TAX COURT OPINION

Case: Vito Manente
Docket Number: 1013-23
Judge: Copeland
Opinion Type: bench
Filed: 06/18/2024
Pages: 12

VITO MANENTE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent United States Tax Court Washington, DC 20217 Docket No. 1013-23. ORDER A trial in this case occurred on April 8, 2024, before Judge Elizabeth A. Copeland during the Trial Session of the Court in New York, New York. Thereafter, on April 9, 2024, she rendered her oral findings of fact and opinion. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this Order to Petitioner and to Respondent a copy of the pages of the transcript of the April 9, 2024, rendition of Judge Elizabeth A. Copeland's Oral Findings of Fact and Opinion, which opinion was rendered during the Court's Trial Session in New York, New York. In accordance with the Oral Findings of Fact and Opinion, the Court will issue an Order for computations under Rule 155. (Signed) Elizabeth A. Copeland Judge Served 06/18/24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Bench Opinion by Judge Elizabeth A. Copeland 3 April 9, 2024 Vito Manente v. Commissioner of Internal Revenue Docket No. 1013-23 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 upon as precedent in any other case. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Section references in this opinion are to the Internal Revenue Code, in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner, Vito Manente, disputes a notice of deficiency in which the Commissioner of Internal Revenue (Commissioner) determined a $23,416 deficiency in Mr. Manente's income tax for tax year 2018 and an accuracy- related penalty under section 6662(a). On the evidence before us, and using the burden- of-proof principles explained below, the Court finds the 25 following facts: 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 FINDINGS OF FACT 4 Mr. Manente resided in New Jersey when he timely filed his Petition. Mr. Manente's former wife, Denise Manente, was also listed on the Petition. (We will refer to Denise Manente as Mrs. Manente because she was still married to Mr. Manente during 2018, the year at issue in this case.) However, we dismissed the case for lack of jurisdiction as to Mrs. Manente because her signature on the Petition was improper and was not timely corrected. We also dismissed the case as to Mr. Manente's representation in the Petition that he was disputing a notice of determination concerning collection action, since no such notice was issued. Mr. Manente is a certified public accountant (CPA). In 2018, Mr. Manente held a position as head of the audit department for Rising Pharmaceuticals, Inc. (Rising), and Mrs. Manente worked as a programmer for Cvent, Inc. (Cvent). The Manentes filed a joint Form 1040, U.S. Individual Income Tax Return, for tax year 2018, reporting capital losses, losses from rental real estate, and zero wages and salaries. On the basis of these tax items, the Manentes claimed a tax refund of $29,553. They attached to their return "representations of [F]orms W-2," Wage and Tax Statement, purporting to show that Rising and Cvent paid Mr. and Mrs. Manente, 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 respectively, zero wages in 2018 but withheld amounts for 5 federal income tax, Social Security tax, and Medicare tax. That 2018 Form 1040 requested a refund of all withheld taxes including the withheld Social Security and Medicare taxes. On the basis of information reporting submitted by third parties to the Internal Revenue Service (IRS), the Commissioner determined that in 2018 Mr. Manente received $116,862 in wages from Rising and that Mrs. Manente received $72,718 in wages from Cvent. Similarly, on the basis of information reporting by the State of New York and alleged information reporting by the State of New Jersey to the IRS, the Commissioner determined that in 2018 Mr. and Mrs. Manente received state income tax refunds of $4,151 from New York and $3,067 from New Jersey. On the Manentes' joint 2017 Form 1040X, Amended U.S. Individual Income Tax Return, the Manentes had deducted $8,572 for state and local income tax payments. OPINION In general, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving them erroneous by a preponderance of the evidence. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Where a case involving unreported income is appealable to the Court 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 Appeals for the Third Circuit, which is the case here 6 absent a contrary stipulation by the parties, see I.R.C. § 7482(b)(1)(A), the Commissioner must produce evidence linking the taxpayer to the alleged tax-generating activity in order to benefit from the presumption of correctness. Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986), vacating and remanding T.C. Memo. 1985-101. Although the Manentes are no longer married and Mrs. Manente is not a party to this proceeding, Mr. Manente will be personally liable for any tax deficiency that we find with respect to the Manentes' 2018 joint tax return, even if attributable in whole or in part to Mrs. Manente's separate tax items. See I.R.C. § 6013(d)(3). In response to questioning at trial, Mr. Manente agreed that in 2018 he and Mrs. Manente received money in the amounts reflected in the notice of deficiency from Rising, Cvent, and the State of New York. However, he denied that either he or Mrs. Manente received any refund from the State of New Jersey in 2018. Because the Commissioner presented no other evidence linking the Manentes to the New Jersey refund, the presumption of correctness does not apply to the determination that the Manentes received a taxable refund from New Jersey in 2018. Otherwise, Mr. Manente's admissions at trial suffice to link the Manentes to the tax-generating 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 activities of receiving money in exchange for labor and of 7 receiving the New York refund, respectively. Therefore, Mr. Manente has the burden of proving that the amounts paid to the Manentes by Rising, Cvent, and the State of New York were not taxable income. As to the Rising and Cvent 2018 receipts, Mr. Manente admitted at trial that he would be subject to taxation on "gains from labor." However, he advanced the unsupported legal proposition that such gains were only taxable if the monies received in return for labor were invested and then sold to convert them to "gains." He claims wages are not taxable in and of themselves and cited to select text from multiple cases including Supreme Court cases. However, he entirely ignored the ultimate holdings of the cases he cited. To illustrate, he cited Lucas v. Earl, 281 U.S. 111, 114 (1930), for the proposition that salaries and wages are not taxable unless they represent "gains." Lucas v. Earl involved a husband's attempt to shift taxation of one-half of his wages to his wife by contract. The Supreme Court concluded that such wages were taxable income to the husband who earned them alone. Id. The opinion said nothing about having to convert such wages to investments that could then produce "gains." What the Supreme Court held was that "[t]here is no doubt that the statute could 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 tax salaries to those who earned them and provide that the 8 tax could not be escaped by . . . contracts however skillfully devised to prevent salary when paid from vesting even for a second in the man who earned it." Id. at 114-115. The "statute" referred to in Lucas v. Earl contained language substantially similar to section 61 of the Internal Revenue Code as in effect during the year at issue. In other words, payments for labor are taxable when paid to the person who performed the labor. Nothing in any of the cases that were decided after the passage of the Sixteenth Amendment to the Constitution and cited by Mr. Manente supports his conclusion that monies received in exchange for labor are not taxable gain to the recipient when received. Furthermore, his arguments regarding the narrow definition of an employee as only including persons similar to an officer, employee or elected official of the United States and excluding privately employed persons such as himself are unavailing. Section 61(a) provides that "gross income means all income from whatever source derived," including "[c]ompensation for services." I.R.C. § 61(a)(1). We will not further dissect Mr. Manente's additional unsupported arguments or refute them with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have colorable 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 merit. See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 9 1984); see also Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) ("Courts uniformly have rejected as frivolous the arguments that money received in compensation for labor is not taxable income or that a person is liable for tax only if he benefits from a governmental privilege." (Citations omitted.)). The evidence in this case shows that Mr. Manente received $116,862 in taxable wages in 2018 and that Mrs. Manente received $72,718 in taxable wages in 2018. The evidence also shows that the Manentes received a New York income tax refund of $4,151 in 2018. That refund is presumptively taxable under the general rule of section 61(a), that gross income includes income from whatever source derived. We do note however that, as to the New York refund, section 111(a) provides that "[g]ross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter." However, Mr. Manente did not present any evidence that either he did not deduct in a prior year the New York income tax that was refunded in 2018 or that he did deduct that tax but it did not thereby reduce his prior year federal income tax liabilities. Indeed, the copy of the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Manentes' joint 2017 Form 1040X in the record suggests 10 that they claimed a deduction for the New York income tax in question, and a copy of the IRS transcript attached to the Manentes' 2017 Form 1040X indicates that the Commissioner applied any potential refund from that return to past due civil penalties assessed under the Code. Therefore, we hold that the full amount of the New York tax refund determined as taxable in the notice of deficiency is gross income for the Manentes' 2018 tax year. See Glover v. Commissioner, T.C. Memo. 2010-228, 100 T.C.M. (CCH) 342, 343. However, because the Commissioner failed to provide any substantive evidence linking the Manentes to the New Jersey tax refund, we do not sustain the determination that they received a taxable $3,067 tax refund from the State of New Jersey in 2018. The notice of deficiency also determined an accuracy-related penalty for an underpayment of tax attributable to a substantial understatement of income tax. See I.R.C. § 6662(a), (b)(2). The Commissioner bears the burden of producing evidence sufficient to persuade the Court that the penalty determination is correct, absent applicable affirmative defenses. See I.R.C. § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 24 446-47 (2001). 25 Section 6662(d)(1)(A) provides that a tax return 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 substantially understates income tax if the understatement 11 exceeds the greater of $5,000 or ten percent of the tax required to be shown. In light of our holding that the Manentes failed to report approximately $193,700 of gross income, Mr. Manente has understated tax due for 2018 well in excess of both $5,000 and ten percent of the tax required to be shown on the 2018 return. Therefore, the tax return clearly reflects a substantial understatement, and the Commissioner has satisfied one element of his burden of production. He must also show compliance with the supervisory approval requirement of section 6751(b)(1), which provides that "[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." See Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). We have held that supervisory approval must be given before the first formal communication to the taxpayer advising him that penalties have been or will be proposed. Clay v. Commissioner, 152 T.C. 223, 249 (2019), aff'd, 990 F.3d 1296 (11th Cir. 2021). While Mr. Manente did not allege in his Petition that the Commissioner failed to satisfy the supervisory approval requirement, he argued that the penalty approved (under section 6662(d)) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 was not the same as that asserted in the notice of 12 deficiency (under section 6662(a)). He also argued that he was not provided in advance of trial the declaration of the supervisor who purportedly approved the penalty. We explained at trial how the section 6662(d) penalty is a subset of the section 6662(a) penalties, but we did not admit the declaration of supervisor Cheryl Grimes because of its late submission and the potential for prejudice to Mr. Manente, who did not have the opportunity to gather evidence to rebut the declaration. The penalty approval issue was tried by consent of the parties. See Rule 41(b)(1). As such, we examine the evidence in the record to determine whether the Commissioner met his burden of production for the section 15 6662 penalty. 16 17 18 19 20 21 22 23 24 The evidence accepted into the record does not identify the name of the examining agent who proposed the penalty, so we cannot determine that Cheryl Grimes was in fact the immediate supervisor of the examining agent who proposed the penalty. While it is clear that Mr. Manente has advanced only frivolous arguments in support of his return position and that his underpayment was substantial, the Commissioner has not met his burden of production for the section 6662 penalty and we cannot sustain the penalty 25 determination. Therefore, we sustain some but not all of the 13 Commissioner's determinations in the notice of deficiency, and we will order the parties to submit computations under Rule 155. We end by noting that Mr. Manente's return positions are unbecoming to his position as a CPA. We warn Mr. Manente that under section 6673(a), this Court has authority to impose a penalty of up to $25,000 for making frivolous or groundless arguments in proceedings before us. Because this appears to be the first case that Mr. Manente has brought to trial in our Court, we will not impose a penalty at this time. We may not be so lenient if he repeats his performance in the future. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:38 a.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