TAX COURT OPINION

Case: Harry Cunningham, Jr. & Josephine M. Cunningham
Docket Number: 22908-16S
Judge: Leyden
Opinion Type: bench
Filed: 02/16/2018
Pages: 12

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 HARRY CUNNINGHAM, JR. & JOSEPHINE M. CUNNINGHAM, Petitioners, v. ) ) ) ) ) Docket No. 22908-16S. 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at San Diego, California, on February 1, 2018, containing her 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 for respondent as to the deficiency and for petitioners as to the addition to tax under section 6651(a) (1) and the accuracy-related penalty under section 6662(a). (Signed) Diana L. Leyden Special Trial Judge Dated: Washington, D.C. February 16, 2018 SERVED Feb 16 2018 3 1 2 3 4 5 6 7 8 Bench Opinion by Special Trial Judge Diana L. Leyden February 1, 2018 Harry Cunningham, Jr & Josephine M. Cunningham v. Commissioner of Inte nal Revenue Docket No. 22908-16S 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. . 9 THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED 10 UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 152(c), Tax 11 Court Rules of Practice and Procedure. 12 13 This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal 14 Revenue Code of 1986, as amended, and Rules 170 through 15 16 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the 17 authority granted by.section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. 20 21 22 Hereinafter in this bench opinion, all section references are to the Internal Revenue Code, as amended, and in effect for the relevant times, and all Rule 23 references are to the Tax Court Rules of Practice and 24 Procedure. 25 The Court uses the term "Internal Revenue 73)406-2250|operationsøescribers.net|www.escribers.net 4 Service" or "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case. The trial of this case was conducted on January 31, 2018, in San Diego, California. Petitioners appeared on their own behalf. Min Chan appeared on behalf of respondent. In a notice of deficiency dated July 26ph', 2016, 1 2 3 4 5 6 7 8 9 10 11 12 the IRS determined a deficiency in petitioners' 2013 13 Federal income tax of $19,260, a section 6651(a)(1) 14 addition to tax for failure to timely file of $3,464.50, 15 and a section 6662(a) and (b)(2) accuracy-related penalty 16 of $3,852. 17 18 19 20 21 22 23 24 25 Petitioners concede the disallowance of / deductions claimed on their Schedule C, Profit a d Loss From Business. After concessions by petitioners the issue for decision by the Court are whether: (1) petitioners are liable for the addition to tax under section 6651(a)(1) for failing to timely file their 2013 tax return and (2) petitioners are liable for the accuracy- related penalty under section 6662(a) and (b)(2) for substantial understatement of tax for 2013. A BElililB (973)406-2250|operationseescribersnet|www.escribers.net 5 1 2 3 4 5 6 7 8 9 Background Some of the facts are stipulated and are so found. The first stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in the State of California at the time they timely filed their petition with the Court. Mr. Cunningham was an aviation engineer. Sometime in 2000, he was diagnosed with cancer and stopped working as such. He tried to operate several businesses 10 after his cancer treatment, and in 2009 he decided to 11 12 purchase a cab and trailer to work as a truck driver. He drove and carried loads for various large companies that 13 were arranged through a broker. Most of his trips in 2013 14 were from California to New York. 15 16 17 In mid-September 2013 Mr. Cunningham had a roll- over accident in his truck in Missouri, in which he sustained serious injuries. He was treated on an 18 outpatient basis and was charged with driving under the 19 20 influence. He was incarcerated in Missouri from September 18 through October 2, 2013. 21 uhe. After he was released, he traveled 22 back and forth to Missouri and was incarcerated again from 23 May 15 through June 15, 2014. Upon his release, he 24 25 returned to California and was treated for his injuries from the accident for about three months. (973)406-2250|operationsgescribers.net|www.escribers.net 6 1 2 3 4 5 6 7 8 9 During 2013, Ms. Cunningham worked for an attorney, who handled foreclosures. Since then she has been laid off and is currently not employed. For years before 2012, Mr. Cunningham's sister, who is a tax preparer, prepared petitioners' tax returns. They recall being audited for 2010 and that they owed a small amount of tax for that year but that the majority of their Schedule C expenses were allowed. At some point either in 2012 or 2013 Mr. 10 Cunningham's sister's tax return preparation business was 11 12 investigated. During that investigation, the records for that business, which included the records of Mr. 13 Cunningham's trucking operation, were seized. Mr. 14 Cunningham's sister did not prepare petitioners' 2013 tax return. 15 16 While Mr. Cunningham was incarcerated and during 17 his trips back and forth to Missouri, Mrs. Cunningham 18 19 20 21 22 23 24 25 tried to gather necessary documents that showed his expenses relating to the trucking operation in preparation for the filing of their tax return. However, she was unable to obtain all of them. Petitioners also tried to get the seized business records to prepare their 2013 tax return but were unable to do so. Mrs. Cunningham believed that she could not file for an extension to file their 2013 tax return after April 15)h, 2014, because she ) 973)406-2250}operations@escribers.net|www.escribers.net 7 1 2 thought they might owe some taxes. As a result, she did not request an extension to file their 2013 tax return (cid:0)540 after April 15)(, 2014. At the same time, Mr. Cunningham 4 5 6 7 8 9 10 11 and Mrs. Cunningham were dealing with Mr. Cunningham's criminal case in Missouri and his serious injuries and the uncertainty of whether he would be incarcerated again. After Mr. Cunningham was released from jail and after he received medical attention for his serious injuries, the petitioners turned to getting their 2013 tax return prepared. They hired another tax return preparer from an H&R Block franchise and were told that if they 12 were audited the tax return preparer would represent them 13 at the audit. They told the tax return preparer that they 14 did not have all of their documents for the trucking 15 operation because some had been seized when Mr. 16 Cunningham's sister's tax return preparation business was 17 18 19 20 investigated. They had several meetings with the new tax return preparer and signed their 2013 tax return on March 26, 2015. The IRS processed it on April 27, 2015. The IRS subsequently examined petitioners' 2013 21 .tax return and disallowed all of the deductions they 22 23 claimed on Schedule C that exceeded the amount of gross receipts reported. The IRS examiner concluded that 24 petitioners had not shown that they operated the trucking 25 operation as a trade or business. The IRS also proposed (973)406-2250|operationseescdbers.net|www.escdbers.net 8 an addition to tax for failure to timely file and an 2 3 accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of tax. The IRS obtained 4 managerial approval for the accuracy-related penalty 5 6 7 8 9 10 11 before issuing the statutory notice of deficiency. Discussion A. Section 6651(a)(1) Addition to Tax Section 6651(a)(1) imposes an addition to tax for a taxpayer's failure to file a required tax return on or before the specified filing date, including extensions. The Commissioner satisfies his burden of production for an 12 addition to tax for failure to timely file by providing 13 sufficient evidence to show that the taxpayer filed his or 14 15 16 17 her tax return late. Wheeler v. Commissioner, 127 T.C. 200, 207-208 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008); Higbee v. Commissioner, 116 T.C. 438, 447 (2001). The record establishes that the 2013 individual income tax 18 was required to be filed by April 15, 2014, and was filed 19 past the filing the due date on March 31, 2015. 20 Respondent therefore has met his burden of production with 21 22 23 24 25 respect to the addition to tax under section 6651(a)(1) for failure to timely file for 2013. A taxpayer is not liable for an addition to tax for failure to timely file a return if he or she shows that the untimeliness is due to reasonable cause and not (973)406-2250loperationseescribersmet|wwy,.esalbersmet 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 due to willful neglect. Sec. 6651(a)(1); Higbee v. Commissioner, 116 T.C. at 447. "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause." Sec. 301.6651- 1(c)(1), Proced. and Admin. Regs. The taxpayer can prove that he or she did not act with "willful neglect" if he or she can "prove that the late filing did not result from a 'conscious, intentional failure or reckless indifference.'" Niedringhaus v. Commissioner, 99 T.C. 202, 221 (1992) (quoting United States v. Boyle, 469 U.S. 241, 245-246 (1985)). The burden of showing reasonable cause under section 6651(a)(1) remains with petitioners. See Higbee v. Commissioner, 116 T.C. at 446-448. Petitioners have shown reasonable cause for failing to timely file their 2013 tax return. Mr. 17 Cunningham was seriously injured from his accident in late 18 19 20 21 2013, was incarcerated in late 2013, drove back and forth to Missouri in late 2013 and early 2014, was incarcerated again early 2014, and underwent medical treatment upon his return to California in 2014. Additionally, after 22 sister's tax return preparation business came under 23 24 investigation t-he-petitioners hired a reputable tax return preparer who assured them they would assist if the return 25 was audited. Despite her efforts to obtain some 73) 406-2250| operations@escribers.netj www.escribers.net 10 1 2 3 4 5 6 7 8 9 documentation, Mrs. Cunningham was unable to do so. A reasonable person faced with such personal obstacles would have understandingly been focused on Mr. Cunningham's criminal charges and serious health concerns. The Court finds both Mr. and Mrs. Cunningham truthful and sincere when they testified that they focused on these concerns before attending to their 2013 tax return. Accordingly, petitioners had reasonable cause for filing their 2013 tax return late and are not liable for the section 6651(a)(1) 10 addition to tax for 2013. 11 12 B. Section 6662(a) Penalty Respondent determined the accuracy-related 13 penalty for 2013 because petitioners' underpayment was due 14 15 16 17 18 19 20 21 22 23 24 25 to a substantial understatement of income tax. Sec. 6662(a) and (b)(2). Section 6662(a) authorizes the imposition of a 20% penalty on the portion of an underpayment of tax that is attributable to, among other things, any substantial understatement of income tax. Sec. 6662(a)and (b)(2). An "understatement" means the excess of the amount of the tax required to be shown on the tax return over the amount of tax that is shown on the tax return, reduced by any rebate. Sec. 6662(d)(2) (A). There is a substantial understatement of tax for any taxable year if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the ) cnbers (973)406-2250|operationspescribers.net|www.escribers.net return or $5,000. Sec. 6662(d)(1) (A). Respondent did not assert the accuracy-related penalty for negligence or intentional disregard of the rules and regulations. Sec. 11 6662(c). Under section 7491(c) the Commissioner bears the burden of production with regard to penalties. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). To meet that burden the Commissioner must produce sufficient evidence to show that it is appropriate to impose the accuracy related penalty. See id. Petitioners' 2013 tax return showed a tax of $10,367. Respondent determined the amount 1 2 3 4 5 6 7 8 9 10 11 12 of tax required to have been shown on petitioners' 2013 13 tax return as $29,627. Thus, the understatement of tax 14 15 16 determined by respondent was $19,260. That amount exceeds $5,000 which is greater than $2,962.70, 10% of the tax required to be shown on petitioners' 2013 tax return. The 17 Court concludes that respondent has met his burden of 18 production with respect to a substantial understatement of 19 income tax under section 6662(a) and (b) (2). 20 Respondent has also presented evidence that the 1 21 6662(a) penalty was "personally approved (in writing) by 22 the immediate supervisor of the individual making such 23 determination". See. Sec. 6751(b)(1); Chai v. 24 Commissioner, 851 F.3d 190, 221 (2nd Cir. 201 , aff'g in 25 part, rev'g in part T.C. Memo. 2015-42; Graev v. cribers (973)406-2250|operations@escribers.net|www.escribers.net Commissioner, 149 T.C. , (slip op. at 14) (December 12 20, 2017). Once the Commissioner meets his burden of production, a taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); see Higbee v. Commissioner, 116 T.C. at 447. The taxpayer may meet this burden by proving that he or she acted with reasonable cause and in good faith with respect to the underpayment. See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 447; sec. 1.6664-4 03)(1), Income Tax Regs. Circumstances that indicate reasonable cause and good faith include reliance 1 2 3 4 5 6 7 8 9 10 11 12 13 on the advice of a tax professional or an honest 14 misunderstanding of the law that is reasonable in light of 15 all the facts and circumstances. Sec. 1.6664-4(b), Income 16 Tax Regs.; see Higbee v. Commissioner, 116 T.C. at 449. 17 Relevant facts and circumstances for the Court to consider 18 19 20 include the knowledge and experience of the taxpayer. Sec. 1.6664-4 03)(1), Income Tax Regs. Petitioners made efforts to obtain the records 21 but could not do so because the records had been seized. 22 Petitioners had previously been audited with respect to 23 24 the same trucking operation in a prior year and their claimed expenses had been substantially allowed. 25 Therefore petitioners had a reasonable belief that their (973)406-2250loperationsøescribers.netlwww.escribers.net 13 1 2 3 4 5 6 7 8 9 10 11 12 13 2013 tax return, which claimed similar deductions, was correct. During the time that the tax return was due, Mr. Cunningham was being prosecuted for a criminal charge and was dealing with serious injuries. When petitioners were able to attend to the preparation of their return, they hired a reputable tax return preparer who assured them that they would represent them if the return was audited. That assurance, in addition to their prior experience with an audit of their tax return that resulted in most of the claimed trucking operation expenses being allowed, formed a reasonable belief that the return as filed was correct. The Court finds petitioners credible and holds that they acted with reasonable cause and in good faith 14 with respect to the substantial underpayment of their 2013 15 16 17 18 19 taxes. In order to give effect to our disposition of the disputed issues, a decision will be entered for respondent as to the deficiency and for petitioners as to the addition to tax under section 6651(a)(1) and the 20 accuracy-related penalty under section 6662(a). 21 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT 22 AND OPINION IN THIS CASE. 23 24 25 (Whereupon, at 11:34 a.m., the above-entitled matter was concluded.) ) (973)406-2250|operationseescribers.net|wwwescribers.net