Brooke v. Commissioner

T.C. Memo. 2000-194

UNITED STATES TAX COURT

RONALD M. BROOKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15401-97. Filed June 28, 2000.

Ronald M. Brooke, pro se.

Stephen R. Takeuchi and Robert S. Bloink, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Judge: Respondent determined a deficiency in

petitioner’s 1992 Federal income tax of $12,186, a penalty

pursuant to section 6662(a)1 of $2,437.20, and a late-filing

addition pursuant to section 6651(a)(1) of $3,046.50. The

primary issues for our consideration are whether petitioner is

1
Unless otherwise stated, all section references are to the
Internal Revenue Code in effect for the taxable year in issue.
 - 2 -

subject to the alternative minimum tax (AMT), and whether he was

negligent when he failed to calculate the AMT on his 1992 Federal

income tax return. Petitioner also challenges the late-filing

penalty determined by respondent.

FINDINGS OF FACT

The stipulation of facts and the exhibits attached thereto

are incorporated herein by this reference.

At the time his petition was filed, petitioner was a U.S.

citizen residing in Ludwigshafen, Germany. Petitioner had

remained in Germany after retiring from the U.S. Army in 1985.

From 1986 to 1992, petitioner owned a business that contracted

with the U.S. military in Germany. In 1992, he received $567,331

in income from that business and reported an adjusted gross

income of $507,761. Included in that amount was interest income

of $1,421 and dividend income of $196, both of which are

considered U.S.-source income and were not taxed by the German

Government.

Petitioner paid 456,738 German marks (DM) for taxes

associated with the 1992 taxable year to the German Finanzamt,

the sovereign taxing authority of Germany. Using the applicable

exchange rate for that time (DM 1.56 to the dollar), that amount

equals $292,781. The parties agree that petitioner’s U.S.

tentative AMT liability for 1992 would have been $121,863 before

accounting for the alternative minimum tax foreign tax credit and
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the alternative minimum tax net operating loss deduction.

Petitioner claimed on his U.S. income tax return that the foreign

tax credit and net operating loss deduction completely offset any

U.S. tax liability he may have had for 1992.

Petitioner’s 1992 Federal income tax return was received by

respondent on April 15, 1996. Respondent later reviewed

petitioner’s 1992 return and determined that petitioner had

negligently failed to report that he owed the AMT. Respondent

determined that petitioner owed $12,186 in income tax after the

correct foreign tax credit was applied and a negligence penalty

of $2,437.20 for failing to report and pay his AMT. Respondent

also determined that petitioner owed a late-filing addition of

$3,046.50 because his return was received after the required date

for foreign returns.

OPINION

Nonresident U.S. citizens, such as petitioner, are required

to file Federal income tax returns by a date certain and report

all worldwide income. See sec. 6012; sec. 1.6012-1(a)(1)(i),

Income Tax Regs. If the nonresident citizen pays income tax to

foreign jurisdictions, that citizen is entitled to claim a

foreign tax credit. See secs. 27(a), 901. Petitioner received

U.S.-source income, in the form of dividends and interest, and

German-source income, in the form of a salary from his company

based in Germany. He reported all sources of income on his
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Federal income tax return and calculated the appropriate tax. He

then claimed a credit for the German income tax he had paid

against the income tax he owed to the United States, thereby

reducing his Federal income tax liability to zero. He did not

report any liability for the section 55 AMT.

Section 55(a) imposes an AMT on noncorporate taxpayers equal

to the excess of the “tentative minimum tax” over the “regular

tax”2 for the taxable year. That excess amount is paid in

addition to any regular tax owed. The AMT prevents a taxpayer

with substantial income from avoiding significant tax liability

through the use of exemptions, deductions, and credits. See

Urbanek v. United States, 866 F. Supp. 1414 (S.D. Fla. 1994),

affd. per curiam 71 F.3d 855 (11th Cir. 1996); S. Rept. 99-313,

at 518 (1986), 1986-3 C.B. (Vol. 3) 1, 518.

Noncorporate taxpayers may reduce their tentative minimum

tax by the foreign tax credit. See sec. 55(b)(1)(A). However,

that foreign tax credit is limited by section 59(a)(2)(A). The

foreign tax credit cannot offset more than 90 percent of the

tentative minimum tax figured. See id. The parties agree that

petitioner’s tentative minimum tax is $121,863. Ninety percent

of $121,863 is $109,676. Therefore, petitioner’s AMT, the

2
The term “regular tax” means “the regular tax liability
for the taxable year (as defined in section 26(b)) reduced by the
foreign tax credit allowable under section 27(a)”. Sec.
55(c)(1).
 - 5 -

tentative minimum tax minus the foreign tax credit, is $12,186.

Because he had no additional regular tax due, petitioner would

owe $12,186 for 1992.

In his challenge of the deficiency determined by respondent,

petitioner does not question respondent’s calculation of the AMT.

Instead, he contends that the AMT violates the double tax

prohibition found in the U.S.-Germany tax treaty. See Convention

for the Avoidance of Double Taxation, Aug. 29, 1989, U.S.-

Germany, art. 23, 30 I.L.M. 1778, 1779 (the U.S.-Germany treaty).

This was the same argument made in Pekar v. Commissioner, 113

T.C. 158 (1999). In that case, we found that the treaty

provision had been written to allow for the preexisting

alternative minimum tax provision in section 59. See id. at 163-

164. The treaty provision, which was written 5 years after

section 59 was enacted, states that the double taxation

prohibition is “‘subject to the limitations of the law of the

United States.’” Id. at 163 (quoting the U.S.-Germany treaty,

art. 23(1)). Because the treaty provision may be read in harmony

with the AMT provision, petitioner is not excused from liability

for the AMT.

Petitioner also disputes respondent’s determination that a

section 6662(a) negligence penalty should be applied. Petitioner

contends that he should not be subject to the section 6662(a)

negligence penalty because he relied on the advice of a Judge
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Advocate General (JAG) officer hired to help U.S. service

personnel living in Germany prepare their tax returns, who told

him that he was not liable for the AMT.

Section 6662(a) imposes an accuracy-related penalty of 20

percent on any portion of an underpayment of tax that is

attributable to items set forth in section 6662(b). Respondent

contends that petitioner was negligent with respect to his

understatement of tax. Negligence includes any careless,

reckless, or intentional disregard of rules and regulations, any

failure to make a reasonable attempt to comply with the

provisions of the law, and any failure to exercise ordinary and

reasonable care in the preparation of a tax return. See Zmuda v.

Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C.

714 (1982). To prevail on the issue of negligence, petitioner

must prove that his actions in connection with this transaction

were reasonable in light of his experience and business

sophistication. See Hoffpauir v. Commissioner, T.C. Memo.

1996-41; Avellini v. Commissioner, T.C. Memo. 1995-489. If a

taxpayer acts in good faith and with reasonable cause, he or she

will not be liable for the addition to tax for negligence. See

sec. 6664(c); Collins v. Commissioner, 857 F.2d 1383, 1386 (9th

Cir. 1988), affg. Dister v. Commissioner, T.C. Memo. 1987-217.

Petitioner has no tax or accounting background beyond helping

fellow service personnel read Internal Revenue Service forms.
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Petitioner’s return was prepared by an officer who petitioner

understood to be hired solely to provide tax advice to service

personnel stationed abroad and upon whom he relied. Although we

have not ruled in favor of petitioner on the AMT issue, his

failure to comply with the regulations was due to his reasonable

belief that the JAG officer would know whether he was liable for

the AMT. Consequently, petitioner is not liable for the

accuracy-related penalty.

As a final issue, petitioner also contends that he should

not be liable for the 6651(a)(1) late-filing penalty. Individual

Federal income tax returns are generally due on or before April

15 of the year following the close of the calendar year. See

sec. 6072(a). That date may be extended by an additional 2

months for U.S. citizens whose tax homes are outside the United

States and Puerto Rico. See sec. 1.6081-5(a)(5), Income Tax

Regs. Petitioner’s 1992 Federal income tax return was received

by respondent on April 15, 1996, approximately 3 years past the

due date. Petitioner argues that, because a claim for refund may

be filed up to 3 years from the return due date, he may also file

his return within 3 years of the due date. Petitioner has cited

no authority for this position, nor can we find any such

authority. Petitioner is therefore liable for the late-filing

penalty.
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To reflect the foregoing,

Decision will be entered for

respondent as to the deficiency and

the late-filing addition, and for

petitioner as to the negligence

penalty.