Hyde v. Comm'r

T.C. Memo. 2011-131

UNITED STATES TAX COURT

PATRICIA LOUISE HYDE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25406-08. Filed June 14, 2011.

Patricia Louise Hyde, pro se.

Dessa J. Baker-Inman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined a Federal income tax

deficiency of $6,941 and a section 66621 accuracy-related penalty

of $1,388 with respect to petitioner’s 2005 taxable year and

1
All section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 2 -

reflected those determinations in a notice of deficiency dated

July 21, 2008. Petitioner timely petitioned this Court to

contest respondent’s determinations.

The issues for decision2 are as follows:

(1) Whether petitioner received nonemployee compensation of

$29,791 that she did not report on her 2005 income tax return;

and

(2) whether petitioner is liable for the section 6662

penalty for 2005.

In her petition, petitioner alleged that she rescinded her

2005 return before respondent mailed the notice of deficiency to

her. She also raised a plethora of other issues that we will not

address in this opinion because they are frivolous. See Williams

v. Commissioner, 114 T.C. 136, 138-139 (2000) (quoting Crain v.

Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)).

FINDINGS OF FACT

A few of the relevant facts have been stipulated. We

incorporate the stipulation of facts into our findings by this

reference. When the petition was filed, petitioner resided in

Arkansas.

2
The notice of deficiency adjusted Schedule A, Itemized
Deductions, and the Lifetime Learning Credit, imposed self-
employment tax on the nonemployee compensation, and allowed a
deduction for one-half of the self-employment tax. These are
either computational adjustments or matters that were not
challenged by petitioner and thus need not be decided herein.
 - 3 -

Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for 2005. On that return she reported wages of

$38,127, taxable interest of $25, ordinary dividends of $1,768, a

taxable refund of $738, and a $3,000 capital loss. Petitioner

did not report any self-employment income.

By CP2000 Notice dated June 18, 2007, respondent notified

petitioner that she did not include on her 2005 return $29,791 of

nonemployee compensation reported by a third-party payor, Ally

Apparel Resources L.L.C. (Ally Apparel), on a Form 1099-MISC,

Miscellaneous Income. In the CP2000 Notice, respondent proposed

changes to petitioner’s 2005 return that included increasing

petitioner’s income by $29,791, reducing her Schedule A

deductions and a Lifetime Learning Credit to reflect the

additional income, imposing self-employment tax on the additional

income, and allowing a deduction for one-half of the self-

employment tax. The notice notified petitioner that the

resulting tax increase was $9,433 and proposed the imposition of

a penalty under section 6662(a).

Petitioner responded to the CP2000 Notice dated June 18,

2007, through a mailing that respondent received on July 20,

2007. In that mailing petitioner stated that she did not agree

with some of the changes, and she included a Schedule C, Profit

or Loss From Business, for 2005 and other documents explaining

her disagreement. On the Schedule C petitioner reported gross
 - 4 -

receipts of $29,791, expenses of $8,394 (including $221 for the

business use of her home), and a net profit of $21,397.

Petitioner calculated that she owed additional tax for 2005 of

$6,179, which included self-employment tax of $3,023, and she

enclosed a check for $6,179.

By CP2000 Notice dated November 13, 2007, respondent

notified petitioner that he agreed with her position. The

November 13, 2007, notice reflected a revised 2005 tax increase

of $6,941, a section 6662(a) penalty of $1,388, and interest of

$961, for a total proposed liability, after application of the

earlier $6,179 payment, of $3,111. Petitioner responded to the

November 13, 2007, notice in a mailing that respondent received

on December 13, 2007. In that mailing petitioner stated that she

had not had time “to properly review all records and documents”

and that she did not know whether she agreed or disagreed with

the tax liability reflected in the notice. However, she enclosed

a check for $3,111, to avoid additional penalties and interest.

She stated that “Once a review is completed we will file a proper

amended return.”

In a letter dated January 25, 2008, respondent responded to

petitioner’s mailing. Respondent stated in the January 25, 2008,

letter, in pertinent part, as follows:

You do not need to file an amended return. If you will
send us the correct information on Schedule C and
Schedule SE, we will make all necessary changes for you
and send a corrected notice to you. * * *
 - 5 -

We need your signature on the “Consent to Tax Increase”
at the end of this letter to complete our action on
your tax account. Please sign the consent and send it
to us. * * *

If you don’t agree with our proposed changes, please
write to us and tell us why. * * *

On February 19, 2008, petitioner sent a response that asked

respondent to provide the law that shows petitioner is liable for

any tax and an explanation of how the tax is to be lawfully

calculated.

Respondent sent another CP2000 Notice to petitioner. The

notice was dated April 14, 2008, and showed a balance due of

zero. In a mailing sent on May 14, 2008, petitioner notified

respondent that she was rescinding her 2005 return and was

demanding a refund of $9,625.3 Additional correspondence between

petitioner and respondent followed. On July 21, 2008, respondent

mailed to petitioner a notice of deficiency for 2005 in which

respondent determined that petitioner had failed to report

nonemployee compensation of $29,791, that petitioner was entitled

to $8,394 of business expense deductions, and that petitioner was

liable for a deficiency of $6,941 and a section 6662(a) penalty

of $1,388.

3
The $9,625 tax refund claimed presumably included the
payments of $6,179 and $3,111 and the tax of $330 reported on
petitioner’s original 2005 return. There is a $5 difference that
the record does not explain.
 - 6 -

Petitioner timely petitioned this Court to contest

respondent’s determination. A trial was held. We ordered

posttrial briefing, and both parties submitted briefs in

accordance with our order. Thereafter, by order dated March 30,

2011, we directed the parties to submit supplemental briefs

addressing whether this Court has jurisdiction over this case

because, before the notice of deficiency was mailed, petitioner

had sent remittances sufficient to fully pay the $6,941

deficiency determined therein.

In response to the order, both parties filed supplemental

briefs. In his supplemental brief, respondent acknowledged that

petitioner remitted $6,179 and $3,111 before he mailed to

petitioner the notice of deficiency dated July 21, 2008.

Respondent contends, however, that, while he posted the

remittances to petitioner’s 2005 income tax account, he did not

assess these amounts. Respondent requests the following finding:

The petitioner’s first remittance of $6,179 did not
fully pay the deficiency respondent proposed for
taxable year 2005, the petitioner’s second remittance
of $3,111 was a deposit under I.R.C. § 6603 and not a
payment of tax, and therefore the Court has
jurisdiction in this case.

In petitioner’s supplemental brief, she agrees that she made

the remittances in 2007 before respondent mailed the notice of

deficiency dated July 21, 2008, she objects to the above-quoted

requested finding of fact, and, citing Commissioner v. Lundy, 516

U.S. 235 (1996), she contends that we have jurisdiction under
 - 7 -

section 6512(b)(3) to determine and refund the overpayment she

contends she made. Petitioner does not dispute respondent’s

requested findings of fact that respondent did not treat the

remittances as payments of tax and that respondent did not assess

the amounts of the remittances as deficiencies. We so find.

OPINION

I. Jurisdiction

The Tax Court is a court of limited jurisdiction, and it may

exercise its jurisdiction only to the extent authorized by

statute. Sec. 7442; Commissioner v. Gooch Milling & Elevator

Co., 320 U.S. 418, 420 (1943). This Court is authorized to

redetermine the amount of a deficiency for a taxable period as to

which the Commissioner issued a notice of deficiency and the

taxpayer timely petitioned the Court for review. See secs. 6212,

6213, and 6214. This Court also has jurisdiction to determine

the amount of any overpayment a taxpayer made for a year that is

properly before the Court on a petition to redetermine a

deficiency. Sec. 6512(b)(1). If the Court determines that there

is an overpayment and further determines the amount of the

overpayment that is refundable in accordance with section

6512(b)(3), the overpayment amount thus determined “shall, when

the decision of the Tax Court has become final, be credited or

refunded to the taxpayer.” Sec. 6512(b)(1).
 - 8 -

Section 6211(a) defines an income tax deficiency as the

amount by which the tax imposed under the income tax provisions

of the Code exceeds the excess of--

(1) the sum of

(A) the amount shown as the tax by the taxpayer
upon * * * [her] return, * * * plus

(B) the amounts previously assessed (or collected
without assessment) as a deficiency, over--

(2) the amount of rebates * * * made.

In the notice of deficiency dated July 21, 2008, respondent

determined that petitioner was liable for a $6,941 deficiency and

a section 6662(a) penalty of $1,388. However, petitioner mailed

to respondent remittances of $6,179 and $3,111 in 2007, which

respondent received and posted to petitioner’s 2005 account but

did not treat as payments or assess as deficiencies before the

notice of deficiency was mailed to petitioner.

Our jurisdiction to redetermine a deficiency depends upon

the issuance of a valid notice of deficiency and a timely filed

petition. Monge v. Commissioner, 93 T.C. 22, 27 (1989).

Ordinarily, we will not look behind the notice of deficiency to

examine the circumstances surrounding the determination. See

Petzoldt v. Commissioner, 92 T.C. 661, 687-688 (1989). Instead,

we conduct a proceeding de novo and redetermine a taxpayer’s tax

liability on the basis of the evidence presented during the

deficiency proceeding, not on whatever record was developed at
 - 9 -

the administrative level before the notice of deficiency was

issued. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C.

324, 327-328 (1974). “It is not the existence of a deficiency

but the Commissioner’s determination of a deficiency that

provides a predicate for Tax Court jurisdiction.” Hannan v.

Commissioner, 52 T.C. 787, 791 (1969).

Respondent treated petitioner’s remittances as deposits and

not payments. Respondent did not assess additional tax equal to

the amounts of the remittances as a deficiency before issuing the

notice of deficiency. Petitioner does not dispute these facts.

Respondent determined a deficiency of $6,941 for 2005, and we

have jurisdiction.

II. Burden of Proof and Burden of Production

The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer ordinarily bears the

burden of proving that the Commissioner’s determinations are in

error. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). If, however, a taxpayer produces credible evidence with

respect to any factual issue relevant to ascertaining the

taxpayer’s tax liability, the burden of proof on any such issue

shifts to the Commissioner, but only if the taxpayer has complied

with the requirements of section 7491(a)(2). Sec. 7491(a)(1) and

(2).
 - 10 -

Petitioner does not contend that section 7491(a) applies,

nor has she established that the requirements of section

7491(a)(2) have been met. Consequently, petitioner bears the

burden of proof as to any disputed factual issue. See Rule

142(a).

Under section 6201(d), if a taxpayer asserts a reasonable

dispute with respect to an item of income reported on an

information return filed by a third party and the taxpayer meets

certain other requirements, the Commissioner bears the burden of

producing reasonable and probative information, in addition to

the information return, concerning the deficiency attributable to

the income item. At trial petitioner disputed that she received

any income from Ally Apparel, the entity that issued the Form

1099-MISC reporting the income at issue. Petitioner admitted,

however, that she received $29,791, the amount shown on the Form

1099-MISC, during 2005 from an entity she identified at trial as

Texport. In addition, petitioner submitted a Schedule C for 2005

to respondent in response to the CP2000 Notice dated June 18,

2007, in which she admitted receiving the funds. Although the

record does not clarify why Ally Apparel issued the Form 1099-

MISC nor disclose the relationship of Ally Apparel to Texport,

the unclarified corporate relationship does not change the fact

that petitioner has admitted receiving $29,791 of nonemployee

income, which she was obligated to report on her 2005 return but
 - 11 -

did not. We conclude that petitioner’s attempt to dispute the

accuracy of the Form 1099-MISC under these circumstances is not

reasonable and that the burden of production with respect to the

income does not shift to respondent under section 6201(d).

III. Unreported Nonemployee Compensation

Section 61 defines gross income as “all income from whatever

source derived” and includes compensation paid for services,

whether furnished by the taxpayer as an employee or as a self-

employed person or independent contractor. See sec. 61(a).

Petitioner admitted that she provided services to Texport

during 2005 for which she was paid $29,791. Because this

compensation must be included in petitioner’s income for 2005

under section 61, we sustain respondent’s determination.

IV. Petitioner’s Attempt To Rescind Return

Petitioner’s position that she is not liable for any Federal

income tax for 2005 and that she is entitled to a refund focused

on her misguided attempt in 2008 to avoid liability for Federal

income tax by rescinding her 2005 return. Petitioner never fully

explained her position but appears to believe that rescinding her

2005 return thereby imposes on respondent the obligation to prove

that she is liable for tax.

Neither the Internal Revenue Code nor the regulations

promulgated thereunder, which are the sources of a taxpayer’s
 - 12 -

obligation to file an annual income tax return,4 contain any

provision permitting a taxpayer to rescind a filed income tax

return. Moreover, petitioner failed to prove that she overpaid

her 2005 tax liability and that she was entitled to a refund. We

reject petitioner’s argument as meritless.

V. Section 6662 Penalty

Section 6662(a) and (b) authorizes the imposition of a 20-

percent penalty on the portion of an underpayment that is

attributable, among other things, to a substantial understatement

of income tax or to negligence or disregard of rules or

regulations. Respondent alleges that petitioner is liable for

the section 6662 penalty because the underpayment was

attributable to either a substantial understatement of income tax

or to negligence.

A substantial understatement of income tax exists if the

amount of the understatement exceeds the greater of 10 percent of

the tax required to be shown on the return, or $5,000. Sec.

6662(d)(1)(A). The term “understatement” means the excess of the

amount required to be shown on the return for the taxable year

over the amount of tax imposed that is shown on the return,

reduced by any rebate. Sec. 6662(d)(2)(A). The amount of the

understatement is reduced by that portion of the understatement

4
See, e.g., secs. 6012-6014; sec. 1.6012-1, Income Tax
Regs.; sec. 301.6012-1, Proced. & Admin. Regs.
 - 13 -

that is attributable to (1) the tax treatment of any item if

there is or was substantial authority for such treatment, or (2)

any item if the relevant facts affecting the item’s tax treatment

are adequately disclosed in the return or in a statement attached

to the return and there is a reasonable basis for the taxpayer’s

tax treatment of the item. Sec. 6662(d)(2)(B).

The term “negligence” as used in section 6662 refers to any

failure on the part of the taxpayer to make a reasonable attempt

to comply with the provisions of the Internal Revenue Code. Sec.

6662(c). The term “disregard” includes any careless, reckless,

or intentional disregard. Id.

A taxpayer may avoid liability for the section 6662 penalty

imposed because of the taxpayer’s negligence or substantial

understatement of income tax if the taxpayer demonstrates that

the taxpayer had reasonable cause for the underpayment and that

the taxpayer acted in good faith with respect to the

underpayment. Sec. 6664(c)(1). Reasonable cause and good faith

are determined on a case-by-case basis, taking into account all

pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income

Tax Regs. The most important factor in determining reasonable

cause and good faith is the extent of the taxpayer’s effort to

assess his or her proper tax liability. Id.

A taxpayer may establish reasonable cause and good faith

within the meaning of section 6664(c) if the taxpayer
 - 14 -

demonstrates that he or she reasonably relied in good faith on

the informed advice of an independent professional adviser as to

the proper tax treatment of an item. Id. The taxpayer must show

that: (1) The adviser was a competent and qualified professional

who had sufficient expertise to justify the taxpayer’s reliance

on him, (2) the taxpayer provided all necessary and accurate

information to the adviser, and (3) the taxpayer actually relied

in good faith on the adviser’s judgment in deciding on the proper

tax treatment of the item. See Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.

2002).

Under section 7491(c), the Commissioner has the initial

burden of production with respect to any penalty, addition to

tax, or additional amount and must introduce evidence that it is

appropriate to impose the section 6662 penalty on the taxpayer to

satisfy that burden of production. Once the Commissioner has

satisfied his initial burden of production, the taxpayer must

then come forward with evidence sufficient to persuade us that

the Commissioner’s determination is incorrect. Higbee v.

Commissioner, 116 T.C. 438, 446-449 (2001). The taxpayer bears

the burden of proving that he or she is not liable for the

section 6662 penalty. The Commissioner need not produce evidence

regarding whether a taxpayer is entitled to relief from the

penalty under section 6664(c). The taxpayer must raise that
 - 15 -

issue and carry the burden of proof with respect to it. Id. at

446.

Respondent satisfied his initial burden of production under

section 7491(c) by introducing evidence that petitioner received

nonemployee compensation of $29,791 but failed to report that

income on her 2005 return. Petitioner then had the obligation to

show that the section 6662 penalty did not apply. Petitioner

made no such showing.

Petitioner testified that she performed services for which

she was paid $29,791, and she does not dispute that she failed to

include that income on her 2005 return. Petitioner argued that

she did not know Ally Apparel and seemed to contend that, because

she did not receive the money from Ally Apparel, she could ignore

the Form 1099-MISC Ally Apparel issued even though she knew that

she had received the income. Petitioner also contended that she

did not receive the Form 1099-MISC (or at least that she did not

receive a Form 1099-MISC that covered the unreported

compensation) and that, therefore, she did not have to report the

nonemployee compensation she received.

We do not find credible any testimony that suggests

petitioner did not receive the Form 1099-MISC. The record

supports a finding that petitioner received the Form 1099-MISC

but chose to ignore it because the name of the issuer did not

match the name of the company for which she worked, and we so
 - 16 -

find. Regardless of whether petitioner received the Form 1099-

MISC, however, petitioner deliberately failed to include income

she knew she had received on her 2005 return. That failure was

negligent at best and justifies the imposition of the section

6662 penalty.

We turn to the issue of reasonable cause and good faith

under section 6664(c). At one point during the trial, petitioner

testified that she relied on her return preparer for the position

that the nonemployee compensation did not have to be reported on

her 2005 return. When pressed by the Court, however, petitioner

claimed that she could not recall whether she told the preparer

she had actually received the income or whether she simply told

him that she did not get a Form 1099-MISC with respect to the

income.

Petitioner’s testimony was insufficient to satisfy her

burden of proving that she reasonably relied on professional

advice with respect to the unreported nonemployee compensation

income she received in 2005. Petitioner offered no other

testimony to prove that she had reasonable cause for her failure

to report the income, and she certainly did not prove that she

acted in good faith. Consequently, we sustain respondent’s

determination that petitioner is liable for the section 6662

penalty.
 - 17 -

VI. Conclusion

We have considered all of the arguments raised by either

party, and to the extent not discussed, we find them to be

irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.