TAX COURT OPINION

Case: Ronald Sai & Lee-Ann U. Sai
Docket Number: 15824-13
Judge: Vasquez
Opinion Type: bench
Filed: 06/10/2014
Pages: 8

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 RONALD SAI & LEE-ANN U. SAI, Petitioner(s), v. ) ) ) ) Docket No. 15824-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ORD ER 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 Juan F. Vasquez at Honolulu, Hawaii, on May 23, 2014, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. (Signed) Juan F. Vasquez Judge Dated: Washington, D.C. June 10, 2014 SERVED Jun 11 2014 Capital Reporting Company 3 1 Bench Opinion by Judge Juan F. Vasquez 2 May 23, 2014 3 Ronald Sai and Lee-Ann U. Sai v. Commissioner 4 Docket No. 15824-13 5 THE COURT: THE COURT HAS DECIDED TO RENDER 6 ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND 7 8 THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND 9 OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY 10 OTHER CASE. 11 This bench opinion is made pursuant to the F 12 authority granted by virtue of section 7459(b) and p( 13 Rule 152. All section references are to the Internal 9 PV 14 Revenue Code in effect for the year in issue and all 15 Rule references are to the Tax Court Rules of 16 Practice and Procedure. 17 This is the case of Ronald Sai and Lee-Ann 18 U. Sai, petitioners, versus Commissioner of the 19 Internal Revenue, respondent, Docket No. 15824-13. 20 Petitioners resided in Hawaii at the time they filed 21 22 23 the petition. Background Ms. Sai worked at H&R Block Enterprises for 24 28 years. She began her career at H&R Block in 1981 25 as a return preparer, preparing returns mostly for (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 4 1 2 low income taxpayers. She was promoted in 1987 or 1988 to an administrative position and then later to 3 assistant district manager. As assistant district 4 manager, Ms. Sai assumed a number of managerial and 5 administrative responsibilities and no longer 6 prepared tax returns. She became district manager in 7 1995, which involved similar duties to those in her 8 previous position. 9 10 11 Ms. Sai resigned from H&R Block in June of 2008. The cause of her resignation is not clear from the record. However, not long after her resignation, 12 Ms. Sai began to suffer from insomnia and severe 13 depression. She went to a psychologist, who 14 prescribed medication to treat the depression. Ms. 15 Sai also put on a large amount of weight. 16 17 On April 7, 2009, less than a year after her resignation, Ms. Sai filed a civil lawsuit 18 against H&R Block in the U.S. District Court for the 19 District of Hawaii alleging unlawful discrimination 20 based on race and age. Ms. Sai and H&R Block settled 21 22 the lawsuit in June of 2010. As part of the settlement, H&R Block paid Ms. Sai $33,696.99 for 23 her, "alleged but disputed claim for lost wages," and 24 $101,090.95 for her, "alleged but disputed claim for 25 emotional distress, compensatory, and/or other non- (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 1 wage damages." H&R Block issued Ms. Sai Forms W-2 5 2 3 4 5 6 7 8 and 1099-MISC, or Miscellaneous Income, for the 2010 year in the amounts of $33,696.99 and $101,090.95, respectively. Petitioners reported the $33,696.99 payment from H&R Block ipedme on their 2010 joint Federal income tax return. However, they did not report the $101,090.95 payment in income, believing it to be 9 excludable as compensation received on account of 10 emotional distress. On April 29th, 2013, respondent 11 12 issued petitioners a notice of deficiency, in which he determined a deficiency of $33,837 and an 13 accuracy-related penalty under section 6662(a) of 14 $6,767. The deficiency is attributable to 15 petitioners' failure to report the $101,090.95 16 payment from H&R Block and $106 of interest income. 17 Petitioners filed a timely petition with this Court. 18 19 Discussion Section 104 deals with compensation 20 received on account of injuries or sickness. 21 Originally, section 104(a)(2) excluded from gross 22 income any damages received for, "personal injuries 23 or sickness." The statute, as originally drafted, 24 applied to nonphysical inJurles, such as emotional 25 injuries and injuries to one's reputation and (866) 448 - DEPO www.Capita]ReportingCompany.com 2014 4 Capital Reporting Company 6 1 2 3 4 character. See Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir. 1983). In August of 1996, as part of the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, sec. 1605, 110 Stat. at 1838, 5 Congress revised section 104(a)(2) to exclude from 6 gross income only, "the amounts of any damages (other 7 8 9 than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or 10 physical sickness." Sec. 104(a)(2). Therefore, 11 damages for nonphysical injuries no longer qualify 12 13 for the gross income exclusion. At trial, petitioners conceded they were 14 not entitled to exclude the $101,090.95 payment from 15 H&R Block. Petitioners do not dispute the $106 of 16 interest income or the penalty thereon. Petitioners 17 dispute only the accuracy-related penalty with 18 19 respect to the $101,090.95 payment. Respondent asserted an accuracy-related 20 penalty for negligence and for a substantial 21 understatement of tax. "Negligence" is defined as 22 any failure to make a reasonable attempt to comply 23 with the provisions of the Internal Revenue Code; 24 this includes a failure to keep adequate books and 25 records or to substantiate items properly. Sec. (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 7 1 2 3 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. A "substantial understatement" of income tax is defined as an understatement of tax that exceeds the greater 4 of 10% of the tax required to be shown on the tax 5 6 return or $5,000. Sec. 6662(d)(1)(A). The Commissioner bears the initial burden 7 of production. Sec. 7491(c). If the Commissioner 8 satisfies his burden, the taxpayer then bears the 9 ultimate burden of persuasion. Higbee v. 10 Commissioner, 116 T.C. 438, 446-447 (2001). 11 Petitioners reported tax of $32,283 on their return. 12 They should have reported tax of $66,120. They 13 understated their tax liability by $33,837, which 14 15 exceeds both $5,000 and 10% of $32,283. Therefore, respondent has met his burden of production as to the 16 accuracy-related penalty. 17 The accuracy-related penalty is not imposed 18 with respect to any portion of the underpayment as to 19 which the taxpayer shows that he or she acted with 20 reasonable cause and in good faith. Sec. 6664(c)(1); 21 Higbee v. Commissioner, 116 T.C. at 448. 96 The 22 decision as to whether the taxpayer acted with 23 reasonable cause and in good faith depends on all the 24 pertinent facts and circumstances. See sec. 1.6664- 25 4(b)(1), Income Tax Regs. Relevant factors include (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 8 1 2 3 the taxpayer's efforts to assess his or her proper tax liability, including the taxpayer's reasonable and good faith reliance on the advice of a 4 professional such as an accountant. See id. Further, 5 6 an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge, and 7 education of the taxpayer may indicate reasonable 8 cause and good faith. See Barr v. Commissioner, T.C. 9 Memo. 2009-250, slip op. at 12. 10 11 12 We find that petitioners acted with reasonable cause and good faith. After Ms. Sai resigned from H&R Block, she experienced emotional 13 distress, suffered from insomnia, and was diagnosed 14 with severe depression by a psychologist. In 2010, 15 petitioners consulted the Internal Revenue Service's 16 website for guidance but mistakenly believed that the 17 18 $101,090.95 payment Ms. Sai received as compensation for her emotional distress and mental illnesses 19 qualified for the exclusion under section 104(a), as 20 amended. While Ms. Sai prepared tax returns for 21 clients at H&R Block in the beginning of her career, 22 23 24 she mostly worked with low income taxpayers. At trial, she credibly testified that she could not recall a single return that she had prepared which 25 raised section 104(a). From 1987 or 1988 until her (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 1 resignation, Ms. Sai's duties at H&R Block were 2 administrative and managerial in nature -- she had no 9 3 4 5 6 7 8 9 10 11 12 13 14 involvement in tax return preparation. Given the foregoing, we find that petitioners' failure to report the $101,090.95 payment from H&R Block in income was based on an honest misunderstanding of the law. Accordingly, we hold .that petitioners are not liable for the accuracy-related penalty with respect to this payment. The foregoing represents the Court's oral findings of fact and opinion in this case. In reaching our holdings herein, we have considered all arguments made, and to the extent not mentioned above, we conclude they are moot, irrelevant or 15 without merit. This concludes the Court's oral 16 findings of fact and opinion. Thank you. (Whereupon, at 11:06 a.m., the above- captioned matter was concluded.) 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2014