T.C. Memo. 2006-68
UNITED STATES TAX COURT
DANIEL C. McMANUS, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent
Docket Nos. 12336-04, 12711-04. Filed April 10, 2006.
Philip A. Putman, for petitioner.
Monica Gingras, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes for 2001 and 2002 (years at
issue) of $39,799 and $21,789, respectively, as well as additions
to tax under section 6651(a)(1) of $9,949 and $5,447, and
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additions to tax under section 6654 of $1,590 and $728,
respectively.1
The issues for decision are: (1) Whether petitioner failed
to report income of $113,469 and $68,233 for 2001 and 2002,
respectively; and (2) whether petitioner is liable for additions
to tax under sections 6651(a)(1) and 6654.
FINDINGS OF FACT
Petitioner resided in La Habra, California, when he filed
the petitions.
During the years at issue, petitioner was an insurance
salesperson licensed by the California Department of Insurance.
Petitioner entered into agency agreements with various insurance
companies. Under these agency agreements petitioner worked as an
independent contractor, soliciting applications for long-term
health care insurance.
On April 23, 1999, petitioner entered into an agency
agreement with Bankers United Life Assurance Co. (Bankers United)
designating him a contracting insurance agent.2 Pursuant to the
agreement, petitioner sold long-term convalescent care insurance
coverage for Bankers United. Bankers United assigned petitioner
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. Amounts are rounded to the nearest dollar.
2
Bankers United merged into Life Investors Insurance Co. of
America on Dec. 31, 2001.
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two sales agent numbers and created a monthly account analysis
under each of petitioner’s agent numbers showing the account
activity. Each monthly account analysis reflects entries for the
policies petitioner sold as an agent for Bankers United. Bankers
United paid commissions via monthly checks based on the policies
petitioner sold.
On May 13, 1999, petitioner entered into an “Assignment of
Commissions” contract, whereby he assigned to Salt Creek Services
all interest in his commissions due from Bankers United.
Petitioner signed the “Assignment of Commissions” as both
assignor and assignee. Pursuant to petitioner’s request, Bankers
United paid his commission checks to Salt Creek Services.
Petitioner claimed Salt Creek Services was an irrevocable family
trust, an ongoing business, and his employer.
Bankers United marked the checks as commission payments on
the monthly account analysis. Bankers United printed out the
commission checks and manually compared them to the monthly
account analysis to verify accuracy. The checks and monthly
account analysis statements were then mailed out together to Salt
Creek Services.3
Bankers United filed a Form 1099-MISC, Miscellaneous Income,
reporting petitioner earned commissions totaling $113,469 in 2001
3
However, some of the commissions from Bankers United, for
the years at issue, on policies sold by petitioner were made
payable to the State of California Franchise Tax Board.
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and $52,871 in 2002 as an agent for Bankers United.4 In
addition, respondent asserted four other insurance companies
reported petitioner was paid total commissions of $15,362 in
2002.5
Petitioner failed to file Federal income tax returns and
failed to pay Federal income taxes for the years at issue. Using
third-party information returns, on April 21, 2004, respondent
issued separate notices of deficiency to petitioner for the years
at issue, setting forth unreported income of $113,469 and
$68,233, respectively, together with Federal income tax
liabilities of $39,799 and $21,789, respectively, as well as
additions to tax under section 6651(a)(1) of $9,949 and $5,447,
and additions to tax under section 6654(a) of $1,590 and $728,
respectively.
Petitioner timely filed petitions regarding his 2001 and
2002 deficiencies on July 15 and July 19, 2004, respectively.
These cases were consolidated on February 11, 2005, for briefing,
trial, and opinion. Trial was held on this matter on March 17,
4
The commissions for 2001 were reflected by Bankers United
as follows: $70,304.52 (agent No. 58AG93 earnings) + $192.88
(agent No. 58AG93 renewals) + $26,882.90 (agent No. 58V384
earnings) + $16,088.89 (agent No. 58V384 renewals) = $113,469.19
5
The Form 4549, Income Tax Examination Changes, for 2002
reflected that petitioner received commissions of $1,826 from New
York Life Insurance Co., $6,414 from John Hancock Life Insurance
Co., $4,829 from GE Capital Insurance, and $2,293 from
Continental Casualty Co.
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2005. Although petitioner did not appear, petitioner’s counsel
did. Petitioner’s counsel did not introduce witnesses or provide
documentary evidence in support of petitioner’s position.
OPINION
Petitioner asserts he is not liable for the deficiency and
additions to tax respondent determined because: (1) Petitioner
did not receive income in the years at issue because he assigned
the income to a trust; (2) respondent failed to meet the burden
of producing evidence that the income earned during the years at
issue was attributable to petitioner; (3) respondent failed to
meet the burden of producing evidence that petitioner is liable
for additions to tax; and (4) the person who issued the notices
of deficiency lacked delegated authority.
A. Assignment of Income
Petitioner asserts he did not earn the commissions paid by
Bankers United for the years at issue because he assigned all his
commissions to Salt Creek Services. Section 61(a) defines gross
income for purposes of calculating taxable income as “all income
from whatever source derived”. This broad definition includes
“Compensation for services, including fees, commissions, fringe
benefits, and similar items”. Sec. 61(a)(1); sec. 1.61-2(a)(1),
Income Tax Regs. One of the fundamental principles of the
Federal income tax is that income must be taxed to the one who
earns it. Lucas v. Earl, 281 U.S. 111 (1930). Attempts to
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subvert this principle by deflecting income away from its true
earner to another entity through contractual arrangements,
however drafted, are not recognized as dispositive for Federal
income tax purposes. Id. at 114-115; Vercio v. Commissioner, 73
T.C. 1246, 1253 (1980). The Supreme Court has referred to this
assignment of income rule as “the first principle of income
taxation”, Commissioner v. Culbertson, 337 U.S. 733, 739 (1949),
and “a cornerstone of our graduated income tax system”, United
States v. Basye, 410 U.S. 441, 450 (1973).
Petitioner does not dispute that the amount paid to Salt
Creek Services for work performed must be taxed to the earner of
the income. Instead, petitioner asserts that for tax purposes,
Salt Creek Services should be considered to have earned the
income (i.e., was the “true earner” of the income) for the years
at issue because of the assignment. However, petitioner, not
Salt Creek Services, was entitled to receive the commissions from
Bankers United. The agency agreement was between petitioner and
Bankers United. Moreover, the record does not contain any
evidence showing an agreement existed between petitioner and Salt
Creek Services. Lastly, outside of his assertions, petitioner
produced no evidence showing Salt Creek Services actually
existed.
Accordingly, the Court concludes the assignment to Salt
Creek Services was ineffectual to shift the tax burden away from
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petitioner. The total amount paid to Salt Creek Services in
consideration for petitioner’s personal services is includable in
his gross income.
B. Burdens of Production and Proof
1. Section 6201(d)
If a taxpayer asserts a reasonable dispute with respect to
any item of income reported on a third-party information return
and the taxpayer has fully cooperated with the Secretary, the
Secretary has the burden of producing reasonable and probative
information concerning that deficiency in addition to the
information return. Sec. 6201(d).
Petitioner did not assert any reasonable dispute with
respect to income reported by the third-party payors. Petitioner
did not testify at trial, called no witnesses, and produced no
relevant evidence. Therefore, the Court concludes respondent
does not have the burden of production under section 6201(d).
2. Determination in Unreported Income Cases
The Court of Appeals for the Ninth Circuit has determined
that in order for the presumption of correctness to attach to the
deficiency determination in unreported income cases, the
Commissioner must establish “some evidentiary foundation”
connecting the taxpayer with the income-producing activity,
Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.
1979), revg. 67 T.C. 672 (1977), or demonstrate the taxpayer
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received unreported income, Edwards v. Commissioner, 680 F.2d
1268, 1270 (9th Cir. 1982); see Petzoldt v. Commissioner, 92 T.C.
661, 689 (1989).
There is an evidentiary foundation connecting petitioner
with an income-producing activity. The Court finds that
petitioner was an insurance agent during the years at issue and
received commission income from insurance companies.
Petitioner bears the burden of proving that respondent’s
determinations are incorrect. See Rule 142(a). Petitioner
provided no evidence to dispute respondent’s determination of
petitioner’s receipt of income for the years at issue.
Therefore, the Court concludes petitioner received taxable income
of $113,469 and $68,233 in 2001 and 2002, respectively.
C. Additions to Tax
Pursuant to section 7491(c), the Commissioner has the burden
of production with respect to any penalty, addition to tax, or
additional amounts. The burden of production requires the
Commissioner only to come forward with sufficient evidence
indicating it is appropriate to impose additions to tax. Higbee
v. Commissioner, 116 T.C. 438, 446 (2001).
Petitioner did not file returns for the years at issue, and
he did not make estimated tax payments with respect to his tax
liabilities for those years. There is no evidence that
petitioner paid any tax for the years at issue. Thus, respondent
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has met the burden of production, and petitioner is liable for an
addition to tax for failure to file under section 6651(a)(1) of
$9,949 and $5,447 for 2001 and 2002, respectively, and an
addition to tax under section 6654 for failure to pay estimated
tax of $1,590 and $728 for 2001 and 2002, respectively.
D. Delegated Authority
As a final argument, petitioner asserts that the person who
issued the notice of deficiency for the years at issue lacked
proper authority. It is well settled the Secretary or his
delegate may issue notices of deficiency. Secs. 6212(a),
7701(a)(11)(B) and (12)(A)(i); see Pendola v. Commissioner, 50
T.C. 509, 512-514 (1968). For these reasons and petitioner’s
failure to provide authority to the contrary, the Court finds
petitioner’s argument is without merit.
The Court, in reaching its holding, has considered all
arguments made and concludes that any arguments not mentioned
above are moot, irrelevant, or without merit.
To reflect the foregoing,
Decisions will be entered
for respondent.