T .C. Su m m ary Op i n io n 2 01 7 -2 3

UNITED STATES TAX COURT

W ILLIAM A. ALEXANDER, J R. AND DIANE C. ALEXANDER, Pet i t i o n ers v .

COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 3 4 93 -1 5 S. Fi l edAp ri l 1 0 , 2 0 1 7
.

W i l l i am A. Al ex an d er, J r., an d Di an e C. Al ex an der, p ro s es e. M i ch ael T. Garret tan d M at th ew A. Ho u t s m a, fo r res p o n d en t
.

SUM M ARY OPINION
J ACOBS, J u d ge: Th i s cas e was h eard p u rs u an tt o th e p ro v i s i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. Pu rs u an t t o s ect io n 7 4 6 3 (b ), t h e d eci s i o n t o b e en t ered i s n ot rev i ewab l e b y an y o t h er co u rt , an d t h is o p i n i o n s h al l n o tb e t reat ed as p reced en tfo r an y o t h er cas e.- 2
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Res p o n d en td et erm i n eda d efi ci en cy i n p et i t i o n ers ’ Fed eral i n co m e t ax o f $ 1 1 ,8 3 1 an dan accu racy -rel at edp en al t y u n d er s ect i o n 6 6 62 (a) o f $ 2 ,3 66 fo r 2 0 1 2
. Th e d efi ci en cy

i s t h e res u l t o f res p o n d en t ’ s d et erm i n at i n g th atp et i t i o n ers recei v ed $ 1 8 ,0 0 0 i n u n rep o rt edn o n em pl o y ee co m

p en s at i o n an d$ 4 0,9 5 6 i n u nrep o rt ed So ci al Secu ri t y

d i s ab i l i ty

b en efi t s an dm ak i n g co rres po n di n g co m p ut at io n al ad ju s t m en t s . Attri al res p on d en tco n ced edthatp et i t i on ers recei ved$ 1 5 ,8 00 , rat h er t h an$ 1 8 ,0 0 0 , i n u n rep ort edn o nem p lo y ee co m

p en s at i o n . Un l es s o t h erwi s e i n d i cat ed , al l s ect io n referen ces are t o th e In t ern al Rev enu e Co de (Co d e) fo r t he y ear i n i s s u e, an dal l Ru le referen ces are t o the Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Back gro u n d Th e p art i es fi l eda s t ip ul at i o n o f fact s an d acco m pan y i n g ex h ib i t s th atare i n co rp o rat edb y

thi s referen ce. Wh en th ey t i m el y fi l edth ei r p et i t i o n , p et i ti o n ers , h u s b an dan dwi fe, res i d edi n Co l o rad o. M r. Al ex an der i s a fo rm er at t o rn ey wh o p ract i cedl aw i n t h e fi el d s o f
wo rk ers ’ co m

p en s at i o n an dSo ci al Secu ri t y d i s ab i l i t y m at t ers fo r ap p ro x i m at el y 3 5 y ears . He co n s i d ers h i m s el f an ex p erti n th es e fi el ds . In 2 0 1 1 M r. Al ex an d er
ceas edp ract ici n g l aw b ecau s e (1 ) h e was s u fferi n g fro m s eri o u s m ed ical p ro b l em s- 3
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an d (2 ) th e St at e o f Co l o rad o h ads u s p en d edh i m fro m the p ract ice o f l aw. On M ay 8 , 2 0 1 2 , M r. Al ex an d er was p erm an en t l y d is b arred fro m t h e p ract i ce o f l aw. M rs . Al ex an d er i s a reg i s t ered n urs e. In 2 0 1 2 s h e wo rk edatth e card i ac u n i t
o f a l o cal h o sp i t al an d t au g htn u rs i n g s tu d en t s. Sh e u s edh er n u rs in g b ack g ro u n d t o treatM r. Al ex an d er’ s m ed i cal p ro bl em s . By 2 0 1 2 M r. Al ex an der’ s h eal t h h adi m p ro vedt o th e p oi n t h e was ab l e t o
wo rkfo r St ev en M ul l en s , an o t h er wo rk ers ’ co m pen s at i o n at t orn ey . M es s rs . Al ex an der an dM ul l en s were wel l kn o wnt o each o th er i n th e wo rk ers ’
co m p en s at i o n co m

m u n i ty . In d eed , aft er M r. Al ex an d er ceas edp ract i ci n g l aw,
m o sto f h i s fo rm er cl i en t s were referred t o M r. M u l l en s ’ fi rm . M r. M u ll en s was i n v ol v edi n a Fed eral cl as s act i on l aws u i t ag ai ns tW al

M artan dCo n cen t ra Heal th o n b eh al f o f al l i n ju redCo l o rad o res i den t s t h ath ad
wo rk edfo r W al -M art . M r. M u l l en s as k ed M r. Al ex an d er t o as s is t h i m i n th e l i ti g at i o n ev en t h o u g h M r. M u ll en s was aware t h atM r. Al ex an d er h adb een d i s b arred . M r. Al ex an der ag reed t o h el p M r. M u ll en s an das kedt o b e p ai d $ 1 0 0 p er weekfo r g as an dm eal s ex p en s es wh il e wo rk i n g o n th e cas e. M r. M u l l en s ag reed t o M r. Al ex an d er’ s req u es t
. M r. Al ex an der rev i ewedm at eri al s an d d o cu m en t s i n 3 0 b o x es o f W al

M art ’ s cl ai m s ad

ju st ers ’ fi l es . Each b o x was three feet l o n g an do n e fo o twi d e.- 4
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M r. Al ex an d er p rep ared wri tt en s u m m ari es o f each fi l e i n an at t em p tt o d o cu m en t M r. M u l l en s ’ an d h i s b el i efs t h ati n s u ran ce ad ju s t ers wo rk i n g fo r W al -M arth ad
o ft en d i ct at edth e m ed ical care t o b e p ro v i dedb y Co n cen t ra d o ct o rs t o th e i n ju red
wo rk ers . M r. Al ex an d er wo rk edatM r. M u l l en s ’ o ffi ce ap p ro x i m at el y fo u r h o u rs a d ay , fo u r o r fi v e d ay s p er week , fo r ei g h tweek s . M r. Al ex an d er es t i m at edh e
wo rk ed1 6 0 h o u rs o n the W al -M artl i ti g at i o n . M r. M u ll en s req ues t edM r. Al ex an der t o s ubm i ta b i l l fo r th e h o u rs h e wo rk edo n th e cas e. Onth e ev e o f t ri al t h e l aws u i twas s et tl ed
. Aft er co m

p l et i n g h i s W al -M artwo rk , M r. Al ex an d er d i d“p ri v at e wo rk ” fo r M r. M u l l en s . M r. Al ex an d er’ s wo rk co n s i s t edo f p erfo rm i n g l eg al res earch , draft in g b ri efs an dres p o n s es , an dp rep ari n g m em o ran d a fo r M r. M u l l en s du ri n g t h e l at ter p arto f 2 0 12 . Itwas ag reed thatM r. M u ll en s wo u l dp ay M r. Al ex an d er
acco rd i n g t o th e v al u e o f t h e cas e an dth e p ercen t ag e o f M r. Al ex an der’ s
co n tri b u t i o n . M r. Al ex an d er wo rk edb et ween 5 0 an d1 00 h o u rs o n M r. M ul l en s ’

“ p ri v at e wo rk ” i n 2 01 2
. In ad d i t i o n t o p ay i ng M r. Al ex an d er $ 8 0 0 i n rei m bu rs em en t s ($ 1 0 0 a week fo r ei gh tweek s), M r. M ul l en s m ad e t wo p aym en t s t o M r. Al ex an d er: (1 ) a $ 5 ,0 0 0 ch eck , o n an u ns p eci fi edd at e i n 2 0 12 , wh i ch M r. Al ex an d er ato ne t i m e ch aract eri zedas a l oan thatwas u l ti m at el y fo rg i v enan d atan o t h er t i m e as an- 5
-

ad v an ce fo r h i s “p ri v at e wo rk ” an d(2 ) a $ 10 ,0 0 0 ch eckd at edAp ri l 1 8 , 2 0 1 2 . Th e $ 1 0 ,0 0 0 ch eckwas en d o rs ed b y b o th p et i t i o n ers wi t h th e n o t at i o n “ Pay t o Di an e C. Al ex an d er” an dd ep o s i t edi nt o p et i t i o n ers ’ jo in tb an k acco u nt
. M r. M u ll en s ’ o ffi ce i ss u eda Fo rm 1 0 9 9 -M ISC, M i s cel l an eo u s In co m e, t o M r. Al ex an d er fo r n o n em pl o y ee co m

p en sat i on t o tal i n g $ 1 8 ,0 00 . Res p o n den t
co n ced es th atM r. Al ex an d er recei v ed$ 1 5 , 8 0 0 rat h er t h an $ 18 ,0 0 0 fro m M r. M u l l en s du ri n g 2 0 1 2 . Pet i t i o n ers cl ai m t h atth ey d i dn o t recei v e a Fo rm 1 0 9 9
- M ISC fro m

M r. M u l l en s . M r. Al ex an der b el i ev edth atM r. M u ll en s h ad p ai dh i m l es s th an h e was
wo rt h as an ex p eri en cedwo rk ers ’ co m p en s at i o n at to rn ey , s tat i n g : “ If h e h adt o l d
m e t h ath e was p ay i n g m e t hi s am o u n to f m on ey [i .e., th e $ 1 5,8 0 0 ] I wo u l dh av e wal k ed o u to f t h e o ffi ce.” M r. Al ex an d er as sert s th atth e p aym en t s h e recei v ed fro m M r. M u l len s were m erel y g i ft s . Wh en M r. Al ex an d er l earn edth atM r. M u l l en s h adrecei v edm o re t h an $ 1
m i l l io n i n l eg al fees fo r t h e W al -M artl i t i g at i o n , M r. Al ex an d er co n fro nt edh i m , d em an d i n g m o re m o n ey . M r. Al ex an d er t es t i fi edth ati n a “ h y s t eri cal ” t el ep h o n e
co n vers at i on , M r. M u l l en s t o l dM r. Al ex an d er: “ ‘ I d o n ’ t o we y o u a g o dd am n t h i n g .’ An d , y o u kn o w, ‘ I ch o s e t o g i v e y o u$ 1 5 ,0 0 0 an dth at ’ s al l I’ m g o i n g t o g i v e y o u . ’ An d t h o s e were h i s ex actwo rd s , ‘ g i v e y o u .’ ” M r. Al ex an d er fo l l o wed- 6
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up th e p ho n e cal l wi t h a l et t er t o M r. M u l l en s s t at in g th atM r. M u ll en s o wedh i m

“ a reas on ab l e wag e.” An dwh en M r. M u l l en s ’ o ffi ce m ai l ed t h e Fo rm 1 09 9 -M ISC t o an o ut -o f-d at e ad dres s , M r. Al ex an d er b el i ev edth atth e m i s t ak e was m ad e d el i b erat el y

“ ju s tt o b e d i ffi cu lt , p ro b ab l y i n th e h op es I wo u l dn ’ t g eti t, b ecau s e h e kn ew I wo u l db e i n h i s o ffi ce i n a m i n ut e i f I g o t a 1 0 9 9 s ay i n g t h ath e h adp ai d
m e t h atm o n ey .” Atth i s p o i n t , we n o t e t h atM r. M u l l en s d i edb efo re tri al an d t h erefo re was n o tav ai l ab le t o tes t i fy as t o h i s i n t en t (g ifto r co m p en s at i o n ) i n
m ak i n g t he p aym en t s t o M r. Al ex an d er. Al t h ou g h h e was wo rk i n g fo r M r. M ul l en s , M r. Al ex an d er recei v ed$ 4 0 ,9 5 6 i n So ci al Secu ri ty

d i s ab i l i t y

b en efi t s i n 2 0 1 2. Th e d i s ab i l it y ch eck s were d ep os i t edi n t o p et i t i o n ers ’ jo i n tb an kacco u n t . Th e So ci al Secu ri t y Adm i n i s t rat i on i s su eda Fo rm 1 0 9 9 -G, Cert ai n Go v ern m en t Paym en t s , d o cu m en t i n g thes e d i s ab i l i t y b en efi tp aym en t s , al t h o u g h p et it io n ers d o n o trem em b er recei v i n g th i s fo rm . M rs . Al ex an d er h an d l edth e fam i ly ’ s fi n an ces . Sh e o p en ed t he fam i l y ’ s
m ai l , b al an ced t h e fam il y ’ s ch eck i n g acco u n t, an dp ai dth e b il l s. Sh e was wel l
aware o f th e fam i ly ’ s fi n an ces an dkn ew t h atth e ch eck s fro m So ci al Secu ri t y , as wel l as th e ch eck s fro m

M r. M ul l en s , were d ep o s i t edi n th e fam i l y ’ s ch eck i n g
acco u n t
.- 7
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Pet i t i o ners fi l eda jo i nt2 0 1 2 Fo rm 1 0 40 , U.S. In d i v idu al In co m e Tax Ret u rn , p rep ared b y

Ro y Ki rm er, a cert i fi edp ub l i c acco u n tan tan dp et it i o n ers ’ l o n g t i m e t ax retu rnp rep arer. M rs . Al ex an der t oo kth e l ead i n wo rk i n g wi t h M r. Ki rm er t o p rep are p et i ti o n ers ’ t ax retu rn , m eet i n g wi th h i m an d p ro v id in g h i m wi t h d ocu m en t s an dn eces s ary reco rd s . Pet it i o n ers d i dn o td i s cl o s e ei th er t h e So ci al Secu ri t y

d i s ab i l i ty

p aym en t s o r M r. M u l l en s ’ p aym en t s t o M r. Ki rm er; th u s , p et i t i o n ers ’ Fo rm

1 0 40 rep o rt edo n l y

M rs . Al ex an der’ s wag es o f $ 5 7 ,2 0 0. In a
co n vers at i on M r. Ki rm er h adwi t h p et i t i on ers i n 2 01 4 , M r. Ki rm er fi rs tl earn ed t h atp et i t i o n ers h ad recei v eds o m e k in do f d i sab i l i t y p aym en t s . Si n ce M r. Ki rm er h ad n o s p eci fi c i n fo rm at i on ab o u tth e p aym en t s , h e t o l d p et i t io n ers th atth e p aym en t s p ro b ab l y

were n o tt ax ab l e. Bu t wh en M r. Ki rm er l at er l earn edthatthe p aym en t s were So ci al Secu ri t y b en efi ts , an dth erefo re t ax ab l e, h e t ol dp et it i o n ers :

“ [T] h ey [th e IRS] wi l l p i ck t h atup i n th e m at ch i n g p ro g ram , an dy o u ’ re g o i n g t o b e t ax ed , an dy o uju s tn eedt o p ay i t . An d we are n o t g o i n g t o p rep are an am en d ed retu rn .” Attri al M r. Ki rm er s t at edth ati f p et it i on ers h adi n fo rm edh i m o f t h e So ci al Secu ri t y

d i s ab i l i ty

p aym en t s , h e “ ab s o l ut el y ” wo u l dh av e rep o rt edth e
am ou n t s o f t h e p aym en t s o n th e t ax retu rn .- 8
- Di s cu ss i o n In an u n rep o rt edi n co m e cas e, s u ch as th e i ns t an t m at t er, a p res u m p t i o n o f
co rrect nes s at t ach es t o t h e Co m m i s s i o n er’ s d et erm i n at io n aft er h e p ro v i d es a
m i n i m al ev i d en t i ary

fo u n d at io n. See Ru l e 1 4 2(a); Un i tedSt at es v . M cM u l l i n , 9 48 F.2 d1 1 8 8 , 1 1 9 2 (1 0 th Ci r. 1 9 9 1 ). Ho wev er, we d o n o td eci d e t h i s cas e b y referen ce t o th e p l acem en t of t h e b u rd en o f p ro o f. 1 I. M r. M u ll en s ’ Paym en t s t o M r. Al ex an d er Sect io n 6 1 (a)(1 ) p ro v i d es th atco m p en s at io n fo r s erv ices i s i n cl u d edi n g ro s s i n co m e fo r Fed eral i n co m e t ax p u rp o s es . Th e p art i es ag ree t h at M r. Al ex an der was p ai d$ 1 5 ,8 0 0 i n 2 0 1 2 fo r p erfo rm i n g wo rkfo r M r. M u l l en s . Res po n d en td et erm i n edth atth es e p aym en t s were t ax ab l e n o n em p l o y ee
co m p en s at i o n . Pet it i o n ers , i n co n tras t , cl ai m th es e p aym en ts were g ift s an dth u s
n o n t ax ab l e p u rs u an t t o s ect i o n 1 0 2 (a). Sect io n 1 0 2 p ro v i d es th atg ro s s i n co m e d o es n o ti n cl u d e am o u n t s acq u i red b y g i ft . Wh et h er a p aym en ti s a g i ftu n der s ect i o n 1 0 2 (a) o r g ro s s i nco m e u n d er
s ect i on 6 1 (a) i s a fact u al qu es t i o n . See Ban k s v . Co m m i s s io n er, T.C. M em o .

1 In cert ai n ci rcu m s t an ces th e b u rd en o f p ro of wi t h res p ectt o fact u al m at t ers m ay s h iftt o th e Co m

m i s s i o n er. Sec. 7 4 9 1 (a). Pet i ti o n ers d o n o targ u e th ats ec. 7 4 9 1 (a) ap p li es h erei n , n o r d o t h ey s h o w th atth ey

m eti t s req ui rem en t s fo r s h i ft i n g t h e b u rd en o f p ro o f.- 9
-

1 9 9 1 -6 4 1 . Th e Sup rem e Co u rth as h el d t hatd i s t i n gu i s h i n g a g iftfro m t ax ab l e i n co m e “ d o es n ot l en d i t s el f t o an y m o re d efi n i t i v e s t at em en t t h at wo u l dp ro du ce a t al i s m an fo r t h e s o l ut i o n o f co n cret e cas es .” Co m m i s s io n er v . Dub ers t ei n , 3 6 3 U.S. 2 7 8 , 2 8 4 -2 85 (1 9 6 0). Th e Sup rem e Co u rtco n cl u d ed t h atth e t ran s fero r’ s i n t en ti s th e m o stcri ti cal co n s id erat i o n an d t h ere m u s tb e an o bject i v e i n qu i ry i n t o t h e t ran s fero r’ s i n t en t . Id . at2 85 -2 8 6 . Gen eral l y , th e t ran s fer m u st b e m ad e fro m a “ ‘ d et ach edan d d i s i n t eres t edg en ero s it y ’ * * * ‘ o u t o f affect i o n, res p ect , ad m i rat i o n , ch ari t y , o r l ik e i m p u l s es .’ ” Id . at2 85 (ci t at i on s o m it t ed ). W e m u s t
m ak e “ an o b

ject iv e i nqu i ry

as t o wh et h er wh ati s cal l eda g i ftam o u n t s t o i ti n real it y . * * * Its carcel y

n eed s ad d i n g t h atth e p art i es ’ ex p ect at i o n s o r h o pes as t o t h e t ax treat m en to f t h ei r co n du cti n th em s el v es h av e n o th i n g t o d o wi th t he
m at t er.” Id . at 2 8 6 (ci t at i o n s o m i t t ed ). In ap p l y in g th es e p ri n ci pl es t o t h e fact s o f t h e cas e, we fi n dth atM r. Al ex an d er recei v edt ax ab l e n o n em pl o y ee co m

p en s at i o n fro m M r. M u l len s . M r. M u ll en s d i ed b efo re t ri al ; h en ce, we can n o tkn o w fo r cert ai n h i s i n t en t i n m ak i n g t h e p aym en t s t o M r. Al ex an d er. Ho w ev er, t h e o bject i v e fact s d em o n s t rat e t h atM r. Al ex an d er: (1 ) was p ai daft er h e p erfo rm edwo rk fo r M r. M u l l en s ; (2 ) s ub m i t t eda t i m es heet s h o w i n g t h e n u m b er o f h ou rs h e wo rk ed , s o t h atM r. M u l len s co u l ds ub m i tth e t im es h eet s t o t h e t ri al co u rt “ as a co s tan dg et- 1 0 -

m e p ai d
. ”; (3 ) ex p ect edt o b e p ai dfo r h i s wo rko n M r. M u l l en s’ “p ri v at e wo rk ”
acco rd i n g t o th e v al u e o f t h e cas es h e wo rk edo n an dh i s co n tri b ut i o n t o w ard s t h ei r s ucces s ; (4 ) ch aract eri zedth e $ 5 ,0 0 0 p aym en tfi rs t as a l o an t h atwas fo rg i ven , wh i ch wo u l dn o tb e a g i ft , s ee s ec. 6 1 (a)(1 2 ) (d i s ch arg e o f i n d eb t ed n es s
co n st i tu t es g ro s s i n co m e), 2 an dth en as an ad v an ce p ai d i n an t i ci p at i o n o f wo rkh e
was t o p erfo rm , wh i ch wo u l dal s o n o t b e a g i ft ; an d(5 ) co n s i d ered h i m s el f t o b e
u n d erp ai dan dco n fro n tedM r. M ul l en s b o t h o n th e t el ep h o n e an db y l et t er d em an d i n g a reas o n ab l e wag e. Th e t o t al it y o f th es e o b ject i v e fact s co n v i n ces u s t h atM r. M u l len s d i dn o ti nt en dth e p aym en t s h e m ad e t o M r. Al ex an d er t o b e g ift s
m ad e fro m

a d et ach edan dd i s i n t eres t edg en ero s i t y . Pet i t i o ners as s ertth atb ecau s e t h e n o t i ce o f d efi ci en cy was i n co rrect i n th at
res p o n d en t h add et erm i nedthatM r. Al ex an d er was p ai d$ 1 8 ,0 0 0 , rat h er t h an $ 1 5 ,8 0 0 , th e b u rd en o f p ro o f s h i ft edt o res po n d en tt o p ro v e p et i t i o ners ’ co rrect t ax ab l e i n co m e. Pet i ti o n ers ’ as s ert i o n i s n o t s us t ai n ab l e. As we n o t eds upra p ag e 8 , th i s cas e d o es n o ttu rno n th e b u rd en o f p ro o f. Res p o nd en t co n ced es t h ath i s $ 1 8 ,0 0 0 d et erm i n at i o n i s erro neo u s , an dp et i t i o n ers co n ced e t h atM r. Al ex an d er

2 Sec. 1 0 8 (a) ex cl u d es th e d i sch arg e o f i n d eb t ed n es s fro m g ro s s i n co m e i f t h e d eb twas d i s ch arg ed u n d er fi v e s p eci fi c ci rcu m s tan ces . Pet i t i o ners h av e n o t arg u ed , o r p ro v i d edev i d en ce t o d em o n st rat e, t h atth ey m eet t h e req ui rem en t s o f an y o f t h e ex cep t i o nal ci rcu m s t an ces .- 1 1 -

recei v ed$ 1 5 ,8 0 0 fro m M r. M u l l en s . Th e qu es t io n we m u s t d eci d e i s the ch aract eri zat i o n o f t he $ 1 5 , 8 0 0 ; i s i ta n o n t ax ab l e g i fto r i s i tt ax ab l e i n co m e? Res po n d en t ’ s co n ces s i o n as t o th e am o u n tM r. Al ex an der recei v edfro m M r. M u l l en s d o es n o taffect i t s ch aract eri zat io n . Nex t , p et i t i o n ers arg u e t h at t h e m o n ey s th atM r. Al ex an d er recei v edco u l d
n o tb e co m

p en sat io n b ecau s e t h e am o u n twas i n s u ffi ci en tt o i n du ce h im t o wo rk fo r M r. M u l l en s . M r. Al ex an d er m ai n t ai n s th atth e m o t i v at io n fo r ren d eri n g h i s
s erv i ces was “ fo r t h e du ty thath e fel tth ath e o wedt o t h e co m m u n i t y o f i n

ju red
wo rk ers th at h av e g i v en h i m an accep t ab l e l i fes t y l e fo r m ore t h an 3 0 y ears .” M r. Al ex an der’ s m o t i v es are n o ti n qu es t i o n, b u twe are m i n dfu l th atwh en h e p erfo rm edh i s wo rk

fo r M r. M u l l en s , h e was a d is b arred at t orn ey an dM r. M u l l en s kn ew t h i s . M r. Al ex an d er was p ai d$ 1 5 , 0 0 0 fo r 2 1 0 t o 2 6 0 h o u rs 3 o f wo rk , wh ich
am ou n t edt o $ 58 t o $ 7 1 p er h o u r. W e d o n o tb el i ev e t h i s t o b e anu n reas o nab l y l o w rat e o f p ay

fo r a d i s barred at t o rn ey . Th e $ 8 0 0 ex p en s e rei m bu rs em en tth at M r. Al ex an d er recei v edi s al so i n cl u d ib l e i n h i s i n co m e. See Co m m i s s i o n er v . Ko wal s k i , 4 3 4 U.S. 7 7 (1 9 7 7 ) (cas h m eal al l o wan ce i s t ax ab l e i n co m e); Go l d s t ei n
v . Co m m i s s i o n er, 7 3 T.C. 1 6 4 (1 9 7 9 ) (s t i p en d s are t ax ab l e i nco m e).

3 Th es e h o u rs are t he s u m o f 1 6 0 h o u rs wo rk in g o n th e W al -M art cas e an d 5 0 t o 1 0 0 h o u rs wo rk i ng o n M r. M u l len s ’ “p ri v at e wo rk ”.- 1 2 -

M r. Al ex an der al s o as s ert s th ati f h e were an i n ju redwo rk er i n a wo rk ers ’
co m p en s at i o n cas e, t h e ju d ge wo u ldn o tco n s i d er h i m t o b e an em

p l oy ee el i g i b l e t o recei v e wo rk ers ’ co m

p en s at i o n b en efi t s. Pet i t i o n ers h av e n o tci t ed an y s p eci fi c
s t atu te o r cas e t o s up p ortth i s b o l das s ert i o n . Rat h er t h ey refer t o two u n rep o rt ed
cas es wi t h n o ci t at io ns . No r d o p et i t i o n ers at t em ptt o es t ab li s h t h atth e s t an d ard fo r d et erm in i ng em

pl o ym en t u n d er Co l o rad o ’ s wo rk ers ’ co m pen s at i o n l aws i s
s i m i l ar t o th e ru les s etfo rt h i n th e Co d e. In s u m , we fi n d t h at th e $ 1 5 ,8 0 0 th at M r. M u l l en s p ai d t o M r. Al ex an d er i s i n cl u d i b l e i n p et i t i on ers ’ 2 0 1 2 i n co m e. II. M r. Al ex an der’ s So ci al Secu ri t y Di s ab i l i ty Paym en t s Sect io n 8 6 req u i res t h e i n cl u s i o n i n g ro s s i n co m e o f up t o 8 5 % o f So ci al Secu ri t y b en efi t s, i n cl ud i n g d i s ab i l i t y b en efi t s , recei v eddu ri n g th e t ax ab l e y ear. See s ec. 8 6 (a), (d ); 4 s ee al s o Rei m el s v . Co m m i s s io ner, 1 2 3 T.C. 2 45 , 2 4 7 (2 0 0 4 ), aff’ d , 4 3 6 F.3 d3 4 4 (2 dCi r. 2 0 0 6 ); W at ts v . Co m m i s s io n er, T.C. M em o . 2 0 0 9
- 1 0 3 . Pet it i o n ers co nced e t h atM r. Al ex an d er recei ved$ 4 0 ,9 56 i n So ci al Secu ri t y d i s ab i l i t y b en efi t s , an dth ey

d o n o t d i s p u t e res p o nd en t ’ s d et erm in at io n t h at , b ecau s e o f p et i t i o n ers ’ o t h er i n co m e, 8 5 % o f M r. Al ex an d er’ s So ci al Secu ri t y

4 Sec. 8 6 (d )(1 )(A) d efi n es So ci al Secu ri t y b en efi t s t o i n cl u d e am o u nt s recei v edu n d er t i t. II o f t h e So ci al Secu ri t y Act , 4 2 U.S.C. s ecs . 4 0 1 -4 3 4 (2 0 0 0 ), as am en d ed , wh i ch i n cl u de So ci al Secu ri t y d i s ab il i t y

b en efi t s . Id . s ec. 4 23
.- 1 3 -

b en efi t s i s t ax ab le. See s ec. 8 6(a)(2 )(B). Th u s , p et i t i o ners co n ced e t h at$ 3 4 ,8 1 3
o f M r. Al ex an d er’ s So ci al Secu ri t y d i s ab i l i t y b en efi t s co n s t i tut es t ax ab le i n co m e
an d t h atth ey

o we t ax as res p o nd en t d et erm i n ed
. Pet i t i o ners cl ai m

th ati f t h e Co u rtwere t o fi n d t h atth e p aym en ts th atM r. Al ex an der recei vedco n s t itu t edt ax ab l e i n co m e, wh ich we h av e fo u nd , M r. Al ex an der wo u l d b e o b l i gat edt o rep ay t he So ci al Secu ri ty Adm in i s t rat i o n th e
am ou n t s h e recei v ed
. Co n s equ en t l y , p et i t i o n ers s eek an equ i t ab l e ad ju s t m en tt o M r. Al ex an d er’ s t ax ab le So ci al Secu ri t y d i s ab il i t y

p aym en t s . In th i s res p ect , p et i t i o n ers arg u e:

Th i s Co u rtm ay

s t at e t h ati ti s n o t a Co u rto f Equ i t y . Th e u n d ers i g n edt ak es o ffen s e ats u ch a h o l d i n g. Th i s Co urtd o es equi t y o n a ro u t i ne b as i s . Th e In n o cen tSp o u s e Do ctri n e i s reg u larl y d et erm i nedb y

Th i s Co u rt . Th atd o ctri n e i s n o l es s equ i tab l e t h an th e ru l i n g req u es t edh erei n . Th e am ou n tp ai dt o W . Al ex an d er b y th e SSA [So ci al Secu ri ty Ad m i ni st rat i o n] i s n o td i s p u t ed . Infact , Pet it io n ers ad m i tth atth ey o we t ax es o n th at am o u nt . Th e o n l y reas o n t h atth os e t ax es h av e n o t al l read y b een p ai d i s th atan y

am o u n tp ai db y

M u l l en s as t ax ab l e i n co m e s h o u ldb e d educt edfro m th o se p aym en t s . Ev en th o u g h t h e g o v ern m en two ul dl i ke a d o ub l e p aym en t , i t can no tb e ex p ect ed . If t h e p aym en t s recei vedfro m M u l l en s were t ax ab l e, t h en W . Al ex an der s h o u l d n o th av e recei v edth at am o u n tfro m SSDI. Des pi t e p et i ti o ners ’ co n v ict i o n , th i s Co u rti s n o ta co u rt o f equ i t y . See Co m m i s s i o n er v . M cCo y , 4 8 4 U.S. 3 , 7 (1 9 8 7 ); Pax m an v . Co m m i s s i on er, 5 0 T.C.- 1 4 -

5 6 7 , 5 7 6 (1 9 6 8), aff’ d , 4 1 4 F.2 d2 65 (1 0 t h Ci r. 1 9 69 ). Ou r d eci si o n s i n i n n o cen t
s p o u se cas es are g o v ern edb y s t atu t e, n o t b y

equ i t ab l e d o ct ri nes . See s ec. 6 0 1 5
. An dwe are m in d fu l th atth e Co d e p ro v i d es fo r So ci al Secu ri t y b en efi t s t o b e ad ju s t edfo r rep aym en ts du ri ng th e t ax y ear. Sect i o n 8 6 (d )(2 )(A) p ro v id es : Fo r p u rp o s es o f t h i s s ect i o n , th e am o u n to f s o ci al s ecu ri t y b en efi t s recei v eddu ri n g an y

t ax ab l e y ear s hal l b e red u cedb y an y rep aym en t m ad e b y th e t ax p ay er duri n g t h e t ax ab l e y ear o f a s o ci al s ecu ri t y b en efi tp rev io us l y

recei vedb y

th e t ax p ay er (wh et h er o r n o ts u ch b en efi twas recei v edduri n g t h e t ax ab l e y ear). Sect i o n 8 6 (d )(1 ) d efi n es th e t erm “ So ci al Secu ri t y

b en efi t ” as “ an y

am ou n t recei v edb y

th e t ax pay er b y

reas o n o f en t i t l em en t t o --(A) a m o n t h l y b en efi tu n d er t i tl e II o f th e So ci al Secu ri t y Act , o r (B) a t i er 1 rai l ro adret i rem en tb en efi t.” Th u s , s ect i on 8 6 (d )(2 )(A) al l o ws a t ax p ay er t o redu ce t h e am o un to f So ci al Secu ri t y b en efi t s i n cl u d i b l e i n i n co m e i f t h e t ax p ay er rep ay s th e So ci al Secu ri t y b en efi t s recei v eddu ri n g t h e s am e t ax y ear. Pet i t io n ers , h o wev er, h av e n o t d on e s o . W e t h erefo re fi nd t h at 8 5 % o f M r. Al ex an der’ s So ci al Secu ri t y d is ab i l i t y p aym en t s i s i n cl u d i b le i n p et i t i o n ers ’ 2 01 2 i n co m e as p ro v i d ed b y s ect i o n 8 6
. III. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t y Res p o n d en td et erm i n edth at p et i t i o n ers are l i ab l e fo r a s ect io n 6 66 2 (a)
accu racy -rel at edp en al ty

o f $ 2 ,3 6 6 fo r 2 0 1 2 . Sect i o n 6 6 6 2(a) i m p os es a 2 0 %
accu racy -rel at edp en al ty

o n an y p ort i o n o f an u n d erp aym en tat tri b ut ab l e t o, i n t er- 1 5 -

al i a, n eg l i g en ce o r d i s reg ard o f ru l es o r reg u l at i o n s , s ub s ec. (b )(1 ), o r a s ub s t an t i al
u n d ers t at em en to f i n co m e t ax , s ub s ec. (b )(2 ). Neg l i g en ce as u s edi n s ect i o n 6 6 6 2 (b )(1 ) i s d efi n edas an y fai l ure t o m ak e a
reas on ab l e at t em

p tt o co m p l y wi t h th e Co d e an dan y

fai l u re t o k eep ad equ at e b o o k s an dreco rd s o r t o s ub s t an t i at e i t em s p ro p erl y . Sec. 6 6 6 2(c); s ec 1 .6 66 2
- 3 (b )(1 ), In co m e Tax Reg s . Anu n d ers t at em en to f i n co m e t ax i s s ub st an t i al fo r p u rp os es o f s ect io n 6 6 6 2 (b )(2 ) i f i tex ceed s th e g reat er o f 1 0 % o f t h e t ax req u i red t o b e s h own o n th e ret u rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2 (d )(1 )(A). Sect io n 7 4 9 1 (c) p ro v i d es th atth e Co m m i s s io n er b ears th e b u rd eno f p ro duct i o n wi th reg ardt o p en al t i es an dm u s t co m e fo rwardwi t h s u ffi ci en t
ev i d en ce i n d i cat i n g th ati ti s ap p ro p ri at e t o i m p o s e t he s ect i o n 6 66 2 (a) accu racy rel at ed p en al t y . See Hi g b ee v . Co m m i s s io n er, 1 1 6 T.C. 4 38 , 4 4 6 (2 0 0 1 ). On ce t h e Co m m i s s i o n er h as m eth is b u rd en o f p ro duct i o n , th e t ax p ay ers b ear t h e b u rd en
o f p ro v i n g th atth e p en al t y i s i n ap p ro p ri at e, b y

d em o n s trat i n g fo r ex am

p l e, t h at t h ei r p os i t i o n was s upp o rt edb y s ub s t an t i al au t h ori t y u n d er s ect i on 6 6 6 2 (d )(2 )(B)(i ) o r th atth ey h adreas o nab l e cau s e fo r t he u n d erp aym en tan dact ed i n g o o d fai t h u nd er s ect i o n 6 6 64 . See Ru l e 1 4 2(a); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6 -4 4 7 . Reas on ab l e cau s e an d g o o dfai th are d et erm i n edo n a cas e-b y -- 1 6 -

cas e b as i s , t ak in g i nt o acco u n t al l p ert i n en tfact s an dci rcu m s t an ces . Sec. 1 .6 6 64
- 4 (b )(1 ), In co m e Tax Reg s . Res p o n d en th as m eth i s b u rd en o f p ro du ct i on wi t h res p ectt o p et it i on ers ’
s ub s t an t i al u n ders t at em en to f i nco m e t ax . Pet i t i o n ers rep o rt edt ax ab l e i nco m e o f $ 5 7 ,2 0 0 o n th ei r 2 0 1 2 t ax retu rn . Res p o nd en th as es t ab l i s h edth atp et i t i o ners ’ i n co m e was $ 1 0 7 ,8 13 fo r 2 0 12 (i .e., th e s u m o f $ 5 7 ,2 00 i n rep o rt edwag es , p l u s $ 3 4 ,8 1 3 as th e t ax ab l e p ort io n o f M r. Al ex an d er’ s So ci al Secu ri t y d i s ab i li t y b en efi t s , p lu s M r. Al ex an d er’ s co m p en sat i o n fro m

M r. M u l l en s o f $ 1 5 , 8 00 ). Th u s, p et i t io n ers rep o rt edap p ro x im at el y 5 3 % o f t h ei r t o tal 2 0 1 2 i n co m e. Pet i t i o ners d o n otas s ert t h atth ere i s s ub s t an t i al au t h o ri ty s up p o rt i n g th ei r p o s i t i on . Rat h er, th ey

arg u e th atth ey

h adreas o nab l e cau s e an d act edi n g o o dfai t h i n t ak i ng th ei r p o s i t i o n . Inth i s reg ard , th ey cl ai m th at : (1 ) t hey

rel i edo n M r. Ki rm er i n fi l i n g t h ei r 2 0 1 2 t ax retu rn an d(2 ) t h ey co u l dn o tp ro v i d e M r. Ki rm er wi t h al l o f t h ei r t ax i n fo rm at i o n b ecau s e t h ey d i dn o tt i m el y

recei v e Fo rm s 1 0 9 9 fro m th e So ci al Secu ri ty

Adm in i s t rat io n an dM r. M u l l en s . Rel i an ce o n p ro fes s i o n al ad v i ce m ay co n s t i tu te reas o nab l e cau s e an dg o o d fai t h , b u t“ i tm

u s t b e es t ab l i s h edth atth e rel i an ce was reas o n ab l e.” Frey t ag v . Co m m i s s i o n er, 8 9 T.C. 8 49 , 8 8 8 (1 9 8 7 ), aff’ d o n an o t her i s s u e, 9 0 4 F.2 d1 0 1 1- 1 7 -

(5 t h Ci r. 1 9 9 0 ), aff’ d , 5 0 1 U.S. 8 6 8 (1 9 9 1 ); s ec. 1 .6 6 6 4-4 (b )(1 ), In co m e Tax Reg s . W e h av e d efi n ed“ reas o nab l e” as fo l l o ws :

In s u m , fo r a t ax p ay er t o rel y reas o n ab l y

up o n ad v i ce s o as p o s s i b l y t o n eg at e a s ect i o n 6 66 2 (a) accu racy -rel at ed p en al t y d et erm i nedb y

the Co m m i s si o n er, t h e t ax p ay er m u s tp ro v e b y

a p rep on d eran ce o f t h e ev i d en ce t h atth e t ax p ay er m eet s each req u irem en t o f t h e fo l l o wi n g th ree-p ro n g t es t : (1 ) Th e ad v i s er was a co m p et en tp ro fes s i o n al wh o h ads u ffi ci en tex p ert i s e t o ju st i fy rel i an ce, (2 ) th e t ax p ay er p ro v i d edn eces s ary an d accu rat e i n fo rm at i o n t o th e ad v i s er, an d(3 ) t h e t ax p ay er act u al l y rel i ed i n g o o d fai t h o n th e ad vi s er’ s ju dg m en t . * * * Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 02 ). Pet i t i o ners m eetthe fi rs tp ro n g o f th e Neo nat o l o g y As s o cs ., P.A. t es t ; M r. Ki rm er i s a co m

p et en tan d ex p eri en cedt ax ad v i s er. Ho wev er, p et i t i o n ers d o n o t
m eetei t her t h e s eco n dp ro n g o f t h e t es t i n th atthey d i dn o tp ro v i d e n eces s ary an d
accu rat e i n fo rm at i o n t o M r. Ki rm er o r t h e t h i rdp ro n g o f t he t es ti n thatth ey d i d
n o trel y o n M r. Ki rm er’ s ad v i ce. W i t h res p ect t o th e s eco ndp ro n g o f th e Neo n at ol o g y As s o cs ., P.A. t es t , p et i t i o n ers ack no wl ed g e t h at t h ey d i dn o tp ro vi d e M r. Ki rm er wi t h fu l l i n fo rm at i o n . Ho wev er, t h ey arg u e t hatth ey s ho u l db e ex cu s edfo r t h i s fai lu re b ecau s e th ey

d idn o tt i m el y

recei v e the Fo rm s 1 0 99 . Pet i t i o n ers ’ p os i t i o n i s- 1 8 -

u n reas o nab l e as th ey were i n p o s s es s i o n o f al l t h e i n fo rm at i o n n eces s ary t o p ro p erl y rep o rtth ei r i n co m e. W i t h res p ect t o M r. Al ex an d er’ s So ci al Secu ri t y d i s ab i l i t y b en efi t s , b ecau s e h e was a fo rm er at t orn ey

wh o h ad p ract i cedi n th e fi el do f So ci al Secu ri t y d i s ab i l i t y b en efi t s fo r 3 5 y ears , i ti s u n reas o nab l e t o b el i ev e h e n eed ed a Fo rm 1 0 9 9 -G t o kn o w th at t h e b en efi t s were t ax ab l e. M o reo v er, t h e $ 40 ,9 5 6 i n b en efi ts M r. Al ex an d er recei v edth ro u g h o u tth e y ear was a s i g n i fi can t p o rt io n o f p et i t i o n ers ’ i n co m e fo r 2 0 1 2 . Itwas n o ts o m et h i n g th atco u l db e fo rg o tt en . M rs . Al ex an der was al so aware, o r s h o u l dh av e b een aware, t h atp et i ti o n ers h ad recei v edSo ci al Secu ri t y d i s ab i l i t y b en efi t s . Sh e h adfu l l acces s t o p et i t io n ers ’ jo i n t ban kacco u n t , an dattri al s h e an swered wh en as k ed wh et h er s h e was aware
o f t h e So ci al Secu ri t y

b en efi td ep os i t s : “ I p ro b ab l y co u l d h av e [kno wn ] i f I p ai d at t en ti o n . ” W i t h res p ect t o th e p aym en t s recei v edfro m M r. M u l l en s , p et it i o n ers were wel l aware t h atM r. Al ex an d er h adrecei ved$ 1 5 ,8 00 fro m h i m , y et t h ey

n ev er d i s cl os edth i s factt o M r. Ki rm er. An dM r. Al ex an d er’ s two “ co n fro n t at io n s ” wi t h M r. M u l l en s , wh erei n h e d em an d edad d i ti o nal m o n ey o n th e b as i s o f t h e b en efi t s
o f h i s wo rk , m ak e i t cl ear t hatM r. Al ex an d er d i dn o tco n s i d er M r. M u l l en s’ p aym en t s t o b e a g iftwh en h e recei v edth em . M r. Al ex an d er s t at edth at h e was- 1 9 -

n o ta t ax l awy er, y eth e d i d n o ts eekM r. Ki rm er’ s ex p erto p i ni o n as t o t h e t ax at i o n
o f t h e p aym en t s h e recei v edfro m M r. M u l l en s. W e p rev i o us l y n o tedth at M rs . Al ex an der was aware o f t h e p aym en t s . Sh e h adacces s t o p et i t i on ers ’ jo in tb an k
acco u n t , an ds he en d o rs edM r. M ul l en s ’ $ 1 0 ,0 0 0 ch eck wi t h the n o t at i o n “ Pay t o Di an e C. Al ex an d er”. W e h av e h el dth at“ [t ] he u l t im at e res p on s ib i l i ty fo r a co rrect return l i es wi th t h e t ax p ay er, wh o m

u s tatl eas tfu rn i s h th e n eces s ary i n fo rm at io n t o h i s ag en twh o p rep ared th e ret u rn . ” En o ch v . Co m m i s s i on er, 5 7 T.C. 7 8 1 (1 9 7 2 ). An dwe h av e h el dth atth e fact th ata t ax p ay er d i dn o tt im el y recei v e i n fo rm at io n retu rn s d o es
n o tal l ow t he t ax p ay er t o cl ai m th e reas o nab l e cau s e d efen s e. See Bru n s m anv . Co m m i s s i o n er, T.C. M em o . 2 0 0 3 -2 9 1 (reject i n g the reas o n ab le cau se d efen s e wh ere t h e t ax p ay er recei v edo n l y o ne Fo rm

1 0 9 9 -M ISC b u t knew h e h adh el dtwo jo b s ); DuPo u x v . Co m

m i s s i o n er, T.C. M em o. 1 9 94 -4 4 8 (“ [F] ai lu re t o recei v e t ax d o cu m en t s [s u ch as Fo rm 1 0 9 9 -M ISC] d o es n o tex cu se t ax p ay ers fro m th e du t y t o rep o rti n co m e.”). Pet i t i o ners al s o fai l t o m eetth e t h i rdp ro n g o f th e Neo nat o l o g y As s o cs ., P.A. t es t. No to nl y

d i dth ey n o ts eekM r. Ki rm er’ s ad vi ce reg ard in g th e
u n rep o rt edi n co m e; attri al M r. Ki rm er s t at edthath adp et i ti o ners i n fo rm edh i m o f- 2 0 -

t h e So ci al Secu ri t y

d i s ab i l i t y b en efi t s , h e wo u l dh av e rep o rt edth e am o u nto n th e t ax return . In co n cl u s i o n , we h o l dthatp et i t io n ers fai l edt o s h o w th at t hey h ad
reas on ab l e cau s e fo r, o r act edi n g o o dfai t h wi t h res p ectt o , th e u n d erp aym en t s . To refl ectthe fo reg o i n g an d co n ces s io ns b y res p on d en t , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.