T.C. Summary Opinion 2006-117
UNITED STATES TAX COURT
DAVID E. CARUSO, JR. AND BARBARA CARUSO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17087-04S. Filed July 24, 2006.
David E. Caruso, Jr., and Barbara Caruso, pro se.
Scott T. Welch, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority. Petitioners
seek a review under section 6330(d) of respondent’s decision to
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
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proceed with collection of petitioners’ Federal income tax
liability for the 1999 tax year.
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and made part hereof.
Petitioners’ legal residence at the time the petition was filed
was New Orleans, Louisiana.
Petitioners live and work in Louisiana. Mr. Caruso is a
practicing attorney who specializes in personal injury law.
During the year at issue, Mr. Caruso was a salaried employee at a
small local firm. He worked at this firm until June 2002, when
he left that firm and joined another local firm. Mrs. Caruso is
also an attorney licensed in California but did not practice law
during the year at issue. Instead, she was employed part time as
a paralegal for several New Orleans firms.
Petitioners did not file their 1999 joint Federal tax return
until March 17, 2003. They had previously filed for, and been
granted, an extension to file until October 15, 2000.
Petitioners did not file for additional extensions after October
15, 2000, nor did they make any estimated tax payments. On their
1999 return, petitioners reported a tax liability of $91,200 and
withholding credits of $8,677. Petitioners did not remit payment
for the remaining $82,523 balance due.
On May 12, 2003, petitioners were assessed a section
6651(a)(1) addition to tax in the amount of $18,635, a section
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6651(a)(2) addition to tax of $15,266.75, and a section 6654(a)
addition to tax in the amount of $3,917.03. On May 27, 2003,
petitioners were assessed a tax liability of $82,820 plus
interest.2 In a letter dated May 23, 2003, petitioners requested
relief of the additions to tax and interest charges and included
payment of $82,820 of the amount assessed by respondent.3
On August 2, 2003, respondent notified petitioners of an
intent to levy with respect to petitioners’ unpaid tax liability
for 1999. The notice listed $61,689.39 due for 1999.
Petitioners filed a timely Form 12153, Request for a
Collection Due Process Hearing. In their request, petitioners
stated they contested the levy because their tax was fully paid,
and they had previously requested abatement of additions to tax
and interest by the IRS. Petitioners attached the letter, dated
2
Respondent’s assessment disallowed the $297 tax credit for
child and dependent care expenses petitioners claimed on their
tax return because petitioners did not include a correct Social
Security number, employer identification number, or IRS
individual taxpayer identification number for their child care
provider; therefore, the tax assessed was $297 higher than the
amount reported on petitioners’ Federal income tax return.
Respondent, in a letter dated May 12, 2003, notified petitioners
of the error and gave petitioners an opportunity to supply the
correct information. Petitioners did not respond to the letter
and did not challenge the adjustment.
3
The assessment petitioners received from respondent, dated
May 27, 2003, listed the tax liability, additions to tax, and
interest owed as of that date; however, it did not indicate
receipt of the $82,820 petitioners sent. Because the assessment
notice was mailed a mere 4 days after petitioners mailed their
payment, it appears to the Court that respondent had no notice of
this payment prior to the assessment.
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May 23, 2003, sent to the IRS that had requested removal and
abatement of additions to tax and interest and had included the
payment of $82,820. In that letter, petitioners explained:
the 1999 return involved very unusual circumstances in its
complexity and need for documents involving sales of
renovated real estate. Unfortunate events kept interrupting
our efforts to file in a timely manner, including death of a
parent and estate duties, loss of job, and health problems.
The Appeals officer assigned to petitioners’ case
experienced numerous delays in reaching petitioners and receiving
documentation from them. Finally, on August 9, 2004, the Appeals
officer issued a notice of determination sustaining the levy. In
the notice, the Appeals officer noted that petitioners had not
requested either an installment agreement or an offer-in-
compromise, nor were they eligible for either because they were
delinquent in filing Federal income tax returns for several
years. Petitioners filed a timely petition with this Court
appealing the decision.
The Court must decide whether petitioners are entitled to
relief from the Appeals officer’s determination. Where the
underlying tax liability is properly at issue before the Appeals
officer, this Court reviews that issue on a de novo basis. Goza
v. Commissioner, 114 T.C. 176, 181-182 (2000). Although
petitioners did not receive a notice of deficiency and were
entitled to challenge the underlying tax liability, they
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stipulated the correctness of the Commissioner’s assessment.
Therefore, where the underlying tax liability is not at issue, as
in this case, this Court reviews the determination under an abuse
of discretion standard. Sego v. Commissioner, 114 T.C. 604, 610
(2000). An abuse of discretion is defined as any action that is
unreasonable, arbitrary or capricious, clearly unlawful, or
lacking sound basis in law, taking into account all the facts and
circumstances. E.g., Thor Power Tool Co. v. Commissioner, 439
U.S. 522, 532-533 (1979); Swanson v. Commissioner, 121 T.C. 111,
119 (2003).
Petitioners seek an abatement of the additions to tax and
interest with respect to taxable year 1999 and claim that
respondent’s failure to do so amounts to an abuse of discretion.
With respect to abatement of the interest due by
petitioners, the Appeals officer notified petitioners in
correspondence that “interest is charged by law. Even if I am
able to provide you with a favorable decision, you must pay the
interest due on the tax paid after it was due on 4/15/2000.”
A taxpayer may, under certain circumstances, qualify for an
abatement of interest under section 6404. A taxpayer, however,
is not eligible for such consideration if he files a return but
does not pay the taxes due. Downing v. Commissioner, 118 T.C. 22
(2002); H. Conf. Rept. 99-841 (Vol. II), at II-811 (1986), 1986-3
C.B. (Vol.4) 1, 811. Petitioners filed their 1999 Federal income
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tax return in March 2003 and did not pay the reported tax
liability until more than 2 months later. They are clearly not
eligible for abatement of interest; therefore, respondent did not
abuse his discretion in refusing to consider abatement of
interest during petitioners’ hearing.
As to the additions to tax, the Appeals officer sustained
the determination of respondent, stating:
You failed to establish that you exercised due
diligence and prudent business care or that you were
not able to pay or would have suffered an undue
hardship if you paid on the due date* * *. Mr.
Caruso’s medical condition did not disable him to the
point that rendered him unable to attend to his day-to-
day activities. Mr. Caruso’s loss of 30-year
employment occurred two years after the due date of the
subject tax and tax return.
The section 6651(a)(1) addition to tax applies where there
is a failure to file a timely return, unless the taxpayer can
establish that the failure “is due to reasonable cause and not
due to willful neglect.” Sec. 6651(a)(1). Willful neglect is
defined as “a conscious, intentional failure, or reckless
indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).
A taxpayer may establish reasonable cause by showing that,
despite the exercise of ordinary care and prudence, the taxpayer
was unable to file the required tax return within the prescribed
time. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; see United
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States v. Boyle, supra at 246; Crocker v. Commissioner, 92 T.C.
899 (1989).
Petitioners filed their 1999 Federal income tax return
almost 3 years late. At the appeals hearing and at trial,
petitioners presented numerous reasons for the delay.
Petitioners testified that they sold three properties during 1999
and knew they would owe tax for capital gains on the sales.
Because petitioners made renovations to each of the properties,
they had valuation difficulties in the computation of their
gains. Petitioners further testified that they experienced
difficulty in gathering the necessary documentation. Petitioners
filed for, and were granted, two extensions to file; however,
they did not file for additional extensions after October 15,
2000.
Beyond the complexity of their Federal income tax return,
petitioners complained of numerous other difficulties that kept
them from filing their return timely. In June 2000, petitioners
moved into a new residence, due to rising crime in their former
neighborhood. In July 2000, Mr. Caruso’s father died and he
claimed he had to “spend nearly a year and most nights and
weekends sorting through family belongings from * * * [his
parents’] 68 years of marriage. Also, bills had to be paid for
the estate, and that house sold, with great difficulty and
delays.” Mr. Caruso testified that, although he had siblings, he
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shouldered the bulk of that burden. In addition, Mr. Caruso
apparently suffers from high blood pressure and panic attacks.
The attacks “near incapacitated” him; however, he managed to
maintain full-time employment continually, despite the panic
attacks. Lastly, petitioners testified they finally sent
information to their certified public accountant (C.P.A.) in
February 2002 to complete their Federal income tax return. The
C.P.A., however, requested additional information. Before
petitioners could locate that information, Mr. Caruso lost his
job and had to “devote substantial time to finding new employment
and then starting a new job.” Therefore, he was not able to
locate the additional information for nearly a year.
Although petitioners experienced some difficult
circumstances, the Court is not convinced that their delay of
almost 3 years was due to reasonable cause and not “willful
neglect”. Petitioners employed a C.P.A. for the preparation of
their tax return. All that was required of petitioners was that
they find and send the appropriate documentation to their C.P.A.,
which they neglected to do in a timely fashion.
Petitioners were not incapacitated by Mr. Caruso’s health
problems. As previously noted, Mr. Caruso managed to maintain
full-time employment, leave what he considered to be a bad job,
and successfully find a new one during the 3 years. In addition,
the Court is not convinced that dealing with the affairs of Mr.
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Caruso’s deceased father could monopolize so much time that
petitioners were unable to find and send the required
documentation to enable their C.P.A. to prepare their tax return
timely. As for the 1 year it took petitioners to locate the
additional documentation requested by their C.P.A., the Court
rejects petitioners’ explanations for this exorbitant delay.
Respondent’s determination is sustained.
The Appeals officer also sustained the section 6651(a)(2)
determination against petitioners. Section 6651(a)(2) imposes an
addition to tax when a taxpayer fails to pay the amount shown as
tax on any return specified in paragraph (1) on or before the
date prescribed for payment of such tax, unless it is shown that
such failure is due to reasonable cause and not due to willful
neglect. With respect to any return, the amount of the addition
under section 6651(a)(2) reduces the amount of the addition under
section 6651(a)(1) for any month to which an addition to tax
applies under both paragraphs. Sec. 6651(c)(1).
A taxpayer has reasonable cause for failure to pay a tax
timely if the taxpayer has made a satisfactory showing that he
exercised ordinary business care and prudence in providing for
payment of his tax liability and was nevertheless either unable
to pay the tax or would suffer an undue hardship, as described by
section 1.6161-1(b), Income Tax Regs., if he paid on the due
date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. An undue
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hardship is defined as more than an inconvenience to the
taxpayer. Sec. 1.6161-1(b), Income Tax Regs. An undue hardship
will result to the taxpayer if, for instance, he or she will
suffer a substantial financial loss; for example, a loss due to
the sale of property at a distress price. Downing v.
Commissioner, 118 T.C. at 29; see also Fran Corp. v. United
States, 164 F.3d 814, 816-817 (2d Cir. 1999).
As previously discussed, petitioners’ alleged hardships did
not amount to reasonable cause. Furthermore, petitioners
reported a $531,661 capital gain on the sale of their properties,
and the Court declines to believe they would have suffered a
substantial financial loss had they paid their liability timely.
Petitioners were aware they would have a substantial tax
liability for the year 1999, and, even if they were unsure of the
exact amount, they could have submitted an estimated payment when
they filed their request for an extension. Therefore, respondent
is sustained.
Lastly, the Court reviews the Appeals officer’s decision to
sustain respondent’s section 6654 determination. A taxpayer is
subject to this addition to tax “in the case of any underpayment
of estimated tax by an individual.” Sec. 6654. Subject to
certain statutory exceptions, the addition to tax is
automatically applied if the amount of withholding and estimated
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tax payments do not equal statutorily designated amounts.
Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).
The statute, however, provides an exception to this
automatic imposition under certain circumstances. Petitioners
presented no evidence, either to the Appeals officer or at trial,
that they met the statutory exceptions. Petitioners’ only
arguments during appeals and at trial were the hardship arguments
discussed above. The Court sustains the determination.
Petitioners received an appropriate hearing under section
6330(b)(1). Day v. Commissioner, T.C. Memo. 2004-30; Leineweber
v. Commissioner, T.C. Memo. 2004-17; sec. 301.6330-1(d)(2), Q&A-
D6, Proced. & Admin. Regs. Respondent properly verified that the
requirements of applicable law and administrative procedures were
met and balanced the need for efficient collection of taxes with
the legitimate concern of petitioners that the collection action
be no more intrusive than necessary. On this record, the Court
holds that there was no abuse of discretion in sustaining the
notice of intent to levy. Respondent, therefore, is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.