TAX COURT OPINION

Case: Edward Turney Savage
Docket Number: 10287-09
Judge: Colvin
Opinion Type: bench
Filed: 01/25/2010
Pages: 15

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 EDWARD TURNEY SAVAGE, . Petitioner , v . ) Docket No . 10287-09 . 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 David Gustafson at New York, New York, on January 13, 2010, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered entered under Rule 155 . (Signed ) David Gustafson Judge Dated : Washington, D .C . January 25, 2010 ED JAN 2 9 2olP 3 1 BENCH OPINION BY JUDGE DAVID GUSTAFSON 2 SAVAGE V . COMMISSIONER DOCKET NO . : 27365-07 3 January 13, 201 0 4 The Court has decided to render ora l 5 Findings of Fact and opinion in this case, and th e 6 following represents the Court's oral Findings of Fact 7 and Opinion . The oral Findings of Fact and opinio n 8 shall not be relied on as precedent in any other case . 9 This Bench Opinion is made pursuant to the 10 authority granted by section 7459(b) of the Internal 11 Revenue Code of 1986, as amended, and Rule 152 of the 12 Tax Court Rules of Practice and Procedure . 13 By a statutory notice of deficiency dated 14 January 27, 2009, the Internal Revenue Service (IRS) 15 determined a deficiency in the Federal income tax of 16 petitioner Edward Turney Savage in the-amount o f 17 $2,552 for the year 1995, and for the year 199 7 18 determined a deficiency in his Federal income tax in 19 the amount of $19,325, with additions to tax o f 20 $1,927 .58 pursuant to section 6651(a)(1), $2,141 .75 21 pursuant to section 6651(a)(2), and $441 .05 pursuant 22 to section 6654 . Petitioner has conceded the sole 23 issue giving rise to the 1995 deficiency . (Stip . 8 ; 24 Ex . 1-J, p .9 .) For 1997 petitioner conceded before 25 trial several issues in the notice of deficiency (se e Heritage Reporting Corporation (202) 628-4888 4 1 Stip . 4-8) . Both parties conceded basis and holding 2 period issues as reflected on Exhibit 6-J, and 3 respondent also conceded the $5,000 basis tha t 4 petitioner asserted for the "C Ser 60 NYC" entry 5 thereon . Petitioner raised five issues not on the 6 notice of deficiency, three of which responden t 7 conceded (i .e ., capital loss of $4,265 for a worthless 8 security, a deduction for margin interest of $316 .50, 9 and charitable contributions totaling $600), and two 10 of which were disputed (i .e ., medical expens e 11 deduction and unreimbursed business expens e 12 deduction) . After these concessions, the four issues 13 in dispute are : 14 (1) petitioner's receipt of income from the 15 proceeds of the sale of, and his basis and holdin g 16 period for, five securities sold by Cowen and Company 17 (i .e ., AMT, Cytogen, two from PNC, and Gateway ; see 18 Ex . 6-J ; Ex . 1-J, p . 11, item (c) ; Ex . 2-J, pp . 23- 19 26) ; 20 (2) petitioner's receipt of a state tax refund 21 of $20,175 (Ex . 1-J, p . 11, item (d)) ; 22 (3) petitioner's deduction for medical expenses ; 23 an d 24 (4) petitioner's deduction for unreimbursed 25 business expenses . Heritage Reporting Corporation (202) 628-4888 Trial of this case was conducted on Januar y 12, 2010, in New York City . We find the followin g 5 facts : Finding s Mr . Savage was self-employed as an attorne y in 1997 and also made money from investments . H e received proceeds from numerous securitie s transactions in 1997, which transactions the third - party payors reported to the IRS . (Ex . 2-J ; Stip . 9 . ) Five of those transactions were reported by a fir m called Cowen and Company, with an address in New Yor k City . Mr . Savage testified that he cannot recall eve r owning those securities or dealing with Cowen an d Company, but the Court finds that the transaction s took place as reported to the IRS . The State of New York issued a state tax 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 .17 refund of $20,175 to Mr . Savage in 1997 and reporte d 18 19 20 21 22 23 24 25 the refund to the IRS . Mr . Savage testified that h e does not recall receiving the refund, but the Cour t finds that the refund was made as reported to the IRS . Mr . Savage testified that in 1997 h e incurred deductible expenses for medical care and fo r unreimbursed business expenses, but the Court find s that he did not substantiate those expenses . Mr . Savage has never filed a tax return fo r 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 1997 . The return was due in April 1998, and almost eleven years thereafter the IRS issued its notice o f deficiency (Ex . 1-J) . Mr . Savage timely filed hi s petition on April 27, 2009, at which time he reside d in New York (Stip . 1) . Opinio n The IRS's determination reflected on a notice of deficiency is presumed correct, and th e taxpayer bears the burden to prove his entitlement t o the exemptions and credits he claimed . Rule 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . Similarly, the taxpayer bears the burden to prove an y additional deductions that he would raise to diminis h his deficiency . INDOPCO, Inc . v . Commissioner , 50 3 U .S . 79, 84 (1992) . Consequently, except to th e extent of respondent's concessions and of Mr . Savage' s proving that the determination is incorrect or provin g additional deductions, the deficiency determined i n the notice must be sustained . Late-disclosed evidenc e For three of the four disputes--i .e ., to attempt to show his non-receipt of the state ta x refund, and to substantiate his medical and busines s expenses--Mr . Savage offered into evidence a documen t (Ex . 8-P) that purports to be a 1997 summary statemen t Heritage Reporting Corporation (202) 628-4888 7 1 of his checking account at Dean Witter . He showed 2 this document to the IRS for the first time on the 3 morning of the calendar call, on January 11, 2010 . 4 Respondent objected to the document, and the Court 5 sustained the objection . Five months earlier, on 6 August 4, 2009, the Court had given notice that this 7 case would be tried in the'session beginnin g 8 January 11, 2010, in New York City, and had issued its 9 Standing Pretrial Order, which stated in part : 10 Any documents or materials which a 11 party expects to utilize in the event of 12 trial (except solely for impeachment), but 13 which are not stipulated, shall b e 14 identified in writing and exchanged by the 15 parties at least 14 days before the first 16 day of the trial session . The Court may 17 refuse to receive in .evidence any document 18 or material not so stipulated or exchanged, 19 unless otherwise agreed by the parties or 20 allowed by the Court for good cause shown . 21 Notwithstanding this instruction, Mr . Savage 22 says that it was not until the day before trial that 23 he located the document . He said that the documen t 24 was in a carton in his home office--a carton that he 25 did not realize contained that document--and that as Heritage Reporting Corporatio n (202) 628-4888 8 1 he was going over his preparation for the trial, he 2 thought to look in that container for the first time . 3 Even taking his testimony at face value, the process 4 that resulted in his finding the document should have 5 taken place much earlier . Particularly where the 6 transactions at issue took place so many years ago, 7 his opponent was entitled to some opportunity t o 8 examine the document, investigate its contents, and 9 develop means to verify or contradict it . Mr . Savage 10 did not demonstrate the "good cause" required by the 11 standing pretrial order before late-produced documents 12 will be admitted into evidence . 13 Moreover, even if the document had bee n 14 admitted, it would not have been probative as to the 15 alleged non-receipt of the state tax refund . The 16 document reflects (at 4) two deposits in amount s 17 (i .e ., $22,111 and $20,945 .49) that were greater than 18 the state tax refund (i .e ., $20,175) and therefore 19 could have included that refund . 20 Without that document, Mr . Savage is left to 21 rely solely on his own testimony to substantiate his 22 contentions about transactions and expenditures from 23 12 years ago . As someone who failed altogether t o 24 file a return, he cannot and does not present himself 25 as meticulous in handling his affairs . Thus, even Heritage Reporting Corporatio n (202) 628-4888 9 1 without concluding that he is deliberately dishonest, 2 the Court cannot but doubt the reliability of hi s 3 memory and the credibility of his testimony about the 4 receipt of income . 5 Moreover, his contentions about medica l 6 expenses and business expenses (unlike his contentions 7 about the non-receipt of income) do not involve hi s 8 having to prove a negative . Rather, he claims that he 9 spent money on medical and business expenses, and such 10 expenditures are normally accompanied by documentary 11 proof (invoices, bills, receipts, credit card slips, 12 cancelled checks, etc .) that can be retained an d 13 proffered when the expenses must be proved . 14 Mr . Savage failed to retain documentary proof of his 15 alleged expenditures, and we find his testimon y 16 inadequate . 17 Section 6201(d ) 18 Mr . Savage does not cite or rely on 19 section 6201(d), but it bears mention here . The 20 statute reads : 21 In any court proceeding, if a taxpayer 22 asserts a reasonable dispute with respect to 23 any item of income reported on a n 24 information return filed with the Secretary 25 under subpart B or C of part III of Heritage Reporting Corporation (202) 628-4888 1 0 1 subchapter A of chapter 61 by a third party 2 and the taxpayer has fully cooperated wit h 3 the Secretary (including providing, within a 4 reasonable period of time, access to and 5 inspection of all witnesses, information, 6 and documents within the control of the 7 taxpayer as reasonably requested by the 8 Secretary), the Secretary shall have th e 9 burden of producing reasonable and probative 10 information concerning such deficiency i n 11 addition to such information return . 12 Two of the four disputes--Mr . Savage' s 13 receipt of the state tax refund and his receipt of the 14 Cowen and Company proceeds--do involve third-part y 15 payor information . These third parties reported t o 16 the IRS, roughly contemporaneously, that they had paid 17 these amounts to Mr . Savage, and the principa l 18 counter-evidence that he proffers--in the case o f 19 Cowen and Company, the only counter-evidence--is his 20 own testimony that he does not think he received the 21 amounts . 22 Section 6201(d) does not help Mr . Savage 23 here because two things required by the statute are 24 lacking--i .e ., a "reasonable dispute" and "full[] 25 cooperat [ion] " : Heritage Reporting Corporation (202) 628-4888 1 1 1 Admittedly Mr . Savage's contrary testimony 2 is not inherently implausible, but it stands alone ; 3 and in this context--where it comes 12 years after the 4 fact as the result of nothing other than Mr . Savage's 5 unilateral delay, it cannot support a "reasonabl e 6 dispute" . His delay has rendered his testimon y 7 unreliable and has made his account impossible to 8 verify . This is not reasonable . 9 And although Mr . Savage has apparently not 10 been defiant or hostile in his dealings with the IRS, 11 he has certainly not been fully cooperative . Th e 12 legislative history of section 6201(d) emphasizes the 13 matter of timeliness : 14 Fully cooperating with the IRS includes (but 15 is not limited to) the following : bringing 16 the reasonable dispute over the . item of 17 income to the attention of the IRS within a 18 reasonable period of time , and providing 19 ( within a reasonable period of time ) access 20 to and inspection of all witnesses , 21 information and documents within the control 22 of the taxpayer (as reasonably requested by 23 the Secretary) . [H . Rept . 104-506, at 3 6 24 (1996), 1996-3 C .B . 49, 84 ; emphasis added .] 25 This Court has previously applied this Heritage Reporting Corporatio n (202) 628-4888 1 language in the case of a non-filer, like Mr . Savage . 2 In McQuatters v . Commissioner , T .C . Memo . 1998-88 , 3 this Court stated : 1 2 4 First, we note that petitioner failed t o 5 file an income tax return for [the year in 6 suit] . As a nonfiler, petitioner plainly 7 did not bring his dispute over any item of 8 income to the attention of the IRS within a 9 reasonable period of time as contemplated b y 10 the terms and legislative history of section 11 6201(d) . 12 In this case, the third-party payor 13 information adequately supports the notice of 14 determination, and Mr . Savage cannot invok e 15 section 6201(d) to shift the burden of proof on these 16 issues to respondent . 17 Consequently, . the income tax deficiency 18 determined in the notice of deficiency must b e 19 sustained, except to the extent of respondent' s 20 concessions . To give Mr . Savage that benefit, the 21 Court will order that decision be entered unde r 22 Rule 155 . 23 Addition to tax under section 6651(a)(1 ) 24 The notice of determination also reflects 25 the determination of an addition to tax under Heritage Reporting Corporation (202) 628-4888 1 3 1 section 6651(a)(1) for Mr . Savage's failure to file 2 his income tax return when due . Section 6651(a)(1) 3 authorizes the imposition of an addition to tax for 4 failure to file a timely return unless the taxpayer 5 proves that such failure is due to reasonable cause 6 and is not due to willful neglect . Sec . 6651(a)(1) ; 7 see United States v . Boyle , 469 U .S . 241, 245 (1985) . 8 Respondent met his burden of production under section 9 7491(c) with the stipulated fact that Mr . Savage file d 10 no return . (Stip . 2 .) Mr . Savage alleges n o 11 reasonable cause to excuse the non-filing, and the 12 addition will be sustained . 13 Addition to Tax Under Section 6651(a)(2) 14 The outcome is different unde r 15 section 6651(a)jj, which imposes an addition to tax 16.. "[i]n case of failure * * * to pay the amount shown as 17 tax on any return", including an income tax return . 18 This addition does not accrue unless a tax amount is 19 "shown on" a return, so the Commissioner mus t 20 introduce evidence that the tax was shown on a Federal 21 income tax return to satisfy his burden of production 22 under section 7491(c) . Cabirac v . Commissioner , 120 23 T .C . 163 (2003) . When a taxpayer has not filed a 24 return, the section 6651(a)(2) addition to tax may be 25 imposed if the IRS prepared a substitute for return Heritage Reporting Corporation (202) 628-4888 1 4 1 (SFR) that meets the requirements of section 6020(b) . 2 Wheeler v . Commissioner , 127 T .C . 200, 208-209 (2006), 3 affd . 521 F .3d 1289 (10th Cir . 2008) . In this case , 4 although the IRS has alleged the preparation of an 5 SFR, no such document is in evidence, and it s 6 existence has not been stipulated . During the trial 7 Mr . Savage may have assented to the preparation of a 8 "substitute for return", but since that phrase i s 9 sometimes used to refer to a "dummy return" (i .e . , 10 page 1 showing only the taxpayer's name, address, and 11 Social Security number) or an unsubscribed return that 12 does not meet the standards of section 6020(b), we do 13 not find that he has admitted this fact . As a result, 14 the addition under section 6651(a)(2) will not be 15 sustained . 16 Addition to Tax under Section 665 4 17 Likewise, the predicate for th e 18 section 6654(a) addition has not been entirel y 19 satisfied . Section 6654(a) imposes an addition to tax 20 "in the case of any underpayment of estimated tax by 21 an individual" . A taxpayer has an obligation to pay 22 estimated tax for a particular year if he has a 23 "required annual payment" for that year . 24 Sec . 6654(d) . A "required annual payment" is defined 25 in section 6654(d) (1) (B) as, the lesser of, (i) 90 Heritage Reporting Corporation (202) 628-4888 1*1 15 1 percent of the tax shown on the return for the taxabl e 2 year (or, if no return is filed, 90 percent of the tax 3 for such year), or (ii) 100 percent of the tax show n 4 on the return of the individual for the preceding 5 taxable year . 6 Clause (ii) shall not apply if, th e 7 individual did not file a return for such precedin g 8 taxable year . ' 9 Thus, respondent's burden of production 10 under section 7491(c) requires him to produce, fo r 11 each year for which the addition is asserted, evidence 12 that the taxpayer had a required annual payment under 13 section 6654(d) ; and in order to do so he mus t 14 demonstrate the tax shown on the taxpayer's return for 15 the preceding year, unless he can show that th e 16 taxpayer did not file a return for that preceding 17 year . Wheeler v . Commissioner , supra at 212 . Th e 18 record here does not establish whether Mr . Savage "did 19 not file a return for such preceding taxable year"-- 20 i .e ., 1996 . For all the record shows, he might have 21 filed a 1996 return that showed no liability . Thus, 22 respondent has not shown any "required annual payment" 23 for 1997, and the section 6654(a) addition cannot be 24 sustained . 25 Consequently, the 1995 deficiency is Heritage Reporting Corporation (202) 628-4888 16 1 sustained in full ; the 1997 deficiency is sustained i n 2 part (i .e ., except to reflect respondent' s 3 concessions) ; the section 6651(a)(1) addition to tax 4 determined by the IRS is sustained ; and the additions 5 under sections 6651(a)(2) and 6654 are not sustained . 6 Decision will be entered under Rule 155 . 7 This concludes the Court's oral Findings of 8 Fact and Opinion in this case . 9 (Whereupon, at 10 :55 a .m ., the bench opinion 10 in the above-entitled matter was concluded . ) 11 12 13 14 15 16 17 18 19 20 21 22 23 / / 2 4 25 Heritage Reporting Corporation (202) 628-4888