T.C. Memo. 2010-167
UNITED STATES TAX COURT
ETTA M. LOWERY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20656-08. Filed August 2, 2010.
Etta M. Lowery, pro se.
Marty J. Dama, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in and penalties with respect to petitioner’s
Federal income taxes:
Penalty
Year Deficiency Sec. 6662(a)
2003 $53,265 $10,653.00
2004 26,903 5,380.60
2005 62,991 12,598.20
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Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
After concessions by respondent,1 the issues for decision
are whether petitioner: (1) Is entitled to deduct amounts
received as compensation for services from Allstate Insurance Co.
(Allstate) and First Command Financial Planning (First Command)
as other miscellaneous deductions (miscellaneous itemized
deductions) claimed on Schedule A, Itemized Deductions, for 2003,
2004, and 2005; (2) is entitled to deduct expenses for her home
health care business claimed on Schedule C, Profit or Loss from
Business, for 2003 and 2004; (3) must include in her 2004 gross
income the distribution to her from the Savings and Profit
Sharing Fund of Allstate Employees (the distribution); (4) is
liable for a 10-percent additional tax under section 72(t) for
1
Respondent concedes income tax adjustments of $2,121 and
$5,118 for 2004 and 2005, respectively.
The self-employment tax and related deductions and the
amount of petitioner’s personal exemption are computational
matters. See secs. 151, 164(f), 1401, 1402.
Petitioner argued in her pretrial memorandum and at trial
that the Court did not have jurisdiction and respondent must
pursue the return of the refunds under sec. 7405. On brief,
however, she advanced no argument in support of this contention;
it is therefore deemed abandoned. See Mendes v. Commissioner,
121 T.C. 308, 312-313 (2003).
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the distribution; and (5) is liable for a section 6662(a)
accuracy-related penalty for each of the years 2003, 2004, and
2005.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. At the time the petition was
filed, petitioner resided in Texas.
Petitioner worked for Allstate as a sales manager in 2003
and as a district manager in 2004 and part of 2005. She worked
for First Command for the remainder of 2005. In 2003, 2004, and
2005 petitioner received $123,533, $126,820, and $226,155,
respectively, as compensation. Petitioner included these amounts
in her Federal income tax returns for 2003, 2004, and 2005 and
claimed miscellaneous itemized deductions in equal amounts.2
Petitioner also claimed $24,200 in Schedule C deductions for
expenses related to her home herbal health care business for
2003. Her deductions were claimed for advertising expenses,
automobile expenses, supplies, travel, meals and entertainment,
and other expenses. She claimed her house had been flooded and
therefore she could not recover any receipts from 2003. She did
2
Petitioner claimed total Schedule A itemized deductions
of $154,949, $131,573, and $286,877 for 2003, 2004, and 2005,
respectively. Respondent disallowed miscellaneous itemized
deductions of $124,256, $127,413, and $288,537 for 2003, 2004,
and 2005, respectively.
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not give respondent’s revenue agent, Cathy Street (Ms. Street),
the names of her suppliers or other information to reconstruct
the claimed expenses. She also claimed $250 in Schedule C
deductions for 2004.
Petitioner received from the Savings and Profit Sharing Fund
of Allstate Employees a distribution of $26,800 by check dated
April 30, 2004. Petitioner deposited the check into her
interest-bearing checking account at Bank of America. She was 48
years old when she received the distribution. Petitioner did not
include the distribution in her income for 2004. Ms. Street
issued a summons to petitioner’s bank to obtain bank records and
performed a bank account analysis to identify the source of the
deposit.
At trial petitioner claimed “Allstate Insurance Company is
not a trade or business.” She also disputed the “W-2s and 1099
information” on the grounds that:
Allstate Insurance Company, First Command Financial
Planning, and Etta Lowery do not fit within the
specific kind and class expressly itemized in the
definition of trade or business under 7701(a)(26) nor
does Etta Lowery fit within the specific kind and
class expressly in the definition of employee, 3401(c),
and in the Federal Register, on Tuesday, September 7,
1943, at page 12267 Section 404.101.
We advised petitioner that her arguments were frivolous and
warned her that the Court might impose a penalty under section
6673(a)(1) if she continued to assert such arguments.
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OPINION
I. Burden of Proof
As a general rule, the taxpayer bears the burden of proving
the Commissioner’s deficiency determinations incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section
6201(d) provides that if the taxpayer, in a court proceeding,
asserts a reasonable dispute with respect to the income reported
on an information return and has fully cooperated with the
Commissioner, then the Commissioner shall have the burden of
producing reasonable and probative information in addition to the
information return. In addition, section 7491(a) provides that
if the taxpayer introduces credible evidence and meets certain
other prerequisites, the Commissioner shall bear the burden of
proof with respect to factual issues relating to the taxpayer’s
liability for a tax imposed under subtitle A or B of the Code.
Petitioner has not raised a reasonable dispute within the
meaning of section 6201(d). She has also failed to introduce any
credible evidence or substantiate her deductions as required by
section 7491(a). Therefore, petitioner bears the burden of
proof.
II. Deductions
Deductions are a matter of legislative grace, and taxpayers
have the burden of showing that they are entitled to any
deduction claimed. Rule 142(a); New Colonial Ice Co. v.
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Helvering, 292 U.S. 435, 440 (1934). Taxpayers are required to
maintain records that are sufficient to enable the Commissioner
to determine their correct tax liability. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs. Additionally, taxpayers bear the
burden of substantiating the amount and purpose of the item
claimed as a deduction. Hradesky v. Commissioner, 65 T.C. 87, 89
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
A. Miscellaneous Itemized Deductions
Petitioner argues that her compensation from Allstate and
First Command is deductible as a miscellaneous itemized deduction
because neither Allstate nor First Command is a trade or
business. She also claims that she herself is not a trade or
business and that she is not an employee of Allstate or First
Command.
Petitioner advances shopworn arguments characteristic of
tax-protester rhetoric that have been universally rejected by
this and other courts. See Stearman v. Commissioner, 436 F.3d
533 (5th Cir. 2006), affg. T.C. Memo. 2005-39. We shall not
painstakingly address petitioner’s assertions “with somber
reasoning and copious citation of precedent; to do so might
suggest that these arguments have some colorable merit.” See
Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).
Accordingly, we sustain respondent’s disallowance of the
miscellaneous itemized deductions.
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B. Schedule C Deductions
Petitioner did not substantiate any of her Schedule C
deductions. Accordingly, we sustain respondent’s disallowance of
the Schedule C deductions.
III. The Distribution
Generally, a distribution from a qualified retirement plan
is includable in the distributee’s gross income in the year of
the distribution. Sec. 72(a). Section 72(t)(1) imposes a 10-
percent additional tax on the taxable amount of an early
distribution from a qualified retirement plan (as defined in
section 4974(c))3 unless an exception applies. A distribution is
early if made to an employee who has not attained age 59-1/2.
Sec. 72(t)(2)(A)(i).
Petitioner was 48 years old when she received the
distribution in 2004.4 Petitioner did not offer any evidence of
an applicable exception. We therefore sustain respondent’s
determinations that the distribution is includable in
petitioner’s income for 2004 and that she is liable for the 10-
percent additional tax. See Rule 142(a).
3
The term “qualified retirement plan” includes a plan
described in sec. 401(a). Sec. 4974(c)(1).
4
Regardless of whether the additional tax under sec. 72(t)
is a penalty or an additional amount for which the respondent
would have the burden of production under sec. 7491(c),
respondent has satisfied any such burden by showing petitioner
was not 59-1/2 when she received the distribution. See Milner v.
Commissioner, T.C. Memo. 2004-111 n.2.
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IV. Section 6662(a) Accuracy-Related Penalty
Pursuant to section 6662(a) and (b)(1) and (2), taxpayers
may be liable for a penalty of 20 percent of the portion of an
underpayment of tax due to negligence or disregard of rules or
regulations or attributable to a substantial understatement of
income tax. The term “understatement” means the excess of the
amount of tax required to be shown on a return over the amount of
tax imposed which is shown on the return, reduced by any rebate
(within the meaning of section 6211(b)(2)). Sec. 6662(d)(2)(A).
Generally, an understatement is a “substantial understatement”
when it exceeds the greater of $5,000 or 10 percent of the amount
of tax required to be shown on the return. Sec. 6662(d)(1)(A).
In addition, section 6662(c) defines “negligence” as any failure
to make a reasonable attempt to comply with the provisions of the
Code, and “disregard” means any careless, reckless, or
intentional disregard.
The Commissioner has the burden of production with respect
to the accuracy-related penalty. Sec. 7491(c). To meet this
burden, the Commissioner must produce sufficient evidence
indicating that it is appropriate to impose the penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the
Commissioner meets this burden of production, the taxpayer must
come forward with persuasive evidence that the Commissioner’s
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determination is incorrect. Rule 142(a); see Higbee v.
Commissioner, supra at 447.
Whether otherwise applied because of a substantial
understatement of income tax or negligence or disregard of rules
or regulations, the accuracy-related penalty is not imposed with
respect to any portion of the underpayment as to which the
taxpayer acted with reasonable cause and in good faith. See sec.
6664(c)(1). The decision as to whether the taxpayer acted with
reasonable cause and in good faith depends upon all the pertinent
facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax
Regs. Relevant factors include the taxpayer’s efforts to assess
his proper tax liability, including the taxpayer’s reasonable and
good faith reliance on the advice of a professional such as an
accountant. See id. Further, an honest misunderstanding of fact
or law that is reasonable in light of the experience, knowledge,
and education of the taxpayer may indicate reasonable cause and
good faith. See Remy v. Commissioner, T.C. Memo. 1997-72.
Respondent has satisfied the burden of production.
Petitioner’s 2003, 2004, and 2005 income tax returns contain
understatements of tax greater than $5,000 and greater than 10
percent of the amount of tax required to be shown on the returns.
Sec. 6662(d)(1)(A).
Petitioner did not offer any evidence of reasonable cause or
good faith. Accordingly, we sustain respondent’s determination
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as to the section 6662(a) accuracy-related penalties for 2003,
2004, and 2005.
V. Section 6673(a)(1) Penalty
Section 6673(a)(1) authorizes the Court to impose a penalty
not to exceed $25,000 if the taxpayer took frivolous or
groundless positions in the proceeding or instituted the
proceeding primarily for delay. A taxpayer’s position is
“frivolous” if it is “contrary to established law and unsupported
by a reasoned, colorable argument for change in the law.”
Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).
We warned petitioner that her arguments were frivolous and
have been universally rejected by this and other courts. We
further advised petitioner that the Court has the discretion to
impose a penalty of up to $25,000 if she were to proceed with
such arguments.
Although respondent has not moved for a section 6673(a)(1)
penalty, and we decline to impose the penalty at this time, we
take this opportunity to warn petitioner that we may impose this
penalty if she returns to the Court and proceeds in a similar
manner in the future. See Pierson v. Commissioner, 115 T.C. 576
(2000).
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
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mentioned above, we conclude they are irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.