2011 U.S. Tax Ct. LEXIS 31
Tax Ct.2011Background
- Petitioners Stephen G. Woodsum and Anne R. Lovett resided in New Hampshire; in 2006 they recognized a $3.4 million gain from terminating a swap.
- Deutsche Bank issued a Form 1099-MISC reporting the $3.4 million; petitioners received 160+ information returns including 1099s.
- Venture Tax Services prepared petitioners’ 2006 federal return; Hopfenberg supervised, with a CPA actually preparing the return.
- The 115-page return omitted the $3.4 million from Deutsche Bank, though the petitioners signed and filed it on Oct. 15, 2007.
- The IRS determined a tax deficiency and a 20% accuracy-related penalty under §6662(a); petitioners paid the tax and contested the penalty.
- The core issue is whether petitioners had reasonable cause under §6664(c)(1) to omit the $3.4 million, considering reliance on a preparer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was the understatement substantial? | Woodsum/Lovett contend the omission was inadvertent and not substantial. | IRS asserts the $521,473 understatement exceeds the statutory threshold. | Yes; the understatement was substantial. |
| Does reliance on a professional adviser establish reasonable cause? | Petitioners relied on VTS to prepare the return and include the item. | Reliance fails where the taxpayer knew the item should be reported and failed to verify. | No; reliance on preparer does not establish reasonable cause here. |
| Did return preparer error constitute reasonable cause? | Omission was an error by the preparer; reasonable cause should apply. | The error was not a mere clerical/isolated error given the straightforward omission. | No; the error did not justify reasonable cause. |
Key Cases Cited
- Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000) (three-prong test for reliance on professional advice)
- Metra Chem Corp. v. Commissioner, 87 T.C. 656 (1986) (reasonable review required to avoid penalties)
- Thrane v. Commissioner, T.C. Memo. 2006-269 (2006) (return preparer's error rarely relieves taxpayer duty)
- Magill v. Commissioner, 70 T.C. 465 (1978) (taxpayer must review return to ensure all items included)
- Boyle v. United States, 469 U.S. 241 (1985) (substantive advice required for reasonable cause defense)
- Bailey v. Commissioner, 21 T.C. 678 (1954) (taxpayer cannot delegate ultimate responsibility to preparer)
- Higbee v. Commissioner, 116 T.C. 438 (2001) (burden on taxpayer once substantial understatement shown)