TAX COURT OPINION

Case: Susan M. Kuznik
Docket Number: 14832-14
Judge: Gustafson
Opinion Type: bench
Filed: 10/28/2015
Pages: 10

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 SUSAN M. KUZNIK, Petitioner, v. ) ) ) ) Docket No. 14832-14. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceeding at Chicago, Illinois, on October 20, 2015, 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 Judge Gustafson at Chicago, Illinois, 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, decision will be entered for respondent regarding the deficiency for tax year 2011 based on petitioner's concession, and for respondent as to the accuracy-related penalty. (Signed) David Gustafson Judge Dated: Washington, D.C. October 28, 2015 SERVED Oct 28 2015 Capital Reporting Company 3 1 Bench Opinion by Judge Ddvid Gustafson 2 October 20, 2015 3 4 5 6 7 8 Susan M. Kuznik v. Commissioner Docket No. 14832-14 THE COURT: The Court has decided to render in this case the following as its oral Findings of Fact and Opinion, which shall not be relied upon as precedent in any other case. This bench opinion is 9 made pursuant to the authority granted by section 10 11 12 13 14 15 16 17 7459(b) of the Internal Revenue Code and Tax Court Rule 152. By Notice of Deficiency dated March 24, 2014, (Ex. 1-J), the Internal Revenue Service ("IRS") determined as to petitioner Susan M. Kuznik a deficiency in Federal income tax for 2011, which arises from settlement proceeds that she failed to report as income, and an accuracy-related penalty. 18 Petitioner has conceded the income tax deficiency; 19 20 21 22 23 24 25 and the issue for decision is whether she is liable for the accuracy-related penalty under section 6662(a) on the underpayment resulting from the non- reporting of that income. We hold that she is liable. Trial of this case was conducted on October 19, 2015, in Chicago, Illinois. Molly A. Recar and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 Andrew Van Singel represented Ms. Kuznik; and Alexander R. Roche represented the Commissioner. We find the following facts: FINDINGS 5 Petitioner's disability 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Ms. Kuznik has a high school education. She worked as a Human Resources manager for Astellas US, LLC, until December of 2007. (Stip. 11.) However, she was disabled by depression and anxiety, and after she attempted to return to work in early 2008, she was told that there was no job for her there. STD and SSDI benefits Before the year at issue here, Ms. Kuznik applied for and received both short-term disability ("STD") benefits from her employer's plan and SSDI benefits from the Social Security Administration. She began to receive the SSDI payments in February 2010, retroactive to December 2007. (Stip. 13.) She received what she calls "income statements" (either Forms W-2 or Forms 1099) reporting those SSDI and STD amounts as taxable income, and she reported that income on her tax returns. LTD benefits In February 2010 Ms. Kuznik also applied 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 for long-term disability ("LTD") benefits under her former employer's LTD plan. When the employer's insurance company did not grant her the benefits, Ms. Kuznik hired attorney Mark DeBofsky to claim them on her behalf. He was successful, and in February 2011 she received $45,000 in settlement of her claim for long-term disability benefits. The insurance company had sent a .check for $60,000 to Mr. DeBofsky, of 9 which he retained $15,000 as his fee. He therefore 10 11 12 13 14 15 sent to Ms. Kuznik a check in the net amount of $45,000, which she deposited. (Stip. 15-18.) Lawyer's comments on taxes Mr. DeBofsky is not a tax lawyer, does not practice tax law, and does not give tax advice. He brought up with Ms. Kuznik the general subject of 16 whether the LTD benefits are taxable or not, and he 17 18 19 20 21 22 23 24 25 recommended that she consult a tax professional to determine whether she should report the settlement proceeds as taxable income. He also recommended that she be alert to whether she received a Form W-2 or Form 1099 from her employer (or its insurer) characterizing the proceeds as income, because he believed that that can be an indication of whether the proceeds are taxable or not. Ms. Kuznik seems to have inferred from 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company these comments that if she did not receive a Form W-2 or 1099, then the proceeds were not taxable. However, we find that Mr. DeBofsky did not actually so advise her and that her inference was not 6 reasonable. 2011 taxes Sometime after paying the LTD proceeds, the insurance company issued a Form W-2 reporting those proceeds of $60,000. The insurance company duly filed the form with the Government, but it sent Ms. Kuznik's copy to an old address from which she had 1 2 3 4 5 6 7 8 9 10 11 12 moved in April 2010 (Stip. 27.) She did not receive 13 14 15 16 17 18 19 20 21 22 23 24 25 the misaddressed Form W-2. From that non-receipt, she concluded that the LTD proceeds were not taxable to her. Ms. Kuznik retained a paid tax return preparer (an "enrolled agent") to prepare her 2011 return. (Stip. 10.) She did not advise the preparer about the LTD benefits because she had concluded that they were not taxable. On her 2011 return she did not report the LTD proceeds, she reported adjusted gross income of $32,284, and she reported a total 2011 income tax liability of $2,991. Evidently the IRS's computers noted that the $60,000 reported on the insurance company's W-2 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 7 was not reported as income on Ms. Kuznik's tax return. In June 2013 the IRS sent a CP2000 notice pointing out the omission. (Stip. 25.) Ms. Kuznik contacted the insurance company and learned for the first time that it had sent a Form W-2 to her obsolete address. (Stip. 26.) On March 24, 2014, the IRS issued to Ms. Kuznik a Notice of Deficiency (Ex. 1-J) that treated the proceeds as taxable, allowed a deduction for Mr. DeBofsky's fee, and determined a deficiency of income tax in the amount of $13,628 (which Ms. Kuznik has conceded) and an accuracy-related penalty of $2,726, which is the amount in dispute. On June 19, 2014, Ms. Kuznik timely mailed her petition to this Court. At that time she resided in Illinois (Stip. 2.) I. Burden of proof OPINION In a deficiency case, the IRS's determination is generally presumed correct, see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), and the taxpayer generally bears the burden of proof, see Rule 142(a). It is true that, under section 7491(c), the Commissioner has the initial burden in effect to make a prima facie showing of liability for the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 penalty; but the Commissioner shows that the amount of the deficiency of $13,628 (which Ms. Kuznik no longer disputes) that results from the taxability of the unreported income is great enough that the resulting underpayment is "substantial" for purposes of section 6662(b)(2)--i.e., it exceeds $5,000 and it exceeds by more than 10 percent the $2,991 that Ms. Kuznik reported (see Ex. 2-J). The Commissioner has thereby carried his burden of production for purposes of section 7491(c), so that Ms. Kuznik will be liable for the accuracy-related penalty unless she can prove a defense under section 6664(c) (1). II. "Reasonable cause" and "good faith" Section 6664(c)(1) provides: "No penalty shall be imposed under section 6662 or 6663 with respect to any portion of any underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith 19 with respect to such portion." We hold that Ms. 20 21 22 23 24 25 Kuznik demonstrated "good faith", but this defense also requires that she establish that she had "reasonable cause for not reporting the income. We hold that she has not established reasonable cause. The determination of whether a taxpayer acted with reasonable cause and in good faith is made 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 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 on a case-by-case basis, taking into account all the pertinent facts and circumstances, including the extent of the taxpayer's efforts to assess his or her proper tax liability; the taxpayer's education, knowledge, and experience; and the taxpayer's reasonable reliance on a tax professional. 26 C.F.R. sec. 1.6664-4(b) (1). The extent of the taxpayer's efforts to assess the proper tax liability is generally the most important factor. Id. Good-faith reliance on professional advice concerning tax laws may be a defense to section ff ed penalties. United States v. Boyle, 469 U.S. 241, 250-251 (1985); see also 26 C.F.R. sec. 1.6664- 4(b) (1). Reliance on professional advice is not an absolute defense to the section 6662(a) penalty, Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff'd, 904 F.2d 1011 (5th Cir. 1990), aff'd, 501 U.S. 868 (1991); but reasonable cause exists where a taxpayer relies in good faith on the advice of a qualified tax adviser and the taxpayer provided the adviser with all necessary and accurate information, see Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). In this case, several considerations defeat 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Ms. Kuznik's attempted defense: f,irst, as to tax 2 matters Mr. DeBofsky was not a tax professional, and 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 he explicitly disclaimed that status. Rather, he recommended that Ms. Kuznik consult with someone who was a tax professional--not himself. See 26 C.F.R. sec. 1.6664-4(c)(1) eliance may not be reasonable or in good faith if the taxpayer knew, or reasonabl should have known, that the advisor lacked knowledge in the relevant aspects of Federal tax law"). Second, Mr. DeBofsky did not give the tax advice that Ms. Kuznik claims. She claims he advised that non-receipt of a Form W-2 would assure that the proceeds were not taxable, but we find he never gave this advice. He made the unimpeachable suggestion that she take the receipt of a Form W-2 as an indication that the proceeds might be taxable. Third, Ms. Kuznik failed to follow the. advice that Mr. DeBofsky did give her--i.e., that she should retain a tax professional to advise her about the tax treatment of the proceeds she received. Fourth, Ms. Kuznik relied on her non- receipt of a Form W-2, which of course is not the same thing as a payor's non-issuance of the form. A form duly issued may be lost in the postal service or (as here) mis-addressed or mis-delivered; it may be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 overlooked, misunderstood, or forgotten by the recipient; or it may be discarded by someone else in her household. There are many reasons, having nothing to do with one's liability, that one might not receive a Form W-2; and in basing her tax return on this non-event, Ms. Kuznik did not exercise reasonable judgment. Fifth, Ms. Kuznik did not disclose the 9 matter to the enrolled agent whom she did hire to 10 11 12 prepare her return. Given the AGI of $32,284 reported on her 2011 return, her receipt of a net payment of the much greater amount of $45,000 was the 13 most significant transaction of that year. Her silence to the preparer, and her reliance instead on her non-receipt of a Form W-2 in light of her unwarranted misconstruction of Mr. DeBofsky's comments, was not reasonable. Ms. Kuznik is therefore liable for the section 6662(a) penalty. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 11:12 a.m., the above- entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com