                        T.C. Memo. 2006-269



                      UNITED STATES TAX COURT



             FREDERIC W. THRANE, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7367-04.                 Filed December 18, 2006.



     Robert J. Gumser, for petitioner.

     Michael S. Hensley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined an income tax deficiency

of $80,922 and a section 6662(a)1 accuracy-related penalty of

$14,918 with respect to petitioner's 2001 taxable year.   After


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986 as in effect for the taxable
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                                   - 2 -

concessions,2 the issue left for decision is whether petitioner is

liable for an accuracy-related penalty under section 6662(a) with

respect to the understatement of tax on his 2001 Federal income

tax return.       We hold that petitioner had reasonable cause and

acted in good faith with respect to the associated underpayment

and is therefore not liable for an accuracy-related penalty.

                             FINDINGS OF FACT

        Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.       At the time the petition

was filed, petitioner resided in Pacific Grove, California.

        Petitioner was the sole shareholder of Windsor Capital

Mortgage Corp. (Windsor), which was engaged in real estate credit

activities, from its incorporation in 1989 through 2001.

Petitioner was employed full time as president of Windsor during

2001.       Petitioner elected for Windsor to be taxed under the

provisions of subchapter S of chapter 1, subtitle A, of the

Internal Revenue Code, effective July 1, 1998, and the election

was in effect through 2001.




        2
       Petitioner concedes that he failed to report $173,093 of
ordinary income in 2001. Respondent concedes that petitioner did
not have an additional $27,840 of income determined for that
year, as had been reported to respondent on an erroneous Form W-
2, Wage and Tax Statement, issued to petitioner.
                                 - 3 -

        Petitioner retained a certified public accounting firm,

Oliva, Sahmel & Goddard (OSG), to provide tax and accounting

services both for Windsor and for himself.     For 2001, OSG

provided tax and financial accounting services to Windsor,

including the preparation of Windsor's Federal income tax return,

and prepared petitioner's individual Federal income tax return.

Windsor employed a part-time bookkeeper/accountant who served as

the main point of contact between OSG and Windsor.     Windsor and

petitioner had been clients of OSG for at least 3 years at the

time the 2001 returns were prepared.

     Philip Wright was a certified public accountant employed by

OSG since 1999.     In March of 2002, Wright prepared Windsor's

audited financial statements for the year ended December 31,

2001.    The audited financial statements were signed by the OSG

audit partner, Thomas Goddard, and were prepared for, among other

reasons, compliance with requirements set by the U.S. Department

of Housing and Urban Development for mortgage lenders.

     After completion of the audited financial statements, Wright

prepared Windsor's 2001 Form 1120S, U.S. Income Tax Return for an

S Corporation.     The Form 1120S was prepared using a tax

accounting computer program that electronically stored the

return, matched debits and credits, and allowed other OSG

personnel to electronically access the return.    After Wright
                                 - 4 -

completed it, the Form 1120S was submitted to Ronald Sahmel, an

OSG partner, who reviewed and signed it as the preparer on June

27, 2002.

     The Form 1120S was then hand delivered to Robert Delgado at

Windsor's corporate offices.    He signed it on July 1, 2002, in

his capacity as Windsor's corporate secretary and mailed it.3      The

Form 1120S included a Schedule K-1, Shareholder's Share of

Income, Credits, Deductions, etc., for petitioner, which reported

that petitioner had ordinary income of $587,938 from Windsor and

had received $412,000 in distributions.     A copy of the Schedule

K-1 was issued to petitioner.

     As filed, the Form 1120S did not separately state any amount

for "Compensation of officers" on line 7.    Instead, an aggregate

figure of $426,743 for all compensation, both officers' and other

employees', was listed on line 8, "Salaries and wages (less

employment credits)".    After the Form 1120S was filed, OSG

obtained information that Windsor's officer compensation for 2001

was $173,093.    Thereafter, $173,093 was entered into the

electronically stored version of the Form 1120S on line 7 as

"Compensation of officers".     However, no correlative adjustment

was made to line 8 for "Salaries and wages (less employment

credits)".    Consequently, the $173,093 in officer compensation



     3
         Respondent received the Form 1120S timely on July 7, 2002.
                               - 5 -

was counted twice (as a deduction) on the electronically stored

version of the Form 1120S, resulting in an erroneous $173,093

understatement of ordinary income from Windsor's operations on

the electronically stored Form 1120S; namely, $414,845 rather

than $587,938.   As petitioner was Windsor's sole shareholder, a

corresponding error was carried through to the electronically

stored version of the Schedule K-1 for petitioner, so that it

likewise reported $414,845 rather than $587,938 as petitioner's

share of ordinary income.

     After the Form 1120S had been filed, Sahmel prepared

petitioner's 2001 Form 1040, U.S. Individual Income Tax Return.

Following OSG standard practice, Sahmel used the electronically

stored version of petitioner's Schedule K-1 from Windsor to

prepare the Form 1040.   That version, however, contained the

$173,093 understatement of ordinary income as $414,845 rather

than $587,938.   The erroneous $414,845 figure for Windsor's

ordinary income was entered once on a worksheet accompanying

petitioner's Schedule E, Supplemental Income and Loss.    On the

worksheet, the $414,845 figure was offset by $36,417 in

supplemental business expenses before being recorded on the face

of the Schedule E as $378,428 in income from Windsor.    The Form

1040 was signed by Sahmel as preparer and by petitioner.
                                 - 6 -

                                OPINION

     Petitioner now concedes that he failed to report $173,093 of

income from Windsor in 2001.    We must decide whether he is liable

for a section 6662(a) accuracy-related penalty based on a

substantial understatement of income tax, as determined by

respondent.   See sec. 6662(a) and (b)(2).     A "substantial

understatement" exists for this purpose if the amount of tax

required to be shown on the return exceeds that shown by the

greater of 10 percent of the tax required to be shown or $5,000.

Sec. 6662(d)(1)(A).

     The Commissioner has the burden of production under section

7491(c) with respect to the liability of any individual for a

penalty imposed by the Internal Revenue Code and must come

forward with sufficient evidence indicating that it is

appropriate to impose the penalty.       See 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 as to

the penalties is incorrect or that the taxpayer had reasonable

cause or substantial authority for his position.      See id. at 447;

sec. 1.6664-4, Income Tax Regs.

     The $173,093 omission of income conceded by petitioner

produces an understatement exceeding the greater of $5,000 or 10

percent of the tax required to be shown on his return.
                               - 7 -

Accordingly, respondent has satisfied his burden of production

and petitioner bears the burden of establishing the applicability

of the reasonable cause exception.

     A penalty under section 6662(a) will not be imposed with

respect to any portion of the underpayment as to which the

taxpayer acted with reasonable cause and in good faith.     Sec.

6664(c)(1).   The determination as to 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) and (c), Income Tax Regs.

"An isolated computational or transcriptional error generally is

not inconsistent with reasonable cause and good faith."     Sec.

1.6664-4(b)(1), Income Tax Regs.   Further,

     Reliance * * * on the advice of a professional tax
     advisor * * * does not necessarily demonstrate
     reasonable cause and good faith. * * * Reliance on
     * * * professional advice, or other facts, however,
     constitutes reasonable cause and good faith if, under
     all the circumstances, such reliance was reasonable and
     the taxpayer acted in good faith. * * * [Id.]

     In United States v. Boyle, 469 U.S. 241, 251-252 (1985), the

Supreme Court held that, because it requires no tax expertise to

ascertain a deadline and meet it, a taxpayer's reliance on a tax

professional to make a timely filing of a return does not

constitute reasonable cause for a late filing of a return.    In so

holding, the Supreme Court also stated a corollary:   "When an

accountant or attorney advises a taxpayer on a matter of tax law,
                               - 8 -

* * * it is reasonable for the taxpayer to rely on that advice."

Id. at 251.

     Whether reasonable cause exists when the taxpayer has relied

on an accountant or attorney to prepare a return correctly

depends on the facts and circumstances.   See Neonatology

Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd.

299 F.3d 221 (3d Cir. 2002).   Compare Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 661-663 (1987) (reliance on accountant

with complete information regarding taxpayer's business

activities not reasonable cause where taxpayer's cursory review

of return would have revealed errors), and Pritchett v.

Commissioner, 63 T.C. 149, 174-175 (1974) (reliance on accountant

with complete information on transaction not reasonable cause

even where proper treatment of item "requires a fair degree of

expertise and sophistication"),4 with Harrison v. Commissioner,

T.C. Memo. 1998-417 (taxpayer's reliance on accountant's

computation of estimated tax liability for purposes of extension

request is reasonable cause for late filing), and Drummond v.

Commissioner, T.C. Memo. 1997-71 (to same effect for extension

request; to same effect for other items where taxpayer's review

of return would not have revealed errors), affd. in part and

revd. in part without published opinion 155 F.3d 558 (4th Cir.


     4
       We need not and do not decide herein whether the holding
in Pritchett v. Commissioner, 63 T.C. 149 (1974), can be fully
reconciled with United States v. Boyle, 469 U.S. 241 (1985).
                               - 9 -

1998).   In appropriate circumstances, nonetheless, a taxpayer's

reliance on his accountant's preparation of the return, including

the computations thereon, may constitute reasonable cause.      See

Harrison v. Commissioner, supra; Drummond v. Commissioner, supra.

     In order for a taxpayer's reliance on professional advice to

constitute reasonable cause to negate a section 6662(a) accuracy-

related penalty, the taxpayer must show that (1) the adviser was

a competent professional who had sufficient expertise to justify

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.   Neonatology Associates,

P.A. v. Commissioner, supra at 98; see also Charlotte's Office

Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 & n.8 (9th

Cir. 2005), affg. 121 T.C. 89 (2003); Cramer v. Commissioner, 101

T.C. 225, 251 (1993), affd. 64 F.3d 1406 (9th Cir. 1995).

     On the basis of our review of all the facts and

circumstances, we conclude that petitioner had reasonable cause

with respect to the substantial understatement in this case.

Except for the single error arising from the inadvertent double-

deducting of Windsor's officer compensation, OSG competently

prepared Windsor's and petitioner's returns for 2001; there is no

evidence of other defects in either, for the year in issue or

prior years.   Thus, petitioner's reliance on OSG's competence was

reasonably justified.   Windsor, which petitioner controlled,
                              - 10 -

employed a part-time bookkeeper/accountant to serve as a contact

with OSG, and OSG prepared Windsor's audited financial

statements.   We are consequently satisfied that OSG had full

access to all necessary information and that the understatement

on petitioner's return is not attributable to petitioner's

failure to provide accurate information.

     We also conclude that petitioner actually and reasonably

relied in good faith on OSG's professional expertise.    Respondent

argues otherwise, relying on Metra Chem Corp. v. Commissioner,

supra.   Respondent seeks to draw a parallel between the instant

case and Metra Chem, where two taxpayer-shareholders of a C

corporation failed to report $10,000 and $6,800, respectively, in

cash dividends paid to them by the corporation, amounts which

were large in relation to the taxpayers' other income (over 20

percent thereof).   The taxpayers argued that they had reasonable

cause for the omissions because they relied on their accountant

to prepare their returns.   The accountant had also prepared the

corporate return and had access to the corporate books showing

the dividends.   We declined to find reasonable cause, for two

reasons.   First, reliance on professional advice constitutes

reasonable cause only where complex transactions are involved,

and reporting the receipt of cash dividends was not a complex

transaction, we reasoned.   Second, we noted that a review of the

taxpayers' returns would have revealed the erroneous omissions.
                              - 11 -

     Metra Chem is distinguishable from the instant case.       The

computation of the income of a mortgage lending business

conducted in S corporation form, which must be reported on the

shareholders' individual returns without regard to whether it is

distributed to them, is a more complex undertaking than the

straightforward reporting of a cash dividend received by a C

corporation shareholder.   The erroneous income figure for Windsor

($414,845) appeared only on a worksheet to the Schedule 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.   Moreover, even assuming

petitioner had spotted the erroneous $414,845 income figure, that

number approximated the $412,000 distributed to him from Windsor

during 2001.   Thus, petitioner may have surmised, as a layman

relying on accountants, that he was reporting as taxable income

from Windsor the amounts distributed to him.    In sum, the

discrepancy here arose in the context of reporting a transaction

(an S corporation shareholder's recognition of passthrough income

from a mortgage lender) that was more complex, and less

transparent, than that at issue in Metra Chem.

     To be sure, the $173,093 discrepancy here was large, but

smaller in relative terms than the errors made by the taxpayers'
                             - 12 -

accountants in Harrison v. Commissioner, supra, who computed the

taxpayers' estimated tax liability for extension purposes as

$1,408 and $2,200 for 1988 and 1989, respectively, when the

amount ultimately reported as due on the return was $96,418

(ultimately stipulated as $175,686) and $38,702 (ultimately

stipulated as $116,389), respectively.   Notwithstanding these

discrepancies, we concluded that the taxpayers in Harrison had

reasonable cause for late filing as a result of their reliance on

their accountants to perform the calculations of estimated tax

necessary to obtain extensions.

     Finally, as noted above, the regulations provide that an

isolated computational error generally is not inconsistent with

reasonable cause and good faith.   The error underlying

petitioner's income omission of $173,093, wherein his accountants

failed to remove that amount from salaries generally when they

separately stated it as officer compensation in the

electronically stored version of petitioner's S corporation's

Form 1120S, resembles the kind of isolated computational error

generally intended to give rise to relief.

     We accordingly hold that petitioner had reasonable cause for

the understatement attributable to his failure to report $173,093

of income from Windsor in 2001.
                             - 13 -

     To reflect the foregoing, and after concessions by both
parties,



                                        Decision will be entered

                                   under Rule 155.
