TAX COURT OPINION

Case: Sheri Valente
Docket Number: 20452-18S
Judge: Leyden
Opinion Type: bench
Filed: 11/18/2020
Pages: 15

UNITED STATES TAX COURT WASHINGTON, DC 20217 SHERIVALENTE, Petitioner, v. ) ) ) ) Docket No. 20452-18S. 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Hartford, Connecticut, on November 13, 2020, containing her oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings offact and opinion, a decision will be entered for respondent as to the deficiency and for petitioner as to the accuracy-related penalty under section 6662(a). (Signed) Diana L. Leyden Special Trial Judge Dated: Washington, D.C. November 18, 2020 SERVED Nov 18 2020 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bench Opinion by Special Trial Judge Diana L. Leyden November 13, 2020 Sheri Valente v. Commissioner of Internal Revenue Docket No. 20452-lSS THE COURT: 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. See Rule 152(0), Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, and all Rule DLL references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code, as amended, in effect at all relevant times. This proceeding was heard as a Small Tax Case 16 pursuant to the provisions of section 7463 and Rules 170 17 18 19 through 174. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152, The Court uses the term "Internal Revenue 20 Service" or "IRS" to refer to administrative actions taken 21 outside of these proceedings. The Court uses the term 22 "respondent" to refer to the Commissioner of Internal 23 Revenue, who is the head of the IRS, and is respondent in this case, and to refer to actions taken in connection 24 25 with the case. (973)406-2250 jopemtionsadesciers.net|www.escribertnet 4 The trial of this case was conducted on November 10, 2020, in the Remote Trial Session for Tampa, Florida. Petitioner appeared on her own behalf. Ryan J. Hough appeared on behalf of respondent. In a Notice of Deficiency dated July 23, 2018, the IRS determined a deficiency in petitioner's 2015 Federal income tax of $10,272 and a section 6662(a) accuracy-related penalty of $2,054.40. The issues for decision by the Court are as follows: (1) whether petitioner failed to report alimony in the amount of $49,333 as income, and (2) whether 1 2 3 4 5 6 7 8 9 10 11 12 petitioner is liable for the accuracy-related penalty. 13 The adjustment to the itemized deduction and claimed by DLL 14 petitioner is computational, and need not be discussed. 15 The Court concludes that petitioner failed to report 16 alimony income in the amount of $49,333, but that she is 17 18 not liable for the section 6662(a) accuracy-related penalty because she has proven that she had reasonable 19 cause for not reporting the alimony income. 20 Background 21 22 Some of the facts are stipulated and are so found. The first stipulation of facts and the attached 23 exhibits are incorporated herein by this reference. 24 Petitioner resided in the State of Connecticut at the time 25 that the petition was filed with the Court. 1. Separation Agreement and Di_vorce Petitioner and Gregory Valente married on June 5 6, 1992. During their marriage petitioner and Gregory Valente had three children- Bailey Valente, born May 25, 1 2 3 4 1995, Lilly Valente born April 13, 5 Valente born 1998 and Jackson DLL 6 7 8 9 August 8, 2000. Petitioner filed a complaint for dissolution of marriage in the State of Connecticut Superior Court of the Judicial District of Stamford on December 28, 2010. On January 25, 2013, the Connecticut 10 Superior Court entered a Dissolution Of Marriage (Divorce) 11 12 13 14 15 judgment. On the same date petitioner and Gregory Valente entered into a Separation Agreement that provided that beginning on February 1, 2013, Gregory Valente "shall pay unallocated alimony and child support to [petitioner) for a period of ten (10) years or until the event of 16 [petitioner's] remarriage, cohabitation per the Statute, 17 18 19 of the death of either [Gregory Valente or petitioner]. As is relevant to the year in issue, 2015, the amount of alimony that Gregory Valente was to pay beginning on 20 February 1, 2013, through August 1, 2017, was forty 21 percent of his base salary of $185,000, as stated in the 22 Separation Agreement, in monthly payments of $6,166.67. 23 Thereafter the Separation Agreement provided for a 24 recalculation of the amount of the alimony for the BEE (973)4 f62250} operations Hescribers.net | www.escribersnet Mr. Valente has paid less than the amount due under the Separation Agreement formula including for 2015, the year 6 in issue. Petitioner and Gregory Valente agreed pursuant to the Separation Agreement that "the unallocated alimony and child support and/or alimony payments paid to and received by [petitioner) from Gregory Valente are taxable to [petitioner) and deductible by [Gregory Valente]." The Separation Agreement provided that the term of the alimony 1 2 3 4 5 6 7 8 9 10 was non-modifiable but the amount of the alimony remained 11 modifiable based on the Connecticut General Statutes 12 13 14 15 16 subject to the terms of the Separation Agreement. The Separation Agreement provided that "[w]hen alimony ends for any reason, "Gregory Valente] shall pay child support payments to [petitioner) for the support of the minor children, in accordance with the then current 17 Connecticut Child Support Guidelines in effect." During 18 the year in issue, 2015, the alimony was paid and had not 19 ended for any of the reasons set forth in the Separation 20 Agreement. The Separation Agreement does not state a 21 fixed amount of child support. During 2015 the 22 Separation Agreement as originally written and signed was 23 in effect. 24 During 2015, Gregory Valente paid petitioner 25 $74,000 and deduced that amount on his 2015 Federal income BEE 7 tax return as alimony paid. Petitioner reported as alimony received on her 2015 Federal income tax return $24,667. The IRS examined petitioner's 2015 tax return and proposed a deficiency based on unreported alimony income of $49,333 and an accuracy-related penalty under section 6662(a) for substantial understatement of tax of $2,054.40. 2. Petitioner and Mr. Valente hired Mr. Paul Lupo, an Enrolled Agent and College Financial Planning professional to prepare their Federal income taxes and assist them with college financial planning beginning in 2012. After petitioner and Mr. Valente executed a Separation Agreement and dissolved their marriage, Mr. Lupo prepared petitioner's and Mr. Valente's tax returns 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 for 2013 and 2014 and advised them how to allocate the 17 18 payments Mr. Valente made to petitioner as well as payments of the mortgage interest that petitioner paid. 19 Petitioner gave Mr. Lupo the checks of the payments she 20 received as unallocated alimony and child support and 21 provided him with her Separation Agreement. As an 22 enrolled agent, Mr. Lupo is subject to the professional 23 responsibility requirements issued by the IRS under 24 Circular 230. 25 Mr. Lupo prepared petitioner's and Mr. Valente's 1 2 3 4 5 6 7 8 9 10 11 separate tax returns for 2013 and 2014. In doing so, Mr. Lupo allocated a portion of the unallocated alimony/child support payments as "alimony" which he then reported as gross income on petitioner's 2013 and 2014 tax returns and reported as a deduction on Mr. Valente's 2013 and 2014 tax returns. Mr. Lupo treated the remaining amount of the unallocated alimony and child support payments as child support and did not report it as gross income on petitioner's 2013 and 2014 returns and did not report it as a deduction on Mr. Valente's 2013 and 2014 tax returns. The Separation Agreement also provided that 12 petitioner and Mr. Valente were to apportion the mortgage 13 14 and tax deductions for 2012 in accordance with "IRS rules and guidelines for said deductions and in accordance with 15 which party has made the payments to the mortgage 16 company." Further, the Separation Agreement provided that 17 petitioner "shall get the entire mortgage, real estate tax 18 and other applicable tax deductions for any payments she 19 made in 2012 and onward until the sale of the marital 20 residence." Petitioner had not been able to sell her 21 house in 2015. Mr. Lupo advised petitioner to accept the 22 allocations he calculated of the unallocated alimony and 23 child support between alimony and untaxable child support 24 on her returns because he advised her it was best for 25 purposes of completing her child's Free Application for 9 in accordance with his college Federal Student Aid (FAFSA) financial planning advice. 3. 2015 tax returns Mr. Valente hired a different tax return preparer to prepare his 2015 tax return. During 2015 paia deducted DLL Gregory Valente/ petitioner $74,000 and deduced that amount on his 2015 Federal income tax return as alimony paid. Petitioner reported as alimony received on her 2015 Federal income tax return $24,667, in accordance with 1 2 3 4 5 6 7 8 9 10 Mr. Lupo's advice. Mr. Lupo prepared petitioner's 2015 11 12 tax return but did so before Mr. Valente's return was prepared. Petitioner had taken several steps to force Mr. 13 Valente to give her copies of his tax returns, including 14 15 the 2015 tax return, but had not been successful. The record does not show if Mr. Lupo advised petitioner that 16 she could file an extension to file her 2015 tax return. 17 18 19 The IRS examined petitioner's 2015 tax return. In connection with that examination the IRS obtained a copy of the Separation Agreement and copies of checks that 20 Mr. Valente issued to petitioner that were noted as 21 "alimony/child support" or "alimony". The IRS proposed a 22 deficiency to petitioner's 2015 tax liability based on 23 unreported alimony income of $49,333 (the difference 24 between the amount petitioner had reported on her 2015 tax 25 return and the amounts paid by Mr. Valente to her) and an BEE (973)4%-2250|operations erriers.netlwwmesaibersnet accuracy-related penalty under section 6662(a) for substantial understatement of tax of $2,054.40. 10 In response to an order of the courted dated DLL July 27, 2020, respondent provided case notes from the Correspondence Exam Automation Support (CEAS). It contained the following entry, 09/01/2017 Garner, Brandy L, Non Action Manager approval to propose Accuracy-Related Penalty Substantial Understatement of Tax IRC 6662(d) per Lead Sheet completed on case. Ms. Garner testified that she was an IRS employee and the immediate supervisor of Ms. Hinecker, the examiner who initially proposed the accuracy-related i penalty. Ms. Garner reviewed the examiner's proposal for an accuracy-related penalty, approved it, and signed her 2 3 4 5 6 7 8 9 10 11 12 13 14 15 approval in writing on September 1, 2017. 16 Discussion 17 18 Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the 19 burden of proving it incorrect. See Rule 142(a); Welch v. 20 Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions 21 22 are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction 23 claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 24 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 25 440 (1934). BE 973)406-2250|operathnsaeseribers.net|www.escriben.net Under section 7491(a), the burden of proof may 11 shift to the Commissioner if the taxpayer produces credible evidence with respect to any relevant factual issue and meets other requirements. Petitioner has not argued that section 7491(a) applies nor established that its requirements are met. The burden of proof remains with petitioner. 1. Section 71 (c) (1) provides that the general inclusion rule under section 71(a) "shall not apply to that part of any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support of children of the payor spouse." Any payment 1 2 3 4 5 6 7 8 9 10 11 12 13 14 that will be reduced "(A) 15 contingency on the happening of a DLL 16 specified in the instrument relating to a child (such as 17 18 attaining a specified age, marrying, dying, leaving school, or similar contingency), or (B) at a time which 19 can clearly be associated with a contingency of a kind 20 21 22 23 specified in subparagraph (A)" is treated as an amount fixed as payable for the support of children of the payor spouse. Sec. 71 (c) (2). Under the Separation Agreement petitioner and 24 Mr. Valente agreed that he would pay petitioner during the year in issue. Such payments meet 12 the criteria for alimony or separate maintenance payments under section 71(b) (1). The parties also agreed that such amounts would be taxable to petitioner and deductible by Mr. Valente. the conditions in the Separation Agreement None of that would have required Mr. Valente to pay indicate that any of DLL the paymento ao child support were in effect for the year in issue. Therefore all of the amount paid to petitioner by Mr. Valente during 2015- $74,000- constituted alimony and was income to petitioner. Therefore the Court finds that the unreported amount of alimony- $49,333- is income to petitioner in 2015. Petitioner argues that she and Mr. Valente did not follow the terms of the Separation Agreement and urges the Court to accept the allocation between alimony and child support advanced by Mr. Lupo as her college 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 what was best financial planner because she and Mr. Valente agreed to do for the children. Petitioner is bound to 18 the allocation provisions in the Separation Agreement that she signed unless she provides strong proof 19 20 allocations are not accurate. See In re Tax Refund that that the 21 ITETg., 766 F. Supp. 1248, 1263 (E.D.N.Y. 1991). 22 Petitioner has not shown strong proof why the provisions 23 of the Separation Agreement, an agreement she signed and 24 during which she was represented by counsel, should be 25 disregarded. The Court is concerned that the change BEE (973)406-2250loperatinsgescr6ers.net esriben.net petitioner asserts should be adopted appears to be based 13 on gaming the FAFSA process after the Separation Agreement was signed. There is not any evidence that the parties agreed to amend the Separation Agreement to reflect that the amount petitioner excluded from her 2015 return was agreed to be child support. Therefore, the Court rejects petitioner's request to disregard the express language of the Separation Agreement. 2. A Respondent bears the burden of production with respect to the imposition of the section 6662(a) accuracy- related penalty. See secs. 6751(b) and 7491(a). Based on the record the Court concludes that the firct timo the DLL accuracy-related penalty was proposed by an examiner, Ms. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 I 15 Hinecker, wac on August 31, 2017, and that Brandy L. DLL 16 Garner approved it in writing on September 1, 2017. 17 Petitioner has not provided any evidence to rebut that the 18 accuracy-related penalty was approved by the examiner's 19 supervisor. Therefore, respondent has met his burden of 20 production. 21 22 3. Reasonable Cause The accuracy-related penalty does not apply to 23 any part of an underpayment of tax if the taxpayer shows 24 she acted with reasonable cause and in good faith with that indicate reasonable cause and good faith include 14 2 reliance on the advice of a tax professional or an honest 3 misunderstanding of the law that is reasonable in the 4 5 6 7 8 9 10 11 12 13 14 light of all facts and circumstances. Sec. 1.6664-4(b), Income Tax Regs.; see Higbee v Commissioner, 116 T.C. 438, 449 (2001). Relevant facts and circumstances for the Court to consider in"1ndo *ho knmalodge and experience of 1.664-4(b)(1) the taxpayer. Sec. 1.6661 4 O)(1), Income Tax Regs. DLL Generally, reliance upon the advice of the tax professional may establish reasonable cause and good faith for purposes of avoiding liability for the section 6662(a) penalty. See UnitedMes v. Boyle, 469 U.S. 241, 250 (1985). Such reliance does not serve as an "absolute defense"; it is merely a "factor to be considered." 15 Freygg v. Commissioner, 89 T.C. 849, 888 (1987), aff'd, 16 904 F.2d 1011 (5th Cir. 1990), aff'd, 501 U.S. 868 (1991). 17 18 The case law sets forth the following three requirements in order for a taxpayer to use reliance on a 19 tax professional to avoid liability for a section 6662(a) 20 penalty: "(1) The adviser was a competent professional who 21 had sufficient expertise to justify reliance, (2) the 22 23 taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good 24 faith on the adviser's judgment." See Neonatology 25 Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), 15 aff'd, 299 F.3d 221 (3d Cir. 2002). Mr. Paul Lupo, an Enrolled Agent, convinced petitioner that he was properly preparing her returns. The Court believes that petitioner was a victim of a tax preparer who manipulated numbers to conform to college financial planning advice he was being paid to give. Petitioner provided Mr. Lupo with all the checks she received from her husband as unallocated alimony and child support and the Separation Agreement which expressly stated that the unallocated alimony and child support was to be taxable to petitioner. Further, the internal revenue laws which Mr. Lupo as an enrolled agent is supposed to apply also require the same result. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Petitioner credibly testified at trial on November 10, 15 2020, that she relied in good faith on Mr. Lupo's judgment 16 to prepare her taxes. 17 18 Accordingly, the Court concludes that petitioner has met her burden of proving reasonable cause and is not 19 liable for the section 6662(a) accuracy-related penalty 20 21 22 23 24 for 2015. In order to give effect to our disposition of the disputed issues, decision will be entered for respondent with respect to deficiency related to $49,333 of unreported alimony income and decision for petitioner 25 with respect to the section 6662(a) accuracy-related penalty. 16 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 11:20 a.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 10 11 12 14 15 16 17 18 19 20 21 22 23 24 25