TAX COURT OPINION

Case: Phyllis Brenner & Murray Brenner
Docket Number: 24305-16S
Judge: Kerrigan
Opinion Type: bench
Filed: 11/21/2017
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 DRC PHYLLIS BRENNER & MURRAY BRENNER, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. ) ) ) ) 24305-16S. ORD 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Kathleen Kerrigan at Hartford, Connecticut on October 18, 2017, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. November 21, 2017 SERVED Nov 27 2017 Bench Opinion by Judge.Kathleen Kerrigan .October 18, 2017 Phyllis Brenner & Murray Brenner v. Commissioner of 3 Internal Revenue Docket No. 24305-16S THE COURT: The Court has decided to render in this case the following as its oral Findings of Fact and Opinion, which shall not b,e relied upon in any other case. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of.Practicé and Procedure. This Bench Opinion is made pursuant to the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 authority granted.by section 7459(b) of the Internal 15 Revenue Code, and Rule 152 of the -Tax Court Rules of 16 Practice and Procedure. Unless otherwise indicated, all 17 18 19 20 21 22 23 24 25 section references are to the Internal Revenue Code in ef¾ect for the tax year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. By notice of deficiency dated September 26, 2016, the Internal Revenue Service determined a deficiency in petitioners' Federal income tax for tax year 2014, along with an accuracy-related penalty under section 6662(a). After concessions, the issues for consideration are: (1) whether petitioners are entitled to claim a 4 foreign tax credit for Canadian taxes that they claimed were withheld from dividends paid on stock investments held in an individual retirement account (IRA); (2) whether petitioners are.entitled to claim an additional casualty loss deduction; and (3) whether petitioners are liable for the accuracy-related penalty. Trial of this case was conducted on October 17, 2017, in Hartford, Connecticut. Petitioners represented themselves, and Aaron M. Greenberg represented respondent. The parties' Stipulation of Facts was admitted into evidence along with the attached exhibits. We find the following facts: Background Petitioners resided in Connecticut when they timely filed their.petition. In an unspecified year petitioner wife opened a traditional IRA, which held securities representing stock investments in two Canadian companies. In tax year 2014, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 petitioner wife converted a portion of the traditional IRA 20 21 to a Roth IRA. For the tax year 2014 petitioner wife received a 1099-R, Distribution from Pensions, Annuities, 22 Retirement or Profit Sharing Plans, IRAs, Insurance 23 Contracts, etc., for $131,380. 24 25 Petitioners timely filed a Form 1040, U.S. Individual Income Tax Return, for tax year 2014. On their 5 Form 1040, petitioners reported $85,455 of distributions from an IRA. Petitioners' return included a handwritten note which indicated 30% of the distributions were foreign. Petitioners reduced the amount reported as total taxable IRA distributions to $60,000 on their Form 1040. Petitioners did not claim a foreign tax credit for tax year 2014. On their 2014 Form 1040, petitioners claimed a deduction on their Schedule A, Itemized Deductions, for a casualty loss, which respondent allowed. Petitioners claim that they are entitled to an additional casualty loss. Petitioners had a structural engineering report done on their residence at the request of their insurance company. The request for the report was dated April 27, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2011. The report addressed leaks in the roof. The report 16 concluded that the roof was approximately 30 years old and 17 18 had been installed over two previous layers of shingles. The report further concluded that the observed leakage and 19 drywall damage were the result of failed or improperly 20 21 22 installed flashings and siding details. Discussion Generally, a taxpayer bears the burden of 23 proving the Commissioner's determinations in a notice of 24 deficiency are erroneous. Rule 142(a)(1); Welch v. 25 Helvering, 290 U.S. 111, 115 (1933). Petitioners have } cribers (973)406-2250|operationsgescribersmet|www.escribers.net 6 1 2 3 4 5 6 7 8 9 neither claimed nor shown that they meet the specifications of section 7491(a) to shift the burden of proof to respondent as to any relevant factual issue. An amount in a traditional IRA may be converted to an amount in a Roth IRA if specific requirements are satisfied. See sec. 1.408A-4, Q&A-1, Income Tax Regs. For tax purposes, the converted amount is treated as a distribution from the traditional IRA and as a qualified rollover contribution to the Roth IRA. Sec. 1.408A-4, 10 Q&A-1(c), Income Tax Regs. Specifically, with respect to 11 12 13 14 a Roth IRA, the amount distributed from the traditional IRA is treated as a taxable distribution (except for nondeductible contributions) and, therefore, included in gross income. See sec. 408A(d)(3) (A) (i); sec. 1.408A-4, 15 Q&A-7(a), Income' Tax Regs. 16 17 Petitioner wife's conversion of the amount in the traditional IRA was properly treated as a distribution 18 from the traditional IRA, and that amount is -i-ne4-uded in 19 petitioners' gross income for tax year 2014. Petitioners 20 21 22 23 24 25 contend that they should be entitled to a foreign tax credit for foreign taxes paid by the traditional IRA on dividends received for stock of two Canadian companies. See sec. 901. Under section 901, a foreign tax credit is allowed only in the year the taxes were paid or accrued. } cribers (973)4D6-2250|operations@escribersmetlwwnescribersnet The taxable IRA distribution is U.S. source income. A foreign tax credit reduces foreign source income. Sec. 7 904. Petitioners c&anet- provide documentation showing that the Canadian companies paid dividends in connection with the securities held by the traditional IRA or that the traditional IRA·paid or accrued any foreign taxes. Pursuant to Article XXI, paragraph 2, of the Convention Between the. United States of America and Canada With 1 2 3 4 5 6 7 8 9 10 Respect to Taxes on Income and on Capital, Sept. 26,. 1980, 11 U.S.-Can., T.I.A.S. No. 11087, (hereinafter, U.S.-Canada 12 13 14 treaty) as in effect for tax year 2014, dividend income derived by "a trust, company, organization or other arrangement that is a resident of a Contracting State, 15 generally exempt from income taxation 'in a.taxable year in 16 .that State and operated exclusively to administer or 17 provide pension, retirement or employee benefits shall be 18 exempt from income taxation in that taxable year in the 19 other Contracting State." Under this provision of the 20 U.S.-Canada Tax treaty, dividends received by an IRA, an 21 entity which is "generally exempt from ,income taxation" in 22 the United States, would be income exempt from taxation in 23 Canada. 24 In addition, there is no Code provision that 25 would allocate to or deem as paid by beneficiaries any 7 40(cid:0)540l250jóperations@escriberst was ribers.nét 8 foreign taxes paid or accrued by the IRA. Petitioners are not entitled to a foreign tax credit in connection with the taxable distribution from petitioner wife's IRA. Deductions are a matter of legislative grace, and a taxpayer must prove his or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). An individual may deduct losses arising "from fire, storm, shipwreck or other casualty, or from theft." Sec. 165(c)(3); see Durden v. Commissioner, 3 T.C. 1, 3 (1944). A casualty does not include "the progressive 1 2 3 4 5 6 7 8 9 10 11 12 13 deterioration of property through a steadily operating 14 cause." Fay v. Helvering, 120 F.2d 253 (2d Cir. 1941), 15 aff'g per curiam 42 B.T.A. 206 (1940); see also Durden v. 16 Commissioner, supra. Petitioners testified that the roof 17 18 19 20 21 22 was impacted by snow. However, they provided no evidence to link damage to the roof to a storm that occurred in 2014. The engineering report on the roof was done prior to tax year 2014.) Respondent's disallowance of the casualty loss is sustained. Section 6662 imposes an "accuracy-related 23 penalty" of 20 percent of the portion of the underpayment 24 of the tax that is attributable to the taxpayer's 25 negligence or disregard of rules or regulations or that is Ö73 40È-2250jöperatioris@escriberssriet|irmw.escribers.riét 9 1 2 3 4 5 6 7 8 9 10 11 attributable to any substantial understatement of tax. The Commissioner bears the burden of production with respect to the penalty. Sec. 7491(c). Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). An understatement of tax is defined as the difference between the tax required to be shown on the taxpayer's return and the amount actually shown on the return. Sec. 6662(d)(2) (A). A substantial understatement 12 of tax exists when a taxpayer understates his income by 13 14 15 the greater of $5,000 or 10% of the tax required to be shown on his or her return. The notice of deficiency in this case asserts an understatement of tax of $10,500 for 16 tax year 2014, which exceeds both $5,000 and 10% of the 17 18 tax.required to be shown on petitioners' return. Petitioner husband prepared the 2014 return 19 himself. He testified about the manner in which he 20 prepared his taxes. There was no evidence to support some 21 of the deductions that he took. 22 23 24 The accuracy-related penalty does not apply with respect to any portion of the underpayment for which it is shown that the taxpayer had reasonable cause and acted in 25 good faith. Sec. 6664(c)(1). Petitioners have not shown )À06-2250Íoperations@escribersaiet|6rwwrescri ersáet reasonable cause or good faith. For tax year 2014, petitioners are liable for the. section 6662(a) penalty. A decision will be entered for respondent. This concludes the Court's oral Findings of Fact and Opinion in 10 this case. (Whereupon, at 9:11 a.m., the above-entitled 1 2 3 4 5 6 7 matter was concluded.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25