T.C. Summary Opinion 2005-80
UNITED STATES TAX COURT
HARALD BERREY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18849-03S. Filed June 9, 2005.
Harald Berrey, pro se.
Kathleen C. Schlenzig, for respondent.
GOLDBERG, 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 year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s Federal
income tax of $46,076, an addition to tax of $4,874.85 pursuant
to section 6651(a)(1), an addition to tax of $3,791.55 pursuant
to section 6651(a)(2), and an addition to tax of $910.21 pursuant
to section 6654(a) for the taxable year 1999.
The petition placed in dispute respondent’s determination as
to filing status, allowance of standard deduction, and all
additions to tax.1 After respondent’s concessions,2 the issues
still in contention are: (1) Whether petitioner is entitled to
claim an itemized deduction for medical expenses in excess of
those conceded by respondent; and (2) whether petitioner is
liable for the additions to tax under sections 6651(a)(1),
(a)(2), and 6654(a). The amount of the additional 10-percent tax
pursuant to section 72(t) is a computational matter and will be
resolved by our decision on the medical expenses issue.
1
Petitioner, in his petition, did not dispute respondent’s
determination as to the inclusion of certain items in gross
income. As a result, the amount of deficiency placed in
controversy is less than $50,000. See Rule 170; Kallich v.
Commissioner, 89 T.C. 676 (1987).
2
Respondent concedes medical expenses in the amount of
$18,904, leaving at issue expenses in the amount of $28,666
($47,570-$18,904). Respondent also concedes that any medical
expenses allowed as a deduction under sec. 213 shall be deemed
paid for by a portion of petitioner’s withdrawal from his thrift
savings plan and are therefore excepted from the additional tax
under sec. 72(t). Respondent further concedes that petitioner’s
filing status is married filing jointly.
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Background
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
Hoffman Estates, Illinois, on the date the petition was filed in
this case.
During 1999, petitioner was a project manager for the
Federal Aviation Administration (FAA) branch of the United States
Department of Transportation. As of 1999, petitioner had been a
full-time employee with the FAA for almost 15 years. In August
of 1999, petitioner voluntarily resigned from his employment at
the FAA.
The U.S. Department of Transportation prepared a 1999 Form
W-2, Wage and Tax Statement, for petitioner showing wage income
of $56,149.15 and Federal income tax withheld of $10,457.36.
Also in 1999, petitioner withdrew all of his contributions
from his thrift savings plan through the National Finance Center.
As a result of this withdrawal, the National Finance Center sent
to petitioner a Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance
Contracts, Etc., for the year 1999 reflecting a withdrawal in the
amount of $96,760.69 and Federal income tax withheld of
$11,954.35. Petitioner did not make any payments to the Internal
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Revenue Service for the 1999 taxable year other than the
withholdings.
During the tax year at issue, petitioner was married to
Cynthia K. Berrey (Ms. Berrey). Ms. Berrey was a customer
service supervisor for Warner-Lambert Company during taxable year
1999. As a result of her employment, Warner-Lambert Company
prepared a 1999 Form W-2 for Ms. Berrey showing wage income of
$32,754.70 and Federal income tax withheld of $4,440.50.
Petitioner did not file his 1999 Federal income tax return
by the April 15, 2000, due date. Additionally, petitioner did
not request an extension of time to file the 1999 tax return.
In a notice of deficiency, respondent determined that
petitioner’s filing status was married filing separately and that
petitioner received total income (wages, interest, dividends,
pensions, misc.) of $153,954. Respondent also determined that
petitioner was liable under section 72(t) for the 10-percent
additional tax on that portion of a distribution from a qualified
retirement plan that is includable in petitioner’s gross income,
and additions to tax for failure to file a Federal income tax
return for the 1999 taxable year, failure to pay Federal income
tax for the 1999 taxable year, and an underpayment of estimated
tax.
On April 6, 2004, after the notice of deficiency was issued,
petitioner submitted to respondent’s Appeals officer, a Form
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1040, U.S. Individual Income Tax Return, for the taxable year
1999 with a filing status of married filing jointly. The Federal
income tax return for the taxable year 1999 was signed by
petitioner and petitioner’s wife, Cynthia K. Berrey, on or about
March 31, 2004. On his Form 1040, petitioner reported the
following relevant items:
Line Amount
7 Wages $88,904
8a Taxable interest 71
9 Ordinary dividends 89
13 Capital gain 966
16a Total pensions and annuities 96,761
16b Taxable amount 96,761
34 Adjusted gross income 187,214
36 Itemized deductions 53,512
53 Tax on IRAs,... 6,323
On Schedule A, Itemized Deductions, petitioner reported the
following relevant deductions and expenses:
Line Amount
1 Medical and dental expenses $47,570
1
2 Adjusted gross income 187,214
3 Multiply line 2 above by 7.5%2 14,041
4 Medical expense deduction $33,529
1
Amount from Form 1040, line 34.
2
7.5-percent limitation under sec. 213(a).
As of the time of trial, petitioner’s Form 1040, which was
submitted to respondent’s Appeals officer, had not been accepted
by respondent. Also, as of the time of trial, respondent had not
assessed the tax due from Ms. Berrey because, as respondent
explained, “[petitioner] and * * * [Ms. Berrey] filed jointly,
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that [sic] * * * [respondent is] waiting until * * * [the issue
as to the medical expense deduction] is resolved before * * *
[respondent will] * * * assess the tax, because otherwise * * *
[Ms. Berrey’s] going to end up with a much larger liability than
* * * [petitioner] would”.
Discussion
As a general rule, the determinations of the Commissioner in
a notice of deficiency are presumed correct, and the taxpayer
bears the burden of proving the Commissioner’s determinations in
the notice of deficiency to be in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). As one exception to this
rule, section 7491(a) places upon the Commissioner the burden of
proof with respect to any factual issue relating to liability for
tax if the taxpayer maintained adequate records, satisfied the
substantiation requirements, cooperated with the Commissioner,
and introduced during the Court proceeding credible evidence with
respect to the factual issue. Although neither party alleges the
applicability of section 7491(a), we conclude that the burden of
proof has not shifted to respondent with respect to the medical
expenses still in dispute. Respondent has the burden of
production with respect to the additions to tax, however. Sec.
7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
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1. Medical Expenses
Deductions are a matter of legislative grace, are allowed
only as specifically provided by statute, and the taxpayer bears
the burden of proving that he or she is entitled to the claimed
deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). With these well-established propositions in mind, we
must determine whether petitioner has satisfied his burden of
proving that he is entitled to deductions for medical expenses
allegedly incurred during taxable year 1999. As previously
noted, respondent concedes medical expenses in the amount of
$18,904. However, respondent argues that petitioner’s claimed
medical expenses in excess of that amount have not been
substantiated; specifically, respondent claims that petitioner
has not shown that payments for such expenses were made in
taxable year 1999.
A taxpayer may deduct expenses incurred for medical care and
dental expenses to the extent that the expenses exceed 7.5
percent of the taxpayer’s adjusted gross income. See sec.
213(a). Medical care expenses include amounts paid for insurance
premiums. See sec. 213(d)(1)(D). To substantiate medical and
dental expenses under section 213, a taxpayer must provide the
name and address of each person to whom payment was made and the
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amount and date of each payment. See sec. 1.213-1(h), Income Tax
Regs.
At trial, respondent and petitioner entered into evidence
stipulated joint exhibits which consisted of various documents
reflecting medical treatment received by petitioner and/or
petitioner’s family members during the taxable year 1999.
Exhibits 3-J, 4-J, and 5-J consisted of documents reflecting the
medical expenses which respondent conceded, along with the health
insurance premiums in the aggregate amount of $1,390 paid by
petitioner during taxable year 1999.
Exhibit 6-J consisted of various documents reflecting
medical expenses as follows:
Type of Service Date Amount
For Eyes--Optical 12/12/1999 $44.00
Room, Substance Abuse 05/18/1999 1,212.50
Hosp. Misc, Inpatient
Substance Abuse Doctor 10/28/1999 129.50
Visits, Inpatient
Room, Substance Abuse 9/28/1999 1,090.01
Hosp. Misc, Inpatient
Substance Abuse 11/16/1999 560.00
Behavioral Health
Doctor Visit, Inpatient 10/07/1999 78.00
Room, Substance Abuse 4/13/1999 963.01
Hosp. Misc, Inpatient
Diagnostic X-Ray 9/30/1999 164.00
For all of the above expenses in Exhibit 6-J, except for the For
Eyes--Optical expense, petitioner introduced into evidence copies
of the canceled checks used to pay such expenses and a copy of
his personal bank account summary showing debits for such
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expenses. Therefore, we hold that petitioner has substantiated
payment of the above listed medical expenses, except for the For
Eyes--Optical expense, in taxable year 1999 in the amount of
$4,197,3 which amount is in addition to the amount respondent
conceded of $18,904.
The rest of petitioner’s claimed medical expenses were
reflected by various documents in Exhibit 7-J. However, while
these documents provided the name and address of each person to
whom payment was due and the amount due for such payment, these
documents did not substantiate that petitioner made the required
payment or that such payment was made in the taxable year 1999.
Petitioner did not introduce into evidence any further
documentation which would substantiate the date of such payment
or if payment of such expenses was actually made. Therefore, we
hold that no further medical expenses have been substantiated by
petitioner.
2. Additions to Tax
a. Section 6651
Respondent determined that petitioner is liable for
additions to tax for: (1) Failure to file a timely return for
taxable year 1999 pursuant to section 6651(a)(1); and (2) failure
to make timely payment of tax pursuant to section 6651(a)(2).
3
Monetary amount is rounded to the nearest dollar.
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Section 6651(a)(1) imposes an addition to tax for failure to
timely file a tax return. The addition to tax is equal to 5
percent of the amount of the tax required to be shown on the
return if the failure to file is not for more than 1 month. See
sec. 6651(a)(1). An additional 5 percent is imposed for each
month or fraction thereof in which the failure to file continues,
to a maximum of 25 percent of the tax. See id. Section
6651(a)(2) provides for an addition to tax of 0.5 percent per
month, up to 25 percent for failure to pay the amount shown or
required to be shown on a return. A taxpayer may be subject to
both paragraphs (1) and (2), in which case the amount of the
addition to tax under section 6651(a)(1) is reduced by the amount
of the addition to tax under section 6651(a)(2) for any month to
which an addition to tax applies under both paragraphs (1) and
(2). The combined amounts under paragraph (1) and paragraph (2)
cannot exceed 5 percent per month. Sec 6651(c)(1).
The additions to tax under section 6651(a)(1) and (2) are
applicable unless the taxpayer establishes: (1) The failure to
file and/or pay did not result from “willful neglect”; and (2)
the failure to file and/or pay was “due to reasonable cause”.
United States v. Boyle, 469 U.S. 241, 245 (1985); Heman v.
Commissioner, 32 T.C. 479, 489-490 (1959), affd. 283 F.2d 227
(8th Cir. 1960). If petitioner exercised ordinary business care
and prudence and was nonetheless unable to file his return or pay
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the tax due within the date prescribed by law, then reasonable
cause exists. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
“Willful neglect” means a “conscious, intentional failure or
reckless indifference.” United States v. Boyle, supra at 245.
Petitioner’s 1999 Federal income tax return was due on April
15, 2000. As previously stated, on April 6, 2004, after the
notice of deficiency was issued, petitioner submitted a Form 1040
for the taxable year 1999 to respondent’s Appeals officer.
Petitioner testified that he had no real explanation for not
filing his 1999 return on time. Petitioner did not pay the
balance shown on his return when he submitted it to respondent’s
Appeals officer. Respondent has carried his burden of producing
evidence to show the additions to tax are appropriate.
Petitioner has failed to show that he exercised ordinary business
care and prudence in this case. Respondent’s determinations are
sustained.
b. Section 6654(a)
Respondent also determined that petitioner is liable for an
addition to tax for the underpayment of estimated tax pursuant to
section 6654(a).
Section 6654(a) provides that in the case of an underpayment
of estimated tax by an individual, there shall be added to the
tax an amount determined by applying the underpayment rate
established under section 6621 to the amount of the underpayment
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for the period of the underpayment. Unless the taxpayer
demonstrates that one of the statutory exceptions applies,
imposition of the section 6654(a) addition to tax is mandatory
where prepayments of tax, either through withholding or by making
estimated quarterly tax payments during the course of the taxable
year, do not equal the percentage of total liability required
under the statute. See sec. 6654(a); Niedringhaus v.
Commissioner, 99 T.C. 202, 222 (1992).
The amount of the addition to tax under section 6654(a)
stated in the notice of deficiency is based on the return
prepared for petitioner by respondent prior to the filing of the
notice of deficiency. Nothing in the record indicates petitioner
made the required amount of estimated tax payment for taxable
year 1999, and petitioner does not argue, and the record does not
indicate, that any of the statutory exceptions apply.
Accordingly, we conclude petitioner is liable for the addition to
tax.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the parties’ concessions and our resolution of
the disputed matters,
Decision will be entered
under Rule 155.