Gary E. and Rebecca L. Hurley - Page 12

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          cause and that the taxpayer acted in good faith.  Sec. 6664(c);             
          sec. 1.6664-4(a), Income Tax Regs.  Reasonable cause may be shown           
          by a good faith effort by the taxpayer to determine the correct             
          tax liability.  Larson v. Commissioner, T.C. Memo. 2002-295.                
               Mr. Hurley testified that he discussed this exclusion with             
          numerous law enforcement individuals who were excluding a portion           
          of their income due to a permanent disability, and they confirmed           
          to him that this was a common practice among law enforcement                
          officers.  In addition, petitioners conferred over the phone with           
          a representative of a tax return preparation service, H&R Block,            
          who also advised that such a reduction was allowable and common             
          practice.  The Court finds Mr. Hurley’s testimony credible.                 
          Petitioners made no effort to hide the reason they were excluding           
          30 percent of Mr. Hurley’s income; in fact, they attached a                 
          written explanation of the exclusion to their 1999 Federal income           
          tax return.  In addition, once petitioners received the notice of           
          deficiency, they included 100 percent of Mr. Hurley’s income on             
          their subsequent income tax returns while awaiting a decision by            
          this Court.  Petitioners’ actions amount to reasonableness under            
          section 6662(c), and their actions are not considered by the                
          Court to amount to “careless, reckless, or intentional                      
               Section 6662(b)(2) also provides a penalty in the amount of            
          20 percent for any “substantial understatement of income tax”.  A           

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