Cross References
• Bernard, T.C. Memo. 2012-221, August 1, 2012

The taxpayer was a former assistant U.S. attorney who suffered from various health ailments, including cardiac disorders, depression, and memory loss. He retired in 2000 because of disability. For 2007, the year at issue, he prepared his own tax return.

He claimed that distributions from an IRA were a return of investments made through nondeductible contributions, and that the gains on those investments should be taxed as capital gains rather than ordinary income. The taxpayer produced no evidence to support his claim that the IRA contributions were made with after-tax funds. Nor could he cite any law to support his claim that the gain on his non-deductible contributions should be taxed as capital gains rather than ordinary income. The Court ruled all of the IRA distributions were taxable as ordinary income.

The Court then considered the accuracy-related penalty. Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty on any underpayment of federal income tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial understatement of income tax. Section 6662(c) defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the Code and defines disregard as any careless, reckless, or intentional disregard. Disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rules or regulations. The penalty does not apply if the taxpayer acted with reasonable cause and in good faith.

The taxpayer argued that his health problems, which started in 1995, were the cause of the numerous errors on his 2007 tax return. He argued that the penalties assessed by the IRS did not take into consideration his poor health. He also argued that penalties have not been imposed against other taxpayers, such as the Secretary of the Treasury, who relied on TurboTax to prepare their returns.

The Court said poor health, confusion, and memory loss is no excuse for errors on a return. The Court said the taxpayer’s failure to seek competent help in preparing the return was negligence. The length and severity of the health problems suggest that a reasonable person in the taxpayer’s position would have sought help rather than adopt his disability as an excuse for inaccurate reporting. The Court ruled the taxpayer was subject to the penalty because he did not exercise reasonable diligence in determining his tax liability.