Opinion
Docket No. 5108-20.
05-27-2021
MARGARET ANN HEWITT, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER OF SERVICE OF TRANSCRIPT
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and respondent a copy of the pages of the transcript in the above case before Judge Richard T. Morrison, at Little Rock, Arkansas, on April 28, 2021, containing his oral findings of fact and opinion rendered at the conclusion of trial.
In accordance with the oral findings of fact and opinion, a decision will be entered.
(Signed) Richard T. Morrison
Judge Bench Opinion by Judge Richard T. Morrison April 28, 2021
THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's Oral Findings of Fact and Opinion. The Oral Findings of Fact and Opinion shall not be relied on as precedent in any other case.
This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure.
Unless otherwise indicated, all references to sections are to the Internal Revenue Code of 1986, as amended and in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent, the Commissioner of Internal Revenue, is referred to as the IRS.
On December 30, 2019, the IRS mailed petitioner Margaret Ann Hewitt a notice of deficiency for the 2016 tax year, determining a deficiency of $11,346, an addition to tax of $1,789.20 for failure to file a return, an addition to tax of $1,232.56 for failure to pay tax, and an addition to tax of $181.08 for failure to pay estimated income tax.
Hewitt filed a timely petition for redetermination of the deficiency, and additions to tax, under section 6213(a). We have jurisdiction under section 6214(a).
At trial, the IRS conceded the addition to tax for failure to pay tax.
The issues to be resolved are:
• Whether Hewitt received wage income totaling $36,032 for the 2016 tax year. We hold that she did.
• Whether Hewitt received interest income in the amount of $53. We hold that she did.
• Whether Hewitt received taxable distributions from pensions or retirement plans in the amount of $31,610. We hold that she did.
• Whether Hewitt received other income in the amount of $3,311. We hold that she did.
• Whether Hewitt is liable for self-employment tax on the other income she received. We hold that she is.
• Whether Hewitt is liable for an addition to tax pursuant to section 6651(a)(1). We hold that she is liable in the amount of $1,988.
• Whether Hewitt is liable for an addition to tax pursuant to section 6654. We hold that she is.
Findings of Fact
Hewitt was a resident of California when she filed her petition.
Hewitt failed to file a federal income tax return for the 2016 tax year. The only payments of federal income tax she made for 2016 were $3,394 withheld from her wage income.
The IRS received the following information from third parties regarding Hewitt's income for the 2016 tax year:
• West County Health Centers, Inc., reported it paid $18,351 in wages to Hewitt and withheld $2,031 from her wages for federal income tax;
• Santa Rosa Community Health Centers reported it paid $17,681 in wages to Hewitt and withheld $1,363 from her wages for federal income tax;
• City & County of San Francisco Employees Retirement System reported a $53 interest payment;
• City & County of San Francisco Employees Retirement System reported a gross distribution from pensions or retirement plans in the amount of $19,572, of which the taxable amount was $19,344;
• Sonoma County Employees' Retirement Association reported a gross distribution from pensions or retirement plans in the amount of $12,266, the entire amount of which was taxable; and
• City & County of San Francisco Controllers Office reported payment of other income to Hewitt in the amount of $3,311.
Discussion
1. Jurisdiction
Hewitt had previously moved to dismiss this case for lack of jurisdiction on the ground that, among other things, the notice of deficiency for 2016 was not valid. We denied her motion. Jurisdiction in a deficiency case is founded on the issuance by the IRS of a valid notice of deficiency and the timely filing of a petition by the taxpayer. Monge v. Commissioner, 93 T.C. 22, 27 (1989). Jurisdiction is a matter that can be considered by the Court at any time and may be considered by the Court on its own initiative without motion by the parties. Smith v. Commissioner, 124 T.C. 30, 40 (2005). The IRS attached the notice of deficiency, which was addressed to Hewitt, to its court papers. At trial, Hewitt testified that she did not receive a "statutorily valid notice of deficiency" and she made various claims why the notice of deficiency was invalid, but she conspicuously declined to testify that she did not receive the notice of deficiency and she did not claim that the IRS did not mail the notice of deficiency. We infer that Hewitt received the notice of deficiency and we find as a matter of fact that the IRS mailed the notice of deficiency. Hewitt's petition was timely as to the 2016 notice of deficiency. Thus, we have jurisdiction to redetermine the deficiency and additions to tax.
2 . Unreported income
Section 1 imposes a tax on taxable income. Taxable income is gross income minus deductions. Section 63(b). Gross income includes income from whatever source derived, including compensation for services, interest, and pension income. Section 61(a)(1), (4), and (10).
The IRS determined that Hewitt had taxable wages, interest, taxable pension-or-retirement plan distributions, and other income.
Under section 7491(a), the burden of proof shifts to the IRS if the taxpayer introduces credible evidence. However, section 7491(a) does not apply unless the taxpayer has maintained all records required under the Internal Revenue Code and has cooperated with reasonable requests by the IRS for witnesses, information, documents, meetings, and interviews. Section 7491(a)(2)(B). The record does not show, nor does Hewitt contend, that these conditions are met. Therefore, section 7491(a) is not applicable.
Under section 6201(d), if a taxpayer asserts a reasonable dispute with respect to amounts of income reported on a third-party information return and the taxpayer has fully cooperated with the IRS, the IRS has the burden of producing reasonable and probative information in addition to the information return. Hewitt has not asserted a reasonable dispute nor has she shown that she has fully cooperated with the IRS. Therefore, section 6201(d) is not applicable.
Absent application of these special statutory provisions, the determinations in the notice of deficiency are presumptively correct and the taxpayer has the burden of proving they are incorrect. Rule 142(a). However, the IRS cannot rest on the presumption of correctness alone when the taxpayer challenges the determinations of unreported income made in the notice of deficiency. Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984). The IRS has introduced records showing it received the third-party information returns. It has satisfied the evidentiary foundation for its determinations.
The evidence fails to persuade us that the IRS's determinations of unreported income are incorrect. We sustain the determination in the notice of deficiency and hold that Hewitt earned the unreported income.
3. Self-employment tax
In addition to the tax under section 1, taxpayers are subject to self-employment tax on their self-employment income during a taxable year. Section 1401(a), (b)(2). Self-employment income is generally defined as "the net earnings from self-employment derived by an individual". Section 1402(b). "Net earnings from self-employment" are defined as "the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business". Section 1402(a). The performance of services by an individual as an employee is not a "trade or business". Section 1402(c)(2). The term "employee" has the same meaning as under the Federal Insurance Contributions Act. Section 1402(d). Under the Federal Insurance Contributions Act, an "employee" (as relevant here) is "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee". Section 3121(d)(2).
We have held that Hewitt earned $3,311 of other income. The record does not persuade us that this amount is not self-employment income. We sustain the determination in the notice of deficiency that the $3,311 of other income is self-employment income.
4. Section 6651(a)(1) addition to tax for failure to timely file a tax return
The IRS determined that Hewitt is liable for the section 6651(a)(1) addition to tax for the 2016 tax year. Section 6651(a)(1) imposes an addition to tax for the failure to file a tax return by its filing deadline unless the taxpayer can establish that the failure to file is due to reasonable cause and not due to willful neglect. The IRS bears the burden of production for the section 6651(a)(1) addition to tax. See section 7491(c). The IRS satisfies its burden by producing sufficient evidence to establish that the taxpayer failed to timely file a required federal income tax return. Higbee v. Commissioner, 116 T.C. 438, 447 (2001). A substitute for return does not count as a return for purposes of the section 6651(a)(1) addition to tax. Section 6651(g)(1).
Section 6012 requires every individual who has gross income over a certain amount to file an income tax return. Hewitt's gross income for 2016 was well above the relevant amount. She was therefore required to file a return for 2016.
The IRS presented records showing Hewitt did not timely file a return. This is sufficient to satisfy the IRS's burden of producing evidence that imposing the addition to tax under section 6651(a)(1) is appropriate for 2016. See Higbee v. Commissioner, 116 T.C. at 447. In addition, the trial record as a whole does not persuade the Court that Hewitt filed a timely return.
The burden of proof is on the taxpayer to show that imposing the addition to tax is improper, for example, because the failure to file the return was due to reasonable cause and not willful neglect. See id. at 447-448. Therefore, Hewitt is liable for the section 6651(a)(1) addition to tax for the 2016 tax year unless the evidence is sufficient to persuade the Court that she had reasonable cause for her failure to file her return and that her failure to file was not due to willful neglect. See section 6651(a)(1); Higbee v. Commissioner, 116 T.C. at 446-447. Reasonable cause excusing a failure to timely file exists if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return by the deadline. See section 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a conscious, intentional failure or reckless indifference. United States v. Boyle, 469 U.S. 241, 245 (1985).
We find that Hewitt did not have reasonable cause for her failure to file her 2016 income tax return. Accordingly, we hold that she is liable for the section 6651(a)(1) addition to tax.
The section 6651(a)(1) addition to tax is 5% of the correct amount of tax, plus another 5% of the correct amount of tax for each month or fraction of a month the failure to file continues, not to exceed 25% in the aggregate. Section 6651(a)(1), (b)(1). Thus, a failure to file a return for five months results in the maximum 25% penalty. Hewitt failed to file her 2016 tax return for at least five months. The correct amount of tax is reduced by timely payments and any credits against the tax that can be claimed on the return, including amounts withheld for federal income tax. Sections 6651(b)(1), 31(a). The correct amount of tax was calculated by the notice of deficiency as $10,878 of section 1 tax plus $468 of self-employment tax, for a total of $11,346, which was reduced to $7,952 by the $3,394 of withholdings. The section 6651(a)(1) penalty is $1,988, which is 25% of the $7,952 unpaid tax due.
5. Section 6651(a)(2) addition to tax for failure to timely pay tax
The notice of deficiency determined that Hewitt is liable for the section 6651(a)(2) addition to tax for the 2016 tax year. Section 6651(a)(2) provides that if a taxpayer fails to pay the amount shown as tax on a return on or before the due date for payment, there is added to the amount shown as tax on the return 0.5% of the amount, and an additional 0.5% for each additional month or fraction of a month during which the failure to pay continues, not exceeding 25% in the aggregate. Section 6651(b)(2) provides that the amount of tax shown on the return is, for purposes of computing the addition for any month, reduced by the amount of any part of the tax paid on or before the beginning of the month and by the amount of any credit against the tax which may be claimed on the return. Section 31(a) provides that any amount withheld for income tax counts as a credit to the recipient of income for the tax year in which the withholding was made.
The amount of the addition to tax calculated in the notice of deficiency was $1,232.56, equal to unpaid tax of $7,952 multiplied by 0.5% multiplied by 31 months. The notice of deficiency stated that the penalty amount continued to accrue every additional month that Hewitt did not pay, up to 50 months.
A return for this purpose includes either a return filed by the taxpayer or a substitute for return prepared by the IRS under section 6020(b). Section 6651(g)(2). The payment of tax is generally due on or before the unextended due date for filing the return. Section 6151(a).
Section 6651(c)(1) provides that the amount of any addition to tax under section 6651(a)(1) must be reduced by the amount of the addition to tax under section 6651(a)(2) for any month to which an addition to tax applies under both section 6651(a)(1) and (a)(2).
However, at trial, the IRS conceded that Hewitt is not liable for the addition to tax under section 6651(a)(2). We hold that Hewitt is not liable for the section 6651(a)(2) addition to tax. As a consequence, the section 6651(a)(1) addition to tax should not be reduced under section 6651(c)(1). The notice of deficiency applied section 6651(c)(1) by reducing the 6651(a)(1) penalty from 5% per month to 4.5% per month.
6. Section 6654(a)
The IRS determined that Hewitt is liable for the section 6654(a) addition to tax for the 2016 tax year. Section 6654(a) imposes an addition to tax on an individual taxpayer who underpays one or more of the four installments of estimated tax. Section 6654(a), (b), and (c). Each installment is equal to one-fourth of an amount referred to as the "required annual payment". Section 6654(d)(1)(A). The required annual payment is defined by section 6654(d)(1)(B) as the lesser of two amounts: (1) 90% of the tax shown on the return for the tax year (or, if no return is filed, 90% of the correct tax for such year), or (2) if the individual filed a return for the prior tax year, 100% of the tax shown on the prior year's return. The section 6654(a) addition to tax is determined by applying the underpayment interest rate established under section 6621 to the amount of the underpayment for the period of the underpayment. Section 6654(a)(1). The amount of the underpayment is the excess of the required installment over the amount, if any, of the installment paid on or before the due date for the installment. Section 6654(b)(1). Income tax withholding credits are treated as payments of estimated tax. See section 6654(g)(1), (2)(a). The withheld amount for each tax year is treated as a payment of estimated tax for that year, and one-fourth of this amount is deemed as paid on each of the four estimated-tax required installment due dates for that tax year, unless the taxpayer establishes the dates on which all amounts were actually withheld. See id.
The IRS bears the burden of production for the addition to tax determined under 6654(a)(1). See section 7491(c).
The record shows that Hewitt had a "required annual payment" for the 2016 tax year. The first amount is 90% of the tax shown on the return for 2016 (or if no return is filed, 90% of the correct tax for such year). Section 6654(d)(1)(B). Hewitt did not file a return for 2016. The first amount is therefore 90% of her correct tax for 2016. See section 6654(d)(1)(B)(i). The IRS calculated that the first amount was $10,211.40, which is 90% of $11,346. The second amount is 100% of tax shown on Hewitt's 2015 return, but only if she filed a return for 2015. See section 6654(d)(1)(B)(ii), (and flush language). She did not file a return for 2015. Her "required annual payment" for 2016 is therefore 90% of her correct tax for 2016.
Each of the four required installments is one-fourth of the "required annual payment" amount. See section 6654(d)(1)(A). Therefore, each of the required installments is $2,552.85. Hewitt had $3,394 of federal income tax withheld from her wage income in 2016. The dates of the federal income tax withholdings are not in the record. However, neither the IRS nor Hewitt contends that the amount of the addition to tax should be computed using these dates as the payment dates as opposed to using the four deemed-payment dates as the payment dates. See section 6654(g)(1). Accordingly, one-fourth of $3,394, or $848.50, is deemed to be Hewitt's payment of estimated tax made on each of the four due dates for the 2016 tax year. See section 6654(g)(1). These are the same deemed payment dates and amounts that were used in the notice of deficiency. Besides the $3,394 of withholding, Hewitt made no other payments of estimated tax for 2016. The IRS has satisfied its burden of producing evidence that imposing the section 6654(a) addition to tax is appropriate for the 2016 tax year because the $848.50 deemed payment is less than the $2,552.85 required installment payment.
The section 6654(a) addition to tax is mandatory unless the taxpayer establishes that one of the exceptions listed in section 6654(e) applies. Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980). There is no general exception to the section 6654 (a) addition to tax relating to reasonable cause and lack of willful neglect. See Estate of Ruben v. Commissioner, 33 T.C. 1071, 1072 (1960)); cf. section 6654(e)(3)(B)(ii). Hewitt does not contend, nor does the record show, that any of the exceptions under section 6654(e) applies. Accordingly, we hold that Hewitt is liable for the section 6654(a) addition to tax for the 2016 tax year.
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, a decision will be entered.
This concludes the Court's Oral Findings of Fact and Opinion.
(Whereupon, at 11:23 a.m., the above-entitled matter was concluded.)