T.C. Sum m ary Opi ni on 20 15 -5 1

UNITED STAT ES TAX COURT

JAM ES RAMONE TAYLOR, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 22 54 1- 11 S. Fi le d Au gu st24 , 20 15 .
Ja m es Ram on e Tay lo r, pr o s e. Mi ch ael R. Co nn el ly, fo r res po nd en t.

SUMM ARY OPINION CARLUZZO, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs ua ntto th e pr ov is io ns of s ect io n 7 46 3 o f th e In te rn al Rev enue Co de ineffe ctwhen th e pe ti ti on was fi le d. Pur su an t t o s ect io n 7 46 3( b) , th e d eci si onto be en te redis no t 1
Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 (co nt in ue d...)- 2 -

rev ie wab le by any

othe r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de nt fo r an y othe r cas e. Ina no ti ce o f de fic ie nc y

date d S ep te m

be r 12 , 20 11 (no ti ce), re sp on de nt de te rm in eda $6 ,48 8 d efi ci en cy in , anda $1 ,29 8 a ccu racy-rela te d p en al ty with re sp ectto , pet it io ne r’s 20 09 Fed eral in co m e ta x. Afte r a co nc es si on , th e is su es forde ci si on are: (1) whet he r an y or a ll of 2 pe ti ti on er’s m il it ary ret ire m en t p ay is ex cl ud ab le fro m

in co m e an d (2 ) whe th er pe ti ti on er i s l iabl e fo r a s ect io n 6 66 2( a) ac curacy-rela te d p en al ty. Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Atth e ti m e th e pe ti ti on was fi le d, p et it io ne r res id edinOkl ah om a. Afte r 26 y ears of a ct iv e se rv ic e in th e U.S. Arm y , pet it io ne r ret ire d a s a li eute na ntco lo ne l i n 2 00 2. Atth e ti m e, pe ti ti on er qua li fie d fo r an d b eg anto rece iv e m il it ary ret ire m en t p ay . Thatsame y ear p et it io ne r was di vo rced . Purs ua nt
(...co nt inue d) 1 Co de of 1 98 6, as am en de d, i n e ffec t fo r 20 09 . Rul e ref eren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Pet it io ne r co nc ed es th athe fai le d t o re po rt i nt eres t i nc om e o f $1 ,05 3 fr om 2 th e In te rn al Rev enue Serv ic e in 20 09 an d tha t the en ti re am ountis in cl ud ab le in hi s i nc om e fo r th aty ear.- 3 -

to th e d iv or ce, p et it io ne r’s fo rm er s po us e was award eda po rti on of h is m il it ary ret ire m en t p ay . See 1 0 U.S.C. s ec. 1 40 8( c) (2 00 0) . 3 A Defen se Fin an ce an d Acc ou nt in g S erv ic e (DFAS) a cco un t s tate m en t sh ows pe ti ti on er’s 2 00 9 g ro ss ret ire m en t p ay as $ 48 ,96 6, wh ic h i nc lu de s: (1) ap pr ox im at el y

$2 ,24 4.4 0 a ttrib ut ab le to th e p orti on of h is m il it ary ret ire m en t p ay th athe was re qu ire d t o wai ve be cau se of h is ele ct io n t o re cei ve VA di sabi li ty co m pe ns at io n (VA wai ve r co m pe ns at io n) ; an d (2 ) th e p orti onof h is m il it ary

4 ret ire m en t p ay

award edto hi s fo rm er s po us e. The a cco un t s ta te m en t al so sh ows
On Oct ob er 1 , 20 02 , pet it io ne r fi le d acla im forservi ce-c on ne ct ed 3 di sabi li ty com

pe ns at io n wi th th e Dep artm en t o f Vet eran s Aff ai rs (VA). On Nov em be r 8, 2 00 2, the VA det erm in edth athe was 7 0% d is ab le d a t the ti m e o f hi s ret ire m en t an d was en ti tl edto rece iv e d is ab il ity co m pe ns at io n o f $1 ,08 1 am on th fro m th e VA st art in g o n No ve m be r 1, 2 00 2 (d is ab il ity

co m pe ns at io n) . The p art ie s ag ree t ha t p et it io ne r’s di sabi li ty com pe ns at io n i s ex cl ud ab le fro m hi s g ro ss in co m e pu rs ua ntto sec . 10 4( a)(4 ). Befo re 2 00 4 am il it ary ret ire e was no t p erm it te d t o re cei ve m il it ary 4 ret ire m en t p ay

an d VA d is ab il ity

co m pe ns at io n c on cu rren tl y . See 1 0 U.S.C. s ec. 14 13 (20 00 & Supp . 20 01 -0 3) ; s ee al so 38 U.S.C. sec s. 5 30 4, 5 30 5 (2 00 0 & Supp . 20 01 -0 6) . In thi s re ga rd , a ret ire e was requi redto waiv e m il it ary ret ire m en t p ay in anam ou ntequa l t o a ny VAdi sabi li ty com pe ns at io n re cei ve d. Se e S. Rep t. No . 10 8- 26 5, at39 (20 04 ). In t he Nati on al Defen se Autho riz at io n ActforFis cal Year 20 04 , Pub . L. No. 10 8- 13 6, s ec. 6 41 (a)- (c), 1 17 Sta t. at15 11 -1 51 4, Co ng res s rep eal ed10 U.S.C. sec . 14 13 (20 00 ) an d a m en de d 1 0 U.S.C. s ec. 1 41 4 (2 00 0) to el im in at e (o ve r a 1 0- y ear p eri odbe gi nn in g J anua ry 1, 2 00 4) th e co nc urren t re cei pt res tri ct io n o ut li ne d abo ve as app li edto m il it ary ret ire es with s erv ic e-co nn ect ed di sabi li ti es rat edby the VA at n otles s than 5 0%. See 10 U.S.C. sec . 14 14 (c) (2 00 0 & Supp . 20 01 -2 00 4) .- 4 -

th atpe ti ti on er d idno t el ectto parti ci pa te inth e su rv iv orbe ne fitpl anth en av ai labl e. Fo r 20 09 DFAS is su edto pe ti ti on er a Fo rm 10 99 -R, Dis tri bu ti on s Fr om Pen si on s, Annu it ie s, Re ti rem en t o r Pro fit -Sh ari ng Pla ns , IRAs, In su ran ce Co nt ract s, et c., th atsh ows $2 8,0 07 as t he “ ta xabl e am ou nt ” o f hi s m il it ary ret ire m en t p ay . The VA waiv er co m pe ns at io n i s n otin cl ud edinth e ta xabl e am ountsh own on th e Fo rm 10 99 -R. Nei th er i s the po rti on of p et it io ne r’s ret ire m en t p ay

award edto hi s fo rm er s po us e. Befo re the pre parat io n o f hi s 2 00 9 F ed eral in co m e ta x re tu rn , andup on th e reco m m en da ti on an d a dv ic e o f anacqua in tanc e, pe ti ti on er s ub m it te d a m en de d Fed eral in co m e ta x re tu rn s fo r 20 06 , 20 07 , and20 08 (am en de d re tu rn s) . 5 App aren tl y , onth e o rig in al return fo r eac h o f th os e y ears pe ti ti on er i nc lu de d i n in co m e th e am ou ntof t he m il it ary ret ire m en t p ay sh own as t ax ab le on th e Fo rm s 10 99 -R tha t DFAS i ss ue d t o h im . On eac h am en de d re tu rnpe ti ti on er cl ai m eda refu ndco m

pu te d b y tre at in g the tax ab le am ou ntas e xc lu dabl e fro m in co m e. In cl ud edwith e ach am en de d re tu rnis a st at em en t s ho win g h ow the am ou ntof t he ex cl us io n was co m

pu te d. Acco rd in g t o p et it io ne r, th e co m pu ta ti on s ar e b as ed Fro m whatha s b eensubm it te d, we ar e rel uc tantto fin d tha t al l o f th e 5 am en de d re tu rn s wer e subm it te d a t o nc e, bu t i t wo ul d app ear t ha t i s wh at happ en ed .- 5 -

up on ex am

pl es insec ti on 1.1 22 -1 , Inc om e Tax Reg s.; sp eci fic al ly, parag rap h (c ) an d Ex am pl e 4 of p arag rap h (d ). Pet it io ne r rec ei ve d the refu nd s cl ai m edon th e am en de d re tu rn s b efo re h is 20 09 return was fil ed . The $2 8,0 07 of m il it ary ret ire m en t p ay rep orte d a s t ax ab le onth e Fo rm 10 99 -R i s s ho wn o n p et it io ne r’s se lf- pr ep ared20 09 Fed eral in co m e ta x re tu rnbu t no t i nc lu de d i n the in co m e rep orte d o n tha t re tu rn . After p et it io ne r’s 20 09 return was fil ed , he p ro vi de d t o re sp on de nta co m pu tati on (20 09 co m

pu ta ti on ) sh owi ng ho w th e ex cl us io n was co m pu te d. As with the am en de d re tu rn s, the 20 09 co m pu ta ti on ap pe ars to be ba se d upo n e xa m pl es insec ti on 1.1 22 -1 , Inc om e Tax Reg s. Inad di ti on to anad jus tm en t n ow ag reedup on , inth e n ot ic e res po nd en t in crea se d p et it io ne r’s in co m e b y th e ta xabl e p orti on of h is m il it ary ret ire m en t p ay an d i m po se d asec ti on 66 62 (a) p en al ty upo n the gro un d tha t the un de rp aym en t o f ta x re qu ire d t o b e sh own on hi s re tu rnis a subs tant ia l u nd ers tate m en t o f in co m e ta x.- 6 - Dis cu ss io n I. Mi li tary

Ret ire m en t Pa y Sect io n 6 1( a) p ro vi de s tha t g ro ss in co m e m ean s “ al l i nc om e fro m what ev er so ur ce d eri ve d” . Pen si on s an d re ti rem en t al lo wan ces co ns ti tu te gro ss in co m e un le ss ex cl ud edby law. Sec. 6 1( a)(1 1) ; s ec. 1 .61 -1 1( a), In co m e Tax Reg s. Mi li tary ret ire m en t p ay

is pe ns io n i nc om e wit hi n the m ean in g o f se ct io n 6 1( a)(1 1) , Whe el er v . Comm is si on er, 1 27 T.C. 20 0, 2 05 n.1 1 (2 00 6) , aff’d, 5 21 F.3d12 89 (1 0t h C ir. 2 00 8) , th atis , inge ne ral , no t ex em ptfro m tax at io n, s ee Sc arce v. Co m m is si on er, 1 7 T.C. 8 30 , 83 3 (1 95 1) ; Ho ltv. Co m m is si on er, T.C. Mem o. 19 99 -3 48 . Acco rd in g t o p et it io ne r, se ct io n 1 22 an d i ts co rres po nd in g re gu la ti on s al lo w fo r th e ex cl us io n o f hi s m il it ary ret ire m en t p ay fro m gro ss in co m e. Sect io n 1 22 pr ov id es foranex cl us io n fo r th e am ou ntof a ny redu ct io n i n a n i nd iv idua l’s m il it ary ret ire m en t p ay

pu rs ua ntto th e in di vi du al ’s surv iv or ’s ann ui ty elect io n. See 1 0 U.S.C. ch . 73 . As no te d, the tax ab le po rti on of p et it io ne r’s m il it ary ret ire m en t p ay

do es no t i nc lu de th e am ou ntpa idto hi s fo rm er s po us e p ur su an t t o th ei r di vo rce, an d h e h as no t m ad e a s urvi vo r’s an nu ity ele ct io n u nd er t it le 10 . W e fai l t o s ee h ow s ect io n 1 22 an d/ orit s co rres po nd in g re gu la ti on s ap pl y to all ow fo r- 7 -

th e ex cl us io n tha t p et it io ne r cl ai m s. Acco rd in gl y , we agr ee wi th res po nd en t tha t pe ti ti on er i s n oten ti tl edto ex cl ud e $ 28 ,00 7 fr om hi s g ro ss in co m e fo r 20 09 . II. Sect io n 6 66 2( a) Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b )(2 ) im po se s a p en al ty of 20 % of the po rti on of t he un de rp aym en t o f ta x a ttrib ut ab le to a subs tant ia l und ers ta te m en t o f in co m e ta x. An u nd ers ta te m en t o f in co m e ta x i s s ub st an ti al withi n the m ean in g o f se ct io n 6 66 2 if, a s re le va nthe re, the un de rs ta te m en t ex ceed s $ 5,0 00 . See s ec. 6 66 2( d) ; s ec. 1.6 66 2- 4( b) , Inc om e Tax Reg s. Sect io n 6 66 2( d) (1 )(A) d efi ne s a “ subs tant ia l und ers ta te m en t o f in co m e ta x” as anun de rs ta te m en t i n an a m ou ntex ceed in g the gre at er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Th e te rm “un de rs ta te m en t” is de fin edas t he ex ces s o f th e am ou ntof t ax requi redto be sh own on th e return o ve r th e am ou ntsh own . Sec. 6 66 2( d) (2 )(A). Sec ti on 66 62 (d )(2 )(B) reduc es th e am ountof a n und ers ta te m en t b y th e p orti on of t he un de rs ta te m en t fo r whi ch : (1 ) th ere i s s ub st an ti al auth or ity forth e ta xp ay er’s t ax tre atm en t o f th e it em or ( 2) th ere i s ad equa te di sc lo su re o f th e rel ev an t fa ct s af fect in g the it em ’s tax tre atm en t an d the re i s a r eas on ab le ba si s fo r th e ta xp ay er’s treat m en t o f th e it em . Pet it io ne r’s po si ti on is no t s up po rte d b y an y subs tant ia l au th or ity , no r di d h e ad equa te ly dis cl os e o n h is 20 09 return the reas on he ex cl ud edth e ta xabl e p orti on- 8 -

of hi s m il it ary ret ire m en t p ay . See Sam ps onv. Co m

m is si on er, T.C. Mem o. 2 01 3- 21 2; sec . 1.6 66 2- 4( f), In co m e Tax Reg s.; Rev . Pro c. 20 10 -1 5, 2 01 0- 7 I.R .B. 40 4. Res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto th e im po si ti on of th e p en al ty here i n d is pu te , see sec . 74 91 (c), an d tha t b ur de n h as be ensat is fie d be cau se th e und ers ta te m en t o f in co m e ta x, wh ic h e qu al s the de fic ie nc y , exc eed s $5 ,00 0, s ee s ecs . 62 11 , 66 62 (d )(2 ), 66 64 (a). Th atbe in g s o, i t i s p et it io ne r’s bu rd ento est ab li sh th atth e im po si ti on of t he pe na lty

is no t ap pr op ria te . See Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 47 (20 01 ); s ee al so Ru le 14 2( a); W el ch v. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Sect io n 6 66 4( c)(1 ) pr ov id es th atth e se ct io n 6 66 2( a) ac cu racy-rela te d pe na lty do es no t ap pl y

to an y po rti on of a n und erp aym en t i f th e ta xp ay er es tabl is he s tha t the re was reas on ab le cau se for , andth e ta xp ay er ac te d i n g oo d fai th with re sp ectto , th e und erp aym en t. Sec . 1.6 66 4- 4( a), In co m e Tax Reg s. Th e de te rm in at io n o f whe th er the tax pa y er ac te d wi threas on ab le cau se an d i n g oo d fai th is m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t the pe rti ne ntfact s an d ci rcu m st an ces . Id. p ara. (b )(1 ). Pet it io ne r’s rel ianc e upo n s ect io n 1 22 an d/ orhi s re li an ce upo n the advi ce rece iv edfro m

anacqua in tanc e wou ldha rd ly sup po rt afin di ng th athe ha d reas on ab le cau se for , andact edingo odfai thwith re sp ectto , th e ex cl us io n o f th e- 9 -

ta xabl e p orti on of h is m il it ary ret ire m en t p ay , whi chintu rnres ul te d i n a subs tant ia l p orti on of t he un de rp aym en t o f ta x. Bu t p et it io ne r’s go odfai th an d the ap pa ren t re as on ab le ne ss of h is po si ti on are s up po rte d b y th e se qu en ce o f certa in ev en ts th atpre ced edth e fi li ng of h is 20 09 return. Sp eci fic al ly, no t o nc e, no t twi ce, b utth ree t im es pe ti ti on er cl ai m edrefu nd s co m pu te d b y ex cl ud in g the ta xabl e p orti on s o f hi s m il it ary ret ire m en t p ay pre vi ou sl y

in cl ud edinin co m e, an d with e ach refu ndcla im

he pro vi de d the ex pl an at io n fo r th e ex cl us io n tha t h e rel ie s up on he re. Noton ce, n ottwi ce, b utth ree t im es th e ref un d c la im s wer e al lo wed . Tech ni cal ly, th e ap pa ren tl y erro ne ou s re fundcla im

all owa nc es say no th in g abo ut th e m eri ts of p et it io ne r’s po si ti on . Neverth el es s, the all owa nc es co ul d l eada reas on ab le pe rs on to be li ev e th atth e b as is for th e ex cl us io n h adm eri t. See, e.g ., 6 Mat th ews v. Co m

m is si on er, 9 2 T.C. 3 51 , 36 2- 36 3 (1 98 9) , aff’d, 9 07 F.2d11 73 (D.C. Ci r. 19 90 ). Becaus e p et it io ne r’s refu ndcla im s wer e al lo wedbe fo re the 7 W e al so no te th atno th in g i n the reco rdsu gg es ts th atth e Uni te d S ta te s 6 at te m pt edto reco ve r th os e ref

un ds th ro ug h asec . 74 05 pro ceed in g. InMat th ews v. Co m

m is si on er, 9 2 T.C. 3 51 (19 89 ), aff’d, 9 07 F.2d11 73 7 (D.C. Ci r. 19 90 ), th e Co urt n ot edth atth e reject io n o f th e Co m m is si on er’s im po si ti on of wh atwas the n an a dd it io n t o t ax for ne gl ig en ce was li m it edto th e fact s o f th atcas e. Sim il arl y , we li m itou r reject io n o f th e se c. 66 62 (a) a ccu racyrel at edpe na lty

he re i n d is pu te to th e fac ts of t hi s ca se . Our rea so ni ng with re sp ect to th e reject io n o f pe ti ti on er’s cl ai m th athi s m il it ary ret ire m en t p ay is ex cl ud ab le fro m in co m e, of

co ur se , cou ldap pl y

to othe r y ears , andwe no te th athe ha s the (co nt in ue d...)- 10 -

fil in g o f hi s 2 00 9 re tu rn , andbe cau se th e p os it io n t ak enon th os e ref un d c la im s i s th e sa m e th atcau se d h im to ex cl ud e th e in co m e h ere i n d is pu te , we fin d tha t h e ha d re as on ab le cau se an d a ct edingo odfai th with re sp ectto th e p orti on of the un de rp aym en t o f ta x a ttrib ut ab le to th e ex cl us io n o f th e ta xabl e p orti onof h is 20 09 m il it ary ret ire m en t p ay . Peti ti on er i s n otli ab le fora se ct io n 6 66 2( a) p en al ty with re sp ectto th atpo rti on . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red un de r Ru le 15 5.

(...co nt inue d) 7 sa m e is su e p en di ng inTay lo r v. C omm is si on er, T.C. Dkt . No. 7 13 7- 13 S (fi le d Mar . 28 , 20 13 ).