TAX COURT OPINION

Case: Zeta Dianne Woodruff
Docket Number: 19940-07S
Judge: Colvin
Opinion Type: bench
Filed: 11/26/2008
Pages: 16

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 ZETA DIANNE WOODRUFF, Petitione r v . ) Docket No . 19940-07S . COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 Joseph H . Gale at Nashville, Tennessee, on October 30, 2008, containing his oral findings of fact and opinion rendered at the conclusion of trial . Decision will be entered under Rule 155 in accordance with the oral findings of fact and opinion . Dated : Washington, D .C . November 26, 2008 (Signed) Joseph H . Gale Judge SERVED Nov 28 2008 2 1 Bench Opinion by Judge Joseph H . Gal e 2 Zeta Dianne Woodruff Docket No . 19940-07S 3 vs . Commissione r 4 5 THE CLERK : 19940-07S , Zeta Dianne Woodruff . 6 THE COURT : The Court has decided to render 7 oral findings of fact and opinion in this case, and 8 the following represents the Court' s oral findings of 9 fact and opinion . The oral findings of fact an d 10 opinion shall not be relied upon as precedent in any 11 other case . 12 This proceeding was heard as a Small Ta x 13 Case pursuant to the provisions of Section 7463 of the 14 Internal Revenue Code of 1986, as amended, and Rules 15 170 through 175 of the Tax Court Rules of Practice and 16 Procedure . 17 Hereinafter in this bench opinion al l 18 section numbers refer to the Internal Revenue Code of 19 1986 in effect for the taxable years at issue and all 20 rule references refer to the Tax Court Rules o f 21 Practice and Procedure . 22 Petitioner appeared on her own behalf . 23 Terra-Lynn Zentara appeared on behalf of respondent . 24? For the taxable year2002 respondent determined a 25 deficiency of $2,262 in petitioner's federal income Heritage Reporting Corporatio n (202) 628-4888 3 1 tax and a penalty of $452 .40 under Section 6652(a) . 2 For the taxable year 2003 responden t 3 determined a deficiency of $3,583 in petitioner's 4 federal income tax, and a penalty of $716 .60 under 5 Section 6652(a) . 6 For taxable year 2004 respondent determined 7 a deficiency of $6,394 in petitioner 's federal income 8 tax and a penalty of $1,278 . 80 under Section 6652(a) . 9 For taxable year 2005 respondent determine d 10 a deficiency of $810 in petitioner's federal income 11 tax and a penalty of $162 under Section 6652(a) . 12 The issues for decision by the Court are as 13 follows : (1) whether petitioner is entitled to claim 14 charitable contribution deductions under Section 170 15 of $17,915 for 2002 ; $24,225 for 2003 ; $6,576 fo r 16 2004 ; and $5,376 for 2005 ; (2) whether petitione r 17 failed to report $13,320 of retirement income received 18 from Vanguard Fiduciary Trust Company in 2004 ; (3 ) 19 whether the $13,320 received from Vanguard Fiduciary 20 Trust Company in 2004 is subject to a ten percen t 21 additional tax under Section 72( ) ; (4) whethe r 22 petitioner failed to report $374 of wage income from 23 the Holland Group of Tennessee, Incorporated , in 2004 ; 24 (5) whether petitioner is liable for penalties under 25 Section 6662(a) for 2002, 2003, 2004 and 2005 . Heritage Reporting Corporation (202) 628-4888 4 1 Some of the facts have been stipulated an d 2 they are so found . .petitioner resided i n 1 3 Tennessee when she filed the petition . Petitione r 4 timely filed her federal income tax returns for 2002, 5 2003, 2004 and 2005 . She claimed deductions fo r 6 charitable contributions of $18,500, $24,500, $7,525 7 and $5,376 for 2002, 2003, 2004 and 2005 respectively . 8 Respondent examined petitioner ' s returns for 9 those years and petitioner provided respondent wit h 10 substantiation for charitable contributions of only 11 $585, $275 and $949 in 2002, 2003 and 200 4 12 respectively . 13 At trial petitioner introduced a lette r 14 dated January 16', 2006, from the St . Vincent dePaul 15 Finance Committee acknowledging that she had mad e 16 contributions totaling $390 to the %% fund during 17 2005 . 18 In 2004 petitioner received a $7,72 7 19 distribution from a qualified retirement plan . She 20 reported this distribution as $7,728 on her 200 4 21 return as taxable and as being subject to th e 22 additional ten percent tax for premature distribution . 23 Petitioner also received a $13,30 4 24 distribution from a qualified plan in 2004 . On June 25 24th, 2004 she rolled over this amount directly into an Heritage Reporting Corporatio n (202) 628-4888 5 1 individual retirement account, hereinafter referred to 2 as an IRA or I-R-A, which she had established with the 3 Vanguard Group that day . 4 On June 28'h, 2004 petitioner withdrew $8,00 0 5 from the IRA . On September 27th, 2004 petitione r 6 withdrew the $5, 321 .88 balance in the IRA, consisting 7 of rollover funds and income dividends that ha d 8 accrued . The IRA was closed on the same day . 9 In total the distributions made t o 10 petitioner from the IRA in 2004 were $13,321 .88 . 11 Petitioner did not report these amounts on her 2004 12 return . 13 Petitioner was born in July of 1962 . She 14 was 41 years old on June 28'r, 2004, and 42 years old 15 on September 27==, 2004 . 16 Vanguard issued petitioner a Form 1099- R 17 indicating taxable IRA distributions of $13,321 .88 for 18 2004 . 19 Petitioner received $374 of wage income from 20 the Holland Group of Tennessee, Inc ., in 2004, which 21 she did not report on her 2004 tax return . 22 Respondent issued petitioner a notice of 23 deficiency for her 2002 through 2005 taxable years . 24 Therein respondent disallowed petitioner's charitable 25 contribution deductions for taxable years 2000 throug h 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 2004, except to the extent -the dollar amount s 4 previously note for which petitioner had provide d substantiation, and for 2005 respondent disallowed al l charitable contribution deductions claimed . Respondent also determined that petitione r should have included an IRA distribution of $13,320 i n gross income and should have paid a ten percen t additional tax, because it was an early withdrawa l under Section 72( t Finally, respondent determined tha t petitioner is liable for penalties under Section 666 2 for taxable years 2002 through 2005 . In response to the notice of deficienc y petitioner timely petitioned the Court . We turn now to the substantive law . W e first address petitioner's charitable contributio n deductions . Section 170 permits a taxpayer a deduction for any charitable contribution made during the taxable year . If the charitable contribution i s money, the taxpayer must keep a canceled check, a receipt from the donee or another reliable writte n record . Sectional70(a)-(13), Income Tax Regulations . Further, any charitable gift over $250 mus t be substantiated with a contemporaneous writte n acknowledgment of the contribution by the done e Heritage Reporting Corporation (202) 628-4888 1 organization . Section 170(f)(8) . 2 Except for the 2005 taxable year, petitioner 3 did not provide any documentation to substantiat e 4 charitable contributions beyond those allowed b y 5 respondent . She claims that she could not provide 6 documents from her bank, presumably canceled checks, 7 because of a name change and because the records were 8 not kept . She further claims that she did not obtain 9 receipts from the donee organizations for her donation 10 of goods . 11 Given the size of the claimed deductions, we find petitioner's claims regarding lack of substantiation implausible, unpersuasive an d 14 ultimately not credible . 15 Because of the failure of substantiation, we 16 sustain respondent's disallowance of the claime d 17 charitable contribution deductions for 2002, 2003 and 18 2004 in the notice of deficiency . 19 Petitioner did, however, provide evidence at 20 trial that she made cash contributions to the St . 21 Vincent de Paul Church Fund in 2005 in an aggregat e 22 amount of $390 . Based on her testimony concerning her 23 pattern of giving to churches, we find that thi s 24 amount was given in increments of less than $250 . 25 Consequently, Section 170(f)(8) does not apply . See Heritage Reporting Corporatio n (202) 628-4888 8 1 Section 1 .170(a)-13(f)(1), Income Tax Regulations . 2 The notice of deficiency did not allow any 3 amount for charitable contribution deductions in 2005 . 4 Consequently, we conclude that petitioner has shown 5 error in the notice of deficiency and we hold that she 6 is entitled to a charitable contribution deduction of 7 $390 for 2005 . 8 We turn next to the determination tha t 9 petitioner had a taxable IRA distribution of $13,320 10 in 2004 that was subject to the ten percent tax for 11 early distributions . 12 In 2004 petitioner received distributions 13 totaling $21,031 from a qualified retirement plan . 14 She reported $7,728 as a taxable distribution, subject 15 to an additional ten percent tax for earl y 16 distributions . She rolled over the remainder, 17 $13,304, into an IRA account at Vanguard . 18 On her 2004 return she treated the foregoing 19 state of affairs as the end of the matter, that is , 20 that the $13,304 balance of the qualified plan 21 distribution was nontaxable as a rollover . But 22 petitioner left the rolled over amounts in th e 23 Vanguard IRA for only a brief period . All amounts had 24 been distributed to her and the IRA account closed by 25 September, 2004 . She received a Form 1099 from Heritage Reporting Corporation (202) 628-4888 9 1 Vanguard advising her tnat she had a taxabl e 2 distribution from an IRA in 2004 of $13,321 .88 . She 3 did not report any of the foregoing amount as taxable 4 on her return, however . 5 Gross income includes all income fro m 6 whatever source derived . Section 61(a) . Further, an 7 additional ten percent tax applies to earl y 8 distributions from qualified retirement plans , 9 including IRA's . Section 72 (tFO)t.j_ $Sectio n 10 4974(c)(4) . A distribution is an early distribution 11 unless the recipient is 59 and one-half years old, is 12 55 years old and has separated from service, o r 13 another exception applies . Section 72(t)(2) . 14 Based on our review of the evidence, we 15 concluded that petitioner received a taxable IRA 16 distribution in 2004 of $13,321 .88 . Moreover , 17 petitioner was 41 years old when she received the June 18 28 " , 2004 distribution, and she was 42 years old when 19 she received the September 27'h, 2004 distribution . 20 She was,;therefore/f Loo young to be eligible to avoi d 21 the ten percent tax imposed by Section 72( t 22 Petitioner has not claimed nor shown eligibility for 23 any of the other exceptions that would relieve her of 24 the ten percent tax under Section 72(t)(2) . 25 Accordingly, we sustain respondent's Heritage Reporting Corporation (202) 628-4888 1 0 1 determination that she had a taxable distribution of 2 $13,320 that is subject to the ten percent tax o n 3 early distributions for the taxable year 2004 . 4 We turn next to petitioner's failure t o 5 report as income $374 she received from the Hollan d 6 Group of Tennessee , Incorporated, in 2004 . Gros s 7 income includes compensation for services . Section 8 61(a )( 1) . Commissioner v . Glenshaw Glass Company , 9 348, U .S . 426 430, (1955) . Petitioner admit s 10 receiving the income and stipulated thereto . Sh e 11 makes no argument that it is anything other tha n --2 taxable wages . She must accordingly include the $374 1 in income and respondent's determination in the notice to that effect is sustained . 15 We finally turn to the penalties unde r 16 Section 6662 determined by respondent for petitioner's 17 2002 through 2005 taxable years . Respondent' s 18 position is that petitioner's understatement for 2004 19 is substantialjwithin the meaning of Sectio n A 20 6662(d)(1)(/) . Respondent further contends that those 21 understatements for the years at issue attributable to 22 petitioner's claimed charitable deductions an d 23 unreported wage income are attributable to negligence . 24 Section 6662 imposes a penalty on tha t 25 portion of the underpayment of tax attributable to Heritage Reporting Corporatio n (202) 628-4888 1 1 1 negligence or disregard of rules or regulations, as 2 well as on any substantial understatement of income 3 tax . 4 Where the underpayment of taxes attributabl e 5 to both negligence and a subst an tial understatement, 6 only one penalty wee be imposed . Section 1 . 662-2.41~ 7 Income Tax Regulations . 8 Negligence is a lack of due care or the 9 failure to do what an ordinarily prudent and 10 reasonable person would do under the circumstances, 11 and it includes any failure to make a reasonabl e 12 attempt to comply with the income tax laws . Marcello 13 v . Commissioner , 380 F .2d9, 506, (5'h Cir . 1967), 14 affirming in part and remanding in part 43 T .C . 168L, 15 1969and T .C . Memo 1964-299 . 16 Negligence includes any failure to exercise 17 reasonable care in return preparation, failure to keep 18 proper books and records, or failure to properl y 19 substantiate items . Section 1 .6662-3(b)(1), Income 20 Tax ~ree Axelrod v . Commissioner , 56 T .C . 248, 21 258 through 259(1971) . Disregard includes an y 22 careless , reckless or intentional disregard . Section 23 66621'. V-j 24 A substantial understatement exists if the 25 amount of tax required to be shown on the retur n Heritage Reporting Corporation (202) 628-4888 1 exceeds that shown by -en percent of the tax require d 1 2 2 to be shown or by $5,000, whichever amount is greater . 3 Section 6662(d)(1)(4) . However, any substantia l A 4 understatement of income tax is reduced to the extent 5 to which it is attributable to an item for which ther e 6 is or was substantial aut ority for the taxpayer' s ~or 7 treatment , or to an item w i- h which the relevant fact s 8 affecting the item's treatment are adequatel y 9 disclosed in the return or a statement attached to th e .8 10 return . Section 6662 ( d) (2) ( )6,) . 11 No penalty will be imposed under Section p~fio n 12 6662(a) with respect to any AeT-sC of an underpaymen t 13 if the taxpayer shows that there was reasonable caus e 1= for that portion and that she acted in good faith with 15 respect to it . Section 6664X". 16 The determination of whether a taxpaye r 17 acted with reasonable cause and in good faith is made 18 on a case-by-case basis, taking into account all the 19 pertinent facts and circumstances . Section 1 .6664- 20 4(b)(1) and-*, Income Tax Regs . CC ) 21 Respondent bears the burden of production 22 under Section 7491-91with respect to an individual' s (C ) 23 liability for a penalty under Section 6662 and must 24 come forward with sufficient evidence indicating that 25 it is appropriate to impose the penalty . Higbee v . Heritage Reporting Corporation (202) 628-4888 1 3 1 Commissioner , 116 T .C . 438, 446-447, (2001) . 2 Once respondent meets hi s ..burden of eVi+ioner 3 production, t pa e~ must come forward wit h 4 persuasive evidence that respondent's determination as 5 to the penalties is incorrect or that the reasonabl e 6 cause exemption applies . See Al lib . at 447 Sectio n 7 1 .6664- 4, Income Tax Regulations . 8 With respect to petitioner ' s 2004 income tax 9 return, respondent has met his burden of establishing 10 a substantial understatement . According t o 11 respondent's deficiency determination for 2004, which 12 we have sustained in full, the amount of tax required 13 to be shown on petitioner' s return was $ 19,685 . The 14 amount actually shown on the return was $13,292 . The 15 amount of tax required to be shown, therefore , exceeds 16 the amount of tax shown by $6,393 . This exceeds the 17 greater of ten percent of the tax required to be shown 18 or $5,000 . Therefore, the accuracy related penalt y 19 applies, except to the extent that petitioner can 20 establish that a portion of the understatement was 21 attributable to reasonable cause as discussed below . 22 With respect to respondent' s position that 23 those understatements of tax attributable t o 24 petitioner's failure to include wage income and to her l 25 claimed charitable contribution deductions ,( insofar Heritage Reporting Corporation ' (202) 628-4888 1 4 1 that she has not established her entitlement to 2 deductions) are negligent, we agree with th e 3 respondent . We note that we discussed negligence for 4 all years at issue, even though we have already found 5 that Section 6662 penalty to apply to petitioner' s 6 2004 return by virtue of a substantial understatement . 7 The failure to keep records and the failure 8 to substantiate items constitute negligence . Section 9 1 .6662-3(b)(1), Income Tax Regulations . 10 For the years at issue petitioner claimed 11 deductions for charitable contributions o f 12 approximately $18,000 in 2002, approximately $24,000 13 in 2003, approximately $7,000 in 2004, and $5,00 0 14 approximately in 2005 . Of these claimed deduction s 15 petitioner provided records to substantiate relatively 16 insignificant amounts : $585, $275, $949, and $390 in 17 2002 through 2005 respectively . 18 Petitioner further failed to exercis e 19 reasonable care in preparing her 2004 return when she 20 omitted $374 in wage income . Under thes e 21 circumstances we have no difficulty concluding that 22 the understatements in petitioner's income taxes for 23 2002 through 2005 attributable to her claimed bu t 24 unsubstantiated charitable contribution deductions and 25 her under reported wage income are attributable to Heritage Reporting Corporatio n (202) 628-4888 b 1 negligence . Thus, she is liable for the Section 66$ 1 5 2 penalties except to the extent that she can establish 3 the application of the reasonable cause exception . 4 Circumstances that indicate that there was reasonable 5 cause and that the taxpayer acted in good fait h 6 include an honest misunderstanding of the fact of law 7 that is reasonable in light of the experience , 8 knowledge and education of the taxpayer, as well a s 9 reliance on an information return, professional advice 10 or other facts, if such reliance is reasonable under 11 the circumstances and the taxpayer acted in-goo d 12 faith . Section 1 .6664-4(b)(1), Income Tax 13 Regulations . 14 With respect to the IRA distributions i n 15 2004, petitioner did not reasonably rely on an honest 16 misunderstanding of fact or law, nor did she rely on 17 an information return . Vanguard issued petitioner a 18 Form 1099-R, which clearly stated that the IR A 19 distributions were taxable . 20 Petitioner received a distribution from a 21 qualified retirement plan in 2004, which she rolled 22 over into the IRA . She withdrew all funds from the 23 IRA within three months, however, petitioner reported 24 these transactions as if nothing else had occurre d 25 after the rollover into the IRA, even though she Heritage Reporting Corporatio n (202) 628-4888 16 1 received an information return describing the Vanguar d 2 and IRA distributions as taxable . Under thes e 3 circumstances petitioner did not have reasonable cause 4 for the portion of her understatement of income tax i n 5 2004 attributable to her failure to report the IRA 6 distributions as taxable . 7 We note further that petitioner also did not 8 have reasonable cause for the other items giving rise 9 to the understatements of income tax for the years i n n have- b 10 issue . We have already found petitioner to (cid:127) - ee 11 negligent with respect to each of those items and :2 petitioner has provided no basis for us to conclude ~3 that the reasonable cause exception applies . 14 Accordingly, petitioner is liable fo r 15 penalties under Section 6652(a) for the years in issue 16 as apply to that portion of the deficiencies we have 17 sustained herein . 18 In order to give effect to our disposition 19 of the disputed issues, decision will be entered under 20 Rule 155 . 21 This concludes the Court' s oral findings of 22 fact and opinion in this case . 23 (Whereupon, at 5 :04 p .m ., the bench opinion 24 in the above-entitled matter was concluded . ) 25 // Heritage Reporting Corporation (202) 628-4888