                  T.C. Summary Opinion 2009-130



                     UNITED STATES TAX COURT



    KENNETH JAMES HOPSON AND LINDA S. HOPSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25584-08S.             Filed August 25, 2009.



     Kenneth James Hopson and Linda S. Hopson, pro sese.

     Katherine Lee Kosar, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                               - 2 -

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

for any other case.

     Respondent determined a deficiency in petitioners’ Federal

income tax of $21,954, as well as an accuracy-related penalty

under section 6662(a) of $1,956, for 2006.

     Petitioners concede that they are liable for the deficiency

in income tax as determined by respondent.2   Thus, the only issue

for decision is whether petitioners are liable for the accuracy-

related penalty.   We hold that they are.

                            Background

     None of the facts have been stipulated by the parties.

Petitioners resided in the State of Ohio when the petition was

filed.

     In 2006 petitioner, Kenneth James Hopson (Mr. Hopson),

received distributions from two accounts with the Ohio Public

Employees Retirement System of $42,501 and $18,381, for a total

of $60,882.   The funds were attributed to Mr. Hopson’s employment

with the State of Ohio and the City of Cleveland.   Mr. Hopson is

no longer employed with the State or city; he requested a full



     2
        Respondent acknowledges that petitioners are entitled to
a credit of $12,176, which amount represents withholding that was
not claimed by petitioners on their return. However, we note
that the determination of a statutory deficiency does not take
such withholding into account. See sec. 6211(b)(1). Such
withholding, however, does reduce the underpayment upon which the
accuracy-related penalty is based. See sec. 6664(a)(1)(B); sec.
1.6664-2(d), Income Tax Regs.
                               - 3 -

distribution of the account values in order to satisfy a home

equity loan and pay off credit card debt.   Before these

distributions Mr. Hopson had not received any payments from these

accounts, and he will not receive any future payments because the

accounts now have zero balances.   Mr. Hopson received a Form

1099-R, Distributions from Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for each

of the distributions.

     Petitioners prepared their tax return for 2006 using tax

return preparation software.   Mr. Hopson usually takes the lead

on tax return preparation and has been using tax return

preparation software since the 1980s to prepare returns.     He

completed the software’s interview process, which required him to

enter the information necessary to generate the return.    During

this process Mr. Hopson did not enter the information from the

Forms 1099-R.   He stated that he knew petitioners received the

income, but he inadvertently omitted it from the return.     The

software program ran an error check of the information entered by

Mr. Hopson and did not detect any mistakes.   The software

generated a joint Federal income tax return that Mr. Hopson

printed, but neither he nor Mrs. Hopson reviewed it for accuracy.

The return was timely filed with the IRS, listing petitioners’

total income as $88,488 and total tax of $6,515.
                               - 4 -

                            Discussion

     Section 6662(a) and (b)(2) imposes a penalty equal to 20

percent of the amount of any underpayment attributable to a

substantial understatement of income tax.3    An understatement of

income tax is “substantial” if the understatement exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.   Sec. 6662(d)(1)(A).   The term “understatement”

means the excess of the tax required to be shown on the return

over the tax actually shown on the return.    Sec. 6662(d)(2)(A).

     Section 6664 provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there

was reasonable cause for the understatement and that the taxpayer

acted in good faith with respect to that portion.4    Sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.    The determination

of whether the taxpayer acted with reasonable cause and in good

faith is made on a case-by-case basis, taking into account the

pertinent facts and circumstances.     Sec. 1.6664-4(b)(1), Income


     3
        In the notice of deficiency respondent determined the
accuracy-related penalty on the basis of sec. 6662(d), a
substantial understatement of income tax. At trial respondent
argued that petitioners were also negligent. The record makes
clear that respondent determined the penalty on the basis of sec.
6662(d), and a determination of a substantial understatement is
sufficient to impose the penalty. See sec. 6662(b); Fields v.
Commissioner, T.C. Memo. 2008-207. Therefore, we need not
examine the negligence issue.
     4
       The substantial authority and adequate disclosure
provisions of sec. 6662(d)(2)(B) do not apply to the facts before
us.
                                 - 5 -

Tax Regs.     Generally, the most important factor is the extent of

the taxpayer’s effort to assess the proper tax liability for such

year.   Id.

     With respect to a taxpayer’s liability for any penalty,

section 7491(c) places on the Commissioner the burden of

production, thereby requiring the Commissioner to come forward

with sufficient evidence indicating that it is appropriate to

impose the penalty.     Higbee v. Commissioner, 116 T.C. 438, 446-

447 (2001).    Once the Commissioner meets his burden of

production, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.    See

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).

     The Commissioner may satisfy his burden of production for

the accuracy-related penalty on the basis of a substantial

understatement of income tax by showing that the understatement

on the taxpayer’s return satisfies the definition of

“substantial”.    E.g., Graves v. Commissioner, T.C. Memo. 2004-

140, affd. 220 Fed.Appx. 601 (9th Cir. 2007); Janis v.

Commissioner, T.C. Memo. 2004-117, affd. 461 F.3d 1080 (9th Cir.

2006), affd. 469 F.3d 256 (2d Cir. 2006).    Respondent satisfied

his burden of production because the record demonstrates that

petitioners failed to include the distributions in their gross

income, thereby causing petitioners to substantially understate
                                 - 6 -

their income tax for 2006, i.e., the understatement of $21,954

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

on the return (i.e., $2,847) or $5,000.    See sec. 6662(d)(1)(A);

Higbee v. Commissioner, supra at 447-449.     Accordingly,

petitioners bear the burden of proving that the accuracy-related

penalty should not be imposed.    See sec. 6664(c)(1); Higbee v.

Commissioner, supra at 446.

     Petitioners have not met their burden of persuasion with

respect to reasonable cause and good faith.    Mr. Hopson admitted

that he received both Forms 1099-R for the distributions and that

he knew they constituted income.    After using tax return

preparation software for nearly 20 years, he simply filed the

return that was generated by the software without reviewing it.

The omission of the distributions resulted in the failure to

report over 40 percent of petitioners’ total income for the year.

Granted this was a one-time event, but petitioners nevertheless

had a duty to review their return to ensure that all income items

were included.   See Magill v. Commissioner, 70 T.C. 465, 479-480

(1978), affd. 651 F.2d 1233 (6th Cir. 1981).    Petitioners were

not permitted to bury their heads in the sand and ignore their

obligation to ensure that their tax return accurately reflected

their income for 2006.   In the end, reliance on tax return

preparation software does not excuse petitioners’ failure to

review their 2006 tax return.
                                 - 7 -

     Under the facts and circumstances, we are unable to conclude

that petitioners acted with reasonable cause and in good faith

within the meaning of section 6664(c)(1).       Accordingly,

petitioners are liable for the accuracy-related penalty under

6662(a) as determined by respondent in the notice of deficiency.

                           Conclusion

     We have considered all of the arguments made by petitioners,

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

we conclude that they are without merit.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
