TAX COURT OPINION

Case: Jerry M. & Judy L. Slota
Docket Number: 22464-08S
Judge: Kroupa
Opinion Type: summary
Filed: 10/12/2010
Pages: 8

T.C. Summary Opinion 2010-152 UNITED STATES TAX COURT JERRY M. AND JUDY L. SLOTA, Petitioners v. COMMISSIONER- OF INTERNAL REVENUE, Respondent Docket No. 22464-085. Filed October 12, 2010. Bob A. Goldman,- for petitioners. Sitephen A. Haller and James A. Kutten, for respondent. KROUPA, Judge: This case was heard pursuant to the - provisions of section 74631 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the de:cision to be entered is not reviewable by any other court, All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. and this opinion shall not be treated as precedent for any other - 2 case. Respondent determined a $36, 8712 deficiency and a $12, 967 accuracy-related penalty under section 6662 (a) with respect to petitioners' Federal income tax for 2005. After concessions, there are two issues for decision.3 The first issue is whether income that petitioner Jerry Slota (Mr. Slota) transferred to a newly organized corporation, Quad J, Inc. (the corporation) , is taxable to petitioners . We hold that it is taxable to petitioners, not the corporation. The second issue is whethe petitioners are liable for the accuracy-related penalty. We hold that they are liable. Background This case was .submitted fully stipulated under Rule 122. The stipulation of facts and the accompanying exhibits are incorporated by this reference. Petitioners resided-in Washta, Iowa at the time they filed the petition. Mr. Slota owned and operated a.farm as a sole proprietor in 2005. Mr.- Slota's farming-operations consisted of planting, 2All monetary amounts are rounded to the "nea'rest doldr unless otherwise indicated. 3Petitioners challenged no other adjustments in either their petition or their briefs. Petitioners are therefore treated as having-conceded all adjustments made in the deficiency notice other than the adjustments mentioned in this opinion. Rothstein v. Commissioner, 90 T.C. ~488, .497 (1988) . See - 3 - cultivating and harvesting soybeans and corn (the drops). Mr. Slota generated income by selling the crops and receiving periodic payments from the United States Department" of Agriculture (USDA). Mr Slota deposited the income from his firming operations into petitioners' farm bank account (petitioners' individual-account). In September 2005 petitioners organized the corporation and filed articles of incorporation with the Iowa secretary of state. Petitioners were the-solesshareholders and served as the-only directors of the corpóradion: Petitioners and the corporation did not sign-or execute a deed, sales contract or other written agreement conveyïng, transferring or leasing the'·land or, the crops from petitioners ~to the corporation. The only, asset petitioners conveyed to the córporation upon its organization was $10,000 from petitioners' individual account to a bank account established fôr the corpetation (carporate account). In October 2005~Mr. Slota deposited,all USDA payments e receided in 2005 into petiti'oners' individual account, except'for one USDA payment of $6,1424that petitioners.deposited into the corporate account. Mr. Slota then transferred into the corporate accoun;t the USDA payments he'had deposited into petitioners' individual Ëccount af r October 5. In additio , Mr. Slota deposited into the corporate account all crop sales proceeds received after October 5. - 4 - Petitioners« hired a tax adviser to prepare and file their- Federal income tax return for 2005. Petitioners reported $195, 938 from crop sales and, $61, 416 in USDA payments on .Schedule F, Profit or Loss From Farming.4 :Petitioners claimed an expense deduction f or i$44 , 165- of USDA payments and $20 , 532 , of . crop sales proceeds that petitioners deposited into or transferred to the corporate account . : Petitioners reported only $481 of , sel f - employment tax liability. Ther corporation also filed a corporate Federal income tax return for the fiscalayear ending September 30, 2006. The corporation reported $370,647 of income that was ,offset by, an equal amount of: expenses resulting in zero taxable income. Respondent examined2 petitioners' Federal income tax return for 2005; a Respondent determined -that .petitioners earned an additional $103, 930 from crop sales 'and USDA payments that petitioners had deyosited into or transferred to the corporates account." During the examination, petitioners agreed to increase s their $481-reported tax liability to, $28,445, and signed a Form 870, Waiver of ,Restrictions on Assessment and Collection, of 4Petiïtionees $alculated heir total s'al'es of crops and livestock by adding the total corn and soybean sales ($104, 048 + 90 , 987) and hay sales ($903) . sRespóncient atitiributed as income to petitionèrs all monies - deposited into or transferred to the corporate account but excluded the $6,142 USDA payment directly depos~ited into the corporate account: in 2005 - 5 - Deficiency in Tax (waiver form) . • Respondent issued petitioners the de:ficiency- notice for the deficiency and the accuracy-related penalty. Petitioners timely filed a. petition for -review with this Court . Discussion We are asked to decide whether petitioners are taxable on amounts deposited into or transferred to the .corporate account. Petitioners claim that they transferred their crops and USDA payments to thencorporation and therefore the corporation, not petitiioners, must pay the tax on the incomeeearned from the crop sales and USDA payments. Respondent arguessthat Mrc. Slota trañsferred the crop sales proceeds only, not the crops themselves, and therefore petitioners earned the income and are liable for the tax. In addition, respondent contends-that the USDA payments at issue are -income to petitioners because they were issued in petitioners' names, -not in the corporation's name. We shåll" consider the parties'- arguments after· first addressing the - btìrden - of proof . The Commissioner' s determinations are generally- presumed correct, and taxpayers bear the burden of proving otherwise. Rule 142 (a-) t. Accordingly, petitioners bear the burden of establishing that athe crop sales proceeds and USDA payments are not taxable to them. - 6 - The parties do not dispute the amount received from crop sales proceeds, and USDA payments. NMoreover, petitioners do not challenge respondent' s use "of the bank accounts and general ledgers,in determining the 'deficiency amount. See Holland v. United States, 348 U.S. 121, 132 (1954) . Rather, the parties focus on whether petitioners are taxed on the crop sales proceeds ande USDA 'payment s . It is a fundamental tax principle that income is taxed to the party that earned the income: Sec. 61(a) ; United-States v. Baste, 410 U.S.s441 '(1973); Lucas v..eEarl, 281 U.S. 111 (1930). FÍere; t!he income came from soybean and, corn sales and- USDA' . paymentís . Petitioners seem to argue; that the corpõration, not them, should be taxed on the-income because they organized the corporation in a nontaxable, trarisaction that qualified under.1. section 351. Petitioners also assert hat they contribut-ed.the crops and USDA payments to the corporation and therefore ,the corporation earned the income . Petitioners' focus on section 351 is misplaced. ,That 4 section governs the transfer of property to a corporation in exchange for stock in the" corporation. See sec. 351.. Moreover, petitioners faileda to provide any documents demonstrating 'that they transferred the land- or ythe crops t-o the corporation. The only p'roperty that petitioners assignedtor transferred to the corporation was the proceeds from the crop sales and the USDA payments. The assignment of income doctrine provides that a taxpayer cannot escape tax liability for income the taxpayer earned by t ansferring the income to another. Lucas v. Earl, supra. It is equally fundamental that taxpayers may not avoid paying tax on income by transferring crop sales proceeds to à newly organized corporation in a section 351 transaction. Weinberg v. Commissioner, 44 T.C. 233 (1965), affd. in part, revd. in part and remanded sub nom. Commissioner v. Sugar Daddy, Inc., 386 F.2d 836 (9th' Cir. 1967). Mr. Slota owned the farmland and the crops and earned the income when he sold the crops. Further, as the owner of the land and the crops, Mr. Slota, not the corporation, received the payments from the USDA. Accordingly, petitioners received the crop sales proceeds and USDA payments on their own behalf . Petitioners have not presented evidence to show that they transferred the soybeans, the corn or the underlying land to the corporation. Petitioners may not avoid taxation by assigning income they earned to the corporation. Petitioners have the burden of proof, and they have failed to meet that burden. We conclude that petitioners, not the corporation, earned the income from the crop sales and USDA payments. Accordingly, we sustain respondent's determination that petitioners, not the corporation, had unreported income. - 8 - We.next address the accuracy-related penalty. Petitioners ask that we not sustain the penalty because they had a tax adviser prepares the return. Petitioners have, not established, however, that their reliance on their return preparer was reasonable or in good faith. Petitioners failed to submit any evidence showing the return preparer' s experience or qualifications and failed to show ,that they provided all the. necessary and accurate information to a tax adviser. We ,cannot simply accept petitioners' bald ,assertion that they relied upon a tax adviser as a defense against the accuracy-related p,enalty. See Peacock v: Commissioner, T.C. Memo. -2002-122. Accordingly, we sustain respondent's.determination that petiti.oners are liable for the accuracy-related penalty under section 6662 (a) for 2005. We have considered all remaining arguments the parties made and, to the extent not addressed, we ,conclude they are irrelevant, moot, or meritless. To reflect the foregoing Decision will be entered f or respondent .