TAX COURT OPINION

Case: Joseph Michael Czarnecki
Docket Number: 28668-10S
Judge: Whalen
Opinion Type: bench
Filed: 01/09/2012
Pages: 15

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOSEPH MICHAEL CZARNECKI, Petitioner, v. ) ) ) ) ) Docket No. 28668-10S COMMISSIONER OF INTERNAL REVENUE, Respondent. ORDER ) ) ) Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that pages 5, 7, 8, and 10 of the transcript of the proceedings in the above case before Judge Laurence J. Whalen at St. Louis, Missouri, containing his oral opinion rendered on December 8, 2011, shall be changed as shown in the corrected transcript attached to this Order, and that Appendix A, which is referred to on page 7 of which was omitted from the transcript, shall be attached to the corrected transcript. findings of fact and It is further the transcript, but ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of corrected transcript of Judge Laurence J. Whalen at St. Louis, Missouri, containing his oral findings of fact and opinion rendered.on December 8, 2011, together with Appendix A thereto. the proceedings in the above case before the pages of the In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D . C. January 9, 2012 gERVEB JAN 10 2012 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 3 Bench Opinion by Senior Judge Laurence J. Whalen Joseph Michael Czarnecki December 8, 2011 I. 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. II. This proceeding was heard as a Small Tax Case . pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986,.as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. Hereinafter, unless stated otherwise, all section numbers refer to the Internal Revenue Code, as amended, and in effect for 2008, the taxable year in issue, and all rule references are to the Tax Court Rules of Practice and Procedure. III. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. . IV. Mr. Joseph Michael Czarnecki appeared in these proceedings on his own behalf, and Ms. Karen O. Myrick, attorney at law, appeared on behalf of Respondent. 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 Respondent determined a deficiency in V. Petitioner's Federal income tax for the taxable year 2008 in the amount of $11,007, and an accuracy-related penalty under section 6662(a) in the amount of $1,556. The deficiency determined in the notice was based upon the imposition of the 10 percent tax on early distributions from a qualified retirement plan, together with an increase in Petitioner's income attributable to two items, an unreported state income tax refund of $551, and an unreported distribution from Petitioner's retirement account of $32,267. VI. Respondent filed an Amendment to Answer in this case alleging that the amount of the retirement account distribution, as set forth in the notice of deficiency, $32,267.52, is incorrect. According to the Amendment to Answer, Petitioner had received a liquidating distribution of $16,134 and, after his retirement account had been liquidated, the trustee forgave the balance of a loan from the account of $7,815. Thus, according to the Amendment to Answer, .the total amount of the taxable retirement distributions received by Petitioner during 2008 was $23,949. 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 5 In addition, the Amendment to Answer raised two new issues. _First, it alleged that Petitioner had improperly reported a gambling loss of $2,250 on Schedule A of his 2008 return. Second, it alleged that Petitioner had improperly deducted sales taxes on residential utilities of $8,782, notwithstanding the fact that he elected on his return to deduct state income taxes. In effect, the Amendment to Answer alleged that Petitioner's taxable income should be increased in the aggregate amount of $37,860. This increase was computed by making the following four adjustments to the income reported on Petitioner's return: (1) including the unreported distributions from Petitioner's retirement account, $23,949, as discussed above, (2) including the unreported state income tax refund of $551, (3) disallowing the gambling loss of $2,250, and (4) disallowing the sales tax deduction claimed on residential utilities, $8 82. Those adjustments also require the followi g two consequent adjustments to the income reported on Petitioner's return: (1) decreasing the amount of Petitioner's net medical and dental expenses by $1,838, and (2) decreasing the amount of Petitioner's excess miscellaneous deductions by $490. Based on those 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 changes to Petitioner's income, and the imposition of the 10 percent tax on early distributions from a qualified retirement plan, the Amendment to Answer alleged that the correct deficiency in Petitioner's tax for taxable year 2008 is $10,200, rather than the amount determined in the notice of deficiency, $11,007. The Amendment to Answer also alleged that the gambling loss deduction and the sales taxes deduction on residential utilities were erroneous deductions which resulted in an underpayment of the tax required to be shown on Petitioner's 2008 return. According to the Amendment to Answer these erroneous deductions were the result of negligence or disregard of rules or regulations and they were the result of Petitioner's substantial understatement of income tax. Thus, the Amendment to Answer alleged that the entire deficiency for 2008 is subject to the accuracy-related penalty under section 6662(a). Petitioner objected to the granting of Respondent's Motion for Leave to File Amendment to Answer in an objection which merely stated, "I oppose the imposition of the penalty that I filed an incorrect income tax return". Petitioner did not reply to, cn: otherwise move in response to, 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 Respondent's Amendment to Answer. At trial, Petitioner raised no issue with respect to any of the factual allegations in Respondent's Amendment to Answer, other than s assertion that he is not liable for the accuracy related penalty under section 6662(a). Thus, while Petitioner conceded that he is liable for the deficiency in income tax in the amount of $10,200 on the items specified in the Amendment to Answer, he objected to the imposition of the accuracy-related penalty under section 6662(a). Accordingly, the only issue for·decision by the Court is whether Petitioner is liable for the accuracy- related penalty for negligence and for substantial understatement of income tax under section 6662(a), (c), and (d). A comparison of the adjustments determined in the notice of deficiency issued to Petitioner for 2008, with the adjustments specified in the Amendment to Answer, and the Petitioner's tax liability, as computed in both documents, is set forth in Appendix A hereto. VII. Subsection (a) of section 6662 imposes an accuracy-related penalty of 20 percent of the portion of any underpayment attributable to causes specified in subsection (b). Respondent asserts two causes Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 8 19 20 21 22 23 24 25 8 justifying the penalty in this case: negligence, subsec. (b) (1), and a substantial understatement of income tax, subsec. (b) (2). The term "negligence" includes any failure to make a reasonable attempt to comply with the Internal Revenue Code, and the term "disregard" includes any careless, reckless or intentional disregard. Sec. 6662(c). "'Negligence is a lack of due care or the failure to do what a.reasonable and ordinarily prudent person would do under the circumstances.'" Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting Martello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d 1022 (5th Cir. 1990), affd. 501 U.S. 868 (1991). An individual substantially understates his or her income tax when the reported tax is understated by the greater of ten percent of the tax required to be shown on the return of $5,000. Sec. 6662(d) (1) (A). Tax is not understated to the extent that the. treatment of the item related thereto is based on substantial authority, or is adequately disclosed in the return or ïn a statement attached to the return, and there is a reasonable basis for the tax treatment of such item by the taxpayer. Sec. 6662(d) (2) (B). 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 The accuracy-related penalty does not apply to any portion of an underpayment if it is shown that there is reasonable cause for that portion of. the understatement, and that the taxpayer acted in good faith with respect to all or that portion of the understatement. Sec. 6664 (c) (1); sec. 1.6664-4 (b), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good·faith is made on a case-by-case basis, taking into account all of the pertinent facts and circumstances. Sec. 1.6664-4 (b) (1), Income Tax Regs. The most important factor is the extent of a taxpayer's effort to assess the taxpayer's proper tax liability for such year. Id. Section 7491(c) places on the Commissioner the burden of production with respect to a taxpayer's liability for any penalty. To satisfy Respondent's burden of production, Respondent must come forward with "sufficient evidence indicating that it is appropriate to impose" the accuracy-related penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Although Respondent bears the burden of production with respect to the accuracy-related penalty under section 6662(a), Respondent "need not introduce evidence regarding reasonable cause * * * or similar 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 10 provisions. * * * the taxpayer bears the burden of proof with regard to those issues". Id. Petitioner bears the burden of proving that he had reasonable cause for, and acted in good faith, with respect to any portion of the underpayment, such that he should not be liable for the accuracy-related penalty. See section 6664 (c) (1). VIII. Petitioner's position: Petitioner contends that he is not liable for the accuracy-related penalty. He testified that, before filing his return for 2008, he did not receive a copy of the Form 1099 reporting the retirement plan distribution. After filing his return, he asserts that he was not able to obtain a Form 1099 with respect to the retirement account distribution. He further asserts that he "did everything possible to obtain the 1099 in questio ". In support of that assertion, he introduced into evidence a "Timeline" of his attempts to obtain the Form 1099 which began on July 5, 2010, when he contacted his employer's "HR Administrator". . . A's to the other adjustments in this case, Petitioner testified vaguely that he thought the tax return instructions stated.that taxpayers were 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 11 permitted to deduct sales taxes, along with income taxes, and that taxpayers were entitled to deduct gambling losses in excess of winnings. IX. . Discussion: The underpayment in this case is attributable to the four adjustments to Petitioner's return for 2008 which were specified in the Amendment to Answer described above, and the imposition of the ten percent tax on early distributions from a qualified retirement plan. In the case of each of those changes, it is readily apparent that Respondent satisfied his burden of production of presenting sufficient evidence indicating that it is appropriate to impose the accuracy-related penalty. First, each of the adjustments demonstrates a disregard of the rules and regulations on Petitioner's part: (1) Petitioner failed to report a state income tax refund of $551 that was clearly taxable, (2) Petitioner failed to report taxable retirement income of $23,949 that was clearly taxable, (3) PetitiÈner deducted gambling losses of $2,250, notwithstanding section 165(d) which provides that the deduction of such losses is allowed only to the extent of the gains from such transactions, (4) Petitioner improperly deducted general sales taxes on residential utilities, contrary 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 12 to his election under section 164 (b) (5) to deduct state income taxes, and (5) Petitioner failed to report the ten percent tax on early distributions, imposed by section 72(t), based upon the distribution from his.qualified retirement plan. Second, as a result of those changes, as to which Petitioner concedes, Petitioner substantially understated his income tax for 2008 by an amount which exceeds the greater of ten percent of the tax required to be shown on the return, or $5,000. See sec. 6662(d) (1) (A). At trial, it was evident that Respondent had met his burden of production with respect to both causes of the accurate-related penalty relied upon by Respondent, negligence and substantial understatement. Accordingly, the Court instructed Petitioner that he had the burden of proving that he was not liable for the penalty with respect to any portion of the underpayment. Nevertheless, Petitioner did not meet . that burden. For example, Petitioner failed to show that any adjustment composing the understatement was adequately disclosed in the return or in a statement attached to the return. Sec. 6662(d) (2) (B). Furthermore, Petitioner failed to show that there was a reasonable cause for any portion of the understatement, or that he acted in good faith with 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 13 respect to that portion. Sec. 6664 (c) (1); sec. 1.6664-4 (b), Income Tax Regs. Petitioner's principal argument is that he should not be subject to the accuracy-related penalty with respect to the taxable retirement income for 2008 because he was unable to obtain a copy of the Form 1099 for that distribution. It is evident that his attempts to obtain the Form 1099 do not have a bearing on the tax reported on his return for 2008. According to Petitioner's "Timeline", those efforts did not take place until well after his 2008 return had been filed. Petitioner failed to show that he made a reasonable attempt to comply with the Internal Revenue Code as to any of the changes specific in the Amendment to Answer. Petitioner was well aware that he had received taxable retirement income during 2008 and that his loan balance had been forgiven. He had requested the distribution of the balance of his retirement account, and he had received a check for the distribution in the amount of $12,907. He knew, from the authorization that he had signed, that the amount he received was "less 20 percent federal income tax withholding". Indeed, shortly prior to receiving his check, Morgan Stanley had issued a check to Petitioner in the amount of $16,133.76, the full 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 14 balance of Petitioner's account, without deducting taxes . On January 14, 2008, Morgan Stanley realized its error, and it stopped payment on the check for $16,133.76 and issued a second to Petitioner for the correct amount. Petitioner deposited the check for $12, 9Ò7 into his bank account on January 18, 2008. Nevertheless, Petitioner reported no part of the taxable retirement income that he received in 2008 on his return for the year. As to the other changes in this case, Petitioner testified vaguely he recalled reading that the tax return instructions permitted taxpayers to deduct sales taxes, along with income taxes, and to deduct net gambling.losses. We do not credit that part of Petitioner's testimony. We are unable. to conclude that Petitioner acted with reasonable cause and in good faith as to any portion of the underpayment. Accordingly, there being a negligent understatement of income tax and a substantial understatement of income tax, Petitioner is liable for an accuracy-related penalty, but in the reduced amount of $1, 395 . Respondent ' s determination is therefore sustained but only to that extent. In order to give effect to our disposition of the X.. 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 15 disputed issue, as well as the parties' concessions, decision. will be entered for Respondent (1) for the deficiency in income tax in the reduced amount specified ïn Exhibit A of the Amendment to Answer, $10, 200, and (2) for the accuracy-related penalty under section 6662(a), (c), and (d) in the reduced amount o f $1, 3 95 . THIS CDNCLUDES THE COURT'S ORAL FINDINGS OF FACT XI. . AND OPINION IN THIS CASE . (whereupon, at 12:32 p.m., the bench opinion in the above-entitled matter was concluded. ) // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888 osépl Michael Czarnecki No. 28668-10S ndix A Adjustments: State tax refund Retirement income taxable Gambling loss Sales tax on utilities Medical deduction Miscellaneous deduction Total adjustments Taxable income per return Taxable income as revised . Tax . Corrected tax liability Less: Child tax credit Plus: Tax on qualified plans Total corrected tax liability Total tax shown on return . Deficiency - increase in tax Adjustments to prepayment credits - increase (decrease) Balance due (underpayrnent of tax) Accuracy-related Penalty Notice of Deficiency Amendment to Ahswer . 551 32,267 2,462 657 35,937 47,036 82,973 13,431 .. -400 . 3,227 16,258 5,251 11,007 . -3,226 7,781 1,556 551 23,949 2,250 8,782 1,838 490 37,860 47,036 84,896 13,906 -850 2,395 15,451 5,251 10,200 -3,226 6 974 1,395