Stephen Woodsum undid a swap because he thought the investment wasn't worthwhile. He made $3.4 million of income (in a year when he had about $23 million other income). But he didn't report the income from doing it on his tax return. To avoid paying a penalty, he blamed his accountant for overlooking the income, claiming the reasonable cause affirmative defense to the understatement penalty.
Here's the first paragraph from the Tax Court case describing the facts.
In 2006 Ps received gain of $3.4 million upon the termination of a “swap” transaction. P-H was personally involved in terminating the transaction and received from the payor a Form 1099-MISC, Miscellaneous Income, that reported the payment. Ps retained a firm with a lawyer and a certified public accountant to prepare their 2006 income tax return. Ps gave to the firm all the 160-plus information returns they had received from third-party payors, including the Form 1099-MISC reporting the $3.4 million. The 115-page return that the firm prepared reported $29.2 million of adjusted gross income but omitted the $3.4 million from the swap transaction. Ps signed and filed the return. The IRS determined a deficiency of tax (which Ps conceded and paid) and an accuracy-related penalty under I.R.C. sec. 6662(a), which Ps dispute on grounds of “reasonable cause” under I.R.C. sec. 6664(c)(1).
The Tax Court didn't buy it: the problem isn't that the accountant was faulty, but that the equity firm manager paid a lot more attention to getting his investments right than he did to getting his tax return right. "[W]hen he was signing his tax return and reporting his tax liability, his routine was so casual that a half-million-dollar understatement of that liability could slip between the cracks," said Judge David Gustafson. So Woodsum has to pay the taxes, and the $104 thousand understatement penalty for 2006.
Right outcome in Stephen G. Woodsum & Anne R. Lovett v. Comm'r, Case o18934-09, Tax Court May 13, 2011. See Buyout Executive's $3.4 Million Goof leads to loss in tax court, Bloomberg.net. ("Goof"? wonder if it was more a calculated risk? 3.4 million is more than 1/10th of his total high income. Wouldn't it actually be hard to review a return that missed that much of one's income?)
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