T.C. Mem o. 2 01 6- 10 9

UNITED STAT ES TAX COURT

ITA ANDREW

UDEOBONG, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 37 9- 13 . Fi le d J un e 2 , 20 16 .
ItaAndrew Ud eo bo ng , pro se. Po rti a Neo m i Ro se an d Yv et te Nun ez, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION PUGH, Ju dg e: In ano ti ce o f de fic ie nc y date d Oct ob er 9 , 20 12 , res po nd en t de te rm in eda de fic ie nc y

inpe ti ti on er’s 2 01 0 F ed eral in co m e ta x o f $4 9,0 14 an d a-2
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[* 2] pe na lty

un de r se ct io n 6 66 2( a) o f $9 ,80 3. The i ss ue s fo r de ci si on are: (1) 1 whe th er am ou nt s re cei ve d fr om Cig naGov ern m en t Be ne fit s (C ig na ) sh ou ldbe in cl ud edinpe ti ti on er’s t ax ab le in co m e fo r 20 10 an d (2 ) whe th er p et it io ne r is li ab le forth e p en al ty und er s ect io n 6 66 2( a). FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at ed , andth e st ip ul at edfact s ar e in co rp or at edinou r fi nd in gs by thi s re fere nc e. Pet it io ne r li ve d i n Tex as at t he ti m e hi s p et it io n was fil ed
. In20 01 pe ti ti on er s ta rte d abu si ne ss cal le d M id la ndHeal th Care Med ic al Supp ly & Equi pm en t. Pet it io ne r’s bu si ne ss was o n t he cas h a cco un ti ng m etho d. As p artof h is bu si ne ss , bef or e 2 00 5, p et it io ne r rec ei ve d M ed ic ai d re im bu rs em en t pa ym en ts fro m

Cig na . Cig narep orte d the se pa ym en ts to pe ti ti on er o n F orm s 10 99 , andpe ti ti on er re po rte d a ndpa idFed eral in co m e ta x o n t he m . After pe ti ti on er re po rte d andpa idtax on th e p aym en ts , a di sp ut e aro se an d h e returne d th e p aym en ts to Cig na . Peti ti on er d idno t d educ t the returne d p aym en ts fro m hi s in co m e fo r th e y ear i n wh ic h h e returne d t he m to Cig na ; n ordi d h e fi le a cl ai m for refu nd . Liti ga ti on ov er the pa ym en ts fol lo wed , andCig nawas re qu ire d t o re pa y Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de (Co de ) of 19 86 , as a m en de d a ndineffe ctat a ll rel ev an t t im es . All Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e.-3
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[* 3] pe ti ti on er ce rta in of t he Med ic ai d re im bu rs em en t p aym en ts th atpe ti ti on er h ad returne d t o C ig na , res ul ti ng inth e fo ll owi ng ev en ts rel ev an t t o 2 01 0. In20 10 pe ti ti on er re cei ve d 7 8 c he ck s fr om Cig naforwhi chpay

m en t was st op pe d o r withh el d (s to pp edch eck s) . Peti ti on er al so rece iv edfou r ch eck s fr om Ci gn a th atrep res en te d p aym en ts he ke pt(ret ai ne d c he ck s) . The fac e am ou nt s o f th e ret ai ne d c he ck s t ot al ed$2 58 ,97 5.3 5. Pe ti ti on er en do rs edth e ret ai ne d c he ck s, th ree o f whi chhe en do rs edas p ay ab le to hi s wi fe. Ci gn a p rep areda Fo rm

10 99 -MI SC, Mi sc el la ne ou s In co m e, fo r 20 10 rep orti ng pa ym en ts to pe ti ti on er o f $3 ,20 4,6 37 .91 . This su m in cl ud edbo th th e am ou nt s re pr es en te d b y

th e st op pe d c he ck s an d t he am ou nt s re pr es en te d b y th e ret ai ne d c he ck s, al th ou gh th e to ta l o f th os e two am ou nt s i s g reat er tha n t he am ou nt th atCig narep orte d t o re sp on de nton th e Fo rm 10 99 -MI SC. Pet it io ne r ti m el y

fil eda Fo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r 20 10 . On h is Fo rm

10 40 he rep orte d t ot al in co m e o f $1 ,64 7 a ndno tax li ab il ity an d c la im eda refu ndatt rib ut ab le to th e m ak in g wo rkpa y cred itan d t he earn ed in co m e cre di t (EIC ). He di d n otin cl ud e inin co m e an y of t he pa ym en ts he rece iv edvi a th e ret ai ne d c he ck s o r th e p aym en ts th atCig narep orte d o n the Fo rm 10 99 -MI SC.-4
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[* 4] In20 12 Cig napro vi de d t o p et it io ne r a co py of th e 2 01 0 F orm 10 99 -MI SC
an d ali stof t he 78 st op pe d c he ck s. Th e to ta l s ho wn o n C ig na ’s li stof t he 78 st op pe d c he ck s was $3 ,05 2,8 04 .50 . Cig naals o p ro vi de d t o p et it io ne r co pi es of 1 9 of th e 7 8 s to pp edch eck s. Th e am ou nt s s ho wn o n s om e o f th e 1 9 c he ck s d idno t m at chth e co rres po nd in g c he ck en tri es on Cig na ’s li st . Gener al ly, th e am ou nt s sh own on th e 1 9 c he ck s wer e smalle r th anth e co rres po nd in g e ntrie s o n C ig na ’s li st . For o ne ch eckth e d is crep an cy was o ve r $3 ,00 0; th e rem ai ni ng di sc rep an ci es were m uc h s m al le r. Pet it io ne r en do rs edall 19 ch eck s; on e was en do rs edas pa y ab le to hi s wi fe (s im il ar t o thr ee o f th e fo urret ai ne d c he ck s)
. Res po nd en t i ss ue d ano ti ce o f de fic ie nc y on Octo be r 9, 2 01 2. Re sp on de nt de te rm in edth e am ou ntof g ro ss rece ip ts fro m pe ti ti on er’s b us in es s tha t was om itte d fr om

hi s re tu rn , $1 51 ,83 3.4 1, b y subt ract in g the to ta l o n C ig na ’s li stof t he 78 st op pe d c he ck s, $ 3,0 52 ,80 4.5 0, fr om th e to ta l fo r th e p aym en ts Cig narep orte d on th e Fo rm

10 99 -MI SC, $ 3,2 04 ,63 7.9 1. Re sp on de ntals o m ad e co rres po nd in g co m pu ta ti on al ad

jus tm en ts to pe ti ti on er’s s el f-em pl oym en t t ax , m ak in g wo rkpa y cred it , andEIC an d d et erm in edanaccu racy-rela te d p en al ty. Pet it io ne r ti m el y pe ti ti on edth e Co urt fo r red et erm in at io n.-5 -

[* 5] OPINION I. Burd enof P ro of Ord in ari ly, th e b ur de n o f pr oo f incas es be fo re the Co urt i s o n t he tax pa y er. Ru le 14 2( a)(1 ); Welc h v . Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . Und er s ect io n 74 91 (a), i n c ert ai n c irc um st an ces , th e b ur de n o f pr oo f m ay sh iftfro m

th e ta xp ay er to th e Co m

m is si on er. Pet it io ne r ha s n otcla im edor s ho wn tha t h e m eet s the sp eci fic at io ns of s ect io n 7 49 1( a) t o s hi ft t he bu rd enof p ro of to res po nd en t as to an y rel ev an t fa ctua l i ss ue . II. Paym en ts Fro m

Cig na Sect io n 6 1( a) re qu ire s a t ax pay er t o i nc lu de “ al l i nc om e fro m what ev er so ur ce d eri ve d” . Peti ti on er ar gu es th athe sh ou ldno t b e ta xe d o n i nc om e th athe di d n otrece iv e, na m el y , th e am ou nt s s ho wn o n t he 78 st op pe d c he ck s. He i s n ot ; th e n ot ic e o f de fic ie nc y

di d n otin cl ud e th e am ou nt s o n the st op pe d c he ck s. Add it io na ll y , alt ho ug h p et it io ne r adm it s tha t h e rec ei ve d t he pa ym en ts m ad e b y th e ret ai ne d c he ck s, h e arg ue s tha t tho se pa y m en ts rep res en te d t he return t o h im of Med ic ai d re im

bu rs em en t p aym en ts on whi chhe ha d p ai d t ax an d wh ic h h e subs eque nt ly hadreturne d t o C ig na(be fo re 2 00 5) . He arg ue s tha t h e sh ou ldno t ha ve to pa y

tax ag ai n o n t he same inc om e.-6
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[* 6] No s ta tu to ry

pro vi si ongi ve s p et it io ne r th e rel ie f he is see ki ng . Sect io n 13 41 (a) p ro vi de s a f

orm of r el ie f fo r a t ax pa y er o n t he cas h m etho d o f acc ou nt in g, al lo win g a n a dju st m en t t o t ax es owedinth e y ear o f th e rep aym en t t o re fle cttax es al read y pa id . Thatpro vi si on ap pl ie s i f: (1 ) a t ax pa y er i nc lu de s an am ou ntin in co m e fo r a p rio r ta x year th atth e ta xp ay er re pa y s i n alat er t ax y ear a nd(2) th e ta xp ay er i s en ti tl edto a de du ct io n fo r th e rep aym en t fo r th atlat er y ear. Here , pe ti ti on er re cei ve d p aym en ts fro m Cig nainearl ie r y ears with re sp ectto whi chhe pa idFed eral in co m e ta x. Ina late r ta x year he returne d the pa ym en ts to Cig na . Sect io n 1 34 1 m ig htha ve all owe d h im to ad jus t h is tax forth e y ear tha t h e rep ai d Ci gn a, if he were en ti tl edto a de du ct io n i n t ha t t ax y ear u nd er an ot he r Co de pr ov is io n. Se e se c. 13 41 (a); see als o F arah an i v . Comm is si on er, T.C. Mem o. 20 14 -1 11 (ho ld in g t ha t the tax pay er was no t en ti tl edto rel ie f be cau se th e ta xp ay er was no t en ti tl edto a de du ct io n fo r th e y ear b efo re the Co urt). As a cas h m etho d ta xp ay er, p et it io ne r was en ti tl edto a de du ct io n o nl y forth e y ear i n wh ic h h e rep ai d C ig na . See s ec. 1 .44 6- 1( c)(1 )(i ), In co m e Tax Reg s. (f ora ta xp ay er u si ng th e cas h m etho d o f acc ou nt in g, “ [e]xp en di tures are t o b e d educ te d fo r th e ta xabl e y ear i n wh ic h a ctua ll y

m ad e”); see als o s ec. 1 .46 1- 1( a)(1 ), In co m e Tax Reg s. (s ta ti ng th e g en eral rul e th attax pa y ers m ak in g c as h d is bu rs em en ts are t o t ak e al lo wab le de du ct io ns forth os e d is bu rs em en ts inth e y ear m ad e). Tha t year was-7 -

[* 7] no t 2 01 0. Th eref

or e, th e am ou nt s p et it io ne r rec ei ve d fr om Cig nam us t b e in cl ud edinhi s i nc om e fo r 20 10 irr es pe ct iv e o f whe th er the y rep res en t p aym en ts th atha d b eentax edbu t n otret ai ne d fo r pr io r y ears . See s ec. 6 1( a). Pet it io ne r’s al te rn at iv e arg um en t, tha t h e was un ab le to rep ort the in co m e be cau se Cig nadi d n otpro vi de hi m a Fo rm 10 99 -MI SC, al so is in co rrec t. He rece iv edan d k ep t the pa ym en ts m ad e b y th e ret ai ne d c he ck s an d m us t i nc lu de th os e am ou nt s i n i nc om e fo r th e y ear h e rec ei ve d t he m reg ard le ss of wh ethe r he rece iv edan y

in fo rm at io n re tu rn . See s ec. 6 1; see , e.g., DuPo ux v. Co m m is si on er, T.C. Mem o. 1 99 4- 44 8 (f

ai lu re t o re cei ve a Fo rm

10 99 -MI SC d oe s n otco nv ert ta xabl e in co m e in to no nt ax ab le in co m e); Vaug hn v. Co m m is si on er, T.C. Mem o. 19 92 -3 17 (sa m e), aff

’d witho utpubl is he d o pi ni on , 15 F.3d10 95 (9t h C ir. 1 99 3) At tria l re sp on de ntals o m ov edun de r Ru le 41 (b ) to am en d h is an swe r to co nf orm to th e ev id en ce tha t the ret ai ne d c he ck s t ot al ed$2 58 ,97 5.3 5, i nc reas in g pe ti ti on er’s g ro ss rece ip ts fro m $1 51 ,83 3.4 1 t o t ha t am ou ntan d, as a res ul t, in crea si ng th e d efi ci en cy . Rul e 4 1( b) (2 ) pr ov id es th atwhen ev id en ce i s o bjec te d to as o ut si de th e is su es rai se d b y th e p le ad in gs (pe ti ti on er d idso ), an d, the refo re, th e is su e is no t trie d b y

co ns en t, we m ay

rece iv e th e ev id en ce, an d we m ay “ atan y ti m e al lo w th e p le ad in gs to be am en de d t o c on fo rm to th e p ro of

, andsh al l d o s o free ly whe n ju st ic e so requi res ” so lo ng as t he no nm ov in g p arty is no t p reju di ced
.-8
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[* 8] Chur chof S ci en to lo gy v. Co m m is si on er, 8 3 T.C. 3 81 , 46 9 (1 98 4) , aff’d, 8 23 F.2 d 1 31 0 (9 th Cir . 19 87 ); Es ta te of Ho rv ath v . Comm is si on er, 5 9 T.C. 5 51 (1 97 3) . Whe th er jus ti ce re qu ire s u s t o g ran t re sp on de nt ’s m ot io n t o a m en d t he pl ead in gs un de r Ru le 41 li es withi n o urso un d d is cret io n. Se e, e.g ., Esta te of Qui ck v. Co m mis si on er, 1 10 T.C. 17 2, 1 78 (19 98 ); S pa in v. Co m m is si on er, T.C. Mem o. 1 97 8- 27 0. Re sp on de nt ’s m ot io n c am e atth e en d o f tr ia l, an d we c on cl ud e th atitwas an u nf

ai r su rp ris e an d p reju di ci al to pe ti ti on er, wh o t he n was un rep res en te d. Pe ti ti on er al so tes ti fie d t ha t h e en do rs edth e ch eck s o ve r to hi s wife on in st ru ct io n o f co un se l an d p ai d h is att orne y fro m th e p ro ceed s, ra is in g t he po ss ib il ity

th atha d t he m ot io n t o a m en d b eenm ad e ear li er, p et it io ne r m ig htha ve of fere d e vi de nc e attri al th athe was e nt it le d t o ade du ct io n t ha t co ul d h av e reduc edhi s t ax ab le in co m e. W e th eref or e wil l d en y

res po nd en t’s m ot io n. III. Sec ti on 66 62 (a) Pe na lty Sect io n 6 66 2( a) an d (b )(1 ) an d (c ) im po se s a p en al ty equ al to 20 % of a n un de rp aym en t o f ta x wh enth e und erp aym en t i s at tri bu tabl e to “ ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns ” an d/ ora “ subs tant ia l u nd ers tate m en t o f in co m e ta x.” Negl ig en ce i nc lu de s “ an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th is ti tl e”. Sec . 66 62 (c). Anun de rs ta te m en t o f in co m e ta x-9
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[* 9] is a “ subs ta nt ia l u nd ers ta te m en t” if i t ex ceed s the gre at er o f 10 % of the tax requi redto be sh own on th e return o r $5 ,00 0. Se c. 66 62 (d ). W ith re sp ectto anin di vi du al tax pa y er’s l iabi li ty for a p en al ty, se ct io n 74 91 (c) p la ces th e b ur de n o f pr oduc ti on on th e Co m m is si on er, requi rin g t he Co m m is si on er t o c om e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g t ha t i m po si ti on of a pe na lty is ap pr op ria te . Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (2 00 1) . Once t he Co m

m is si on er m eet s h is bu rd enof p ro du ct io n, the tax pa y er be ars th e b ur de n o f pr ov in g t ha t the Co m m is si on er’s d et erm in at io n i s i nc orrect . Id .; s ee Ru le 14 2( a). W e fi ndth atres po nd en t h as di sc ha rg edhi s b ur de n o f pr oduc ti on as t o asubs ta nt ia l u nd ers ta te m en t o f in co m e ta x b y sh owi ng th atpe ti
ti on er fa il edto rep ort an d p ay tax on th e p aym en ts fro m Cig narep res en te d b y

th e ret ai ne d c he ck s an d t ha t the un de rs ta te m en t o f in co m e ta x e xc eed s 1 0% o f th e am ou ntof t he tax requi redto be sh own on pe ti ti on er’s return (wh ic h a m ou ntis gr eat er tha n $ 5,0 00 ). See s ec. 1 .66 62 -4 (b ), In co m e Tax Reg s. Sect io n 6 66 4( c)(1 ) pr ov id es anex cep ti onto th e im po si ti onof t he accu racyrel at edpe na lty

if the tax pa y er es tabl is he s tha t the re was reas on ab le cau se for , and th athe act edingo odfai thwith re sp ectto , th e und erp aym en t. Hig be e v . Co m m is si on er, 1 16 T.C. at 4 48 -4 49 . The d eci si on as t o wh ethe r th e ta xp ay er act edwith re as on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is ,-1 0-

[* 10 ] tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces . See s ec. 1 .66 64
- 4( b) (1 ), In co m e Tax Reg s. Ci rcum st an ces th atm ay si gn al reas on ab le cau se an d go odfai th “ in cl ud e anho ne stm is un de rs ta nd in g o f fac t o r la w th atis reas on ab le in li gh t o f al l o f th e fac ts an d c irc um st an ces , in cl ud in g t he ex pe rie nc e, kn owl ed ge , an d e du cat io n o f th e ta xp ay er.” Id
. Pet it io ne r te st ifi edth athe ha s p ai d t ax es inth e p as t (i nc lu di ng on pa ym en ts fro m Cig na ) an d tha t h e und ers ta nd s the du ty to p ay tax . Peti ti on er cl ai m edth at he di d n otrece iv e a Fo rm 10 99 -MI SC fro m

Cig nafor20 10 an d d idno t i nc lu de th e pa ym en ts rep res en te d b y

th e ret ai ne d c he ck s o n h is 20 10 Fo rm 10 40 be cau se of hi s m is ta ke n v ie w th atth e p aym en ts were n ottax ab le for20 10 be cau se th ey ha d al read y be entax edon ce. Pet it io ne r’s m is take n v ie w of the law d oe s n otris e to th e le ve l o f “ reas on ab le cau se ” o r “ go odfai th ”. See i d. No r do es hi s n on rece ip t o f th e Fo rm 10 99 -MI SC co ns ti tu te reas on ab le cau se . See, e.g ., Ash m or e v . Co m m is si on er, T.C. Mem o. 2 01 6- 36 : Dea s v . Comm is si on er, T.C. Mem o. 2 00 0- 20 4. We th eref

or e h ol d tha t p et it io ne r de m on st rat edne ithe r “ reas on ab le cau se ” no r “ go odfai th ” fo r th e und erp aym en t. Hav in g c on cl ud edth atth e p en al ty for an un de rp aym en t at tri bu tabl e to a subs ta nt ia l und ers ta te m en t o f in co m e ta x app li es , we ne edno t co ns id er ap pl ic at io n o f th e n eg li ge nc e p en al ty.-1 1-

[* 11 ] IV. Con cl us io n W e wil l s us ta in th e d efi ci en cy an d t he pe na lty

de te rm in edinres po nd en t’s no ti ce o f de fic ie nc y . In re ach in g o urho ld in g, we h av e co ns id eredall arg um en ts m ad e an d e vi de nc e o ffer ed , and , to th e ex te ntno t m en ti on edab ov e, we co nc lu de th ey are m oo t, i rrel ev an t o r witho utm eri t. To re fle ctth e fo reg oi ng , An ap pr op ria te ord er an d d eci si on wil l b e en te red
.