Court Opinion

ID: 9411761
Source: CourtListenerOpinion
Date Created: 2023-07-27 19:03:52.685185+00
Date Added: 2024-06-11T16:41:11.688780
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2023-25

                             ROBERT R. DOGGART,
                                  Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 6928-21S.                                            Filed July 27, 2023.

                                     —————

Robert R. Doggart, pro se.

Phillip A. Lipscomb and John S. Hitt, for respondent.

                              SUMMARY OPINION

       MARSHALL, 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.

       Respondent determined a deficiency of $9,910 and additions to
tax pursuant to sections 6651(a)(1) and (2) and 6654 of $1,434, $1,147,
and $143, respectively, for petitioner’s 2017 tax year. 2           After
concessions, the issues remaining for decision are (1) whether petitioner
received constructive distributions of income from two life insurance
policies; (2) whether petitioner is entitled to deduct rental property

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, and Rule references are to
the Tax Court Rules of Practice and Procedure.
        2 All monetary amounts have been rounded to the nearest dollar.

                                 Served 07/27/23
                                         2

expenses reported on Schedule E, Supplemental Income and Loss; and
(3) whether petitioner is liable for the additions to tax under sections
6651(a)(1) and (2) and 6654.

                                   Background

       On February 16, 2017, petitioner was incarcerated. He remained
incarcerated through the time of trial. Petitioner resided at his home in
Signal Mountain, Tennessee (Signal Mountain Property), for some years
before 2017 and through February 16, 2017. The Signal Mountain
Property was then left vacant until September 15, 2017. As of that date
through the end of 2017, petitioner rented the Signal Mountain Property
to his daughter for $500 per month. Petitioner concedes that $500 per
month was significantly below the fair market rental value of the
property.

       Before 2017 petitioner took out a series of loans against two life
insurance policies that he held with Prudential Insurance Co. of
America (Prudential). The cash value of his policies served as collateral
for the loans. While incarcerated, petitioner stopped paying premiums
on the two policies. As a result, each policy lapsed and Prudential used
the cash values of the policies to repay the loans plus interest due.
Prudential subsequently issued petitioner Form 1099–R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., for 2017 with respect to each policy and
reported taxable distributions from life insurance to the Internal
Revenue Service (IRS). 3 The amounts reported as taxable on the Forms
1099–R were $13,214 and $5,366, calculated with respect to each policy
as the outstanding loan amount repaid by the cash value of the policy
less the total premiums petitioner paid with respect to the policy. Upon
inquiry by petitioner, Prudential issued to petitioner a letter dated
September 1, 2021, with respect to each policy explaining these
calculations.

       Petitioner failed to file an income tax return for the 2017 tax year
and to make estimated tax payments or otherwise fully pay his tax due.
Petitioner also failed to file an income tax return for the 2016 tax year. 4

       3 The Forms 1099–R were cited in the notice of deficiency issued to petitioner

and addressed by the parties at trial. There is no dispute that the Forms 1099–R were
issued. We note, however, that the parties did not submit the forms into evidence.
       4 Petitioner concedes that in years before 2016 he was aware that there were

due dates for filing returns and paying tax.
                                        3

On or around March 9, 2020, the IRS prepared a substitute for return
(SFR) pursuant to section 6020(b) for petitioner’s 2017 tax year. 5 On
November 30, 2020, respondent issued petitioner a notice of deficiency
for the 2017 tax year, which, inter alia, included in petitioner’s gross
income the taxable distribution amounts reported by Prudential. On
February 25, 2021, while residing in Kentucky, petitioner timely filed a
Petition with this Court.

       On or about September 2, 2021, petitioner prepared a proposed
income tax return for the 2017 tax year, which he provided to
respondent. The proposed return claimed a rental real estate loss
deduction of $77,675 in connection with the Signal Mountain Property.
In calculating the loss on Schedule E, petitioner claimed deductions for
the following alleged expenses: $1,762 for insurance for the entire 2017
tax year; $650 for repairs paid for by his daughter in exchange for an
offset in rent; $3,670 for utilities for January 1 through September 15,
2017; and $73,593 for depreciation that petitioner calculated using the
appraised value of the property and a seven-year cost-recovery table,
which he selected because it corresponded to the length of his remaining
prison sentence. At trial petitioner conceded that the amount of his
claimed loss was limited to $25,000. See § 469(i). Petitioner did not
provide any documentation to substantiate the alleged expenses.

                                  Discussion

I.     Burden of Proof, In General

       Generally speaking, the Commissioner’s determinations in a
notice of deficiency are presumed correct, and the taxpayer bears the
burden of proving by a preponderance of the evidence that the
determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Section 7491(a) provides that if, in any court
proceeding, a taxpayer introduces credible evidence with respect to any
factual issues relevant to ascertaining the liability of the taxpayer for
any tax imposed by subtitle A or B of the Code and meets other
prerequisites, the burden of proof shall shift to the Commissioner with
respect to that issue. Higbee v. Commissioner, 116 T.C. 438, 440–41
(2001). Petitioner has neither argued nor shown that he has satisfied

       5 With respect to the SFR, respondent introduced into evidence a signed IRC

Section 6020(b) ASFR Certification and corresponding Letter 2566–ASFR-30-Day
Proposed Assessment, along with petitioner’s transcript of account for 2017.
                                    4

the requirements of section 7491(a) to shift the burden of proof to
respondent and thus bears the burden of proof in this case.

II.   Income from Life Insurance

       We first decide whether petitioner received constructive
distributions of $13,214 and $5,366 as reported on Forms 1099–R with
respect to two life insurance policies. When a case involves unreported
income and is appealable to the U.S. Court of Appeals for the Sixth
Circuit, as is this case, the presumption of correctness does not attach
to the Commissioner’s determination of such income unless the
Commissioner can provide at least a “minimal” factual predicate or
foundation of substantive evidence linking the taxpayer to the income-
producing activity or to the receipt of funds. See United States v. Walton,
909 F.2d 915, 918–19 (6th Cir. 1990); Garavaglia v. Commissioner, T.C.
Memo. 2011-228, slip op. at 47–48, aff’d, 521 F. App’x 476 (6th Cir.
2013). Once the Commissioner makes the required threshold showing,
the burden shifts to the taxpayer to prove by a preponderance of the
evidence that the Commissioner’s determination is erroneous or
arbitrary. Walquist v. Commissioner, 152 T.C. 61, 67–68 (2019) (citing
Helvering v. Taylor, 293 U.S. 507, 515 (1935)).

        The $13,214 and $5,366 taxable distribution amounts reported on
the Forms 1099–R are linked to life insurance policies petitioner held
with Prudential and are supported by Prudential’s letters explaining
their calculations. Petitioner admits to holding the policies and to
having outstanding loans against them. Petitioner also admits that the
policies lapsed in 2017 and raises no dispute with respect to the
derivation or computation of the amounts reported on the Forms 1099–R
upon the policies’ termination.            Cf. § 6201(d).    Respondent’s
determination of unreported income is therefore entitled to the
presumption of correctness, and petitioner must come forward with
proof that the determination is in error. See Martinez v. Commissioner,
T.C. Memo. 2016-182, at *4–5; Feder v. Commissioner, T.C. Memo. 2012
10, slip op. at 7; see also Banister v. Commissioner, T.C. Memo. 2008 201,
slip op. at 5 (holding that a notice of deficiency indicating third-party
payers paid the taxpayer the specific amounts in question satisfied the
minimal evidentiary burden even though direct evidence was not in the
record), aff’d, 418 F. App’x 637 (9th Cir. 2011).

      Gross income includes income derived from life insurance
contracts. § 61(a)(9); Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 429 (1955). Amounts received from life insurance contracts other
                                    5

than as a death benefit or annuity are included in gross income to the
extent that they exceed the investment in the contract. §§ 72(b),
(e)(1)(A), (5)(A), (C), 101(a). The “investment in the contract” is the
aggregate amount of the premiums paid less amounts previously
received as income from the contract but excluded from gross income
calculations. § 72(e)(6).

       A taxpayer can receive a constructive distribution from the
termination of his life insurance policy, which must be included in gross
income, even if the taxpayer does not physically receive cash or other
property from the policy during the tax year. Black v. Commissioner,
T.C. Memo. 2014-27, at *8–9; Brown v. Commissioner, T.C. Memo. 2011
83, slip op. at 10–12, aff’d, 693 F.3d 765 (7th Cir. 2012); Sanders v.
Commissioner, T.C. Memo. 2010-279, slip op. at 2–6; McGowen v.
Commissioner, T.C. Memo. 2009-285, slip op. at 7–12, aff’d, 438 F. App’x
686 (10th Cir. 2011); Barr v. Commissioner, T.C. Memo. 2009-250, slip
op. at 3; Atwood v. Commissioner, T.C. Memo. 1999-61, slip op. at 4–6.
The termination of both a life insurance policy and indebtedness against
the policy functions as the application of the cash value of the insurance
policy against the debt owed. McGowen, T.C. Memo. 2009 285, slip op.
at 8–12. The application of the cash value of a life insurance policy
against an outstanding loan is no different from distributing the
proceeds of the policy to the taxpayer to permit the taxpayer to use those
proceeds to pay off the loan. Feder, T.C. Memo. 2012-10, slip op. at 11.
A constructive distribution is included in gross income insofar as it
exceeds the taxpayer’s investment in the life insurance contract.
Sanders, T.C. Memo. 2010-279, slip op. at 5.

       When petitioner stopped paying the premiums on his two life
insurance policies, Prudential notified him that the lack of payments
resulted in the termination of his loans and underlying policies. The
terminations effectively applied the cash values of his policies against
the loans in extinction of both. Petitioner’s investment in the two
contracts is equal to the sum of his premiums paid. When the policies
were terminated and the cash values of the policies were taken to repay
the loans, petitioner constructively received the cash values of the
policies.    The amounts constructively received in excess of his
investments in the contracts are therefore includible in gross income.
Accordingly, we conclude that petitioner, who disputes neither the
amounts of the loans extinguished by the policies’ cash values nor the
amounts of his investments in those policies, received and failed to
report life insurance income from the two lapsed policies as Prudential
calculated.
                                          6

       Petitioner contends that termination of his life insurance policies
should not result in income for the 2017 tax year because he did not
actually receive any money at the time the policies were terminated.
Petitioner argues that distributions were instead taxable, if at all, when
he initiated the loans with Prudential and received cash. Petitioner has
not, however, argued or otherwise shown that his policy loans were not
true loans. And it is well established that the receipt of cash in the form
of a bona fide loan does not constitute income so long as an obligation to
repay the borrowing remains. Commissioner v. Indianapolis Power &
Light Co., 493 U.S. 203, 207–08 (1990); Commissioner v. Tufts, 461 U.S.
300, 307 (1983). Loans taken out against life insurance policies can
constitute bona fide loans. Black, T.C. Memo. 2014-27, at *8. Because
petitioner’s borrowings had an obligation of repayment at the time they
were taken, they did not constitute income when initially received.
While petitioner did not physically receive money upon the lapse of his
policies, he no longer had to repay the loans, so it is “irrelevant that no
money changed hands.” Brown v. Commissioner, 693 F.3d at 768. As
physical receipt of cash does not dictate taxability, the initial
disbursement of the loans was not taxable. Likewise, the lack of
distribution of cash to petitioner does not render untaxable the
termination of his life insurance policies.

III.   Rental Property Deductions

       We next decide whether petitioner is entitled to deduct rental real
estate expenses reported on his proposed Schedule E with respect to the
Signal Mountain Property. Petitioner bears the burden of proving
entitlement to any deductions claimed. See Rule 142(a); INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); Deputy v. du Pont, 308 U.S.
488, 493 (1940).

       Respondent disputes petitioner’s entitlement to the Schedule E
deductions for the reported expenses on multiple grounds. He primarily
contends that the expenses are nondeductible because of petitioner’s use
of the Signal Mountain Property as a residence during 2017. 6 Because
we agree, we do not address respondent’s other arguments on this point.

        6 Respondent also contends that petitioner failed to substantiate the expenses

and that the expenses were personal. As to the depreciation expense, respondent
further argues that petitioner used the incorrect cost basis and the incorrect recovery
period for calculating the expense. Finally, he argues that any rental real estate loss
petitioner did incur would be nondeductible pursuant to the general passive activity
                                         7

      Taxpayers must comply with the specific requirements for any
deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S.
at 84; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Personal expenses may not be deducted unless there is an explicitly
provided exception. § 262(a). Under section 212, ordinary and necessary
expenses paid or incurred for the managing or maintaining of property
held to produce income shall be deductible. Where a taxpayer uses a
dwelling as a personal residence during the taxable year, however,
deductions under section 212 are not allowed. §§ 262(a), 280A(a), (d);
Hunter v. Commissioner, T.C. Memo. 2014-164, at *6 (citing Osborne v.
Commissioner, T.C. Memo. 1987-553). A dwelling is considered the
personal residence of the taxpayer for this purpose if the taxpayer used
the dwelling for personal purposes for a period exceeding the greater of
14 days or 10% of the days the dwelling was rented at fair market value
during the tax year. § 280A(d).

       Petitioner resided at the property from January 1 until February
16, 2017, exceeding the 14-day maximum for this reason alone.
Petitioner is also considered to have used the Signal Mountain Property
for personal purposes on the days it was rented to his daughter for less
than fair market value. See § 280A(d)(2)(A), (C), (3)(A). The Signal
Mountain Property is thus classified as petitioner’s personal residence
for the 2017 tax year. Accordingly, petitioner may not deduct any of the
alleged expenses he reported with respect to the Signal Mountain
Property.

IV.    Additions to Tax

       Also at issue are additions to tax for failure to file under section
6651(a)(1), failure to pay the amount shown under section 6651(a)(2),
and failure to pay estimated tax under section 6654. Pursuant to section
7491(c), respondent bears the burden of production with respect to
petitioner’s liability for these additions to tax. In order to satisfy his
burden, respondent must produce sufficient evidence indicating that it
is appropriate to impose the relevant addition to tax. Higbee, 116 T.C.
at 446.

       A.      Section 6651(a)(1)

       Section 6651(a)(1) provides for an addition to tax if a taxpayer
fails to file timely a required income tax return, unless the taxpayer

loss limitation of section 469(a) and that petitioner failed to show that the $25,000
offset of section 469(i) applies.
                                    8

proves that such failure is due to reasonable cause and is not due to
willful neglect. United States v. Boyle, 469 U.S. 241, 245 (1985).
Respondent introduced evidence demonstrating that petitioner was
obligated to file a tax return for the 2017 tax year but that he did not do
so. See § 6012. This is sufficient to satisfy respondent’s burden of
production. See Wheeler v. Commissioner, 127 T.C. 200, 207–08 (2006),
aff’d, 521 F.3d 1289 (10th Cir. 2008).

        Petitioner testified that he had “no valid excuse” for not having
filed except for ignorance of the requirement to file while incarcerated.
Petitioner had knowledge of a general duty to file as he testified he had
done so in previous years. Incarceration is not a reasonable cause for
failure to file. See Llorente v. Commissioner, 74 T.C. 260, 268–69 (1980),
aff’d in part, rev’d in part on other grounds and remanded, 649 F.2d 152
(2d Cir. 1981); George v. Commissioner, T.C. Memo. 2019-128, at *9–12,
aff’d, 821 F. App’x 76 (3d Cir. 2020). In the absence of evidence of
reasonable cause, we conclude that petitioner is liable for the addition
to tax for failure to file under section 6651(a)(1).

      B.     Section 6651(a)(2)

       Section 6651(a)(2) imposes an addition to tax for failure to pay
timely the amount shown as tax due on a return. In a case such as this,
where the taxpayer did not file a return, the Commissioner must
introduce evidence that an SFR satisfying the requirements of section
6020(b) was made. Wheeler, 127 T.C. at 210. A return made under
section 6020(b) is treated as “the return filed by the taxpayer for
purposes of determining the amount of the addition” under section
6651(a)(2). § 6651(g)(2).

       Respondent produced evidence that the IRS prepared an SFR
satisfying the requirements of section 6020(b) for petitioner’s 2017 tax
year and that petitioner failed to pay the amount shown on the SFR.
Respondent has therefore met his burden of production for the addition
to tax under section 6651(a)(2). See Burnett v. Commissioner, T.C.
Memo. 2023-46, at *6 n.7; Rivera v. Commissioner, T.C. Memo. 2009 215,
slip op. at 7. Petitioner’s only argument with respect to the addition is
that he was ignorant of the law requiring him to continue paying tax
while incarcerated. As with the failure to file a return, incarceration is
not a reasonable cause for the failure to pay tax. See George, T.C. Memo.
2019-128, at *9–12; Kohn v. Commissioner, T.C. Memo. 2009-117,
slip op. at 11–14, aff’d, 377 F. App’x 578 (8th Cir. 2010). Accordingly,
                                     9

petitioner is liable for the addition to tax for failure to pay under section
6651(a)(2).

      C.     Section 6654

       Section 6654 imposes an addition to tax on an individual taxpayer
who underpays his estimated tax. The addition to tax is calculated with
reference to four required installment payments of the taxpayer’s
estimated tax liability. § 6654(c)(1). Each required installment of
estimated tax is equal to 25% of the required annual payment.
§ 6654(d)(1)(A). The required annual payment is equal to the lesser of
(1) 90% of the tax shown on the individual’s return for that year (or, if
no return is filed, 90% of his tax for such year), or (2) if the individual
filed a return for the immediately preceding taxable year, 100% of the
tax shown on that return. § 6654(d)(1)(B). In order to satisfy the burden
of production under section 7491(c) regarding an individual’s liability for
the section 6654 addition to tax, the Commissioner, at a minimum, must
produce evidence necessary to enable the Court to conclude that the
individual had a required annual payment under section 6654(d)(1)(B).
Wheeler, 127 T.C. at 210–11.

       Respondent has met his burden by introducing evidence
demonstrating that petitioner had a tax liability for the 2017 tax year,
that petitioner did not file a return for the 2017 or 2016 tax year, and
that petitioner did not make any estimated tax payments for the 2017
tax year. Cf. id. at 211–12. Petitioner did not contest this evidence but
rather reiterated his claim that he had reasonable cause for his failure
to pay: his ignorance of the requirement to pay tax while incarcerated.
Even if we were to find this argument persuasive, section 6654 provides
no general exception for reasonable cause or lack of willful neglect. See
Mendes v. Commissioner, 121 T.C. 308, 323 (2003). Accordingly,
petitioner is liable for the addition to tax for failure to pay estimated tax
under section 6654.

      In reaching the holdings herein, we have considered all
arguments put forth by the parties, and to the extent they are not
discussed above, we consider them moot, irrelevant, or without merit.

      To reflect the foregoing,

      Decision will be entered under Rule 155.