                        T.C. Memo. 2003-97



                      UNITED STATES TAX COURT




                 LISA B. WILLIAMS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 12030-99.                Filed April 8, 2003.




     James R. Walker, for petitioner.

     Sara J. Barkley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax and penalties for the taxable

years 1993, 1994, and 1995 as follows:
                                 - 2 -

                                           Penalty
          Year      Deficiency           Sec. 6662(a)
          1993        $7,000                $1,400
          1994        10,437                 2,087
          1995        10,725                 2,145

The controversy between the parties presents the following issues

for our consideration:   (1) Whether the amounts of $25,000,

$35,000, and $35,000, received from her employer for 1993, 1994,

and 1995, respectively, were gifts or income that petitioner

failed to report; (2) whether the period for assessment had

expired with respect to petitioner’s 1993 and 1994 tax years at

the time of the mailing of the notice of deficiency; (3) whether

$1,300 received by petitioner’s husband was wages or an early

distribution from a qualified pension plan; and (4) whether

petitioner is liable for an accuracy-related penalty for 1993,

1994, or 1995 under section 6662(a).1

                         FINDINGS OF FACT2

     Petitioner Lisa B. Williams3 resided in Littleton, Colorado,

at the time her petition was filed.       After receiving training at

the University of Wisconsin, Health Sciences Center and during



     1
       All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
       The parties’ stipulation of facts is incorporated by this
reference.
     3
       At the time of filing the petition, petitioner’s surname
was Williams. At the time of trial, petitioner’s surname was
Bruehahn.
                                - 3 -

1985, petitioner began her career as a staff radiation therapist

with Deland and Noell, a corporate entity with its place of

business in Lafayette, Louisiana.   The corporation, which

provided treatment to cancer patients was owned and operated by

Thomas Noell and Maitland Deland, two doctors, who were also

husband and wife.

     Petitioner was 21 when she began working on the staff of the

corporation, and in 1991 she was promoted to a position as chief

therapist.    During 1993, petitioner was promoted to the position

of corporate chief therapist.   As the corporate chief therapist,

petitioner supervised all of the corporation’s radiation

therapists.   During 1991 through 1995, the corporation was in a

period of expansion and opening cancer treatment centers in

multiple geographical locations.    Petitioner was instrumental in

the successful expansion and operation of the radiation therapy

aspect of the corporate business.   Corporate management was

grooming petitioner to become part of administration and

management, rather than limiting her focus to clinical

operations.

     During her employment with the corporation, a personal

friendship developed between petitioner and Dr. Maitland Deland,

who was the president and a shareholder of the corporation.    Dr.

Deland and petitioner spent time together during and after work,

and their relationship developed into a close and personal one.
                                 - 4 -

Their families, including the children, were also involved in the

personal relationship.

     During the years in issue, Marvin K. Sullivan was the

corporation’s chief operating officer, and procedures were in

place for evaluating employee compensation.    Each department head

would evaluate the employees under him and send his evaluations

of them, along with salary and bonus recommendations to Mr.

Sullivan.    He would then meet with Drs. Deland and Noell to

discuss salary and bonus adjustments for the corporation’s

employees.    Mr. Sullivan personally supervised petitioner and

evaluated her performance in the same manner as other employees

of the corporation.    Mr. Sullivan considered petitioner to be one

of the “finest clinical therapists in the country”.    Mr. Sullivan

evaluated petitioner’s performance for 1993, 1994, and 1995, and

he recommended the amounts of her bonuses for those years, which

were approved by Drs. Deland and Noell.

     Petitioner received the following annual salary and bonuses

for 1989 through 1995:

            Year      Salary        Bonus         Total
            1989    $38,000.00     $1,000      $39,000.00
            1990     41,800.00      1,750       43,550.00
            1991     47,500.00      2,500       50,000.00
            1992     51,100.00     11,000       62,100.00
            1993     56,292.61     25,000       81,292.61
            1994     59,242.70     35,000       94,242.70
            1995     62,856.81     35,000       97,856.81

With respect to 1993, 1994, and 1995, petitioner received Forms

W-2, Wage and Tax Statement, from the corporation that reflected
                                - 5 -

her base salary.    The Forms W-2, however, did not include the

amount of the bonus that she had received during the taxable

year.   Petitioner did not receive a separate Form W-2 or Form

1099 from the corporation with respect to the bonus amounts she

received during 1993, 1994, or 1995.    The corporation did not

withhold income or employment taxes from petitioner’s bonus

checks.   The corporation deducted petitioner’s bonus checks as

salary expense.

     Petitioner received each year’s bonus in the form of a

single check, and she negotiated it by endorsement and depositing

into her bank account.    Two of the three checks contained the

explanation on its face that it was being paid as a “bonus”.      In

the process of employee evaluation, each employee discussed the

salary adjustments and/or bonuses with an immediate supervisor

and the bonus checks were provided in a sealed envelope, the

contents of which was usually known only by Dr. Deland.

Petitioner was not aware of the amount of any other employee’s

bonus for the 3 years in question.

     Petitioner was married to Jeffrey W. Williams, and they

filed joint Federal income tax returns for their 1993, 1994, and

1995 tax years.    The joint Federal income tax return filed by

petitioner and her husband for 1993 was prepared by a commercial

return preparer.    For 1994 and 1995, however, petitioner’s

husband prepared their joint Federal income tax returns.
                                - 6 -

Petitioner was aware that the bonuses were not included in the

joint Federal income tax return filed for 1994 and 1995.

     Mr. Sullivan received salary and bonuses in 1993, 1994, and

1995, as follows:

           Year     Salary         Bonus         Total
           1993     $92,379       $75,000      $167,379
           1994     100,000       100,000       200,000
           1995     100,000       125,000       225,000

In the same manner as petitioner, Mr. Sullivan was not issued

Forms W-2 for the bonus amounts and he did not report his bonuses

on his 1993, 1994, and 1995 income tax returns.   Mr. Sullivan was

criminally prosecuted with respect to his omissions of the

bonuses and pleaded guilty to filing a false return for 1995.    He

was required to make restitution by paying income tax on the

omitted bonuses for 1993, 1994, and 1995.   Mr. Sullivan was not

aware that petitioner’s bonuses were not reflected on a Form W-2

or that there was no withholding for her 1993, 1994, or 1995

bonuses.

     During 1996, the corporation’s in-house counsel hired

certified public accountants to examine or audit the

corporation’s books because of discrepancies on the corporation’s

Federal tax returns.   The examination was conducted during

January 1997, and, as a result, the corporation filed revised

employment tax returns.    In addition, revised Forms W-2 for 1993,

1994, and 1995 were prepared and issued only to two of the

corporation’s employees.   The discrepancy discovered by the
                               - 7 -

accountants specifically concerned Mr. Sullivan’s and

petitioner’s bonus checks that had been deducted by the

corporation as salary, but had not been reported to the

Government as such on Forms W-2.   In addition, no withholding tax

had been taken from petitioner’s and Mr. Sullivan’s bonuses.

     Petitioner’s friendship with Dr. Deland ended during 1996,

after petitioner’s sister, who also worked for the corporation,

was dismissed from her position.   Petitioner did not receive a

bonus during and for the 1996 year, and she resigned from the

employ of the corporation.

     During the spring of 1997, the corporation sent petitioner

Forms W-2c, Statement of Corrected Income and Tax Amounts, for

1993, 1994 and 1995, which reflected the bonuses (additional

compensation) in the amounts of $25,000, $35,000, and $35,000,

respectively.   After receiving the Forms W-2c, petitioner did not

amend her 1993, 1994, or 1995 income tax returns to report the

increased amounts reflected on the Forms W-2c.   During December

1997, petitioner was advised that she was under criminal

investigation by the Internal Revenue Service.   Ultimately, there

was no prosecution of petitioner in connection with her tax

matters.

     During 1995, petitioner’s husband received a $1,300

distribution from Mutual of America which was reflected on a Form

1099-R, Distributions From Pensions Annuities, Retirement or
                                 - 8 -

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which is a

form designated for distributions from pensions, annuities,

retirement, or profit sharing and related plans, including

individual retirement accounts.    Withholding of $260 was taken

from the $1,300 gross distribution by Mutual of America.

                             OPINION

     The factual focus of this case concerns annual lump-sum

payments to petitioner in the amounts of $25,000, $35,000, and

$35,000 during 1993, 1994, and 1995, respectively.     The amounts

were not reported to respondent or petitioner on Forms W-2, and

no withholding was effected by petitioner’s employer.     Key to

petitioner’s position is that the $25,000 and $35,000 payments

were gifts from Dr. Deland, who, during those years, was a

personal friend of petitioner.    In that regard, “Gross income

does not include the value of property acquired by gift”.       Sec.

102(a).

     Section 102(c)(1), however, denies section 102 exclusion

treatment for “any amount transferred by or for an employer to,

or for the benefit of, an employee.”     The legislative history

indicates that a gift made by an employer to an employee

exclusively for personal reasons (such as a birthday present), if

it is entirely unrelated to the employment relationship and

reflects no anticipation of business benefit, can still qualify

for section 102 exclusion treatment.     See S. Rept. 99-313,   at 49
                                - 9 -

(1986), 1986-3 C.B. (Vol. 3) 1, 49.      Clearly, the amounts

received by petitioner do not fall within the narrow exception

intended for purely personal reasons.      Accordingly, under section

102(c)(1), petitioner would not be entitled to treat the amounts

received as excludable from gross income.

     Furthermore, the record does not support a finding that Dr.

Deland, based on detached and disinterested generosity and out of

affection, respect, and admiration, intended to make gifts to

petitioner.    Commissioner v. Duberstein, 363 U.S. 278, 285

(1960).   The facts in this case reflect that the amounts paid to

petitioner were in exchange for her high-quality performance as

an employee.   The amounts were paid as bonuses after evaluation

of her performance by the corporation’s chief operating officer

and his recommendation of the bonus amounts.      The recommended

amounts were approved by Dr. Deland, the person who petitioner

alleges made the alleged gifts.

     It is clear from this record that petitioner was a key

employee and that the amount she received in each of the 3 years

was earned and commensurate with the bonuses paid to other

employees, including Mr. Sullivan.      Petitioner has placed much

emphasis on the fact that Dr. Deland was a personal friend, and

she contends that the friendship was the source of disinterested

generosity to support a gift.   Dr. Deland’s approval and payment

of the amounts in question, however, were not out of
                                - 10 -

disinterested generosity.     The bonuses were set by a third person

and based on petitioner’s quality performance and approved by

Drs. Deland and Noell.    The facts in this record do not support a

finding that the payments to petitioner were intended as gifts.

See also sec. 102(c); Leschke v. Commissioner, T.C. Memo. 2001-

18.   Accordingly, we hold that the $25,000, $35,000, and $35,000

payments of bonuses constituted gross income that petitioner

failed to report.

      Next, we address petitioner’s claim that the normal 3-year

period for assessment had expired prior to respondent’s issuance

of the notice of deficiency for the 1993 and 1994 tax years.

There is agreement that the period for assessment under section

6501 was not extended by written consent of the parties.     As of

April 13, 1999, when respondent mailed the notice of deficiency

to petitioner, more than 3 years had elapsed since the filing of

petitioner’s return for 1993 and 1994.     Respondent, however,

relies on section 6501(e), which provides for a 6-year period for

assessment, if a taxpayer “omits from gross income an amount

properly includible therein which is in excess of 25 percent of

the amount of gross income stated in the return”.

      In that regard, respondent bears the burden of showing the

25-percent omission.     We have already decided, based on the

preponderance of the evidence, that the bonuses were includable

in petitioner’s gross income for 1993 and 1994.     Petitioner and
                               - 11 -

Mr. Williams’s joint 1993 and 1994 income tax returns reflect the

reporting of gross income in the amounts of $65,520 and $96,228,

respectively.   There is no mention on those returns of the

$25,000 or $35,000 payment received by petitioner from the

corporation during 1993 or 1994.   Twenty-five percent of the

income reported for 1993 and 1994 is $16,380 and $24,057,

respectively.   Therefore, the $25,000 and $35,000 bonuses, which

were includable in and omitted from gross income for 1993 and

1994, respectively, were in excess of 25 percent of the gross

income reported for each year within the meaning of section

6501(e).    Accordingly, we hold that the period for assessment had

not expired for 1993 and 1994 on April 13, 1999, the date

respondent mailed the notice of deficiency to petitioner and Mr.

Williams.

     The third issue presented for our consideration involves

respondent’s determination that, for 1995, petitioner and Mr.

Williams had incorrectly reported as wages a premature withdrawal

of $1,300 from a pension account that was subject to the 10-

percent penalty under section 72(t).    Respondent determined that

the $1,300 should be removed from income in the wage category and

included in income in the pension category.    Those adjustments

cancel each other out and do not result in an increase in the

gross income of petitioner and Mr. Williams.    Changing the

category of the $1,300, however, resulted in a $130 (10-percent
                              - 12 -

penalty) increase in tax for the 1995 tax year.

     Petitioner offered no evidence on this adjustment and makes

no argument that would show that respondent’s determination is in

error.   Accordingly, we hold that petitioner is liable for the

$130 increase in tax and that respondent’s reclassification of

the $1,300 from wage to pension income is sustained.

     Finally, we consider whether petitioner is liable for an

accuracy-related penalty for failing to report the bonuses

received during 1993, 1994, or 1995.4   Respondent determined that

section 6662(a) applies and that petitioner is liable for a 20-

percent accuracy-related penalty on the portion of the

underpayment represented by the failure of petitioner to report

her bonuses for 1993, 1994, or 1995.

     A taxpayer is negligent when he or she fails “‘to do what

[a] reasonable and ordinarily prudent person would do under the

circumstances.’”   Korshin v. Commissioner, 91 F.3d 670, 672 (4th

Cir. 1996) (quoting Schrum v. Commissioner, 33 F.3d 426, 437 (4th

Cir. 1994), affg. in part, vacating and remanding in part on

another ground T.C. Memo. 1993-124), affg. T.C. Memo. 1995-46.

     As pertinent here, “negligence” includes the failure to make

a reasonable attempt to comply with the provisions of the



     4
       As a result of the inclusion of the bonuses in income some
purely mathematical adjustments resulted due to an increase in
petitioner’s adjusted gross income, which, in turn, caused a
reduction in allowable itemized deductions.
                               - 13 -

Internal Revenue Code.    See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.   A taxpayer may avoid the application of the

accuracy-related penalty by proving that he or she acted with

reasonable cause and in good faith.     See sec. 6664(c).   Whether a

taxpayer acted with reasonable cause and in good faith is

measured by examining the relevant facts and circumstances, and

most importantly, the extent to which he or she attempted to

assess the proper tax liability.    See Neely v. Commissioner, 85

T.C. 934 (1985); Stubblefield v. Commissioner, T.C. Memo. 1996-

537; sec. 1.6664-4(b)(1), Income Tax Regs.

     Although there were numerous employees in the corporation,

only petitioner and Mr. Sullivan, the chief operating officer,

did not have their bonuses reported on a Form W-2.     Deductions

were claimed with respect to all of the bonuses paid by the

corporation, including those paid to petitioner and Mr. Sullivan.

Petitioner has emphasized that she was a close personal friend of

Dr. Deland, who made the ultimate decisions regarding bonuses,

and petitioner has argued that the $25,000 and $35,000 payments

were gifts from Dr. Deland.

     For the 1993 tax year, petitioner and Mr. Williams’s joint

return was professionally prepared.     Petitioner contends that she

did not pay much attention to her Form W-2 for 1993 and simply

provided the documents received from various employers and payers

to the return preparer.
                              - 14 -

     For 1994 and 1995, however, Mr. Williams prepared the joint

return, and petitioner admits that she was more careful with

respect to the reporting documents, including the Forms W-2.    She

noticed that the $35,000 amounts had not been included in the

Forms W-2.   Petitioner testified that she had asked Mr. Sullivan

about the absence of the bonus amounts from the Forms W-2, and

she contends that he said that her Forms W-2 were correct.     Mr.

Sullivan, however, denies any such conversation.   He remembers a

conversation about loans that had been made for the purpose of

paying Mr. Williams’s college tuition and whether forgiveness of

those loans was a taxable event for petitioner and Mr. Williams.

On that point, petitioner contends that the loans were not

forgiven, but that she and Mr. Williams had repaid them in full.

Accordingly, the record is clouded as to any conversations

between Mr. Sullivan and petitioner on the subject.

     Petitioner was aware of the $25,000 and the two $35,000

bonus payments received from her employer during 1993, 1994, and

1995.   She had discussions with Mr. Sullivan, who, as her

immediate supervisor, rated her performance and recommended the

bonus amounts to Drs. Deland and Noell.   We note that

petitioner’s base salary in 1993, 1994, and 1995 was in a range

of approximately $56,000 to $63,000.   Considering the fact that

her bonuses were nearly one-half or more than one-half of her

annual salary, it is highly unlikely that she could have been
                              - 15 -

unaware or ignorant of the fact that the bonus amounts were not

included in the amounts reflected in the Forms W-2.

     Petitioner with respect to 1993 claims reliance on a

commercial return preparer.   Petitioner also claims that during

1994 and 1995 she inquired of Mr. Sullivan as to why her bonuses

were not included on her Forms W-2 for those years.   She contends

that Mr. Sullivan advised her that the Form(s) W-2 was correct.

In that regard, petitioner may not avoid her duty to report

accurately by placing the responsibility on an agent.    See United

States v. Boyle, 469 U.S. 241, 250-251 (1985).   More to the point

here, petitioner did not provide the preparer with information

about the payments from the corporation for the 1993 year, and

the preparer did not provide petitioner with legal or tax advice.

With respect to the 1994 and 1995 tax years, however, petitioner

admitted that she was aware that the amounts were not included on

the Forms W-2.   Irrespective of any advice that she may have

received from Mr. Sullivan, she was not entitled to rely on him

with respect to her income tax obligations.   Id.

     Under those circumstances, petitioner’s claim of reliance

upon the preparer or Mr. Sullivan was not reasonable, and

petitioner is liable for the 20-percent penalty under section

6662(a) with respect to any underpayment that may result from the

failure to report the $25,000, $35,000, and $35,000 bonuses

received during 1993, 1994, and 1995, respectively.     Betson v.
                             - 16 -

Commissioner, 802 F.2d 365 (9th Cir. 1986), affg. in part and

revg. in part on another ground T.C. Memo. 1984-264; Indus.

Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272 (1976).

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
