TAX COURT OPINION

Case: Matina Rae Harward
Docket Number: 17905-09S
Judge: Colvin
Opinion Type: bench
Filed: 11/30/2010
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 MAT INA RAE HARWARD, CLC Petitioner, v. ) Docket No. 17905-09 S. COMMISSIONER OF INTERNAL REVENUE, Respondent O R D 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 the pages of the to petitioner and to respondent a copy of transcript of the hearing in the above case before Judge David Laro at Las Vegas, Nevada, on October 29, 2010, containing his oral the hearing. fact and opinion rendered at the conclusion of findings of In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. (Signed) David Laro Judge Dated: Washington, D.C. November 30, 2010 SERVED Dec 02 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 3 Bench Opinion by Senior Judge David Laro October 29, 2010 Harward v. Commissioner Docket No. 17905-095 THE COURT: The Court has decided to render Oral Findings of Fact and Opinion in this case. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of Practice and Procedure. Petitioner refers-to Matina Rae Harward, and Canyon Stone refers to Canyon Stone and Installation, Inc section references are to the Internal Revenue Code, and - le references are to the Court's Rules of Practice and Procedure. P titioner petitioned the Court to redetermine Respondent's determination of a $14,865 deficiency and a $2,973 accuracy-related penalty in her 2007 Federal income tax. Petitioner resided in Saint George, Utah, when the petition was filed. Background Petitioner, while employed as an Office Manager with Canyon Stone, embezzled approximately $41,662 during 2007. Petitioner was prosecuted criminally and pled guilty to theft by deception, a second degree felony in Utah. 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 In late 2008, the Fifth District Court, Washington County, State of Utah, ordered Petitioner to pay restitution to Canyon Stone in the amount of $45,578.32 plus interest. Petitioner began paying restitution in November d OL. 2008. Petitioner filed her 2007 Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, but did not report any portion of the embezzled funds as taxable income. Apparently at some point after Petitioner filed her 2007 ormL1040EZ, Canyon Stone issued to Petitioner a.F'orm 1099-MISC, Miscellaneous Income, reporting the $41,662 in embezzled funds as nonemployee compensation to Petitioner. We note that the amount of restitution ordered by the Fifth District Court, $45,578.32, exceeds the amount reported on Form 1099 by Canyon Stone,[$41,6623 but attribute this difference to the imposition of statutory interest from the date of embezzlement to the date restitution was ordered. Petitioner testified that after she received the Form 1099 from Canyon Stone, she sought the advice of an accountant who allegedly advised her that the embezzled funds were "a loan" and "not real income". Respondent determined that Petitioner failed 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 to report the embezzled funds on her 2007 Form 1040EZ. Petitioner petitioned the Court, and on October 25, 2010, a trial was held in Las Vegas, Nevada. Petitioner was the only witness to testify. Discussion I. Embezzled Funds. Section 61(a) provides that gross income includes all income from whatever source derived. It is well-settled that lawful and unlawful gains are comprehended within the term "gross income". See Rutkin v. United States, 343, U.S. 130 (1952); Cohen v. United States, 297 F.2nd 760, 768-769 (9th Cir. 1962). Petitioner advances two theories to support her argument that the embezzled funds are not taxable to her, neither of which we find convincing. First, Petitioner argues that the embezzled funds should be regarded as a loan for Federal income tax purposes. Petitioner has not offered any support, other than her direct testimony, that she considered the funds to be a loan she intended to repay at a future date at the time .tg she took the funds from Canyon Stone . We decline to credit Petitioner's testimony in light of the record as a whole. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) . Where there is 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 no mutual agreement between the party providing the money and the party receiving it, there can be no support for the claim that money obtained unlawfully should be excluded from gross income on a loan theory. Moore v. United States, 412 F.2d 974, 979-980 (5th Cir. 1969); McSpadden v. Commissioner, 50 T.C. 478, 489 (1968). Second, Petitioner asserts that the embezzled funds should not be taxable to her because she is making restitution of those monies. Where, as here, embezzled funds are received without restriction and without a consensual recognition of repayment, those funds must be included in the embezzler's gross income. See James v. United States, 366 U.S. 213, 219 (1961); Mais v. Commissioner, 51 T.C. 494, 498&499 (1968). Because we previously determined that a loan did not exist between Petitioner and Stone Canyon, those funds must be included in Petitioner's gross income in accordance with Section 61. See Beaton v. Commissioner, T.C. Memo. 1980-413, affd. 664 F.2d 315 (1st Cir. 1981). Nor do we find that Section 165 entitles Petitioner to a deduction in 2007 because she did not begin making restitution payments until November 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 2008. See Collins v. Commissioner, 3 F.3d 625, 631 (2nd Cir. 1993), affg. T.C. Memo 1992-478. II. Accuracy-Related Penalty Respondent also determined that Petitioner is liable for an accuracy-related penalty because she substantially understated her 2007 income tax. See Sec. 6662(d). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. See Sec. 6662(d) (1). The Commissioner bears a burden of production with respect to the applicability of an accuracy-related penalty. See Secf. 7491(c). That burden requires the Commissioner to produce sufficient evidence to support imposition of an accuracyrrelated penalty on the taxpayer. Once the Commissioner has met his burden, the burden of proof is then placed on the taxpayer to prove that the accuracy-related penalty does not apply because of reasonable cause, substantial authority, or 1 the like. See Secs. 662(d) (2) (B), 6664(c) (1); Higbee v. Commissioner, 116 T.C. 438, 449 (2001). The notice of deficiency determined a deficiency of $14,865, which amount exceeds the greater of $5,000 or 10 percent of the amount required 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 8 to be shown on the return. Thus, we conclude that Respondent has met his burden of production. Petitioner argues that she is not liable for the accuracy-related penalty because she relied on the advice of her accountant. Reliance on the advice of a professional, such as an accountant, may constitute reasonable cause and good faith if, under all facts and circumstances, the reliance is reasonable and the taxpayer acted in- good faith. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd. 299 F.3d -sak (3d Cir. 2002); Sec. 1.6664-4(c) (1), Income Tax Regs. We have stated that reasonable cause and good faith is present.wb4n,the record establishes that: (1) The taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviggt who has sufficient expertise to justify reliance; (2) the taxpayer provides necessary and accurate information to the adviser; and (3) the taxpayer actually relies in good faith on the adviser's judgment. See Neonatology Associates, P.A. v. Commissioner, supra at 99. Notwithstanding the inaccuracy of the advice received, we conclude that Petitioner has met the reasonable cause exception to the accuracy-related 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 penalty because, we find, Petitioner relied reasonably and in good faith on the advice of her accountant as to the treatment of the embezzled funds as loans. Petitioner testified, without cross- examination, that she provided her accountant with a copy of the Form 1099 received from Stone Canyon and Petitioner did not report those funds as income based on that advice. We do not believe that Petitioner was under any further obligation to independently research whether her accountant's advice was correct. See Estate of Lee v. Commissioner, T.C. Memo 2009-84. Accordingly, we hold that Petitioner is not liable for the accuracy-related penalty. . III. Conclusion We will issue an appropriate order. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 9:45 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // Heritage Reporting Corporation (202) 628-4888