                         T.C. Memo. 2011-276



                       UNITED STATES TAX COURT



          JOHN J. AND TERESA M. BRENNAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8981-10.                Filed November 21, 2011.



     Eugene A. Steger, Jr., for petitioners.

     James H. Harris, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:    The IRS issued to petitioners, John J. and

Teresa M. Brennan, a notice of deficiency for tax year 2004 which

determined that the Brennans are liable for a $14,368.62 penalty

under section 6662A.    Unless otherwise indicated, all references

to sections are to the Internal Revenue Code in effect for the
                                - 2 -

year at issue.    The Brennans petitioned the Court under section

6214 for redetermination of the deficiency.

                          FINDINGS OF FACT

     The parties stipulated some of the facts; and those facts

are so found.

     The Brennans resided in Pennsylvania when they filed their

petition.   During 2004, John Brennan was the sole shareholder of

J.J. Brennan, Inc., an S corporation.

     On November 17, 2004, J.J. Brennan, Inc., adopted the J.J.

Brennan, Inc. 412(i) Defined Benefit Plan (the “plan”).    The plan

was effective as of January 1, 2004.    It provided coverage to

John and Teresa Brennan, who were the only employees of J.J.

Brennan, Inc.    The plan provided death benefits of $927,022 to

Teresa Brennan and $844,664 to John Brennan.    J.J. Brennan, Inc.,

paid $223,802 in life-insurance premiums related to the plan.      As

the parties have stipulated, in 2004 the Brennans engaged in a

listed transaction of the type described in Rev. Rul. 2004-20,

2004-1 C.B. 546 (defining as a listed transaction the

participation by employers in certain employee-benefit plans

providing death benefits and holding life insurance contracts).

     On March 20, 2005, J.J. Brennan, Inc., filed its federal

income-tax return for 2004.    On this return, it deducted $223,802

for life-insurance premium payments.
                               - 3 -

     On their federal income-tax return for 2004, the Brennans

reported flowthrough income from J.J. Brennan, Inc., to John

Brennan of $14,200, net of deductions.1   The return reported an

income-tax liability of $28,748, an amount that they paid as of

the due date of the return.   The Brennans did not attach a Form

8886, Reportable Transaction Disclosure Statement, to their

return.   Nor did they otherwise disclose the listed transaction

on their return.

     The Brennans filed an amended return which showed an

increase in their taxable income of $155,209.2   A Form 8886 was

attached to the amended return.

     On February 4, 2009, the IRS mailed a notice of deficiency

to the Brennans reflecting the IRS’s determination that they are

liable for a section 6662A penalty of $14,368.62.   In computing

this amount, the IRS assumed that the increase in taxable income

resulting from the Brennans’ improper tax treatment of a section

6662A transaction was $136,8443 and that the highest marginal tax


     1
      Neither party asserts that this amount is inconsistent with
the J.J. Brennan, Inc. return.
     2
      The record is not clear, but the increase in taxable income
may have been the result of the Brennans’ calculation of their
taxable income without the $223,802 deduction that had been
claimed on the return of J.J. Brennan, Inc.
     3
      The IRS now asserts that the use of $136,844 in this
calculation was an error--and that $155,209 should have been used
instead. However, the IRS does not assert an increased penalty
to correct for this supposed error.
                                 - 4 -

rate was 35 percent.     Thus, the reportable transaction

understatement was calculated to be $47,895.40, which is 35

percent of $136,844.     The section 6662A penalty was calculated to

be 30 percent of the $47,895.40 reportable transaction

understatement, which is $14,368.62.      The deficiency notice did

not reflect that the IRS determined a deficiency in income tax

separate from the penalty.4

     On May 4, 2009, the IRS assessed $47,166 of additional

income tax.   The Brennans paid the $47,166--and interest on the

$47,166--by an offset of their 2008 refund and by a $51,724.72

payment made on July 28, 2009.     The record does not disclose how

the $47,166 was calculated.     One could surmise that $47,166 was

the additional tax liability, beyond the $28,748 reported on the

2004 return, that the Brennans would owe if the $223,802

deduction that had been claimed on the return of J.J. Brennan,

Inc., were disallowed.

                                OPINION

     Section 6011(a) provides that taxpayers must file the forms

and statements required by the regulations promulgated by the

Treasury Department.   One such regulation is section 1.6011-4,

Income Tax Regs., which requires every taxpayer who has

participated in a “reportable transaction”, including a “listed

     4
      The parties have not explained why the deficiency notice
did not determine a deficiency in income tax other than the
penalty.
                                - 5 -

transaction”, to attach to its annual tax return a Form 8886.

Sec. 1.6011-4(a), (d), Income Tax Regs.    This disclosure

statement must be attached to the tax return for each taxable

year in which the taxpayer participated in the reportable

transaction.    Sec. 1.6011-4(e)(1), Income Tax Regs.   The

disclosure statement must also be attached to any amended return

that reflects the taxpayer’s participation in a reportable

transaction.    Id.

     Section 6662A(a) provides that “If a taxpayer has a

reportable transaction understatement for any taxable year, there

shall be added to the tax an amount equal to 20 percent of the

amount of such understatement.”    As is relevant to the Brennans’

2004 tax return, the term “reportable transaction understatement”

is defined as

     the product of--

               (i) the amount of the increase (if any) in
          taxable income which results from a difference
          between the proper tax treatment of an item to
          which this section applies and the taxpayer’s
          treatment of such item (as shown on the taxpayer’s
          return of tax), and

               (ii) the highest rate of tax imposed by
          section 1 * * *

Sec. 6662A(b)(1)(A).    Giving content to the words “an item to

which this section applies”, section 6662A(b)(2) provides that

“This section shall apply to any item which is attributable to” a

“listed transaction” or certain other types of transactions.      A
                               - 6 -

listed transaction for the purposes of section 6662A(b)(2) is the

same as a listed transaction for the purposes of section 1.6011-

4, Income Tax Regs.   Secs. 6662A(d), 6707A(c)(2).

     Section 6664(d)(1) provides that “No penalty shall be

imposed under section 6662A with respect to any portion of a

reportable transaction understatement if it is shown that there

was a reasonable cause for such portion and that the taxpayer

acted in good faith with respect to such portion.”   However,

section 6664(d)(2) provides:

     Paragraph (1) [i.e., section 6664(d)(1)] shall not
     apply to any reportable transaction understatement
     unless--

               (A) the relevant facts affecting the tax
     treatment of the item are adequately disclosed in
     accordance with the regulations prescribed under
     section 6011,

               (B) there is or was substantial authority for
          such treatment, and

                (C) the taxpayer reasonably believed that
     such treatment was more likely than not the proper
     treatment.

     Section 6662A(c) provides that a 30-percent penalty rather

than a 20-percent penalty is imposed “with respect to the portion

of any reportable transaction understatement with respect to

which the requirement of section 6664(d)(2)(A) is not met.”

Section 6664(d)(2)(A) requires the taxpayer to disclose the

transaction in order to qualify for the reasonable cause

exception.
                               - 7 -

     Under section 7491(c), the IRS bears the burden of

production with regard to a penalty.   This means that it must

come forward with sufficient evidence indicating that a penalty

is appropriate.   Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).   The parties stipulated that the Brennans engaged in a

listed transaction described in Rev. Rul. 2004-20, supra, and

that they did not disclose the transaction on their 2004 return.

The Brennans do not dispute that $136,844 was the amount by which

their 2004 taxable income should be increased as a result of

their improper tax reporting of the listed transaction.5   The

parties do not dispute the marginal tax rate to be used in

computing the reportable transaction understatement.   Therefore,

the IRS has met the burden of showing that there was a reportable

transaction understatement for 2004 and that therefore it is

appropriate to impose a penalty on the Brennans under section

6662A.

     If the IRS meets the burden of production regarding a

penalty, the taxpayer bears the burden of proving the penalty is

inappropriate because the taxpayer acted with reasonable cause

and good faith.   See Williams v. Commissioner, 123 T.C. 144, 153

(2004); Higbee v. Commissioner, supra at 446-447.   The evidence

     5
      As already explained, the notice of deficiency determined
the amount was $136,844. The IRS asserts that this was an error
and the correct amount was $155,209. However, the IRS does not
seek the increased penalty that would result if this error were
corrected.
                                 - 8 -

adduced by the Brennans in support of the reasonable cause

exception is insufficient.   It showed only that they were unaware

that they had to attach a disclosure statement to their 2004

return.   This lack of awareness does not satisfy any of the three

conditions imposed by section 6664(d)(2) for the reasonable cause

exception.   First, section 6664(d)(2)(A) requires the Brennans to

have attached a disclosure statement to their 2004 return.        They

did not attach a disclosure statement.       Second, section

6664(d)(2)(B) requires the Brennans to show that there was

substantial authority for the tax treatment of the listed

transaction on their 2004 tax return.       They did not do so.

Third, section 6664(d)(2)(C) requires the Brennans to show that

they reasonably believed that their 2004 tax return more likely

than not reflected the correct tax treatment of the listed

transaction.   They did not make such a showing.

     We hold that the Brennans do not qualify for the section

6664(d) reasonable cause exception to the section 6662A penalty

that was determined by the IRS.    They are therefore liable for

the penalty.   In reaching our decision, we have considered all

arguments made by the parties.    To the extent not mentioned or

addressed, they are irrelevant or without merit.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
