TAX COURT OPINION

Case: Peter B. Zschau & Melanie Y. Zschau
Docket Number: 9285-17S
Judge: Carluzzo
Opinion Type: bench
Filed: 04/04/2018
Pages: 10

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 PETER B. ZSCHAU & MELANIE Y. ZSCHAU, ) ) ) Petitioners, v. ) Docket No. 9285-17S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Chief Special Trial Judge Lewis R. Carluzzo at Boston, Massachusetts, 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 under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. April 4, 2018 SERVED Apr 04 2018 Bench Opinion by Special Trial Judge Lewis R. Carluzzo 3 March 21, 2018 Peter B. Zschau & Melanie Y. Zschau v. Commissioner of Internal Revenue Docket No. 9285-17S 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 (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and 1 2 3 4 5 6 7 8 9 10 11 12 Rule references are to the Tax Court Rules of Practice and 13 Procedure. This bench opinion is made pursuant to the 14 authority granted by section 7459(b) and Rule 152. 15 This proceeding for the redetermination of a 16 deficiency is a small tax case subject to the provisions 17 of section 7463 and Rules 170 through 174. Except as 18 provided in Rule 152(c), this bench opinion shall not be 19 cited as authority, and pursuant to section 7463(b) the 20 decision entered in this case shall not be treated as 21 22 precedent for any other case. Peter B. Zschau (petitioner) appeared on his own 23 behalf, as did Melanie Y. Zschau, R. Jeffrey Knight and 24 25 Francesca Chou appeared on behalf of respondent. In a notice of deficiency dated February 6, 2017 cnbers 1 2 3 4 5 6 7 8 9 (notice), a copy of which is attached to the petition, but not otherwise in the record, respondent determined a deficiency in petitioners' 2014 Federal income tax and imposed a section 6662(a) penalty. According to the notice, the penalty is applicable because the underpayment of tax required to have been shown on petitioners' 2014 Federal income tax return (return) is a substantial understatement of income tax within the meaning of section 6662(d). 10 Petitioners now concede the deficiency. 11 Although they concede the deficiency -- they've paid most 12 13 if not all of it before trial -- they dispute the imposition of the penalty. According to petitioners, they 14 did not know of the item of income that resulted in the 15 deficiency 'at the time the return was filed. The issue 16 17 for decision is whether petitioners had reasonable cause and acted in good faith with respect to the underpayment 18 of tax required to have been shown on their return. 19 Before summarizing the relevant facts as we 20 would normally do at this point in a bench opinion, we 21 think it more appropriate to briefly outline the 22 applicable law that will inform our decision, and begin by 23 noting that section 6662(a) Imposes an accuracy-related 24 penalty on "any portion of an underpayment of tax required 25 to be shown on a return". Sec. 6662(a). Respondent bears cribers 1 2 3 4 5 6 7 8 9 10 11 the burden of production with respect to the imposition of the penalty, see sec. 7491(c), and that burden includes establishing that the imposition of the penalty was appropriately approved by the immediate supervisor, or higher level official, of the person who made the initial determination to impose the penalty. See sec. 6751(b). The section 6662(a) penalty does not apply to the portion of the underpayment of tax shown to be due to reasonable cause and good faith on the part of the taxpayer. See sec. 6664(c). In this case, the deficiency, the underpayment 12 of tax, and the understatement of income tax are all 13 14 15 computed in the same manner. See secs. 6211(a), 6664(a), 6662(d)(2) (A). Taking into account the amount of tax shown on the return and the amount of the deficiency 16 determined in the notice,- it is clear that the 17 18 19 20 21 22 23 underpayment of tax is a substantial understatement of income tax because the underpayment exceeds 10% of the tax required to be shown on the return. See sec. 6662(d)(1) (A). That being so, and because respondent has introduced sufficient evidence to establish that the imposition of the penalty was approved in writing as required under section 6751(b), respondent has met his 24 burden of production with respect to the imposition of the 25 penalty, and we turn our attention to petitioners' claim that they had reasonable cause and acted in good faith in connection with the underpayment/deficiency. The burden of proof in this regard rests with petitioners. See Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 6 (2001). Whether a taxpayer acted with "reasonable cause and in good faith is determined on a case-by-case basis, taking into account all pertinent facts and circumstances", sec. 1.6664-4(b) (1) Income Tax Regs., including "the taxpayer's mental and physical condition, as well as sophistication with respect to the tax laws, at the time the return was filed." Kees v. Commissioner, T.C. Memo. 1999-41; see also Hughes v. Commissioner, T.C. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Memo. 2015-89. 15 16 17 18 19 20 21 22 With these fundamental principles in mind, we turn our attention to the "facts and circumstances" relied upon by petitioners to support their claim that they had a reasonable cause and acted in good faith with respect to the underpayment of tax required to be shown on their return. Those facts and circumstances are summarized below. We'll start by noting the that the return was 23 prepared by the same paid Federal income tax return 24 preparer that prepared petitioners' joint Federal income 25 tax returns for many years prior to 2014, which goes a 7 1 2 3 4 5 6 7 8 9 long way in support of their argument against the imposition of a section 6662(a) penalty. We further note that at all times relevant, petitioners maintained numerous non-retirement and retirement investment accounts with various financial institutions, and petitioners' return reports various items of income attributable to those accounts. Here, our focus is on a non-retirement investment account that petitioners maintained with Janus Services, LLC (Janus). Because of capital gains and other 10 income earned by the Janus account during 2014 not 11 distributed to petitioners, but reinvested in the account, 12 13 14 the account enjoyed an increase in value by more than 15%. The increases are shown on the annual Overall Portfolio Summary that Janus provided to petitioners before the 15 return was filed. The capital gains and other income that 16 resulted in the increase in the value of the account 17 18 19 apparently were reported on a paper Form 1099 that Janus issued and mailed to petitioners for. 2014, but due to a delay in delivery, that document was not received by 20 petitioners until long after the return was filed.. 21 According to petitioner, that is the reason the income 22 earned from the Janus account.was not reported on their 23 original return but shown on an apparently unprocessed 24 amended return submitted to respondent after the notice 25 was issued. It would be appropriate to note at this 8 1 2 3 4 5 6 7 8 9 point, that we completely accept his explanation. Petitioner was the only witness who testified at trial, and we found him to be entirely credible. Without specifically repeating the factual background as outlined in petitioner's testimony, we accept petitioners' version of the events at the time the return was filed. Our favorable assessment of petitioner's credibility, and our acceptance of petitioners' version of events, however, does not distance them entirely from the imposition of the 10 penalty here in dispute. Neither does the fact that 11 petitioners now acknowledge the error made on the return 12 13 14 and have paid the deficiency some time ago. On the other hand, respondent's suggestion that petitioners' claim of good faith should be rejected because petitioners paid the 15 deficiency only after the Internal Revenue Service 16 17 18 19 contacted them about it does little to persuade us that the penalty should be imposed. Considering all of the "facts and circumstances" we find this to be a very close case and are disappointed that the parties were unable to 20 resolve it between themselves by splitting the penalty. 21 Because we must resolve the dispute between the parties, 22 23 24 and because we cannot on our own, split the imposition of the penalty, on balance and for the following reasons, we find that the scale tips ever so slightly in respondent's 25 favor. (913}40 -22(cid:0)5400ÍÈperätins@estribersalet|hviwisciibers et We understand that the omitted income giving 9 rise to the deficiency was not distributed to petitioners during 2014. Nevertheless, the year-end summary that Janus provided to petitioners shows a substantial amount of capital gain income and other income earned during 2014. Petitioner explained that over his long relationship with his return preparer, .the practice between them was only to provide the return preparer with Forms 1099 with respect to the various investment accounts 1 2 3 4 5 6 7 8 9 10 maintained by petitioners over the years. That being so, 11 petitioners did not provide the return preparer with the 12 13 14 15 16 17 year-end summary, and because the Form 1099 evidencing the income had not yet been delivered to petitioners, the return preparer did not have that information at the time the return was filed. But petitioners did have that information. The year-end summary was received by petitioners 18 before the return was filed, and even though the document 19 was placed in a folder designated for income tax 20 materials, the document was not provided to petitioners' 21 return preparer. At trial petitioner correctly pointed 22 out that the year-end summary does not characterize the 23 24 25 income as taxable, but the year-end summary clearly shows the extent of the capital gains and other income realized by the investment account during 2014. Neither petitioner 10 1 2 3 4 5 6 7 8 9 10 11 12 claims to be unsophisticated in matters of Federal income taxation, and although the record does not disclose the educational background of either, we cannot ignore petitioner's business background as the long-time owner of an independent insurance brokerage agency. Petitioner's professional experiences must have required him to review and understand various types of financial information, and we have difficulty understanding why, in the absence of a Form 1099 and given the information contained on the year- end summary, he would not have given the document to his return preparer even if the document did not clearly characterize the income as taxable. Upon learning of the 13 substantial amount of capital gains and other income as 14 shown on Janus' year-end summary petitioners should have 15 provided that form to their return preparer. Their 16 17 18 19 failure to do so, even if consistent with their routine arrangements with the return preparer for other years, constrains us to reject their claim that there was reasonable cause and they acted in good faith with respect 20 to the underpayment of tax required to be shown on their 21 return. That being so, respondent's imposition of the 22 penalty is sustained. 23 24 25 To reflect the foregoing, and because the record shows that a portion, if not all of the deficiency has already been paid by petitioners, the Decision to be . 11 entered in this case will be entered under Rule 155 to ensure that the assessments, if any, of those payments are properly accounted for in the amount of the deficiency to be shown on the Decision. This concludes the Court's bench opinion in this case. (Whereupon, at 2:48 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 cribers