TAX COURT OPINION

Case: Donald L. Gould
Docket Number: 28019-21S
Judge: Urda
Opinion Type: bench
Filed: 05/10/2023
Pages: 8

United States Tax Court Washington, DC 20217 DONALD L. GOULD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 28019-21S. 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 oral findings of fact and opinion rendered at the conclusion of the trial in the above-referenced case held before Judge Patrick J. Urda in Houston, Texas. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Patrick J. Urda Judge Served 05/10/23 Bench Opinion by Judge Patrick J Urda March 31, 2023 3 Donald L. Gould v. Commissioner of Internal Revenue Docket No. 28019-21S 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. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times. By notice of deficiency dated May 17, 2021, the Internal Revenue Service (IRS) determined a deficiency of $6,162 in petitioner Donald L. Gould's 2018 Federal income tax. The primary question before us is whether Mr. Gould received and failed to properly report in tax year 2018 certain commissions that he received as an insurance broker. Based on the evidence before the Court, we must resolve this case in the Commissioner's favor. Trial of this case was conducted in Houston, Texas on March 27, 2023. Mr. Gould represented himself, 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 and Chelsea Bachrach represented the Commissioner. On the 4 evidence before us, we find the following facts: FINDINGS OF FACT I. Mr. Gould's 2018 Tax Reporting For many years, Mr. Gould has been a broker of life insurance. In 2018, Mr. Gould earned a total of $45,916 in insurance commissions from one insurance brokerage (Madison Brokerage) and seven life insurance companies (John Hancock Life Insurance Co. (USA), Nassau Life Insurance Company, New York Life Brokerage, Lincoln National Life Insurance Co., Jackson National Life Insurance Company, American General Life Services Co., LLC, and Protective Life Insurance Company). These amounts are not in dispute. Mr. Gould timely filed his Form 1040 federal income tax return for 2018 on April 23, 2019. On his Schedule C, Profit or Loss From Business, he reported gross income of $31,685 and, among other things, claimed a business expense deduction of $8,435 for "Premiums Received on Taxpayers Life Insurance Excludable from Income." Based in part on these numbers, Mr. Gould concluded that he owed $3,076 in tax for 2018, which he paid with his return. II. IRS Examination and Notice of Deficiency The IRS selected Mr. Gould's 2018 tax return for 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 1 examination and determined that, based on Forms 1099 from 5 the ^ 2 brokerage and life insurance companies, he had failed to PJU 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 report $14,228 in income from commissions that he had received. The IRS accordingly adjusted his 2018 income upward and issued him a notice of deficiency, which asserted a tax deficiency of $6,162 and a penalty under section 6662(a) of $1,232. Mr. Gould petitioned this Court for redetermination. At the time he filed his petition, Mr. Gould lived in Texas. During the course of the proceedings in this Court, the Commissioner filed an amendment to his answer, seeking to increase the amount asserted in the notice of deficiency. Specifically, the Commissioner sought to disallow the business expense deduction Mr. Gould claimed for the "Premiums Received," which would have the effect of increasing the deficiency from $6,162 to $9,312. The parties subsequently entered into a stipulation of settled issues, with Mr. Gould conceding a few minor adjustments and the Commissioner conceding the penalty asserted in the notice of deficiency. I. Burden of Proof OPINION Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and a 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 taxpayer bears the burden of proving them erroneous. See 6 Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Carson v. United States, 560 F.2d 693, 695-96 (5th Cir. 1977). In cases involving failure to report income, the Court of Appeals for the Fifth Circuit, to which an appeal in this case would ordinarily lie (if it were not a small tax case), see § 7482(b)(1), has held that the Commissioner first must establish some factual foundation linking the taxpayer to the income-producing activity for the presumption to attach, see, e.g., Parker v. Commissioner, 117 F.3d 785, 787 (5th Cir. 1997); Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), aff'g in part, rev'g in part, and remanding T.C. Memo. 1990-68. Once the Commissioner has done so, the taxpayer bears the burden of proof to show by a preponderance of evidence that the Commissioner's determination is arbitrary or erroneous. See Portillo v. Commissioner, 932 F.2d at 1133; Carson, 560 F.2d at 695-96. We have found that Mr. Gould earned $45,916 in commissions based upon the undisputed Forms 1099 that were issued by the brokerage and the various life insurance companies. This amount exceeds that in the notice of deficiency by three dollars, apparently because the IRS rounded down (thus, in Mr. Gould's favor) a number of the amounts reported in the Forms 1099. The Commissioner thus 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 has introduced factual support linking Mr. Gould to the 7 income-producing activity in at least the amount asserted in the notice of deficiency. Mr. Gould accordingly bears the burden to prove by a preponderance of the evidence that the Commissioner's determination that he earned $45,913 was arbitrary or erroneous. The Commissioner, on the other hand, bears the burden of proof as to the disallowance of the business expense deduction, which was a new matter not described in the notice of deficiency and first introduced in this Court. See Rule 142(a); see, e.g., Shea v. Commissioner, 112 T.C. 183, 197 (1999). Because "the preponderance of the evidence resolves these issues no matter which party has the burden of proof," Dagres v. Commissioner, 136 T.C. 263, 279 (2011), the burden-shifting to the Commissioner on this issue has no effect on the issue's resolution. 17 II. Analysis 18 19 20 21 22 23 24 25 Gross income means all income from whatever source derived, including commissions. See I.R.C. § 61; Treas. Reg. § 1.61-2(a)(1). At trial, Mr. Gould credibly testified that he summarized and submitted to his tax return preparer the various commissions that he received for 2018 by means of a statement written in long hand. He further explained that it was his understanding from long experience in the life insurance field that commissions 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 received by a broker with respect to insurance purchased 8 on that broker's own life were not taxable. He asserted that the deduction he claimed for "Premiums Received" was essentially meant to exclude the amount of commissions he received for policies purchased on his own life, consistent with that understanding. We will sustain the Commissioner's deficiency determination both as to the amount of commissions he received and as to the deduction. Regarding the commissions, Mr. Gould has not met his burden to show that the Commissioner's determination of the amount of unreported income, which was supported by undisputed Forms 1099, is incorrect. Instead, it appears that there was an oversight either in the transmission or actual reporting of the total amount of commissions. As to the deduction, Mr. Gould's understanding of the treatment of commissions with respect to insurance purchased on a broker's own life is incorrect. Both this Court and the U.S. Court of Appeals for the Fifth Circuit long ago recognized that commissions on such insurance constitute taxable income. See Bailey v. Commissioner, 41 T.C. 663, 667 (1964); Commissioner v. Minzer, 279 F.2d 338, 340 (5th Cir. 1960) rev'g 31 T.C. 1130(1959); see also Cooley v. Commissioner, T.C. Memo. 1986-423 (1986). An analogous rule applies in other contexts, such as the 1 2 3 4 5 6 7 8 9 treatment of the commission a real estate agent receives 9 for a house that he buys for himself or that a stockbroker receives with respect to his personal account activity. See, e.g., Williams v. Commissioner, 64 T.C. 1085, 1088-90 (1975); Kobernat v. Commissioner, T.C. Memo. 1972-132, 1972 WL 2256; see also Commissioner v. Daehler, 281 F.2d 823, 824-25 (5th Cir. 1960). As the deduction here was meant to back out the amount of commissions that Mr. Gould received for insurance purchased on his own life, we 10 accordingly will disallow it. 11 III. Conclusion We will sustain the Commissioner's adjustment in the notice of deficiency, as modified in the first amendment to answer, subject to the parties' stipulation of settled issues. Consistent with the representations in the stipulation of settled issues and the Court's findings herein, the parties will submit computations and a decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:12 p.m., the above-entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25