TAX COURT OPINION

Case: Jose R. Luna & Donna J. Luna
Docket Number: 11843-14
Judge: Gustafson
Opinion Type: bench
Filed: 07/01/2015
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOSE R. LUNA & DONNA J. LUNA, Petitioners, v. ) ) ) MN ) Docket No. 11843-14. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Boston, Massachusetts, on June 9, 2015, 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 the undersigned judge at Boston, Massachusetts, containing his oral fimdings 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 for respondent. (Signed) David Gustafson Judge Dated: Washington, D.C. July 1, 2015 SERVED Jul 01 2015 t Capital Reporting Company 3 Bench Opinion by Judge David Gustafson June 9, 2015 Jose R. Luna and Donna J. Luna v. Commissioner Docket No. 11843-14 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By notices of deficiency dated February 24 and I 1 2 3 4 5 6 7 8 9 10 11 12 13 March 21, 2014 (Exs. 1-J, 2-J), the Internal Revenue 14 15 16 17 18 Service ("IRS") determined deficiencies in the Federal income tax of petitioners Jose R. and Donna J. Luna for the years 2011 and 2012, plus accuracy- related penalties. The issues for us to decide are (1) whether the Lunas are entitled to the American 19 Opportunity Tax Credit (we hold that they are not), 20 and (2) whether they are liable for the penalty (we 21 22 23 24 25 hold that they are). Trial of this case was conducted on June 8, 2015 in Boston, Massachusetts. The Lunas represented themselves; and the respondent, the Commissioner of the IRS, was represented by Sheida Lahabi. 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 19 20 21 22 23 24 25 FINDINGS OF FACT Education expenses The Lunas have three children, born 1997, 2001 and 2003. The Lunas consider the education of their children to be very important. They home-schooled their children until the Autumn of 2011, when they enrolled their three children in Nashua Christian Academy ("NCA"), a private Christian school that offered education from Kindergarten through 12th grade. There is no evidence in the record of this case that NCA is eligible to participate in the student financial aid program of the U.S. Department of Education ("DOE"). Mrs. Luna began to work outside the home in order to pay for the expense of their education. The Lunas paid tuition of $6,623 in 2011 and $6,919 in 2012 to NCA. They also paid several hundred dollars (which we cannot precisely quantify) for school supplies and $213 for school uniforms. In 2012, Mr. Luna enrolled in a graduate degree program in the Intercultural Open University Foundation ("IOUF"). He did not pay anything to IOUF before 2013. There is no evidence in the record of this case that IOUF is eligible to participate in the student financial aid program of the DOE. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Tax returns Using TurboTax software, the Lunas prepared and timely filed their tax returns for 2011 and 2012 (in each case, on April 15 of the following year). They claimed the American Opportunity Tax Credit of section 25A(i), in amounts totaling $6,279 in 2011 and $7,700 in 2012 (including the refundable amounts on line 66 and the nonrefundable amounts on line 49). In so doing, they reported on Form 8863 for each year payments of $4,000 of educational expenses for each of their three children (totaling $12,000 per year) and, for Mr. Luna, $1,000 for 2012. Mr. Luna admitted that, when he prepared the returns, he did not read the instructions accompanying Form 8863. The dispute The IRS refunded to the Lunas the overpayments they reported on their 2011 and 2012 returns, except that the IRS corrected a math error on the 2012 return. Thereafter the IRS examined the Lunas' returns for 2011 and 2012, disallowed the American 21 Opportunity Tax Credits claimed thereon, and issued 22 23 24 25 notices (for 2011 on February 24, 2014, and for 2012 on March 21, 2014), determining the resulting deficiencies in tax. On May 19, 2014, the Lunas filed their petition in this Court challenging those 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 determinations. I. Burden of proof OPINION As a general rule, the IRS's determination is presumed correct, and the taxpayer bears the burden to prove any adjustment to the income the IRS determined. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). II. Education credits 10 Section 25A(i) provides for the American 11 Opportunity Tax Credit. The credit is computed by 12 13 14 15 16 17 18 19 reference to the expenses for "tuition, fees and course materials," sec. 25A(i)(3), that are "paid by the taxpayer during the taxable year", sec. 25A(i)(1)(A), for "postsecondary education," sec. 25A(b)(2)(C), (i)(2), at a qualified educational institution that is eligible to participate in certain aid programs of the DOE, sec. 25A(f)(2). NCA is clearly not a postsecondary institution. 20 Rather, it offered education from Kindergarten 21 22 through 12th grade. The Lunas offered no evidence that NCA qualified for DOE aid programs. 23 Consequently, the Lunas are not entitled to credits 24 25 for amounts paid to NCA. Moreover, the Lunas paid only a little more than half of the $12,000 of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 tuition that they reported. (The lesser amounts paid for school supplies and uniforms are not "tuition, fees and course materials.") Similarly, the Lunas offered no evidence that IOUF qualified for DOE aid programs. More important, they did not prove or even allege that they paid any amounts to IOUF "during the taxable year", sec. 25A(i)(1) (A). Consequently, the Lunas are not entitled to credits in connection with IOUF. III. The Lunas' additional arguments A. Unconstitutional discrimination The Lunas contend that, in distinguishing between postsecondary education (which is eligible for the credit) and other education such as secondary and primary (which is not), section 25A impermissibly discriminates in violation of the 5th and 14th Amendments of the U.S. Constitution. We cannot sustain this contention. Congress is permitted to make reasonable distinctions in pursing its legitimate legislative ends, see Taxation With 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Representation v. United States, 585 F.2d 1219, 1224 22 23 24 (4th Cir. 1978), such as assisting with the cost of college education. To the same effect in the State taxation context, the Supreme Court held in Armour v. 25 City of Indianapolis, 132 S.Ct. 2073 (2012), that a 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 state tax regime could treat classes of individuals differently, without violating the equal protection clause of the 14th Amendment, as long as the distinction had a rational basis. Id. at 2079-2080. The Court also noted that legislatures have broad latitude creating classes and distinctions in tax statutes. Id. at 2080. The distinction in section 25A is rational, and we cannot extend the statute to create benefits it does not confer. B. Estoppel The Lunas point out that the IRS corrected a 12 mathematical error in their 2012 claim of the credit, 13 14 15 16 17 18 19 and they suggest that the IRS should have made any challenges to their claim at that time. In effect, the Lunas suggest that the IRS should be estopped from determining any deficiency after having made such a correction. However, there is no basis in law for such a contention. The actual deadline by which the IRS 20 must assess tax--or must issue a statutory notice of 21 22 23 24 25 deficiency, see sec. 6503(a)(1)--is 3 years after the filing of the return, see sec. 6501(a). In this case the IRS met that deadline as to both 2011 and 2012 when it issued the notices of deficiency. IV. Accuracy-related penalty 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 9 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 Subsection (a) of section 6662 imposes an accuracy-related penalty of 20 percent of any underpayment that is attributable to causes specified in subsection (b). Among the causes justifying the imposition of the penalty is any "substantial understatement" of income tax as defined in section 6662(d). There is a "substantial understatement" of income tax for any taxable year where the amount of the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return for the taxable year or (2) $5,000. Sec. 6662(d)(1)(A). The deficiencies we uphold are more than 10 percent of the amounts they reported and are greater than $5,000. The Commissioner has thus made a showing that the Lunas are liable for the penalty. However, the penalty is not imposed if a taxpayer can demonstrate (1) that he had reasonable cause for the underpayment and (2) that he acted in good faith with respect to the underpayment. Sec. 6664(c)(1). Regulations promulgated under section 6664(c) further provide that the determination of reasonable cause and good faith "is made on a case- by-case basis, taking into account all pertinent facts and circumstances." 26 C.F.R. sec. 1.6664- 4(b)(1). 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 Petitioners urge that they filed their returns in "good faith", but that is not clear; and in any event they did not show "reasonable cause". Mr. Luna claims that, in 2011 and 2012, the TurboTax software failed to distinguish between levels of education in its prompts for the credits; but he did not offer screen shots or other evidence of the software application to corroborate his testimony; and at least for 2012 the face of the form itself (on line 24) plainly requires education that leads to a "postsecondary degree". English is not Mr. Luna's first language (though he is fluent in it), and he testified that his misunderstood the term "postsecondary" because in Mexico a Spanish cognate of "secondary" is used to refer to middle school, so that he thought "post-secondary" education includes high school. But especially if his English is flawed to some extent, he was obliged to consult the instructions, which he acknowledges he did not do. Moreover, even if Mr. Luna did think that "postsecondary" means after middle school, that 22 misunderstanding does not explain why he claimed 23 24 25 credits for all three of his children when (according to their ages) only one of them could have been in high school, and the other two must have been in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 middle school or elementary school. It does not 11 explain why he reported expenses nearly double what they actually paid. The Lunas did not make a persuasive showing of reasonable cause and good faith. Decision will be entered in favor of the Commissioner. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:54 p.m., in the above- entitled matter was concluded.) 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.Capita1ReportingCompany.com