TAX COURT OPINION

Case: Robert C. Jacobsen & Carol S. Jacobsen
Docket Number: 28714-12
Judge: Holmes
Opinion Type: bench
Filed: 11/17/2014
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 ROBERT C. JACOBSEN & CAROL S. JACOBSEN, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 28714-12. ) ) ) ) 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the aböve case before Judge Mark V. Holmes at Phoenix, AZ, on October 1, 2014 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) Mark V. Holmes Judge Dated: Washington, D.C. November 17, 2014 SERVED NOV 2 0 2014 Capital Reporting Company 3 1 Bench Opinion by Judge Mark V. Holmes 2 October 1, 2014 3 4 5 6 7 Robert C. Jacobsen & Carol S. Jacobsen v. Commissioner Docket: 28714-12 THE COURT: In the case of Robert C. Jacobsen and Carol S. Jacobson v. Commissioner, Docket No. 28714-12, the Court has decided to render 8 Oral Findings of Fact and Opinion in this case and 9 the following is the court's Oral Findings of Fact 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and Opinion. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice and Procedure. Both of the Jacobsens were residents of Arizona when they filed their petition in this case. The parties didn't quite reach a stipulation, but the Jacobsens did not respond to my order to show cause under Rule 91(f) of the Tax Court's Rules and so those proposed stipulations are deemed stipulated when I made that order to show cause absolute. This case arises from the Jacobsen's 2010 tax year. Mrs. Jacobsen did not appear, but Mr. Jacobsen did. However, he didn't choose to testify, instead choosing only to question the government's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 revenue agent about the audit and her adjustments. This was not typical ef cour of a tax court case, but it wasn't objected to by the Commissioner. After concessions by the government there are eight issues plus the penalty to be decided. Those issues are whether the Jacobsens failed to include gambling winnings of $57,653 in their taxable income. Two, whether the Jacobsens failed to include retirement distributions that were taxable in the 10 amount of $23,174 in their taxable income. Three, 11 whether the Jacobsen's failed to include the taxable 12 qualified dividends in the amount of $10,814. Four, 13 whether they were entitled to deduct IRA 14 contributions in the amount of $11,000. Five, 15 whether they were entitled to deduct self-employed 16 health insurance premiums in the amount of $3,144. 17 18 19 20 Six, whether they were entitled to deduct the contributions to a SEP plan in the amount of $27,700. Seven, whether the Jacobsens were entitled to deduct investment interest expense in the amount of $22,897. 21 Eight, whether the Jacobsens are entitled to deduct 22 23 24 25 any losses they might have incurred from Hurricane Irene from their taxable income for the year 2010. And then the last issue, as I said, was whether penalty is appropriate under section 6662(a). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 I'll go over the income issues first. The first of the income issues is Mr. Jacobsen's gambling 3 winningsg $112,839 was reported by the third parties 4 5 6 to the IRS, but the Jacobsens reported on their return only $55,186, leaving off $57,653. As usual gamblers, they do usually have offsetting or 7 partially offsetting losses. And indeed the IRS 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 computed Mr. Jacobsen's gambling losses; Mrs. Jacobsen had some losses of her own that she claimed. By counting the actual cost of the tickets that Mr. Jacobsen used for three months, adding up that figure, Mr. Jacobsen's own representations of their totals & according to the schedules that he submitted for the remaining nine months and subtracting the portion of the petitioners' totals that represent their unsupported estimates. In other words, the IRS checked the receipts, losing tickets, losing lottery tickets, that kind of thing. In the end the IRS concluded that the Jacobsens should be allowed gambling losses as an itemized deduction of - - $51QQ 726. And I conclude that in fact the IRS was correct that the $112,839 in the added income was 23 partially offset by this $51,726 as an itemized deduction. 24 25 The second item of income at issue was the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 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 unreported retirement distributions. These were shown on the return as $239,904. There appears to have been a minor transcription error of four dollars here and I'll let that go. The Jacobsens proved that $29,250 of this had been a rollover which is not included in the taxable income. That left $210,654 in the total amount of taxable distributions. They had claimed on the return, however, $187,480 which leaves a total of unreported of $23,174 which I fear the LRSs did not report on the return when they should have. The third and last item of income that was disputed between the parties is the question of the Jacobsons' unreported qualified dividends. This was unusual because the Jacobsens actually reported $10,814 in qualified dividends but only zero in total dividends. That doesn't make sense. It's clearly wrong. I have no idea why the Jacobsens didn't concede this issue. My conclusion, of course, is that all the qualified dividends should have been included in taxable income. I'll next deal with the disputed expunges from the gross income; not quite deductions but they're usually counted as exclusions on the part of the front of the 1040. Here there were again three 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 items. The first is $27,700 in SEP simple or qualified plans. These are available only to those taxpayers who have self-employment income, and no proof is offered by Mr. Jacobsen whatsoever that he had any self-employment income, certainly none appears on the face of his return. My conclusion, of course, has to be that the IRS is correct is disallowing his exclusion from his income. The second item of exclusion was $3,144 in self-employed health insurance exclusion. The IRS decided here to disallow this deduction because, again, the Jacobsens did not report any net earnings from self-employment, and this exclusion is available only for those taxpayers who do so. However, the IRS did allow this $3,144 as an itemized deduction for 16 medical expenses on schedule A. Again, there is no 17 18 19 20 21 22 23 24 25 proof the Jacobsens offered at all as to why this treatment is incorrect, so I sustain the exclusion that the IRS had reached. The third excluded item was $11,000 in an IRA contribution. However, the right to make IRA contributions depends on there being some compensation; income, wages, tips, et cetera. And, again, the Jacobsens reported no such compensation, so I'll have to sustain the disallowance of this 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 exclusion as well. Moving on to disputed deductions, the first of these was $22,897 in investment interest. The deduction for investment interest is allowable only to the extent of investment income. See IRC section 163(d)(1). The Jacobsens, however, reported only $24 in interest income which leads me to the conclusion that the IRS disallowance of $22,873 also must be sustained. I note here that the Jacobsens might have been able to apply this investment interest deduction to the extent of their qualified dividends. But that requires an election under the Internal Revenue Code 13 Regulations and the Jacobsens filed on that Form 4952 14 15 16 17 18 19 20 21 22 23 24 25 to elect to treat your qualified dividends as investment income for the purpose of this deduction. I also note if Mr. Jacobsen is reading this that he does have the right to assert a carry forward of this disallowed deduction, and I ask the IRS to make sure if it doesn' t have this programmed in its computers to make sure that the qualified dividend income that I'm finding the Jacobsens should have reported, receives a favorable tax rate. That will be necessary in the computation stage of this case. The second disputed deduction is for $31,450 in Hurricane Irene losses. This was not 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 included on the Jacobsen's schedule A but the relevant form to claim such a deduction was attached to the return. So I'm not actually sure if it was claimed. It doesn't seem to have been entered into the calculations for their taxable income on their own return. It is also not mentioned in the petition, but with an abundance of caution I'll deal 8 with it here. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Hurricane Irene, of course, occurred in August of 2011. The Jacobsens produced no documentation to substantiate that they incurred the losses stated on the one page of the Form 46A before that Mr. Jacobsen attached to the couple's return. No proof that the losses stemmed from Hurricane Irene and no proper election to claim the losses on their 2010 tax return. It is, of course, true that an individual can deduct a loss sustained during a taxable year due to storm to the extent that the loss isn't compensated for by insurance or otherwise. See section 165(a)(c)(3). A casualty loss is generally deducted in the year it occurred, however, a taxpayer can elect nevertheless to deduct a casualty loss for a federally declared disaster on a tax return or an amended return for the tax year immediately preceding the tax year in which the disaster happened. See 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 Internal Revenue Code section 165(i)(1). If an election is made, the casualty resulting in the loss is treated as having occurred in the year for which the deduction is claimed; 165(i)(2). The amount of the loss, however, can not exceed the uncompensated amount determined on the basis of the facts existing at the date the taxpayer claims the loss. See IRC section 165(i)(3). Here I note that the IRS produced evidence during the trial that the Jacobsens claimed 10 half-a-million dollar casualty loss for 2011 which 11 might explain this. But in any event, I do have to 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sustain the disallowance of this item if in fact it was claimed by the Jacobsens in the 2010 tax year that was before me. That leaves only one remaining issue, the penalty under section 6662 (a) . Here the Commissioner has the burden of production which respect to the Jacobsens' liability for any additional penalty. See Code section 7491(c). But once the Commissioner comes forward with evidence to satisfy this burden, the burden of proof is on the Jacobsens to proof that the Commissioner's determination is not correct. The Jacobsens reported a tax liability of zero on their 2010 income tax return. The Commissioner showed that they should have reported a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 tax liability of at least $13,000. This means that the Jacobsens' understatement is greater than $5, 000 and great than ten percent of the tax required to be shown on their tax return. This triggers application of the penalty under Internal Revenue Code section 6662(a). There is, of course, a defense under section 6664 of the Code if a taxpayer is able to show that the position he took on the return was 10 reasonable and filed in good faith. But here Mr. Jacobsen's failure to testify is extremely telling. Very simply, there is no evidence presented whatsoever on this issue, so it too must be sustained. Indeed, even if I generously tried to discern what defense might have been taken by the Jacobsens, there just seems to be no reason for their failure to include this income and no justification for their pattern seemingly making up deductions and exclusions out of thin air. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 9:35 a.m., the above- entitled matter was concluded.) 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