TAX COURT OPINION

Case: Lotus Richard Ballard
Docket Number: 3843-15S
Judge: Carluzzo
Opinion Type: bench
Filed: 02/12/2016
Pages: 9

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 LOTUS RICHARD BALLARD, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 3843-15S ) ) ) ) ) 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 Lewis R. Carluzzo at Los Angeles, California, 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) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. February 12, 2016 SERVED Feb 17 2016 Capital Reporting Company 3 1 Bench Opinion by Special Trial Judge Lewis R. 2 Carluzzo 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 January 28, 2016 Lotus Richard Ballard v. Commissioner Docket No. 3843-15S 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). Section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant periods, and. Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by Section 7459(b) and Rule 152. This proceeding for the redetermination of a deficiency is a small tax case subject to the provisions of Section 7463 and Rules 170 through 175. Pursuant to section 7463(b) the decision entered in this case shall not be treated as precedent for any other case. Lotus Richard Ballard appeared on his own behalf. Mark A. Nelson appeared on behalf of respondent. In a notice of deficiency dated November 24, 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 2014 (notice), respondent determined a $4,703 deficiency in petitioner's 2013 Federal income tax and imposed a section 6662(a) accuracy related penalty. The issues for decision are whether petitioner: (1) is entitled to a dependency exemption deduction for Z.B., who was 10 years old as of the close of 2013; (2) qualifies for head of household filing status; (3) is entitled to an earned income credit; (4) is entitled to a child tax credit; and (5) is precluded by Section 32(k)(1) (A) from claiming an earned income credit for 2014 and 2015. Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioner lived in California. petitioner was born in 1960. He is a barber and operates a barber shop in the Los Angeles, 18 California, area. Although previously engaged, 19 20 21 22 23 petitioner was not married at any time during the year in issue. petitioner's 2013 timely filed Federal income tax return (return) was prepared by a paid return preparer. As relevant here, on that return 24 petitioner: (1) claimed a dependency exemption 25 deduction for Z.B.; (2) claimed an earned income 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 credit computed as though Z.B. was petitioner's qualifying child for purposes of that credit; and (3) claimed a child tax credit computed as though Z.B. was petitioner's qualifying child for that credit as well. The return shows petitioner's adjusted gross income as $15,635. The taxable income and Federal income tax liability reported on the return take into account the standard deduction and petitioner's claimed filing status as a head of household. In the notice respondent: (1) disallowed the dependency exemption deduction claimed for Z.B.; (2) disallowed the earned income credit and child tax credit claimed on the return; (3) changed 15 petitioner's filing status from head of household to 16 17 18 19 20 21 22 23 24 25 single and adjusted the standard deduction accordingly; (4) imposed a section 6662(a) penalty upon the ground of negligence; and (5) determined that petitioner "recklessly and intentionally disregarded rules and regulations" within the meaning of section 32(k) (1)(B) (ii) with respect to the earned income credit here in dispute. After careful review of the evidence in this case in the following numbered paragraphs we limit our findings only to those necessary for the 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 resolution of the above-referenced issues. 1. Petitioner's relationship with Z.B. is certainly consistent with, and might very well transcend the relationships set forth in Section 152(c)(2), (f)(1), but his relationship with Z.B. is not described in those provisions of the Internal Revenue Code. That being so, petitioner does not qualify for the earned income credit claimed on his return or the child tax credit here in dispute. See Section 24(a), (c); Section 32(c)(3) (A). Otherwise, it appears that petitioner fits within the definition of an eligible individual provided in Section 32(c)(1) (A) (ii). If the amount of his adjusted gross income does not in effect reduce any such credit to zero, then the amount allowable can be taken into account in a Rule 155 computation. 2. Petitioner and Z.B. shared the same 19 principal residence as members of the same 20 household during 2013, and that household was 21 maintained by petitioner. I find this to be so 22 23 24 25 even though Z.B. was absent from petitioner's residence for temporary periods in order to spend nights, weekends, or weeks at his mother's residence. It follows from these findings that 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 7 1 petitioner's relationship with Z.B. is described 2 3 4 in Section 152(d)(1) and (2) (H). It further follows that petitioner is entitled to the dependency deduction here in dispute, see 5 Sections 151(c) and 152(a)(2), and that petitioner 6 qualifies as a head of household, see Section 7 8 9 2 (b) (1) (A) (ii) . 3. The evidence shows that petitioner's return was prepared by a paid income tax return 10 preparer. Nothing in the record suggests that 11 Petitioner has any particular training or 12 13 14 15 16 background in accounting or matters involving Federal income taxation, and his relationship with Z.B. has been acknowledged by order of a local court. Taking all of this into consideration, and keeping in mind the definition of "negligence", see 17 Section 6662(c), respondent's burden of 18 19 production, see Section 7491(c), and the provisions of Section 6664(c), we find that 20 Petitioner is not liable for a Section 6662(a) 21 22 penalty. 4. At trial we commented that it would be 23 unlikely that we would resolve this case by bench 24 25 opinion because of the Court's unfamiliarity with issues relating to the application of Section 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 8 1 2 32(k). Subsequent research and the delivery of this bench opinion show that the comment was not 3 well-made. Among other things, Section 32(k) 4 5 precludes a taxpayer from claiming an earned income credit for two years following the year in which 6 Respondent determines that the taxpayer's claim to an earned income credit was due to "reckless or 8 intentional disregard of rules or regulations". Section 32(k)(1)(B)(ii). Respondent made that determination for the year in dispute here, but the determination obviously has no consequence to the deficiency determined in the notice -- the consequences of the determination take effect in years other than the year before us. Normally, in a deficiency case the Court is reluctant to make findings or rulings that have no tax consequences in the period or periods presently before it. Nevertheless, we can see the attractiveness in making the determination in the same year that the earned income credit is disallowed albeit on other grounds and we have addressed the issue in other non-precedential opinions, see Section 7463(b). · In this case not only does the application of section 32(k) have no tax consequence to 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Petitioner's Federal income tax liability for the 25 year before us, the record does not reveal whether 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 9 a finding or ruling on the point would have any Federal tax consequence in either 2014 or 2015. We cannot tell whether petitioner's Federal income tax returns, if required, have been filed for those years -- and point out that his return for 2015 is not yet even due. Assuming that one or both of those returns have been filed, we cannot if either return inCludes a Claim for an earned income credit. Moreover, even if one or both of those returns have been filed, and even if an earned income credit is claimed on one or both of them, we wonder what precedential effect a ruling in this case subject to the provisions of Section 7463(b) would have on the subsequent years. Under the circumstances, we decline to rule on the application of section 32(k) here, although we point out (1) our rejection of the imposition of the Section 6662(a) penalty imposed in the notice strongly suggests that Section 32(k)(1)(B)(ii) does not apply and (2) unless the relationship between petitioner and Z.B. is 1 2 3 4 5 6 10 11 12 13 14 15 16 17 18 19 20 different in the subsequent years from their 21 22 23 24 25 relationship in the year before us, our reasoning for the disallowance of the earned income credit in this case would apply to deny petitioner's entitlement to an earned income credit for those years as well. 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 10 To reflect the foregoing, decision will be entered under Rule 155. THIS CONCLUDES THE BENCH OPINION IN THIS CASE. (Whereupon, at 3:55 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 twww.CapitalReportingCompany.com