TAX COURT OPINION

Case: Daryl Curtis & Maria Teresa Wolfe
Docket Number: 9784-09
Judge: Colvin
Opinion Type: bench
Filed: 11/09/2010
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 DARYL CURTIS AND MARIS TERESA WOLFE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 9784-09. 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 Joseph Robert Goeke at Los Angeles, California, on October 14, 2010, containing his oral findings of the trial. fact and opinion rendered at the conclusion of In accordance with the oral fact and opinion, a decision will be entered under Rule 155, Tax Court Rules y of Practice and Procedure. findings of (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. November 9, 2010 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 Bench Opinion by Judge Joseph Robert Goeke Daryl Curtis and Maria Teresa Wolfe v. Commissioner 3 Docket Number: 9784-09 October 14, 2010 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. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is rendered pursuant to the Rule 152 of the Tax Court Rules of Practice and Procedure, which will be referenced simply by Rule EÁreinafter. This Bench Opinion is rendered after trial in Los Angeles, California, on October 12, 2010. At trial, Mr. Wolfe testified and submitted an Exhibit which was entered into the record. The parties also introduced Exhibits and Stipulations of Facts which were stipulated via a Stipulation of Facts, a Supplemental Stipulation of Facts and a Stipulation of Settled Issues. This case is before the Court based upon deficiency jurisdiction under Internal Revenue Code Section 6213(a). Hereinafter Section references will be to the Internal Revenue Code. In a Notice of Deficiency issued on February Heritage Reporting Corporation (202) 628-4888 4 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 24, 2009, the Commissioner determined deficiencies in income tax and additions to tax under Section 6662(a) for 2005 and 2006. Mr. and Mrs. Wolfe filed a timely petition in response to the Notice of Deficiency. They resided in California when they filed the petition, and the Court of Appeals for the Ninth Circuit would be the venue for appeal barring a Stipulation to the contrary. Mr. and Mrs. Wolfe filed joint Federal Income Tax Returns for 2005 and 2006. They owned a limited liability company named Wolfe's Insurance Enterprises, LLC and also filed Forms 1065 for this entity for 2005 and 2006. For the taxable year 2005, Mr. and Mrs. Wolfe reported a net loss from Wolfe Insurance Enterprises, LLC of $65,578. For the taxable year 2006, Mr. and Mrs. Wolfe reported a net gain from Wolfe Insurance Enterprises, LLC of $310,000. Respondent audited the 2005 and 2006 Joint Federal Income Tax Returns of Mr. and Mrs. Wolfe and proposed Schedule C and E changes for both years. Mr. Wolfe sold insurance in 2005 and 2006 and received ' income which is not disputed, which was reflected in Forms 1099 issued to him. In 2005, the Forms 1099 issued to Mr. Wolfe reflect that he received $170,296.85 from American General Life Companies, LLC Heritage Reporting Corporation (202) 628-4888 | 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 5 and $1,061.94 from Liberty Life Insurance Company. Also, in 2005, Mrs. Wolfe received income, as reflected in a Form 1099 issued by American General Life Companies, in the amount of $11,495.62. Mrs. Wolfe also received W-2 wage income in 2005. For 2006, Mr. Wolfe received income, as reflected in Form 1099 issued by American General Life Companies, in the amount of $125,355.13. He also received income, as reflected in a Form 1099 issued by Reliastar -- that's spelled R-E-L-I-A-S-T-A-R -- Life Insurance Company in the amount of $9,261.06. In 2006, Mrs. Wolfe received W-2 income and disability payment income as well . This case arises because of the Commissioner' s Audit Determinations that proposed Schedule C and Schedule E adjustments to the Wolfes' joint income tax returns for 2005 and 2006. These adjustments include the disallowance of expenses from the insurance business and the disallowance of a pension deduction. Under Rule 142, the Wolfes bear the burden of proof to dispute the adjustments made by the Respondent which are also reflected in the Notice of Deficiency. The Wolfes have not established that the burden of proof shif ts to Respondent under Section 7491. Therefore, the burden at trial to Heritage Reporting Corporation (202) 628-4888 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 6 establish error in Respondent's determinations remained on the Wolfes. Prior to trial, the parties resolved the correct amount of the expenses with the exception of claimed rental expenses and the pension deduction. The parties, however, did not reach agreement on where the expenses should have been reported, and we will address that issue initially. The Wolfes believe the expenses, in which the revised amounts are agreed, should be reflected on the return of the limited liability company. Respondent asserts the expenses are personal to Mr. Wolfe and should be shown on Schedule C or Schedule E of the Petitioners' joint returns. Based upon Paragraph 13 of the Stipulation of Settled Issues, we find the insurance expenses were personal to Mr. Wolfe and should have been reflected on the joint income tax returns. Paragraph 13 of the Stipulation of Settled Issues states as follows: "The parties agree that the receipts submitted to substantiate the amounts in the preceding paragraph were all paid and incurred by Daryl C. Wolfe, not Wolfe Insurance Enterprises, LLC. The amounts reflected in the Heritage Reporting Corporation (202) 628-4888 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 7 preceding paragraph 12 are the agreed expenses which resolve the adjustments originally made in the Notice of Deficiency." The parties entered into a similar Stipulation in Paragraph 22 relative to the expenses for 2006. So, we conclude that these expenses were properly reported, or should-have been properly reported, on the joint returns of Mr. and Mrs. Wolfe. With respect to the rental income, Mr. Wolfe testified candidly that he did not actually pay rent for his office, but it was a reduction in the amounts he received. He was not able to establish that the income he reported was not already net of the rent; and, therefore, he did not establish that any additional rental expense was incurred. Therefore, regarding the expenses apart from the pension expense, Petitioners are only entitled to the amounts that are stipulated in the Stipulation of settled issues, and those amounts should be reflected as expenses on Schedule C of their personal returns. Also, regarding the income in question, Respondent's position that in 2005, Mrs. Wolfe had self-employment income as reflected in the 1099 she received in 2005, is correct. We uphold that Heritage Reporting Corporation (202) 628-4888 1 2 3 4 $ 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 determination. With respect to the pension income in question, Mr. Wolfe offered at trial a Statement from William Alexander who, based upon Mr. Wolfe's testimony, was Mr. Wolfe's accountant who directed him into the pension plan. The parties have also stipulated various documents showing that a trust was established to allow- Mr. Wolfe to make contributions to a pension trust. The Supplemental Stipulation of Facts contains a letter of acceptance of the plan received from the Internal Revenue Service in November 2002 and various agreements reflecting that the documentation for the plan that was sent to the Internal Revenue Service was in place. In the Statement submitted by Mr. Alexander on behalf of Mr. Wolfe, he indicates that Mr. Wolfe made payments to the pension plan. However, Mr. Wolfe's own testimony is inconsistent with that because Mr. Wolfe testified that the amounts in question remain in a safe at his home. Given Mr. Wolfe's testimony, which we believe was candid, we simply cannot uphold the pension deductions in question. Under Section 404(a), the contributions must be paid. The fact that the amounts are still retained by Mr. Wolfe, even though he has segregated Heritage Reporting Corporation (202) 628-4888 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 9 the amounts, causes us to find that he has not met the preliminary requirement in order to deduct the pension payments. Therefore, we uphold Respondent's adjustment relative to the pension payments. The final issue for our consideration is the applicability of the addition to tax under Section 6662(a). Respondent assert that the Petitioners claimed significant expenses for which they have not provided documentation, apart from the pension deduction, and we believe the Stipulations of Fact and the Stipulation of Settled Issues confirm Respondent's position relative to the insurance related expenses, which have been stipulated to be allowable and which are significantly less than the amounts originally claimed. Therefore, we do find that, regarding these insurance-related expenses, the Petitioners' Joint Federal Income Tax Returns for 2005 and 2006 were negligent and that the penalty under Section 6662(a) with respect to the deficiencies associated with those adjustments would be applicable. However, we find that the adjustments related to the Pension Benefit Plan and the deficiencies associated with those adjustments do not warrant the application of a penalty under Section 6662(a) because Mr. Wolfe in good faith relied upon the advice of Mr Alexander, Heritage Reporting Corporation (202) 628-4888 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 10 however ill-conceived and inappropriate that advice may be. We also note that in the Statement that Mr. Alexander submitted, he makes various assertions about Mr. Wolfe's payments to the pension plan which Mr. Wolfe himself conceded were not accurate. Nevertheless, we find that Mr. Wolfe relied upon Mr. Alexander's advice in good faith and that this is reasonable cause for his failure to report the appropriate amount of tax liability associated with the claimed pension benefit deduction. Therefore, to the extent that deficiencies are generated by the disallowance of that claimed pension benefit deduction in 2005 and 2006, those deficiencies do not warrant the addition to tax under Sectio 6662,(a). Because of the parties' settlement and the determinations, a Rule 155 Computation will be necessary. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 9:57 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // Heritage Reporting Corporation (202) 628-4888