T.C. Memo. 2009-152
UNITED STATES TAX COURT
ALAN F. BEANE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6529-05. Filed June 25, 2009.
William S. Gannon, for petitioner.
Lydia A. Branche, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of
$3,080,430 in petitioner’s Federal income tax for 1998. After
concessions, the issues for decision are the extent to which, if
at all, the deficiency for 1998 may be reduced or an overpayment
may be determined as a result of erroneously reported self-
employment tax for 1998, assessed additions to tax for 1998, loss
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carrybacks from subsequent years, and an overpayment of tax for
1999.
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Florida at the time he filed his petition.
Petitioner’s Employment With AAVID
Before October 14, 1993, petitioner was a founder and chief
executive at AAVID Engineering, Inc. In 1993, AAVID Thermal
Technologies, Inc., a Delaware corporation, was formed to acquire
AAVID Engineering, Inc. On or about September 25, 1993, AAVID
Thermal Technologies, Inc., acquired AAVID Engineering, Inc., and
was the sole shareholder. Subsequently, on a fully diluted
basis, petitioner became the largest individual shareholder in
AAVID Thermal Technologies, Inc.
On October 14, 1993, AAVID Thermal Technologies, Inc., and
AAVID Engineering, Inc. (collectively, AAVID), and petitioner
entered into an employment agreement for petitioner to continue
his duties as chief executive officer (CEO) and as a member of
the board of directors of AAVID.
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AAVID and petitioner modified the employment agreement on
September 25, 1995. The resulting amended agreement reflected
modifications that were required by the underwriters of AAVID’s
planned initial public offering.
The employment agreement provided for petitioner to be CEO
for an initial term of 3 years, and, thereafter, to be renewed
automatically for 1-year terms unless either party to the
employment agreement gave notice of intent not to renew, and the
amended agreement incorporated these terms. During the initial
3-year term, petitioner gave notice of intent not to renew, and
the employment agreement was not renewed. Therefore, petitioner
ceased to be CEO but continued as a director and consultant to
management.
Petitioner was on the board of directors of AAVID until his
resignation from this position on January 3, 1998, thereafter
continuing as an adviser. In his capacity as a board member and
adviser, petitioner was an employee of AAVID during 1998 and
received a 1998 Form W-2, Wage and Tax Statement, that reported
wages from AAVID of $95,144.35.
In connection with his employment as CEO of AAVID petitioner
received options to purchase 1,518,000 shares of AAVID stock at
or about the same time he executed the original employment
agreement. The options were nonstatutory and were granted to
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petitioner on October 14 and 16, 1993. The options were
scheduled to vest and become exercisable over a
4-year period with 25-percent vesting each year. AAVID had its
initial public offering on January 29, 1996. At that time, the
options converted to warrants to purchase shares of AAVID’s
common stock. As of July 22, 1997, all of the options that
petitioner had received were fully vested. Petitioner exercised
the options received from AAVID in 1997, 1998, and 1999 and then
sold the underlying shares in 1997, 1998, 1999, and 2000.
Petitioner’s Options Transactions and Reporting
In 1997, petitioner exercised options and acquired a total
of 225,000 shares of AAVID’s common stock at a cost of $42,660.
The shares had a total fair market value of $4,830,000, resulting
in gain of $4,787,340. AAVID did not provide petitioner with a
Form W-2 with respect to the exercise of the options in 1997.
Petitioner did not report income regarding the exercise of the
options on his originally filed 1997 tax return. On an amended
1997 tax return that petitioner filed on or about August 16,
1999, he reported $2,087,657 as ordinary income from the exercise
of the 1997 options. Petitioner underreported income from the
exercise of the options by $2,699,683. Petitioner’s amended
return was processed by the Internal Revenue Service (IRS), and
he received an erroneous refund of $829,991 as a result.
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In 1998, petitioner exercised options and acquired a total
of 1,025,000 shares at a cost of $2,208,936. The shares had a
total fair market value of $24,090,625, resulting in gain of
$21,886,688. AAVID did not provide petitioner with a Form W-2
with respect to the exercise of the options in 1998. Petitioner
reported $13,511,014 of the $21,886,689 of income from the
exercise of the options in 1998 on the Schedule C, Profit or Loss
From Business, of his 1998 tax return.
With respect to petitioner’s exercise of the options in
1997, 1998, and 1999 AAVID did not withhold taxes for
petitioner’s contribution pursuant to the Federal Insurance
Contributions Act (FICA). On his 1998 tax return petitioner
treated the income realized from the exercise of the options as
income subject to the Self-Employment Contributions Act (SECA)
and reported SECA taxes. Petitioner reported a SECA tax
liability of $264,877 and claimed a deduction of 50 percent, or
$132,439.
In 1999, petitioner exercised options and acquired a total
of 268,000 shares at a cost of $588,956. The shares had a total
fair market value of $5,527,500, resulting in a gain of
$4,938,543. Petitioner reported $10,139,696 in income from the
exercise of options as self-employment income on his 1999 tax
return.
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Petitioner sold the option stock and sustained the following
capital gains and losses in 1997 through 2000:
Year Shares Proceeds Basis Gain/loss
1997 200,000 $4,495,250 $4,303,299 $191,951
1998 305,000 7,412,601 9,423,763 (2,011,162)
1999 305,000 5,089,143 7,182,609 (2,093,466)
2000 708,000 18,021,645 13,548,488 4,473,157
If the proceeds of the sales of the option stock had been
correctly reported as capital gains and losses on Schedules D,
Capital Gains and Losses, to petitioner’s returns for 1998
through 2000, petitioner’s net long-term and short-term capital
loss for 1998 would be $1,865,140, of which only $1,500 would be
used in 1998.
Petitioner’s Other Losses
Petitioner has a 45.977-percent ownership interest in
Materials Innovation, Inc. (Innovation), an S corporation.
Petitioner also has a 45.977-percent profit-sharing interest and
a 100-percent loss-sharing interest in a partnership called MII
Technologies, LLC (Technologies), formerly known as MII Sensors.
Innovation and Technologies sustained gains and losses as
follows:
Year Innovation Technologies
1996 $16,374 ($1,087,759)
1997 53,122 (2,388,503)
1998 401,176 (3,950,080)
1999 5,062 (4,347,215)
2000 (178,001) (3,758,680)
2001 (158,464) (2,601,036)
2002 (257,214) (1,157,043)
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On his tax returns for 1996 through 2002 petitioner
correctly reported the Innovation and Technologies income/losses.
Petitioner has sufficient basis in Innovation and Technologies to
claim the losses on his tax returns for 1996 through 2002.
OPINION
The amounts set out in our findings of fact are based on
stipulations and calculations the parties presented. We have
generally adopted respondent’s proposed findings because
petitioner’s briefs did not comply with Rule 151(e) and did not
assist the Court in making sense of a voluminous and confusing
record. See Stringer v. Commissioner, 84 T.C. 693, 703-705
(1985), affd. without published opinion 789 F.2d 917 (4th Cir.
1986).
Trial of this case commenced in Boston in April 2008 and was
suspended after petitioner testified and presented a series of
charts analyzing his options transactions. The charts and
underlying documents had not previously been presented to
respondent but were useful in determining the correct amounts of
petitioner’s gains and losses from the transactions. The trial
resumed in September 2008 after the parties had substantially
narrowed their disputes as to the options transactions and the
loss carryovers. Petitioner’s brief acknowledges that after a
meeting on the day before trial resumed, “almost no factual
issues remained to be tried by this Court.”
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The remaining disagreements concern the manner in which
agreed amounts of income and losses affect the decision to be
entered in this case, which is based solely on a notice of
deficiency for 1998. Petitioner argues that
Irrespective of how this Court rules on the other
issues, the following conclusions are inescapable on
the record: (a) Mr. Beane owes IRS $906,000 * * * for
1998, exclusive of the overpayment/refund; (b) IRS owes
Mr. Beane more than $2,505,000 on account of the 1999
overpayment; and (c) on a net basis, IRS owes Mr. Beane
$1,616,226, plus interest at the statutory rate until
it refunds the overpayment.
Petitioner asserts that respondent’s proposed findings of fact
showing application of losses carried back to 1997 and 1998 from
1999 and 2000 are “irrelevant because they do not prove or tend
to prove how much Mr. Beane owes the IRS or how much it owes Mr.
Beane.” Petitioner attempts to net against his tax liability for
1998 an overpayment for 1999 and to have the Court order a refund
of the net amount, with interest.
Respondent contends that
Although the Court may consider the capital gains and
losses petitioner sustained in 1997 through 2000 and
petitioner’s available [net operating losses] in those
years in order to determine petitioner’s deficiency in
1998, it has no jurisdiction to determine a refund in
1999 or 2000.
Respondent also argues that (1) the erroneously reported and paid
self-employment taxes for 1998 (net after the deduction of 50
percent of those taxes on petitioner’s erroneously prepared
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Schedule C) should be offset by the employee share of FICA taxes
not withheld and paid over by AAVID pursuant to section 6521(a),
and (2) this Court does not have jurisdiction to order or credit
a refund of the unabated late payment addition to tax assessed
under section 6651(a)(2) at the time petitioner’s 1998 return was
filed.
Petitioner argues that the jurisdictional issues were
belatedly raised by respondent, but jurisdictional issues may and
must be raised at any time. See, e.g., Normac, Inc. v.
Commissioner, 90 T.C. 142, 146-147 (1988); Kahle v. Commissioner,
88 T.C. 1063, 1063 n.3 (1987)(and cases cited therein).
We conclude that respondent’s arguments are consistent with
the statutory provisions establishing and limiting our
jurisdiction and that petitioner confuses the determination of a
deficiency with an accounting for taxes owed, amounts assessed,
amounts paid, and net amounts due. Computation and adjudication
of the net amounts owed by or to petitioner over a period of
years is well beyond the proper scope of this case.
Definition of a Deficiency
This case was commenced in response to a notice determining
a deficiency in petitioner’s Federal income tax for 1998. A
“deficiency” is defined in section 6211(a) as
the amount by which the tax imposed * * * exceeds the
excess of–-
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(1) the sum of
(A) the amount shown as the tax by the
taxpayer upon his return * * * plus
(B) the amounts previously assessed (or
collected without assessment) as a deficiency,
over–
(2) the amount of rebates * * *
Briefly, the deficiency in this case is the difference
between the tax due on petitioner’s taxable income for 1998 less
the tax he reported on the return filed for 1998. As set forth
in the notice sent to petitioner, that amount was $3,080,430, or
the difference between $7,754,462 and $4,674,032. The amount
will now be reduced because of respondent’s concessions as to
loss carryovers, and the final deficiency will be determined
under Rule 155, as described below. Petitioner concedes that the
amount owed for 1998, i.e., the deficiency, will be at least
$906,000.
The notice of deficiency was sent to petitioner under
section 6212, and the petition was filed under section 6213.
Section 6214(b) provides:
SEC. 6214(b). Jurisdiction Over Other Years and
Quarters.--
The Tax Court in redetermining a deficiency of income
tax for any taxable year * * * shall consider such
facts with relation to the taxes for other years * * *
as may be necessary correctly to redetermine the amount
of such deficiency, but in so doing shall have no
jurisdiction to determine whether or not the tax for
any other year * * * has been overpaid or underpaid.
Notwithstanding the preceding sentence, the Tax Court
may apply the doctrine of equitable recoupment to the
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same extent that it is available in civil tax cases
before the district courts of the United States and the
United States Court of Federal Claims.
Our jurisdiction to determine whether there has been an
overpayment is limited to the year for which a notice of
deficiency has been issued. Menard, Inc. v. Commissioner, 130
T.C. 54, 60 (2008).
Petitioner does not claim that the doctrine of equitable
recoupment referred to in section 6214(b) applies, and the
circumstances under which it does apply are not present here.
See Menard, Inc. v. Commissioner, supra at 62-63. Because the
examination of petitioner’s returns showed that the amount
petitioner reported for 1999 exceeded the correct amount (by
$2,247,616), there was no deficiency for that year; no notice of
deficiency was sent for that year; and no right to petition this
Court existed for that year. We have no jurisdiction in this
case to redetermine the amount of the overpayment for 1999 or to
determine the accrued interest on that overpayment,
notwithstanding petitioner’s insistence that he is entitled to
offset those amounts against the admitted deficiency for 1998.
Cf. Estate of Baumgardner v. Commissioner, 85 T.C. 445, 448
(1985); see also Vest v. Commissioner, T.C. Memo. 1995-188. The
amount ultimately due to or from petitioner will not be known
until the decision is entered in this case and the correct
deficiency for 1998 is assessed. Petitioner’s account will then
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reflect adjustments that have been made or agreed upon for other
years.
Section 6521(a)
Petitioner erroneously reported his options transactions on
Schedule C of his return for 1998 and mistakenly reported self-
employment tax on the amount that he reported as gain. The
parties now agree that petitioner was an employee during 1998 and
that FICA taxes should have been withheld and paid by his
employer. Petitioner argues that respondent cannot recover the
amounts against petitioner because a claim against the employer
was not timely pursued, and petitioner seeks a refund of the
amount reported and paid for 1998. Respondent seeks to offset
petitioner’s share of FICA taxes against credit for the amount of
self-employment taxes he reported and partially deducted on his
return for 1998.
Respondent relies on section 6521(a), which provides as
follows:
SEC. 6521(a). Self-Employment Tax and Tax on
Wages.--
In the case of the tax imposed by chapter 2 (relating
to tax on self-employment income) and the tax imposed
by section 3101 (relating to tax on employees under the
Federal Insurance Contributions Act)--
(1) If an amount is erroneously treated as
self-employment income, or if an amount is
erroneously treated as wages, and
(2) If the correction of the error would
require an assessment of one such tax and the
refund or credit of the other tax, and
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(3) If at any time the correction of the
error is authorized as to one such tax but is
prevented as to the other tax by any law or rule
of law (other than section 7122, relating to
compromises),
then, if the correction authorized is made, the amount
of the assessment, or the amount of the credit or
refund, as the case may be, authorized as to the one
tax shall be reduced by the amount of the credit or
refund, or the amount of the assessment, as the case
may be, which would be required with respect to such
other tax for the correction of the error if such
credit or refund, or such assessment, of such other tax
were not prevented by any law or rule of law (other
than section 7122, relating to compromises).
Petitioner claims that the offset is not permitted because
FICA taxes have not been assessed against him, and, he contends,
the amount cannot be determined from the record. His petition,
however, prevented assessment of amounts properly included in the
deficiency for 1998. See sec. 6512(a). The notice of deficiency
included an adjustment for self-employment tax, which is
therefore before the Court in this case. Redetermination of
self-employment tax must take account of the offset provided
under section 6521(a) resulting from reclassification of his
income from self-employment income to wages subject to FICA
taxes. The amount of income subject to FICA taxes will
necessarily be determined from the record in this case as part of
the Rule 155 computation described below. Petitioner has
provided neither persuasive reason nor authority for not applying
section 6521(a) in the manner proposed by respondent.
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Section 6651(a)(2)
Petitioner contends that the Court should order a refund of
failure-to-pay penalties assessed in September 1999 after he
filed his 1998 return in August 1999. He contends that his
reported tax liability was paid at that time and that he owes
nothing for 1998 “on a net basis”. As explained above, his
liability for 1998 cannot be determined in this case “on a net
basis”. Payment of the amount due for 1998 was due on April 15,
1999, and an addition to tax under section 6651(a)(2) applied
from that time until payment was made. See Godwin v.
Commissioner, T.C. Memo. 2003-289, affd. 132 Fed. Appx. 785 (11th
Cir. 2005); sec. 1.6081-4(b), Income Tax Regs. (granting by the
IRS of an automatic extension of time to file a return does not
operate to extend the time for payment of tax due on the return).
Rule 155 Computations
Rule 155(a) provides for computations to be submitted by the
parties “pursuant to the Court’s determination of the issues,
showing the correct amount to be included in the decision.” For
our purposes in this case, the amount to be included in the
decision will reflect the tax due for 1998 on the corrected
income that petitioner received during that year, reduced by the
loss carryovers from other years and other income, deduction, and
credit adjustments. The tax due will reflect prior payments
petitioner remitted with his return for 1998, including a
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recomputed credit for self-employment taxes paid. There will
not, however, be an “overpayment” for 1998, because the taxes
paid for 1999 do not reduce the deficiency for 1998 as defined
above. The Rule 155 computation ordered here, moreover, will not
be an invitation for petitioner to reargue his claims to refunds
arising in other years. See Rule 155(c).
We have considered the other arguments of the parties.
Petitioner repeatedly criticizes the results of the examination,
other positions of respondent, and delay in refunding his
overpayment for 1999. Petitioner admits that the examination
“may have been accurate with respect to [his] revenues during
1998 and 1999” but complains that it was “inaccurate with respect
to the amounts due to and from the IRS.” The unfortunate
circumstances of this case, however, resulted from petitioner’s
underreporting of his options income for 1998 and
mischaracterization of that income as self-employment income. It
was his obligation to establish the carrybacks, not the
examiner’s obligation to search them out. Once he presented
adequate substantiation of his basis in the options sold and his
net operating losses, respondent conceded them. His
misunderstanding of the scope of this case extended the
proceedings unnecessarily. The arguments not addressed in this
opinion are irrelevant to our decision or have even less merit
than those addressed.
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To reflect the foregoing,
Decision will be entered
under Rule 155.