TAX COURT OPINION

Case: Robert E. Burton & Elza M. Burton
Docket Number: 17073-10
Judge: Holmes
Opinion Type: bench
Filed: 05/24/2013
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 ROBERT E. & ELZA M. BURTON, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 17073-10. ) ) ) ) ) ) ) ) ) ORDE R Pursuant to Rule 152(b), Tax Court Rulès 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 trial of the above case before Judge Mark V. Holmes at San Francisco, CA on April 9, 20]3, containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. May 24, 2013 SERVED MAY 2 9 2013 Ca ital Reporting Company Robert E. and Elza M. Burton 04-09-2013 3 1 Bench Opinion by J dge Mark V. Holmes 2 April 9, 2013 Robert E. and Elza M. Burton 3 Docket No. 17073-10 4 THE COURT: In the case of Robert E. and 5 Elza M. Burton v. Commissioner of Internal Revenue, 6 Docket No. 17073-1 , the Court has decided to render 7 oral findings of fact and opinion and the following 8 represents the Court's oral findings of fact and 9 opinion. This bench opinion is made pursuant to the 10 authority rendered by Section 7459 (e) of the Internal 11 Review Code of 1986 as amended and Rule 152 of the 12 13 14 15 Tax Court's Rules f Practice and Procedure. The Burt ns' case involves their 2007 and 2008 tax years. T e Burtons were California ! residents when they filed their petition and the case 16 was tried here in San Francisco. The parties settled 17 most of the issues in the case before trial. And 18 after concessions, there were only two issues left 19 for me to decide. 20 The first was whether Mrs. Burton had 21 proven expenses ca egorized as unreimbursed employee 22 business expenses in the amounts of $1,451.58 for 23 2007, and $1,480.90 for 2006. I I The 2006 number might 24 affect the net ope ating loss number that the parties 25 had. So even thouch that is an amount for a year not (866) 448 - DEPO w vw.CapitalReportingCompany.com 2013 Capital Reporting Company Robert El and Elza M. Burton 04-09-2013 1 at issue, it might: affect the years at issue, and so 2 3 4 it was relevant to·the case. Here the' Commissioner conceded at trial that these amounts; were justified in part. There was 5 oral concession made on the record as to the specific 6 7 8 9 amounts for both 2007 and 2006. Mrs. Burton produced no evidence of additional expenses beyond the amounts that the Commissioner conceded. And given all the other problems with the 10 Burtons' returns for the years at issue, I'll grant 11 no extra expenses, based simply on Mrs. Burton's 12 rather general testimony on this point. So this is a 13 partial concession by the Government, which is 14 15 16 accepted by everybody. But the remaining expenses that the Burtons claimed on their returns are denied. The second issue and by far the most 17 important in terms,0f the money at stake is the 18 accuracy-related penalty issues under Section 6662 of 19 the Internal Revenue Code. The Code imposes a 20- 20 percent penalty on any underpayment of taxes 21 attributable to, a ong other things, negligence and 22 disregard of the rùles and regulations or the 23 24 substantial understatement of income tax. The Burtòns did not substantially 25 understate their tax in the 2007 tax year. However, (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 1 the Commissioner a serted that they ac·ted negligently 2 when they reported their 2007 taxable income and 5 3 underpaid their 2007 tax. 4 5 6 7 8 I find that the Government has met its burden of production in these cases. The Burtons' tax return for 200? had some numbers that were quite simply inexplicablë, and they had less than accurate records. So I'll say that the Government met its 9 burden of productibn for 2007 for the accuracy- 10 11 related penalty. In the case of the 2008 tax year, the 12 Government had an ëasier way of meeting its burden, 13 namely that the bu den, namely that the Burtons had 14 substantially understated ·the income tax required to 15 16 be shown on their eturn. That tax for that year, a very big year for Mr. Burton, is over $120,000, the 17 understatement of over $55,000. And the math tells 18 us that there is a substantial understatement of 19 income tax because the understatement for 2008 was 20 greater than 10 percent of the tax required to be 21 shown on the return and greater than $5,000. 22 So I agree with the Commissioner that he 23 has also met his burden of production in the 24 accuracy-related pénalty under Internal Revenue Code 25 Section 7491(c). (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E: and Elza M. Burton 04-09-2013 However, the penalty will not be imposed if 6 the Taxpayer demonstrates that the underpayment of tax was due to reasonable cause and in good faith. See Internal Revenue Code 6664 (c) (1) . The regulations under that section, 26 CFR, Section 1. 6664-4 (b) (1), state that the determination of 1 2 3 4 5 6 7 whether a Taxpayer acted with reasonable cause and in 8 9 good faith is.made on a case-by-case basis, taking into account all pertinent facts and circumstances . 10 . . of the extent that the Taxpayer's effort to 11 assess the Taxpayer's proper tax liability. 12 Circumstances that;may indicate a reasonable cause 13 14 and good faith include an honest misunderstanding of the fact and law that is reasonable in light of all 15 the facts and circumstances, including the 16 experience, knowledge, and education of the Taxpayer. 17 An isolated computation or transcriptional error 18 generally is not inconsistent with reasonable cause 19 and good faith . .;. A Taxpayer's reliance on 20 erroneous information reported on a Form W-2, Form 21 1099, or other information on a return indicates 22 reasonable cause and good faith, provided that the 23 Taxpayer did not know or have reason to know that the 24 25 information was incorrect. Now, the Burtons did concede most of the (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 1 items during and after the audit of their return. And 7 2 Mr. Burton is a highly educated man. He is the one 3 who within this couple prepared the returns. He 4 5 graduate Yale and Columbia Law School, and he had done his own taxes without much incident for over 6 half a century. Clearly, however, the Court observed 7 8 9 that advanced age was creeping up on the Burtons. In '06 and '08, their returns were delayed as well by disruptions in their living situation 10 caused by the return to the home of their middle-aged 11 daughter, her husband, and two very small 12 grandchildren, causing a disruption in the usual flow 13 of paperwork that Mr. Burton kept in his home office 14 and that Mrs. Burton kept of her tour--guide , 15 activities . 16 Moreover and more importantly, Mrs. Burton 17 began to suffer from extremely serious health 18 problems -- two hip-replacement surgerles, a very 19 serious bout with lung cancer, and the attendant 20 chemotherapy and its own side effects. All of this 21 22 created a family that has a lower bar for proving reasonable cause and good faith than the average 23 graduate of Yale and Columbia Law School. So with 24 advanced age, health problems, a disrupted family 25 life, these kinds of factors affect my determination (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 1 about the the facts and circumstances that the 2 Burtons were operating under in completing their 2007 8 3 4 5 and 2008 returns. · They made a number of errors, as I said, almost all of which they conceded before trial. Some 6 of them, as the Government's own witness explained, 7 8 9 seemed to be math errors. The 1099s that Mr. Burton used just added up wrong, fairly small amounts involved. These kinds of math errors are not 10 necessarily negligent. Under the circumstances, I 11 will not determine that the Burtons owe an accuracy- 12 13 14 related penalty. I think Mr. Burton was trying to complete his tax returns as best he could. But with these disrupted fainily arrangements, the ill health 15 of his wife, and his own advanced age and hence 16 diminished capabilìties, he behaved reasonably and 17 certainly was behaving in good faith. 18 So as to·the rather minor items that were 19 more or less math errors -- adding columns of numbers 20 up and getting the wrong result -- no negligence 21 penalty or no accuracy-related penalty for the 22 Burtons on those. 23 The biggest item that the Burtons got wrong 24 in their return, however, were the net operating 25 losses from Mr. Burton's late-in-life foray into oil- (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 9 1 and-gas assets . These had produced losses, the 2 extent of which the Government does not challenge, 3 but the reporting of which it most certainly does, 4 5 6 because the Burtons simply got it wrong. What happened was that Mr. Burton's income is wildly variable. Some years he earns next to 7 nothing and then in other years he earned in the 8 9 hundreds of thousands of dollars. And in the '06 and '07 tax years, when he first began investing in some 10 of these oïl-and-gas leases, he took into account the 11 upfront losses, which again the Government doesn't 12 13 challenge the amount of. He calculated correctly, so far as I can tell, for '06 and '07 that the effect 14 was to give him a net negative adjusted gross income. 15 But having an adjusted gross income that was negative 16 in those years caused him to think that he wasn't 17 using his net operating loss. And he took it again 18 in '07, having lost money in '06, and again in '08, 19 having lost money in '07. This was simply double- 20 counting. This is a kind of subtle double-counting, 21 but I think he behaved, again, under the peculiar 22 factual circumstances that he and his wife were 23 operating under in those years with reasonable cause 24 and certainly .in good faith. He does not get the 25 benefit of double-counting, but he also does not get (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 this accuracy-related penalty for those adjustments 10 to the Burtons and to the returns. A third item was the deduction by the 1 2 3 4 Burtons of what amounted to home mortgage interest, 5 but home mortgage interest taken out in the form of a 6 home equity line of credit as their income plunged 7 during those two years and they faced these health 8 problems. They took out this home equity line of 9 credit, and they began deducting the interest that 10 11 12 13 14 15 they paid on it because, as Mr. Burton said and I find it credible -- and this was all reported on the same form they got from the bank -- and for decades they had been deducting home mortgage interest. Again, under these circumstances, I find reasonable cause and good faith by Mr. Burton in 16 mistakenly taking that home equity line of credit 17 18 interest off his returns as well as the underlying interest of the actual mortgage used to acquire their 19 home in the first place many years ago. 20 Then there were very minor adjustments from 21 Mr. Burton's characterization of his wife as having a 22 business of her own as a tour guide. Oddly, she 23 reported --. and this seems to be credible and 24 entirely true - that she was regarded as an employee 25 by six of the bus tour companies that she worked for (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 1 during the years in question. Seems odd that she 2 would be regarded as the employee of six different 3 4 bus companies, again, that she works out of her home, she develops the tour herself, she has to acquire 11 5 certain certifications as a tour guide in San 6 Francisco from a third party. But nobody's 7 8 challenging that she's an employee of six different companies. Now, he reported it as a Schedule C 9 business instead. Again, I think that's reasonable 10 and in good faith under the circumstances. 11 12 Some few of the errors that the Burtons commit, however, I do find that they should pay the 13 accuracy-related penalty for. In Exhibit 1-J at 14 Bates stamp IRS14, the adjustment at line 1-D, 15 Schedule C, Expenses for Business Use of Home, Mr. 16 Burton testified he just put down $1,500. But the 17 18 form itself says that he has to attach a second form to justify that number, and he was just picking 19 something out of thin air. That is an adjustment. 20 And any understatement of income tax, to which I do 21 22 find the Government has succeeded. in showing, he owes an accuracy-related penalty. He has not rebutted 23 that . 24 As to 1-J, Schedule C--1, Car and Truck 25 Expenses, these turn out to be the Burtons ' commuting (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 12 1 2 3 4 expenses. There's no good reason for them to have tried to deduct those. Commuting expenses are well known to be personal expenses . And, again, I sustain the accuracy-related penalty on any understatement 5 attributable to 1-J as well. 6 7 For ;the 2008 tax year, I'll refer to Exhibit 1-J at Bates No. IRS4. And those 8 also have two ¡adjustments to income: Line 1-D, 9 Schedule C-1, Car and Truck Expenses. Again, these 10 are commuting jexpenses. And I'11 sustain the 11 accuracy-relatied understatement for those expenses as 12 well. And 1-F, which, again, is a $1,500 attempted 13 deduction for expenses for business use of the 14. Burtons' home that Mr. Burton seems to have plucked 15 16 out of thin air. With the exception of any understatement 17 attributable to those two adjustments, however, I 18 don't sustain the accuracy-related penalty against i 19 the Burtons since this is very much a mixed result, 20 together with all the arithmetic complications from 21 the various concessions on both sides. I'll enter a 22 decision under .Rule 155 after the transcript is 23 prepared. 24 This concludes the Court's oral findings of 25 fact and opinion in this case . (866) 448 - DEPO www.CapitalReportingCompany.com 2013 Capital Reporting Company Robert E. and Elza M. Burton 04-09-2013 (Whereupon, at 10:15 a..m., the above- entlitled matter was concluded. ) 1 13 !I li (866) 448 - DEPO www.CapitalReportingCompany.com 2013 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