T.C. Memo. 2000-77
UNITED STATES TAX COURT
DIANA T. VISCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23336-97. Filed March 7, 2000.
Diana T. Visco, pro se.
Carol-Lynn E. Moran, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined a deficiency of $37,114
in petitioner’s 1992 Federal income tax and an addition to tax
pursuant to section 6651(a)(1)1 of $495.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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The issues for decision are: (1) Whether petitioner is
required to include $138,799.18 in compensation for services,
backpay, and interest on backpay in her 1992 gross income; (2)
whether petitioner is required to include a $182 State income tax
refund and $15 of interest in her 1992 gross income; and (3)
whether petitioner is liable for an addition to tax under section
6651(a)(1) for failure to timely file her 1992 Federal income tax
return.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Philadelphia, Pennsylvania, at the time she filed her petition.
Petitioner was a reading specialist for the School District
of Cheltenham Township (district) until June of 1989. In June of
1989, the district asked petitioner not to return to work the
following school year, and in August of 1989, she was suspended
from her position with the district. In November of 1989, the
district’s school board (board) voted to dismiss petitioner for
willfully violating school laws when she failed to follow
directives of superiors. Petitioner appealed the board’s
decision to dismiss her. On January 24, 1990, the secretary of
education for the Commonwealth of Pennsylvania (secretary)
reversed the board’s decision and ordered the district to
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reinstate petitioner to the position which she had held during
the 1988-89 school year, or a comparable position, with backpay
plus interest at 6 percent per annum. The board appealed the
secretary’s order, and on June 3, 1991, the Commonwealth Court of
Pennsylvania (Commonwealth Court) affirmed the secretary’s
decision.
The district employed petitioner from September of 1991
until June of 1992. As compensation for services provided by
petitioner during 1992, she received $38,223.86.2 Petitioner
cashed the checks representing this compensation. Petitioner did
not return to work with the district after June of 1992.
As a result of the above proceedings regarding petitioner’s
dismissal, the district attempted to pay petitioner backpay for
the 1989-90 and 1990-91 school years. On February 25, 1992, the
district issued two checks payable to petitioner in the amounts
of $24,601.74 and $26,328.08. These checks represented
$95,189.92 in backpay and interest on backpay after payroll
deductions. However, petitioner never cashed these checks, and
they were subsequently voided by the district. On December 3,
1992, the Commonwealth Court ordered the district to pay
2
This represents total compensation for services before
payroll deductions.
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petitioner $111,708.44. The $111,708.44 amount was computed as
follows:
1
1989-90 salary $55,634.51
2
1990-91 salary 52,349.93
3
Additional interest 524.58
4
Reimbursement for benefits 3,195.84
5
Total 111,704.86
1
This amount consists of a base salary of $50,500 less interim earnings of
$871.15, plus interest to Feb. 25, 1991, of $6,005.66.
2
This amount consists of a base salary of $54,300 less interim earnings of
$4,968, plus interest to Feb. 25, 1992, of $3,017.93.
3
There is a $12,794.52 difference between the $107,984.44 ($55,634.51 +
52,349.93) in backpay and interest on backpay that the district ultimately paid
petitioner and the $95,189.92 in backpay and interest on backpay that the district
offered her on Feb. 25, 1992. The $524.58 in additional interest represents 6
percent interest on $12,794.52.
4
This amount constitutes reimbursement for medical and dental benefits that
petitioner did not receive while terminated.
5
There is a small difference of $3.58.
The district issued two checks to petitioner, each dated
December 21, 1992, totaling $59,079.78. These checks represented
backpay and interest on backpay of $108,509.02 after payroll
deductions.3 The district also issued a check to petitioner
dated December 21, 1992, in the amount of $3,195.84 as
reimbursement for benefits petitioner had not received. A
courier presented the checks to petitioner on December 28, 1992.4
3
A portion of the payroll deductions consisted of $31,042.86
in Federal income taxes.
4
However, the record is not clear whether petitioner also
received the third check for $3,195.84 on Dec. 28, 1992. It is
irrelevant to our inquiry since the check for $3,195.84 was not
included in the Form W-2, Wage and Tax Statement, for 1992 and is
not included in respondent’s determination of unreported income.
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It is clear from the record that the two checks for backpay and
interest on backpay were delivered to petitioner on December 28,
1992. Petitioner took the checks and called the district‘s
attorney and told him she was refusing the checks. Petitioner
then returned the checks to the courier.
The district mailed petitioner a Form W-2, Wage and Tax
Statement, showing taxable income of $138,799.18 and $35,134.61
in withholdings for Federal income tax purposes. Taxable income
was based on the following:
13 biweekly paychecks of $2,248.46 $29,229.98
1
6/30/92 paycheck 8,993.88
1989-90 salary 55,634.51
2
1990-91 salary & additional interest 52,874.51
Total State wages 146,732.88
Less: Payments to Pennsylvania School
Employees Retirement System (7,933.70)
3
Total taxable wages 138,799.18
1
At the end of each school year, teachers are given a summer payoff which is a
total of four biweekly paychecks.
2
This amount consists of $52,349.93 in salary and $524.58 in additional
interest.
3
The $3,195.84 reimbursement for medical and dental benefits not received
while terminated was not included in the Form W-2 for 1992.
Additionally, petitioner received a $182 State income tax refund
and $15 of interest during taxable year 1992.
On April 15, 1993, petitioner filed a Form 4868,
“Application for Automatic Extension of Time to File U.S.
Individual Income Tax Return”. Petitioner questioned the
accuracy of the Form W-2 that she had received from the district.
On the basis of advice received from the Internal Revenue
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Service’s (IRS) Taxpayer Service, petitioner filed a Form 4852,
“Substitute for Form W-2, Wage and Tax Statement or Form 1099R,
Distributions from Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRA’s, Insurance Contracts, etc.” Petitioner sent
the Form 4852 to the IRS’s Philadelphia Criminal Investigation
Unit in June of 1993. Petitioner did not provide details of any
wages or taxes withheld on the substitute Form W-2 because she
was uncertain as to which items of income to include in her
calculations. However, petitioner asserted on the substitute
Form W-2 that her employer’s Form W-2 does not appear to be valid
because:
(1) Money reported as earnings may actually be monies
illegally withheld from taxpayer’s retirement fund
during the years of credited service (1963-1992);
(2) If, money reported as earnings, constitute employer
contractual liability for wrongful discharge of
taxpayer, then amount entered is inaccurate. Employer
obligation at 6 per cent annum exceeds the amount
entered in Box 10.[5]
(3) Monies issued to taxpayer identified as payroll
checks 95799[6] and 96800[7] dated December 21, 1992 are
not constructively received because they are
5
Wages, tips and other compensation.
6
The payroll check for $29,068.18 represented backpay and
interest on backpay of $55,634.51 after payroll deductions for
the 1989-90 school year.
7
Petitioner appears to be referring to check no. 95800, not
96800. Check no. 95800 is a payroll check for $30,011.60, which
represented backpay and interest on backpay of $52,874.51 after
payroll deductions for the 1990-91 school year.
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inaccurately identified as retirement[8] salary.
Taxpayer has not filed any application for retirement
allowance. Moreover, these checks serve to validate a
grossly inaccurate retirement fund. Consequently, the
taxpayer does not know how to complete tax filing for
the 1992 tax year and kindly requests a thorough
investigation into this matter. * * *
The substitute Form W-2 was accompanied by a letter
requesting a criminal investigation into the matter. In the
letter, petitioner stated she wished to complete her 1992 Federal
tax return in a manner that would allow her to preserve her legal
rights.
On August 13, 1993, petitioner filed a Form 2688,
“Application for Additional Extension of Time to File U.S.
Individual Income Tax Return”. Petitioner provided the following
explanation for her request:
I requested a criminal investigation of monies reported
on my 1992 W-2. I have not received any information
about the information given on Form 4852 dated June 17,
1993 and [sic] am uncertain about how to file my 1992
tax return.
On October 4, 1993, the Commonwealth Court ordered the
district to pay the sum of $62,275.629 into the Commonwealth
8
Neither of the paychecks nor the accompanying payment stubs
identified the payment as retirement salary. The only references
to retirement salary were explanatory notes on the payment stubs
indicating that the payroll deductions taken from petitioner’s
pay for retirement benefits are based on her retirement salary.
9
The difference between the $111,708.44 that the
Commonwealth Court ordered the district to pay petitioner on Dec.
3, 1992, and the $62,275.62 that the Commonwealth Court ordered
(continued...)
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Court since petitioner had refused to keep the two checks
presented to her on December 28, 1992. The district paid
$62,275.62 into the Commonwealth Court on March 10, 1994.
On March 20, 1995, the IRS sent a Form 4598, “Form W-2, or
1099 Not Received or Incorrect”, to the district. The Form 4598
indicated that the district’s Form W-2 differed from petitioner’s
records. The district responded on the back of the same form by
indicating that petitioner’s Form W-2 was mailed to her in
January of 1993.
On September 28, 1995, the Commonwealth Court opened a bank
account with Dauphin Deposit Bank and Trust Co. for the benefit
of petitioner. In order for petitioner to withdraw cash from the
account, all that she was required to do was to write a letter to
the Commonwealth Court requesting access to the funds.
By letter dated October 3, 1995, the Commonwealth Court
notified petitioner that it had transferred the $62,275.62 to an
interest-bearing account in her name. On August 28, 1997,
respondent mailed a statutory notice of deficiency to petitioner
for the taxable year 1992.
9
(...continued)
the district to pay into the Commonwealth Court on Oct. 4, 1993,
was the result of payroll withholdings. The checks for backpay
and interest had net amounts of $29,068.18 and $30,011.60. Thus,
$29,068.18 plus $30,011.60 plus $3,195.84 (reimbursement for
medical benefits not received while terminated) equals
$62,275.62.
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As of the date of trial, petitioner had not contacted the
Commonwealth Court requesting access to the $62,275.62 that the
district had deposited with Dauphin Deposit Bank and Trust Co.
for her benefit. Petitioner has never filed a Federal income tax
return for the taxable year 1992.
OPINION
Gross Income
The first issue is whether petitioner is required to include
$138,799.18 in compensation for services, backpay, and interest
on backpay in her 1992 gross income. Gross income includes
income from whatever source derived, including compensation for
services. See sec. 61(a)(1).
A. Compensation for Services Performed During 1992
At trial, petitioner acknowledged that she received and
cashed paychecks for services performed in 1992. Since
compensation for services rendered is includable in gross income
and petitioner does not dispute that she received it, we hold
that petitioner is required to include $38,223.86 of wages for
services that she performed in 1992 in her 1992 gross income.
B. Backpay and Interest on Backpay
With regard to the backpay and interest on backpay,
petitioner appears to argue, in the alternative, that: She never
constructively received these amounts; the money was a damage
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award in a tortlike action and not backpay; and the income is an
unauthorized withdrawal from her pension plan.
The amount of any item of gross income shall be included in
the taxable year in which it is actually or constructively10
received by the taxpayer. See sec. 451(a); sec. 1.451-1(a),
Income Tax Regs. Amounts owed to cash basis taxpayers are not to
be included in the taxpayers’ income unless it appears that the
money was available to them, the payor was able and ready to pay
them, their right to receive the money was not restricted, and
their failure to receive the cash resulted from the exercise of
their own choice. See Basila v. Commissioner, 36 T.C. 111,
115-116 (1961).
The district made two attempts to pay petitioner for the
backpay and interest on backpay during 1992. Checks were
initially issued to petitioner in February of 1992 and
subsequently voided by the district because petitioner did not
10
Sec. 1.451-2(a), Income Tax Regs., defines the term
“constructive receipt” as follows:
(a) General rule. Income although not actually reduced
to a taxpayer’s possession is constructively received
by him in the taxable year during which it is credited
to his account, set apart for him, or otherwise made
available so that he may draw upon it at any time, or
so that he could have drawn upon it during the taxable
year if notice of intention to withdraw had been given.
However, income is not constructively received if the
taxpayer’s control of its receipt is subject to
substantial limitations or restrictions. * * *
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cash the checks. The district made another attempt to pay
petitioner in December of 1992. This time, petitioner took the
checks and called the district’s attorney and told him she was
refusing the checks. Petitioner then returned the checks to the
courier. We conclude that the money was available11 to
petitioner, and the district was able and willing to pay her.
Nevertheless, petitioner characterized the district’s
attempt to deliver the checks as a settlement offer, which she
rejected. We disagree. Before delivering the checks, the
Commonwealth Court established the exact amount due petitioner
for backpay, interest on backpay, and benefits. The district was
not negotiating; it was complying with the Commonwealth Court’s
December 3, 1992, order. Consequently, when the courier
delivered the checks to petitioner on December 28, 1992, she had
the right to a specific amount of money and the power to receive
that money.
Petitioner argues that a substantial restriction existed on
the money when the Commonwealth Court deposited the funds with
Dauphin Deposit Bank and Trust Co. for her benefit. However,
that account was established for petitioner’s benefit in 1995,
and our inquiry turns on whether a substantial restriction
11
“A check in the hands of a taxpayer ordinarily means that
the funds are immediately available.” Walter v. United States,
148 F.3d 1027, 1029 (8th Cir. 1998).
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existed in 1992. When the checks were delivered to petitioner in
December of 1992, they were payable only to petitioner, and none
of the documents and orders involved in the various proceedings
contained any indication of any condition or limitation imposed
upon petitioner’s receipt of the checks. Petitioner had
unfettered control over the checks in 1992 but returned them.
Thus, the money was not restricted, and petitioner’s failure to
benefit from the amounts represented by the checks resulted from
the exercise of her own choice. Therefore, we conclude that
petitioner constructively received the backpay and interest on
backpay in 1992.12
12
Petitioner had $31,042.86 in Federal income taxes withheld
from the two checks issued to her for backpay and interest on
backpay. Assuming arguendo that petitioner was correct and that
she did not constructively receive the checks for backpay and
interest on backpay in 1992, petitioner would have overpaid her
1992 Federal income taxes.
The Tax Court has jurisdiction to award to a taxpayer a
refund of overpaid taxes if the Commissioner issued the notice of
deficiency within the later of 2 years after the tax was paid or
3 years after the return was filed. See secs. 6511(b)(2)(A) and
(B) and 6512(b)(3)(B); Commissioner v. Lundy, 516 U.S. 235,
241-242 (1996). The 2-year period applies (and the 3-year period
does not) if the taxpayer did not file his or her income tax
return before the Commissioner issued a notice of deficiency for
that year. See secs. 6511(b)(2)(B) and 6512(b)(3); Commissioner
v. Lundy, supra at 243. Petitioner did not file a tax return for
1992.
Respondent mailed the notice of deficiency on Aug. 28, 1997.
We may order a refund of any overpayments petitioner made within
the 2 years preceding Aug. 28, 1997. Petitioner’s payments of
taxes for 1992 were made by the district through withholding.
(continued...)
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Petitioner’s next argument is that “The totality of the
circumstances in this matter points to the nature of the action
as a tortlike action and the nature of the money as damages13 and
not backpay.” We disagree.
Gross income does not include the amount of any damages
received on account of personal injuries or sickness. See sec.
104(a)(2).14 “The term ‘damages received (whether by suit or
agreement)’ means an amount received * * * through prosecution of
a legal suit or action based upon tort or tort type rights, or
12
(...continued)
Withheld income taxes are deemed paid on Apr. 15 of the year
following the taxable year. See sec. 6513(b)(1); Baral v. United
States, U.S. , 68 U.S.L.W. 4119 (Feb. 22, 2000). Thus,
petitioner is deemed to have paid income tax for 1992 on Apr. 15,
1993, which is more than 2 years before Aug. 28, 1997.
If petitioner did not constructively receive the income for
backpay and interest on backpay in 1992, then she would have
overpaid her 1992 taxes but would be time barred to claim credit
for any overpayment. Furthermore, when petitioner actually or
constructively receives the $62,275.62 plus interest from the
interest-bearing account with Dauphin Deposit Bank and Trust Co.,
she will presumably have received taxable income, owe tax on that
income, and might be unable to get any credit for the taxes
previously paid.
13
Petitioner seems to be arguing that the backpay was really
a damage award and thus under sec. 104(a) is excluded from gross
income.
14
The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to
limit the exclusion, inter alia, to “personal physical injuries
or physical sickness.” The amendment does not apply to damages
collected before the date of its enactment and has no bearing
here.
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through a settlement agreement entered into in lieu of such
prosecution.” Sec. 1.104-1(c), Income Tax Regs. In order for
damages to be excludable from gross income under section
104(a)(2), the taxpayer must demonstrate that: (1) The
underlying cause of action is based upon tort or tort type
rights, and (2) the damages were received on account of personal
injuries or sickness. See Commissioner v. Schleier, 515 U.S.
323, 337 (1995).
The record in this case shows that petitioner’s dispute with
the district was over her dismissal for failure to comply with
the directives of her superiors. There is nothing in this record
that would indicate that the dispute involved a tortlike action
or a personal injury. As stated in the opinion of the secretary
of education:
The District’s dismissal action is based upon a
conclusion that Visco persistently and willfully
violated the school laws when she failed to comply with
requests made by the Principal, Assistant
Superintendent and Superintendent. As correctly
pointed out by Visco, the District’s action involves
three elements, all of which must be satisfied in order
for us to uphold the District’s action. The district
has the burden of proving by substantial evidence that
Visco’s actions were 1) persistent; 2) willful; and 3)
violations of school law. “Substantial evidence has
been defined as such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion.”
* * *
Recovery of backpay in this context does not fall within the
exclusion of section 104(a)(2) because it does not satisfy the
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critical element of being “on account of personal injury or
sickness.” Commissioner v. Schleier, supra at 330. In the
instant case, the record is clear that the payments made to
petitioner were for backpay and interest on backpay. We conclude
that the income from backpay and interest on backpay does not
fall within the exclusion from income set forth in section
104(a)(2).
Petitioner’s final argument is that the money received from
the district was an unauthorized withdrawal from her pension.
Petitioner bears the burden of proof. See Rule 142(a). Other
than petitioner’s testimony that she was concerned that the
payment for backpay offered by the district could have been an
unauthorized withdrawal from her retirement fund, she offered no
proof that the money was withdrawn from the Pennsylvania School
Employees Retirement System. All of the other evidence supports
a conclusion that none of the amounts in issue constituted
withdrawals from petitioner’s retirement fund. In fact,
petitioner’s 1992 Form W-2 reflects $7,933.70 in contributions by
her to the pension plan during the year. Thus, we conclude that
petitioner’s assertion lacks merit.
C. State Income Tax Refund and Interest Income
Petitioner stipulated that she received a $182 State income
tax refund in 1992 that she had claimed as a deduction in prior
years. Petitioner offered no evidence that respondent’s
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determination is in error. Petitioner also stipulated that she
received $15 of interest in 1992. We sustain respondent’s
determination regarding these items.
Section 6651(a)(1) Addition to Tax
The final issue is whether petitioner is liable for the
addition to tax under section 6651(a)(1) for 1992. Petitioner
contends that she did not have enough information to file a
return because she could not verify that part of the income
reflected on her 1992 Form W-2 represented backpay and interest
on the backpay rather than an unauthorized withdrawal from her
retirement fund.
It is well settled that in order to avoid the addition to
tax prescribed by section 6651(a), petitioner bears the burden of
proving both (1) that the failure did not result from “willful
neglect,” and (2) that the failure was “due to reasonable cause.”
Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245
(1985). “Willful neglect” denotes “a conscious, intentional
failure or reckless indifference.” United States v. Boyle, supra
at 245. “Reasonable cause” correlates to “ordinary business care
and prudence”. Id. at 246 n.4; sec. 301.6651-1(c)(1), Proced. &
Admin. Regs.
Petitioner was aware of her need to file a return but
questioned the information on the Form W-2 that she received from
the district. Petitioner contacted the district but was unable
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to satisfy her concerns. Petitioner contacted the IRS and on the
basis of the advice of the IRS’s Taxpayer Service, timely filed a
Form 4868, “Application for Automatic Extension of Time To File
U.S. Individual Income Tax return” for 1992. Petitioner again
attempted to obtain information from the district but was not
satisfied. Petitioner contacted the IRS again and was advised to
contact the IRS’s Criminal Investigation Unit and to file a Form
4852, “Substitute for Form W-2, Wage and Tax Statement or Form
1099R, Distributions from Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRA’s, Insurance Contracts, etc.”
When petitioner contacted the Service’s Criminal
Investigation Unit, she indicated that she wanted to complete her
1992 Federal tax return in a manner that would allow her to
preserve her rights but that she did not know how to complete her
tax filing for 1992. Petitioner requested an investigation into
the matter.
In August of 1993, petitioner filed a Form 2688,
“Application for Additional Extension of Time To File U.S.
Individual Income Tax Return” and notified the IRS that she still
had not received the information that she previously requested.
As a result, petitioner asserted that she did not know how to
file her return.
The IRS sent Form 4598, “Form W-2, or 1099 Not Received or
Incorrect”, to the district indicating that petitioner’s records
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differed from the district’s. That letter was sent nearly 2
years after petitioner had advised the IRS of her concerns when
she filed Form 2688 for an additional extension of time to file
her 1992 tax return. The district’s response to the IRS
indicated only that the district mailed petitioner a Form W-2 in
January of 1993.
Petitioner had $35,134.61 in Federal income taxes withheld
from her paychecks in 1992. Respondent’s notice of deficiency
indicates that petitioner’s correct tax liability is $37,114. As
of the date of trial, petitioner had not contacted the
Commonwealth Court requesting access to the $62,275.62 that the
district deposited with Dauphin Deposit Bank and Trust Co. for
her benefit. In other words, 95 percent of petitioner’s Federal
tax liability as determined by respondent was paid in 1992, and
as of 1999, she still had not requested access to the funds
deposited on her behalf for backpay and interest on backpay
because of her confusion about the nature of these funds. We
think petitioner was sincere in her confusion about the nature of
the backpay that had been awarded to her. While petitioner was
mistaken about the nature of the backpay, she subjectively
believed that her concerns were real, she was forthcoming with
the IRS about her confusion and she asked for assistance, and she
did the best that she was personally capable of doing to comply
with the law.
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Consequently, we do not sustain respondent’s determination
that petitioner is liable for an addition to tax pursuant to
section 6651(a)(1).
Decision will be entered for
respondent with respect to the
deficiency and for petitioner with
respect to the addition to tax
under section 6651(a)(1).