No reasonable cause for $3.4 million omission from income.

• Author: Beavers, James A.

The Tax Court held that a taxpayer did not have reasonable cause for omitting from income $3.4 million from the termination of a swap transaction that was reported to him on a Form 1099.

Background

Stephen Woodsum is the founding managing director of a private equity firm. In 1998, he undertook a financial transaction called a 10-year total return limited partnership linked swap with Bankers Trust Company, which was later succeeded in its interest in the swap transaction by Deutsche Bank. The swap transaction was scheduled to end in 2008, but Woodsum decided to terminate the transaction in 2006. The net payout to Wood-sum on the termination of the swap was $3,367,611, which was taxable to him.

As a result of the termination payout, Deutsche Bank issued Woodsum a Form 1099-MISC reporting $3,379,611 as "Other Income" and a Form 1099-INT reporting interest income of $60,292. Woodsum also earned large amounts of income from other sources in 2006. All told, he received almost $33 million in 2006 (including the income from the termination of the swap transaction) that the payers reported to Woodsum on over 160 different information returns.

A tax firm that specialized in part in preparing the individual income tax returns of private equity and hedge fund partners prepared Woodsum's 2006 return. The firm employees who prepared the return had extensive experience in return preparation, and Woodsum gave them all the information returns he received for 2006 (including the Deutsche Bank 1099s). However, for unknown reasons, the approximately $3.4 million of income reported to Woodsum on the Deutsche Bank 1099-MISC was not included in the 115-page individual return the firm prepared for Woodsum. If it had been included, it would have appeared as long-term capital gain on a separate line item in part II of Schedule D, Capital Gains and Losses.

On October 15 (the extended due date of the return), Woodsum met with a representative of the tax firm to review the return and discuss other matters. During the discussion of the return, Woodsum did not compare or match the items of income reported on the Form 1040 and its schedules with the information returns that the third-party payers had provided. He signed the return the same day.

The IRS determined a deficiency of $521,473 based on the omitted income from the termination of the swap transaction and also assessed an accuracy-related penalty under Sec. 6662(a) of $104,295. Woodsum agreed to pay the amount of...