TAX COURT OPINION

Case: Stephen Drah
Docket Number: 11694-13
Judge: Gustafson
Opinion Type: bench
Filed: 03/18/2015
Pages: 10

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 STEPHEN DRAH, Petitioner, v. ) ) ) ) Docket No. 11694-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Washington, D.C., on March 4, 2015, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before the undersigned judge at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. March 18, 2015 SERVED Mar 18 2015 Capital Reporting Company 3 1 Bench Opinion by David Gustafson 2 March 4, 2015 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Stephen Drah v. Commissioner Docket No. 11694-13 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152. By notice of deficiency dated February 25, 2013 (Ex. 2 J), the Internal Revenue Service ("IRS") determined a deficiency in the Federal income tax of petitioner Stephen Drah for the year 2010. By stipulation the parties have resolved most of the issues underlying that notice. However, in dispute is (1) whether Mr. Drah may deduct $35,300 that was 20 withdrawn from his compensation by FedEx Ground and 21 22 23 24 25 placed in his service accounts (we hold that he may not), and (2) whether he is liable for the accuracy- related penalty under section 6662(a) on the underpayment resulting from that erroneous deduction (we hold that he is not liable). Trial of this case 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 4 1 was conducted on March 4, 2015, in Washington, D.C. 2 William Blagogee represented Mr. Drah, and John D. 3 Ellis represented the Commissioner. We find the 4 5 6 following facts: FINDINGS Background. Mr. Drah was born in Ghana, 7 West Africa, and was educated there through the high 8 9 school level. He studied English to some extent in Ghana; but it is not his first language, and he 10 manifests some difficulty in conversing in English. 11 He came to the U.S. in 2002. In 2006 he began 12 working as a delivery driver for FedEx Ground as an 13 14 15 16 17 18 19 20 independent contractor, and continued that work through the year at issue. He owned the truck that he drove for those deliveries. Payments from FedEx. FedEx paid Mr. Drah weekly based on deliveries he made, with enhancements for variations in the distance or complexity of the delivery job. His annual gross compensation for 2010 was $263,389. From the weekly compensation to which 21 Mr. Drah was otherwise due, FedEx deducted various 22 23 24 25 charges before paying him. These withheld amounts totaled $70,776 in 2010. The withheld total consisted of some amounts--totaling $35,476--that, as the parties have stipulated, constituted deductible 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 business expenses. FedEx deposited the remainder of these withheld amounts into so-called "service accounts". Service accounts. FedEx required each driver to maintain a service account for each .6. delivery route to which he was assigned. (Mr. Drah 7 8 9 10 11 12 13 14 15 16 17 18 19 was assigned to two routes.) The purpose of the account was to assure that the driver had money on hand to pay for necessary repairs to his truck, so that FedEx deliveries would not be compromised by the failure of equipment owned by its contractor-drivers. FedEx withheld some of the driver's gross compensation and put it into his account. When a truck needed significant repair, the driver justified the need to his station manager (presenting to him an invoice or an estimate), and the manager then requested that a check be issued to the driver, to be used for the repair. The driver did not actually account for his use of the money, but the station 20 manager was familiar with the driver and with the 21 22 23 24 25 truck and its problems. There is no indication that the money in a service account became the property of FedEx or that the driver forfeited the funds if he stopped working for FedEx. Mr. Drah requested such service account 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 disbursements from time to time in the year 2010, and paid for repairs using those funds. He included the receipts for those repairs among the papers that he gave to his return preparer for the purpose of claiming repairs deductions on his tax return. That is, he claimed deductions for repair expenses paid 7 with service account funds. 8 9 10 11 12 13 14 15 16 17 18 Settlement sheets. Each week FedEx gave each driver a settlement sheet for each of his routes. The sheet shows each.item of compensation, followed by "Adjustments" (some positive allowing extra compensation of some sort, and some negative showing payment for expense or equipment), followed by "Deductions" consisting of, for example, insurance payments that FedEx made on the driver's behalf (which respondent concedes were deductible expenses for the driver) and deposits into the driver's service account (which respondent contends, and we 19 will hold, were not deductible at the time they were 20 withheld). The settlement sheets show both gross compensation (which for Mr. Drah for the year 2010 totaled $263,389, as later reported on Form 1099) and net pay (which for Mr. Drah for 2010 totaled $192,613, as he later reported on his tax return). 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 The settlement sheets are extremely confusing--"difficult", as respondent conceded. 3 Positive and negative amounts are spread through all 4 5 6 the sections on the sheet. The nature of some of the items is unclear; and without tedious computation one cannot tell what the totals of the various 7 withholdings are. The settlement sheets do not 8 9 10 11 12 13 14 15 16 17 18 19 20 21 disclose the portions of the withholdings that are deductible and those that are not. Mr. Drah and the other drivers were confused about the reporting of the service accounts. They came to believe (incorrectly) that amounts deposited into their service accounts (or perhaps amounts disbursed to them from their service accounts) were included on the settlement sheets as "new activity" Increasing gross receipts, even though those amounts had been taken from their gross receipts in the first instance. (Some matching contributions by FedEx to the service accounts were evidently (and properly) treated as "new activity" that increased gross receipts, and anyone studying the settlement sheets 22 might have been further confused if he noticed that 23 24 25 circumstance.) Their station manager was unable to answer the drivers' questions, as were corporate staff sent to explain the system to the drivers. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company . 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 Tax return preparation. When Mr. Drah received his Form 1099 from Fed Ex, he thought (incorrectly) that it had double-counted some of the amounts paid into or out of his service accounts. He therefore took his Form 1099, all of his settlement sheets, and all of his other financial records to a tax attorney who is a return preparer, explained his confusion, and asked the attorney to prepare his return correctly, correcting for any errors in FedEx's Form 1099. The attorney prepared a return that reported only Mr. Drah's net earnings from FedEx. In so doing, he gave Mr. Drah a tax benefit equivalent to deducting the withheld items that constituted deductible expenses, but he also gave Mr. Drah the benefit of excluding from this gross income the amounts withheld and deposited into the service accounts. He also reported, on the return, repair expense deductions that included repairs that had been paid for with money disbursed from the service accounts. Notice of deficiency. The IRS examined Mr. Drah's 2010 return, found that he had failed to report his gross receipts as totaled on the Form 1099, and increased his income accordingly. The IRS 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company issued its notice of deficiency on February 25, 2013; and Mr. Drah filed his petition on May 28, 2013. At that time he resided in Virginia. By the time of trial, the parties had resolved all issues except 9 those we discuss here. OPINION I. General evidentiary principles The IRS's determination is presumed correct, see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), and the taxpayer generally bears the burden of proof, see Rule 142(a). II. Deduction Although amounts deposited into his service accounts were withheld from Mr. Drah's weekly checks, they were put into accounts maintained for his benefit (i.e., to repair his truck) from which he could withdraw upon request. That is, he had not really expended the money when it was withheld from his weekly compensation. Section 162 allows a deduction for "expenses paid or incurred", but as of the time of the withholding, Mr. Drah had not yet paid or incurred anything. Moreover, when he did actually withdraw funds and use them for repairs, he was entitled to claim, and he did claim, deductions for those repairs--deductions that would have been 1 2 3 4 5 6 7 8 9 10 11 12 13 i 14 15 16 17 18 19 20 21 22 23 24 25 866.488.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 20 21 22 duplicative and inappropriate if he had claimed deductions when the amounts were withheld. He is not entitled to deduct the service account contributions. III. Penalty The Commissioner asserts, and we assume, that the amount of the deficiency that will result from disallowance of that deduction will be great enough that the resulting underpayment will be "substantial", for purposes of section 6662(b)(2). We assume that the Commissioner has thereby carried his burden of production for purposes of section 7491(c), so that Mr. Drah will be liable for the accuracy-related penalty unless he can establish a defense of reasonable cause and good faith under section 6664(c)(1). We hold that he has established such a defense. Whether the taxpayer acted with reasonable cause depends on the pertinent facts and circumstances, including his efforts to assess his proper tax liability, his knowledge and experience, and the extent to which he relied on the advice of a tax professional. 26 C.F.R. sec. 1.6664-4(b) (1). 23 Mr. Drah has nothing in his background to suggest any 24 25 level of sophistication regarding taxes. His confusion about FedEx's payment regime was obviously 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 sincere and well justified. The treatment of the service account deposits in particular was confusing. He therefore did exactly what anyone would have advised him to do: He took the problem to a tax professional, gave that professional all of the relevant information, and followed the advice that he received. The Commissioner in effect argues that Mr. Drah should have doubted and contradicted that advice, but we cannot hold that he was obliged to do so. Rather, he did the best he could under the circumstances. We therefore hold that he is not liable for the accuracy-related penalty. So that Mr. Drah's liability for tax can be recalculated, a decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 2:54 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