Tuesday, August 14, 2007

Tax Help: Reasonable cause - reliance on a tax attorny sufficient to abate a negligence penalty


Douglas A. Gibson v. Commissioner.Dkt. No. 13125-05 , TC Memo. 2007-224, August 13, 2007.[Appealable, barring stipulation to the contrary, to CA-9.
Pursuant to the decree, six factors are to be considered in determining the amount of compensation due to unnamed qualified claimants. Those six factors are: (1) The number of citations or threats received; (2) the degree of coercion expressed in the citation or threat or other communication from the county to the claimant; (3) whether the claimant left the dwelling in question because of the citation or threat; (4) the nature and degree of emotional distress suffered, including whether the claimant provided evidence of any physical symptoms of emotional distress, or other special circumstances which increased the emotional distress; (5) whether the claimant provided evidence of any increased costs resulting from the loss of housing, including, but not limited to, increased cost of alternative housing, wages and other income lost during the time spent looking for alternative housing, moving, storage or packing costs, temporary housing costs, any costs of commuting to and from work in excess of those that would have been incurred commuting to and from the denied housing; and (6) whether the claimant provided evidence of any other compensable loss.

Petitioner received $175,000 of the $350,000 awarded to him, his wife's estate, and his children. Petitioner engaged an experienced tax attorney who met with the class action attorneys to obtain all the pertinent facts and circumstances. After reviewing the information, the tax attorney advised petitioner to report $12,500 of the $175,000 as "other income" and to label it "damages" on petitioner's 2002 Form 1040, U.S. Individual Income Tax Return. Petitioner took his tax attorney's advice and reported on his 2002 return $12,500 of the $175,000 in damages he received.

In the notice of deficiency, respondent determined that the entire amount of the settlement was includable in petitioner's gross income. Additionally, respondent determined an accuracy-related penalty of $9,956 related to petitioner's failure to report $162,500 of the settlement proceeds.
OPINIONI. Deficiency
A. Burden of Proof
The Commissioner's determinations generally 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); Durando v. United States , 70 F.3d 548, 550 (9th Cir. 1995). The U.S. Court of Appeals for the Ninth Circuit, to which an appeal of this case would lie, has held that in order for the presumption of correctness to attach to the notice of deficiency in unreported income cases,4 the Commissioner must establish "some evidentiary foundation" linking the taxpayer to the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), revg. 67 T.C. 672 (1977), or "demonstrating that the taxpayer received unreported income", Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982); see also Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985). Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds are not taxable. Tokarski v. Commissioner, 87 T.C. 74 (1986). Accordingly, petitioner bears the burden of proof.5 See Rule 142(a).

B. section 61(a), gross income includes all income from whatever source derived unless otherwise excluded by the Internal Revenue Code. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955). Exclusions from gross income are construed narrowly. Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995).
As relevant here, SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.
(a) In General. --Except in the case of amounts attributable to (and not in excess of) deductions allowed under 6
"Damages received" mean amounts received "through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution." section 104(a)(2), we look to the written terms of the settlement agreement to determine the origin and allocation of the settlement proceeds. See Metzger v. Commissioner, 88 T.C. 834 (1987), affd. without published opinion 845 F.2d 1013 (3d Cir. 1988); Jacobs v. Commissioner, T.C. Memo. 2000-59, affd. sub nom. Connelly v. Commissioner, 22 Fed. Appx. 967 (10th Cir. 2001).
Petitioner settled his claims against the county. The parties entered into a settlement agreement via a consent decree entered by the District Court. In that consent decree, the District Court granted petitioner declaratory, injunctive, and monetary relief. Petitioner received $175,000 of the $350,000 awarded to the Gibsons pursuant to the consent decree. The District Court did not allocate the proceeds among petitioner's claims.
If a settlement agreement lacks express language stating what the settlement amount was paid to settle, we look to the intent of the payor, on the basis of all the facts and circumstances of the case, including the complaint filed and details surrounding the litigation. United States v. Burke, 504 U.S. 229 (1992); Robinson v. Commissioner, 102 T.C. 116, 127 (1994) affd. in part and revd. in part on another issue 70 F.3d 34 (5th. Cir 1995); Knuckles v. Commissioner, T.C. Memo. 1964-33, affd. 349 F.2d 610 (10th Cir. 1965). A key question to ask is "'In lieu of what were the damages awarded?'" Robinson v. Commissioner, supra at 126 (quoting Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), affg. 1 T.C. 952 (1943). Accordingly, the Court must determine the intent of the payor upon the basis of the facts and circumstances including petitioner's complaint in the class action lawsuit.

Petitioner argues that the first amended complaint includes a cause of action and remedy for bodily injury and physical distress. Petitioner testified that he was verbally and physically harassed by other residents of Sun City. According to petitioner, this harassment and the stress of the lawsuit caused him to suffer numerous headaches, stomach aches, and breathing problems. Petitioner testified that he visited a doctor for both stomach aches and breathing problems.

Petitioner failed to show how the county or any of the individuals involved in the class action lawsuit caused his alleged personal physical injury or physical sickness. Additionally, petitioner failed to produce any documentary evidence from his alleged doctor visits. If a party fails to introduce evidence within that party's possession, we may presume in some circumstances that, if produced, the evidence would be unfavorable to that party. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). This is true where the party that does not produce the evidence has the burden of proof or the other party has established a prima facie case. Id. Furthermore, we have previously held that stomach problems and headaches such as those suffered by petitioner are symptoms of emotional distress. See Hawkins v. Commissioner, T.C. Memo. 2005-149 (explaining that emotional distress includes symptoms such as headaches and stomach disorders). Petitioner produced no receipts, prescriptions, or other evidence to corroborate his testimony of his alleged breathing problems. We are not required to, and do not, accept petitioner's self-serving testimony regarding his alleged personal physical injuries or physical sickness without corroborating evidence. See Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159; Lerch v. Commissioner, T.C. Memo. 1987-295, affd. 877 F.2d 624 (7th Cir. 1989).
Petitioner argues that because the consent decree entered in the class action lawsuit provided payments for physical injuries and physical sickness, some share of petitioner's settlement proceeds consist of damages received on account of personal physical injury or physical sickness. Petitioner argues that because he was a named member of the certified plaintiff class, his claims are typical of the claims of the plaintiff class. Petitioner argues that since unnamed plaintiffs must satisfy one of the six factors set forth in the consent decree (discussed supra) to qualify for compensation, petitioner must also satisfy at least one of the six factors. Petitioner claims that the only factor he satisfies is "whether claimant provided evidence of any other compensable loss." Petitioner contends that this demonstrates that he sustained physical injury and physical sickness.

We reject this argument. The six factors referred to by petitioner are relevant to determining the amount of compensation due to unnamed claimants. Assuming arguendo that we accept petitioner's self-serving and uncorroborated testimony, it appears that petitioner qualified for at least three of the six factors cited, none of which consists of personal physical injuries or physical sickness.7 Additionally, factor six, for which petitioner claims he qualifies, refers to "any other compensable loss" and does not necessarily include personal physical injury and physical sickness.

Apart from petitioner's self-serving and uncorroborated testimony, the record does not establish that petitioner received a portion of his $175,000 total settlement proceeds on account of personal physical injury or physical sickness. Accordingly, we sustain respondent's determination that the settlement proceeds petitioner received in 2002 are includable in his gross income. See Geiger v. Commissioner, supra; Lerch v. Commissioner, supra.II. Accuracy-Related Penalty

A. section 6662(a) of $9,956. Respondent determined that the entire underpayment of tax for 2002 was attributable to negligence or disregard of rules or regulations, and/or a substantial understatement of income tax.

Pursuant to Sec. 6662(b). The term "understatement" means the excess of the amount of tax required to be shown on a return over the amount of tax imposed which is shown on the return, reduced by any rebate (within the meaning of Sec. 6662(d)(2)(A). Generally, an understatement is a "substantial understatement" when the understatement exceeds the greater of $5,000 or 10 percent of the amount of tax required to be shown on the return. section 6662(b)(1) includes any failure to make a reasonable attempt to comply with the Internal Revenue Code and any failure to keep adequate books and records or to substantiate items properly. Sec. 6662(c).

B. Burden of Production

The Commissioner has the burden of production with respect to the accuracy-related penalty. sec. 1.6664-4(b)(1), Income Tax Regs.

C. Analysis

Respondent met his burden of production pursuant to sec. 6664(c)(1); Higbee v. Commissioner, supra at 446. Relevant factors include the taxpayer's efforts to assess his proper tax liability, including the taxpayer's reasonable and good faith reliance on the advice of a professional.

In reaching all of our holdings herein, we have considered all arguments made by the parties, and, to the extent not mentioned above, we conclude they are irrelevant or without merit.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.2 Petitioner conceded that the Social Security benefits he received during 2002 are taxable.3 Petitioner's wife died in 2000, and her estate was substituted as a party in the class action lawsuit.4 Although Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), was an unreported income case regarding illegal source income, the U.S. Court of Appeals for the Ninth Circuit applies the Weimerskirch rule in all cases involving the receipt of unreported income. See Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982); Petzoldt v. Commissioner, 92 T.C. 661, 689 (1989).5 For the first time, in the opening brief petitioner raises the issue of respondent's bearing the burden of proof pursuant to 6 7 Petitioner qualified for factor 1 because he received a citation. He qualified for factor 2 because the CCE authorities told the Gibsons they would have to move. Also, the citation threatened fines and imprisonment. Additionally, petitioner was served with a notice to appear in court to face possible criminal charges. He qualified for factor 4 because of the emotional distress he suffered.
Alvin S. Brown, Esq.
Tax attorney
703.425.1400
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1 comment:

Alvin Brown & Associates said...

Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms are determined by the offer investigator and are not limited to the proposal of the taxpayer.

The amounts and due dates of payments must be specified on Form 656.

As a result of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), there are three types of payment terms the IRS and the taxpayer may agree to:

Lump sum cash offer – An offer in which the offer amount must be paid in five or fewer installments upon written notice of acceptance. Twenty percent of the total amount of the offer must be paid with the Form 656, Offer in Compromise. If the installments will be paid in five months or less, the taxpayer should offer the realizable value of his assets plus the total that could be collected over 48 months of payments (or the remainder of the statutory period for collection, whichever is less). If the installment payments will be paid in more than five months, the taxpayer should offer the realizable value of his assets plus the total that could be collected over 60 months of payments (or the remainder of the statutory period for collection, whichever is less).
Note: Realizable value is defined as the quick sale value (amount that a taxpayer could reasonably expect from the sale of an asset if sold quickly, typically in 90 days or less) minus what the taxpayer owes to a secured creditor. The creditor must have priority over a filed Notice of Federal Tax Lien before the IRS will allow a subtraction from the asset’s value.

Short Term Periodic Payment Offer – An offer in which the taxpayer must submit the first payment with the offer and must continue to make regular payments during the offer investigation. The offer amount must be paid within 24 months from the date the IRS receives Form 656, Offer in Compromise. The offer amount must reflect the taxpayer’s realizable value of assets plus the amount that could be collected over 60 months of payments (or the remainder of the statutory period of collection, whichever is less). Failure to make the regular payments during the offer investigation would cause the offer to be withdrawn.
Deferred Periodic Payment Offer – An offer in which the amount must be paid over the remaining statutory period for collecting the tax. As with the short term periodic payment offer, the taxpayer must submit the first payment along with Form 656, Offer in Compromise and must continue to make regular payments during the offer investigation. The offer amount must reflect the taxpayer’s realizable value on assets plus the amount that could be collected through monthly payments during the remaining life of the collection statute. Failure to make the regular payments during the offer investigation will cause the offer to be withdrawn.
Taxpayers may designate in writing how the IRS should apply the offer payments (e.g. lump sum cash, short term, deferred periodic) by specifying the type of tax, period or year, penalty, and interest due. Without a written designation request, the IRS will apply the payments in the best interest of the government. The $150 application fee reduces the assessed tax or other amounts due and cannot be designated by the taxpayer.

All offer payments (e.g. lump sum, short term, deferred periodic) are considered “payments on tax” and are not refundable deposits regardless of whether the IRS declares the offer not processable or later returns, rejects, withdraws, or terminates the offer as a result of its investigation. When this happens, the IRS will apply the payment(s) to the taxpayer’s outstanding tax liability.