TAX COURT OPINION

Case: Reinaldo & Ernestina Moracen
Docket Number: 21949-05S
Judge: Panuthos
Opinion Type: summary
Filed: 05/01/2007
Pages: 9

T .C . Summary Opinion 2007-6 9 UNITED STATES TAX COURT T . ~. j G& REINALDO & ERNESTINA MORACEN, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 21949-05S . Filed May 1, 2007 . Ruth Ioracen Knight , for petitioners . LauralA . Price , for respondent . PANUT OS, Chief Special Trial Judge : This case was heard pursuant t the provisions of section 7463 of the Internal Revenue Cole in effect when the petition was filed . Pursuant to section 7453(b), the decision to be entered is not reviewable by any other ourt, and this opinion should not be treated as precedent or any other case . Unless otherwise indicated, subsequent section references are to the Internal Revenue Code i n SERViD MAY 1 2007 - 2 - effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . Respondent determined a $6,391 deficiency in petitioners' 2003 Federal income tax and a $1,278 accuracy-related penalty pursuant to section 6662(a) .' The issues for decision are : (1) Whether petitioners' gross income includes annuity proceeds of $53,885 and related interest income of $1,136, and (2) whether petitioners are liable for the accuracy-related penalty . Background Some of the facts have been stipulated and are so found . The stipulation of facts and the attached exhibits, as well as additional exhibits introduced at trial, are incorporated herein by this reference . At the time the petition was filed, petitioners resided in Zephyrhills, Florida . References to petitioner in the singular are to Ernestina Moracen . Petitioner's stepmother, Celia Knight, died in July 2003 . Before her death, Mrs . Knight had purchased an annuity contract from Travelers Life & Annuity (Travelers) . Petitioner was a named beneficiary of the annuity contract, as was Mrs . Knight's sister, Gladys Becquer . Petitioner's father, Pedro Knight, was not named as a beneficiary . After Mrs . Knight died, Luis Falcon was appointed executor of the estate . Travelers issued two checks to petitione r 1 All amounts are rounded to the nearest dollar . - 3 - totaling $41 .5,266 . Of that amount, $414,130 represented proceeds from the annuity contract, while $1,136 represented interest that accrued before the proceeds were distributed . At Mr . Falcon's behest, each check was deposited into a joint bank account in the names of petitioner and Ms . Becquer . Petitioner and Ms . Becquer had signature authority over the joint account .2 In August 2003, petitioner rote a check from the account to her father in the amount of $415,000 . In 2004, Travelers issued petitioner a Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit- Sharing Pla s, IRAs, Insurance Contracts, etc ., listing a gross distribution of $414,130 and a taxable amount of $53,886 . Travelers also issued petitioner a Form 1099-INT, Interest Income, listing taxable interest income of $1,136 . Petitioners did not report any portion of the annuity proceeds or interest income on their joint 2003 tax return . Respondent issued petitioners a notice of deficiency in August 2005 Respondent determined that petitioners must include in gross in ome $53,885 of the annuity proceeds and $1,136 of interest in ome . Respondent also determined an accuracy-relate d 2 Ms . ecquer separately received and deposited into the joint accou t proceeds from Mrs . Knight's annuity contract . Those proce ds are not at issue in this case . - 4 - penalty .3 Petitioners filed a timely petition for review of respondent's determination . In February 2006, petitioner filed suit against her father and Mr . Falcon in United States District Court alleging that they "fraudulently and unlawfully converted the proceeds" of the annuity contract . The complaint states in part : (1) Mr . Falcon told petitioner that the annuity proceeds, in fact, belonged to Mr . Knight ; (2) Mr . Falcon instructed petitioner to write the check for $415,000 in order to return the proceeds to Mr . Knight ; and (3) petitioner did not know she was a beneficiary of the annuity contract until respondent began examining petitioners' 2003 tax return . Discussion In general, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing that the determinations are in error . Rule 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . Pursuant to section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances . Petitioners have neither alleged that section 7491(a) applies nor established their compliance with the requirements of section 7491(a)(2)(A) and (B) to substantiate items, maintain records , 3 We assume the difference between the $53,886 taxable amount shown on the information return and the $53,885 listed in the notice of deficiency is due to rounding . - 5 - and coopers to fully with respondent's reasonable requests . Petitioner s therefore bear the burden of proof . I . Unre rted Income Secti c n 61 provides that "gross income means all income from whatever sc urce derived" . The Supreme Court has held that gross income inc udes all "'accessions to wealth, clearly realized, and over which the taxpayers have complete dominion . "4 James v . United States , 366 U .S . 213, 219 (1961) (quoting Commissioner v . Glenshaw Grass Co . , 348 U .S . 426, 431 (1955)) . A taxpayer ha s dominion ark d control over cash when he has the freedom to use it at will, e en though that freedom may be assailable by persons with Bette title . Rutkin v . United States , 343 U .S . 130, 13 7 (1952) ; Iarniello v . Commissioner , 98 T .C . 165, 173 (1992) . Petit' oner does not dispute that she was a beneficiary o f Mrs . Knigh 's annuity contract . Nor does petitioner dispute that a total of $415,266 was deposited into an account over which she had signati. re authority . Accordingly, petitioner had dominio n ' Sec . the procee death of t 101(c), (f) proceeds ar Petitioner rather, pet because the or interest petitioners and whethe]l 165(a), dis 101(a)(1) provides that gross income does not include s of a life insurance contract paid by reason of the e insured, subject to certain limitations . See sec . Respondent contends that the $53,885 of annuity d the $1,136 of interest income are taxable . do not dispute the taxability of these amounts ; itioners believe they should not be liable for the tax y did not receive the benefit of the annuity proceed s income . We therefore limit our discussion to whether had dominion and control over the amounts at issue, petitioners are entitled to a deduction under sec . cussed infra . - 6 - and control over the annuity proceeds, even if her father also claimed title to the proceeds . See Rutkin v . United States , supra . Petitioner nevertheless argues that she is not liable for tax because of the alleged wrongdoing of Mr . Knight and Mr . Falcon described . in the District Court complaint . Even if petitioner's allegations are true, however, petitioner had the freedom to use the annuity proceeds at will . See Ianniello v . Commissioner , supra . Accordingly, petitioners must include in gross income the $53,885 of annuity proceeds and the $1,136 of interest income . Although it is not clear, petitioners may be arguing that they suffered a theft loss . Section 165(a) allows a deduction for "any loss sustained during the taxable year and no t compensated for by insurance or otherwise ." A loss arising from theft is treated as sustained during the year in which the taxpayer discovers such loss . Sec . 165(e) . If in the year of discovery there is a claim for reimbursement that has a reasonable prospect for recovery, a loss is not considered sustained until the tax year in which it can be ascertained with reasonable certainty . Secs . 1 .165-1(d)(3), 1 .165-8(a)(2), Income Tax Regs . Filing a lawsuit to recover a purported loss gives rise to an inference that the taxpayer has such a claim . Dawn v . - 7 - 675 F .2d 1077, 1078 (9th Cir . 1982), affg . T .C . Memo . 1979 479 ; Reed v . Commissioner , T .C . Memo . 1986-213 . We ex ress no opinion on whether the actions of Mr . Knight and Mr . Fal on constitute theft under State law . Petitioner testified t at the lawsuit against her father and Mr . Falcon t o recover the annuity proceeds was still pending in District Court . The pending lawsuit gives rise to the inference that petitioners had a reas o able prospect for recovery as of the date of trial . See Dawn v Commissioner , supra . Nothing in the record rebut s this infere ce . Accordingly, any theft loss petitioners suffered is not cons dered sustained during 2003 . See secs . 1 .16 .5-1(d) ), 1 .165-8(a)(2), Income Tax Regs . Respondent's determinati n on this issue is sustained . II . Accura ly-Related Penalt y Sectio 6662(a) provides that a taxpayer may be liable for a penalty of 210 percent of the portion of an underpayment of ta x attributable to negligence or disregard of rules or regulations . Sec . 6662(a) and (b)(1) . Negligence includes any failure to make a reasonable attempt to comply with the provisions of th e internal rev nue laws . Sec . 1 .6662-3(b)(1), Income Tax Regs . Disregard of rules or regulations includes any careless, reckless, o r intentional disregard . Sec . 1 .6662-3(b)(2), Income Tax Regs . e Commissioner bears the burden of production with - 8 - respect to the accuracy-related penalty . See sec . 7491(c) ; Higbee v . Commissioner , 116 T .C . 438, 446 (2001) . An exception to the section 6662 penalty applies when the taxpayer demonstrates : (1) There was reasonable cause for the underpayment, and (2) the taxpayer acted in good faith with respect to the underpayment . Sec . 6664(c) . Whether the taxpayer acted with reasonable cause and in good faith is determined by the relevant facts and circumstances on a case-by-case basis . See Stubblefield v . Commissioner , T .C . Memo . 1996-537 ; sec . 1 .6664-4(b)(1), Income Tax Regs . "Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light o f all the facts and circumstances, including the experience, knowledge, and education of the taxpayer ." Sec . 1 .6664-4(b)(1), Income Tax Regs . It does not appear that petitioner's husband was involved in any of the above-described dealings with petitioner's father and Mr . Falcon . We therefore focus on petitioner . Petitione r stopped attending school during the seventh grade and has a limited command of English . It is not clear what petitioner understood when the funds were deposited into the joint accoun t or when she signed the check payable to her father in the amount of $415,000 . It is clear that petitioner relied upon Mr . Falcon's advice during these financial transactions . Taking into - 9 - consideratio all of the facts and circumstances contained in this record, we conclude that petitioner acted in good faith and that her rel 'ance on Mr . Falcon as executor of her stepmother's estate was n t unreasonable . The negligence penalty therefore should not b imposed in this case . To ref l ct the forgoing, Decision will be entered for respondent as to the deficiency and for petitioners as to the accuracy-related penalty under section 6662(a) .