T.C. Summary Opinion 2001-8
UNITED STATES TAX COURT
PETER SPULER, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8318-99S. Filed February 2, 2001.
Peter Spuler, Jr., pro se.
Taylor Cortright, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue.
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Respondent determined deficiencies, additions to tax, and
penalties in petitioner’s 1995 and 1996 Federal income taxes as
follows:
Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1995 $12,222 $378 $2,157
1996 13,809 1,209 1,798
The issues for decision are: (1) Whether a distribution in 1995
to petitioner from the individual retirement account (IRA) of
petitioner’s deceased father is taxable to petitioner; (2)
whether petitioner is entitled to deductions for contributions in
1995 and 1996 to a simplified employer pension-individual
retirement account (SEP); (3) whether petitioner is entitled to
deductions for amounts paid for self-employed health insurance;
(4) whether petitioner is liable for additions to tax for failure
to file timely returns for 1995 and 1996 pursuant to section
6651(a)(1); and (5) whether petitioner is liable for negligence
penalties for 1995 and 1996 pursuant to section 6662(a).1
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition herein, petitioner resided in Fort Washington, Maryland.
1
There are also adjustments to personal exemptions,
itemized deductions, and the alternative minimum tax, which
result from the above adjustments and are otherwise not in issue.
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During the years in issue petitioner was employed full-time
as an engineer for Greenhorne & O’Mara, Inc. Petitioner received
a bachelor of science degree in engineering and master’s degrees
in public policy and business. In 1995 petitioner accepted the
position at Greenhorne & O’Mara, Inc., of Director of Marketing
for Federal Land Development and Infrastructure.
In 1986 petitioner filed a certificate of incorporation for
Synergetics Engineering Corp. (SEC). According to a business
plan dated March 1988, the mission of SEC was as follows:
Synergetics has as its core mission to seek unique
profitable business opportunities in the technical
services market by focusing its total efforts on the
high growth environmental quality segments of the
overall market. The venture will always be market-
driven, with primary attention to client needs. The
management team will always nurture a direct personal
relationship with each major client, within mutually
shared objectives of unquestioned long-term technical
reliability and uncompromised attention to long-term
service needs.
For the taxable year ending July 31, 1987, SEC filed a Form
1120S, U.S. Income Tax Return for an S Corporation. The return
reflects that petitioner, his wife, and other family members
owned 100 percent of the shares of SEC. The return also
reflected total income of $6,991, expenses of $9,313, and an
ordinary loss of $2,322.
For the years in issue, no Forms 1120S were filed on behalf
of SEC. The record is unclear to what extent SEC conducted any
business during the years 1988 through 1994. Apparently during
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1995 and 1996, petitioner, as a representative of SEC,
contributed his services as a consulting engineer to nonprofit
organizations such as Christian Fellowship Ministries. Neither
SEC nor petitioner billed or received any money for such
services. SEC did not receive taxable income during the years in
issue, nor did SEC pay petitioner any sums as either salary or
self-employment income during the years in issue.
Petitioner maintained an account at Charles Schwab titled in
his name “UTA Charles Schwab & Co Inc, SEP-IRA DTD 11/20/93".
Contributions were made to the account in the amounts of $27,500
for 1995 and $30,000 for 1996. Petitioner also paid $3,079 and
$4,570 for self-employed health insurance for 1995 and 1996.
Petitioner’s father, Peter J. Spuler, Sr. (Mr. Spuler), died
in 1995. During that year petitioner received a distribution in
the amount of $10,906 from Mr. Spuler’s estate representing
petitioner’s share of an IRA owned by Mr. Spuler and held by the
South Jersey S&L Association. The record is unclear as to
whether petitioner was listed as a beneficiary of the IRA and/or
whether the distribution was paid directly to petitioner or
passed through the estate. Mr. Spuler’s will provided that his
estate would be liable for all Federal, State, and other taxes
arising from the transfer of property under the will.
Petitioner received automatic extensions to file his 1995
and 1996 Federal income tax returns. The due date of the 1995
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and 1996 returns as extended were August 15, 1996, and August 15,
1997, respectively. Petitioner’s 1995 and 1996 tax returns were
received by respondent on August 21, 1996, and October 22, 1997,
respectively.
Respondent mailed a notice of deficiency to petitioner on
February 12, 1999. The notice determined that petitioner failed
to report income of $10,906 in 1995 received as a distribution
from Mr. Spuler’s IRA. The notice also disallowed petitioner’s
deductions for contributions to a simplified employee pension
plan and payments for self-employment health insurance, as
petitioner failed to satisfy the requirements of each deduction.
Respondent also determined that petitioner was liable for an
addition to tax for failure to file a timely return under section
6651(a)(1) and for the negligence penalty under section 6662(a)
for each of the taxable years 1995 and 1996.
After the trial of this case, the Court held a
teleconference with the parties. The Court expressed concern
over the inconclusive evidence regarding the IRA distribution.
The Court provided petitioner an opportunity to submit additional
documents regarding the IRA. We reopened the record and admitted
into evidence a letter from petitioner and a copy of Mr. Spuler’s
will.
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IRA Distribution From Mr. Spuler
Generally, any amount paid or distributed to a taxpayer from
an IRA is included in gross income in the manner provided by
section 72. See sec. 408(d)(1). A payee will generally not have
a basis in the IRA, unless the payee contributed nondeductible
amounts to the IRA. See secs. 72(e), 219(a) and (b), 408(d)(1)
and (2); Campbell v. Commissioner, 108 T.C. 54 (1997); sec.
1.408-4(a), (c), Income Tax Regs. When a payee contributes
nondeductible amounts, the payee’s gross income does include an
amount of the distribution in proportion to the nondeductible
contribution as compared to the total contribution to the IRA.
See secs. 72(e), 408(d)(1); Campbell v. Commissioner, supra; sec.
1.408-4(c), Income Tax Regs.
The parties agree that petitioner received $10,906 in 1995
from Mr. Spuler’s IRA. Petitioner contends that Mr. Spuler had
basis in the IRA for the following reason:
However, given the history of the contributions as made
subsequent to my father’s retirement from his lifetime
primary employer, Public Service Gas & Electric, it is
reasonable to assume that they were non-deductible
contributions. He was earning minor wages working
part-time during those years, and would not have needed
and or required deductible contributions.
We do not find petitioner’s unsupported self-serving statement to
be sufficient to support the assertion that the IRA included
nondeductible contributions. See Niedringhaus v. Commissioner,
99 T.C. 202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C.
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74, 77 (1986). Petitioner failed to establish that Mr. Spuler
made nondeductible contributions to the IRA.2 Thus, the entire
distribution is includable in gross income.
Petitioner additionally argues that he is not liable for tax
on the IRA distribution. Mr. Spuler’s will provides that all
Federal, State, and other death taxes associated with the
transfer of property from his estate to his beneficiaries will be
paid by his estate, and that none of the beneficiaries are liable
for the taxes.
State law determines the legal rights and interests in
property and transfers thereof. However, Federal law determines
the manner and extent to which such rights and interests will be
subjected to Federal tax. See Helvering v. Stuart, 317 U.S. 154,
161 (1942); Morgan v. Commissioner, 309 U.S. 78 (1940); Estate of
Sweet v. Commissioner, 234 F.2d 401 (10th Cir. 1956), affg. 24
T.C. 488 (1955); Estate of Bennett v. Commissioner, 100 T.C. 42,
59 (1993). We conclude that the terms of Mr. Spuler’s will do
not affect petitioner’s liability for the IRA distribution, and
he must include the full amount in gross income.
Deductions for a SEP
A SEP plan is described in section 408(k). An employer may
make contributions to an employee’s retirement account. See sec.
2
As a result of our conclusions, we need not consider
whether petitioner had a basis in the IRA arising from
nondeductible contributions made by his father.
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408(a) and (b). Self-employed persons or sole proprietors are
treated as their own employers under a SEP plan. See secs.
401(c)(4), 408(k)(7). The qualifying provisions for a SEP plan
are extensive. We need not detail the requirements here. While
petitioner may have maintained an account described as a SEP
account and made contributions to it in the years in issue, he
has not established that he was self-employed or a sole
proprietor in the year in issue. Petitioner acknowledges that
his solely owned corporation, SEC, did not receive income or
incur expenses in the years in issue. Petitioner did not receive
any money from SEC as a self-employed person or otherwise. In
fact, as indicated, petitioner was a full-time employee at
Greenhorne & O’Mara, Inc., and received a salary from that
organization during 1995 and 1996. Based on the foregoing,
petitioner is not entitled to the claimed deductions for SEP
contributions.
Self-Employed Health Insurance Deductions
Section 162(l)(1)(A) permits self-employed individuals to
deduct amounts paid for health insurance. As discussed above,
petitioner was not self-employed during the years in issue and
did not receive self-employment income. Petitioner’s earned
income came from his salary as an employee of Greenhorne &
O’Mara, Inc. Accordingly, petitioner is not entitled to the
deductions for payments made for health insurance.
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Additions To Tax for Failure To File Timely Under Section 6651(a)
Petitioner’s 1995 and 1996 Federal income tax returns were
not timely filed. Petitioner does not assert, nor did he present
any evidence, that the returns for the years in issue were
received or mailed prior to the due date as extended.
Section 6651(a) imposes an addition to tax of 5 percent of
the amount of such tax required to be shown on the return per
month, not to exceed 25 percent, for failure to timely file a
return. The addition to tax under section 6651(a) is imposed
unless the taxpayer establishes that the failure was due to
reasonable cause and not willful neglect. The record does not
establish that the failures to timely file were due to reasonable
cause and not willful neglect. Thus, respondent is sustained on
this issue.
Accuracy Related Penalties Under Section 6662(a)
Section 6662(a) imposes an accuracy-related penalty in the
amount of 20 percent of the portion of the underpayment of tax
attributable to negligence or disregard of rules or regulations.
See sec. 6662(b)(1). Negligence is any failure to make a
reasonable attempt to comply with the provisions of the internal
revenue laws. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs. Moreover, negligence is the failure to exercise due care
or the failure to do what a reasonable and prudent person would
do under the circumstances. Neely v. Commissioner, 85 T.C. 934,
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947 (1985). Disregard includes any careless, reckless, or
intentional disregard of rules or regulations. See sec. 6662(c);
sec. 1.6662-3(b)(2), Income Tax Regs. No penalty will be imposed
with respect to any portion of any underpayment if it is shown
that there was reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion. See
sec. 6664(c).
Based on this record, we conclude that petitioner is liable
for the accuracy-related penalties under section 6662(a).
Petitioner’s returns for the years in issue were replete with
errors, and petitioner failed to provide credible evidence to
substantiate or support entitlement to the deductions claimed.
We conclude that petitioner’s actions were not those of a
reasonable and prudent person under the circumstances. Thus, we
sustain respondent on this adjustment.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.