TAX COURT OPINION

Case: Otu A. & Carol O. Obot
Docket Number: 1865-08
Judge: Colvin
Opinion Type: bench
Filed: 11/12/2008
Pages: 13

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 RVIcc 3 OTU & CAROL OBOT, ET AL, Petitioners , v . ) Docket Nos . 6720-07 1865-09 COMMISSIONER OF INTERNAL REVENUE , Respondent . O R D E R 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 of the above case before Judge Mark V . Holmes at Buffalo, New York on October 29, 2008, containing his oral findings of fact and opinion rendered after the conclusion of trial . In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered . (Signed ) Mark V. Holmes Judg e Dated : Washington, D .C . November 12, 2008 SERVED Nov 14 2008 3 1 Bench Opinion by Judge Mark V . Holmes 2 October 29, 200 8 3 Obot v . Commissioner Docket Nos . 6720-07, 1865-08 4 THE COURT : In the consolidated cases of Otu 5 and Carol Obot v . Commissioner , Docket Nos . 6720-0 7 6 and 1865-08, the Court has decided to render oral 7 findings of fact and opinion, and the followin g 8 represents the Court's oral findings of fact and 9 opinion . 10 This bench opinion is made pursuant to the 11 authority granted by Section 7459(b) of the Internal 12 Revenue Code of 1986 as amended and Rule 152 of the 13 Tax Court Rules of Practice and Procedure . 14 Mr . and Mrs . Obot were residents of New York 15 when they filed their petition . The cases involve d 16 are 2004 and 2005 tax years, and y all involve 17 questions of substantiation of items of income or 18 deduction . 19 Before I begin with the individual and 20 specific items, there are a couple of preliminar y 21 matters . One is to figure out what is at issue . Some 22 of the issues are common to both years and some of the 23 issues were not raised in the notice of deficiency . 24 However, Section 6214(a) of the Internal 25 Revenue Code provides that the Tax Court shall have Heritage Reporting Corporatio n (202) 628-4888 4 1 jurisdiction to redetermine the correct amount of the 2 deficiency even if the amount so redetermined i s 3 greater than the amount of the deficiency if claim 4 therefore is asserted by the Secretary before the 5 hearing or a rehearing . And that 's precisely what 6 happened here . 7 Our Rule 41 governs and allows an amende d 8 answer at any time before or at trial, but there is a 9 key limitation it mustn't prejudice the Petitioner in 10 maintaining his own position on the merits . 11 The new issues that were identified by the 12 Respondent in this case were all made known to the 13 Petitioner well in advance of trial and should cause 14 no conceivable prejudice to him in preparing for this 15 case . Therefore, I allowed the amendment of th e 16 Respondent's answer to aver a deficiency of up toon 17 $4,358 .194 for 2004 and $7,756 . 0 for 2005 . 18 The second preliminary matter is of course 19 what proof is required here . The law require s 20 taxpayers to maintain records that enable the IRS to 21 verify income and expenses . That's Section 6001 of 22 the Internal Revenue Code as well as 26 C .F .R . § 23 1 .60001-1(a) of the Income Tax Regulations . 24 Under Rule 142, petitioners bear the burden 25 of proof . There is an exception, however, that places Heritage Reporting Corporatio n (202) 628-4888 5 1 the burden of proof on the Respondent for increases in 2 the deficiency . And so, under Rule 142(a)(1), some of 3 these issues will have the burden of proof assigned to 4 the Respondent and some to the Obots . 5 Now turning to the individual items that are 6 at issue in this case, the very first, I'll go through 7 them in order, first those on which Mr . Obot bears the 8 burden of proof and then those on which the 9 Commissioner bears the burden of proof . 10 The first category are dividends receive d 11 from Metropolitan Life Insurance Company . This was an 12 issue involved in both the 2004 and 2005 tax years , 13 all of $13 in 2004 and $15 in 2005 . The Obots argue 14 that this was a return of premiums on a life insurance 15 policy that Mrs . Obot owned . 16 On this issue, I find in favor of th e 17 Respondent, first, because the Obots offered no proof 18 that they had paid premiums to Metropolitan Life in 19 that year ; second, because the third party report s 20 summarized in the evidence actually report the payor 21 as Mellon Investor Services, which is consistent with 22 their characterization of dividends from stoc k 23 ownership ; and third, of course, it's generally well 24 known that Metropolitan Life demutualized severa l 25 years ago, giving to their then-existing policyholders Heritage Reporting Corporatio n (202) 628-4888 6 1 shares of common stock typically in small amounts . 2 So I find it more probable than not that Mr . 3 Obot and his wife had a long-term policy . I do find 4 his testimony on that point to be credible . But that 5 of course is consistent with the receipt of a smal l 6 amount of stock and hence the receipt of some small 7 amount of qualified dividends in both 2004 and 2005 . 8 The second issue was pension income . This 9 again was for both years, $4,119 in 2004, $6,102 i n 10 2005 . Again, this was caught by the IRS because it 11 was reported by a third party -- in this case, New 12 York State -- that it was paying Mr . Obot a pension . 13 Now Mr . Obot claims that he was recovering 14 contributions under something called the General Rule . 15 Again, I find in favor of the Commissioner on thi s 16 point . It is highly likely that this was a qualified 17 retirement plan with a third-party payor, New Yor k 18 State, having reported to the IRS in evidence that was 19 in the record something called Code 2 on th e 20 distribution . 21 Code 2 is one of the codes that's used by 22 third-party payors when someone who is under 59 and a 23 half years of age receives retirement income tha t 24 would otherwise be subject to an automatic 10 percent 25 tax . Code 2 means that Mr . Obot is not subject to Heritage Reporting Corporatio n (202) 628-4888 7 1 this tax, but it also means that it is more likely 2 than not that this is a qualified plan and that his 3 exclusion from the automatic 10 percent penalty is 4 because he was separated from service of New York 5 State at age 55 , which the Court knows he testified 6 was his age back in 2004 . 7 Such distributions aren't subject to the 10 8 percent penalty, and the Respondent isn't claiming a 9 10 percent penalty . But it does make it much more 10 likely than not that this was what's called a 11 qualified plan, meaning that Mr . Obot cannot use the 12 General Rule . 13 And in any event, whether using the General 14 Rule or the so-called Simplified Rule for calculating 15 the taxability of portions of annuity payments o r 16 pension payments, Mr . Obot completely failed to show 17 his cost in the distributions that were received by 18 him in 2004 and 2005 . 19 The third issue was a New York State ta x 20 refund of $2,700 . This was an issue only for the 2004 21 tax year . Mr . Obot argued that it was nontaxabl e 22 because of something he called the Recoveries Rule . 23 Again, I find in favor of the Commissioner 24 on this point, first because there was little to no 25 proof of any excess credit in 2003 ; and second , Heritage Reporting Corporation (202) 628-4888 8 C 1 because the Recoveries Rule or Recovery Doctrin e 2 typically a lies onl for the -x- pP only ,-+ & nrn-~-°'' of trade or 3 business expenses . It really has nothing to do with 4 state income tax refunds at all . 5 The fourth issue were student loan interest 6 deductions . This applied to both years, $2,500 i n 7 2004 and $2,500 again in 2005 . Mr . Obot argued that 8 he had accrued interest in those years and tha t 9 accrued interest supported his deduction even if not 10 actually paid . 11 Again, I find in favor of the Commissioner 12 on this point . Mr . Obot did show that a student loan 13 existed for those years, but he had no evidence that 14 interest on it was actually paid . Indeed, one 15 document that he got admitted referred to a 16 continuation of deferment of payment . 17 Section 221(a) of the Code requires payment, 18 not just accrual . So we find it more likely than not 19 that Mr . Obot paid nothing in either year, and so this 20 deduction too is denied . 21 Finally, No . 5 is tuition and fee deduction . 22 This was at issue only in 2005 for $4,000 . I say only 23 at issue in this category of items that Mr . Obot had 24 the burden of proof on, as I'll discuss later . But in 25 2005, he had a $4,000 deduction for tuition and fee s Heritage Reporting Corporation (202) 628-4888 9 1 paid, and he does argue that he paid tuition in that 2 year . 3 However, I find again in favor of th e 4 Commissioner . Section 222 ( a) does generally allow a 5 limited deduction for tuition , but Section 6 222(c)(2)(A) provides that a taxpayer who elects t o 7 receive a credit under Section 25(A) gets no deduction 8 under Section 222 . And that is precisely what Mr . 9 Obot did . His 1040 form that was admitted into 10 evidence includes a claim for an education credit 11 under Section 25(A) . That's his Form 8863 . So he 12 loses on this one as well . 13 Now I move on to the additional adjustments 14 that the Commissioner claimed and for which th e 15 Commissioner has the burden of proof . The first of 16 these is the $4,000 tuition deduction that Mr . Obot 17 claimed in 2004 . This is very similar to the 2005 18 tuition deduction ; the only difference is that the 19 Commissioner has the burden of proof . 20 And here I find again in favor of th e 21 Commissioner . He's met his burden of proof because he 22 showed that Mr . Obot's 2004 1040 also shows a n 23 election to claim a credit under Section 25(A), so he 24 gets no deduction under Section 222 . Again, thi s 25 issue I find in favor of the Commissioner . Heritage Reporting Corporation (202) 628-4888 1 0 1 The second issue for which the Commissioner 2 had the burden of proof is something calle d 3 depreciation carryover by Mr . Obot . This affects both 4 years, $10,000 in 2004 and $10,150 in 2005 on Mr . 5 Obot' s Schedule E on line 18 . 6 Mr . Obot argued that this was somethin g 7 called a carryover from his prior case . See Obot v . 8 Commissioner , Tax Court Memorandum Opinion 2005-195 . 9 Nothing in that case, however, suggests that Mr . Obo t 10 proved an entitlement to any depreciation deduction, 11 and so there can hardly be a carryover to these much 12 later years . Moreover, there is no proof that there 13 was property involved, no proof of the basis involved . 14 The Commissioner, in other words, by citing to the Tax 15 Court Memorandum wins on this issue as well, and both 16 of those deductions are denied . 17 The third deduction for which th e 18 Commissioner had the burden of proof was the Schedule 19 A personal property and other taxes . This was lines 7 20 and 8 on Mr . Obot's Schedule A, $3,483 .85 in 2004 , 21 $3,728 .03 in 2005 . 22 While he was testifying, Mr . Obot admitted 23 that these were sales and excise taxes of variou s 24 amounts . Just as clearly, however, on those Forms 25 1040, Mr . Obot deducted state and local income taxes . Heritage Reporting Corporatio n (202) 628-4888 1 1 1 He can't take both as to the sales taxes . That' s 2 grounds in itself to deny him deduction . Excise taxes 3 generally are not deductible anyway for individua l 4 taxpayers other than in the context of a trade or 5 business . Mr . Obot did not allege any trade or 6 business here and indeed tried to take these on a 7 Schedule A rather than a Schedule C . So again, I find 8 in favor of the Commissioner . 9 The fourth issue for which the Commissioner 10 had the burden of proof was the self-employment tax . 11 This was $131 for 2005 . However, there was no proof 12 or testimony or exhibits of any sort on any aspect of 13 this question . So, in this situation, the burden of 14 proof rule governs, and I find in favor of Mr . Obot . 15 The fifth item was an education credit , 16 $1,500 for 2005 . The Commissioner introduced onl y 17 proof that Mr . Obot took this . The testimony did not 18 shake Mr . Obot's story that he was a student during 19 the years in question, and the loan documents tha t 20 were admitted strongly suggest that he was a student 21 during the years in question . With nothing else to go 22 on, again, the burden of proof rules here and I find 23 in favor of Mr . Obot and allow him that $1,50 0 24 educational credit . 25 The sixth item for which the Commissioner Heritage Reporting Corporatio n (202) 628-4888 12 1 had the burden of proof was the electrical vehicle 2 credit, $1,842 in '05, reduced for computationa l 3 reasons, but I'll refer to it as the $1,842 electric 4 vehicle credit . 5 The Commissioner again challenged this but 6 only with the testimony of Mr . Obot . And again, Mr . 7 Obot did tell a consistent story, that his wife had 8 bought a new Prius and didn't say anything tha t 9 contradicted his entitlement to this credit . No proof 10 was given by the Commissioner, for example, of a lack 11 of registration or any request for production of 12 documents or anything in the pretrial proceedings of 13 this case . So again, I have to find in favor of Mr . 14 Obot on this point . 15 The seventh was the mortgage interes t 16 credit . This was $2,206 on the 2005 tax return . The 17 testimony showed quite clearly that Petitioner was not 18 qualified under Section 25 for this credit, and h e 19 admitted that what he was doing was taking a second 20 dip of his mortgage interest paid on his principal 21 residence . He already had taken a deduction fo r 22 interest paid on the mortgage for that house, and he 23 certainly had none of the mortgage credi t 24 certifications required by the terms of Section 25 . 25 On this, I find in favor of the Commissioner . Heritage Reporting Corporatio n (202) 628-4888 13 1 Lastly, although tried without bein g 2 pleaded, our Rules allow for adjustments that come up 3 during the course of a trial, and here there was a n 4 interesting one . It was on Mr . Obot's Schedule E for 5 both 2004 and 2005 . In 2004 , he claimed $2,000 on 6 line 20 of the Schedule E and similarly $2,030 on line 7 20 of his Schedule E for 2005 . 8 In both cases , questions were asked without 9 objection about these items, and in both cases, it was 10 perfectly clear from the face of the return, confirmed 11 by his testimony, that he was claiming a deductio n 12 under Section 179 for a house on Druid Avenue here in 13 Buffalo that he rents out . 14 Section 179 does not allow deductions for 15 property held for the production of income, and so I 16 will disallow these two deductions as well with the 17 caveat that under 6214, the total deficiency at the 18 end of the day even with this disallowance does no t 19 exceed the $4,358 .04 for 2005 -- I'm sorry, the $4,358 20 for 2004 and the $7,756 for 2005 . 21 A decision will have to be entered under 22 Rule 155 under these circumstances . 23 This concludes the Court's oral findings of 24 fact and opinion in this case . 25 We are done with Obot . Go off the record . Heritage Reporting Corporation (202) 628-4888 1 (Whereupon, at 10 :54 a .m ., the bench opinio n 2 in the above-entitled matter was concluded .) 14 3 4 5 6 7 8 9 10 11 // 12 // 13 // 1 4 15 16 // 1 7 18 19 // 2 0 21 22 23 24 25 // Heritage Reporting Corporation (202) 628-4888