Court Opinion

ID: 8488093
Source: CourtListenerOpinion
Date Created: 2022-11-18 22:01:07.879793+00
Date Added: 2024-06-11T16:50:07.929756
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2022-22

            JENNIFER JOY FIELDS AND WALTER T. FIELDS,
                            Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 2925-20S.                                     Filed November 10, 2022.

                                     —————

Jennifer Joy Fields and Walter T. Fields, pro sese.

Deborah R. Kelessidis, for respondent.

                              SUMMARY OPINION

       PANUTHOS, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. 1 Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case.

      In a notice of deficiency dated January 6, 2020, respondent
determined a deficiency in federal income tax of $25,917 and a section
6662(a) accuracy-related penalty of $5,133 for petitioners’ taxable year
2017 (year in issue). After concessions, 2 the issues for decision are:

        1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
       2 Petitioners conceded they were required to include $6,413 in taxable wages

from LTF Club Management Co., LLC (LTF), for the year in issue.

                                 Served 11/10/22
                                            2

         (1)       whether petitioners failed to report income of $79,581 for
                   the year in issue; and

         (2)       whether petitioners are liable for a section 6662(a)
                   accuracy-related penalty for the year in issue.

                                      Background

      Some of the facts have been stipulated and are so found. We
incorporate the Stipulation of Facts and the attached Exhibits by this
reference. The record consists of the Stipulation of Facts with attached
Exhibits and the testimony of Jennifer Joy Fields (petitioner).

         Petitioners resided in California when the Petition was timely
filed.

I.       Petitioner’s Employment

       From January 2009 to January 2017, petitioner was an employee
of Paragon Canada ULC. Paragon Canada ULC operated in Canada,
and it operated in the United States as Paragon Gaming (collectively,
Paragon). Petitioner was employed as vice president of customer
development and marketing at Paragon and worked in Vancouver,
British Columbia, Canada. During the time of petitioner’s employment,
the chief executive officer of Paragon was Scott Menke. 3 Text messages
and emails between petitioner and Mr. Menke reflect a relationship
between the two outside the workplace.

      On February 29, 2012, Paragon wired $35,000 Canadian dollars
(CAD) to petitioner’s bank account. Paragon’s internal records noted the
wire payment as “Outgoing Wire Transfer~~Jennifer Fields.”

       In 2014 petitioner purchased a home in Point Roberts,
Washington, for $370,000. The downpayment on the purchase was
$53,020, and on March 20, 2014, Paragon wired $53,020 to Chicago Title
in Whatcom County, Washington. Paragon’s internal records noted the
wire payment as “Cash-General” and as “Wire Payment Chicago Title-
J Fields.”

      On January 13, 2017, petitioner separated from Paragon. At the
time of separation, petitioner was working at Edgewater Casino LP in
Vancouver, which was being managed by Paragon. In a severance

         3   Scott Menke died in October 2020.
                                         3

agreement signed by a representative of Paragon and petitioner on
January 13, 2017, the respective parties, in addition to providing for
severance payments, agreed as follows:

       Write off of Employee Advances: The $79,581.50[4] in
       employee advances that are currently outstanding with the
       company and owed by you will be written off. You will
       provide the company with a complete W–9 form. The
       company will subsequently issue you a 1099, and you will
       be responsible for remitting any applicable taxes.

      Before separation, petitioner’s attorney had corresponded with
Paragon to discuss possible revised terms of separation. Pursuant to a
purported oral agreement between petitioner and Scott Menke, a
second, revised severance agreement was drafted. The revised draft
severance agreement removed the above-mentioned provision, instead
providing:

       Repayment of Loan: The $88,000 in personal loans for the
       company to you, will be withheld from the total severance
       amounts described above, provided that you have signed
       and returned copies of this letter and the Final Release.

This revised draft severance agreement was not signed.

       On January 13, 2017, petitioner executed a Form W–9, Request
for Taxpayer Identification Number and Certification, which was
provided to Paragon. Paragon subsequently issued to petitioner and
filed with the Internal Revenue Service (IRS) a Form 1099–MISC,
Miscellaneous Income, reporting $79,581 in other income for the year in
issue.

       After petitioner’s separation from Paragon in January 2017,
petitioner engaged in other projects with Mr. Menke and Paragon in a
consulting role in 2017 and 2019.

        4 This amount, $79,581.50, was the total in U.S. dollars (USD) on January 12,

2017. Paragon wired $35,000 CAD to petitioner on February 29, 2012. This amount
was converted to $26,561.50 USD on January 12, 2017, at the exchange rate of 1 CAD
to .7590 USD. This amount, in addition to the $53,020 USD wired on March 20, 2014,
totaled $79,581.50.
                                          4

II.    Petitioner’s Tax Return and Examination

      Petitioners timely filed Form 1040, U.S. Individual Income Tax
Return, for the year in issue on March 5, 2018. Petitioners were assisted
in preparing the return by a paid preparer. The return did not include
any amounts reported on the Form 1099–MISC that Paragon filed with
the IRS by Paragon.

      The IRS Automated Underreporter (AUR) Program 5 determined
a mismatch between the reported income on petitioners’ Form 1040 and
the amount reported on the filed Form 1099–MISC from Paragon.

       On January 6, 2020, respondent issued a notice of deficiency to
petitioners for the year in issue, adjusting petitioners’ income to include
$79,581 in other income from Paragon and $6,413 in taxable wages from
LTF. Respondent also determined that petitioners were liable for a
section 6662(a) and (b)(2) accuracy-related penalty for an underpayment
attributable to a substantial understatement of income tax.

                                    Discussion

       Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving that those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). 6 In order for the presumption of
correctness to attach to the deficiency determination in unreported
income cases in the U.S. Court of Appeals for the Ninth Circuit, the
Commissioner must establish “some evidentiary foundation” connecting
the taxpayer with the income-producing activity or demonstrate that the
taxpayer received unreported income. Weimerskirch v. Commissioner,
596 F.2d 358, 361–62 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). Once the
Commissioner introduces such evidence, the burden shifts to the

       5  The AUR program matches “third-party-reported payment information
against [a taxpayer’s] already-filed” tax return. Essner v. Commissioner, T.C. Memo.
2020-23, at *11. When there is a discrepancy, the AUR program calculates a proposed
deficiency based on the statutory scheme and prepares a letter to the taxpayer
requesting an explanation for the discrepancy. Service Center Notice 200211040 (Mar.
15, 2002). If the taxpayer does not respond, the program will issue a notice of
deficiency. Id. If the taxpayer does not respond to the notice of deficiency, the
deficiency will be assessed. Id.
        6 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 its requirements.
Therefore, petitioners bear the burden of proof.
                                    5

taxpayer to show by a preponderance of the evidence that the
determination was arbitrary or erroneous. Klootwyk v. Commissioner,
T.C. Memo. 2006-130, slip op. at 4–5.

       Petitioners do not dispute the amount reported on the Form
1099–MISC or that they received the amount reported. Petitioners
instead assert that the amount was nontaxable because it was a gift. On
the basis of petitioners’ stipulated receipt of the amount reported and
the Form 1099–MISC filed with the IRS by Paragon, respondent has
met his burden as to the unreported income. Accordingly, the burden of
proof shifts to petitioners.

I.    Unreported Income

       Gross income includes “all income from whatever source derived.”
See § 61(a). Payments that are “undeniable accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion” are
taxable as income unless an exclusion applies. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

       Section 102(a) excludes from gross income the value of property
acquired by gift from gross income. Generally, amounts transferred by
or for an employer to, or for the benefit of, an employee are includible in
gross income. § 102(c)(1). A gift must proceed from a detached and
disinterested generosity, motivated by affection, respect, admiration,
charity, or the like. See Commissioner v. Duberstein, 363 U.S. 278, 285
(1960). There is a strong presumption that payments made beyond an
employee’s salary are compensation for services and not gifts. See Van
Dusen v. Commissioner, 166 F.2d 647 (9th Cir. 1948), aff’g 8 T.C. 388
(1947). A payment between an employer and an employee may be a gift
when the relationship between the employer and the employee is
personal and unrelated to work. Caglia v. Commissioner, T.C. Memo.
1989-143; Harrington v. Commissioner, T.C. Memo. 1958-194.

       Petitioner offered testimony as to her personal relationship with
Mr. Menke. In support of her assertion of a personal relationship and
Mr. Menke’s intent to make a gift, petitioner produced emails, text
messages, and an unsigned draft severance agreement that removed the
text pertaining to the $79,581 being written off as an employee advance.

      The communications presented consist of an email with Mr.
Menke’s administrator scheduling dinner in 2017, a meeting scheduling
email with Paragon stakeholders in 2019, and unverified text messages
from petitioner to Mr. Menke. While petitioner and Mr. Menke
                                   6

corresponded after her separation from Paragon, their communications
do not demonstrate that the payments were intended to be a gift. While
petitioner and Mr. Menke reached an oral compromise regarding the
terms of separation, the second, revised draft severance agreement was
not signed. Even considering the revised agreement and a relevant
provision, it is ambiguous at best. The text of the revised draft
severance agreement does not necessarily support petitioner’s position
that the employer intended a gift to petitioner. At best, it reflects
petitioner’s attempt to recharacterize the payments as a gift, which
apparently neither Mr. Menke nor Paragon agreed to. There is no
evidence in the record from which the Court could conclude that Mr.
Menke or Paragon intended to make a gift to petitioner. The payments
were made from Paragon to petitioner and recorded as accounts
receivables in Paragon’s accounting records. Paragon’s inclusion of the
disputed amount in the signed and executed severance agreement and
the subsequent issuance of a Form 1099–MISC indicates that the
payments were not intended to be a gift.

       We find petitioner’s testimony that she had a personal
relationship with Mr. Menke is insufficient to support her contention
that the payments were a gift.

       Petitioner has failed to establish that the $79,581 amount was a
gift. Accordingly, we sustain respondent’s determination.

II.   Section 6662(a) Accuracy-Related Penalty

       Respondent determined that petitioners are liable for an
accuracy-related penalty on their underpayment of tax for the year in
issue because of a substantial understatement of income tax. Section
6662(a) and (b)(2) imposes an accuracy-related penalty of 20% on any
portion of an underpayment of tax required to be shown on a return
attributable to the taxpayer’s “substantial understatement of income
tax.” An understatement of income tax is substantial if the amount of
the understatement for the taxable year exceeds the greater of 10% of
the tax required to be shown on the return or $5,000. § 6662(d)(1)(A).

      A.     Burden of Proof

      The Commissioner generally bears the burden of production with
respect to a section 6662 penalty. See § 7491(c). To satisfy that burden
the Commissioner must offer sufficient evidence to indicate that it is
appropriate to impose the penalty. See Higbee v. Commissioner, 116
T.C. 438, 446 (2001). Once the Commissioner meets his burden of
                                          7

production, the taxpayer must come forward with evidence sufficient to
show the Court that the determination is incorrect. Id. at 446–47. If
the understatement of income tax for the year in issue is substantial,
the Commissioner has satisfied the burden of producing evidence that
the penalty is justified.

       Respondent determined a deficiency in tax, increasing
petitioners’ total tax liability to $25,917. Respondent has met his
burden because the amount of petitioners’ understatement for the year
in issue was “substantial” in that it exceeded the greater of 10% of the
tax required to be shown on the return or $5,000. See § 6662(d)(1)(A).

        The Court has held that accuracy-related penalties determined
by an IRS computer program without human review are “automatically
calculated through electronic means” and are thus exempt from the
written supervisory approval requirement 7 that generally applies to
such penalties. See Walquist v. Commissioner, 152 T.C. 61, 73 (2019).
This exception includes returns processed through the AUR program
when the IRS issues a CP2000 notice to a taxpayer and the taxpayer
fails to respond to the notice. See Walton v. Commissioner, T.C. Memo.
2021-40, at *9–10; Ball v. Commissioner, T.C. Memo. 2020-152, at *12–
13.

       Respondent asserts, and the record supports him, that the
accuracy-related penalty at issue was automatically calculated through
electronic means and, therefore, falls within the section 6751(b)(2)(B)
exception to the written supervisory approval requirement.

       B.      Reasonable Cause and Good Faith

       Once the Commissioner has met his burden, the taxpayer may
avoid a section 6662(a) accuracy-related penalty to the extent that he or
she can demonstrate (1) reasonable cause for the underpayment and
(2) that he or she acted in good faith with respect to the underpayment.
§ 6664(c)(1). The decision as to whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case basis,
considering all pertinent facts and circumstances, including: (1) the
taxpayer’s efforts to assess the proper tax liability, (2) the knowledge

        7 Generally, the burden of production includes producing evidence establishing

that the penalty was “personally approved (in writing) by the immediate supervisor of
the individual making such determination” unless a statutory exception applies.
§ 6751(b)(1).
                                    8

and experience of the taxpayer, and (3) reliance on the advice of a tax
professional. Treas. Reg. § 1.6664-4(b)(1).

       An honest misunderstanding of the law that is reasonable in the
light of the facts and circumstances may support a conclusion that a
taxpayer acted with reasonable cause and in good faith with respect to
a reported position. Id.; see also Higbee, 116 T.C. at 448–49. Generally,
the most important factor is the extent of the taxpayer’s efforts to assess
his or her proper tax liability. Treas. Reg. § 1.6664-4(b)(1). Statutory
complexity alone does not constitute reasonable cause. Barnes v.
Commissioner, T.C. Memo. 2012-80, aff’d, 712 F.3d 581 (D.C. Cir. 2013).

       While they were assisted in preparing their tax return and timely
filed their return, petitioners were aware of the provisions of the
Paragon Severance agreement and the subsequently issued Form 1099–
MISC. Also, they conceded that the taxable wages of $6,413 attributable
to LTF were required to be included in their income for the year in issue
and did not provide any further explanation as to why that amount was
not reported in their return. Petitioners have not established they acted
in good faith to properly report their tax liability and accordingly have
not established that they had reasonable cause for the underpayment.

      Petitioners are liable for the accuracy-related penalty for an
underpayment due to a substantial understatement of income tax for
taxable year 2017. Respondent’s determination is sustained.

      We have considered all of petitioners’ arguments, and, to the
extent not addressed herein, we conclude that they are moot, irrelevant,
or without merit.

      To reflect the foregoing,

      Decision will be entered for respondent.