TAX COURT OPINION

Case: Luke A. Weinstein
Docket Number: 23245-10
Judge: Goeke
Opinion Type: bench
Filed: 01/04/2012
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 LUISE A. WEINSTEIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) O R D E R Docket No , . 23245-10. Pursuant to it is Procedure, Rule 152 (b) , Tax Court Rules of Practice and the Clerk of the Court. shall transmit herewith to ORDERED. that copy of the pages of the transcript respondent Petitioner and to of the trial in the above. case before Judge Joseph Robert Goeke at Hartford, Connecticut, on Oct ober 28, 2011, containing his oral findings of the trial. the conclusion of . fact and opinio rendered at In accordance with the oral fiact and opinion a decision . will be entered ur der Rule 155, Tax Court Rules of Practice and Procedure . findings of (Signed) Joseph Robert Goeke udge Dated: Washington, D . C. January 4, 2012 ERVED JAN 5 2012 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 Jud e Joseph Robert Goeke Weinstein v. Commiss oner Docket No. 23245-10 October 28, 2011 THE COURT: The court has decided to render oral findings of fact and opinion in this case, ançl the following repres nts the courts oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. Hereinafter in this opinion references to rules will be to the tax court rules of practice and procedure, and section references will be to the Internal Revenue code in e f f ec t in 20 Ö7 . This case is be ore the court based upon the court's deficiency j risdiction when the tagayer has timely filed a petition seeking review of a determination by respondent in a notice of deficiency. In the present case respondent determined deficiencies in income tax iar add tion to tax for the years 2007 and 2008. The additions to tax are on account of negligence and substantial understatement pursuant to Section 6662 (a) . Thys opinion is issued pursuant to Rule 152 of the tax court rules of. practice and procedure. The burdén of proof regarding the remaining issue in t iis case is on the petitioner 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 pursuant to Rule 142 (a) . The parties have resolved all of the issues in this case with the exception of the addition to tax under Section 6662 (a) for the year 2007. To understand the application of the addition to tax. it is necessary to reference information reflected in the income tax return filed by the petitioner for 2007. The return and other documents were stipulated by the parties as well as c rtain other information, and a stipulation of facts was supplemented by testimony from the petitioner. The petitioner resided in Connecticut at the time the petition was fil d. The petitioner timely filed his federal income tax return for 2007. On that return he reflected income earned in his employment and a significant ca ital gain, as well as dividends and interest. . He al o reflected a. net operating loss in the amount of $26 ,489. This net operating loss is the source of respon ent's assertion that the petitioner should be subject to the additions of tax under Section 6662 (a) . The net operating loss flowed from petitioner's 2006 taxable year on which he claimed an alimony d duction of $350,000. Petitioner is a highly intelligent individual with advanced degree in engineering and computer 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 software. He preparpd.his own income tax return for 2007 and did.his òwn personal research into the tax law in.making decisions relative to the return. He did not rely upon a rofessional tax advisor or return preparer relative to his 2Ê07 federal income tax return. Petition r reaÊized that Publication 529 prepared by the Internal Revenue Service provides that alimony should not b included in a net operating loss computation. Petiti ner acknowledged in his testimony that he reviewed Pub icat on 529. He, however, then determined to look directly at the Internal Revenue code provlslons. governing net operating loss, and he found that net operat ing losses·were appropriate if they were based up n business related1 losses. Petitioner ratibnalized that thei $350,000 alimony payment in question was.triggered by a re-visitation of his alimony oblig tions and support obligations after the Supreme coprt of Connecticut determined that he had failed to properly advise his former spouse of . the sale of a busine s interest he held which resulted in proceeds in excess of 1.2 million dollars. - Because these proceeds related to a business he rationalized that despite Publication 529.he should be able to take the net·operating loss associated with the additional $350,000 payment he made to his former spouse. 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 In a prior opinion of this court we determined that this $350, 000 p yment in 2006 . was not properly deducted as alimony, but that treatment is not crucial to the analysis in t e present case. Rather, the analysis in the pres nt case is whether even if such amount was properly deducted as alimony in 2006, ft was appropriate to ort the net operating loss on the 2007 return under the circumstances in question. Because the petition r did not seek any professional advice relative to his decision to disregard Publication 529 we n rmally would end the analysis at this point. However, the pe itioner asserts that he was conservative in his analysis concerning the net operating loss and hat he did. an alternative computation of his t x liability for 2007 using computer software, w ich he believ eflected his appropriate tax liab lity had he not claimed the NOL. He.asserts that this software computation actually . 20. demonstrated a tax liability as reflected on Line 45 21 22 23 24 25 and 46 of Form 1040 that was less than the amount he actually reported, so. he believes he was conservative in using the amount generated with the NOL as opposed to än amount he computed without the NOL. Obviously, petitioner's software.computation of a tax liäbility .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 without the NOL was inaccurate . disallowing the NOL the parties have stipulated that petitioner had a deficiency based upón the amounts he reported with.the NOL, and that that deficiency was $6,864. The question is whether petitioner's credible reliance upon the software based.upon his testimony is sufficient to provide reasonable cause concerning the addition to tax.. We note that without the NOL petitioner had taxable income for the year 2007 in excess of $100,000 before taking into account itemized deductions. And the petitioner reflected alternative minimum tax liability on the 2007 return of $9,648, which after being re uced by credits was reflected as $8, 541. One final factual point is that the petitioner maintains that because of estimated tax payments and withholding, he subs antially overstated his 2007 tax liability as reflect d on his 2007 return, and had an overpayment of $8,.805 on the return. He maintains that the fact that h had this overpayment amount used to be applied to his estimated tax for 2008.should be taken into account in deciding whether he is subject to.the addition to tax. Section 6662(a) imposes an addition to tax on any portion of an underp yment of tax required to be shown Heritage Reporting Corporation (202) 628-4888 8 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 on a return in an amount equal to 20 percent of the portion of the underpayment to which the section applies. Subsection (b) of Section 6662 describes the situations where. an underpayment to which the section would apply is att i utable. Subsection Jb refereNces negligenc or disregard of rules and regulations . Subsec ion. (b) (2) describes a substantial understa ement of income tax. Under Section 6662 (d) subs antial understatement of income tax is more fully explained to include an understatement which exceeds $5,000. In fact, the deficiency which petitioner has agreed to in the present case does ex eed $5, 000, so on its face the addition to tax on this Section 6662 (b) would apply to the current case . S ction 6664 (c) provides that no penalty under Section 6662 will be applied with respect to the porti n of the underpayment if it is shown that there was a reasonable cause for such portion and that the t-axpayer acted in good faith with respect to such portion. The present dispute turns on whether petitioner's stated recalculation using his software in 2007 would be sufficient to pro ide him reasonable cause for his . decision to . disregar Publication 529 and make a determination that h was entitled to. an NOL carried 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 forward fròm 2006. The facts at trial also demònstrated that tlie petitioner miscalculated the NOL even assuming that it was focused on the $350,000 payment in 2006, and that that use of that payment as an NOL f igure woulà%e been correct . Mechanically he included itemized deductions every year in the amounts which he used to carry the NOL from 2006 to 2007 and from 2007 to 2008.9 This inflated the amount of the deduction and in effect included personal items as business items subject to the NOL. Nevertheless, if petitioner's reliance upon his recalculation using the software is reasonable he would avoid the addition to . tax. In Bunney v. Conmissioner 114TC 259 (2000) this court addressed the application of Section 6662 (a) to a situation where the taxpaýer asserted reliance upon computer software. We noted in Bunney that the petitioner will avoi1. the addition to, tax if the record shows that he made a reasonable attempt to comply with the provisions of the Internal Revenue code, and that.he wan not.careless, reckless, or had not intentionally disregarded the rules and regulations . Negligence connotes a lack of due care òr a failure to do waat is reasonable and prudent · under the circumstances, Allen v. Commissioner Heritage Reporting Corporation 202) 628 4888 - 10 1 2 3 5 6 7 8 . 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 92TC1 (1989) af f irmed 925F 2nd 34 8 (9th Circuit 1991) . We also note . that as a threshold matter petitioner's bas1c position that the $350,000 payment in 2006 would be subject to an alimony deduction and also subject to net operating loss carried forward does not satisfy the threshold of an arguable, but fairly and 1 ely t prevail position as described in Treasu tion . 6662 -4 (d) (2) income tax regs . In fact, the position is simply inaccurate, and had petitioner sought thë advice from a professional he should've been advis d that his position was simply wrong as is reflected in the Publication 529, which he referenced. Regarding the reliance upon computer sof tware we noted in..Bunney at 267 that "tax preparation software is only as good as the information one puts into it. Petitioner has not shown that any of the conceded issues were anything but the result of! his own negligence or disregard of regulations . " We believe that quotation could very well apply to the facts of the present case . A though petitioner maintains that the software incorrec ly showed a number that was less than. the amount he tually reported once he had removed the. NOL, we believe this result was too good to be true. Heritage Reporting Cor oration (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 11 The phrase too good to be true w|as used in McCrary v. Commissidner 92TC 827, 850. (1989) . McCrary involved a situation involving an investment in a tax shelter, but the analysis requiring the taxpayer to take extra steps when the result being sought did not accord with common a nse applies to the present situation. Here he petitioner had income in excess of $100,000 which was totally offset by the NOL he claimed on the return he filed. Nevertheless, after he removed the NOL from his software he obtained a tax result which was better for him than the amount he obtained claiming the NOL. We believe a person of the petitioner's intelligence should've reali2ed this defied logic, and that he should've ma e some brief and succinct inquiries that would ve reflected by reference to tax tables that his taxa le income (cid:16)042+er+ieb-i-lèt-y1 her than the amount he was reflectinge . Given this we cannot f ind pe t1oner' s reliance upon the second software run of his ax return without the NOL is suf f icient to provide reasonable cause . While we accept his testimony that he did, in fact, do this second run we believe either through petitioner' s error or the softwar there was a significant Heritage Reporting Corporation (202) 628-4888 / 12 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 discrepancy and that this discrepancy required further inquiry by the petitioner Similar to the further inquiry, which this court found was required of taxpayers in Woodsome v. Commissioner 136TC 29 (June 13th, 2011) . Applying the standard of Henry Schwartz Corporation v. Commissioner 60TC 728, 740 (1973) that we considered the taxpayers action in light of the taxpayers experiences and the specific circumstanc find that the addition to tax was appropriately asserted by the respondent under the facts of this specific case. Therefore, regarding the addition to tax ü7e .uphold respondent's determination. Because of the settlement by the parties of all the other issues in the case and the need for a further analysis of the computations involved a Rule 155 computation will be necessary to submit to the court the actual addition to tax, which will follow from this court's opinion. This concludes the court's oral findings of facts and opinion in this case. (Whereupon, at 12:43 p.m., the bench opinion in the above-entitled matter was concluded.) // // // Heritage Reporting Corporation (202) 628-4888