TAX COURT OPINION

Case: Antonio DeGuzman Pasco & Priscilla R. Pasco
Docket Number: 909-14S
Judge: Wherry
Opinion Type: bench
Filed: 01/20/2015
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 ANTONIO DEGUZMAN PASCO & PRISCILLA R. PASCO, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) Docket No. 909-14S ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of proceedings of this case before Judge Robert A. Wherry in Los Angeles, Califomia on December 8, 2014, containing his oral findings of fact and opinion rendered at the trial session at which this case was calendared. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure (Signed) Robert A. Wherry Judge Dated: Washington, D.C. January 20, 2015 SERVED JAN 2 1 2015 Capital Reporting Company 3 1 2 Bench Opinion by Judge Robert A. Wherry December 8, 2014 3 Antonio DeGuzman Pasco & Priscilla R. Pasco v. 4 5 6 7 8 9 10 11 12 13 14 15 Commissioner Docket No. 909-14S THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT' S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended and Rules 170 through 174 of the Tax Court Rules of 16 Practice and Procedure. 17 18 19 20 21 22 23 24 25 This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure, as in effect for the years at issue in this case. This bench opinion cannot "be relied upon as precedent, except as may be relevant for purposes of establishing the law of the case, res 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 judicata, collateral estoppel, or other similar circumstances." Rule 152(c). The parties submitted a stipulation of facts along with two stipulated exhibits. Exhibit 1- J is a copy of petitioners' 2011 Form 1040, U.S. Individual Income Tax Return. Exhibits 2-J is the notice of deficiency respondent issued to petitioners for their 2011 tax year. At trial, petitioners introduced three additional exhibits. Exhibit 3-P is a Notice CP2005 for petitioners' 2009 tax year reflecting that respondent closed an inquiry into. their 2009 Form 1040 with no amount due (2009 no- change letter). Exhibit 6-P consists of correspondence between petitioner-husband Antonio DeGuzman Pasco and respondent concerning petitioners' 2012 tax year. Exhibit 8-P is a compendium of correspondence with attached exhibits between Mr. DeGuzman Pasco and respondent concerning a CP2000 19 Notice issued by respondent for petitioners' 2011 tax 20 21 22 23 24 25 year, the tax year at issue in this case. These exhibits and the stipulation of facts are incorporated herein by this reference. This proceeding arises from a petition for judicial review of a notice of deficiency issued by respondent on October 21, 2013, with respect to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 petitioners' 2011 tax year. At the time petitioners filed that timely petition, they were residents of 3 California. In the notice of deficiency, respondent 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 determined two noncomputational adjustments to petitioners' jointly-filed 2011 Form 1040: First, respondent determined that, although petitioners had reported $162 of interest income, they had received, and failed to report, an additional $380 of interest income. And second, whereas petitioners had computed the taxable portion of their $30,381 of pension income as $26,063, respondent determined that the remaining $4,318 was also taxable. Respondent also determined a section 6662(a) accuracy-related penalty on the basis of negligence. At trial, petitioners conceded the interest issue, and respondent conceded the accuracy-related penalty. After these concessions, the sole noncomputational issue remaining for decision is 19 whether petitioners' pension income was taxable in 20 21 22 23 24 25 its entirety. Findings of Fact In 1999, petitioner-husband Antonio DeGuzman Pasco retired from the U.S. Navy after 23 years of service, having achieved the senior enlisted rank (E-7) of Chief Petty Officer. He immediately 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 began receiving military retirement pay. Mr. DeGuzman Pasco made no out of pocket monetary contribution of after-tax dollars toward his military pension. After retiring from the Navy, Mr. DeGuzman Pasco went to work for Boeing. He retired in 2004 and began drawing retirement benefits from Boeing. 8 Mr. DeGuzman Pasco made no out of pocket monetary 9 contribution of after-tax dollars toward his Boeing 10 11 12 13 14 15 16 pension. Meanwhile, petitioner-wife Priscilla Pasco worked for K-Mart. She retired in 1996 and began drawing small retirement benefits. Mrs. Pasco made no out of pocket monetary contribution of after-tax dollars towards her K-Mart pension. In 2011, petitioners received $24,195 of 17 military retirement pay, $6,041 of pension payments 18 19 20 21 22 23 24 25 from Boeing, and $145 from K-Mart's pension plan, for a total of $30,381. Mr. DeGuzman Pasco prepared petitioners' 2011 Form 1040. He attempted to do so in accordance with respondent's published instructions for the form, assisted by the form's simplified method worksheet and Internal Revenue Service Publication 525. In determining how to report petitioners' pension receipts, Mr. DeGuzman 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 Pasco aggregated the amounts received from the US. government, Boeing, and K-Mart, and employed the "Simplified Method Worksheet--Lines 16a and 16b" found on page 24 of respondent's Form 1040 instructions. On the basis of his completion of the 6 worksheet, Mr. DeGuzman Pasco concluded that $26,063 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of petitioners' $30,383 of pension receipts were taxable, and that the remaining $4,318 were non- taxable. Mr. DeGuzman Pasco had previously used the simplified method worksheet to compute taxable pension income in preparing petitioners' 2008, 2009, and 2010 income tax returns. With regard to each of these tax years, he had received correspondence from respondent alleging that additional tax was due. However, these inquiries had been resolved, largely favorably for petitioners, after Mr. DeGuzman Pasco sent respondent detailed explanations of how he had computed petitioners' tax liability, including through use of the simplified method worksheet. The dispute in 2009 had even progressed to the filing of another U.S. Tax Court case, docket No. 4226-12S. This dispute, like the others, was settled when respondent conceded the issues, and the case was resolved without trial by means of a stipulated 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 decision agreed between the parties of no deficiency or overpayment. Mr. DeGuzman Pasco thus used the 3 worksheet again in preparing petitioners' returns for 4 5 6 7 8 9 2011, the year at issue, and for 2012. On July 29, 2013, respondent mailed petitioners a notice of deficiency for their 2011 tax year. In the notice, respondent determined, inter alia, that petitioners' $30,383 of pension receipts were taxable in full. Petitioners timely filed a 10 petition with this Court on January 15, 2014, in 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 which they challenged that determination. A trial was held in Los Angeles, California on December 1, 2014. Discussion The parties do not dispute the amounts or sources of pension income petitioners received in 2011, but only the extent to which those amounts are taxable. Petitioners contend that their pensions were only partially taxable, that they properly computed the taxable portions, and that in any event, respondent approved their computation method in other tax years. I. Taxability of Pension Benefits Section 61(a)(11) specifically identifies pensions as a component of gross income. The 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 regulations explain that "[p]ensions and retirement allowances paid either by the Government or by private persons constitute gross income unless excluded by law." Sec. 1.61-11(a), Income Tax Regs. "[W]here the taxpayer did not contribute to the cost of a pension and was not taxable on his employer's contribution the full amount of the pension is to be included in his gross income." Id. Petitioners readily admit that they did not contribute toward the cost^ of their pensions, and S that they were not taxable on any portion of their employers' pension plan contributions. Mr. DeGuzman Pasco testified that neither he nor his wife was ever required to make or otherwise made any contribution, 15 with either pre- or post-tax dollars, to their 16 17 18 19 20 respective employers' pension plans. On the worksheet petitioners used to compute the taxable portion of their pension receipts, they entered a dash, presumably meaning zero. Finally, each of the three Forms 1099-R, Distributions From Pensions, 21 Annuities, Retirement, or Profit-Sharing Plans, IRAs, 22 23 24 25 Insurance Contracts, etc., that petitioners received for 2011 from their former employers' pension plans reports no value for total employee contributions. . Because petitioners did not contribute to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 the cost of their pensions, none of their pension receipts could constitute the return of previously- taxed income. Hence, no portion of the pension receipts were excludible for this reason, and the full amounts of petitioners' pension receipts represented gross income and were taxable. II. Computation of Taxable Portion Petitioners contend that, in reporting a portion of their pension income as nontaxable, they simply followed respondent's 2011 instructions to Form 1040. As an initial matter, whatever those instructions may have said, they did not have the force of law and cannot alter the conclusion compelled by the internal Revenue Code and the regulations thereunder that petitioners' pensions were taxable in full. Zimmerman v. Commissioner, 71 T.C. 367,371(1978) (explaining that "the authoritative sources of Federal tax law are in the statutes, regulations, and judicial decision"), aff'd 20 without published opinion, 614 F.2d 1294(2d Cir. 21 22 23 24 25 1979); Richmond v. Commissioner, T.C. Memo. 2009- 207,98 T.C.M. (CCH) 208,209(2009) (noting that "the instructions to Form 1040***are also not authoritative sources of Federal tax law"). Moreover, it is readily apparent that 866.488.DEPO www,CapitalReportingCompany.com 1 2 3 4 5 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company 11 petitioners misinterpreted those instructions. On Page 23, in reference to pensions and annuities reported on lines 16a and 16b of.Form 1040, the instructions state, in pertinent part: Fully Taxable Pensions and Annuities Your payments are fully taxable if (a) you did not contribute to the cost your pensions or annuity***. annuity is fully taxable, enter the total Pension or annuity payments (from Forms(s) 1099- R, box 1) on line 16b; do not make an entry on line 16a. If your penslon or (see Cost, later) of Fully taxable pensions and annuities also include military retirement pay***. On page 25, the instructions define "cost" as the taxpayer's "net investment in the plan as of the annuity starting date." As they acknowledge, petitioners never invested in their pension plans, and one of petitioners' pensions consisted of military retirement pay. Pursuant to the instructions, then, their three sources of pension income were fully taxable, and the total payments should have been reported on line 16b. Had they followed respondent's instructions, petitioners would not have computed the taxable portion of their pension income using the simplified method worksheet, which the instructions explain is to be used only in certain circumstances, and only for partially taxable pensions. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 During his testimony, Mr. DeGuzman Pasco framed the question presented in this case as whether petitioners were entitled to use the simplified 4 method worksheet. According to respondent's 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 instructions, petitioners were not entitled to use the worksheet. Regardless, had petitioners completed the worksheet properly, it would have produced the correct answer: that their pensions were taxable in full. A note at the top of the worksheet explained that the taxable portion of each pension source should be computed separately, but in petitioners' case, aggregation does not affect the outcome. On line la of the worksheet, petitioners were directed to enter the total pension payments from Form 1099-R, box 1. Petitioners correctly entered $30,383. On line 2 of the worksheet, petitioners were directed to enter their cost in the pension plan at the annuity starting date. Petitioners correctly entered no amount on this line. On line 3, petitioners were directed to enter the appropriate number from a table. 23 Petitioners entered "360". There is insufficient 24 25 information in the record to ascertain whether this number was correct but under the facts of this case 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 it will not matter what this number should have been. On line 4, petitioners were directed to divide line 2 by line 3. Petitioners correctly divided nothing by 360 and entered nothing. On line 5, petitioners were directed to 6 multiply line 4 by the number of months for which 7 pension payments were made during the tax year. 8 Petitioners entered "4,320", presumably because they 9 received pension payments in all 12 months of the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 year and this is the unrounded amount that they thought was tax free. On line 6, petitioners were directed to enter the amount, if any, recovered tax free in prior years. Petitioners entered $52,157". Because they had never contributed to the costs of their pensions, petitioners' pensions were fully taxable in prior years, so they should not have recovered any amounts tax free in prior years. The amount on line 6 should thus have been zero. Because respondent apparently accepted petitioners' reporting for tax years before 2011, however, petitioners. may actually have recovered $52,157 tax free in prior years. On Line 7, petitioners were directed to subtract line 6 from line 2. Here, they went astray. 25 Petitioners entered "52,157", but the amount on line 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 2, zero, minus $52,157, is -$52,157. If we disregard petitioners' improper windfall tax free recoveries in prior years, the amount on line 6 would have been zero, so the amount on line 7 would have been zero, 14 too. On line 8, petitioners were directed to enter the small of line 5 or line 7. They entered "4,320". But the lesser of the amount on line 5, $4,320, and the amount that should have been on line 7--either -$52,157 or zero, if prior tax free recoveries are disregarded--the lesser amount which should have been entered on line 8, is not $4,320. It is either -$52,157 or zero. On line 9, petitioners were directed to subtract line 8 from line 1. They entered $26,063, or $30,383 minus $4,320. They should have entered either $30,383 minus an additional -$52,157, which equals $80,540 since subtracting a negative number is the same as adding the positive form of that number, or $30,383 minus zero, which equals $30,383. Hence, if we disregard their prior tax free recoveries, correctly completing the worksheet would have led petitioners to treat their entire $30,383 of pension payments as taxable income. If we take their prior tax free recoveries into account, correctly 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 completing the worksheet would have led petitioners to the conclusion that they owed tax not only on their current-year pension receipts of $30,383, but also on the $52,157 they apparently recovered tax free in prior years. We have provided the foregoing, detailed explanation of the simplified method worksheet because Mr. DeGuzman Pasco testified that he strives to compute his tax liability accurately, and the 10 Court found him sincere. In sum, however, 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 respondent's 2011 instructions to Form 1040, and the simplified method worksheet in particular, do not support petitioners' contention that a portion of their pension income was non-taxable. III. Applicability of Equitable Estoppel Petitioners, quite reasonably, express bewilderment and frustration at the fact that in at least one and also apparently in other tax years, respondent accepted their treatment of their pension income as only partially taxable and their use of the simplified method worksheet. At trial, they introduced correspondence with respondent concerning their 2012 tax year, including a notice of deficiency in which respondent made determinations essentially identical to those at issue here. Mr. DeGuzman Pasco 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 responded in writing to that notice of deficiency, 2 making the same argument concerning the simplified 3 method worksheet that he made here. Less than two 4 months after issuing the notice of deficiency, 5 6 7 8 respondent mailed petitioners a notice stating that their 2012 Form 1040 inquiry was closed, with no amount due. Mr. DeGuzman Pasco also testified that respondent questioned, and then acquiesced in, 9 petitioners' computation of the taxable portion of their pension receipts in prior tax years. Petitioners' evidence implicates the doctrine of equitable estoppel.1 "Equitable estoppel is a juridical doctrine that 'precludes a party from denying his own acts or representations which induced 10 11 12 13 14 15 16 18 19 20 21 22 23 24 IIt does not implicate collateral estoppel, however. Collateral estoppel precludes a party from relitigating an issue actually determined in prior litigation. See Montana v. United States, 440 U.S. 147,153(1979)("Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.") Here, notice of the petition in docket No. 4226-12S, which petitioners sought redetermination of a deficiency respondent determined for their 2009 taxable year, and of deficiency that resolved that case. Because the 2009 notice of deficiency made no determination concerning the stipulated decision of no that determination jurisdiction, the Court takes judicial in 25 Petitioners' pension income, collateral estoppel is not relevant. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 another to act to his detriment.'" Hofstetter v. Commissioner, 98 T.C. 695,700(1992)(quoting Graff v. Commissioner, 74 T.C. 743,761(1980), aff'd 673 F.2d 784 (5th Cir. 1982)). This Court applies the doctrine of equitable estoppel "against the Government 'with the utmost caution and restraint.'" Boulez v. Commissioner, 76 T.C. 209,214-215 (1981)(quoting Estate of Emerson v. Commissioner, 67 T.C. 612,617- 618(1977)), aff'd 810 F.2d 209 (D.C. Cir. 1987), cert. denied, 484 U.S. 896(1987). To invoke the doctrine of equitable estoppel against the United States, petitioners must satisfy five elements: "(1) A false representation or wrongful, misleading silence by the party against whom" estoppel is to be invoked; "(2) an error in a statement of fact and not in an opinion or statement of law; (3) ignorance of the true facts" by the taxpayer; "(4) reasonable reliance on the act;[] or statement[]" by the taxpayer; and (5) detriment suffered by the taxpayer because of the false representation or wrongful, misleading silence. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Norfolk .S. Corp. v. Commissioner, 104 T.C. 23 24 25 13,60(1995), aff'd, 140 F. 3d 240(4th Cir. 1998). Here, although petitioners' evidence indicates they computed the taxable portion of their 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 pension receipts for 2012 in the same, improper. 2 manner as in 2011, respondent closed his inquiry into 3 their 2012 tax year making no adjustments. 4 Petitioners' evidence suggests the same sequence of 5 6 7 8 9 10 11 12 events may have occurred in 2008, 2009, and 2010. These consistent actions imply a predicate legal conclusion by respondent that petitioners' tax returns correctly reported their income tax liability, and they could be construed as misleading silence, thereby satisfying the first element of equitable estoppel. However, to the extent respondent's actions 13 misled petitioners, respondent misled them with 14 15 16 17 18 19 20 21 22 23 24 25 respect to the tax law applicable to their pension receipts, not with respect to any facts. Indeed, petitioners are and have always been well aware of the principal fact relevant to their pensions' taxability--that is, that they never invested in their pension plans. Hence, petitioners have not satisfied the second and third elements. Moreover, although petitioners may have gained confidence in their use of the simplified method worksheet from respondent's misleading silence, petitioners have never suggested that, but for respondent's apparent acquiescence, they would have computed their 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 pensions' taxability differently. Petitioners thus have not demonstrated the fourth and fifth elements. In sum, petitioners have not satisfied the requisite elements of equitable estoppel, and we will not apply the doctrine to respondent here. Accordingly, the Court will sustain respondent's determination that petitioners' pension income was taxable in its entirety. To reflect the foregoing, decision will be entered under Rule 155. THIS CONCLUDES THE COURT' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 1:08 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com