Opinion
Docket No. 9107-19S.
05-06-2021
JUAN PESANTE, JR. & MARIA A. MORENO-PESANTE, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this Order, to petitioners and respondent, a copy of the pages of the transcript of the trial in this case heard before Judge Elizabeth A. Copeland containing her oral findings of fact and opinion rendered at the remote trial session of this Court at which the case was heard.
In accordance with the oral findings of fact and opinion, decision will be entered for respondent.
(Signed) Elizabeth A. Copeland
Judge Bench Opinion by Judge Elizabeth A. Copeland March 26, 2021
THE COURT: The Court has decided to render oral findings of fact and opinions in this case. The following represents the Court's oral findings of fact and opinion. Except as otherwise provided by Rule 152(b) of the Tax Court Rules of Practice and Procedure, the oral findings of fact and opinion shall not be relied upon as precedent in any other case.
This bench opinion is made pursuant to the authority granted by Internal Revenue Code Section 7459(b) and Tax Court Rule 152. Herein after all section references are to the Internal Revenue Code in affect for the taxable year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
This case was heard pursuant to the provisions of section 7463. Pursuant to section 7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent in any other case.
This case was tried on March 22, 2021 at the Court's virtual trial session for which Dallas, Texas was designated as the place of trial. Petitioner, Juan Pesante, Jr. appeared on that date pro se. Mr. Pesante's wife, Maria A. Moreno-Pesante is a party only because she filed a joint income tax return with her husband. She did not appear at trial. Joseph E. Nagy appeared on behalf of respondent.
In a notice of deficiency dated February 25th, 2019 the Internal Revenue Service ("IRS" or "Respondent") determined that an income tax deficiency of $3,992 for tax year 2016. The deficiency stems from the IRS's determination that Mr. Pesante received $493 in unreported retirement income and $25,000 in unreported non-employee compensation. Mr. Pesante conceded that he received the $493 in unreported retirement income. He contends that the $25,000 in unreported non-employee compensation was received as a gift and therefore not taxable under section 102(a). After concessions the sole issue for our decision is whether the $25,000 that Mr. Pesante received was a non-taxable gift under section 102(a) or was taxable, non-employee compensation under section 61(a).
BACKGROUND
Mr. and Mrs. Pesante resided in Ohio at the time their petition was filed. Mr. Pesante worked for Nexus Vision Group, LLC ("Nexus Vision Group" or the "Company"). He held no ownership interest in the Company but was an employee that played a vital role in building the value of the Company. The Company was sold on January 1, 2016. After much debate, the members of Nexus Vision Illinois, LLC (an affiliate of Nexus Vision Group with common ownership) agreed that Mr. Pesante should receive a portion of the proceeds from the sale. Thus, on January 19, 2016, Nexus Vision Illinois, LLC issued a check in the amount of $25,000 to Mr. Pesante. At or around the time of the issuance of that check, Gerry Shaw, Managing Member of Nexus Vision Illinois, LLC, told Mr. Pesante that the payment was a gift, a reward for his services to the Company.
Nexus Vision Illinois, LLC ultimately reported the $25,000 payment on Form 1099-MISC, Miscellaneous Income, as "Non-Employee Compensation." On February 2, 2017, Mr. Pesante jointly filed Form 1040, U.S. Individual Income Tax Return, for tax year 2016 with his wife. They did not report the $25,000 payment on their Form 1040.
The discrepancy between the Pesantes' income tax return and the information returns received by the IRS led to an examination of the Pesantes' income tax return for tax year 2016. During the exam, Mr. Pesante contended that the $25,000 payment was a non-taxable gift under section 102(a). The IRS disagreed and issued a notice of deficiency, which led Mr. Pesante to timely file a petition with this Court.
At trial, Mr. Pesante presented only his testimony. Respondent introduced into evidence: (1) the notice of deficiency that was issued to Mr. Pesante on February 25, 2019, (2) Mr. & Mrs. Pesante's Form 1040 for tax year 2016, (3) a Wage & Income Transcript showing data received by the IRS from information returns for tax year 2016, and (4) a letter dated January 29, 2020, from Gerry Shaw to the IRS stating, in the pertinent parts:
Mr. Pesante was paid a fee of $25,000 by Nexus Vision Illinois, LLC for his services performed for a company affiliated with Nexus Vision Illinois, LLC through common ownership. The payment was made to Mr. Pesante with a check dated January 19, 2016.
Mr. Pesante had previously been employed by the affiliated company, which was sold to an unrelated party on January 1, 2016, but was never an employee of Nexus Vision Illinois, LLC. At the time of the payment for services, Mr. Pesante was no longer an employee of any of the related companies. Accordingly, Nexus Vision Illinois, LLC
issued Mr. Pesante a [Form] 1099-MISC for tax year 2016 reporting the income as nonemployee [sic] compensation.
At the time of the payment, management communicated to Mr. Pesante that he would be responsible for the taxes related to the $25,000 payment.
Mr. Shaw testified at trial the following: ( 1) that after the sale of Nexus Vision Group, the members of Nexus Vision Group "wanted to do something for [Mr. Pesante]," (2) that not all members were originally in agreement on making the payment, (3) that the $25,000 ultimate payment was a "gift, reward, or whatever you want to call it," and (4) that but for Mr. Pesante's work with the Company he would not have received the payment from Nexus Vision Illinois, LLC.
DISCUSSION
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving those determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). If, however, a taxpayer produces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's liability and satisfies the requirements of section 7491(a)(2), the burden of proof on that factual issue shifts to the Commissioner. Sec. 7491(a)(1); Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001). Mr. Pesante has neither alleged nor shown that he satisfied the requirements of section 7491(a); thus, he has the burden of proof.
Gross income includes "all income from whatever source derived" unless otherwise excluded by the Code. Sec. 61(a). Gross income, however, does not include the value of property acquired by gift. Sec. 102(a). Whether a payment is gross income under section 61(a) or a gift under section 102(a) is a factual question. Runyon v. Commissioner, T.C. Memo. 1984-623, 1984 Tax Ct. Memo LEXIS 47, at *8 (citing Commissioner v. Duberstein, 363 U.S. 278 (1960)). If the payment is made primarily from the constraining force of any moral or legal duty, or from the incentive of anticipated benefit of an economic nature, or is in return for services rendered, it is not a gift. Id. A gift under section 102(a) is one that proceeds from a "detached and disinterested generosity, * * * out of affection, respect, admiration, charity or like impulses." Commissioner v. Duberstein, 363 U.S. at 285. The most critical consideration is the intention of the transferor (or rather, the payor in the instant case). Id. In deciding this issue, we must make an objective inquiry into the circumstances surrounding the payment rather than relying on the payor's subjective characterization of the payment. See Id. at 286.
We make this objective inquiry based on the evidence that we have, which is: (1) Mr. Pesante's testimony, (2) Mr. Shaw' s testimony, (3) Mr. Pesante' s Form 1040 for tax year 2016, (4) the IRS's Wage and Income transcript for tax year 2016, and (5) Mr. Shaw's letter to the IRS dated January 29, 2020. We found some of Mr. Shaw' s testimony not to be credible. He testified that the $25,000 payment was a "gift, reward, or whatever you want to call it," yet his letter does not make any mention of a gift. Rather, his letter states that the $25,000 payment was a fee for services rendered to Nexus Vision Group. The discrepancy between his testimony and the contents of his January 29 letter harms his credibility and leads us to accord less weight to both his January 29 letter and his testimony. We found Mr. Pesante to be a very credible witness.
We believe that Mr. Pesante thought and was led to believe that the $25,000 payment was a non-taxable gift. However, the payor's (here Mr. Shaw's) characterization of a payment as a gift is not determinative. "A claim that [a payment] is a gift presents the sole and simple question whether its designation as such is genuine or fictitious--that is to say, whether, though called a gift, it is in reality compensation." Bogardus v. Commissioner, 302 U.S. 34, 40 (1937); see also Commissioner v. Duberstein, 363 U.S. at 286.
Problematic here are three objective facts: (1) there was a disagreement between the members of the payor entity as to whether or not to make the payment to Mr. Pesante; (2) the payor issued a Form 1099-MISC treating the payment as taxable; and (3) the payment was made close in time to the sale of Nexus Vision Group, an entity that had employed Mr. Pesante and an entity to which Mr. Pesante had added value. Mr. Pesante emphasized this fact at trial.
Gifts (and rewards) are taxable unless there was a "detached and disinterested generosity" rather than a "moral or legal duty" to pay them. See Commissioner v. Duberstein, 363 U.S. at 285. Further, "[w]here a payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." Id. (citing Robertson v. United States, 343 U.S. 711, 714 (1952) (fn. ref. omitted)). Unfortunately, here, Mr. Pesante has not presented sufficient evidence to overcome the payor's treatment of the gift/reward as taxable or to overcome whether the payment was made to compensate him for his past services in building up the value of the Company that was sold.
He did not present sufficient evidence to overcome the presumption of correctness accorded to respondent's deficiency determination. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Because of this we must find that the $25,000 payment, whether it was a gift, reward, or the like, was non-employee compensation taxable under section 61(a). Accordingly, we sustain respondent's determination in his notice of deficiency dated February 25, 2019.
Decision will be entered for respondent.
This concludes the Court's findings and opinion in this case.
(Whereupon, at 10:19 a.m., the above-entitled matter was concluded.)