T.C. Summary Opinion 2001-8

UNITED STATES TAX COURT

PETER SPULER, JR., Petitioner v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8318-99S. Filed February 2, 2001.

Peter Spuler, Jr., pro se.

Taylor Cortright, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed. The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue.
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1 There are also adjustments to personal exemptions,

itemized deductions, and the alternative minimum tax, which

result from the above adjustments and are otherwise not in issue.

Respondent determined deficiencies, additions to tax, and

penalties in petitioner’s 1995 and 1996 Federal income taxes as

follows:

 Addition to Tax Penalty

Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1995 $12,222 $378 $2,157

1996 13,809 1,209 1,798

The issues for decision are: (1) Whether a distribution in 1995

to petitioner from the individual retirement account (IRA) of

petitioner’s deceased father is taxable to petitioner; (2)

whether petitioner is entitled to deductions for contributions in

1995 and 1996 to a simplified employer pension-individual

retirement account (SEP); (3) whether petitioner is entitled to

deductions for amounts paid for self-employed health insurance;

(4) whether petitioner is liable for additions to tax for failure

to file timely returns for 1995 and 1996 pursuant to section

6651(a)(1); and (5) whether petitioner is liable for negligence

penalties for 1995 and 1996 pursuant to section 6662(a).1

Some of the facts have been stipulated, and they are so

found. The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time of filing the

petition herein, petitioner resided in Fort Washington, Maryland.
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During the years in issue petitioner was employed full-time

as an engineer for Greenhorne & O’Mara, Inc. Petitioner received

a bachelor of science degree in engineering and master’s degrees

in public policy and business. In 1995 petitioner accepted the

position at Greenhorne & O’Mara, Inc., of Director of Marketing

for Federal Land Development and Infrastructure.

In 1986 petitioner filed a certificate of incorporation for

Synergetics Engineering Corp. (SEC). According to a business

plan dated March 1988, the mission of SEC was as follows:

Synergetics has as its core mission to seek unique

profitable business opportunities in the technical

services market by focusing its total efforts on the

high growth environmental quality segments of the

overall market. The venture will always be marketdriven, with primary attention to client needs. The

management team will always nurture a direct personal

relationship with each major client, within mutually

shared objectives of unquestioned long-term technical

reliability and uncompromised attention to long-term

service needs.

For the taxable year ending July 31, 1987, SEC filed a Form

1120S, U.S. Income Tax Return for an S Corporation. The return

reflects that petitioner, his wife, and other family members

owned 100 percent of the shares of SEC. The return also

reflected total income of $6,991, expenses of $9,313, and an

ordinary loss of $2,322.

For the years in issue, no Forms 1120S were filed on behalf

of SEC. The record is unclear to what extent SEC conducted any

business during the years 1988 through 1994. Apparently during
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1995 and 1996, petitioner, as a representative of SEC,

contributed his services as a consulting engineer to nonprofit

organizations such as Christian Fellowship Ministries. Neither

SEC nor petitioner billed or received any money for such

services. SEC did not receive taxable income during the years in

issue, nor did SEC pay petitioner any sums as either salary or

self-employment income during the years in issue.

Petitioner maintained an account at Charles Schwab titled in

his name “UTA Charles Schwab & Co Inc, SEP-IRA DTD 11/20/93". 

Contributions were made to the account in the amounts of $27,500

for 1995 and $30,000 for 1996. Petitioner also paid $3,079 and

$4,570 for self-employed health insurance for 1995 and 1996.

Petitioner’s father, Peter J. Spuler, Sr. (Mr. Spuler), died

in 1995. During that year petitioner received a distribution in

the amount of $10,906 from Mr. Spuler’s estate representing

petitioner’s share of an IRA owned by Mr. Spuler and held by the

South Jersey S&L Association. The record is unclear as to

whether petitioner was listed as a beneficiary of the IRA and/or

whether the distribution was paid directly to petitioner or

passed through the estate. Mr. Spuler’s will provided that his

estate would be liable for all Federal, State, and other taxes

arising from the transfer of property under the will. 

Petitioner received automatic extensions to file his 1995

and 1996 Federal income tax returns. The due date of the 1995
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and 1996 returns as extended were August 15, 1996, and August 15,

1997, respectively. Petitioner’s 1995 and 1996 tax returns were

received by respondent on August 21, 1996, and October 22, 1997,

respectively.

Respondent mailed a notice of deficiency to petitioner on

February 12, 1999. The notice determined that petitioner failed

to report income of $10,906 in 1995 received as a distribution

from Mr. Spuler’s IRA. The notice also disallowed petitioner’s

deductions for contributions to a simplified employee pension

plan and payments for self-employment health insurance, as

petitioner failed to satisfy the requirements of each deduction. 

Respondent also determined that petitioner was liable for an

addition to tax for failure to file a timely return under section

6651(a)(1) and for the negligence penalty under section 6662(a)

for each of the taxable years 1995 and 1996. 

After the trial of this case, the Court held a

teleconference with the parties. The Court expressed concern

over the inconclusive evidence regarding the IRA distribution. 

The Court provided petitioner an opportunity to submit additional

documents regarding the IRA. We reopened the record and admitted

into evidence a letter from petitioner and a copy of Mr. Spuler’s

will. 
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IRA Distribution From Mr. Spuler

Generally, any amount paid or distributed to a taxpayer from

an IRA is included in gross income in the manner provided by

section 72. See sec. 408(d)(1). A payee will generally not have

a basis in the IRA, unless the payee contributed nondeductible

amounts to the IRA. See secs. 72(e), 219(a) and (b), 408(d)(1)

and (2); Campbell v. Commissioner, 108 T.C. 54 (1997); sec.

1.408-4(a), (c), Income Tax Regs. When a payee contributes

nondeductible amounts, the payee’s gross income does include an

amount of the distribution in proportion to the nondeductible

contribution as compared to the total contribution to the IRA. 

See secs. 72(e), 408(d)(1); Campbell v. Commissioner, supra; sec.

1.408-4(c), Income Tax Regs. 

The parties agree that petitioner received $10,906 in 1995

from Mr. Spuler’s IRA. Petitioner contends that Mr. Spuler had

basis in the IRA for the following reason:

However, given the history of the contributions as made

subsequent to my father’s retirement from his lifetime 

primary employer, Public Service Gas & Electric, it is 

reasonable to assume that they were non-deductible 

contributions. He was earning minor wages working 

part-time during those years, and would not have needed

and or required deductible contributions.

We do not find petitioner’s unsupported self-serving statement to

be sufficient to support the assertion that the IRA included

nondeductible contributions. See Niedringhaus v. Commissioner,

99 T.C. 202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C.
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2 As a result of our conclusions, we need not consider

whether petitioner had a basis in the IRA arising from

nondeductible contributions made by his father. 

74, 77 (1986). Petitioner failed to establish that Mr. Spuler

made nondeductible contributions to the IRA.2 Thus, the entire

distribution is includable in gross income.

Petitioner additionally argues that he is not liable for tax

on the IRA distribution. Mr. Spuler’s will provides that all

Federal, State, and other death taxes associated with the

transfer of property from his estate to his beneficiaries will be

paid by his estate, and that none of the beneficiaries are liable

for the taxes.

State law determines the legal rights and interests in

property and transfers thereof. However, Federal law determines

the manner and extent to which such rights and interests will be

subjected to Federal tax. See Helvering v. Stuart, 317 U.S. 154,

161 (1942); Morgan v. Commissioner, 309 U.S. 78 (1940); Estate of

Sweet v. Commissioner, 234 F.2d 401 (10th Cir. 1956), affg. 24

T.C. 488 (1955); Estate of Bennett v. Commissioner, 100 T.C. 42,

59 (1993). We conclude that the terms of Mr. Spuler’s will do

not affect petitioner’s liability for the IRA distribution, and

he must include the full amount in gross income. 

Deductions for a SEP

A SEP plan is described in section 408(k). An employer may

make contributions to an employee’s retirement account. See sec.
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408(a) and (b). Self-employed persons or sole proprietors are

treated as their own employers under a SEP plan. See secs.

401(c)(4), 408(k)(7). The qualifying provisions for a SEP plan

are extensive. We need not detail the requirements here. While

petitioner may have maintained an account described as a SEP

account and made contributions to it in the years in issue, he

has not established that he was self-employed or a sole

proprietor in the year in issue. Petitioner acknowledges that

his solely owned corporation, SEC, did not receive income or

incur expenses in the years in issue. Petitioner did not receive

any money from SEC as a self-employed person or otherwise. In

fact, as indicated, petitioner was a full-time employee at

Greenhorne & O’Mara, Inc., and received a salary from that

organization during 1995 and 1996. Based on the foregoing,

petitioner is not entitled to the claimed deductions for SEP

contributions. 

Self-Employed Health Insurance Deductions

Section 162(l)(1)(A) permits self-employed individuals to

deduct amounts paid for health insurance. As discussed above, 

petitioner was not self-employed during the years in issue and

did not receive self-employment income. Petitioner’s earned

income came from his salary as an employee of Greenhorne &

O’Mara, Inc. Accordingly, petitioner is not entitled to the

deductions for payments made for health insurance.
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Additions To Tax for Failure To File Timely Under Section 6651(a)

Petitioner’s 1995 and 1996 Federal income tax returns were

not timely filed. Petitioner does not assert, nor did he present

any evidence, that the returns for the years in issue were

received or mailed prior to the due date as extended. 

Section 6651(a) imposes an addition to tax of 5 percent of

the amount of such tax required to be shown on the return per

month, not to exceed 25 percent, for failure to timely file a

return. The addition to tax under section 6651(a) is imposed

unless the taxpayer establishes that the failure was due to

reasonable cause and not willful neglect. The record does not

establish that the failures to timely file were due to reasonable

cause and not willful neglect. Thus, respondent is sustained on

this issue.

Accuracy Related Penalties Under Section 6662(a)

Section 6662(a) imposes an accuracy-related penalty in the

amount of 20 percent of the portion of the underpayment of tax

attributable to negligence or disregard of rules or regulations. 

See sec. 6662(b)(1). Negligence is any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs. Moreover, negligence is the failure to exercise due care

or the failure to do what a reasonable and prudent person would

do under the circumstances. Neely v. Commissioner, 85 T.C. 934,
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947 (1985). Disregard includes any careless, reckless, or

intentional disregard of rules or regulations. See sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs. No penalty will be imposed

with respect to any portion of any underpayment if it is shown

that there was reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion. See

sec. 6664(c).

Based on this record, we conclude that petitioner is liable

for the accuracy-related penalties under section 6662(a). 

Petitioner’s returns for the years in issue were replete with

errors, and petitioner failed to provide credible evidence to

substantiate or support entitlement to the deductions claimed. 

We conclude that petitioner’s actions were not those of a

reasonable and prudent person under the circumstances. Thus, we

sustain respondent on this adjustment.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent.