TAX COURT OPINION

Case: Mark G. Winshel
Docket Number: 3352-09
Judge: Colvin
Opinion Type: bench
Filed: 12/22/2010
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 MARK G. WINSHEL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) O R D E R Docket No. 3352-09. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of Holmes.at San Francisco, California on Friday, December 10, 2010, containing his oral the conclusion of trial. the above case before Judge Mark V. fact and opinion rendered after the pages of the the trial of findings of In accordance with the oral findings of fact and opinion, a decision will be entered pursuant to rule 155. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. December 22, 2010 SERVED Dec 27 2010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Mark V. Holmes December 10, 2010 Mark G. Winshel v. Commissioner Docket No. 3352-09 3 THE COURT: In the case of Mark G. Winshel v. Commissioner, Docket No. 3352-09, the Court has decided to render oral findings of fact and opinion, and the following represents the Court's oral findings of fact and opinion. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice & Procedure. Mr. Winshel was a resident of California when he filed the petition, and the parties reached a stipulation and supplemental stipulation and stipulation of settled issues, which, together with the testimony, constitute the record in this case. Mr. Winshel is a non-filer who was caught by third-party matching, By far the largest items initially at issue in this case, which arises from the 2005 and 2006 tax years, were proceeds from stock sales. The IRS obtained third-party records that benefitted Mr. Winshel by getting information on his cost basis in those securities. It's usually the responsibility of taxpayers to provide this, and the IRS is to be commended for going out of its way to find this cost basis through third parties. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 This resulted in a substantial net capital loss for Mr. Winshel, which to the limits applicable to capital losses, should benefit him in the recomputation of his taxes for the years involved. The parties also stipulated to other smaller items of income and deductions that had initially been at issue. What's .left for me to decide were four issues, the taxability of a distribution from a traditional to Roth IRA, the failure-to-timely-file penalty, the failure-to-timely- pay penalty, and the estimated-tax penalties. I'll take them in order. The first issue, the staxability of distribution from a traditional to a Roth ÏRA, involved a conversion of a traditional IRA which was in the amount of $31, 568 . The parties stipulated to the Exhibit 10-J, which was the conversion order from traditional to Roth IRA that Mr. Winshel had signed. He made this request, as he testified, he might very well have received bad advice froni a third party regarding the taxability of this conversion, but as he suggested in his closing statement, the remedy if he wants to pursue it, .is against the person who gave him the bad advice, and that bad advice was defying the government. So I do have to find in favor of the government on the question of the taxability of this distribution. The Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 law is quite clear that for tax purposes, a qualified rollover contribution from a traditional IRA to a Roth IRA is treated as an initial distribution from the traditional IRA followed by a subsequent contribution to the Roth IRA. The amount distributed from the traditional IRA is treated as a taxable distribution and included in gross income. Internal Revenue Code section 408A(d) (3) (A) (i). During the taxable year 2005 Mr. Winshel converted this $31,568 from the traditional IRA to a Roth IRA and therefore that amount must be included in his gross income for tax year 2005. As to the remaining three issues that involve additions to tax or penalties, I do want to note that the IRS did not assert a negligence or intentional disregard or willful disregard penalty, and I want to specifically note that Mr. Winshel testified extensively about his preoccupations with public policy and really just essentially good works, in his view, that kept him preoccupied and away from doing the accounting necessary for the more mundane tasks of filing his tax returns in 2005 and 2006. But nevertheless, the IRS did not assert a negligence penalty or say that you willfully disregarded something or intentionally disregarded anything here. The three penalties that they're asserting are almost mechanical Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 or mathematical, and again I'll take them in order. The first is the failure-to-timely-file penalty. The 2005 tax return for Mr. Winshel was, of course, due on or before April 15th, 2006. Similarly, his 2006 tax return would have been due in the normal course around April 15th of 2007. And yet, as he said, and I fully believe him here, he didn't file or actually give his tax return to a representative of the IRS until the eve of trial, which is 2010 . His reason for this is that he' s very busy and was back then with his job and his whistleblower activity, as he put it, for the greater good of San Francisco. Again, however, the Internal Revenue Code doesn't recognize this as an excuse to this particular penalty. Internal Revenue Code section 6651(a) (1) imposes an addition to tax for the failure to timely file a tax return, determined with regard for all extensions, unless the taxpayer can show that the failure to file was due to reasonable cause and not due to willful neglect. General busyness is not good enough for this penalty here. We look to, for instance, a serious illness or other physical incapacity, or mental incapacity arising to the level of financial disability. See IRC section 6651 (a) (1) . I find that Mr. Winshel has not demonstrated reasonable cause in this sense for this failure to timely Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 file his 2005 and 2006 returns. Similarly, the second penalty is the failure-to- timely-pay penalty. Internal Revenue Code section 6651(a) (2) imposes an addition to tax for failure to pay by the date prescribed for payment under section 6151. That's the classic April 15th payment date, although it's subject to extensions in certain cases. If you don't pay by that date, the tax liability shown on your return, you're subject to this addition to tax. As with the 6651(a) (1) addition to tax for failure to timely file, a taxpayer isn't subject to this addition to tax if he can show that his failure to comply is due to reasonable cause and not due to willful neglect. A taxpayer can demonstrate reasonable cause for failure to pay by showing that he exercised ordinary business care and prudence in providing for the payment of the liability but was nevertheless either unable to pay the tax or would suffer an undue hardship as described in Treasury Regulation 1.6161-1(b) if he paid the tax due on the due date. Mr. Winshel has again not demonstrated reasonable cause as it's defined in the case law and regulations for this section for his failure to pay his tax liabilities for the tax years 2005 and 2006. The standard, again, is essentially the same as for the failure to timely file. It has to be a physical hardship or, in the case of failure to Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 timely pay, a very substantial economic hardship. Mr. Winshel's excuse for not paying the tax was that he was preoccupied with these other public service-oriented activities of his. The fourth issue and the third penalty issue is the estimated-tax penalty. This is the penalty provided under Internal Revenue Code section 6654(a) which provides 'in the case of any underpayment of estimated tax by an individual, there shall be added to the tax for the taxable year an amount determined by applying, one, the underpayment rate established under section 6621; two, to the amount of the underpayment; three, for the period of the underpayment'. As in this case no return was filed, if no return is filed for the preceding taxable year, estimated tax is 90 percent of the tax for the taxable year at issue. That's the situation we're confronted with here. Again, the excuses to this are very difficult to prove because this is essentially a mathematical addition for people who haven't filed or haven't withheld enough money from their taxes. In these two years, first in tax year 2005, Mr. Winshel had withholding that totaled $2836. The effect of this withholding will be greatly.affected by computations, but again, it is likely that this amount is less, will turn out to be less, than 90 percent of his tax Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 liability for 2005. Therefore, I find that Mr. Winshel is subject to the failure-to-pay-estimated-tax addition to tax under Internal Reienue Code section 6654(a) for tax year 2005 unless the computation under Rule 155 shows that his withholdings were enough.to cross the 90 percent threshold. For tax year 2006, Mr. Winshel had withholding totaling.$3200, He is subject as well to the failure-to- pay-estimated-tax addition to tax under Internal Revenue Code section 6654(a) for tax year 2006 unless, again, the computations under Rule 155 show that his withholdings were enough to cross the 90 percent threshold. This case will have to be resolved under Rule 155, which is the computation-for-decision rule of Tax Court, and I ask the IRS to take into account Exhibits 22-P and 23-P. I do -- I will admit these into evidence. (The documents referred to, having been previously marked for identification as Petitioner's Exhibits 22-P and 23-P, were received in evidence.) THE COURT: And I ask the IRS to check these records and reflect them in the computations if it would make a difference, given the itemized versus standard deductions. Again, that's a mathematical adjustment. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 I commend the IRS for stipulating to as much as they could under circumstances of this case, and I commend Mr. Winshel for his testimony today and for taking the process so seriously. And with that, I am concluding the Court's oral findings of fact and opinion in this case, and concluding this session as well. Thank you to the IRS and Respondent's counsel. MR. WINSHEL: If I understand, this case is considered all over? THE COURT: It is. They have to do math and then they'll send you a very much reduced tax bill, it looks like, so -- MR. WINSHEL: Because my understanding was usually that when a case like this happens, the ruling comes about a year later. But you're saying this is it? THE COURT: Oh, no, I do things quicker if I can. This one I can do quicker. Good day, Mr. Winshel. THE CLERK: All rise. (Whereupon, at 2:11 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // Heritage Reporting Corporation (202) 628-4888