Bhattacharyya v. Commissioner, T.C. Memo. 2007-19 (2007).

T.C. Memo. 2007-19

UNITED STATES TAX COURT

BIDYUT K. BHATTACHARYYA AND DIANA T. BHATTACHARYYA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15024-04. Filed January 30, 2007.

Bidyut K. Bhattacharyya and Diana T. Bhattacharyya, pro

sese.

Wesley F. McNamara, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Respondent determined a deficiency in

petitioners’ 2000 Federal income tax of $314,372 and an addition

to tax under section 6651(a)(1) of $38,837.1 After concessions,2 the issues for decision are: (1) Whether respondent’s and petitioners’ motions to conform pleadings to the evidence should be granted; (2) whether petitioners received but failed to report certain items of income; (3) whether petitioners are liable for a 10-percent additional tax under section 72(t) on early distributions from qualified retirement plans; (4) whether petitioners are entitled to certain itemized deductions; (5) whether petitioners are liable for any alternative minimum tax; and (6) whether petitioners are liable for an addition to tax under section 6651(a)(1).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and the second supplemental stipulation of facts and attached exhibits are incorporated herein by this reference. At the time they filed their petition, petitioners resided in Beaverton, Oregon.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. All amounts are rounded to the nearest dollar.

2 The parties have agreed to certain issues, either in the stipulation of facts, at trial, or on brief, and respondent has conceded other issues. The parties’ agreements and concessions are discussed herein.

Bidyut K. Bhattacharyya (petitioner) was born on October 8, 1955, and Diana T. Bhattacharyya (Mrs. Bhattacharyya) was born on January 19, 1960. From July 16, 1984, until October 21, 2000, petitioner was employed by Intel Corporation (Intel).

A. Income From Salary, Bonuses, Stock Options, and Other Sources During 2000, petitioner received compensation from Intel in the form of a salary, bonuses, and through the exercise of nonqualified stock options. On January 11, 2000, petitioner exercised a nonqualified stock option granted by Intel to purchase 800 shares of stock at $8.391 per share. The market price on January 11, 2000, was $92.00 per share, resulting in a realized gain of $66,887. On April 17, 2000, petitioner exercised a nonqualified stock option granted by Intel to purchase 5,000 shares of stock at $8.391 per share. The market price on April 17, 2000, was $116.4062 per share, resulting in a realized gain of $540,076. Petitioner exercised the nonqualified stock options through an investment brokerage account with Merrill Lynch (Merrill Lynch brokerage account). Intel issued petitioner a Form W-2, Wage and Tax Statement, for 2000 (the Intel Form W-2), which reported total wages, tips, and other compensation of $746,191. Of that amount, $606,963

represented the gain realized by petitioner on the exercise of the nonqualified stock options.

During 2000, petitioners received a State income tax refund of $34,500 for State income taxes paid with respect to their 1999 tax year.

B. Petitioner’s Intel Retirement Plans

At the time he terminated his employment, petitioner maintained three Intel retirement plans, Plan 15104, Plan 15105, and Plan 15106.

Plan 15104 was a nonqualified deferred compensation plan called the Sheltered Employee Retirement Plan Plus (or SERP+) and was administered by Fidelity Investments Institutional Operations Company (Fidelity Institutional) on behalf of Intel. On December 22, 2000, petitioner received $285,603 from Intel, representing the full distribution of Plan 15104 in the gross amount of $372,850 less Federal and State withholding taxes. Fidelity Institutional issued petitioner a Form W-2 with respect to Plan 15104 for 2000 (the Plan 15104 Form W-2). The parties stipulated that the Plan 15104 Form W-2 accurately reflected the distribution amount, withholding taxes paid, that petitioner made no employee contributions, and that no portion of the distribution was rolled over into another account.

Plan 15105 was a qualified retirement plan called the Intel Corporation 401(k) Savings Plan and was administered by Fidelity Institutional on behalf of Intel. Petitioner borrowed money from Plan 15105 and made payments through payroll withholding.

- 5 Petitioner ceased making payments after he terminated his employment, and the loan was considered in default. The loan was repaid in 2000 by an offsetting distribution from Plan 15105 of $15,552. During October or November of 2000, petitioner made a direct rollover of $286,390 from Plan 15105 into his Fidelity Investments IRA Rollover Account (Fidelity IRA). Fidelity Institutional issued petitioner a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with respect to Plan 15105 for 2000 (the Plan 15105 Form 1099-R). The parties stipulated that the Plan 15105 Form 1099-R accurately reflected the offsetting distribution made in satisfaction of the loan and the direct rollover into the Fidelity IRA, indicated that petitioner made employee contributions of $1,108, and reported a taxable amount of $14,443.

Plan 15106 was a qualified retirement plan called the Intel Corporation Profit Sharing Retirement Plan and was administered by Fidelity Institutional on behalf of Intel. Petitioner borrowed money from Plan 15106 and made payments through payroll withholding. Petitioner ceased making payments after he terminated his employment, and the loan was considered in default. The loan was repaid in 2000 by an offsetting distribution from Plan 15106 of $30,623. On November 6, 2000, petitioner made a direct rollover of $463,930 from Plan 15106 into his Fidelity IRA. Fidelity Institutional issued petitioner a Form 1099-R with respect to Plan 15106 for 2000 (the Plan 15106 Form 1099-R). The parties stipulated that the Plan 15106 Form 1099-R accurately reflected the offsetting distribution made in satisfaction of the loan and the direct rollover into the Fidelity IRA, indicated that petitioner made no employee contributions, and reported a taxable amount of $30,623.

C. Petitioner’s Individual Retirement Accounts (IRAs)

As described above, petitioner made direct rollovers from Plan 15105 and Plan 15106 to his Fidelity IRA totaling $750,320 in 2000. Petitioner received the following distributions from

On November 9 and 16, 2000, petitioner made direct rollovers of $500,000 and $62,930, respectively, from his Fidelity IRA into another IRA administered by US Bancorp Piper Jaffray (US Bancorp IRA). On November 10 and 17, 2000, petitioner received distributions of $500,000 and $62,930, respectively, from his US Bancorp IRA.

On December 11, 2000, petitioner transferred 815 shares of Intel stock from his Fidelity IRA into his US Bancorp IRA. On December 22, 2000, the Intel stock was sold, and petitioner was issued a check for $27,000.

US Bancorp issued petitioner a Form 1099-R with respect to his US Bancorp IRA for 2000. The Form 1099-R reflected the distributions of $500,000 and $62,930, and the check for $27,000, for total distributions of $589,930.

D. Petitioners’ 1999 Federal Income Tax Return

Petitioners filed a joint Federal income tax return for 1999 on June 18, 2003.3 Petitioners reported adjusted gross income of $564,156, itemized deductions of $427,211, a total tax of $33,735, an overpayment of tax of $116,498. Petitioners requested a refund of $105,228 and that $11,270 be applied to their estimated tax for 2000. Petitioners’ 1999 tax return did not include a Form 6251, Alternative Minimum Tax–Individuals.

Respondent examined petitioners’ 1999 tax year and determined that petitioners were not entitled to a refund or estimated tax credit and were liable for alternative minimum tax of $105,616. On November 17, 2003, respondent assessed additional tax of $105,616 and interest of $33,935. The Certificate of Official Record for petitioners’ 1999 tax year

3 Petitioners’ 1999 tax year is not at issue.

reflects that this assessment of additional tax and interest was “abated” on November 8, 2004.

On October 27, 2004, petitioners filed a refund suit in U.S. District Court for the District of Oregon, at docket No. CV-04-01563-KI. By opinion and order dated March 16, 2005, the District Court dismissed petitioners’ suit for lack of subject matter jurisdiction. On May 22, 2006, the Court of Appeals for the Ninth Circuit affirmed the District Court’s dismissal for lack of subject matter jurisdiction. Bhattacharyya v. Commissioner, 180 Fed. Appx. 763 (9th Cir. 2006).

E. Petitioners’ 2000 Federal Income Tax Return

Petitioners filed a joint Federal income tax return for 2000 on May 19, 2003. Petitioners reported wages, salaries, tips, etc., of $746,191, the amount reported by Intel on the Form W-2. On an attached “Exhibit II”, petitioners summarized their IRA and retirement plan distributions and rollovers as follows: Based on Exhibit II, petitioners reported total taxable IRA distributions of $444,327. Petitioners also reported total pension distributions of $372,850, reflecting the distribution from Plan 15104, but they determined that only $192,850 was taxable. After including interest income, dividend income, other income, and a capital loss of $3,000, petitioners reported adjusted gross income of $1,402,076. Petitioners’ reported adjusted gross income did not include: (1) The State income tax refund of $34,500;4 (2) $180,000 of the distribution from Plan

4 The parties agree that petitioners are liable for Federal income tax in 2000 on the State income tax refund received in (continued…)

15104; (3) the offsetting distributions made in satisfaction of the loans from Plan 15105 and Plan 15106 of $15,552 and $30,623, respectively; and (4) $305,603 of the IRA distributions.

On an attached Schedule A, Itemized Deductions, petitioners reported itemized deductions of $1,118,870, summarized by

Petitioners reported taxable income of $213,977, tax of $60,080, tax on IRAs and other retirement plans of $63,717, and total tax

4(…continued)

2000.

of $123,797.5 After deducting total payments of $282,821, petitioners requested a refund of $131,024 and that $28,000 be applied to their 2001 estimated tax. Petitioners’ 2000 tax return did not include a Form 6251 or any other calculation of their alternative minimum tax liability.

In response to a letter from respondent inquiring about the absence of an alternative minimum tax computation, petitioners sent respondent a letter on September 15, 2003, and attached a Form 1040X, Amended U.S. Individual Income Tax Return (petitioners’ first Form 1040X). On petitioners’ first Form 1040X, petitioners included a Form 6251, determined an alternative minimum tax liability of $56,827, but reduced their income by more than $630,000 and claimed a refund of $9,270. Respondent did not file petitioners’ first Form 1040X.

On May 25, 2004, respondent issued petitioners a notice of deficiency. Respondent determined a deficiency in petitioners’ 2000 Federal income tax of $314,372, based on respondent’s determination that petitioners were liable for alternative minimum tax of $314,371.6 Respondent also determined that

5 It is unclear how petitioners calculated the tax on IRAs and other retirement plans, but $63,717 is apparently petitioners’ calculation of a 10-percent additional tax under sec. 72(t).

6 Respondent also increased petitioners’ itemized deductions by $1 to correct a rounding error made by petitioners.

petitioners were liable for an addition to tax under section 6651(a)(1) of $38,837.

On June 26, 2004, petitioners sent respondent a letter and attached another Form 1040X (petitioners’ second Form 1040X). Petitioners’ second Form 1040X was identical to petitioners’ first Form 1040X, but the letter included an additional explanation of the changes made by petitioners to their original Federal income tax return. Respondent did not file petitioners’ second Form 1040X.

Petitioners filed their petition with this Court on August 20, 2004. Petitioners requested the Court to determine that they are due a refund “$9000 (Back Approx.)”. Respondent filed an answer on September 29, 2004, but did not seek an increased deficiency or addition to tax.

This case was called during the Court’s regular trial session in Portland, Oregon, beginning December 5, 2005. On February 21, 2006, respondent filed a Motion for Leave to Amend Answer to Conform to Evidence Presented at Trial and to Claim an Increased Deficiency and Addition to Tax, with Accompanying Proposed Amendment to Answer (respondent’s motion to conform the pleadings to the evidence) under Rule 41(b). In the amendment to answer, which was lodged with the Court on February 21, 2006, respondent asserted that petitioners were liable for an increased deficiency of $561,309, and an increased section 6651(a)(1) addition to tax of $100,571.

On November 3, 2006, petitioners filed a Motion for Amended Petition Consistent with the Evidences Presented at Trial, and to Claim a Refund by Petitioners for $76,890.00, with Accompanying Proposed Amended Petition (petitioners’ motion to conform pleadings to the evidence) under Rule 41(b).

OPINION

I. Respondent’s and Petitioners’ Motions To Conform Pleadings to the Evidence As a preliminary matter, we must determine whether respondent’s and petitioners’ motions to conform pleadings to the evidence should be granted. Section 6214(a) requires a claim for increased deficiency to be asserted at or before the hearing or rehearing. It is well established that the word “hearing” used in section 6214(a) includes all Tax Court proceedings in a case through entry of decision. Henningsen v. Commissioner, 243 F.2d 954, 959 (4th Cir. 1957), affg. 26 T.C. 528 (1956); Law v. Commissioner, 84 T.C. 985, 989 (1985). Rule 41(b) allows the

parties to amend their pleadings to conform with the evidence presented at trial.7 Whether a motion seeking an amendment to

7 Rule 41(b) provides in part:

(1) Issues Tried by Consent: When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects (continued…)

the pleadings to conform to the evidence should be allowed is within the sound discretion of the Court. Commissioner v. Estate of Long, 304 F.2d 136, 143-145 (9th Cir. 1962). If granting the motion would result in unfair surprise or prejudice to the nonmoving party, the motion should be denied. Church of Scientology v. Commissioner, 83 T.C. 381, 469 (1984), affd. 823 F.2d 1310 (9th Cir. 1987).

In respondent’s motion to conform pleadings to the evidence and in the lodged amendment to answer, respondent asserts an increased deficiency of $561,309, and an increased addition to tax under section 6651(a)(1) of $100,571. The increased deficiency is not based on petitioners’ liability for alternative minimum tax, as was the deficiency asserted in the notice of deficiency. Instead, the increased deficiency results from the

7(…continued)

as if they had been raised in the pleadings. The

Court, upon motion of any party at any time, may allow

such amendment of the pleadings as may be necessary to

cause them to conform to the evidence and to raise

these issues, but failure to amend does not affect the

result of the trial of these issues.

(2) Other Evidence: If evidence is objected to at the trial on the ground that it is not within the issues raised by the pleadings, then the Court may receive the evidence and at any time allow the pleadings to be amended to conform to the proof, and shall do so freely when justice so requires and the objecting party fails to satisfy the Court that the admission of such evidence would prejudice such party in maintaining such party’s position on the merits.

increase in income and the disallowance of many of petitioners’ itemized deductions.

Petitioners object to respondent’s motion to conform pleadings to the evidence, arguing: (1) An evidentiary ruling made by the Court during trial prevents respondent from seeking an increased deficiency; and (2) an amendment to answer would result in unfair surprise and would prejudice petitioners because the amendment is based on grounds different from those asserted in the notice of deficiency.

Petitioners also filed a motion to conform pleadings to the evidence. Petitioners assert that, based on the evidence and testimony presented at trial, they are entitled to a refund in the amount of $76,890, instead of the approximately $9,000 asserted in the petition. Respondent does not object to the granting of petitioners’ motion to conform pleadings to the evidence.

Petitioners’ objection notwithstanding, we find that granting respondent’s or petitioners’ motions to conform pleadings to the evidence would not result in unfair surprise or prejudice to either party. Petitioners’ argument that an evidentiary ruling made by the Court prevents respondent from seeking an increased deficiency is based on a misunderstanding of the Court’s evidentiary ruling. Petitioners focus on Exhibit 42R, which was a Form 4549, Income Tax Examination Changes, prepared by respondent and shown to petitioners on the morning of trial. Essentially, Exhibit 42-R summarized respondent’s interpretation of the impact the exhibits attached to the parties’ joint stipulations of fact had on petitioners’ tax liability. The Court did not admit Exhibit 42-R into evidence. Petitioners appear to argue that, because the Court did not admit Exhibit 42-R into evidence, the Court rejected the arguments contained therein. The Court’s ruling was limited to the admissibility of Exhibit 42-R and was not a ruling on the merits of respondent’s arguments contained therein. The increased deficiency and addition to tax sought by respondent are not based on Exhibit 42-R, but instead are based on the exhibits admitted into evidence as part of the parties’ joint stipulations of fact. The Court’s ruling on Exhibit 42-R does not affect respondent’s ability to rely on the exhibits admitted into evidence in seeking an increased deficiency and addition to tax.

Petitioners’ argument that an amendment to answer would result in unfair surprise or prejudice is not persuasive. The amendment to answer would change the issue in this case from whether petitioners are liable for alternative minimum tax to whether petitioners received and did not report certain items of income and whether they are entitled to certain itemized deductions. As stated above, in seeking an increased deficiency and addition to tax, respondent relies on exhibits attached to the parties’ joint stipulations of fact. Petitioners rely on these same exhibits in seeking an increased refund. Petitioners cannot expect to use this evidence to seek an increased refund and at the same time shield themselves from an increased deficiency or addition to tax based on the same evidence. Additionally, respondent informed petitioners at various times before trial, including in respondent’s pretrial memorandum, that respondent intended to raise the issues asserted in the amendment to answer. Petitioner’s testimony also demonstrated his knowledge of respondent’s intention.

Accordingly, we shall grant respondent’s and petitioners’ motions to conform pleadings to the evidence.

II. Items of Income

Generally, taxpayers bear the burden of proving that the Commissioner’s determinations are incorrect. Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933). However, the Commissioner bears the burden of proof with respect to any new matter or increases in deficiency. Rule 142(a). Once the Commissioner produces evidence sufficient to establish a prima facie case, the burden shifts to the taxpayers of coming forward with evidence sufficient to rebut the Commissioner’s proof. See King v. Commissioner, T.C. Memo. 1995-524; Cally v. Commissioner,

T.C. Memo. 1983-203 (citing Papineau v. Commissioner, 28 T.C. 54 (1957)).

Respondent asserts that petitioners received unreported or underreported taxable income from the following sources: (1) $372,850 from the distribution from Plan 15104, of which only $192,850 was reported; (2) $14,443 and $30,623 from the offsetting distributions made in satisfaction of the loans from Plan 15105 and Plan 15106, respectively, none of which was reported; and (3) $749,930 on the distributions from the Fidelity IRA and the US Bancorp IRA, of which only $444,327 was reported as being taxable.8 Respondent raised these matters in the amendment to answer, not in the notice of deficiency, and now seeks an increased deficiency based in part on these new matters. Therefore, respondent bears the burden of proof with respect to these new matters. See Rule 142(a).

Petitioners dispute respondent’s assertions and argue that, of the $746,191 reported as taxable income on the Intel W-2, $606,963 is not included in gross income.9

8 Petitioners also received but did not report a State income tax refund of $34,500. As noted above, the parties agree that petitioners are liable for Federal income tax in 2000 on that refund. See supra note 4.

9 On petitioners’ first and second Forms 1040X, petitioners assert that their taxable income should be reduced by $632,639. In their amended petition and on brief, petitioners argue that their taxable income should be reduced by $606,963. The origin of this discrepancy is unclear.

A. Distribution From Plan 15104

Gross income means all income from whatever source derived, including income from pensions. Sec. 61(a)(11). However, distributions of after-tax employee contributions from a pension plan constitute a nontaxable return of capital. See Lange v. Commissioner, T.C. Memo. 2005-176.

The Plan 15104 Form W-2 reflects a gross distribution to petitioner from Plan 15104 of $372,850 and that petitioner made no employee contributions to Plan 15104. The parties stipulated the accuracy of the Plan 15104 Form W-2, and no evidence in the record contradicts the Plan 15104 Form W-2. This evidence, if not rebutted, is sufficient for respondent to meet his burden of proving that petitioner received a distribution of $372,850 from Plan 15104 and that no employee contributions were made to Plan 15104. The burden shifts to petitioners to come forward with evidence that all or a portion of that distribution is not included in their gross income.

On their tax return, petitioners reported the distribution of $372,850 from Plan 15104, but they asserted that only $192,850 of that amount was taxable. In the information accompanying petitioners’ second Form 1040X, petitioners further reduced the amount they reported as taxable to $132,674. Petitioners’ theory is that the distribution contained after-tax employee contributions, and thus only a portion of the distribution was

taxable. Petitioners explain their theory on brief:

[In] 2000 [the] bonus received was $79568.00. * * *

The federal tax withheld on that money was $10,582.54.

Petitioners’ estimation that approximately half of the Plan

15104 distribution consisted of after-tax employee contributions

is contrary to the Plan 15104 Form W-2, on which Fidelity

Institutional reported that no employee contributions were made.

No evidence in the record supports petitioners’ claim.10

Petitioners have not met their burden of coming forward with

evidence that all or a portion of that distribution is not

included in their gross income.

Therefore, we find that the distribution of $372,850 from

Plan 15104 is included in petitioners’ gross income.

10 Petitioners cite Exhibit 21-J as evidence that half of the Plan 15104 distribution was comprised of employee contributions. Exhibit 21-J, a pay statement from Intel dated Oct. 31, 2000, indicates that a total “SERP deferral” of $39,784 had been made between Jan. 1 and Oct. 31, 2000. Petitioner maintained several accounts that were at various times referred to as “SERP” accounts. Exhibit 21-J does not indicate that the “SERP deferral” was made with respect to Plan 15104 and does not otherwise contradict the Form W-2 issued by Fidelity Institutional.

B. Distributions From Plan 15105 and Plan 15106

Petitioners did not report any distributions made from Plan 15105 or Plan 15106 on their Federal income tax return. However, petitioners received Forms 1099-R from Fidelity Institutional, which reflected: (1) An offsetting distribution of $15,552 was made from Plan 15105 in satisfaction of petitioner’s loan from Plan 15105; (2) petitioner made employee contributions to Plan 15105 totaling $1,109; (3) due to the employee contributions, the taxable amount of the offsetting distribution from Plan 15105 was $14,443; (4) an offsetting distribution of $30,623 was made from Plan 15106 in satisfaction of petitioner’s loan from Plan 15106; and (5) petitioner made no employee contributions to Plan 15106. The parties stipulated the accuracy of the Forms 1099-R, and no evidence in the record contradicts the Forms 1099-R. This evidence is sufficient for respondent to meet his burden of proof. Therefore, we find that $14,443 and $30,623 of the offsetting distributions from Plan 15105 and Plan 15106, respectively, are included in petitioners’ gross income.11

C. IRA Rollovers and Distributions

In general, distributions from an IRA are included gross income in the year received. Sec. 408(d)(1). A distribution to

11 Petitioners did not introduce evidence to contradict the Forms 1099-R, nor did they address the distributions on brief. We find that petitioners abandoned any argument that the offsetting distributions are not included in their gross income.

the individual for whose benefit an IRA is maintained is excluded from gross income, however, if the entire amount is paid into an IRA for the benefit of the same individual within 60 days. Sec. 408(d)(3)(A). Exclusion of a rollover from one IRA to another can only be made by an individual once during any 1-year period. Sec. 408(d)(3)(B). However, the transfer of a taxpayer’s funds directly from the trustee of one IRA to the trustee of another IRA, in a fashion that does not involve any payment directly to the taxpayer, is not a “rollover” for purposes of section 408(d)(3) and therefore does not trigger or violate the 1-year limitation. Rev. Rul. 78-406, 1978-2 C.B. 157; see also Crow v. Commissioner, T.C. Memo. 2002-178; Martin v. Commissioner, T.C. Memo. 1992-331, affd. without published opinion 987 F.2d 770 (5th Cir. 1993).

On their Federal income tax return, petitioners reported the rollovers of $286,390 from Plan 15105 and $463,930 from Plan 15106 to the Fidelity IRA, the subsequent direct rollovers of $500,000 and $62,390 from the Fidelity IRA to the US Bancorp IRA, and the distributions from the Fidelity IRA and the US Bancorp IRA to petitioners totaling $749,930. The parties agree that the rollovers from Plan 15105 and Plan 15106 to the Fidelity IRA and the direct rollovers of $500,000 and $62,930 from Fidelity IRA to the US Bancorp IRA are excluded from income. See sec. 402(c); Rev. Rul. 78-406, 1978-2 C.B. 157. The parties also agree that petitioners received distributions totaling $749,930 from the Fidelity IRA and the US Bancorp IRA. However, the parties disagree as to what extent the distributions totaling $749,930 are included in petitioners’ gross income.

Respondent argues that $749,930 is included in petitioners’ gross income.12 The record establishes, and petitioners do not dispute, that during November and December 2000, petitioners received distributions from the Fidelity IRA totaling $160,000 and from the US Bancorp IRA totaling $589,930. Respondent has met his burden of establishing a prima facie case that petitioners received IRA distributions totaling $749,930. Petitioners bear the burden of coming forward with evidence that all or a portion of the IRA distributions are not included in their gross income.

Petitioners argue that $285,603 of the $500,000 distribution from the US Bancorp IRA was rolled over into another IRA and is

12 Petitioners argue that the numbers proposed by respondent “should be discarded due to inconsistency and generation of various random numbers generated by respondent in [sic] various times.” At various times during preparation for trial, respondent changed his position regarding what amount of the rollovers and distributions were includable in petitioners’ gross income. It is worth noting that, on each occasion, respondent reduced the amount included in petitioners’ gross income as petitioners substantiated the various rollovers. Our ultimate conclusion on this issue is not based on the changes in respondent’s position, but instead is based on the record.

thus not included in their gross income.13 Petitioners provided no evidence that such a rollover took place, or that the rollover took place within 60 days of the distribution. Petitioners were in a superior position with respect to access to information that would prove the amount and date of the alleged rollover. By failing to produce such information, petitioners have failed to meet their burden of coming forward with evidence that $285,603 of the IRA distributions is not included in their gross income.

Therefore, we find that the distributions from the Fidelity IRA and the US Bancorp IRA totaling $749,930 are included in petitioners’ gross income.

D. Income From the Exercise of Intel Stock Options

Gross income includes compensation for services, “including fees, commissions, fringe benefits, and similar items”. Sec. 61(a)(1). Section 83(a) provides in pertinent part that if property is transferred to a taxpayer in connection with the performance of services (e.g., stock transferred to a taxpayer

13 On their Federal income tax return, petitioners reported that only $444,327 of the $749,930 in distributions from the Fidelity IRA and the US Bancorp IRA was included in their gross income. Petitioners’ position was based on their assertion that $20,000 of the $160,000 in distributions from the Fidelity IRA and $285,603 of the $500,000 distribution from the US Bancorp IRA were rolled over into another IRA. On brief, petitioners claimed that only $285,603 of the $500,000 distribution from the US Bancorp IRA was rolled over into another IRA and conceded that $469,091 was includable in their gross income. Thus, we find that petitioners have abandoned their argument that $20,000 of the $160,000 in distributions from the Fidelity IRA was rolled over into another IRA.

upon the exercise of a stock option), the excess of the fair market value of the property (stock) over the amount, if any, paid for the property (the exercise price) shall be included in the taxpayer’s gross income in the first year in which the taxpayer’s rights in the property are not subject to a substantial risk of forfeiture. See Montgomery v. Commissioner, 127 T.C. 43, 53-54 (2006).

Petitioners assert that, of the $746,191 in taxable income reported on the Intel W-2, $606,963 is not included in gross income. Petitioners do not address this assertion in detail. However, it appears that petitioners are arguing that the $606,963 should be treated as long-term capital gain, which could be offset by long-term capital losses realized in 2000, and thus would not be included in their gross income. Petitioners’ position is without merit.

Petitioner exercised on January 11 and April 17, 2000, nonqualified stock options granted to him by Intel, resulting in realized gains of $66,887 and $540,076, respectively (the spread between the exercise price and the market price of the stock on the dates of exercise). This gain is not recognized as long-term capital gain. Instead, section 83(a) and section 1.83-1(a)(1), Income Tax Regs., establish that such gain is ordinary income included in petitioners’ gross income as compensation in 2000, the year of exercise.14 Therefore, we find that the $746,191 in taxable income reported on the Intel W-2, including the $606,963 attributable to the exercise of nonqualified stock options, is included in petitioners’ gross income as ordinary income.

III. Additional Tax on Early Distributions From Qualified Retirement Plans and IRAs Section 72(t)(1) imposes a 10-percent additional tax on early distributions from qualified retirement plans. Qualified retirement plans are defined to include IRAs as defined in section 408(a) and (b). Secs. 72(t)(1), 4974(c). The 10-percent additional tax does not apply to certain distributions, including distributions made after an employee attains age 59-1/2 and distributions attributable to the employee’s disability. Sec. 72(t)(2)(A)(i), (iii). Respondent alleges that petitioners are liable for the 10-percent additional tax on the taxable distributions from Plan 15105 and Plan 15106 (both qualified retirement plans) of $14,443 and $30,623, respectively, and on the taxable distributions totaling $749,930 from the Fidelity IRA and the US Bancorp IRA.

Petitioners were born in 1955 and 1960, respectively. The qualified retirement plan distributions and the IRA distributions

14 Petitioners do not argue that the stock was subject to a substantial risk of forfeiture. Thus, the gain was recognized at the time petitioner acquired beneficial ownership of the stock (the time of exercise). See sec. 83(a); Walter v. Commissioner,

T.C. Memo. 2007-2.

were made in 2000, before petitioner or Mrs. Bhattacharyya attained age 59-1/2.15 Petitioners do not allege and the record does not reflect that the distributions were attributable to disability, or that the distributions otherwise qualify for an exception to the 10-percent additional tax. In fact, petitioners state on brief that “Petitioners do understand that petitioners have to pay 10% penalty tax on the amount stated above * * * This is consistent with IRC section 72(t)(1).” Therefore, we find that petitioners are liable for the 10-percent additional tax on the early distributions from Plan 15105 and Plan 15106 of $14,443 and $30,623, respectively, and on the early distributions totaling $749,930 from the Fidelity IRA and the US Bancorp IRA.

IV. Itemized Deductions

Deductions are a matter of legislative grace and are allowable only as specifically provided by statute.16 See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Joseph v. Commissioner, T.C. Memo. 2005-169. Itemized deductions allowed

15 Nor had petitioner attained age 55 so as to be eligible for an exception based on his separation from service. See sec. 72(t)(2)(A)(v).

16 Generally, taxpayers also bear the burden of proving they are entitled to deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Joseph v. Commissioner, T.C. Memo. 2005169. However, the resolution of this issue does not depend on which party bears the burden of proof, and we resolve this issue based on the preponderance of the evidence in the record.

for individual taxpayers are set forth in part VI and part VII of subchapter B, chapter 1, subtitle A of the Internal Revenue Code. See secs. 161-222.

Petitioners assert that they are entitled to itemized deductions totaling $1,118,870, as originally set forth in their Federal income tax return. Respondent concedes that petitioners are entitled to deduct the following expenses totaling $243,363 as itemized deductions: (1) $37,738, identified by petitioners as “Option Int” for “US Bank Corp.”, as investment interest expenses under section 163; (2) $186,370, identified by petitioners as “Option Int” for “Merrill Lynch”, as investment interest expenses under section 163; and (3) $19,255 of the $20,164 identified by petitioners as “Opt.int” for “Merrill Lynch”, as investment interest expenses under section 163. Respondent also concedes that petitioners are entitled to deduct the following expenses as miscellaneous itemized deductions, totaling $84,581: (1) $71,657, identified by petitioners as “MLF” or “Merrill Lynch Fees”, as expenses for the production of income under section 212; and (2) $12,924 of the $26,000 identified by petitioners as “US Bank Fees”, as expenses for the production of income under section 212.”17 However, respondent

17 Petitioners have not objected to respondents’ characterization of these expenses as miscellaneous itemized deductions. An impact of this characterization is that such deductions are subject to sec. 67(a), which states: “In the case (continued…)

argues that petitioners are not entitled to deduct the remaining expenses, including: (1) $909 of the $20,164 identified by petitioners as “Opt.int” for “Merrill Lynch”; (2) $13,076 of the $26,000 identified by petitioners as “US Bank Fees”; (3) $330,979 and $123,000, identified by petitioners as “Cash Pay” and described as “Merrill Lynch, to protect Taxable income”; and (4) $322,962, identified by petitioners as “Other” and described as “Merrill Lynch, to protect Taxable Income”. Respondent raised these matters in the amendment to answer, not in the notice of deficiency, and now seeks an increased deficiency based in part on these new matters. Therefore, respondent bears the burden of proof with respect to these new matters. See Rule 142(a).

The “Opt.int” expense of $20,164 represents interest petitioners purportedly paid on margin loans issued by Merrill Lynch. Respondent concedes that petitioners are entitled to deduct this type of expense as an itemized deduction. However, respondent argues that a monthly account statement for petitioner’s Merrill Lynch brokerage account shows that only $19,255 was paid. The monthly account statement cited by respondent shows that petitioner paid $19,255 in interest on margin loans issued by Merrill Lynch during the month of August.

17(…continued) of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.”

A yearend account statement shows that petitioners paid a total of $186,370 in interest on margin loans during 2000. The $19,255 appears to be a portion of the $186,370, which respondent already conceded petitioners were entitled to deduct. The record establishes that petitioners paid only $186,370 in interest to Merrill Lynch and did not pay an additional $20,164 as claimed on their return. Nevertheless, based on respondent’s concession, we find that petitioners are entitled to an additional itemized deduction of $19,255.

The “US Bank Fees” expense of $26,000 represents bank fees petitioners purportedly paid to US Bancorp. Respondent concedes that petitioners are entitled to deduct this type of expense as a miscellaneous itemized deduction. However, respondent argues that petitioners are entitled to deduct only $12,924 in bank fees. The US Bancorp statements of account show that petitioners paid $12,924 in bank fees to US Bancorp in 2000. There is no evidence of a greater payment. The statements of account are sufficient for respondent to meet his burden of proof. Therefore, we find that petitioners are entitled to a miscellaneous itemized deduction of only $12,924 with respect to the US Bancorp fees.

The “Cash Pay” expenses of $330,979 and $123,000, and the “Other” expenses of $322,962, represent deposits made by petitioner into his Merrill Lynch brokerage account to exercise his nonqualified stock options and to acquire other stock. The costs of acquiring stock, a capital asset, are capital in nature and are not currently deductible but instead are included in the stock’s tax basis. See Woodward v. Commissioner, 397 U.S. 572, 575 (1970); Lychuk v. Commissioner, 116 T.C. 374, 388-389 (2001); Pappas v. Commissioner, T.C. Memo. 2002-127; see also secs. 1012, 1221(a). Therefore, we find that petitioners are not entitled to deduct the “Cash Pay” and “Other” expenses.

As described above, respondent met his burden of proving that petitioners are entitled to itemized deductions of only $243,363 and miscellaneous itemized deductions of only $84,581. However, petitioners argue that they are entitled to deduct the claimed expenses in full in 2000 because respondent allowed them to deduct similar expenses in 1999.18 Petitioners’ argument is without merit. Each taxable year stands alone, and respondent may challenge in a succeeding year what was condoned or agreed to in a former year. Rose v. Commissioner, 55 T.C. 28, 31-32 (1970); Jeanmarie v. Commissioner, T.C. Memo. 2003-337; Boatner

18 Petitioners also argue that respondent cannot challenge their itemized deductions because the Court admitted into evidence Exhibit 38-P. Exhibit 38-P was offered by petitioners as a summary of their arguments. Similar to their argument regarding Exhibit 42-R, discussed supra pp. 15-16, petitioners’ argument is based on a misunderstanding of the Court’s evidentiary ruling. The admission of Exhibit 38-P into evidence does not establish the truth of petitioners’ assertions made in that exhibit, nor does it preclude respondent from contesting those assertions.

v. Commissioner, T.C. Memo. 1997-379, affd. 164 F.3d 629 (9th Cir. 1998). Respondent’s allowance of certain itemized deductions in 1999 does not establish petitioners’ entitlement to similar deductions in 2000.

For the above-stated reasons and to reflect respondent’s concessions, we find that petitioners are entitled to itemized deductions of $243,363 and miscellaneous itemized deductions of $84,581.

V. Alternative Minimum Tax

In the notice of deficiency, respondent determined that petitioners were liable for alternative minimum tax of $314,371. Petitioners’ alternative minimum tax liability was triggered in part by the itemized deductions claimed on their Federal income tax return. Respondent concedes that, if petitioners are entitled to itemized deductions and miscellaneous itemized deductions only to the extent conceded by respondent, the alternative minimum tax will not apply. As found above, petitioners are entitled to itemized deductions and miscellaneous itemized deductions only to the extent conceded by respondent. Therefore, a determination regarding petitioners’ alternative minimum tax liability is unnecessary.

VI. Section 6651(a)(1) Addition to Tax

Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed (in this case, April 16, 2001), unless the taxpayer can establish that such failure is due to reasonable cause and not willful neglect. In the notice of deficiency, respondent asserted that petitioners were liable for a section 6651(a)(1) addition to tax of $38,837. In the amendment to answer, respondent asserted an increased section 6651(a)(1) addition to tax of $100,571, based on the asserted increased deficiency.

Respondent bears the burden of production with respect to petitioners’ liability for the section 6651(a)(1) addition to tax. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). To meet his burden of production, respondent must come forward with sufficient evidence indicating that it is appropriate to impose the addition to tax. See Higbee v. Commissioner, supra at 446-447. Respondent has met his burden of production because the parties stipulated that petitioners’ 2000 Federal income tax return was filed on May 19, 2003, more than 25 months after it was due.

Once respondent meets his burden of production, petitioners bear the burden of proving that their failure to timely file was due to reasonable cause and not willful neglect.19 To show

19 Respondent bears the burden of proof with regard to any increased deficiency. See Rule 142(a). However, the amount of the sec. 6651(a)(1) addition to tax is a computational matter based on the amount of tax due. To the extent respondent bears the burden of proving an increased sec. 6651(a)(1) addition to tax, respondent has met this burden because, as discussed supra, (continued…)

reasonable cause, petitioners must show that they “exercised ordinary business care and prudence and [were] nevertheless unable to file the return within the prescribed time”. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. For illness or incapacity to constitute reasonable cause, petitioners must show that they were incapacitated to a degree that they could not file their returns. Williams v. Commissioner, 16 T.C. 893, 905-906 (1951); see, e.g., Joseph v. Commissioner, T.C. Memo. 2003-19 (“Illness or incapacity may constitute reasonable cause if the taxpayer establishes that he was so ill that he was unable to file.”).

Petitioners argue that their failure to file was due to reasonable cause because petitioner was sick and because their return preparer had a brain tumor. Petitioners have not introduced any evidence to corroborate these allegations, nor have they explained how long petitioner was sick, how serious his illness was, why Mrs. Bhattacharyya was unable to fulfill petitioners’ filing obligations, or why they were unable to find another return preparer. We find that petitioners did not have reasonable cause for their failure to file timely. Therefore, we

19(…continued) the record shows that petitioners are liable for an increased deficiency. See Howard v. Commissioner, T.C. Memo. 2005-144.

hold that petitioners are liable for a section 6651(a)(1) addition to tax.20

VII. Conclusion

Based on the above, petitioners are liable for an increased deficiency in income tax, an increased addition to tax under section 6651(a)(1), and are not entitled to a refund.

In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

20 Because petitioners filed their return more than 25 months after it was due, the addition to tax under sec. 6651(a)(1) will be 25 percent of the amount required to be shown as a tax on the return. See sec. 6651(a)(1). The amount of the addition to tax should be determined by the parties as part of their Rule 155 computations.

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January 30th, 2007 | 1 Comment »

United States v. Trupin, 2007 U.S. App. LEXIS 1463 (2nd Cir. 2007).

UNITED STATES OF AMERICA, Appellant, v. BARRY TRUPIN, Defendant-Appellee.

Docket No. 05-2934-cr

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

2007 U.S. App. LEXIS 1463

October 11, 2006, Argued

January 23, 2007, Decided

PRIOR HISTORY: [*1] Appeal from an order of the Southern District of New York (McKenna, J.), entered on May 6, 2005, in which the district court resentenced defendant to a term of seven months’ incarceration after a Crosby remand.

United States v. Trupin, 119 Fed. Appx. 323, 2005 U.S. App. LEXIS 88 (2d Cir. N.Y., 2005)
DISPOSITION: REMANDED.

COUNSEL: LYNN A. NEILS, Assistant United States Attorney, (Michael J. Garcia, United States Attorney for the Southern District of New York, Stephen J. Ritchin, Assistant United States Attorney, Celeste L. Koeleveld, Assistant United States Attorney; on the brief) New York, New York for Appellant.

DAYNA FEREBEE, Law Office of Dayna Ferebee, New York, New York, for Defendant-Appellee.

JUDGES: Before: WESLEY, HALL, Circuit Judges, and JONES, District Judge. *
* The Honorable Barbara S. Jones, District Judge, United States District Court for the Southern District of New York, sitting by designation.

OPINION BY: WESLEY

OPINION: WESLEY, Circuit Judge:

This appeal concerns the bounds of “reasonableness” after United States v. Booker, 543 U.S. 220, 261, 125 S. Ct. 738, 160 L. Ed. 2d 621 (2005). In particular, we must determine whether it was reasonable for the district court to prescribe a seven-month prison term — amounting to an eighty percent reduction from the bottom [*2] of the applicable Sentencing Guidelines range — for a defendant who engaged in a multi-year, multi-million dollar tax evasion scheme. We hold that the district court’s decision was unreasonable; it failed to properly weigh all of the sentencing factors enumerated in 18 U.S.C. § 3553(a) and the record does not adequately support those factors on which the district court relied.

Defendant Barry Trupin’s federal criminal prosecution for tax evasion returns to us for a second time. On the first occasion Trupin appealed his conviction, but not his sentence, for one count of attempting to evade the payment of income taxes, 26 U.S.C. § 7201, and one count of making false statements to the Internal Revenue Service, 18 U.S.C. § 1001. We affirmed Trupin’s conviction in a summary order on January 5, 2005. United States v. Trupin, 119 Fed. Appx. 323, 2005 WL 18009 (2d Cir. 2005). As was the practice with all criminal cases following Blakely v. Washington, 542 U.S. 296, 124 S. Ct. 2531, 159 L. Ed. 2d 403 (2004), we withheld issuance of the mandate in anticipation of Booker.

Just seven days after our [*3] summary order, the Supreme Court announced its ruling in Booker. Second Circuit practice at the time gave Trupin fourteen days from the date of Booker to file supplemental briefing pertaining to his sentence. To stem the tide of confusion in the days following Booker, we elected to stay this fourteen-day period until we decided how to handle sentencing cases in the post-Booker world. That decision came in United States v. Crosby, 397 F.3d 103 (2d Cir. 2005). Thereafter Trupin was notified that a “Crosby remand” — returning his case to the district court for resentencing in light of Booker and Crosby — would issue if requested. Trupin’s counsel requested and received the remand.

We need not revisit the entire factual background of Trupin’s crimes except to note that he employed a number of devices to avoid reporting over six million dollars in income over a period of six years. Trupin enlisted the aid of family members to claim ownership of certain assets, created phony paper trails, employed shell corporations and trusts, and shipped expensive assets to the Vancouver Islands in Canada.

At the first sentencing proceeding, the district [*4] court (McKenna, J.) calculated Trupin’s offense level category at 21 under the Guidelines, based on its tax loss calculation n1 and a two- level enhancement for the sophisticated means of Trupin’s deception. The Guidelines also set him at a Criminal History Category of II for his earlier conviction for possession of a stolen Marc Chagall painting. See United States v. Trupin, 117 F.3d 678 (2d Cir. 1997). An offense level of 21 coupled with a Criminal History Category of II resulted in a Guidelines range of 41 to 51 months of imprisonment.

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -

n1 The amount of the tax loss appears to have been a point of contention and confusion throughout sentencing. While setting the tax loss at $ 1.2 million at the first sentencing hearing, the district court seemed to suggest a greater tax loss at resentencing, when “doubt[ing] if the amount of money actually lost by the government was anything like 5 or 6 million, because by the time you get into fighting with other creditors and the validity of the IRS to try to settle things to collect money, I think it might have been a lot, lot less.” Because it does not affect our result, we will assume for purposes of this appeal that the tax loss suffered was $ 1.2 million.

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At the original sentencing proceeding, the district court denied Trupin’s request for a downward departure based on extraordinary family circumstances and his advanced age. The district court found that Trupin neither established that his wife’s health required his presence nor that his “age, in light of his general good health,” warranted a departure. When offered a chance to speak on his own behalf at the hearing, Trupin asserted his innocence: “I sit here, stand here in amazement because I am not aware that I committed any crime.” The district court expressed its dismay at the length of prison time it was required to impose under the Guidelines:

I am going to sentence at the lowest available sentencing range in this case. I don’t want to spend half an hour complaining about the [G]uidelines, but this [G]uideline is one of the worst I have ever seen.

Trupin received the minimum Guidelines sentence of 41 months of incarceration, followed by three years of supervised release, and a mandatory $ 150 special assessment.

On remand, the district court treated the Guidelines as advisory and made no change to its original Guidelines range calculation, but found [*6] the section 3553(a) factors militated in favor of a significantly reduced sentence. The district court first focused on the condition of Trupin’s wife: “[F]rom everything I can see, Mr. Trupin does everything in his power to take good care of [his wife], even though [Trupin] doesn’t have the means that he once had.” The district court acknowledged that Trupin’s crimes amounted to a “serious case,” but thought that “a few weeks in jail for most of us would be a very, very significant punishment.” The district court noted general statistics indicating that “recidivism declines consistently as age increases,” leading it to conclude that “Trupin is [not] going to go out and commit any more crimes of the sort he’s done.” The court also expressed doubt as to whether the IRS could collect from Trupin since a number of creditors would be going after Trupin’s few remaining assets. The district court ultimately decided that Trupin deserved a sentence of seven months of imprisonment, seven months of home confinement, and three years of supervised release. n2 Trupin is currently serving his sentence.

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n2 Following the sentencing hearing, the district court entered a written judgment detailing the reasons for its sentencing decision:

Defendant is over 69 years old, and service of a lengthy sentence will be a greater hardship on him than in most cases. Sentencing Commission studies have found that recidivism decreases consistently with age. Defendant’s wife is sick without financial means or medical insurance or other persons to take care of her. Defendant currently lives on social security, but may be able to earn sufficient money after a short sentence to repay at least some of what he owes to the Internal Revenue Service (IRS). A sentence of seven (7) months of incarceration and seven (7) months home confinement is reasonable, and no greater sentence is necessary to satisfy purposes of 18 U.S.C. § 3553(a)(2).

It is not clear to what extent the district court intended these reasons to supplement or further explain its oral statements on the record. To the extent that the reasons in the written judgment purport to explain considerations stated on the record, they do not cure the unreasonableness of the sentence imposed for the reasons explained below.

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On appeal, the Government argues the district court’s decision to impose a seven-month term of imprisonment — 34 months below the bottom of the applicable Guidelines range — is unreasonable. The Government contends the district court erred by placing undue weight on Trupin’s age and family ties, while giving short shrift to the other 3553(a) factors, including the seriousness of the offense, the need to promote respect for the law, the need to provide deterrence, and the suggested Guidelines range. Trupin responds that the sentence was reasonable: The district court properly considered the section 3553(a) factors, committed no error in its calculation of the advisory Guidelines range, determined that a Guidelines sentences was not appropriate, and exercised its discretion to impose a reduced non-Guidelines sentence.

Reasonableness has a procedural and substantive component. Crosby, 397 F.3d at 114-15. A sentencing court must (1) treat the Guidelines as advisory, (2) calculate the Guidelines range based on its factual findings, and (3) consider the section 3553(a) factors. n3 Id. at 113-115. The ultimate sentence must be reasonable in light of [*8] all the section 3553(a) factors. n4 Id.

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n3 Section 3553(a) requires a district court to “impose a sentence, sufficient, but not greater than necessary, to comply with the purposes set forth in paragraph (2)” and to “consider” the following factors “in determining the particular sentence to be imposed”:

(1) the nature and circumstances of the offense and the history and characteristics of the defendant;
(2) the need for the sentence imposed–
(A) to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment for the offense;
(B) to afford adequate deterrence to criminal conduct;
(C) to protect the public from further crimes of the defendant; and
(D) to provide the defendant with needed educational or vocational training, medical care, or other correctional treatment in the most effective manner;

(3) the kinds of sentences available;
(4) the kinds of sentence and the sentencing range established for–(A) the applicable category of offense committed by the applicable category of defendant as set forth in the guidelines . . . .
(5) any pertinent policy statement–
(A) issued by the Sentencing Commission . . . .

(6) the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct; and
(7) the need to provide restitution to any victims of the offense. 18 U.S.C. § 3553(a).

[*9]

n4 We review a district court’s sentence for reasonableness de novo and evaluate its findings of fact for clear error. United States v. Selioutsky, 409 F.3d 114, 119 (2d Cir. 2005).

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Neither the way in which the district court performed its duty to consider the section 3553(a) factors nor its Guidelines calculation is at issue. “As long as the judge is aware of both the statutory requirements and the sentencing range or ranges that are arguably applicable, and nothing in the record indicates misunderstanding about such materials or misperception about their relevance, we will accept that the requisite consideration has occurred.” United States v. Fleming, 397 F.3d 95, 100 (2d Cir. 2005). Although the district court considered the section 3553(a) factors as required by Booker, it erred in its conclusion. This case thus turns on the result — the reasonableness of the sentence as a whole — rather than the process that produced it.

To date, our review of sentences for reasonableness has been measured. We have held sentences to be unreasonable when unjustified [*10] reliance is placed on one section 3553(a) factor, United States v. Rattoballi, 452 F.3d 127, 137 (2d Cir. 2006), when a sentence reflects general policy disagreement with the Guidelines, see id. at 135, or when a sentence is based on a consideration not included in section 3553(a), United States v. Godding, 405 F.3d 125, 126 (2d Cir. 2005). This case sits at the junction of all three. Here, the district court placed unjustified reliance on Trupin’s age and family circumstances. Moreover, to the extent that the district court gave undue weight to considerations not unique to the defendant, relied upon an improper factor, or substituted personal views for the Commission’s policies, that too was error.

At the original sentencing proceeding, the district court held Trupin’s age and family circumstances were not sufficiently extraordinary to warrant a downward departure under the Guidelines. At no time during resentencing did the district court reconsider its denial of a departure. Instead, the district court noted that Trupin’s “age and family ties and responsibilities are now normally relevant” at sentencing, ostensibly because section 3553(a)(1) requires consideration of “the history and characteristics of the defendant,” 18 U.S.C. § 3553(a)(1). The Government does not argue that the district court’s decision to not grant a departure for age and family circumstances prohibits any consideration of those same facts under section 3553(a)(1). n5 Rather, the Government argues the district court placed far too much weight on Trupin’s family circumstances and age without giving adequate weight to the other statutory factors. We agree.

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n5 Section 3553(a)(1) requires consideration of the “history and characteristics of the defendant.” 18 U.S.C. § 3553(a)(1). Section 3553(a)(5), on the other hand, requires consideration of “any pertinent policy statement,” 18 U.S.C. § 3553(a)(5), one of which states that “family ties and responsibilities . . . are not ordinarily relevant in determining whether a sentence should be outside the guidelines,” United States Sentencing Guidelines Manual § 5H1.6. These two provisions seemingly exist in tension. Compare Rattoballi, 452 F.3d at 136 n. 4; United States v. Jackson, 408 F.3d 301, 305 n. 3 (6th Cir. 2005) with United States v. Wallace, 458 F.3d 606, 613 (7th Cir. 2006); United States v. Ameline, 409 F.3d 1073, 1093 (9th Cir. 2005) (Wardlaw, J., concurring in part and dissenting in part) (en banc). Because the parties did not address this issue and because it is not necessary to this decision, we assume without deciding that Trupin’s age and family needs are proper considerations under section 3553(a)(1).

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The district court’s concern for the condition of Trupin’s wife is “neither sufficiently compelling nor present to the degree necessary to support the sentence imposed.” Rattoballi, 452 F.3d at 137. The district court emphasized Trupin’s professed need to care for his wife: “Mr. Trupin does everything in his power to take good care of her, even though he doesn’t have the means he once had.” Yet the record does not demonstrate that Trupin’s presence was essential to his wife’s well-being; indeed, the district court had found otherwise at Trupin’s first sentencing hearing. Trupin was separated from his wife when he served time in federal prison in 1998. They also lived apart for significant periods of time in 1999, 2000, and 2001, when Trupin could not leave the United States and his wife was living in Canada. Moreover, the separation of Trupin from his wife caused by incarceration is not sufficiently unique to Trupin, but rather is true of every married defendant who runs afoul of the law and is then separated from his family. While tragic, it is a tragedy of Trupin’s making.

In reducing Trupin’s sentence, the district court also placed too much weight on Trupin’s [*13] advanced age, either as a mitigating personal characteristic or a factor relevant to deterrence. The record shows that Trupin was 69 years old and in good health; and while the district court cited statistics that recidivism generally declines with age, Trupin has proven himself to be an exception to the rule. Trupin began his questionable escapades at the age of 54 with the receipt of a stolen painting, continued with an intricate multi-million dollar tax evasion scheme, and ended with a bad faith bankruptcy filing in his late sixties. At sentencing, Trupin continued to press his continued belief in his innocence and even refused to complete a financial affidavit in connection with his Pre-Sentence Report. Aging clearly has not increased Trupin’s respect for the law.

Nor does the sentence reflect the seriousness of Trupin’s offense. See 18 U.S.C. § 3553(a)(2)(A). The tax fraud occurred over six years and accounted for over six million dollars in unreported income. Trupin accomplished his tax evasion through a complex network of corporate shells, phony paper trails, and foreign transactions — efforts that required him to take advantage of his wife and [*14] daughter. Moreover, to the extent that the district court considered whether and to what extent the IRS would be able to collect the unpaid taxes, this is an irrelevant variable to include in the sentencing calculus. Vague notions of how much the IRS will actually collect from Trupin should have played no part in assessing the seriousness of the offense or in otherwise crafting the sentence. What is determinative is the amount Trupin in effect stole from his fellow taxpayers through his deceptions. n6 A seven-month term of imprisonment fails to reflect as much.

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n6 Only a limited number of criminal tax prosecutions are brought relative to the number of alleged violations. See U.S. SENTENCING GUIDELINES MANUAL ch. 2, pt. T, introductory cmt. Deterrence is clearly a primary goal in sentencing a tax evader, see 18 U.S.C. § 3553(a)(2)(B), a result not served by shortening a sentence based on the IRS’s perceived inability to collect.

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We end with a note on the district court’s generalized [*15] objections to imprisonment and the Guidelines in particular. During the initial sentencing hearing, the district court opined that “this [G]uideline is one of the worst I have ever seen.” And at resentencing the court indicated that “a few weeks in jail for most of us would be a very, very significant punishment.” We have rejected general policy disagreements such as these on two occasions. See United States v. Castillo, 460 F.3d 337, 361 (2d Cir. 2006); Rattoballi, 452 F.3d at 127. Sentencing policy is for Congress and the Sentencing Commission, not judges. In the federal sentencing scheme, judges have a limited but important role: tailor a sentence based on defendant-specific considerations. The failure to do so renders a sentence unreasonable.

We are mindful of the difficult duty sentencing courts encounter post-Booker, a duty that is made all the more difficult when a defendant marshals sympathetic facts. In such a case, the sentence must still account for all of the section 3553(a) factors, be fashioned to the individual defendant, and not be based on generalized policy grievances or disagreements.

The case is REMANDED for further proceedings [*16] consistent with this opinion.

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January 23rd, 2007 | 1 Comment »

Rev. Proc. 2007-12

Bookmark to:

January 22nd, 2007 | 1 Comment »

Austin v. Commissioner, T.C. Memo. 2007-11 (2007).

T.C. Memo. 2007-11

UNITED STATES TAX COURT

JOANNE C. AUSTIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8766-06. Filed January 16, 2007.

Joanne C. Austin, pro se.

Joan E. Steele and Melinda G. Williams, for respondent.

MEMORANDUM OPINION

ARMEN, Special Trial Judge: This deficiency case is before the Court on respondent’s Motion To Dismiss For Lack Of Jurisdiction, as supplemented. Respondent moves that this case be dismissed on the ground that the petition was not filed within the time prescribed by section 6213(a) or section 7502.1 As explained below, we shall grant respondent’s motion.

Background

Respondent sent a notice of deficiency to petitioner by certified mail on February 6, 2006.2 In the notice, respondent determined a deficiency in petitioner’s Federal income tax for the taxable year 2000 of $21,997, as well as additions to tax of $4,298.62 under section 6651(a)(1) for failure to file a return, $4,776.25 under section 6651(a)(2) for failure to pay tax, and $1,010.24 under section 6654(a) for failure to pay estimated tax.

The 90th day after respondent mailed the notice of deficiency was Sunday, May 7, 2006. The following day, Monday, May 8, 2006, was not a legal holiday in the District of Columbia.

The petition was received and filed by the Court on Wednesday, May 10, 2006.3 The envelope in which the petition was received bore a FedEx Express USA Airbill with handwritten entries dated May 8, 2006 (customer handwritten label). The customer handwritten label specifies “FedEx Priority Overnight–Next business morning” as the requested delivery service. Affixed to the envelope is an electronically generated FedEx

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 Petitioner’s last known address is not at issue.

3 Petitioner resided in Longmont, Colorado, at the time that the petition was filed.

Priority Overnight service label dated May 9, 2006 (FedEx electronically generated label). The FedEx electronically generated label specifies Wednesday, May 10, 2006, as the “Deliver By” date. The FedEx electronically generated label also identifies a FedEx employee number and provides a tracking number (TRK# 8461 9487 1417) for the envelope.

Tracking information furnished by FedEx shows that the envelope in question was picked up at 5:22 p.m. on Tuesday, May 9, 2006, and delivered at 9:09 a.m. on Wednesday, May 10, 2006.4

As stated above, respondent filed a Motion To Dismiss For Lack Of Jurisdiction on the ground that the petition was not filed with the Court within the time prescribed by section 6213(a) or section 7502.

Petitioner filed an objection to respondent’s motion to dismiss. In her objection, petitioner contends that her petition was timely filed. In this regard, petitioner states: That on May 4, 2006, she flew to Baltimore, Maryland, to attend a trade show; that she stayed at the Days Inn while in Baltimore; that she signed the petition on Sunday, May 7, 2006; that she completed the customer handwritten label at about 8 a.m. on Monday, May 8, 2006, and affixed it to the FedEx envelope; that she placed the petition in the FedEx envelope, which she then

4 After processing the mail and other deliveries, the Court’s mailroom clocked in the petition later that morning at

10:22 a.m.

- 4 handed to the front desk clerk of the Days Inn with the understanding that the envelope would be picked up later that day by FedEx; that the front desk clerk placed the envelope in the hotel’s “pickup box”; and that, upon returning to the hotel after the trade show later that day, she inquired about the envelope and was told by a front desk clerk that the “pickup box” was empty. In sum, petitioner asserts that “There was no reason for me to think that my FEDEX package had not been picked up on the 8th.”

This matter was called for hearing at the Court’s motions session in Washington, D.C. Counsel for respondent appeared and offered argument in support of respondent’s motion to dismiss. In contrast, there was no appearance by or on behalf of petitioner, nor did petitioner file a statement pursuant to Rule 50(c), the provisions of which were explained in the Court’s order calendaring respondent’s motion for hearing.

Discussion

The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner, 85 T.C. 527, 529 (1985). This Court’s jurisdiction to redetermine a deficiency depends on the issuance of a valid notice of deficiency and a timely filed petition. Rule 13(a), (c); Monge v. Commissioner, 93 T.C. 22, 27 (1989); Normac, Inc. v. Commissioner, 90 T.C. 142, 147 (1988).

Section 6212(a) expressly authorizes the Commissioner, after determining a deficiency, to send a notice of deficiency to the taxpayer by certified or registered mail. The taxpayer, in turn, has 90 days (or 150 days if the notice is addressed to a person outside of the United States) from the date that the notice of deficiency is mailed to file a petition with this Court for a redetermination of the contested deficiency. Sec. 6213(a).

There is no dispute in this case that respondent mailed the notice of deficiency to petitioner on February 6, 2006. The 90th day thereafter was Sunday, May 7, 2006. Thus, the last day allowed by law to file a petition in this case was Monday, May 8, 2006, which was not a legal holiday in the District of Columbia. See secs. 6213(a), 7503. However, as previously stated, the petition was not received or filed by the Court until Wednesday, May 10, 2006.

Petitioner contends that her petition was timely filed because she gave it to the front desk clerk of the Days Inn on the morning of Monday, May 8, 2006, for pickup later that day by FedEx.

A timely mailed petition may be treated as though it were timely filed. Sec. 7502(a). Thus, if a petition is received by the Court after the expiration of the 90-day period, it is nevertheless deemed to be timely filed if the date of the U.S. Postal Service postmark stamped on the envelope in which the petition was mailed is within the time prescribed for filing. Sec. 7502(a); sec. 301.7502-1, Proced. & Admin. Regs.

Petitioner did not use the U.S. Postal Service to send her petition to the Court. Nevertheless, petitioner contends that sending her petition by FedEx qualifies as timely mailing.

Section 7502(f)(1) provides as follows:

SEC. 7502(f). Treatment of Private Delivery Services.–

(1) In general.–Any reference in this section to the United States mail shall be treated as including a reference to any designated delivery service, and any reference in this section to a postmark by the United States Postal Service shall be treated as including a reference to any date recorded or marked as described in paragraph (2)(C) by any designated delivery service.

Paragraph (2)(C) of section 7502(f) requires that a designated delivery service “[record] electronically to its data base, kept in the regular course of its business, or marks on the cover in which any item referred to in this section is to be delivered, the date on which such item was given to such trade or business for delivery”.

In Notice 2004-83, 2004-2 C.B. 1030, the Commissioner designated (inter alia) FedEx Priority Overnight delivery service as a private delivery service (PDS). However, respondent contends that the postmark date for purposes of section 7502 is May 9, 2006, which would make the petition 1 day late and would necessitate the granting of respondent’s motion to dismiss.

Notice 97-26, 1997-1 C.B. 413, establishes special rules for deliveries by a PDS to determine the date that will be treated as the postmark date for purposes of section 7502.5 Notice 97-26,

1997-1 C.B. at 414, provides in pertinent part:

SPECIAL RULES FOR DETERMINING POSTMARK DATE: Section 7502(f)(2)(C) requires a PDS to either (1) record electronically to its data base (kept in the regular course of its business) the date on which an item was given to the PDS for delivery or (2) mark on the cover of the item the date on which an item was given to the PDS for delivery. Under § 7502(f)(1), the date recorded or the date marked under § 7502(f)(2)(C) is treated as the postmark date for purposes of § 7502.

This notice provides rules for determining the date that is treated as the postmark date for purposes of § 7502. There is one set of rules for the designated PDSs that qualified for designation because their “postmark date” is recorded electronically to their data bases. There is another set of rules for the designated PDS that qualified for designation because its “postmark date” is marked on the cover of an item.

For items delivered by FedEx, Notice 97-26, 1997-1 C.B. at

414, provides:

An electronically generated label is applied to the cover of all items delivered by FedEx, including those items that already have an airbill attached. The date on which an item is given to FedEx for delivery is marked on the label. There are two types of labels (which are distinguishable from each other). One type of label is generated and applied to an item by a FedEx employee. The other type of label is generated (using computer software and/or hardware provided by FedEx) and applied to an item by a customer.

5 Although Notice 97-26, 1997-1 C.B. 413, has been modified over the years on several occasions, it continues to provide the special rules, as applicable to domestic service, to determine the date that will be treated as the postmark date for purposes of sec. 7502. See Notice 2004-83, 2004-2 C.B. 1030.

The date that will be treated as the postmark date for purposes of § 7502 is determined under the following rules:

(1) If an item has a label generated andapplied by a FedEx employee, the date marked on that label is treated as the postmark date for purposes of § 7502, regardless of whether the item also has a label generated and applied by the customer.

Petitioner contends that, by virtue of section 7502(f), her petition should be treated as having been timely filed on the basis of the fact that she gave it to a hotel desk clerk on Monday, May 8, 2006, for pickup by FedEx later that day and further because she was told by a hotel desk clerk at the end of the day that the hotel’s “pickup box” was empty. We disagree. The date of May 9, 2006, appearing on the FedEx electronically generated label, which appears to have been generated and applied by a FedEx employee, is treated as the postmark date for purposes of section 7502. See sec. 7502(f)(2)(C); see also Notice 97-26, supra.

The circumstances here are analogous to cases in which the

U.S. Postal Service postmark is dated beyond the last date forfiling a petition. In those cases, this and other courts have consistently held for many years that the taxpayer is precluded from introducing extrinsic evidence to show that the petition may have been deposited into the mail before the last date for its timely filing. E.g., Shipley v. Commissioner, 572 F.2d 212, 214 (9th Cir. 1977), affg. T.C. Memo. 1976-383; Malekzad v.

Commissioner, 76 T.C. 963, 967-968 (1981); Estate of McGarity v.

Commissioner, 72 T.C. 253 (1979); Sylvan v. Commissioner, 65 T.C.

548, 551 (1975); Adkison v. Commissioner, T.C. Memo. 1992-411.

Like the presence of a U.S. Postal Service postmark, the date of

May 9, 2006, on the FedEx electronically generated label is

legally conclusive, and petitioner cannot go behind that fact.

The result in this case is not changed by the label on the

FedEx envelope affixed and dated May 8, 2006, by petitioner.

Notice 97-26, 1997-1 C.B. at 414, provides as follows:

(2) If an item has a label generated and appliedby a customer, the date marked on that label is treated as the postmark date for purposes of § 7502 if the item is received within the normal delivery time. (Normal delivery time is one day for FedEx Priority Overnight and FedEx Standard Overnight, or two days for FedEx 2 Day.) If an item is not delivered within the normal delivery time, the person required to file the document or to make the payment must establish (a) that the item was actually either given to, or picked up by, a FedEx employee on or before the due date and (b) the cause of the delay in delivery of the document or payment. These rules are similar to the rules for United States mail that has a postmark made other than by the United States Postal Service. (See Treas. Reg. § 301.7502-1(c)(1)(iii)(b).)[6] The date on the label is May 9, 2006. The petition was

delivered the next day on May 10, 2006, within the normal time

6 This second type of label presupposes software and/or hardware provided by FedEx to its customer. See Notice 97-26, supra. Petitioner has not even alleged either that she was provided with such software and/or hardware or that she prepared the label using such software and/or hardware. In addition, and as previously stated, the FedEx USA Airbill, which is not the type of label specified in Notice 97-26, supra, was prepared by hand; this fact further strengthens our conclusion that the FedEx electronically generated label was generated and affixed by a FedEx employee and not by petitioner.

for FedEx Priority Overnight delivery. Thus, the date on the label is treated as the postmark date for purposes of section 7502. See Notice 97-26, supra.

The Days Inn where petitioner left the petition for pickup by FedEx is not a PDS. See Notice 2004-83, supra. Thus, the handing-over of the petition to the Days Inn front desk clerk on May 8, 2006, does not help petitioner.7

Finally, petitioner argues that she did nothing wrong in handing over her petition to the Days Inn front desk clerk on May 8, 2006. However, even if we were inclined to do so, the Court cannot rely on general equitable principles to expand the statutorily prescribed period for filing the petition. See and compare Woods v. Commissioner, 92 T.C. 776, 784-785 (1989).

7 Compare Estate of Cranor v. Commissioner, T.C. Memo. 2001-27, where we held that a petition sent by FedEx 4 days before the last filing date was timely mailed, even though it was not delivered, but rather returned to the sender because the sender, who had properly addressed the airbill, had erroneously checked the “Hold Saturday” box thereon.

Under these circumstances, we conclude that the petition was not filed within the requisite period prescribed by section 6213(a). Consequently, this case must be dismissed for lack of jurisdiction.8

To reflect the foregoing,

An order granting

respondent’s motion as

supplemented and dismissing

this case for lack of

jurisdiction because of an

untimely filed petition will

be entered.

8 Although petitioner cannot pursue her case in this Court, she is not without a judicial remedy. Specifically, petitioner may pay the tax, file a claim for refund with the Internal Revenue Service, and, if her claim is denied, sue for a refund in the appropriate Federal District Court or the U.S. Court of Federal Claims. See McCormick v. Commissioner, 55 T.C. 138, 142

n.5 (1970).

Bookmark to:

January 16th, 2007 | 1 Comment »

Arnett v. Comm’r, No. 06-1934 (7th Cir. 2007).

DAVE ARNETT, Petitioner-Appellant,. v COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 06-1934

UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

2007 U.S. App. LEXIS 853

 November 6, 2006, Argued

 January 16, 2007, Decided

 
PRIOR HISTORY:    [*1]  Appeal from the United States Tax Court. No. 8866-03. Arnett v. Comm’r, 126 T.C. 89, 2006 U.S. Tax Ct. LEXIS 5 (2006)
DISPOSITION:   AFFIRMED.

COUNSEL:   For DAVE ARNETT, Petitioner - Appellant: Larry D. Harvey, Englewood, CO.
 
For COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee: Teresa T. Milton, Frank P. Cihlar, DEPARTMENT OF JUSTICE, Tax Division, Appellate Section, Washington, DC USA.

JUDGES:   Before RIPPLE, WILLIAMS and SYKES, Circuit Judges.

OPINION BY:   RIPPLE

OPINION:   RIPPLE, Circuit Judge. Petitioner Dave Arnett was employed by Raytheon Corporation and stationed in Antarctica for the calendar year 2001. When he filed his tax return for that year, he claimed an exclusion for income earned in a foreign country under 26 U.S.C. § 911 (”section 911″) for the income he earned while working in Antarctica. The Internal Revenue Service (”IRS”) assessed a deficiency for this exclusion based on its view that Antarctica is not a “foreign country” for purposes of section 911. Mr. Arnett challenged that deficiency in the Tax Court. The Tax Court sustained the IRS’ position. For the reasons set forth in this opinion, we affirm the judgment of the Tax Court.

I

BACKGROUND

The facts of this case are not in dispute. Mr. Arnett, a resident of  [*2]  Hayward, Wisconsin, was employed by Raytheon Support Services Co., which provided support services under contract with the National Science Foundation at McMurdo Station, Ross Island, Antarctica. When he filed his tax return for income received during tax year 2001, Mr. Arnett claimed that, by virtue of section 911, he was entitled to exclude $ 48,894 in income received from his work in Antarctica. On March 7, 2003, the IRS sent Mr. Arnett a notice of deficiency, stating that he was not permitted to exclude the income that he had received from his work in Antarctica because Antarctica is not a foreign country within the meaning of section 911. Mr. Arnett contested the IRS’ conclusion in the Tax Court.

In the Tax Court, the Commissioner of Internal Revenue (”Commissioner”) moved for summary judgment, contending that, under the treasury regulations then in effect, only territory under the sovereignty of a foreign nation is considered a “foreign country” for purposes of section 911. See 26 C.F.R. § 1.911-2(h). The United States neither makes any claim to sovereignty nor recognizes any other nation’s claims of sovereignty over Antarctica. See Antarctic  [*3]  Treaty art. IV, Dec. 1, 1959, 12 U.S.T. 794; Smith v. United States, 507 U.S. 197, 198 n.1, 113 S. Ct. 1178, 122 L. Ed. 2d 548 (1993). Thus, the Commissioner submitted, under the applicable treasury regulations Antarctica is not a foreign country for purposes of section 911. Relying on Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984), the Tax Court deferred to the Commissioner’s interpretation of section 911, embodied in IRS regulations, and held that, for purposes of section 911, the term “foreign country” applied only to territory within the sovereignty of a foreign country. The Tax Court therefore concluded that, because Antarctica was not within the sovereign territory of any foreign country, Mr. Arnett could not exclude income earned for services rendered in Antarctica.

II

DISCUSSION

A.

In challenging the Tax Court’s holding, Mr. Arnett makes two arguments. First, he submits that the term “foreign country” is not ambiguous and therefore there is no need for deference to the IRS’ regulation defining the term. In Mr. Arnett’s view, the word “foreign country” unambiguously includes Antarctica.  [*4]  Secondly, Mr. Arnett submits that, even if the statute is ambiguous, the language of the regulation does not support the Tax Court’s conclusion that Antarctica is not a “foreign country” for purposes of section 911. We begin our assessment of these contentions by first examining the statute in question and the methodology mandated by the Supreme Court’s cases for resolving the issues before us.

Under section 911, qualified individuals may exclude, within statutory limits, n1 foreign earned income from their gross income. 26 U.S.C. § 911(a)(1), (b)(2)(D). Foreign earned income is defined in the statute as amounts received “from sources within a foreign country” for services performed by the taxpayer. Id. § 911(b)(1)(A). The Internal Revenue Code (”IRC”) does not define “foreign country.” The Commissioner, therefore, has issued regulations to define this term. These regulations were promulgated under a specific grant of statutory authority to prescribe regulations to carry out the purposes of section 911, id. § 911(d)(9), and under the IRC’s general grant of authority to prescribe rules to enforce the provisions of the IRC, id. § 7805(a). See  [*5]  48 Fed. Reg. 33,007 (July 20, 1983). These regulations define “foreign country” to include territory under the sovereignty of a foreign nation. See 26 C.F.R. § 1.911-2(h). The Tax Court accorded this definition Chevron deference and concluded that Antarctica did not fall within the definition of a “foreign country” because the United States does not recognize Antarctica to be the sovereign territory of any foreign government.

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n1 For calendar year 2001 the exclusion was limited to $ 78,000. 26 U.S.C. § 911(b)(2)(D)(i). In calendar year 2002, the limit increased to $ 80,000. Id. Beginning with calendar year 2007, the amount excludable will be adjusted each calendar year to account for inflation. Id. § 911(b)(2)(D)(ii).
 

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Under the Chevron doctrine, we examine an agency’s construction of a statute that it administers under a two-part analysis that mirrors Mr. Arnett’s arguments. We first ask “whether Congress has directly spoken  [*6]  to the precise question at issue,” and second, “if the statute is silent or ambiguous with respect to the specific issue ,” whether the agency’s construction is permissible. Chevron, 467 U.S. at 842-43 (emphasis added). When the statute grants the agency “an express delegation of authority. . . to elucidate a specific provision of [a] statute by regulation,” the agency’s construction of the statute is permissible, and the regulation will be controlling, unless the regulation is “arbitrary, capricious, or manifestly contrary to the statute.” Id. at 843-44; see also United States v. Mead Corp., 533 U.S. 218, 227, 121 S. Ct. 2164, 150 L. Ed. 2d 292 (2001). When the statute does not delegate rulemaking authority explicitly, we shall consider statutory ambiguities to be implicit delegations to the agency administering the statute to interpret the statute through its rulemaking authority. See Mead, 533 U.S. at 229; Chevron, 467 U.S. at 844. Such interpretation will be permissible, and we shall defer to it, so long as the interpretation is a reasonable construction of the statute. Chevron, 467 U.S. at 844.  [*7] 

B.

We must first determine whether the term “foreign country” is unambiguous. The term has been defined in other contexts by the Supreme Court. In Smith v. United States, 507 U.S. 197, 113 S. Ct. 1178, 122 L. Ed. 2d 548 (1993), the Court had to determine whether Antarctica was a foreign country for purposes of the Federal Tort Claims Act (”FTCA”), 28 U.S.C. §§ 1346(b), 1402(b), 2401(b), 2671-80. That statute states that the United States’ waiver of sovereign immunity does not apply to “[a]ny claim arising in a foreign country.” 28 U.S.C. § 2680(k); see also Smith, 507 U.S. at 201. In its examination of the issue, the Court explicitly noted that the dictionary definition of “country” which it noted, “[a] region or tract of land,” was “not the only possible interpretation of the term.” Id. (quoting Webster’s New International Dictionary 609 (2d ed. 1945)) (internal quotation marks omitted). Then, in order to arrive at a definition of “country” for purposes of the FTCA, the Court examined the rest of the FTCA. Id.

First, the Court noted that the FTCA’s  [*8]  provisions operated both as a waiver of sovereign immunity and as a choice of law provision. Id. The Court reasoned that, if Antarctica were not a foreign country under the statute, the FTCA would waive the United States’ sovereign immunity in Antarctica and, at the same time, direct the district “courts to look to the law of a place that has no law in order to determine the liability of the United States,” a result the Court found “bizarre.” Id. at 201-02. Additionally, the FTCA’s venue provisions would result in a waiver of sovereign immunity but provide no venue when a person injured in Antarctica did not reside in the United States. Id. at 202. The Court found that this result was incompatible with the presumption that “Congress does not in general intend to create venue gaps.” Id. at 202-03 (quoting Brunette Mach. Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706, 710 n.8, 92 S. Ct. 1936, 32 L. Ed. 2d 428 (1972)) (internal quotation marks omitted). The Court also noted that, because the FTCA is a limited waiver of sovereign immunity, the Court should not “extend the waiver beyond that which Congress intended.” Id. at 203  [*9]  (quoting United States v. Kubrick, 444 U.S. 111, 117-18, 100 S. Ct. 352, 62 L. Ed. 2d 259 (1979)) (internal quotation marks omitted). Lastly, the Court found important the presumption against extraterritorial application of statutes. Id. at 203-04.

In short, in order to give meaning to the term “foreign country” in the FTCA, the Supreme Court focused in Smith on the purpose and operation of the FTCA. The Court’s resort to the statute’s context in order to give meaning to the term undercuts Mr. Arnett’s claim that the term “foreign country” unambiguously includes Antarctica. n2 Smith demonstrates that the term “foreign country” has meaning only when that term is interpreted in the particular statutory context in which it appears.

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n2 The Supreme Court’s methodology in Smith v. United States, 507 U.S. 197, 113 S. Ct. 1178, 122 L. Ed. 2d 548 (1993), also makes clear that we cannot rely directly on that precedent to give meaning to the term “foreign country.” Indeed, the Supreme Court recently has emphasized that a prior judicial interpretation of a statutory term will foreclose Chevron deference only if the “judicial precedent hold[s] that the statute unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill.” Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 162 L. Ed. 2d 820, 125 S. Ct. 2688, 2700 (2005).
 

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The conclusion that the term “foreign country” is inherently ambiguous is certainly validated by an examination of the text of section 911. Here, the appropriate meaning of the term is even more difficult to discern from the statutory context. Indeed, the text of section 911 provides no indication of the proper definition of “foreign country” or whether Antarctica should be considered a foreign country.

C.

Because we conclude that the term “foreign country,” as employed in section 911, is ambiguous, we must examine whether the IRS’ interpretation, as set forth in its regulations, is permissible. In doing so, we must remember that United States v. Mead Corp., 533 U.S. 218, 121 S. Ct. 2164, 150 L. Ed. 2d 292 (2001), requires that we give great deference to the interpretation of the Commissioner. See id. at 218; see also Chevron, 467 U.S. at 842-43. n3

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -

n3 We also note that the text of section 911 expressly delegates to the Commissioner the power to “prescribe such regulations as may be necessary or appropriate to carry out the purposes of” section 911. 26 U.S.C. § 911(d)(9). The term “foreign country” is used throughout the section, including in definitions relating to who may take advantage of the exclusion. See id. § 911(d)(1). Given the importance of the term, it is certainly “appropriate” that the Commissioner define the term “foreign country.” Under the most deferential standard we apply to rules issued under specific grants of authority, see Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 979 (7th Cir. 1998), it is clear that the rule in question is within the Commissioner’s delegated authority.
 

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The Commissioner submits that the regulation is reasonable under the Chevron doctrine. When evaluating the reasonableness of a rule issued by the Commissioner, we must assess “whether the regulation harmonizes with the language, origins, and purpose of the statute.” Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 983 (7th Cir. 1998). Of course, we must also remember that exclusions from income are narrowly construed. See Comm’r v. Schleier, 515 U.S. 323, 328, 115 S. Ct. 2159, 132 L. Ed. 2d 294 (1995).

1.

The Commissioner’s definition of “foreign country” is consistent with the congressional purpose underlying the exclusion. When Congress replaced the deduction for foreign earned income established by the Foreign Earned Income Act of 1978, Pub. L. No. 95-615, §§ 201-210, 92 Stat. 3097, 3098-3110 (1978), with the current exclusion, n4 it did so as a part of a legislative enactment intended to promote economic growth. See Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981 at 17 (J. Comm. Print 1981) [hereinafter ” General Explanation”]. Congress viewed the added employment costs which flowed from providing  [*12]  employees with additional reimbursement to account for added tax burdens experienced by American citizens working abroad as an impediment to the competitiveness of United States companies overseas. Id. at 43. Congress also believed that American companies, in order to remain competitive overseas, would resort to hiring nationals of the countries in which they sought to compete, and that these nationals would, in turn, purchase fewer American-made goods than an American citizen in the same position overseas. Id. Given these legislative purposes, the Commissioner reasonably could have concluded that, because there would not be similar tax burdens in territories outside of the sovereignty of a foreign nation, limiting the definition of “foreign country” to those geographic areas under the sovereignty of a foreign nation would advance the goal of Congress.

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n4 See infra part II.C.2.
 

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2.

“[T]reasury regulations and interpretations long continued without substantial change, applying to unamended  [*13]  or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.” Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 561, 111 S. Ct. 1503, 113 L. Ed. 2d 589 (1991) (quoting United States v. Correll, 389 U.S. 299, 305-06, 88 S. Ct. 445, 19 L. Ed. 2d 537 (1967)). The regulation in question originated in a rule issued in 1957, which read:

Definition of “foreign country”. The term “foreign country” means territory under the sovereignty of a government other than that of the United States. It does not include a possession or Territory of the United States.
26 C.F.R. § 1.911-1(a)(9), (b)(7) (1957), 22 Fed. Reg. 6758, 6759 (Aug. 22, 1957). The statute relating to this rule remained largely the same until the Foreign Earned Income Act of 1978, Pub. L. No. 95-615, §§ 201-210, 92 Stat. 3097, 3098-3110 (1978), replaced the exclusion for foreign earned income with a deduction for foreign earned income. n5 See General Explanation at 41. Nevertheless, despite this change, the general requirements for the deduction were no different than those for the exclusion it replaced. Id. As a result of the Foreign  [*14]  Earned Income Act of 1978, the then existing 26 C.F.R. § 1.911-1 was deleted and replaced with regulations relating a new 26 U.S.C. § 911, the provisions of which are not pertinent here. See 44 Fed. Reg. 27,079, 27,080 (May 9, 1979). The definition of “foreign country” was moved to a new regulation related to the deduction for foreign earned income that replaced the old exclusion. See 26 C.F.R. § 5b.913-3(d) (1979), 44 Fed. Reg. 27,084 (May 9, 1979). The new regulation substantially followed the old definition, adding only a sentence that a “foreign country” included the air space above any territory under the sovereignty of a government other than that of the United States. Id.

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n5 The act placed the deduction in a new section, 26 U.S.C. § 913. The exclusion for foreign earned income had been codified previously at 26 U.S.C. § 911.
 

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In 1981, Congress eliminated the foreign earned  [*15]  income deduction created by the Foreign Earned Income Act of 1978 and reinstated the income exclusion at 26 U.S.C. § 911. See Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, § 111, 95 Stat. 172, 190-94 (1981); General Explanation at 44. The 1981 act made no changes to the existing law relating to residence or the sort of income to which the exclusion applied. See General Explanation at 44. As a result of the 1981 act, the Commissioner issued a new regulation, 26 C.F.R. § 1.911-2(h), again defining “foreign country” with some clarification. See 48 Fed. Reg. 33,007, 33,011 (July 20, 1983). This rule provided the definition of “foreign country” in its present form:
Foreign country. The term “foreign country” when used in a geographical sense includes any territory under the sovereignty of a government other than that of the United States. It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), the air space over the foreign country, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters  [*16]  of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.
26 C.F.R. § 1.911-2(h).

In sum, although, over time, there have been some changes to the precise treatment of foreign earned income, these changes focused primarily on the manner in which that income would reduce the taxpayer’s overall liability, not the type of income or class of individuals permitted to claim the exclusion or deduction. Additionally, the regulations defining “foreign country,” although moved around to reflect changes in the IRC, remained largely unchanged substantially. Although the definition has become more detailed, the focus on sovereign territory has remained constant. Such consistency is highly indicative of reasonableness. See Cottage Sav., 499 U.S. at 561-62.

We must conclude, therefore, that the Commissioner’s definition of “foreign country” is reasonable, and, accordingly, we must defer to the Commissioner’s reading of the statute.

D.

We now turn to the ultimate question of whether the Commissioner is correct  [*17]  in determining that Antarctica is a “foreign country” under 26 C.F.R. § 1.911-2(h). Although we have deferred to the Commissioner’s interpretation of the term “foreign country” embodied in 26 C.F.R. § 1-911.2(h), we cannot give the same deference to the Commissioner’s conclusion in this regard because the conclusion that Antarctica is not a “foreign country” is not an “authoritative, prelitigation interpretation” of the rule. See Cottage Sav., 499 U.S. at 562-63. We now turn to an examination of that question.

1.

At the outset, we think that it is important to note that considering Antarctica not to be a “foreign country” is compatible with the general statutory scheme. Notably, section 911 is found under subtitle A, chapter 1, subchapter N of the IRC, which is designated “Tax Based on Income from Sources Within or Without the United States.” Part I of this subchapter, entitled “Source Rules and Other General Rules Relating to Foreign Income,” deems any activity in Antarctica to be “space or ocean activity.” In turn, the United States is designated the source country of income from such activity when earned  [*18]  by a citizen of the United States. 26 U.S.C. § 863(d). Although this provision does not provide a definitive answer as to whether Antarctica is a “foreign country,” it supports the conclusion that section 911 is not intended to apply to income earned for services provided in Antarctica.

We think it also important to note that the United States does not recognize any claims of sovereignty over Antarctica. See Smith, 507 U.S. at 198 n.1. Under the prior versions of the rules defining “foreign country” for purposes of foreign earned income, the Tax Court has held, and the IRS has ruled, that Antarctica is not a “foreign country.” See Martin v. Comm’r, 50 T.C. 59, 62 (1968); see also Rev. Rul. 67-52, 1967-1 C.B. 186. Mr. Arnett does not challenge the rulings under the prior versions of the rules defining “foreign country,” but instead contends that the current version of the rule defines “foreign country” differently than the rules in place at the time of Martin.

Prior to 1983, the rules defined “foreign country” to “mean[] territory under the sovereignty of a government other than that of the United States.  [*19]  ” 26 C.F.R. § 1.911-1(a)(9), (b)(7) (1957), 22 Fed. Reg. 6758, 6759 (Aug. 22, 1957). The rules now define “foreign country” to ” include [] any territory under the sovereignty of a government other than that of the United States.” 26 C.F.R. § 1.911-2(h) (emphasis added). Mr. Arnett submits that use of the term “includes” suggests that the rule now envisions a broader definition of “foreign country.”

We cannot accept this view. The text, structure and history of the current rule do not support Mr. Arnett’s interpretation. Although the current version of the rule differs from the prior versions in its use of “includes” rather than “means,” the sentence stating that the rule “includes any territory under the sovereignty of a government other than that of the United States” cannot be read in isolation. It would make little sense for a definition of “foreign country” that purports to reach all land outside of the United States, as Mr. Arnett suggests, to focus on the narrower category of land outside of the United States, composed only of territory within the sovereignty of a foreign nation.

When read in its entirety  [*20]  and in common sense fashion, the rule supports the position that sovereignty is an essential component of the definition a “foreign country” under 26 C.F.R. § 1.911-2(h). The definition itself goes on to elaborate those other areas included in the definition of a “foreign country,” all of which are tied to claims of sovereignty by a foreign nation. The rule uses the word “includes” not only to reference territory within the sovereignty of a foreign nation, but also in reference to “territorial waters. . ., air space over the foreign country, and the seabed and subsoil . . . adjacent to the territorial waters. .. over which the foreign country has exclusive rights, in accordance with international law.” 26 C.F.R. § 1.911-2(h). Each use of the word “includes” in the definition of “foreign country” is made in connection with some form of sovereign territorial rights.

Indeed, with respect to the word “includes,” the definition of “foreign country” largely mirrors the rule’s definition of “United States” in its usage of “includes.” See 26 C.F.R. § 1.911-2(g). The rule defines the “United States” as:  [*21] 
United States. The term “United States” when used in a geographical sense includes any territory under the sovereignty of the United States. It includes the states, the District of Columbia, the possessions and territories of the United States, the territorial waters of the United States, the air space over the United States, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.
26 C.F.R. § 1.911-2(g). This definition of “United States” is found in the same rule, in the subsection immediately preceding the definition of “foreign country.” Use of the same word in an interrelated regulation and in close proximity to one another “presents a classic case for application of the ‘normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning.’” Comm’r v. Lundy, 516 U.S. 235, 250, 116 S. Ct. 647, 133 L. Ed. 2d 611 (1996) (quoting Sullivan v. Stroop, 496 U.S. 478, 484, 110 S. Ct. 2499, 110 L. Ed. 2d 438 (1990))  [*22]  (some internal quotation marks omitted). If, as Mr. Arnett argues, the word “includes” renders the definition of “foreign country” so broad as to reach a limitless class of sovereign-less territory, a similar effect should be given to the use of “includes” in connection with the definition of “United States” to reach a similarly limitless class of sovereign-less territory.

Lastly, the Supreme Court’s decision in Smith neither requires nor counsels that Antarctica be considered a “foreign country.” The FTCA involves a number of significant considerations not present in the context of section 911. First, the FTCA directs district courts to apply the law of the place where the acts or omissions giving rise to the injury occurred in tort claims against the United States. 28 U.S.C. § 1346(b)(1). Antarctica lacks any civil tort law of its own. Smith, 507 U.S. at 198. As a matter of statutory interpretation, the Court found it unlikely that, given this concern, Congress would have waived the sovereign immunity of the United States under the FTCA with respect to claims arising in Antarctica. Id. at 204-05. The Court also noted  [*23]  that Congress acted against a background presumption against extraterritorial application of United States laws. Id. at 204.

These concerns do not counsel the same result in the context of section 911. Like a waiver of sovereign immunity, exclusions from gross income are narrowly construed. See Schleier, 515 U.S. at 328. In the case of a waiver of sovereign immunity, a narrow construction means avoiding a construction that would broaden the waiver beyond what Congress intended. See Smith, 507 U.S. at 203. In the case of exclusions from gross income, a narrow construction means avoiding a construction which would exclude more income than Congress intended. Thus, narrow constructions of the FTCA and section 911 necessarily lead to different conclusions as to whether Antarctica is a “foreign country.” A construction of section 911 that excludes Antarctica from the definition of “foreign country” does not exclude from, but includes within, gross income that income received for services provided in Antarctica. Moreover, unlike a broad construction of the FTCA, such a reading does not implicate the problem of extraterritorial application  [*24]  of United States law.

In sum, we believe that the Tax Court correctly determined that Antarctica is not a “foreign country” as that term is employed in the Commissioner’s regulations.

Conclusion

Accordingly, we conclude that Antarctica is not a “foreign country” for purposes of section 911. The decision of the Tax Court is affirmed.
AFFIRMED

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January 16th, 2007 | 1 Comment »

US v. Wardell, No. 03-CR-415-REB (10th Cir.).

States v. Pursley, 05-1428.

was a leader of the criminal activity, id. at § 3B1.1(c); and (3) a two-levelenhancement for obstruction of justice, id. at § 3C1.1. The adjustments yielded a

Federal Sentencing Guidelines.” Id. The court concluded that it was appropriate

based on the three sentencing enhancements. Since United States v. Booker, 543

advisory Guidelines for reasonableness. United States v. Kristl, 437 F.3d 1050,

that range.” Id. at 1055. In assessing the Guidelines’ application, we review the

execution or concealment of an offense.” Id. at § 2T1.4(b)(2) cmt. n.3. The

paid, United States v. Rice, 52. F.3d 843, 849 (10th Cir. 1995), or of notdisclosing income to one’s accountant, United States v. Stokes, 998 F.2d 279,

See, e.g., United States v. Guidry, 199 F.3d 1150, 1159 (10th Cir. 1999)

valuable clothes and jewelry in multiple storage units); United States v. Ambort,

Ambort, 405 F.3d at 1120 (quoting USSG § 2T1.1(b)(2) (1991)), fitting well

forms in his own name. He indicated that he signed his tax forms before Wardell

enhancement. See, e.g., United States v. Valdez-Arieta, 127 F.3d 1267, 1272

§ 3B1.1(c) enhancement); United States v. Billingsley, 115 F.3d 458, 465 (7th Cir.

defendant as an organizer under § 3B1.1(c)); United States v. Giraldo, 111 F.3d

enhancement. Valdez-Arieta, 127 F.3d at 1272 (“[A] defendant may be punished

with the definite and firm conviction that a mistake has been made.” UnitedStates v. Mandilakis, 23 F.3d 278, 280 (10th Cir. 1994) (stating the criterion to

This final enhancement stems from Wardell’s pro se motion in limine to

findings as the court’s own. See United States v. Laury, 985 F.2d 1293, 1308

U.S.S.G. §3C1.1, including committing perjury, id. §3C1.1, App.

proceeding, id. §3C1.1, App. N. 4[(c)], and providing materially falseinformation to a judge, id. §3C1.1, App. N. 4(f).

justice.” United States v. Bedford, 446 F.3d 1320, 1325 (10th Cir. 2006) (internal

materiality under USSG. § 3C1.1 is conspicuously low,” Bedford, 446 F.3d at

article. But cf. United States v. Hernandez-Ramirez, 254 F.3d 841, 843–44 (9th

materially mislead federal authorities. While we can only speculate as to the

document to a judge under

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January 11th, 2007 | 1 Comment »

US v. Battle, No. 06-20466 (5th Cir. 2007).

January 10, 2007

Charles R. Fulbruge III

Clerk

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

No. 06-20466

Summary Calendar

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

versus

ROBERT M. BATTLE,

Defendant-Appellant.

Appeal from the United States District Court

for the Southern District of Texas

(4:05-MC-00520)

Before DAVIS, BARKSDALE, and BENAVIDES, Circuit Judges.

PER CURIAM: ^*

 For this pro se appeal from the district court’s enforcement of two Internal Revenue Service summonses, Dr. Robert M. Battle asserts they were invalid and unenforceable. He also contends the district court exceeded its authority by holding him in civil contempt for not complying with the enforcement order.

  Dr. Battle, a licensed physician, practices in Houston, Texas. In July 2005, the IRS served him summonses alleging: (1) for the taxable years 1994 through 1998, Dr. Battle filed invalid returns, as a result of which the IRS determined and assessed liabilities exceeding $600,000; and (2) for the taxable years 1999 through 2004, Dr. Battle failed to file any returns. Dr. Battle appeared in response to these summonses but failed to produce the required information.

  The IRS petitioned the district court for enforcement of the summonses. A hearing was scheduled for 6 January 2006. Prior to the hearing, Dr. Battle filed a number of challenges to the validity of the summonses. At the hearing, Dr. Battle: (1) disputed the IRS’ calculation of the assessed amounts for 1994 through 1998 and claimed he was in the process of preparing returns in support of that dispute; and (2) stated he was in the process of preparing returns for the years 1999 through 2004.

  The district court ordered Dr. Battle to return on 20 January 2006 with an accountant or attorney to articulate his challenges to the summonses and provide the requested information. The court suggested that, as a good-faith measure, Dr. Battle pay 70% of the liabilities assessed against him.   (Dr. Battle challenged the voluntary payment aspect of the order with a petition for writ of mandamus, asking our court to prohibit the district court from enforcing the order; the order was improperly filed and was not received by our court.)

  On 20 January 2006, Dr. Battle appeared in district court with an accountant, but without any documentation related to the 1994- 1998 assessment. The district court entered an enforcement order and required Dr. Battle to appear later that day with the required documentation.

  Upon returning that afternoon, Dr. Battle answered some questions regarding his tax status but still refused to produce any evidence responsive to the summonses. Instead, he asserted his rights under the Fifth Amendment, claiming he should not be forced to produce incriminating documents.   The district court, in ruling the document production would not be incriminating, determined that Dr. Battle did not have a valid Fifth Amendment claim. The court held Dr. Battle in contempt of the enforcement order and ordered him in custody, until he produced documents responsive to the summons. On 23 January, Dr. Battle’s associate produced the necessary documentation. As a result, the civil contempt order was vacated, and Dr. Battle was released.

  The first issue to address is whether Dr. Battle’s notice of appeal sufficiently shows he is appealing from the contempt and the enforcement orders. The somewhat erroneous notice of appeal indicates he is appealing both. Smith v. Barry , 502 U.S. 244, 248 (“While the requirements of Rule 3(c) are jurisdictional … court’s construe a notice of appeal liberally to avoid technical barriers to review); see Fed. R. App. P. 3(c)(4). Additionally, any technical error in the notice of appeal does not bar review of the claim because the Government has not shown it was “prejudiced or misled by the mistake”. Morin v. Moore , 309 F.3d 316, 321 (5th Cir. 2002) (internal citations omitted).

  Section 7602 of the Internal Revenue Code authorizes the IRS to summon an individual or third party to testify and produce documents relevant to an inquiry regarding tax liability. 26 U.S.C. § 7602. Should the taxpayer or third party refuse to produce the required information, the IRS may petition the district court to compel compliance with the summons. 26 U.S.C. § 7402(a) & (b). In order to obtain enforcement of an administrative summons, the IRS must satisfy the requirements in United States v. Powell , 379 U.S. 48, 57-58 (1964): (1) the investigation is being conducted for a legitimate purpose; (2) the inquiry is relevant to that purpose; (3) the requested information is not within the IRS’ possession; and (4) the administrative steps required by the Internal Revenue Code have been followed. Based on our review of the record, the IRS has done so. Accordingly, the burden shifts to Dr. Battle: (1) to show the Government has failed to meet its burden under Powell ;   (2) to assert and prove that enforcement would constitute an abuse of the court’s process; or (3) to show any other appropriate ground under which the summons should not be enforced. See United States v. Huckaby , 776 F.2d 564, 567 (5th Cir.) (internal citations and quotations omitted), cert. denied , 475 U.S. 1085 (1986).

  Dr. Battle makes a number of challenges to the enforcement order. First, Dr. Battle asserts the issuance of the summonses were not for a legitimate purpose because they were issued solely for the purpose of gathering evidence for a criminal prosecution. “The burden of proving that the IRS, as an institution, has abandoned any pursuit of [a] taxpayer’s civil tax liability, is a heavy one, requiring the taxpayer to prove an extraordinary departure from IRS’ established procedure.” Miami Springs , 655 F.2d at 665. (internal citations and quotations omitted). Dr. Battle offers no evidence in support of his claim; instead, he was told repeatedly throughout the proceedings that he was not the target of any criminal investigation. His bald assertions, without more, are not sufficient.

  Second, Dr. Battle challenges the validity of the assessments the Government is attempting to collect. Specifically he claims the summonses are void because the Government: (1) has not produced evidence of any income tax due; (2) has failed to produce evidence of an existing tax liability; and (3) did not adequately notify him of the assessments for years 1994 through 1998. A summons-enforcement action is not the appropriate forum for challenging the validity of an assessment. See United States v. Harper , 662 F.2d 335, 336 (5th Cir. 1981). Instead, in an enforcement proceeding, the Government need only show that the Powell factors have been met. Id. As noted, the Government has satisfied that burden. Therefore, Dr. Battle’s challenges to the assessments underlying the summonses fail.

  Third, Dr. Battle claims that he was not afforded an administrative hearing before the summonses were issued, rendering them premature. Though appropriate in some circumstances, a taxpayers right to such a hearing is not absolute.   See United States v. Harris , 628 F.2d 875, 879 (5th Cir. 1980). To obtain the hearing, a taxpayer must show “in a substantial way the existence of substantial deficiencies in the summons proceedings.” Id . (internal citations omitted). Dr. Battle failed to do so.

  Fourth, Dr. Battle asserts that the IRS did not follow proper internal procedures. Specifically, he complains the IRS: (1) did not to comply with the Privacy Act of 1974; (2) engaged in taxpayer harassment, in contravention of 26 U.S.C. § 6304, the fair tax collection practices section of the Internal Revenue Code; and (3) failed to respond to his numerous correspondences. None of Dr. Battle’s claims bar the enforcement action. Contrary to his assertions, compliance with the Privacy Act is not a prerequisite to issuance of an IRS summons. See United States v. McAnlis , 721 F.2d 334, 336 (11th Cir.), cert. denied , 467 U.S. 1227 (1984). In addition, a review of the record shows the Government did not engage in any harassment or abusive behavior. Finally, Dr. Battle does not provide any details about correspondences to which the Government allegedly failed to respond, nor does he provide any legal basis why such actions should bar his enforcement action. See generally , Powell , 379 U.S. at 55-57 (detailing the requirements for an enforcement action).

  Next, Dr. Battle asserts the Government failed to allow a collection due-process hearing regarding the assessed liabilities, as required by 26 U.S.C. §§ 6330(b) and 6320(b). As the Government notes, however, Dr. Battle told the district court a due-process hearing was already set for February 2006. The fact that the hearing had yet to have taken place at the time the district court ordered the enforcement action does not bar the order.

  Finally, Dr. Battle asserts the order holding him in civil contempt and serving a subpoena duces tecum on Jane Clifford was in violation of his Fifth Amendment rights protecting against the compelled production of records. Dr. Battle failed to brief this

claim, and therefore, has effectively abandoned it. See   Yohey v. Collins , 985 F.2d 222, 224-25 (5th Cir. 1993) .

AFFIRMED    

  ^* Pursuant to 5th Cir. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5th Cir. R. 47.5.4.

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January 10th, 2007 | 1 Comment »

Mathia v. Commissioner, T.C. Memo. 2007-4 (2007).

T.C. Memo. 2007-4

UNITED STATES TAX COURT

JEAN MATHIA AND ESTATE OF DOYLE V. MATHIA, DECEASED, JEAN MATHIA, PERSONAL REPRESENTATIVE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16483-05L. Filed January 8, 2007.

Mark W. Curnutte, for petitioners.

Ann L. Darnold, for respondent.

MEMORANDUM OPINION

MARVEL, Judge: This matter is before the Court on respondent’s Motion for Relief From Stipulations pursuant to Rule 91(e)1.

1All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

- 2

Background

Petitioner Jean Mathia resided in Grove, Oklahoma, when she petitioned this Court on her own behalf and as personal representative of the Estate of Doyle V. Mathia, her deceased husband. Doyle V. Mathia (Mr. Mathia) and petitioner were married and filed joint income tax returns for all relevant tax years. Mr. Mathia died on February 19, 2000.

Mr. Mathia was a limited partner in Greenwich Associates (Greenwich), a New York limited partnership subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648, for the relevant tax years. He owned an 8.484-percent limited partnership interest in Greenwich at all relevant times. Kevin Smith was the general partner and tax matters partner (the TMP) of Greenwich.2

On August 3, 1990, the Commissioner issued Greenwich a Notice of Final Partnership Administrative Adjustment for 1982 through 1984. The TMP timely filed a petition for review in this Court pursuant to section 6226 (the Greenwich litigation).3 On

2Sec. 6224(c)(3) authorizes the tax matters partner of a partnership, as defined by the Code, to enter into a settlement agreement that is binding on all partners who are not notice partners or members of a notice group, i.e., those partners not entitled to notice of administrative proceedings with respect to the partnership.

3Docket No. 24102-90.

August 31, 2001, the parties submitted a decision document, which we filed as a Stipulation of Settlement Between the TMP and Respondent (the Greenwich settlement). On January 17, 2002, we entered an order and decision resolving the Greenwich litigation.

On January 27, 2003, respondent assessed against petitioners income tax deficiencies and interest attributable to the Greenwich settlement. On October 27, 2003, petitioners paid all of the tax, but not the interest, attributable to the Greenwich settlement. On February 6, 2004, petitioners mailed to respondent Forms 843, Claim for Refund and Request for Abatement (interest abatement claims), with respect to the accrued interest attributable to the Greenwich settlement.

On February 10, 2004, respondent issued to petitioners a Final Notice–Notice of Intent to Levy and Notice of Your Right to a Hearing for 1982 through 1984, and petitioners timely requested a section 6330 hearing. On April 2, 2004, respondent issued to petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320, for 1983 and 1984, and petitioners timely requested a section 6320 hearing. On April 7, 2004, respondent denied petitioners’ interest abatement claims. On May 5, 2004, petitioners submitted a request to respondent’s Appeals Office to review the denial of their interest abatement claims.

On August 5, 2005, respondent issued to petitioners a notice of determination with respect to the Notice of Intent to Levy and a second notice of determination with respect to the Notice of Federal Tax Lien Filing. On August 18, 2005, respondent issued a notice of final determination denying petitioner’s interest abatement claims. Petitioners timely filed a petition contesting each of respondent’s determinations. Petitioners contend that the period of limitations on assessment had expired before respondent had assessed petitioners’ 1982-84 tax liabilities. Petitioners further contend that respondent improperly denied their interest abatement claims.

This case was scheduled for trial during the trial session of the Court beginning March 6, 2006, at Oklahoma City, Oklahoma. On March 6, 2006, the parties filed a Stipulation of Facts (Stipulation) and a Joint Motion for Leave to Submit Case Under Rule 122, which motion we granted that same day. The Stipulation, which was signed by both parties, contains 21 pages and states that “the parties agree to this Stipulation of Facts” and “All stipulated facts shall be conclusive.” We established a posttrial briefing schedule that required the parties to submit their opening briefs on or before May 5, 2006.

On April 27, 2006, approximately 1 week before opening briefs were due, we had a conference call with the parties at the request of respondent’s counsel. During that conference call, respondent’s counsel stated that she wanted to move for relief from two of the previously agreed stipulations because she believed that the stipulations were in error. After ascertaining from petitioners’ counsel that he objected to respondent’s request for relief, we suspended the briefing schedule to permit respondent to file a motion for relief from the stipulations by order dated April 27, 2006.

On May 5, 2006, respondent filed a Motion for Relief from Stipulations (motion), requesting relief from paragraphs 22 and 34 of the Stipulation (the disputed stipulations) pursuant to Rule 91(e) but did not file a motion to vacate the March 6, 2006, order granting the parties’ Joint Motion for Leave To Submit Case Under Rule 122 (March 6, 2006, order).4 Paragraph 22 of the Stipulation states that Mr. Mathia was not a notice partner or a member of a notice group of Greenwich. Paragraph 34 of the Stipulation provides that Mr. Smith, as the TMP, had the authority to bind all of Greenwich’s partners to the stipulation of settlement. Respondent now contends that Mr. Mathia was a notice partner and, therefore, was not automatically bound by the stipulation of settlement under section 6224(c)(3). Respondent

4Rule 91(e) provides that a stipulation shall be treated as a conclusive admission by the parties, “unless otherwise permitted by the Court or agreed upon by those parties.” Rule 91(e) also provides that “The Court will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part, except that it may do so where justice requires.”

moves for relief from the disputed stipulations because they “include legal conclusions which are erroneous” and “so that the record is consistent and accurate”. On June 5, 2006, petitioners filed a response opposing the motion. Neither party requested a hearing on respondent’s motion, and we are satisfied that a hearing is not necessary to rule on the motion.

Discussion

The stipulation process is considered “the bedrock of Tax Court practice” and acts “as an aid to the more expeditious trial of cases”. Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974). Stipulations eliminate burdensome and unnecessary discovery and result in “an orderly trial with a full and fair exposition of the facts.” Teller v. Commissioner, T.C. Memo. 1992-402. Stipulations narrow controversies to their essential issues of dispute, Estate of Quirk v. Commissioner, 928 F.2d 751, 759 (6th Cir. 1991), affg. in part and remanding in part T.C. Memo. 1988-286, and materially assist a court in managing its caseload, see Stamos v. Commissioner, 87 T.C. 1451, 1456 (1986).

Generally, a stipulation of fact is binding on the parties, and the Court is bound to enforce it. Rule 91; Stamos v. Commissioner, supra at 1454. Rule 91(e) provides an exception by permitting relief from the binding effect of a stipulation where justice so requires. Courts generally enforce stipulations unless “manifest injustice” would result. Bokum v. Commissioner, 992 F.2d 1132, 1135-1136 (11th Cir. 1993), affg. 94 T.C. 126 (1990); Bail Bonds by Marvin Nelson, Inc. v. Commissioner, 820 F.2d 1543, 1547 (9th Cir. 1987), affg. T.C. Memo. 1986-23; Clendenen v. Commissioner, T.C. Memo. 2003-32, affd. 345 F.3d 568 (8th Cir. 2003).

Given the importance of the stipulation process to this Court, our reluctance to relieve a party of a stipulation it negotiated and executed is understandable. Permitting challenges to otherwise binding stipulations of fact undermines the stipulation process and injects uncertainty into our litigation process, often after the record is closed. See, e.g., La. Land & Exploration Co. v. Commissioner, 90 T.C. 630, 649 (1988); Logsdon

v. Commissioner, T.C. Memo. 1997-8 (relief from stipulation denied where the taxpayer sought to introduce evidence not in the record to support his motion and the Commissioner would be prejudiced by the lack of opportunity to develop the stipulated position at trial); Grasso v. Commissioner, T.C. Memo. 1994-479 (relief from stipulation denied when taxpayer contended for the first time in his posttrial brief that he mistakenly agreed to the stipulation). Although we have discretion to modify or set aside a stipulation of fact that is clearly contrary to the facts established by the record, Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989), we do not set aside a stipulation of fact that is consistent with the record simply because one party claims the stipulation is erroneous, see Rule 91(e); Logsdon v. Commissioner, supra.

Respondent argues that the disputed stipulations contain erroneous legal conclusions and requests that we remove them. Although we are not bound by stipulations of law, see Bokum v. Commissioner, 94 T.C. at 143, respondent’s argument fails to acknowledge that stipulations of law may bind the parties to the stipulation as a matter of contract law, see Stamos v. Commissioner, supra at 1455. In Estate of Quirk v. Commissioner, supra at 759, the Court of Appeals for the Sixth Circuit explained that the stipulation process allows the parties to concede both factual and legal issues that they might otherwise have litigated, noting that “In fact, narrowing disputes to the essential disputed issues is the primary function of stipulations.” A court is not required to relieve a party from erroneous stipulations of law, particularly when the stipulation is part of a negotiated settlement. See, e.g., Stanley v. Commissioner, T.C. Memo. 1991-20.

We also disagree with respondent’s characterization of the disputed stipulations as containing stipulations of law. At most, the stipulations in question contain mixed statements of fact and law. As petitioners point out in their response opposing respondent’s motion,

even if the Court determines that stipulations 22 and

34 do “include legal conclusions” as asserted by

- 9 Respondent, this should not be a basis for relief for Respondent, because at most, stipulation[s] 22 and 34 are applications of law to fact, which is expressly

permitted under Tax Court Rule 91(a). The truth of petitioners’ statement can be seen by examining the disputed stipulations.

Stipulation 22 provides that “Neither the Petitioner nor Doyle V. Mathia, deceased, was a notice partner in Greenwich or a member of a notice group as described in I.R.C. §6223(b)(2).” Stipulation 34 provides that “At all times relevant to the pending matter, Smith possessed the authority to bind both Greenwich and all of its partners, including Doyle V. Mathia, deceased, to a settlement agreement with the Respondent.” Implicit in each of the stipulations is a set of facts and the application of law to those facts. Stipulation 22 refers to “notice partner” and “notice group”, two terms that are defined by sections 6231(a)(8) and 6223(b)(2), respectively. Section 6231(a)(8) defines a notice partner as “a partner who, at the time in question, would be entitled to notice under subsection

(a) of section 6223 (determined without regard to subsections(b)(2) and (e)(1)(B) thereof).” Section 6223 provides the rules governing when and how notices of the beginning and completion of administrative partnership-level proceedings must be given by the Secretary to the partners. Section 6223(b) provides a special notice rule for partnerships with more than 100 partners. Section 6223(b)(2) requires the Secretary to give the notice required by section 6223(a) to a notice group defined as “a group of partners in the aggregate having a 5 percent or more interest in the profits of a partnership” if the notice group has requested such notice and designated one of its members to receive the notice. In order to find that Mr. Mathia and/or petitioner were members of a notice group, the record would have to contain evidence that Greenwich was a partnership with more than 100 partners, that a notice group was properly formed and that petitioner and Mr. Mathia were members of it, and that a member of the notice group was properly and timely designated in accordance with section 6223(b)(2) and applicable regulations. In order to enable us to find that petitioner and/or Mr. Mathia were notice partners, the record would have to establish they were entitled to notice under section 6223(a) without regard to the provisions of section 6223(b)(2) (dealing with notice to a notice group involving a partnership of more than 100 partners) and section 6223(e)(1)(B) (dealing with the effect of the Secretary’s failure to give notice involving a partnership of more than 100 partners). Petitioner and/or Mr. Mathia would be entitled to notice only if their names and addresses, as well as information sufficient to enable the Secretary to determine that they were entitled to receive notice under section 6223(a), had been furnished timely to the Secretary.

The above discussion illustrates the heart of the problem presented by respondent’s motion. At the present time, this case is fully stipulated under Rule 122. If respondent’s motion were granted, this Court’s March 6, 2006, order directing that this case proceed as a fully stipulated case would have to be vacated, a period for discovery related to the disputed stipulations would have to be set, and a trial, in all likelihood, would have to be held to develop the facts regarding whether the TMP had the authority, on the date he executed the stipulation of settlement, to bind all of Greenwich’s partners to the Greenwich settlement. Respondent has not requested that the Court’s March 6, 2006, order be vacated. However, petitioners dispute respondent’s factual allegations in support of his motion, and, as a matter of fundamental fairness, petitioners would be entitled to a trial.

By submitting this case fully stipulated pursuant to Rule 122, the parties waived their respective rights to introduce evidence at trial. Granting respondent relief from the disputed stipulations would undoubtedly prejudice petitioners, because petitioners can no longer introduce evidence supporting those stipulations absent an order vacating our March 6, 2006, order and setting this case for trial. See Korangy v. Commissioner,

T.C. Memo. 1989-2, affd. 893 F.2d 69 (4th Cir. 1990).

If we grant respondent’s motion, we would be compelled to set this case for trial, and the parties would have to expend considerable time and effort developing and presenting evidence on the issue of whether Mr. Mathia was bound by the TMP’s execution of the Greenwich settlement. Resetting this case for trial would prejudice petitioners, see Stamm Intl. Corp. v. Commissioner, 90 T.C. 315, 321 (1988), who would be forced to prepare for trial and litigate factual issues resolved in the Stipulation, see Korangy v. Commissioner, supra. Such a substantial change in the procedural setting of this case would burden this Court’s resources and those of the parties. See id. “‘These unnecessary burdens on the system are unreasonable and unfair from the standpoint of everyone involved.’” Id. (quoting Brooks v. Commissioner, 82 T.C. 413, 430 (1984), affd. without published opinion 772 F.2d 910 (9th Cir. 1985)).

It is reasonable to assume that respondent had or could have had access to his administrative file before he entered into the disputed stipulations and that respondent had or should have had all of the necessary facts to determine whether petitioners were bound by the Greenwich settlement between the TMP and the Commissioner in the Greenwich litigation before he entered into the disputed stipulations. See Tate & Lyle, Inc. & Subs. v. Commissioner, T.C. Memo. 1996-80, revd. on other grounds 87 F.3d 99 (3d Cir. 1996). Respondent has not alleged any exceptional circumstances in this case justifying respondent’s sudden change in position and explaining why respondent did not conduct a proper investigation before he executed the Stipulation. Under the circumstances of this case, we believe that justice is best served by holding the parties to the terms of the Stipulation. See id.

Respondent also moves for relief from the referenced stipulations “so that the record is consistent and accurate”. However, we do not agree that our denial of relief would lead to an inconsistent or inaccurate result. The only evidence offered by respondent to demonstrate that the disputed stipulations are wrong consists of an undated copy of Form 886-Z, Partners’ or S Corporation Shareholders’ Shares of Income, bearing the name “Greenwich Associates” and references to taxable years 8212, 8312, and 8412 (48 pages), and a letter dated August 3, 1990, which appears to be a transmittal letter but which does not refer to Form 886-Z. The documents are not authenticated, are not stipulated to by the petitioners, and are not sufficient to establish that the disputed stipulations are erroneous. Moreover, respondent does not allege that the documents are newly discovered or that the documents were not available to him before the Stipulation was executed and the motion to submit the case under Rule 122 was filed.

Because the parties agreed in their joint motion, which we granted, to submit the case under Rule 122, the record in this case is limited to the pleadings and the Stipulation. At this

- 14 late date, we shall not consider documents outside those submitted with the pleadings or Stipulation. The disputed stipulations are consistent with each other and with the rest of the evidentiary record. The parties entered into the disputed stipulations on their own accord; there is no evidence of any fraud or duress.

Respondent claims that he mistakenly agreed to the disputed stipulations. If respondent erred, however, his mistake was unilateral. Responsibility rested with respondent’s counsel to understand the significance of the disputed stipulations and to examine his case thoroughly before agreeing to the disputed stipulations. See Korangy v. Commissioner, supra. We perceive no injustice in holding the parties to the terms of the Stipulation.

For the reasons described, we shall deny respondent’s Motion for Relief from Stipulations.

An appropriate order will be issued.

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January 8th, 2007 | 1 Comment »

Lam v. Commissioner, T.C. Memo. 2006-265 (2006).

T.C. Memo. 2006-265

UNITED STATES TAX COURT

KAI-CHUNG C. AND MEEKHING T. LAM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14711-03. Filed December 14, 2006.

Forest J. Dorkowski, for petitioners.

Caroline R. Krivacka, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KROUPA, Judge: Respondent determined deficiencies in and penalties with respect to petitioners’ Federal income tax for 1994, 1995, and 1996 (the years at issue). For 1994, respondent determined a $15,300 deficiency and a $3,060 accuracy-related penalty under section 6662(a).1 For 1995, respondent determined a $25,759 deficiency and a $5,152 accuracy-related penalty. For 1996, respondent determined a $24,587 deficiency and a $4,917 accuracy-related penalty.

After concessions,2 there are three issues for decision. The first issue is whether petitioners substantiated various business expenses they claimed in each of the years at issue. We hold that petitioners did not substantiate any of these expenses. The second issue is whether petitioners failed to report $3,424 of rental income in 1996. We hold that they did. The third issue is whether petitioners are liable for the accuracy-related penalty for each of the years at issue. We hold that they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits, the supplemental stipulation of facts, and the second supplemental stipulation of facts are incorporated by this reference.

1All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. Amounts have been rounded to the nearest dollar.

2Petitioners conceded the increases in rental income respondent determined for 1994 and 1995 and certain business expenses respondent disallowed for each of the years at issue. Respondent conceded certain disallowed business expenses that petitioners claimed for each of the years at issue.

Petitioners resided in Cordova, Tennessee, at the time they filed the petition.

Mr. Lam (petitioner) was self-employed during the years at issue.3 Petitioner owned and operated two businesses during the years at issue; an investment and insurance business, and a real estate business. All the business income and expenses in dispute relate to the operation of these two businesses.

Petitioner’s “major business” is the investment and insurance business, in which petitioner, a certified financial planner, provided clients investment services and sold insurance products. Petitioner also is a licensed realtor and operated his real estate business, Cordova Realty, as a “sideline.” Cordova Realty’s business included renting, managing, and selling properties.

I. Income Tax Returns for the Years at Issue

Petitioners filed joint income tax returns that petitioner prepared, including detailed depreciation schedules. Petitioners reported the income and expenses from petitioner’s two businesses on Schedule C, Profit or Loss From Business.

A. Schedule C Deductions

Petitioners claimed deductions for, among other things, repair and maintenance, supplies, bad debt, office, insurance,

3Mrs. Lam is a party to this case because she filed joint returns with petitioner.

interest, taxes and licenses, depreciation, advertising, legal and professional, car and truck, travel, and meals and entertainment expenses.

Petitioner presented documents and offered testimony regarding the repair and maintenance expenses claimed as deductions. Petitioner did not introduce a single receipt, though, that showed he paid a repair or maintenance expense for either of his businesses.

Petitioner suggested that some of the individuals and businesses with whom he dealt did not differentiate between receipts and invoices. Petitioner suggested that we therefore treat the invoices he submitted as receipts.

Petitioner testified that he used service providers who did not know how to read or write, so petitioner would occasionally himself prepare the invoice for the work done. Petitioner also presented invoices from a numbered “receipt book” he kept for use by service providers who did not produce their own documentation.

Petitioner submitted a few documents that appear to have been drafted by third parties, but the amounts listed were crossed out, and petitioner wrote in different amounts. Petitioner explained that he made these alterations after negotiating a better price for the services, but he did not explain why he, and not the third party, made the alteration.

Petitioners introduced many undated documents. Petitioner testified that he incurred some expenses in 1994 because he had placed the documents for those expenses in the box meant to contain only documentation of expenses incurred in 1994. Other expenses, however, were supposedly incurred in 1995 because petitioner had placed the documents for those expenses in the box meant to contain only documentation of expenses incurred in 1995.

The invoices for repair and maintenance expenses that were on another company’s letterhead and were dated did not show whether petitioner actually paid them. For example, petitioner submitted a $252 invoice for painting and a $145 invoice for lawn care, but he introduced no corresponding documentary proof that he paid for the services. Petitioner’s testimony was the only evidence petitioner submitted indicating that he paid the repair and maintenance expenses.

Petitioner also submitted more than 20 different invoices from a hardware store to support his deduction for supplies. Petitioner did not, however, submit corresponding receipts, canceled checks, or credit card statements that would have shown he paid the amounts indicated on these invoices.

Regarding bad debt expenses, petitioner testified that he occasionally made small loans in his real estate business to potential home buyers. He further testified that when a purchaser needed larger sums of money, $10,000 or greater, he would have the purchaser sign a note and “put me on the lien on the house.” Petitioner did not, however, introduce any of these alleged notes or any other documentation regarding these “loans.”

Regarding office expenses, petitioner explained he operated both of his businesses from one office and testified that the two businesses shared expenses, such as phone lines, secretaries, and other office workers. Petitioner did not introduce any documentation, however, to show the amount of any of these office expenses.

In addition, petitioner testified that he was licensed with “realty commissions,” the “Insurance Department,” and the National Association of Securities Dealers. Yet petitioner did not introduce photocopies of any of these licenses, nor did petitioner have any invoices or documented proof of payment for the alleged annual licensing fees. Petitioner also testified that he was annually assessed personal property tax on the assets in his businesses, yet he did not introduce any documentation regarding these expenses.

Regarding advertising expenses, petitioner testified that he spent money on “leads”–mass mailings undertaken by advertising companies, as part of his insurance and investment business, but he did not testify or submit documentation regarding the advertising expenses he incurred in his real estate business.

For other categories of expenses, including insurance, interest, depreciation, legal and professional, car and truck, travel, and meals and entertainment expenses, petitioner offered no testimony and submitted no documentation.

B. 1996 Rental Income

Petitioner did not present any documentation or offer any testimony regarding the $3,424 of additional rental income respondent determined petitioner earned in 1996.

II. Audit and Deficiency Notice

Respondent began examining petitioners’ returns for the years at issue in October 1997. Respondent repeatedly asked petitioners to submit documentation to support each of the items they claimed on the returns. Petitioners failed to submit documentation that would substantiate many of their expenses.

Respondent issued a deficiency notice in which he made adjustments to the Schedule C expenses petitioners claimed, increased petitioners’ income by the amounts of rental payments they failed to include, and determined that petitioners are liable for the accuracy-related penalty. Respondent disallowed the Schedule C expenses on the grounds that they were not ordinary and necessary business expenses, lacked sufficient substantiation, or were personal in nature.

Petitioners timely filed a petition.

-8

OPINION

This is a substantiation case in which we are asked to decide whether petitioners substantiated nearly a quarter of a million dollars of business expenses that remain in dispute. The business expenses that remain in dispute include $53,371 repair and maintenance, $52,366 supplies, $48,486 bad debt, $19,579 office, $4,463 insurance, $650 interest, $12,583 taxes and licenses, $7,552 depreciation, $693 advertising, $1,601 legal and professional, $18,272 car and truck, $15,979 travel, and $5,390 meals and entertainment. We also must decide whether petitioners failed to include $3,424 rental payments in income in 1996 and are liable for the accuracy-related penalty. We first address the general deductibility rules of business expenses under section 162, then examine the additional strict substantiation requirements of section 274(d).

I. Business Expenses Under the General Rule

We begin with two fundamental principles of tax litigation. First, as a general rule, the Commissioner’s determinations are presumed correct, and the taxpayer bears the burden of proving that these determinations are erroneous.4 Rule 142(a); see

4This principle is not affected by sec. 7491(a), because respondent initiated the examination of petitioners’ returns for the years at issue in October 1997, which is before the July 22, 1998, effective date of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Second, deductions are a matter of legislative grace, and the taxpayer must show that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

A taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions. Sec. 6001; Hradesky v. Commissioner, supra. A taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. The Court need not accept a taxpayer’s self-serving testimony when the taxpayer fails to present corroborative evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)), affd. without published opinion 956 F.2d 1166 (9th Cir. 1992).

If a taxpayer establishes that he or she paid or incurred a deductible business expense but does not establish the amount of the deduction, this Court may approximate the amount of the allowable deduction, bearing heavily against the taxpayer whose inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). For the Cohan rule to apply, however, a basis must exist on which this Court can make an approximation. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). Against this background, we consider the categories of expense for which there remain amounts in dispute.

First, petitioners contest respondent’s disallowance of repair and maintenance expenses. At trial, petitioner presented documents regarding these expenses, all of which we find insufficient. Almost all the documents submitted were invoices rather than receipts. While petitioner would have us believe that receipts and invoices are one and the same thing, we disagree. An invoice is a “written account of goods or services to be provided,” while a receipt is a “writing acknowledging the receiving of *** money.” Webster’s New International Dictionary 1190, 1894 (3d ed. 1993).

In addition to petitioner’s erroneous usage of invoices as receipts, we find petitioner’s documents lacking in other respects. Many of the documents are undated. Petitioner assured the Court that each of these expenses was properly claimed in the year it was allegedly incurred because he found the documentation in a box with other dated documents. Yet petitioner offered no testimony or evidence showing this record-keeping “system” was free from error or manipulation. Petitioner introduced some dated documentation but failed to provide proof of payment. For expenses attributed to a document that lacks a date or is otherwise inadequate proof of payment, the only available evidence that the expense was incurred in the year it was claimed or was actually paid is petitioner’s own self-serving testimony, which we are not required to accept, and which we do not, in fact, find to be credible. See Niedringhaus v. Commissioner, 99

T.C. 202, 219 (1992).

Petitioner introduced some documents that indicate date and payment; yet we find the documents or petitioner’s explanations not credible. For example, petitioner submitted documents he himself wrote because he claimed he used service providers that could not read or write but did not offer testimony from any of these alleged service providers. We also do not find petitioner’s explanations for the invoices from his invoice book and those with alterations to be credible. None of these invoices was accompanied by third-party testimony.

Second, petitioners contest respondent’s disallowance of supplies expenses. We note that petitioner submitted many invoices to support his deductions for supplies. Petitioner failed, however, to submit corresponding receipts, canceled checks, or credit card statements that would have shown he paid the amounts indicated on these invoices. The only available

-12evidence to that effect is petitioner’s own self-serving testimony, which we do not find to be credible. Id.

Finally, with respect to the office, bad debt, advertising, and taxes and licenses expenses, petitioner vaguely described what he incurred. Petitioner did not, however, introduce any documentation to show the amount of any of these expenses. For the insurance, interest, depreciation, and legal and professional expenses, petitioners offered nothing.

We conclude that petitioners failed to substantiate any repair and maintenance, supplies, bad debt, office, insurance, interest, depreciation, advertising, taxes and licenses, and legal and professional expenses, and thus they are not entitled to any deduction beyond what respondent previously allowed. No additional amount may be estimated under the Cohan rule because there is no basis to do so. See Vanicek v. Commissioner, supra at 742-743.

II. Section 274(d) Expenses

We turn next to the business expenses that are subject to the strict substantiation requirements of section 274(d). In addition to the general substantiation requirements, taxpayers must substantiate certain business expenses, such as car and truck, travel, and meals and entertainment expenses, by adequate records or by sufficient evidence corroborating the taxpayer’s own statement. Sec. 274. The substantiation must show the amount of such expense or other item, the time and place of the expense, the business purpose of the expense, and the business relationship to the taxpayer of the person entertained. See sec. 274(d); sec. 1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). We may not estimate expenses subject to the strict substantiation requirements. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).

Petitioner contests respondent’s disallowance of car and truck, travel, and meals and entertainment expenses. Petitioners offered no testimony as to what car and truck, travel, and meals and entertainment expenses were incurred and introduced no documentation. We conclude that petitioners have failed to substantiate any of the expenses subject to the strict substantiation requirements of section 274(d) and therefore are not entitled to any deduction beyond what respondent previously allowed.

III. Unreported Rental Income

We now address whether petitioners failed to report $3,424 of rental income in 1996 as respondent determined. Petitioners did not introduce any evidence at trial regarding respondent’s determination of the unreported rental income and did not address this determination in their brief. We conclude that petitioners have conceded this issue by not pursuing it on brief. See Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

IV. Accuracy-Related Penalty

We next consider whether petitioners are liable for the accuracy-related penalty under section 6662(a) due to negligence for each of the years at issue, as respondent determined. Petitioners bear the burden of production as well as the burden of proof with respect to the accuracy-related penalty because the examination commenced before section 7491(c) became effective. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

A taxpayer is liable for an accuracy-related penalty for any part of an underpayment attributable to, among other things, negligence or disregard of rules or regulations.5 Sec. 6662(a) and (b)(1). Negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). Negligence includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs.

5Respondent determined in the alternative that petitioners are liable for the accuracy-related penalty for substantial understatements of income tax under sec. 6662(b)(2) for the years at issue. Because of our holding on the negligence issue, we need not consider whether the underpayments were also substantial understatements.

Petitioners submitted insufficient documentation for a few expenses, and had no documentation for the majority of the expenses claimed. We have found that petitioners failed to substantiate adequately any of the claimed business expense deductions in dispute. Accordingly, we find that petitioners were negligent in failing to substantiate any of their claimed expenses.

The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment, however, if there was reasonable cause for the taxpayer’s position with respect to that portion and the taxpayer acted in good faith with respect to that portion. 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 pertinent facts and circumstances, including the taxpayer’s efforts to assess his or her proper tax liability and the knowledge and experience of the taxpayer. Sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioners argue that they acted with reasonable cause regarding the disallowed deductions, citing respondent’s concessions. We disagree. While petitioners correctly assert that many of the expense adjustments respondent determined have been reduced by agreement of the parties, petitioners failed to substantiate any of the disputed expenses. Petitioner is a knowledgeable and experienced businessman. He is a certified financial planner, runs his own businesses, and prepared petitioners’ returns, which included detailed depreciation schedules. Despite this, petitioners claimed deductions for hundreds of thousands of dollars of business expenses, none of which they could substantiate. Petitioners failed to convince the Court they took the requisite effort to determine their proper tax liability considering petitioner’s knowledge and experience. We find that petitioners did not prove that the underpayments of income tax for the years at issue were due to reasonable cause and that they acted in good faith. Accordingly, we conclude that petitioners are liable for the accuracy-related penalty for each of the years at issue.

To reflect the foregoing and the concessions of the parties,

Decision will be entered

under Rule 155.

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