Opinion
3800-20
02-23-2023
JACE KING, F.K.A. ALI TAVANA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Emin Toro, Judge.
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is hereby
ORDERED that the Clerk of the Court shall transmit to petitioner and respondent a copy of the pages of the transcript of the trial in the above-referenced case, held before Judge Emin Toro in Los Angeles, California, on January 18, 2023, containing the Court's Oral Findings of Fact and Opinion, rendered at the trial session at which this case was heard. In accordance with the Oral Findings of Fact and Opinion, a Decision will be entered under Rule 155.
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 upon as precedent in any other case. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times. We round all monetary amounts to the nearest dollar.
In a notice of deficiency dated February 10, 2020, the Commissioner of Internal Revenue determined a deficiency of $9,281 in Ali Tavana's federal income tax for 2015. The name Ali Tavana is the one petitioner Jace King used previously. The Commissioner also determined additions to tax under sections 6651(a)(1), 6651(a)(2), and 6654(a) in the amounts of $1,583, $1,547, and $122, respectively.
After concessions that we describe in greater detail below, the issues that remain for our decision are: (1) whether Mr. King's gross income includes $26,375 in disability benefits paid by Sedgwick Claims Management Services (SCMS) on behalf of Los Angeles County, Mr. King's former employer, and (2) whether Mr. King is liable for an addition to tax under section 6651(a)(1) for failure to timely file an income tax return. As we will explain, the Commissioner prevails on both issues.
Background
We began trial of this case remotely (via ZoomGov) on November 16, 2021, during one of the Court's remote trial sessions. Mr. King participated in the remote proceedings by telephone after representing that he did not have the capability to join by video. Once trial began, we encountered difficulties taking testimony remotely and decided that the interests of justice required continuing the trial. We held further trial in person during the Court's January 17, 2023, Los Angeles, California trial session.
Mr. King represented himself, and Clinton M. Crosser represented the Commissioner.
FINDINGS OF FACT
On the evidence before us, and using the burden-of-proof principles explained below, the Court makes the following findings of fact. We draw the facts from the testimony and other evidence admitted at trial, as well as the parties' pleadings and their Stipulation of Facts and all attached Exhibits thereto.
Mr. King is a disabled firefighter. Before becoming disabled in 2013, he worked for Los Angeles County. In 2015, the year before us, Mr. King used the name Ali Tavana. For convenience, throughout our opinion, we refer to petitioner as Mr. King, even though many of the relevant documents in the record reflect the name Ali Tavana. Mr. King resided in California when he filed the Petition in this case.
SCMS is a company that handles disability claims on behalf of Los Angeles County. For 2015, SCMS Administrative Services Inc. issued a Form W-2, Wage and Tax Statement, to Mr. King. Box 1 of the form reflects "Wages, tips, other comp" of $26,375. Box 2 reflects "Federal income tax withheld" of $2,069. Box 16 reflects "State wages, tips, etc." of $26,375. Box 17 reflects "State income tax" withholding of $502. And in Box 13 the notation "Third-party sick pay" is checked.
During 2015, SCMS, as disability claims processor for Los Angeles County, sent 11 checks to Mr. King's address of record, the same address as the one Mr. King used in his Petition. SCMS's records show that the checks cleared the Los Angeles County bank account on which they were drawn. In total, the 11 checks amounted to $23,804. Adding to this amount the federal and state withholdings reflected in the Form W-2 issued to Mr. King ($2,069 and $502, respectively), one obtains $26,375, the amount reflected in Box 1 of the Form W-2. The withholding amounts are reflected in SCMS's records as "adjustments" (or reductions) from the gross disability payments due to Mr. King.
At a time not disclosed by the record, but before June 2021, Mr. King filed with the California Franchise Tax Board a Form 540, California Resident Income Tax Return, for 2015. Line 12 of that form reflects "State wages from your Form(s) W-2" of $53,431. Line 13 of the form reflects "federal adjusted gross income" of $53,432. The California return also includes as an attachment a Form W-2 showing "State wages, tips, etc." of $26,375 in Box 16 and "State income tax" withholding of $502 in Box 17. Box 1, "Wages, tips, other compensation," in this form is blank, although Box 3, "Social security wages," shows $26,375. Box c of the form lists SCMS Administrative Services as the employer's name.
Mr. King's federal income tax return for 2015 would ordinarily have been due in April 2016. But Mr. King obtained an extension until October 15, 2016, for filing that return. Despite the extension, Mr. King did not file a federal income tax return for 2015 by that date.
Since Mr. King did not timely file a return, on March 25, 2019, the Commissioner prepared a substitute for return pursuant to section 6020(b) based on information the Commissioner received from third parties. The February 10, 2020, notice of deficiency followed.
According to the notice, the deficiency in Mr. King's tax for 2015 arose from Mr. King's failure to report (1) taxable distributions from pensions of $27,056 and (2) Wages - Tips - Other of $26,375. The Commissioner determined that Mr. King owed $6,575 in tax with respect to these amounts. The Commissioner further determined that Mr. King was liable for a 10-percent additional tax of $2,706 under section 72 (t) with respect to early distributions from qualified retirement plans. (These two amounts add up to the total deficiency of $9,281.) As already noted, the Commissioner also determined additions to tax under sections 6651(a) (1), 6651(a) (2), and 6654(a) in the amounts of $1,583, $1,547, and $122, respectively.
Mr. King timely petitioned the Court for a redetermination of the Commissioner's determinations.
Since then, the Commissioner has conceded that Mr. King is not liable for a 10-percent additional tax on early distributions from qualified retirement plans under section 72 (t) and that he is not liable for additions to tax under sections 6651(a)(2) and 6654(a).
Mr. King in turn stipulated that he received taxable pension distributions of $27,056 in 2015. Although in the pre-trial colloquy with the Court on January 17, 2023, Mr. King expressed some reservations about what he had stipulated to, the stipulation is clear and Mr. King did not request to be relieved from it. Nor does it appear that he would meet the standard for relief even if we were to construe the pre-trial exchange as having constituted such a request. See Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992). Therefore, we find Mr. King has conceded that in 2015 he had taxable pension distributions of $27,056, as determined by the Commissioner. See Rule 91(e).
In the course of the litigation, on or about November 8, 2021, Mr. King provided to the Commissioner a copy of his unfiled Form 1040, U.S. Individual Income Tax Return, for 2015. Line 7 of that form reflects "Wages, salaries, tips, etc." of $26,375. Line 16b reflects taxable pension and annuity distributions of $26,057. And line 37 reflects "adjusted gross income" of $53,432.
OPINION
I. Unreported Income
A. Burden of Proof
As a general rule, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. Ill. 115 (1933). But, under precedent from the U.S. Court of Appeals for the Ninth Circuit (to which an appeal in this case would ordinarily lie, see I.R.C. § 7482(b)(1)(A)), this general rule is subject to conditions:
For the presumption to apply . . . the Commissioner must base the deficiency on some substantive evidence that the taxpayer received unreported income. If the Commissioner introduces some evidence that the taxpayer received unreported income, the burden shifts to the taxpayer to show by a preponderance of the evidence that the deficiency was arbitrary or erroneous. If the petitioner succeeds in showing that the deficiency was arbitrary or erroneous, the burden shifts back to the Commissioner to show that the [determination] was correct.Hardy v. Commissioner, 181 F.3d 1002, 1004-05 (9th Cir. 1999) (citations omitted), aff'g T.C. Memo. 1997-97; see also Caldwell v. Commissioner, T.C. Memo. 2022-51, at *5 ("In cases of unreported income, the Commissioner must establish an evidentiary foundation connecting the taxpayer to the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev'g 67 T.C. 672 (1977), or demonstrate that the taxpayer actually received income, Edwards v. Commissioner, 680 F.2d 1268, 1270-71 (9th Cir. 1982).").
Under section 6201(d), the Commissioner may not rely solely on a third-party report of income, such as a Form W-2, if certain requirements set out in that section are met. Muhammad v. Commissioner, T.C. Memo. 2021-77, at *6.
Here the Commissioner met his initial burden of "introduc[ing] some evidence that [Mr. King] received unreported income," Hardy v. Commissioner, 181 F.3d at 1004, or of connecting Mr. King with the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d at 361. He produced, among others, (1) a Form W-2 from SCMS showing income reported to Mr. King for 2015 in the amount of $26,375; (2) records from SCMS showing (a) that checks totaling $23,804 were sent to Mr. King's address of record in 2015 and cleared the Los Angeles County's bank account on which they were drawn and (b) that federal and state taxes were withheld in connection with those checks in the amount of $2,571; and (3) credible testimony from an SCMS employee describing (a) how those records were kept and (b) SCMS's function as a disability payment processor for Mr. King's former employer, Los Angeles County. We have previously held that such information suffices to meet the Commissioner's initial burden. See, e.g., Caldwell v. Commissioner, T.C. Memo. 2022-51, at *5 ("Information supplied to the IRS on a Form W-2 is sufficient to meet the Commissioner's initial burden."); see also Hardy v. Commissioner, 181 F.3d at 1005.
Thus, the burden has shifted to Mr. King to demonstrate, by a preponderance of the evidence, that the Commissioner's determination with respect to the income reported by SCMS is arbitrary or erroneous. As we now explain, Mr. King has failed to do so.
B. Unreported Disability Benefits
We begin our analysis by observing that section 61(a) provides that "gross income means all income from whatever source derived." This includes disability benefits (which are viewed as a replacement for wages) unless the premiums for those benefits are paid with after-tax dollars. See I.R.C. § 104(a)(3); Tuka v. Commissioner, 120 T.C. 1, 4 (2003) ("[E]xemption of benefits depends on whether contributions . . . involve after-tax dollars."), aff'd, 85 Fed.Appx. 875 (3d Cir. 2003); see also Tuka, 120 T.C. at 3.
It is somewhat difficult to identify what exactly Mr. King contends is wrong with the Commissioner's determination.
In his Petition, in response to the instruction to "Explain why you disagree with the IRS determination in this case (please list each point separately)," Mr. King wrote:
"* employer failed to provide W2 for year 2015 & refused to after several requests were made by tax payer via email/mail
* IRS was notified of employer's refusal and failure to provide W2 for 2015 & failed to enforce employer to issue W2
* tax payer completed extension to file tax return for 2015 while awaiting employer and IRS for either to provide W2
* any late, penalty, interest, fees, charges should be waived or reverse[d] as tax payer work[ed] in good faith"
Nothing in these assertions can fairly be read as contesting the fact that Mr. King received income from the relevant employer. Rather, they appear to challenge the timeliness of the issuance of the Form W-2, an issue that is irrelevant to the question whether the disability payments were made on behalf of Los Angeles County, Mr. King's former employer, and constituted gross income to Mr. King.
At trial, Mr. King did not discuss the alleged failure to receive a W-2. In his testimony, Mr. King agreed that he received some $26,000 or $27,000 on account of his disability in 2015, but disagreed that he received twice that amount. His principal contention appeared to be that he simply did not receive that much cash that year. But this contention is insufficient to carry his burden.
To begin with, we are not required to accept self-serving testimony, particularly where it is inconsistent and unsupported by any further evidence. See, e.g., Geiger v. Commissioner, 440 F.2d 688, 689-90 (9th Cir. 1971), aff'g per curiam T.C. Memo. 1969-159. Moreover, if Mr. King's argument is that he can only be liable for tax as the Commissioner maintains if, in 2015, he received some $53,000 as cash or through one or more checks, that argument is misplaced. In certain circumstances, an amount could be included in Mr. King's taxable income for 2015 even if he received no cash or checks in that year. For example, if Mr. King obtained a loan from his retirement plan before 2015 and failed to make a required repayment in 2015, the retirement plan would report the outstanding balance of the loan as a distribution in 2015, even though Mr. King received no cash from the retirement plan that year. See Treas. Reg. § 1.72(p)-l, Q&A (10) (c) .
That may have happened here. Of the taxable retirement distributions that Mr. King stipulated to, $26,157 was reported to the IRS on a Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., issued by Great-West Retirement Services. (The remaining $899 was reported by New York Life Trust Company.) The Form 1099-R from Great-West Retirement Services included a distribution code "L" and a distribution code value stating "Loans treated as deemed distributions under section 72(p)." Thus, even if Mr. King's recollection that he received only $26,000 or $27,000 in cash during 2015 is correct, it would not refute the Commissioner's determination, because it could have been SCMS, rather than Great-West Retirement Services, that made the cash payments that Mr. King recalls. Moreover, Mr. King admitted at trial that he borrowed funds from his retirement plan and that he was repaying the loan before he became disabled, but he maintained that the loan amount was much smaller than $26,000 or $27,000 at issue. In light of Mr. King's imprecise recollections as to what happened in 2015, the absence of any documentation supporting his assertions, and the evidence supporting the Commissioner's contrary assertions, we cannot conclude that the preponderance of the evidence shows the Commissioner's determination to treat the disability benefits paid by SCMS as includible in Mr. King's gross income to be arbitrary or erroneous.
At trial and in other communications with the Court, Mr. King also argued that the Commissioner should produce the checks that SCMS's records show to have cleared Los Angeles County's bank account. That documentation, in Mr. King's view, would have convinced him to give up the case long ago. But Mr. King's argument places on the Commissioner a burden the Commissioner does not bear. Once the Commissioner carried the initial burden of "introduc[ing] some evidence that [Mr. King] received unreported income," Hardy v. Commissioner, 181 F.3d at 1004, or of connecting Mr. King with the income-producing activity, Weimerskirch v. Commissioner, 596 F.2d at 361, it was up to Mr. King to introduce evidence that the Commissioner's determination was arbitrary or erroneous. Once Mr. King knew that payments SCMS made on behalf of Los Angeles County were at issue and once he received from the Commissioner the SCMS records we have already described, Mr. King could have subpoenaed additional records from SCMS or Los Angeles County (or its bank) to show that he never negotiated the checks SCMS's records say went to his address. He could have also called his own witnesses on this point. This he did not do. All we have in the record on this issue is Mr. King's testimony that, while he recalls receiving $26,000 or $27,000 from some source, he does not believe it was from SCMS. Given the rest of the record in this case, we find the testimony insufficient to find in his favor.
Mr. King also testified that he filed an amended return with the California Franchise Tax Board reflecting reduced income amounts. (He made a similar claim with respect to his federal return, but given that he never filed an original return, it is not clear to us how and with whom Mr. King filed an amended federal income tax return.) Even if that were so, it would not change our conclusion. As we have said repeatedly, a tax return does not establish that a taxpayer had income and losses in the amounts reported on the return. See Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); see also Wagner v. Commissioner, T.C. Memo. 2015-120, at *26-27 (collecting authorities). And, while the Commissioner might be able to use a taxpayer's inclusion of an income item on a tax return as an admission by the taxpayer that the income was received (as the Commissioner proposes to do here with respect to Mr. King's original California return), the absence of an item from the return is not affirmative proof that no income was received.
We pause briefly to consider in a bit more detail if section 6201(d) helps Mr. King. That section provides:
"In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary . . . by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return."
Mr. King did not cite section 6201(d) to us, nor are we able to find that he met the cooperation requirements of that provision. See, e.g., McQuatters v. Commissioner, T.C. Memo. 1998-88, 1998 WL 88180, at *3-4. But even if we were to overlook these points, we would conclude that the Commissioner has "produce[d] reasonable and probative information concerning the deficiency in addition to the [information return]" issued by SCMS, as discussed above. See Kleber v. Commissioner, T.C. Memo. 2011-233, 2011 WL 4485037, at *2. Thus, section 6201(d) does not change the conclusion here.
The same is true with respect to section 7491(a). Under that section, the burden of proof may shift to the Commissioner as to certain factual issues relevant to a taxpayer's tax liability if the taxpayer meets certain conditions. See Higbee v. Commissioner, 116 T.C. 438, 440-43 (2001) . Mr. Smith does not contend that the burden of proof should shift to the Commissioner under section 7491 (a), nor has he established that the requirements for shifting the burden of proof have been met.
Finally, we note that Mr. King does not dispute that disability benefits, as a replacement for wages, constitute taxable income unless the premiums for those benefits are paid with after-tax dollars. See I.R.C. § 104(a)(3); Tuka, supra. Moreover, Mr. King has offered no evidence that the benefits here are attributable to premiums paid with after-tax dollars. Nor has Mr. King argued that some other exception under section 104 should apply. Thus, we see no basis for excluding those benefits from Mr. King's income.
In short, in view of the evidence before us, we are unable to conclude that the Commissioner erred in determining that Mr. King received the disability income SCMS reported on the Form W-2 for 2015 and find that Mr. King's gross income includes unreported income of $26,375.
II. Addition to Tax for Failure To Timely File a Return
That leaves us with the second issue. Section 6651(a)(1) imposes an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and not willful neglect. Wheeler v. Commissioner, 127 T.C. 200, 207 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). The amount of such addition to tax is "5 percent of the amount of such tax [required to be shown as tax on the return] if the failure [to file] is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate." I.R.C. § 6651(a) (1) .
Under section 7491(c), the Commissioner has the burden of production with respect to a taxpayer's liability for any asserted addition to tax. To satisfy the burden of production, the Commissioner must produce evidence showing that the addition to tax is appropriate. Higbee, 116 T.C. at 446.
Mr. King stipulated that he did not timely file an income tax return for his 2015 tax year. And the record does not show that he ever filed an income tax return with the Commissioner for his 2015 tax year. Accordingly, the Commissioner's burden of production under section 7491(c) is met.
Aside from the bare allegations in the Petition that he did not receive the Form W-2 timely, allegations that Mr. King did not renew at trial, Mr. King has not put forth any arguments that his failure to timely file a return was due to reasonable cause and not willful neglect. In view of the evidence before us, we find that Mr. King is liable for an addition to tax under section 6651(a) (1) .
To reflect the foregoing, decision will be entered under Rule 155.
This concludes the Court's oral findings of fact and opinion in this case.
(Whereupon, at 3:35 p.m., the above-entitled matter was concluded.)
CERTIFICATE OF TRANSCRIBER AND PROOFREADER
CASE NAME: Jace King, f.k.a. Ali Tavana v. Commissioner
DOCKET NO.: 3800-20
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 21 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Jacqueline Denlinger on January 18, 2023 before the United States Tax Court at its session in Los Angeles, CA, 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.
Meribeth Ashley, CET-507 2/13/23
Transcriber ate
Susan Patterson, CDLT-174 2/13/23
Proofreader ate