Opinion
16077-19
06-28-2021
Paul Edwin Johnson, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Courtney D. Jones Judge
Before the Court are competing motions for summary judgment. By Notice of Deficiency dated June 3, 2019, the Internal Revenue Service (IRS or respondent) determined a deficiency in the Federal income tax of petitioner Paul Edwin Johnson and a section 6662(a) accuracy-related penalty for substantial understatement of income tax. On September 3, 2019, Mr. Johnson timely filed the Petition and respondent filed an Answer on October 21, 2019.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.
On November 16, 2020, Mr. Johnson filed a motion for summary judgment. On December 29, 2020, Respondent filed an objection and response to Mr. Johnson's motion for summary judgment. On the same day, respondent filed a competing motion for summary judgment. On February 9, 2021, Mr. Johnson filed a self-styled document entitled "Petitioner's Plea to the Jurisdiction and Request for Extension of Time to File Response", which we treated as a response to respondent's motion for summary judgment.
The issues for decision are: (1) whether Mr. Johnson had unreported gross income for taxable year 2016 as respondent determined; and (2) whether for taxable year 2016 Mr. Johnson is liable for a penalty under section 6662(a) for a substantial understatement of tax. For the reasons discussed below, we will grant in part respondent's motion for summary judgment, and deny petitioner's motion.
Background
There is no dispute as to the following facts which are based on the parties' pleadings and motion papers, the stipulation of facts, and the exhibits attached thereto. Mr. Johnson resided in Texas when he timely petitioned this Court.
Mr. Johnson timely filed his 2016 Form 1040, U.S. Individual Income Tax Return, jointly with his spouse, and reported $41,827 in retirement income. Mr. Johnson reported a total tax due of $1,805. Mr. Johnson's return showed "$0" from Equity Trust Company (Equity Trust). On September 17, 2018, the Commissioner's Automated Underreporting (AUR) program generated a CP2000 Notice informing Mr. Johnson that it had detected a discrepancy between records of payments made to him and the amount of taxable income he reported on his 2016 income tax return. The CP2000 Notice proposed a substantial tax understatement penalty in the amount of $3,160. The CP2000 Notice provided petitioner with the opportunity to agree to the proposed changes or to provide more information regarding the discrepancy identified by the AUR program.
On October 16, 2018, the AUR program received a response to the CP2000 Notice from Mr. Johnson in which he appeared to agree with the changes but argued that he should be eligible for increased credits. On December 17, 2018, Cheryl Woods, an AUR Tax Examiner, considered Mr. Johnson's response to the AUR and found that he was eligible for increased credits but determined that the IRS should impose a penalty. Jennifer Bastarache was Cheryl Woods' immediate supervisor and approved, in writing, Ms. Woods' initial determination of the penalty for petitioner's 2016 tax year. On January 14, 2019, Mr. Johnson wrote a second written response to the CP2000 Notice, in which he stated that he "was unaware that he had underpaid" his Federal income tax because he had not received a Form 1099-R.
On June 3, 2019, the AUR program generated a notice of deficiency for taxable year 2016. The notice determined that Mr. Johnson failed to include taxable retirement income of $64,839 on the basis of Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., issued by Equity Trust. The IRS determined a deficiency of $5,390 and a substantial understatement penalty of $1,078 for taxable year 2016.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid an unnecessary (and potentially expensive) trial. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp. v. Commissioner, 98 T.C. at 520. The nonmoving party may not rest upon the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
Upon review of the stipulation of facts, parties' motion papers, and associated declarations and exhibits, we are satisfied that this case is appropriate for partial summary adjudication.
II. Subject Matter Jurisdiction
Petitioner contends that we do not have subject matter jurisdiction over the two primary issues in this case, namely, whether he earned and failed to report certain retirement income in taxable year 2016 and whether he is liable for the substantial tax understatement penalty under section 6662(a).
This Court is a court of limited jurisdiction, and we may exercise jurisdiction only to the extent expressly authorized by Congress. See sec. 7442; Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Our jurisdiction in a deficiency case is predicated on the Commissioner's issuing a valid notice of deficiency and the taxpayer's timely filing a petition with our Court to challenge the notice. Secs. 6212, 6213, 7442; Rules 13, 20; see, e.g., Dees v. Commissioner, 148 T.C. 1, 3-4 (2017).
The IRS issued a valid notice of deficiency to petitioner on June 3, 2019, advising him of "the basis for, and identify[ing] the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties included in such notice." See sec. 7522(a). In response to the notice, Mr. Johnson filed the petition in this Court on September 3, 2019. Prima facie, we have jurisdiction to redetermine the deficiencies determined in the notice. See, generally, secs. 6211-6214. Because Mr. Johnson properly invoked our jurisdiction, we have subject matter jurisdiction over these issues and reject the basis for the arguments in Mr. Johnson's self-styled filing entitled "Plea to the Jurisdiction and Request for Extension of Time to File Response".
We also deny Mr. Johnson's request for additional time to file a response to respondent's motion for summary judgment.
III. Admissions
Mr. Johnson's main point of contention is that he believes that respondent did not adequately respond to certain allegations in his petition. Specifically, Mr. Johnson believes that respondent did not properly deny his allegation that the IRS is liable for a section 6662(a) penalty payable to himself in the form of a refund. As such, Mr. Johnson contends that respondent's inadequate response is a deemed admission on the matter.
Rule 36(b) provides,
The answer shall be drawn so that it will advise the petitioner and the Court fully of the nature of the defense. It shall contain a specific admission or denial of each material allegation in the petition; however, if the Commissioner shall be without knowledge or information sufficient to form a belief as to the truth of an allegation, then the Commissioner shall so state, and such statement shall have the effect of a denial.
After review of the record, we conclude that all of the material allegations set forth in the petition in support of the assignments of error have been denied in respondent's answer. Furthermore, Mr. Johnson has not raised any issues upon which respondent has the burden of proof. We conclude that respondent did not have a deemed admission on the issue of the "refund" petitioner demands.
IV. Petitioner's Deficiency
Gross income includes all income from whatever source derived. See sec. 61(a); see also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955); Helvering v. Clifford, 309 U.S. 331, 334 (1940). Distributions from Mr. Johnson's retirement plan are includible in his gross income for the year of the distributions. Secs. 61(a)(11), 72, 402(a).
The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, sec. 11051(b)(1)(A), 131 Stat. at 2089, redesignated sec. 61(a)(11) as sec. 61(a)(10) for taxable years beginning after December 31, 2018.
On January 14, 2019, in a second written response to the CP2000 Notice, Mr. Johnson explained that he agreed with the adjustment (but disagreed with other aspects of the case). Furthermore, Mr. Johnson did not assign error to the issue of the deficiency for the 2016 tax year in his petition, nor did he dispute it at any point in this case. As such, the issue of petitioner's deficiency for the 2016 tax year is deemed conceded. See Rule 34(b)(4).
To the extent Mr. Johnson is contesting the issue of interest, this issue is premature as the Court generally lacks jurisdiction over issues involving interest, except in limited circumstances not at issue here. See sec. 7481(c); Med. James, Inc. v. Commissioner, 121 T.C. 147, 151-152 (2003).
V. Substantial Understatement Penalty
Section 6662 provides for an accuracy-related penalty of 20% imposed for either negligence or a substantial understatement of income tax. Section 6662(d)(2)(A) generally defines the term "understatement" as the excess of the tax required to be shown on the return over the amount shown on the return as filed. In the case of an individual, an understatement is "substantial" if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).
Section 7491(c) imposes the burden of production in any court proceeding on the Commissioner with respect to the liability of any individual for penalties. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). The Commissioner's burden of production includes making a prima facie case that the section 6751(b)(1) requirement for written supervisory approval for an accuracy-related penalty has been met prior to the first formal communication that demonstrated that an initial determination of a penalty had been made. See Belair Woods, LLC v. Commissioner, 154 T.C. 1 (2020); Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). The "initial determination" of a penalty, for purposes of section 6751(b)(1), must be a "formal act" that resembles a determination. Belair Woods, LLC v. Commissioner, 154 T.C. at 10. In a deficiency context "the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties" would embody the initial determination of those penalties. Id. at 15; see Clay v. Commissioner, 152 T.C. 223, 249 (2019).
Respondent contends that respondent obtained supervisory approval prior to the issuance of the notice of deficiency, dated June 3, 2019, and the record seems to support this conclusion. But it appears to the Court that the CP2000 Notice, dated September 17, 2018, was the IRS' first formal communication of the initial determination to assert penalties pursuant to section 6662(a). Therefore, respondent has the burden of production with respect to its compliance with section 6751(b)(1) regarding the CP2000 Notice, not the notice of deficiency. See Belair Woods, LLC v. Commissioner, 154 T.C. at 15. As there is no evidence in the record to support that written supervisory approval was obtained prior to the issuance of the CP2000 Notice, we hold that there is a genuine dispute of material fact regarding whether respondent carried respondent's burden of production pursuant to 6751(b)(1) with regard to the section 6662(a) penalties for this case.
We note that it appears that the CP2000 Notice was issued through the AUR program. Managerial approval pursuant to sec. 6751(b)(1) is not required for penalties calculated through electronic means. See sec. 6751(b)(2)(B); Walquist v. Commissioner, 152 T.C. 61, 73-74 (2019). It is curious that respondent did not address the potential application of sec. 6751(b)(2)(B) to this case, but we will not argue it for him. See Rule 151(e)(5); Feigh v. Commissioner, 152 T.C. 267, 277 (2019). As we have said before, our job is to consider the issues advanced by the parties, not to craft alternative arguments never raised. Id.
Accordingly, we will deny respondent's motion with respect to the imposition of the section 6662(a) accuracy-related penalty.
VI. Penalty Under Section 6673
Section 6673(a)(1) authorizes the Court to require a taxpayer to pay a penalty to the United States in an amount not to exceed $25,000 whenever it appears to the Court that the taxpayer instituted or maintained the proceeding primarily for delay or that the taxpayer's position in the proceeding is frivolous or groundless.
Mr. Johnson is no stranger to this Court, having filed a petition at docket No. 14429-18 for redetermination of a deficiency for his 2015 taxable year. Mr. Johnson repeats the same arguments here as he had proffered during his previous case regarding the allegation that respondent owes him a "penalty" under section 6662. This is a frivolous argument as section 6662 functions to impose a penalty against taxpayers, not the IRS. See sec. 6662.
Though we will not impose a penalty under section 6673 upon Mr. Johnson in the instant case, we take this opportunity to warn him that penalties, up to a maximum of $25,000, could be imposed upon him in any future cases before this Court if he continuous to advance frivolous litigating positions.
We have considered all of the arguments made by the parties and, to the extent they are not addressed herein, we deem them to be moot, irrelevant, or without merit.
Upon due consideration, it is
ORDERED that respondent's motion for summary judgment, filed December 29, 2020, is granted in part insofar as it seeks a determination regarding petitioner's deficiency for the 2016 taxable year. It is further
ORDERED that respondent's motion for summary judgment, filed December 29, 2020, is denied in part insofar as it seeks a determination regarding penalties for petitioner's 2016 taxable year. It is further
ORDERED that petitioner's motion for summary judgment, filed November 16, 2020, is denied. It is further
ORDERED that jurisdiction of this case is no longer retained by the undersigned and is hereby restored to the general docket for trial or other disposition.