouse on several occasions to obtain the

statements and any Forms 1099 for the education accounts.




     4
      (...continued)
Albany mailed copies of the education account statements to the
wrong address.
     5
        In 2002, the Forms 1099 were sent to the trustees of the
Monte Educational Trust.
     6
        In August 2000, First Albany sold its private client
group to First Union Securities (First Union). Mr. Evereth also
joined First Union.
                               - 6 -

Petitioner never received any documents from his former spouse,

and she never divulged any information to him.7

     Petitioner’s accountant, David R. Barrett (Mr. Barrett),

prepared petitioner’s Federal income tax return for 2000.    Mr.

Barrett has prepared petitioner’s income tax returns since 1990

(including petitioner’s and his former spouse’s joint returns

during their marriage).8   In his 2000 return, petitioner reported

only the income from his individual brokerage accounts as

disclosed in the Forms 1099.

     During the administrative phase of this case, respondent

proposed a deficiency in petitioner’s income tax for 2000 of

$14,499 because of petitioner’s failure to report dividends and

capital gains from the education accounts.   Upon learning of the

income, petitioner promptly paid the proposed deficiency in full.

     In the notice of deficiency, respondent determined that

petitioner was liable for an accuracy-related penalty under

section 6662(a) because of his failure to report income from the

education accounts.

                            Discussion

     The Commissioner bears the burden of production with respect

to a taxpayer’s liability for any penalty.   Sec. 7491(c).   To


     7
        Petitioner’s former spouse claimed to have forwarded
everything to him and that there were no Forms 1099.
     8
        Mr. Barrett also prepares the income tax returns for the
Monte Educational Trust.
                                - 7 -

meet this burden, the Commissioner must produce sufficient

evidence indicating that it is appropriate to impose the relevant

penalty.    Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Where an exception to the penalty is afforded upon a showing of

reasonable cause, however, the taxpayer bears the burden of

showing such cause.    Id. at 447.   The taxpayer still has the

burden of proving that the Commissioner’s determination of the

accuracy-related penalty is erroneous.    Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

290 U.S. 111, 115 (1933); Higbee v. Commissioner, supra at 446-

448.

       As relevant herein, section 6662(a) imposes a penalty equal

to 20 percent of any underpayment of tax that is attributable to

either (1) negligence or disregard of rules or regulations or (2)

a substantial understatement of income tax.    See sec. 6662(a) and

(b)(1) and (2).

       The term “negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws.    Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs.    The term “disregard” includes any careless, reckless, or

intentional disregard.    Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs.

       An understatement of income tax is “substantial” if it

exceeds the greater of 10 percent of the tax required to be shown
                                  - 8 -

on the return, or $5,000.    Sec. 6662(d)(1)(A).    An

“understatement” is defined as 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).

     Whether the accuracy-related penalty is applied because of

negligence or disregard of rules or regulations, or a substantial

understatement of tax, section 6664 provides an exception to

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.    Sec. 6664(c)(1); sec. 1.6664-4(b),

Income Tax Regs.; see United States v. Boyle, 469 U.S. 241, 242

(1985).   Although not defined in the Code, “reasonable cause” is

viewed in the applicable regulations as the “exercise of ordinary

business care and prudence”.      Sec. 301.6651-1(c)(1), Proced. &

Admin. Regs.; see United States v. Boyle, supra at 246.       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 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, including reliance on facts that, unknown to the

taxpayer, are incorrect.    Id.
                                 - 9 -

     Respondent satisfied his burden of production under section

7491(a)(1) because the record shows that petitioner substantially

understated his income tax for 2000.     See sec. 6662(d)(1)(A)(ii);

Higbee v. Commissioner, supra at 442.     Accordingly, petitioner

bears the burden of proving that the accuracy-related penalty

should not be imposed with respect to any portion of the

understatement for which he acted with reasonable cause and in

good faith.   See sec. 6664(c)(1); Higbee v. Commissioner, supra

at 446.

     Respondent argues that petitioner is liable for the

accuracy-related penalty because petitioner failed to make

reasonable attempts to obtain the pertinent information to report

the income from the education accounts, and that petitioner did

not have reasonable cause nor did he act in good faith with

respect to the understatement.    In contrast, petitioner contends

that “he did everything to try to file the appropriate tax, but

never received the Forms 1099”.

     Although this is a close case, the totality of the facts and

circumstances leads us to conclude that petitioner had reasonable

cause for the understatement and that he acted in good faith with

respect to such understatement.

     We note at the outset that we found petitioner to be a very

conscientious taxpayer.   In preparing to file his 2000 return,

petitioner made concerted efforts to obtain any statements and
                                - 10 -

Forms 1099 pertaining to the education accounts.    On several

occasions, petitioner attempted to obtain the information from

his former spouse, who refused to divulge any information or

inconsistently claimed that she did not receive any documents or

that she sent him everything.    It is understandable that

petitioner was unsuccessful in obtaining documents from his

former spouse because of their acrimonious divorce.

     In addition, petitioner, on several occasions, submitted a

change of address to First Albany requesting that all documents

related to the education accounts be mailed to him at the

Clarendon address.    Petitioner simultaneously submitted a change

of address to First Albany requesting that all documents related

to his individual brokerage accounts be mailed to him at the

Clarendon address.    Peculiarly, petitioner received all

statements and Forms 1099 pertaining to his individual brokerage

accounts, but he never received any such documents for 2000

pertaining to the education accounts.    Indeed, petitioner only

started receiving these statements in 2001.    Mr. Evereth admitted

that the company did not send the statements to the correct

address pursuant to petitioner’s repeated requests.

     Moreover, petitioner specifically requested that First

Albany mail him copies of the Forms 1099 pertaining to the

education accounts.   In response to his request, First Albany

stated that it would check and mail him the Forms 1099, if any.
                              - 11 -

Petitioner never received any Forms 1099 for 2000 from First

Albany pertaining to the education accounts.   It was not

unreasonable for petitioner to assume that there were no Forms

1099 issued for 2000 for which he would be responsible for

reporting on his 2000 return because, after making repeated

requests, he never received any Forms 1099 from either his former

spouse or First Albany.   In addition, it was not unreasonable for

petitioner to assume that a trust had been established pursuant

to the property settlement and separation agreement, and that, if

there was any income, the trust would have been responsible for

reporting that income on the trust’s income tax return.

     Upon a review of the record, we find that petitioner had

reasonable cause to believe that there were no Forms 1099

pertaining to him, and that he acted in good faith with respect

to the understatement attributable to the income reported on

those forms.

                            Conclusion

     In view of the foregoing, we hold that petitioner is not

liable for the accuracy-related penalty pursuant to section 6662.

     We have considered all of the arguments made by respondent,

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

arguments, we conclude that they are unconvincing.

     Reviewed and adopted as the report of the Small Tax Case

Division.
                        - 12 -

To reflect our disposition of the disputed issue,



                              Decision will be entered

                         for petitioner.
