TAX COURT OPINION

Case: William Sean Cannon
Docket Number: 12900-15
Judge: Wherry
Opinion Type: bench
Filed: 05/25/2016
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 WILLIAM SEAN CANNON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 12900-15. ) ) ) ) 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 Judge Robert A. Wherry, Jr. at Denver, Colorado, on April 29, 2016, 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 for respondent. (Signed) Robert A. Wherry, Jr. Judge Dated: Washington, D.C. May 25, 2016 SERVED Jun 02 2016 Capital Reporting Company 3 1 Bench Opinion by Judge Robert A. Wherry, Jr. 2 April 29, 2016 3 William Sean Cannon 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 12900-15 United States Tax Court, William Sean Cannon, Petitioner, versus Commissioner of Internal Revenue, Respondent, Docket No. 12900-15. William Sean Cannon, pro se, Michael Garrett, for Respondent. MEMORANDUM FINDINGS OF FACT AND OPINION WHERRY, Judge: 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 OPINI N. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references are to the Code of 1986, and Rule references are to the Tax Court Rules of Practice and Procedure. William Sean Cannon appeared on his own behalf. Michael Thomas Garrett appeared on behalf of the Respondent. Capital Reporting Company 4 This case is before the Court on a petition for redetermination of an income tax deficiency of $7,316 and an accuracy-related penalty of $1,463.20 that respondent determined for petitioner's 2013 tax year. The issues for decision are (1) whether petitioner is entitled to dependency exemption deductions for S.C. and W.A., his minor children; (2) whether petitioner is entitled to child tax credits for S.C. and W.A.; (3) whether petitioner is entitled to head of household filing status; (4) whether petitioner is entitled to the earned income tax credit and (5) whether petitioner is liable for a penalty under section 6662(a). FACTS Some of the fact have been stipulated, and the facts contained in the stipulations, with the accompanying exhibits, are incorporated herein by this reference. Petitioner resided in South Dakota at the time his petition was filed.1 Petitioner is the father of two minor children, S.C. and W.A.2 petitioner and the Immediately after the separation from his now ex-wife, 1 petitioner moved to Las Vegas, Nevada. He returned to Rapid city, South Dakota in December 2012. 2 It is the policy of this Court not refer to petitioner's two minor children by their initials. See Rule 27(a)3). to identify minors. We 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 Capital Reporting Company 5 1 2 3 4 children's mother, Meagan Ahasay also known as Meagan Cannon (Ms. Ahasay), were separated and lived apart during the entire 2013 tax year. Ms. Ahasay resided in Rapid City, South Dakota and petitioner resided 5 with his parents on Copperfield Drive in Rapid City, 6 7 8 9 10 11 South Dakota, for most, if not all of the 2013 year. Petitioner and Ms. Ahasay separated in August 2012 after a little over a year of marriage. On October 9, 2012, Ms. Ahasay filed for divorce in South Dakota. Incident to their pending divorce, pet t oper and Ms. Ahasay entered into a Stipulation, 12 h,hild Custödy and Property Settlement Agreement. 13 That agreement granted primary physical custody of 14 W.A. and S.C. to Ms. Ahasay. Petitioner was 15 16 17 18 19 20 21 22 23 24 25 permitted to have visitation with W.A. and S.C. in accordance with the relevant guidelines in South Dakota. On January 8, 2013, the court in South Dakota issued a Judgment and Decree of Divorce which incorporated the Child Custody and Property Settlement Agreement. Pursuant to the divorce decree and separation agreement, Ms. Ahasay retained primary custody for S.C. and W.A. from January 2013 through the end of August 2013. S.C. and W.A. were allowed to stay with petitioner every other weekend during that period. The South Dakota parenting guidelines Capital Reporting Company 6 1 2 3 4 also provided that the children spend half of the summer vacation3 with each parent, in addition to alternating holiday weekends (Martin Luther King, Jr. Day, President's Day, Easter, the Fourth of July, 5 Native American's Day (second Monday in October), and 6 7 8 9 10 11 12 13 14 Thanksgiving). After a criminal charge against petitioner on March 17, 2013, petitioner was arrested and was not permitted to have contact with S.C. or W.A. while the charges were pending. Although the charges were eventually dropped, petitioner missed his weekend visitation with the children from March 17, 2013 through the end of April 2013. Despite the court order and pending charges, Ms. Ahasay often dropped 15 W.A. and S.C. off at the Copperfield Drive residence 16 while she went to work. In May 2013 petitioner's 17 weekend visitation rights resumed. Allegations of 18 mistreatment of W.A. and S.C. by Ms. Ahasay came to 19 20 21 light in September 2013. South Dakota child protective services removed the children from Ms. Ahasay's care and placed them with Ken and Priscilla 22 Moon, petitioner's parents who lived at the 23 Copperfield Drive residence. On or about November 24 25 20, 2013, petitioner filed a motion with the state 3 S.C. and W.A. ended the school year on May 20, 2013 and resumed on August 26, 2013. Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 court in South Dakota where he sought primary custody of the children and requested child support from Ms. Ahasay. On December 11, 2013, petitioner's custody redetermination was denied -- Ms. Ahasay retained primary custody (provided that certain conditions were met). Nonetheless, following the court order the children remained at the Copperfield Drive residence and did not return to Ms. Ahasay's custody. The following year, Ms. Ahasay moved to Wisconsin 10 without the children. 11 12 13 Petitioner timely filed as head of household a self-prepared Form 1040, U.S. Individual Income Tax Return for the 2013 taxable year. 14 Petitioner. claimed S.C. and W.A. as dependents on his 15 16 17 18 19 20 21 22 23 24 25 return and' included copies of their social security cards. On her Federal Tax return for 2013, Ms. Ahasay also claimed the two children as dependents. Respondent mailed the notice of deficiency to petitioner on February 17, 2015. In the notice of deficiency, respondent: (1) disallowed the dependency exemptions for petitioner's two children; (2) changed petitioner's filing status from head of household to single and adjusted the standard deduction accordingly; (3) disallowed the child tax credits; and (4) disallowed the earned income credit. Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 As a result, respondent determined a deficiency of $7,316. Respondent also asserted an accuracy-related penalty under section 6662(a) for substantial understatement and negligence. Petitioner timely petitioned this Court, and a trial was held on April 25, 2016, in Denver, Colorado for a redetermination of the $7,316 income tax deficiency and penalty of $1,463.20. Petitioner appeared at trial, and presented arguments to the 10 Court. However, petitioner did not testify nor 11 12 13 14 15 16 17 18 19 20 21 22 23 24 present other evidence at trial. The Court informed petitioner during trial about the repercussions of not presenting sworn testimony. The Court further informed petitioner that he bore the initial burden of proof in relation to the claimed deductions and that respondent bore the burden of production in relation to the penalty. The Court welcomed opening statements, but instructed petitioner that his opening statement arguments were "not evidence and that the Cöurt could not make a finding of fact" based on these statements -- only statements made under oath and in the witness chair would be admissible as evidence. The Court further instructed that any testimony offered under oath by petitioner 25 would be subject to cross-examination by Mr. Garrett, Capital Reporting Company 9 1 within the scope of direct examination, and an 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 opportunity for re-direct would be provided. That being said, petition was not compelled to testify on his own behalf. At the conclusion of petitioner's case, the Court again offered petitioner the opportunity to testify. Petitioner indicated that the stipulation of facts was sufficient and he did not have any additional witnesses or documents to introduce. OPINION Deductions and credits are a matter of legislative grace, and the taxpayer must maintain adequate records to substantiate the amounts of any deductions or credits claimed. Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs. As a general rule, the Commissioner's determination of a taxpayer's liability in the notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper. See Rule 142(a); 21 Welch v. Helvering, 290 U.S. 111, 115 (1933). 22 23 24 25 However, pursuant to section 7491(a)(1), the burden of proof on factual issues that affect the taxpayer's tax liability may be shifted to the Commissioner where the "taxpayer introduces credible evidence with Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 respect to *** such issue". The burden will shift only if the taxpayer has, inter alia, complied with substantiation requirements pursuant to the Internal Revenue Code and "cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews". Sec. 7491(a)(2). In the instant case, petitioner did not comply with the substantiation requirements and other than the stipulation of facts and attached exhibits 10 failed to introduce any evidence at trial. 11 Accordingly, the burden remains on petitioner. 12 13 14 15 16 17 18 19 20 21 22 23 24 I. Dependency Exemption Deductions Section 151(c) generally allows an exemption for each dependent who is a child of the taxpayer, subject t age limitations not in issue here. See sec. 152(c). In general, section 152(a) defines "dependent" to include the taxpayer's son or daughter who did not provide over half of his or her own support and who has the same principal place of abode as the taxpayer fo more than one-half of the calendar year. See sec. 152(c). If the parents claiming any qualifying child do not file a joint return, that child shall be treated as the qualifying child of the parent with whom the child resided for 25 the longer period of time during the taxable year Capital Reporting Company 1 2 (i.e., the custodial parent). See sec. 152(c)(4)(B). Under section 1.152-4(d)(1), Income Tax 3 Regs., the custodial parent is the parent with whom 11 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the children reside for the greater number of nights during the calendar year, and the noncustodial parent is the parent who is not the custodial parent. A child is treated as residing with a parent for a night if (1) the child sleeps at the residence of that parent or (2) if the child sleeps in the company of the parent, when the child does not sleep a a parent's residence. Sec. 1.152-4(d) (i) and (ii), Income Tax Regs. However, the noncustodial parent may claim the dependency exemption deduction if the custodial parent executes a written declaration releasing the custodial parent's claim to the deduction and the noncustodial parent attaches that written declaration to the noncustodial parent's return for that taxable year. Sec. 152(e)(2); Barrett v. Commissioner, T.C. Memo. 2008-284. Petitioner and Ms. Ahasay both claim to have been S.C. and W.A.'s custodial parent in 2013, and both claimed dependency exemption deductions on their tax returns on that basis. W.A. and S.C. can be a qualifying child of only one of them. Capital Reporting Company 12 1 Petitioner does not claim that he is entitled to the 2 dependency exemption deduction on the basis of a 3 written declaration under section 152(e)(2). Thus, 4 5 6 7 8 9 we must determine with whom the two children resided for the longer er od of time during the 2013 taxable year. See sec. 152(c)(4) (B) (i). Here, the divorce decree gave primary custody of the children to Ms. Ahasay. The divorce decree granted weekend visitation rights to 10 Petitioner' under the o th Dakota parenting 11 12 13 14 guidelines. See S.D. Codified Laws, Section 25-25- 4A, App. A, Parenting Guideline 3(2012). Petitioner spent two nights every other weekend with his two children until his arrest on March 17, 2013. 15 Alternating weekend visitation resumed in May, until 16 17 18 19 20 May 21, 2013, when the children's summer vacation began. During summer vacation, the South Dakota guidelines provide that the children spend one-half of the summer with each parent. School resumed on August 26, 2013, when the children returned to their 21 mother's care until South Dakota child protective 22 23 24 25 services removed them from their mother's care on Septembe 7, 2013. Petitioner's parents, with whom etitioner resided, received temporary custody from South Dakota child protective services from September Capital Reporting Company 1 1 2 3 4 5 6 7 13 7, 2013 until December 11, 2013, when the South Dakota state court held that Ms. Ahasay would remain the primary custodial parent. Therefore, the two children resided under the same roof as petitioner at the Copperfield Drive residence from September 7, 2013 to December 31, 2013. The record reflects that Ms. Ahasay often dropped the children off at the 8 Copperfield residence, but there is nothing in the 9 record to indicate that W.A. and S.C. spent the night 10 with petitioner on these days. In sum, we find that 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the children spent no more than 180 nights with petitioner during 2013.4 As petitioner did not spend the greater portion of the year, or 183 nights, with the two children, Ms. Ahasay is the custodial parent, and petitioner is the noncustodial parent for 2013. II. Earned Income Credit Section 32(a)(1) allows an eligible individual an earned income credit against the individual' s income tax liability. Section 32 (b) prescribes different percentages and amounts used to from January 1, 2013, 4 We reached this calculation by crediting petitioner with 10 weekend visitation nights (representing two nights every other weekend) (starting with the second weekend January 11, 2013) to his arrest on March 17, 2013. When visitation resumed in May 2013, petitioner spent an additional four nights with his children. During the children's summer vacation from May 21, 2013 to August 25, 2013, petitioner spent 48 nights with the children. From September 7, 2013 to December 31, 2013, same residence as their father. Under was also entitled to two of September 7, 2013. extent that the parties did not follow the South Dakota guidelines, petitioner had the burden of proof to establish any additional custodial nights, which he failed to do. this represents 180 nights with petitioner. To the four holiday nights which occurred prior to the children spent all 116 nights at the the South Dakota guidelines, petitioner In sum, Capital Reporting Company 14 calculate the credit. The limitation amount is based on the taxpayer's earned income, the taxpayer's adjusted dross income, and whether the taxpayer has any qualifying children. Sec. 32(b), (f). To be eligible to claim a higher earned income credit with respect to a child, the taxpayer must establish that the child meets the definition of a qualifying child under section 152(c) as modified by section 32(c) (3) (A). A taxpayer's "qualifying child" for purposes of the earned income tax credit means an individual who: (1) is related to the taxpayer; (2) has the same principal place of abode as the taxpayer for more than one-half of the taxable year; (3) meets certain age requirements; and (4) who has not filed a joint return. See secs. 32(c) (3) (A), 152(c). At the close of the calendar year for the year at issue, neither child had attained the age of 19, thus satisfying the age test. See sec. 32(c)(3) (A). Since the petitioner included the name, age, and TIN of each of his children on his return, he satisfied the identification requirement. See sec. 32(c)(3)(D). Here, the record indicates that the children's residence with their mother was their principal place of abode. Thus, petitioner failed to 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 Capital Reporting Company 15 1 2 3 4 5 6 7 satisfy the residency requirement of section 32 and section 152(c) (1)(B), and neither of petitioner's two children is considered a qualifying child. Nonetheless, individuals who do not have any qualifying children may also be eligible under section 32(a)(2) for an earned income credit, subject to, among other things, phaseout limitations. 8 Merriweather v. Commissioner, T.C. Memo. 2002-226, 9 Briggsdan els v. Commissioner, T.C. Memo 2000-105, 10 aff'd, 248 F.3d 1169(9th Cir. 2001). An individual 11 12 13 14 15 16 17 18 19 who does not have any qualifying children is eligible for an earned income credit if: (1) the individual's principal place of abode is in the United States; (2) the individual, or his spouse, has attained the age of 25 but not the age of 65 at the close of the taxable year; and (3) the individual is not a dependent for whom a deduction is allowed under section 151 to another taxpayer. Sec. 32(c) (1) (A). Although petitioner satisfies the 20 eligibility requirements under section 32(c) (1) (A), 21 22 23 24 25 the phaseout limitation prevents the receipt of any earned income credit. The earned income credit for an individual without any qualifying children is completely phased out in tax year 2013 when an individual's modified adjusted gross income (AGI) Capital Reporting Company 16 1 exceeds $14,340. See IRS Pub. 596, Earned Income 2 Credit (2013). Petitioner's modified AGI for 2013 3 4 5 6 7 8 9 10 11 was $23,874.00 in wages. Thus, respondent's determination is sustained with respect to the earned income tax credit. III. Head of Household Filing Status Section 1(b) imposes a special tax rate on an individual filing his Federal tax return as head of household. Section 2(b) defines "head of household" as an individual taxpayer who is: (1) unmarried !at the close of the taxable year; and (2) 12 maintains as his home a household which constitutes 13 14 15 16 17 18 19 20 21 22 23 24 25 for more than one-half of the taxable year the principal place of abode of a dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151. Sec. 2(b)(1)(A)(i) and (ii). This Court has already concluded that petitioner is not entitled to dependency exemptions under section 151 for S.C. and W.A. Accordingly, a fortiori, petitioner is not entitled to head of household filing status. IV. Child Tax Credit Section 24 allows a credit for each "qualifying child" of the taxpayer. A "qualifying child" for purposes of section 24 is an individual Capital Reporting Company 17 who is defined in section 152(c), and has not attained the age of 17 by the close of the taxable year, and with respect to whom the taxpayer is entitled to a dependency exemption deduction under section 151. Sec. 24(c). As a son or a daughter of petitioner, petitioner's two children meet the relationship test. During the year in issue, neither child had attained the age of 17. W.A. was 5 years old and S.C. was 11 years old at the close of the taxable year. However, as previously discussed, petitioner is not eligible to claim a dependency exemption deduction for either child for 2013. Thus, petitioner is not allowed a child tax credit. V. Penalty Respondent asserted in the notice of deficiency that petitioner was liable for a $1,463.20 accuracy-related penalty under section 6662(a). Section 6662(a) and (b) (1) and (2) provides for the imposition of a 20% penalty on the portion of an underpayment of tax required to be shown on a return that is attributable to negligence, disregard of rules and regulations, or a substantial understatement of income tax. Negligence "includes any failure to make a reasonable attempt to comply 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 Capital Reporting Company 18 1 with the provisions of*** [the Internal Revenue 2 Code]". Sec. 6662(c). It constitutes "'a lack of 3 4 5 6 7 8 9 due care or the failure to do what a reasonable and ordinary prudent person would do under the circumstances.'" Freytag v. Commissioner, 89 T.C. 849,887(1987)(quoting Marcello v. Commissioner, 380 F. 2d 499, 506 (5th Cir. 1967), aff'g 43 T.C. 168 (1964) and T.C. Memo. 1964-299), aff'd, 904 F. 2d 1011 (5th Cir. 1990), aff'd 501 U.S. 868 (1991). 10 Disregard .of rules and regulations "includes any 11 12 13 14 15 16 17 18 19 20 21 careless, reckless or intentional disregard of rules or regulations", including the Code, the regulations thereunder, and guidance published by IRS. Sec. 1.6662-3(b)(2), Income Tax Regs. A substantial understatement of income tax, as to an individual, is an understatement that exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d) (1) (A). Under section 7491(c), respondent bears the burden of production with respect to petitioners' liability for the section 6662(a) penalty. 22 Generally, this means that respondent "must come 23 24 25 forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438, 446(2001). Capital Reporting Company 19 1 Petitioner's understatement of income tax for their 2 3 4 5 6 7 8 9 10 11 2013 tax year is substantial under section 6662(d) (1) (A) because it exceeds $5,000 and is greater than 10 percent of the amount required to be shown on his return. Respondent has therefore satisfied his burden of production with respect to the section 6662(a) penalty. Section 6664(c) generally provides a defense to the section 6662(a) penalty with respect to any portion of. an underpayment of tax for which the taxpayer had reasonable cause and with respect to 12 which the taxpayer acted in good faith. "The 13 14 15 16 17 18 19 determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case- by-case basis, taking into account all pertinent facts and circumstances." Sec. 1.6664-4(b) (1), Income Tax Regs. Reliance on professional advice may constitute reasonable cause and good faith, but "it 20 must be established that the reliance was 21 22 23 24 25 reasonable." Freytag v. Commissioner, 89 T.C. at 888; sec. 1.6664-4(b)(1), Income Tax Regs. In sum, for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) accuracy-related penalty Capital Reporting Company 20 determined by the Commissioner, the taxpayer must prove *** that the taxpayer meets each requirement of the following three-prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser's judgment.*** Neonatology Associates, P.A. v Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). Petitioner stipulated that he self-prepared his 2013 return. He presented no evidence on the reasonableness of his return position. Thus, he does not meet the exception under 6664(c) and therefore we sustain the penalty. As we find that petitioner has a substantial understatement of tax, we do not need to reach the question of negligence. The Court has considered all of petitioner's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant. To reflect the foregoing. 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 Capital Reporting Company Decision will be entered for respondent. ;THIS CONCLUDES THE COURT'S ORAL FINDINGS OF 21 FACT AND OPINION IN THIS CASE. (Whereupon, at 1:34 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 I