Opinion
20103-18 19422-19
07-23-2021
Michael F. Kissell & Maddalena P. Kissell Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Joseph W. Nega Judge
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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above consolidated case before Judge Joseph W. Nega in Pittsburgh, Pennsylvania, containing his oral Findings of Fact and Opinion rendered on June 10, 2021, at the remote hearing at which the case was heard. In accordance with the oral Findings of Fact and Opinion, an appropriate decision will be entered.
Pages: 1 through 17
Place: Pittsburgh, Pennsylvania (Remote Proceeding)
Date: June 10, 2021
Moorhead Federal Building 100 Liberty Avenue Room 1108, 11th Floor
Pittsburgh, Pennsylvania 15222 (Remote Proceeding)
June 10, 2021
The above-entitled matter came on for bench opinion, pursuant to notice at 12:50 p.m.
BEFORE: HONORABLE JOSEPH W. NEGA Judge
APPEARANCES:
For the Petitioners: No Appearance
For the Respondent: No Appearance
PROCEEDINGS
(12:50 p.m.)
THE CLERK: Recalling from the calendar docket number 20103-18, Michael F. Kissell and Maddalena P. Kissell, and consolidated docket number 19422-19, Michael F. Kissell and Maddalena Kissell.
THE COURT: Do you need to list both docket numbers?
THE CLERK: I just did. THE COURT: I thought I only heard the one. Okay.
(Whereupon, a bench opinion was rendered.)
Bench Opinion by Judge Joseph W. Nega June 10, 2021 Michael F. Kissell & Maddalena P. Kissell v. Commissioner Docket Nos. 20103-18, 19422-19
THE COURT: The Court has decided to render the following as its oral findings of fact and opinion in these consolidated cases. The bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152; and it shall not be relied upon as precedent in any other case. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, as amended and in effect at all relevant times. Dollar amounts are rounded to the nearest dollar.
Petitioners, Michael F. Kissell (petitioner husband) and Maddalena P. Kissell (petitioner wife), appeared pro se. Roman M. Olchowecky appeared on behalf of respondent.
Petitioners filed joint returns for 2016 and 2017. By notice of deficiency dated September 4, 2018, respondent determined a deficiency of $4,847 in petitioners' Federal income tax for the 2016 taxable year. By separate notice of deficiency dated September 30, 2019, respondent determined a deficiency of $4,177 in petitioners' Federal income tax for the 2017 taxable year. The issues for decision are whether petitioner husband received and failed to report taxable retirement income in the amounts of $21,208 and $21,208 for the 2016 and 2017 taxable years, respectively.
On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts:
FINDINGS OF FACT
These consolidated cases were remotely tried on June 7, 2021. Petitioners resided in Greensburg, Pennsylvania, at the time they filed their petitions in these cases. Some of the facts have been stipulated and are so found. The first stipulation of facts and exhibits attached thereto, and the admitted exhibits are incorporated herein by reference.
Petitioner husband was employed by the Pennsylvania Department of Corrections (PA DOC) as a correctional officer at the Greensburg, Pennsylvania facility beginning in 1988. Petitioner husband's employment with the PA DOC was terminated in June 1994. In 1997, petitioner husband filed an employment discrimination lawsuit against PA DOC, alleging violations of his rights under Title VII of the Civil Rights Act of 1964. By verdict entered on April 25, 2002, a jury awarded petitioner husband $500,000 in his employment discrimination lawsuit, which consisted of $144,304 of compensatory damages, $355,696 of back pay, and $31,864 for interest. Petitioner husband was also reinstated as a correctional officer at a different PA DOC facility.
The Treasurer of the Commonwealth of Pennsylvania issued a check, dated December 21, 2004, for $387,560 pay to the order of petitioner husband to satisfy the portion of the judgment allocated to back pay and interest (collectively referred to as back-pay award). The deputy attorney general representing PA DOC in the litigation forwarded the check to petitioner husband's then-attorney. On or about December 29, 2004, petitioner husband's then-attorney deposited the check into an account without petitioner husband's endorsement. By check dated February 9, 2005, petitioner husband's then-attorney caused $317,849 to be drawn on the account and remitted to petitioner husband, which represented the amount of the back-pay award less attorney's fees.
After issuing the check, PA DOC issued to petitioner husband and filed with the Internal Revenue Service (IRS) a Form 1099-MISC, Miscellaneous Income, for the 2004 taxable year, reporting the $387,560 payment as "Nonemployee Compensation" income to petitioner husband. The Commonwealth of Pennsylvania (Commonwealth) did not deduct any taxes from the back-pay award distribution. At some point after the check was cashed, the Pennsylvania Bureau of Commonwealth Payroll (BOCP) determined that the payment should have been considered back pay and amounts should have been withheld for income tax, Social Security, Medicare, unemployment, union dues, and retirement withholdings. The BOCP calculated the amount that should have been withheld from the back-pay award distribution to be $158,889. In November 2005, the Commonwealth of Pennsylvania, Office of General Counsel, issued to petitioner husband and filed with the IRS a corrected W-2 for the 2004 taxable year, which reported the $387,560 payment as "Wages, tips, other compensation".
On December 6, 2005, the IRS issued separate letters to petitioner husband and the Commonwealth in response to a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, received by the IRS. In the letter to petitioner husband, the IRS notified him that the supplemental income paid by his employer, and reported on the Form 1099-MISC, is considered wages for Federal income tax purposes and instructed petitioner husband to file an amended 2004 tax return. In the letter to the Commonwealth, the IRS informed the Commonwealth that the back-pay award was considered supplemental wages subject to withholding and instructed the Commonwealth to adjust their employment tax returns accordingly.
By letter dated May 25, 2012, PA DOC informed petitioner husband that the Commonwealth paid the taxes, retirement contributions, and union dues for the period of the back pay on petitioner husband's behalf and, as a result of these payments, petitioner husband had an outstanding debt of $158,889 payable to the Commonwealth. The letter also advised petitioner husband of his options to repay the debt and informed him that "any amount not received at separation from Commonwealth employment will be deducted from your retirement account thereby reducing any annuity to which you are entitled". On December 17, 2012, PA DOC issued a letter to petitioner husband informing him, inter alia, that his request for forgiveness of debt to the Commonwealth is denied and payroll deductions will begin on January 18, 2013.
In June 2014, petitioner husband retired from PA DOC. On July 7, 2014, after petitioner husband's separation from Commonwealth employment, the BOCP issued a letter to petitioner husband informing him that he had a remaining balance of $138,595 on his outstanding debt to the Commonwealth, which had been reduced on account of amounts deducted from petitioner husband's pay while employed. The letter also advised petitioner husband of his options for repayment of the debt, which included a one-time payment of the net amount or repayment from petitioner husband's Commonwealth of Pennsylvania State Employees' Retirement System (SERS) contributions. On July 7, 2014, the BOCP also informed SERS of petitioner husband's outstanding debt and instructed SERS to pay petitioner husband's debt from his retirement account.
According to the Annuitant Payment Detail Reports (APDR) prepared and maintained by SERS for the 2016 and 2017 taxable years, petitioner husband was entitled to a monthly gross pension of $3,300, subject to a monthly health insurance deduction of $169 and a monthly JWN debt repayment deduction of $1,650. Based on these amounts, SERS issued to petitioner husband and filed with the IRS Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., reporting gross distributions of $39,600 and taxable distributions of $38,985 to petitioner husband for each of the 2016 and 2017 taxable years.
Petitioners filed joint Forms 1040, U.S. Individual Income Tax Return, for the 2016 and 2017 taxable years. On each return, petitioners reported taxable retirement income of $17,777, which represented the amount of the total pension distributions SERS paid to petitioner husband after deductions for health insurance and debt repayment for each of the 2016 and 2017 taxable years. On September 4, 2018, respondent issued to petitioners a notice of deficiency in which respondent determined a deficiency of $4,847 in petitioners' Federal income tax for the 2016 taxable year. On September 30, 2019, respondent issued to petitioners a separate notice of deficiency in which respondent determined a deficiency of $4,177 in petitioners' Federal income tax for the 2017 taxable year. The notices of deficiency indicated that the tax deficiencies were a result of respondent's determination that petitioners had unreported taxable pension income of $21,208 for each of the 2016 and 2017 taxable years.
On October 12, 2018, petitioners timely filed a petition for redetermination of the 2016 deficiency with this Court at Docket No. 20103-18. On October 28, 2019, petitioners timely filed a petition for redetermination of the 2017 deficiency with this Court at Docket No. 19422-19. By Order dated January 16, 2020, the cases at Docket Nos. 20103-18 and 19422-19 were consolidated for purposes of trial, briefing, and opinion.
OPINION
In general, the Commissioner's determinations in a notice of deficiency are presumed correct, and the petitioner bears the burden of proving them erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, where a case involves unreported income and is appealable to the Court of Appeals for the Third Circuit, as these cases are barring a contrary written stipulation, see sec. 7482(b)(1)(A), the Commissioner's determination of unreported income is entitled to a presumption of correctness only if the Commissioner produces foundational evidence linking the taxpayers to the tax-generating activity, see Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986) (citing Gerardo v. Commissioner, 552 F.2d 549, 554 (3d Cir. 1977), aff'g in part, rev'g in part and remanding T.C. Memo. 1975-341), vacating and remanding T.C. Memo. 1985-101. If the taxpayer rebuts the presumption by showing the determination is arbitrary and erroneous, the presumption disappears and the burden of going forward with evidence shifts to the Commissioner; however, the Third Circuit has held that the ultimate burden of proof or persuasion remains with the taxpayer. Anastasato v. Commissioner, 794 F.2d at 887; Sullivan v. United States, 618 F.2d 1001, 1008 (3d Cir. 1980).
The record in these cases contain certified copies of Forms 1099-R that SERS issued to petitioner husband and filed with the IRS, reporting taxable distributions of $38,985 to petitioner husband in both the 2016 and 2017 taxable years. The record also contains certified copies of APDRs prepared and maintained by SERS showing a breakdown of petitioner husband's monthly gross pension distributions and deductions for health insurance and debt repayment for each year. Moreover, petitioners admit that petitioner husband received $17,777 of pension distributions in 2016 and 2017, which represents the total net amount paid to petitioner husband after deductions for health insurance and debt repayment. Accordingly, respondent has met his burden of producing sufficient foundational evidence linking petitioner husband to the unreported pension income for 2016 and 2017. Thus, the presumption of correctness applies to respondent's determinations of unreported pension income and petitioners bear the burden of proving them erroneous.
In addition, pursuant to section 7491(a), the burden of proof as to the factual matters shifts to the Commissioner under certain circumstances. Petitioners do not contend, and the evidence does not establish, that the burden of proof shifts to respondent under 7491(a) as to any issue of fact. Therefore, petitioners bear the burden of proof.
Section 61(a) provides that "gross income" means "all income from whatever source derived". Section 61(a)(11) specifically provides that pensions, whether paid by the Government or by private persons, constitute gross income unless excluded by law. Sec. 1.61-11(a), Income Tax Regs. The scope of section 61(a) is broad, and exclusions from gross income must be narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Commissioner v. Glenshaw Glass Company, 348 U.S. 426, 429 (1955); Helvering v. Clifford, 309 U.S. 331, 334 (1940). Taxpayers seeking an exclusion from gross income must demonstrate they are eligible for the exclusion and bring themselves "within the clear scope of the exclusion". Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998).
The Forms 1099-R SERS issued to petitioner husband and filed with the IRS reported taxable distributions of $38,985 to petitioner husband for each of the 2016 and 2017 taxable years. However, petitioners only reported $17,777 of taxable pension income on each of their 2016 and 2017 tax returns. Petitioners did not report the remaining $21,208 of taxable distributions reported on the Forms 1099-R, representing the total amounts deducted from petitioner husband's pension for repayment of outstanding debts to the Commonwealth and health insurance.
Petitioners do not dispute that petitioner husband's pension distributions are taxable. Rather, petitioners contend that the additional taxable distributions reported in 2016 and 2017 are excludable from the petitioners' income because: (1) petitioner husband did not actually receive these amounts, (2) petitioners believe that petitioner husband's outstanding debt to the Commonwealth is invalid, and (3) if these amounts are includible in income, they should have been included in petitioners' income for the 2004 and 2005 taxable years. Respondent asserts that petitioner husband constructively received income of $19,800 for the amounts deducted from his pension and used to partially satisfy his outstanding debt to the Commonwealth. Respondent further points out that petitioners have failed to explain why the $2,023 deducted from petitioner husband's pension for health insurance would not be taxable. Accordingly, respondent asserts that petitioners improperly excluded $21,208 of petitioner husband's taxable pension that SERS deducted for debt repayment and health insurance. We agree with respondent.
Section 451(a) provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which it was received by the taxpayer. The cash receipts and disbursements method of accounting provides that such amounts are includible in gross income when actually or constructively received. Sec. 1.451-1(a), Income Tax Regs. An employer's payment of an obligation of the taxpayer is equivalent to the taxpayer's receipt of income in the amount paid. See Old Colony Trust Company v. Commissioner, 279 U.S. 716 (1929); Minor v. Commissioner, T.C. Memo. 1998-237. Lack of control over the earnings does not justify exclusion of earnings from the employee's gross income used to pay an obligation of the employee. See Tucker v. Commissioner, 69 T.C. 675, 678 (1978). Similarly, where the transfer of funds at least partially discharges a legal obligation of the taxpayer, the transfer is equivalent to receipt by the taxpayer. See Helvering v. Horst, 311 U.S. 112, 116 (1940). The fact that the transfer is involuntary, such as by garnishment, has no significance. See, e.g., Tucker v. Commissioner, 69 T.C. at 678; Chambers v. Commissioner, T.C. Memo. 2000-218 (holding amounts garnished from employee's wages for alimony and child support were includable in employee's income), aff'd, 17 Fed.Appx. 688 (9th Cir. 2001); Vorwald v. Commissioner, T.C. Memo 1997-15 (taxpayer was required to include in income as a distribution from his IRA amounts transferred from his IRA to his former spouse in a garnishment proceeding).
As an initial matter, we note that the validity of petitioner husband's outstanding debt to the Commonwealth is an issue between petitioners and the Commonwealth, and is not an issue properly before this Court. The only issue before this Court is whether petitioners had $21,208 of unreported pension income in the 2016 and 2017 taxable years with respect to petitioner husband's pension distributions.
We find that petitioner husband constructively received the additional $21,208 of taxable pension distributions reported on their Forms 1099-R for the 2016 and 2017 taxable years and, therefore, petitioners improperly excluded these amounts from their income in those years. In 2016 and 2017, SERS deducted $19,800 from petitioner husband's pension and used it to partially satisfy his outstanding debt to the Commonwealth.
Petitioner husband received an economic benefit from these payments or transfers through the reduction of his outstanding debt to the Commonwealth. The fact that SERS effectively garnished petitioner husband's pension and the transfer was involuntary has no significance. See, e.g., Tucker v. Commissioner, 69 T.C. at 678; Chambers v. Commissioner, T.C. Memo. 2000-218, aff'd, 17 Fed.Appx. 688 (9th Cir. 2001); Vorwald v. Commissioner, T.C. Memo 1997-15. Finally, petitioners failed to provide any evidence or explanation to support the exclusion of the $2,023 deducted from petitioner husband's pension for health insurance. Petitioner husband received an economic benefit from these health insurance payments through his health insurance coverage during the 2016 and 2017 taxable years.
In conclusion, we find that the petitioners failed to satisfy their burden of showing that respondent's determinations of unreported pension income to petitioner husband for each taxable year are erroneous. Petitioners have failed to provide any evidence or credible testimony to establish that petitioner husband did not actually or constructively receive the additional $21,208 of unreported pension income for the 2016 and 2017 taxable years. Accordingly, we sustain respondent's determinations as set forth in the notices of deficiency dated September 4, 2018, and September 30, 2019. This concludes the Court's oral Findings of Fact and Opinion in this case.
Decision will be entered for respondent in Docket Nos. 20103-18 and 19422-19.
This concludes our bench opinion.
(Whereupon, at 1:17 p.m., the above-entitled matter was concluded.)
CERTIFICATE OF TRANSCRIBER AND PROOFREADER CASE NAME: Michael F. Kissell & Maddalena P. Kissell v. Commissioner DOCKET NOS.: 20103-18, 19422-19
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 17 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Eva Walsh on June 10, 2021 before the United States Tax Court at its remote session in Pittsburgh, PA, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording.
Hana Copperman, CET-487 6/15/21
Transcriber Date
Traci Fine, CDLT-169 6/15/21
Proofreader Date