TAX COURT OPINION

Case: Peter J. Polanco
Docket Number: 23632-15
Judge: Morrison
Opinion Type: bench
Filed: 01/03/2017
Pages: 13

17 UNITED STATES TAX COURT WASHINGTON, DC 20217 PETER J. POLANCO, Petitioner v. ) ) ) ) ) Docket No. 23632-15. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, there is transmitted herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at New York, New York, on December 13, 2016, containing his oral findings of fact and opinion rendered at the conclusion of trial. In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. January 3, 2017 SERVED Jan 06 2017 Capital Reporting Company 3 Bench Opinion by Judge Richard T. Morrison December 13, 2016 Peter J. Polanco v. Commissioner Docket No. 23632-15 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. References to sections are to the Internal Revenue Code of 1986, as amended. References to rules are to the Tax Court Rules of Practice and Procedure. As permitted by Section 6213(a), the petitioner, Mr. Peter Polanco, filed a petition challenging a notice of deficiency for the 2013 tax year determining that he had a deficiency of $28,684 and owed a Section 6662 penalty of $5,103. We have jurisdiction under Section 6214(a). Findings of Fact Polanco filed a joint federal income tax 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 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 return for 2013. On the return, Polanco and his wife reported that they received wages of $27,449 and no other income. On March 13, 2015, the IRS wrote a letter to the Polancos regarding the Polancos' 2014 year, the year after the year at issue. The letter thanked them for the correspondence it had received on December 29, 2014. The letter also stated: "We reviewed the information you provided and determined no action is necessary on your account." The March 13, 2015, letter is marked as Exhibit 1-P. In June 2015, the IRS issued a notice of deficiency to the Polancos in reference to their 2013 tax return. The notice of deficiency determined that, based on a Form 1099-MISC, Polanco earned $149,062 from New York Public Radio. It further determined that the Polancos did not report the income. As a result, the notice determined a deficiency of $28,864 and a Section 6662 penalty of $5,103 for the 2013 year. In September 2015, Polanco, but not his 22 wife, filed a petition challenging the notice of 23 deficiency. The petition stated that the IRS had 24 written a letter to the Polancos stating that it 25 would take no further action with respect to the 2013 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 year. On September 1, 2016, the IRS filed a request for admissions. Paragraphs 8 and 9 of the requested admissions stated that Polanco received $149,062 of unreported Form 1099-MISC income from New York Public Radio for 2013. On September 26, 2016, the IRS sent a letter to Polanco's wife. The letter thanked her for an inquiry she had made on July 22, 2016, and said that the IRS had recently sent her a letter in error. According to the September 26, 2016, letter, the earlier erroneous letter (1) thanked her for the information she sent and (2) explained that the IRS would contact her about the action it would take. The September 26, 2016, letter also stated that the IRS has already resolved the issue on her account, that it did not need to take any further action, and apologized for its error. The September 26, 2016, letter is marked as Exhibit 2-P. On September 30, 2016, the IRS wrote another letter to Polanco's wife. The September 30, 2016, letter again both thanked her for an inquiry she had made on July 22, 2016, and said the IRS had recently sent her a letter in error. According to the September 30, 2016, letter, the earlier letter 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 6 incorrectly stated that the IRS would contact her about the action it would take on her account. The September 30, 2016, letter then explained that either the IRS had already resolved Polanco's wife's "account issue" or that no action was required. The September 30, 2016, letter is marked as Exhibit 3-P. On October 3, 2016, Polanco filed a response to the IRS's request for admissions. In his response, he admitted that Paragraphs 8 and 9 were correct, but contended that the March 13, 2015, letter was a notice of determination from the IRS that the Polancos' 2013 return was correct. Discussion Trial was held in this case on December 1 , 2016. Polanco's sole argument is that the three letters that were written by IRS, Exhibits 1-P, 2-P, and 3-P, preclude the IRS from taking the position that he earned $149,062 in unreported income from New York Public Radio. The IRS objected to the admission of the three letters. It contends that the letters are irrelevant because they do not preclude the IRS from taking the position that Polanco earned the unreported We reserved ruling on the IRS' s objections. We overruled the IRS's objections and admit 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 7 1 Exhibits 1-P, 2-P, and 3-P. These documents are 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 relevant to Polanco's contention that the IRS is precluded from determining that he did not report his New York Public Radio income. However, having reviewed the letters, we find that they are not the type of document that would bind the IRS. It is firmly established that Section 7121 sets forth the exclusive means by which an agreement between the IRS and a taxpayer concerning the latter's tax liability may be accorded finality. See, e.g., Hudock v. Commissioner, 65 T.C. 351, 362 (1975). Section 7121 authorizes the IRS to enter into a written agreement with any person with respect to any tax for any taxable period and provides that such an agreement shall be final and conclusive if approved by the IRS. See Sec. 7121(a) and (b); see also Sec. 7701(a)(11) (B). Section 301.7121-1(d), Proced. & Admin. Regs., provides that all such 19 written agreements shall be executed on forms 20 21 22 23 24 25 prescribed by the IRS. The IRS has prescribed for this purpose two forms namely, Form 866, Agreement as to Final Determination of Tax Liability and Form 906, Closing Agreement. Form 866 is used to conclusively determine a taxpayer's total tax liability for a taxable period. Sec. 601.202(b), 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 Statement of Procedural Rules. Form 906 is used if an agreement relates to one or more separate items affecting the tax liability of a taxpayer. Id. The three letters are not Forms 866 or Forms 906. Furthermore, the Polancos did not execute the letters. Therefore, the letters are not agreements entered into under Section 7121. See Hudock v. Commissioner, supra at 362-363. Additionally, the Court cannot determine what exactly the letters mean even if they were binding. Counsel for the IRS contended that if the 12 Court saw the full correspondence between the agency 13 14 15 16 17 18 19 20 21 22 23 24 25 and the Polancos, it would find that (1) the Polancos had agreed with the IRS that Polanco failed to report the New York Public Radio income and (2) at least one of the letters merely expressed the IRS's satisfaction with Polanco's agreement that he failed to report the income. Neither party introduced the full correspondence between the Polancos and the IRS, and it is Polanco who bears the burden of proof. Rule 142(a). The three letters in the record are not inconsistent with the IRS's hypothesis regarding the full correspondence. In summary, the three letters are not in form or substance the type of agreement that bars the IRS from pursuing its theory that 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 9 Polanco failed to report $149,062 of income from New York Public Radio. In his response to the IRS's request for admissions, Polanco admitted that he failed to report the New York Public Radio income. Under Rule 90(c) this admission is binding. It is therefore established that Polanco failed to report the $149,062 of income from New York Public Radio. Polanco made no other arguments against the determinations in the notice of deficiency, including the determination that he owed a penalty under Section 6662(a). Although the IRS normally has the burden of production for showing that the penalty should be imposed, Polanco has waived any challenge to the imposition of the penalty, and we so hold. See Rule 34(b) (4); Swain v. Commissioner, 118 T.C. 358, 363 (2002). Nonetheless, we explain why we believe the IRS has satisfied its burden of production as to the penalty. The IRS determined a penalty under Section 6662(a) in the notice of deficiency. The IRS contends that Polanco is liable for this penalty on the basis of a substantial understatement of income tax. See Sec. 6662(b)(2). Section 6662(a) and 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 (b) (2) imposes a penalty equal to 20 percent of an 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 underpayment of tax required to be shown on a return that is attributable to a substantial understatement of income tax. Under Section 6664(a), an underpayment of tax for this purpose is defined as the excess of the amount of income tax imposed over the sum of the "amount of tax shown as the tax by the taxpayer on thejreturn". If refundable credits specified in Section 6211(b)(4) reduce this later amount (the "amount of tax shown as the tax by the taxpayer on the return") below zero, the refundable credits are taken into account as negative amounts of tax for the purpose of computing the underpayment. See Sec. 6664 (flush language). This treatment of refundable credits reflects the amendments to Section 6664 made in the 16 Consolidated Appropriations Act (or CAA). 17 Consolidated Appropriations Act of 2016, Pub. L. No. 18 19 20 21 22 23 24 25 114-113, Sec. 209, 129 Stat. 2241, 3084-85 (2016). CAA Sec. 209(a) effectively overruled the holding in Rand v. Commissioner, 141 T.C. 376, 390-391 (2013), that, for purposes of computing an underpayment under former Section 6664(a), refundable credits reduce the amount of tax shown on the return but not below zero. CAA Section 209(d) provides that the "negative amounts of tax" rule in Section 6664 is effective for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 returns filed after December 18, 2015, and returns filed on or before that date if the period specified in Section 6501 for assessment of the taxes to which such return relates has not expired as of such date. Id. An "understatement" is the excess of the amount of tax required to be shown on a return over the amount of tax shown on the return. Sec. 6662(d) (2)(A). An understatement is substantial when it exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1) (A). The IRS bears the burden of production with respect to the penalty under Section 6662(a) that the IRS determined in the notice of deficiency. See Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the IRS meets its burden of production, the taxpayer bears the burden of proving it is inappropriate to impose the penalty because of reasonable cause and good faith or a similar provision. See Higbee v. Commissioner, 116, T.C. at 446. The determination of 22 whether a taxpayer acted with reasonable cause and 23 24 25 good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 most important factor is the extent of the taxpayer's 2 effort to assess the proper tax liability. Id. 12 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The IRS has met its burden of production regarding the existence of a substantial understatement of income tax for 2013. The tax required to be shown on the return was $25,514, as computed in the notice of deficiency. The tax shown on the return depends on whether the refundable credits can reduce tax below zero. The Polancos reported: (cid:16)042 pre-credit tax liability of $353, (cid:16)042 a child tax credit of $353, (cid:16)042 an earned income credit (which is a refundable credit) of $2,523, (cid:16)042 and an additional child tax credit (which is another refundable credit) of $647. If refundable credits can reduce the tax below zero, then the tax shown on the return is $353 - $353 - $2,523 - $647, or negative $3,170. The understatement would be $25,514 minus negative $3,170, or $28,684. This amount exceeds 10 percent of the amount required to be shown on the Polancos' return ($2,868) and it exceeds $5,000. If refundable credits cannot reduce the tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 below zero, then the tax shown on the return is $0. The understatement would be $25,514 - $0, or $25,514. This amount exceeds 10 percent of the amount required to be shown on the Polancos' return ($2,551) and it exceeds $5,000. Under either method of computation, the understatement exceeds 10 percent of the tax required to be shown and exceeds $5,000. See Lakhani v. Commissioner, 142 T.C. 151, 164 (2014) (holding that by demonstrating that the understatement of income exceeds these thresholds the IRS satisfied its burden of production). It is up to the taxpayer to show reasonable cause for an underpayment. Polanco's only argument in his pleadings or at trial is that the three letters barred the IRS from taking the position that he had $149,062 in unreported income. He did not argue reasonable cause or present any evidence that there was reasonable cause for his failure to report the $149,062. Accordingly, Polanco is liable for an accuracy-related penalty on his underpayment for 2013. Given our holding, a decision will be entered for the respondent determining a deficiency of $28,684 and a Section 6662 penalty of $5,103. This concludes the Court's oral findings of 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 14 fact and opinion in this case. (Whereupon, at 5:19 p.m., the above- entitled matter was concluded.) 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.Capita1ReportingCompany.com