TAX COURT OPINION

Case: Steven Cusack & Mary Cusack
Docket Number: 6628-17S
Judge: Carluzzo
Opinion Type: bench
Filed: 04/05/2018
Pages: 8

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 STEVEN CUSACK & MARY CUSACK, Petitioners, v. ) ) ) ) Docket No. 6628-17S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ORDER 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Chief Special Trial Judge Lewis R. Carluzzo at Boston, Massachusetts, 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, a decision will be entered under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. April 5, 2018 SERVED Apr 05 2018 Bench Opinion by Special Trial Judge Lewis R. Carluzzo March 21, 2018 Steven Cusack & Mary Cusack v. Commissioner of Internal 3 Revenue Docket No. 6628-17S 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 (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and 1 2 3 4 5 6 7 8 9 10 11 12 Rule references are to the Tax Court Rules of Practice and 13 Procedure. This bench opinion is made pursuant to the 14 authority granted by section 7459(b) and Rule 152. 15 This proceeding for the redetermination of a 16 deficiency is a small tax case subject to the provisions 17 of section 7463 and Rules 170 through 174. Except as 18 provided in Rule 152(c), this bench opinion shall not be 19 cited as authority, and pursuant to section 7463(b) the 20 decision entered in this case shall not be treated as 21 22 precedent for any other case. Steven Cusack (petitioner) appeared on his own 23 behalf. Mary Cusack did not appear at trial, but she 24 25 signed the stipulation of facts that was admitted into evidence. R. Jeffrey Knight and Francesca Chou appeared 1973)406-2250 operations@escribetsmet www.escribersmet 4 1 2 3 4 5 6 7 8 9 10 11 on behalf of respondent. In a notice of deficiency dated February 21, 2017 (notice), respondent determined a deficiency in petitioners' 2014 Federal income tax and imposed a section 6662(a) penalty. According to the notice, the penalty is applicable because the underpayment of tax required to have been shown on petitioners' 2014 Federal income tax return (return) is a substantial understatement of income tax within the meaning of section 6662(d). Petitioners now concede the deficiency. They dispute the imposition of the penalty. The issue for 12 decision is whether petitioners acted in good faith and 13 14 15 demonstrated reasonable cause for the underpayment of tax required to have been shown on their return. Before summarizing the relevant facts as we 16 would normally do, we think it more appropriate to briefly 17 outline the applicable law that will inform our decision, 18 and begin by noting that section 6662(a) imposes an 19 accuracy-related penalty on "any portion of an 20 21 underpayment of tax required to be shown on a return". Sec. 6662(a). Respondent bears the burden of production 22 with respect to the imposition of the penalty, see sec. 23 24 7491(c), and that burden includes establishing that the imposition of the penalty was appropriately approved by 25 the immediate supervisor, or higher level official, of the (973)406-2250loperationseescribetsmetlwwwasenbersmet 1 2 3 4 5 6 7 8 9 person who made the initial determination to impose the penalty. See sec. 6751(b). The section 6662(a) penalty does not apply to the portion of the underpayment of tax shown to be due to reasonable cause and good faith on the part of the taxpayer. See sec. 6664(c). In this case, the deficiency, the underpayment of tax, and the understatement of income tax are all computed in the same manner. See secs. 6211(a), 6664(a), 6662(d) (2)(A). Taking into account the tax shown on the 10 return and the amount of the deficiency determined in the 11 notice, it is clear that the underpayment of tax is a 12 13 14 substantial understatement of income tax because the underpayment exceeds $5,000. See sec. 6662(d)(1)(A). That being so, and because respondent has introduced 15 sufficient evidence to establish that the imposition of 16 17 the penalty was approved in writing as required under section 6751(b), respondent has met his burden of 18 production with respect to the imposition of the penalty, 19 20 and we turn our attention to petitioners' claim that they had reasonable cause and acted in good faith in connection 21 with the underpayment/deficiency. The burden of proof in 22 23 24 25 this regard rests with petitioners. See Rule 142(a); , 116 T.C. 438, 446-447 (2001). Whether a taxpayer acted with "reasonable cause and in good faith is determined on a case-by-case basis, (973}4½2250|operatiomeerribermetlwwwascribersaat 6 taking into account all pertinent facts and circumstances", sec. 1.6664-4(b)(1), Income Tax Regs., including "the taxpayer's mental and physical condition, as well as sophistication with respect to the tax laws, at the time the return was filed." Kees v. Commissioner, T.C. Memo. 1999-41; see also Hughes v. Commissioner, T.C. Memo. 2015-89. The Court also recognizes that a downturn in a taxpayer's financial status, such as the loss of a job, or foreclosure on a house, around the time a tax return is filed can excuse a mistake and constitute reasonable cause for an underpayment of tax on that return. See Abdelhak v. Commissioner, T.C. Memo. 2006- 158. With these fundamental principles in mind, we turn our attention to the "facts and circumstances" relied upon by petitioners to support their claim that they had reasonable cause and acted in good faith with respect to the underpayment of tax required to be shown on their return. Those facts and circumstances are summarized below. At all times relevant, petitioners maintained a traditional individual retirement account (IRA) at Chase 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Bank (Chase). Because of petitioner's employment and 24 25 living situations during 2014, petitioners made five or six withdrawals totaling $36,500 from the IRA in order to (973)406-2250loperations@escribersmet|wwmesaibersaet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 pay basic living expenses. A Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., issued by Chase to petitioners for 2014 shows a taxable distribution of only $2,780, which amount is reported on petitioners' return. The balance of the IRA distributions are not reported on petitioners' return. Neither are two other items of income that we need not address in this bench opinion because the amount of each, now conceded by petitioners, is de minimis. According to petitioner, Chase's failure to show the total amount of the IRA distributions on the Form 1099-R, or to issue an additional, or corrected Form 1099-R showing the balance of the IRA distributions, was due to the internal operations of Chase. Otherwise, the return, which was prepared by a paid income tax return service, shows adjusted gross income of $135,898, consisting primarily of wage income earned and received by one or the other petitioner. Mathematically speaking, petitioners omitted 21 more than 20% of their income from their return. We can 22 23 24 25 understand petitioner's distraction with the various personal and financial problems they were experiencing at the time, but we cannot understand their failure to detect that the income reported on the return was severely 973)406-2250|operations@escribermetiwww.esaibersaet 8 1 2 3 4 5 6 7 8 9 understated. Petitioners were obviously aware that the IRA distributions were made, and we sympathize with them for the reasons that the distributions had to be made, but we cannot excuse their failure to question the relatively low amount the return preparer included on the return as an IRA distribution, knowing that the distributions were necessary because their combined wages and other sources of income apparently were insufficient to satisfy their basic living expenses. One or both of them must have 10 known that the amount shown on the return as an IRA 11 distribution was understated. That being so, their claim 12 that they acted in good faith and had reasonable cause 13 with respect to the underpayment of tax that resulted from 14 15 16 17 the under reporting of the IRA distributions must be rejected. To reflect the foregoing, and because the record shows that a portion of the deficiency has already been 18 paid by petitioners, the Decision to be entered in this 19 case will be entered under Rule 155 to ensure that the assessments, if any, of those payments are properly accounted for in the amount of the deficiency to be shown on the Decision. 20 21 22 23 24 25 Crber 973)406-2250 operations@escribersnet wwwascribersmet This concludes the Court's bench opinion in this 9 case. (Whereupon, at 2:36 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 (973}406.2250|operatkmseescribersmet|wwwascrbersmet