                   T.C. Summary Opinion 2007-161



                      UNITED STATES TAX COURT



                PERRY ALAN PEDERSEN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3391-05S.              Filed September 10, 2007.



     Perry Alan Pedersen, pro se.

     Charles M. Berlau, for respondent.



     WHERRY, Judge:   This case was heard pursuant to 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 other court, and this opinion shall not

be treated as precedent for any other case.

     1
       All subsequent section references are to the Internal
Revenue Code of 1986, as amended and in effect for the taxable
year at issue. The Rule reference is to the Tax Court Rules of
Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax for the 2002 taxable year in the amount of $23,277.

Respondent also determined an accuracy-related penalty pursuant

to section 6662(a) in the amount of $1,068.   Petitioner does not

dispute the deficiency as determined by respondent.2   Thus, the

sole issue now before the Court is whether petitioner is liable

for the section 6662(a) accuracy-related penalty.

                              Background

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference.   At the time he filed his petition, petitioner resided

in Albuquerque, New Mexico.

     Petitioner filed, in a timely manner, a Form 1040, U.S.

Individual Income Tax Return, for the 2002 taxable year.   For the

2002 taxable year, petitioner received from his employer, Altana,

Inc., two Forms W-2, Wage and Tax Statement, in the amounts of

$103,955.11 and $73.313.30.    Petitioner failed to report, on his

Form 1040, $73,310.30 in wages, the amount on one of his Forms W-


     2
       Although the amount of tax owed is not in dispute, it is
noteworthy that the actual amount of tax owed by petitioner was
$5,337.10, significantly less than the $23,277 deficiency listed
in the notice of deficiency. The difference is attributable to
the fact that withholding from one of petitioner’s Forms W-2,
Wage and Tax Statement, was not initially accounted for by
respondent because petitioner had failed to report the income
from that Form W-2. Respondent accounted for that difference
before determining the accuracy-related penalty in this case. In
any event, the deficiency in this case constitutes a substantial
understatement of income tax.
                                 - 3 -

2, and $15 in dividend income.    In addition, in Schedule E,

Supplemental Income and Loss, petitioner improperly reported a

$7,584 passive loss.   On January 24, 2005, respondent issued the

aforementioned notice of deficiency.     Petitioner then filed a

timely petition with this Court disputing only his liability for

the accuracy-related penalty.    A trial was held on November 27,

2006, in Albuquerque, New Mexico.

                            Discussion

I.   Parties’ Contentions

      Petitioner argues that he is not liable for the accuracy-

related section 6662(a) penalty because he relied on his

accountant for the preparation of his 2002 tax return.     In

addition, petitioner contends that he and his accountant were

confused by the fact that petitioner’s employer, Altana, Inc.,

had issued two separate Forms W-2 for the 2002 taxable year.

Petitioner asserts that he believed that only one of the Forms W-

2 was correct and that one Form W-2 superseded the other.       In

support of this contention, petitioner has provided two letters

from his accountant, David M. Beail (Mr. Beail), sent to the

Internal Revenue Service (IRS) in August and October 2004 in an

attempt to persuade the IRS to abate the section 6662(a) penalty.

In the October 2004 letter, Mr. Beail asserts that “It was our
                               - 4 -

thought that only one W-2 was correct, as Mr. Pedersen had never

received two W-2's from his company.”3

     Respondent contends that nothing other than petitioner’s own

testimony indicates whether his accountant was competent.   More

importantly, respondent asserts that petitioner and his

accountant’s assumptions regarding the two Forms W-2 were not

reasonable in light of the fact that neither Form W-2 was marked

revised.   Respondent further asserts that the failure of

petitioner and his accountant to contact Altana, Inc., in order

to verify the correct amount of petitioner’s wages reflects a

lack of good faith and reasonable cause.   Finally, respondent

points out that, at trial, petitioner admitted that he had not

examined his tax return “closely enough” and that petitioner’s

failure to do so resulted in his failing to report more than 40

percent of his wages on his 2002 tax return.




     3
        At trial, respondent conceded that the October 2004
letter is contained in respondent’s administrative file.
Petitioner had already raised that letter in his pretrial
memorandum. Nevertheless, when petitioner referred to that
letter at trial, respondent objected to its introduction into
evidence on the basis of hearsay. Noting that this is a small
tax case, the Court observed that section 7463 generally allows
disputes in small tax cases to be decided in proceedings in which
the normally applicable procedural and evidentiary rules are
relaxed. In addition, the Court referenced Rule 174(b), which
provides: “Trials of small tax cases will be conducted as
informally as possible consistent with orderly procedure, and any
evidence deemed by the Court to have probative value shall be
admissible.” The Court then overruled respondent’s objection.
                                  - 5 -

II.   Section 6662 Penalty

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

production with respect to petitioner’s liability for the section

6662(a) penalty.    This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.”      Higbee v. Commissioner, 116 T.C.

438, 446 (2001).

      We conclude that respondent has met the section 7491(c)

burden of production with respect to the substantial

understatement penalty.      As explained below, in this close case,

we ultimately find unavailing petitioner’s argument that he is

not liable for the accuracy-related penalty because he acted with

reasonable cause and in good faith by relying on his accountant

in failing to report $73,313.30 in wages for the 2002 taxable

year.

        Subsection (a) of section 6662 imposes an accuracy-related

penalty on an underpayment of tax that is equal to 20 percent of

any underpayment that is attributable to a list of causes

contained in subsection (b).     Among the causes justifying the

imposition of the penalty are (1) negligence or disregard of

rules or regulations and (2) any substantial understatement of

income tax.    Section 6662(c) defines negligence as “any failure

to make a reasonable attempt to comply with the provisions of

this title.”    “[D]isregard” is defined to include “any careless,
                               - 6 -

reckless, or intentional disregard.”   Id.   Under caselaw,

“‘Negligence is a lack of due care or the failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.’”   Freytag v. Commissioner, 89 T.C. 849, 887

(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.

1964-2990), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).

     There is a “substantial understatement” of income tax for

any taxable year where the amount of the understatement exceeds

the greater of (1) 10 percent of the tax required to be shown on

the return for the taxable year or (2) $5,000.

Sec. 6662(d)(1)(A)(i) and (ii). However, the amount of the

understatement is reduced to the extent attributable to an item

(1) for which there is or was substantial authority for the

taxpayer’s treatment thereof, or (2) with respect to which the

relevant facts were adequately disclosed on the taxpayer’s return

or an attached statement and there is a reasonable basis for the

taxpayer’s treatment of the item.   See sec. 6662(d)(2)(B).

      There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) further provide that the
                                - 7 -

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

circumstances.”   Sec.   1.6664-4(b)(1), Income Tax Regs.

     Reliance upon the advice of a tax professional may, but does

not necessarily, establish reasonable cause and good faith for

the purpose of avoiding a section 6662(a) penalty.    See United

States v. Boyle, 469 U.S. 241, 251 (1985) (“Reliance by a lay

person on a lawyer is of course common; but that reliance cannot

function as a substitute for compliance with an unambiguous

statute.”).   Such reliance does not serve as an “absolute

defense”; it is merely a “factor to be considered.”    Freytag v.

Commissioner, supra at 888.    The caselaw sets forth the following

three requirements in order for a taxpayer to use reliance on a

tax professional to avoid liability for a section 6662(a)

penalty: (1) The adviser was a competent professional who had

sufficient expertise to justify reliance, (2) the taxpayer

provided necessary and accurate information to the tax adviser,

and (3) the taxpayer actually relied in good faith on the

adviser's advice.   See Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.

2002).

     In this case, the notice of deficiency included the

imposition of a $1,068.00 section 6662(a) penalty on the basis

that there was a substantial understatement of petitioner’s
                                 - 8 -

income tax for the 2002 taxable year.    Petitioner does not

contest that he substantially understated his 2002 income tax.

The vast majority of that understatement was attributable to

petitioner’s failure to report $73,313.30 in wages on his income

tax return for that year.   Although petitioner also failed to

report $15 in dividend income and improperly claimed a $7,584

Schedule E passive activity loss, all of petitioner’s and

respondent’s arguments, at trial and in their briefs, focus on

petitioner’s failure to report the $73,313.30 in wages.

     With respect to the first prong of the Neonatology, test, we

conclude that petitioner has established that his accountant was

a competent professional who had sufficient expertise to justify

reliance.4   See Neonatology Associates, P.A. v. Commissioner,

supra at 99.   With respect to the second prong of the Neonatology

test, Mr. Beail’s letters make clear that petitioner did provide

Mr. Beail with both Forms W-2.    Because petitioner’s failure to

report all of his wages is the sole basis argued by respondent to

support the imposition of a penalty in this case, petitioner has

satisfied the second prong of the Neonatology test.


     4
        Mr. Beail’s letters indicate that he is a certified
public accountant, and records of the Washington State Board of
Accountancy, which this Court will take judicial notice of,
indicate that Mr. Beail is currently licensed to practice public
accounting. In addition, the Supreme Court has held that
accountants, like attorneys, are professionals upon whom
taxpayers can rely for advice “on a matter of tax law, such as
whether a liability exists.” United States v. Boyle, 469 U.S.
241, 251 (1985).
                                - 9 -

     Turning to the third prong of the Neonatology test, we note

that petitioner admitted at trial that he had not examined his

2002 tax return “closely enough.”    Petitioner had a duty to read

his return to ensure that all income items were included.      Magill

v. Commissioner, 70 T.C. 465, 479-480 (1978), affd. 651 F.2d 1233

(6th Cir. 1981).    Petitioner was not permitted to bury his head

in the sand and ignore his obligation to ensure that his tax

return accurately reflected his income for the 2002 taxable year.

In the end, reliance on his accountant does not excuse

petitioner’s failure to closely examine his 2002 tax return.

        To the extent that petitioner and/or his accountant might

have been confused by the fact that petitioner’s employer, Altana

Inc., issued two Forms W-2 for the 2002 taxable year rather than

one, they were free to contact petitioner’s employer to inquire

as to that issue.    As was conceded by petitioner at trial,

neither petitioner nor his accountant contacted Altana, Inc.,

before filing petitioner’s 2002 tax return, in order to determine

why petitioner had been issued two Forms W-2 for the 2002 taxable

year.    Given (1) the materiality of the large amount of

unreported Form W-2 income, (2) the fact that petitioner and his

accountant were both confused as to why petitioner had received

two Forms W-2, and (3) the fact that neither one of them made a

reasonable effort to resolve that issue, the Court cannot find

that petitioner relied in good faith on Mr. Beail’s advice.
                             - 10 -

Finally, as respondent correctly points out, because neither Form

W-2 was marked as having been corrected, it was not reasonable

for petitioner and his accountant to believe, without questioning

petitioner’s employer, that only one of the Forms W-2 was

correct.

     Although this close case might have been more equitably

resolved by the parties, this Court is constrained to apply the

full penalty or no penalty at all.    Because petitioner has not

demonstrated reasonable cause and good faith for the

underpayment, the Court sustains respondent’s imposition of the

section 6662(a) penalty.

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.    To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
