T.C. Summary Opinion 2011-101
UNITED STATES TAX COURT
WILLIAM B. AND CHERYL B. O’BRYANT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15472-07S. Filed August 15, 2011.
William B. and Cheryl B. O’Bryant, pro sese.
Heather K. McCluskey, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2001 and 2002, the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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this opinion shall not be treated as precedent for any other
case.
The controversy in this case is the residual of extensive
settlement negotiations and the resolution of most of the
determinations set forth in the notice of deficiency. The
remaining issues concern: (1) Whether petitioners are liable for
section 6651(a)(1) additions to tax for the 2001 and 2002 tax
years; and (2) whether the Court has jurisdiction to consider
certain aspects of the parties’ disagreement concerning a prior
tax year (1999) from which various credits were carried over for
the 2001 and 2002 tax years.
Background
This case was calendared for trial during fall 2008, and at
that time the parties presented to the Court a settlement
agreement that resolved all of the determinations set forth in
the notice of deficiency other than the section 6651(a)(1) late-
filing additions to tax and their disagreement about the
application of certain overpayment credits from prior-year
returns.2 The background information in this case is complex and
was further complicated by petitioners’ late filing and errors
2
There were numerous differences concerning the credits from
prior years. The Court worked with the parties beginning in
fall 2008, and after numerous telephone conferences most of the
parties’ differences have been resolved. The resolution of the
complex computational issues required exceptional patience,
cooperation, and efforts by the parties, and the Court
compliments those efforts.
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respondent made in the processing of petitioners’ tax returns.
We address only those facts that bear on the remaining issues.
Petitioners resided in California at the time their petition
was filed. Following his completion of medical school in 1979,
William B. O’Bryant (petitioner) began his residency in internal
medicine in California. He was successful in the practice of
medicine in Orange County, California. After approximately
18 years, however, petitioner found that he had a proclivity and
the ability to be a day trader. Late in 1998 he abandoned the
practice of medicine and became a full-time day trader. Four or
five months later, petitioner wife suffered a severe head injury
that resulted in a cerebral hemorrhage and coma. Following brain
surgery, petitioner wife became paralyzed on the left side of her
body, and she had a limited memory.
At that time petitioners had two minor children and two
children in college, and petitioner ceased day trading to care
for his wife and children full time. It took more than 2 years
for petitioner wife to be able to get around and manage her own
care independently. Initially, petitioner’s wife was unable to
perform most of the basic functions of human existence, and
petitioner taught her to walk, eat, dress, etc.
During 2001 petitioner began working as an appeals medical
director for a health insurance company. Shortly after that, his
wife developed a new condition known as “normal pressure
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hydrocephalus”. This condition caused additional problems for
petitioner and his wife, including her lack of balance, worsening
short-term memory, and incontinence, among other things. She
required additional brain surgery during July 2001 to implant a
shunt in her cranial ventricle to allow drainage. During the
following 2 years petitioner’s income was insufficient to cover
his family’s living expenses, and he amassed approximately
$150,000 in debt.
Petitioners had prepayment credits from prior years and
various estimated payments, and when their 2001 and 2002 tax
returns were filed, albeit late, any amounts of tax owed were
small.3 As of May 24, 2004, petitioners had not filed their 2001
and 2002 joint Federal income tax returns, and respondent
prepared substitutes for returns for those years using available
information from respondent’s records. On or about February 24,
2006, petitioners filed 2001 and 2002 joint Federal income tax
returns.
Discussion
Section 6651(a)(1) imposes an addition to tax in the case of
any failure to timely file a Federal income tax return unless it
is shown that such failure is due to reasonable cause and not due
to willful neglect. A showing of reasonable cause requires
3
Petitioners, after considering credits, had a refund due
them for 1 of the tax years.
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taxpayers to demonstrate they exercised ordinary business care
and prudence and nevertheless were unable to file the tax return
by the due date. The addition will not apply if it is shown that
the failure to file a timely tax return was due to reasonable
cause and not due to willful neglect. See sec. 6651(a)(1); see
also United States v. Boyle, 469 U.S. 241, 245 (1985); sec.
301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect is
interpreted as a “conscious, intentional failure or reckless
indifference.” United States v. Boyle, supra at 245.
The fact that petitioners’ income tax returns for 2001 and
2002 were filed late satisfies respondent’s burden of production
under section 7491(c) and establishes the potential for
petitioners’ liability for the section 6651(a)(1) addition to tax
unless they can establish reasonable cause for the failure to
file timely. See Higbee v. Commissioner, 116 T.C. 438, 446
(2001).
Petitioner claims that his late filing was due to reasonable
cause because of his good-faith belief that prior year’s credits
or overpayments would result in no tax or addition to tax due4
for 2001 and 2002. When the 2001 and 2002 returns were due,
petitioner was unable to accomplish much more than caring for his
4
Ultimately, the credits from earlier years resulted in an
overpayment in 1 year. We note, however, those circumstances do
not obviate the sec. 6651(a)(1) late-filing addition to tax.
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wife, children, and household while continuing to earn money to
support his family.
In Ruggeri v. Commissioner, T.C. Memo. 2008-300, the
following contrasting opinions were set forth to show some
parameters of reasonable cause cases with circumstances similar
to those we consider here:
The Court has found reasonable cause where the taxpayer
or a member of the taxpayer’s family experiences an
illness or incapacity that prevents the taxpayer from
filing his or her tax return. See, e.g., Tabbi v.
Commissioner, T.C. Memo. 1995-463 (reasonable cause
found where the taxpayers’ son had heart surgery and
the taxpayers spent 4 months continuously in the
hospital with him, and the taxpayers filed their return
2 months after their son’s death); Harris v.
Commissioner, T.C. Memo. 1969-49 (reasonable cause
found where the taxpayer’s activities were severely
restricted, and the taxpayer was in and out of
hospitals because of various severe medical ailments
including stroke, paralysis, heart attack, bladder
trouble, and breast cancer).
On the other hand, the Court has not found
reasonable cause where the taxpayer does not timely
file but is able to continue his or her business
affairs despite the illness or incapacity. See, e.g.,
Judge v. Commissioner, 88 T.C. 1175, 1189-1191 (1987)
(no reasonable cause found where the taxpayer had a
long history of delinquent filing of returns and the
taxpayer was actively involved in preparing and
executing business-related documents despite illness
during years at issue); Watts v. Commissioner, T.C.
Memo. 1999-416 (reasonable cause not found where,
although the taxpayer’s mother and daughter were both
ill and the taxpayer frequently took them to see
doctors, the taxpayer also performed extensive
architectural services in the taxpayer’s business);
Wright v. Commissioner, T.C. Memo. 1998-224 (reasonable
cause not found where the taxpayer had capacity to
attend to matters other than filing tax returns despite
the trauma of his mother’s disappearance and death),
affd. without published opinion 173 F.3d 848 (2d Cir.
1999).
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Petitioner’s circumstances are most like those in Tabbi v.
Commissioner, supra, and Harris v. Commissioner, supra, in which
the Court found reasonable cause for the late filing. The record
reflects that after petitioner wife’s accident he was consumed by
his constant attention to her needs during the period under
consideration; by his unsuccessful5 attempt to earn enough money
to pay the bills; by his obligation to care for his family; and
by the maintaining of his household. When the returns were due
petitioner slept little and had no time for any other activity.
Under these circumstances, petitioner attempted to maintain
sufficient records but was nevertheless unable to file the tax
returns within the prescribed time. Additionally, during that
time petitioners’ returns were being audited, and there were
substantial differences between the parties concerning the
application of credits and overpayments from prior years. The
failure to file was not due to petitioners’ intentional failure
or reckless indifference.
We accordingly hold that petitioners are not liable for the
late-filing addition to tax under section 6651(a)(1) for the 2001
and 2002 tax years.
Finally, we turn to the computational issue. By way of
background, the genesis of the problem was the filing of
5
During the period 2001 to 2003 petitioner went
approximately $150,000 into debt.
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petitioners’ 1998 tax return, wherein they reported a $21,991
overpayment and directed that the overpayment be applied to
estimated tax payments for 1999. Respondent, instead of applying
the overpayment to 1999, sent petitioners a refund check for
$21,991. Petitioners did not cash the refund check; shortly
thereafter their 1998 tax return came under audit; no amount of
the claimed overpayment was credited to the 1999 tax year; and
respondent placed a “freeze” on the $21,991 refund for 1998.
Ultimately, in connection with petitioners’ earlier case before
this Court, respondent released some portion of the 1998 refund.
Through a combination of respondent’s computational and related
errors, petitioners’ late filing of returns, and litigation with
respect to 1998, 1999, 2001, and 2002 the computational and other
differences in the amount of credits to be applied or penalties
for any year were compounded. These complexities caused further
delay in the filing of petitioners’ 2001 and 2002 tax returns.
The parties worked diligently and resolved all but one of those
differences.6
Ultimately, the computational differences were agreed to,
but petitioners contend that they should not be responsible for
6
The parties resolved most of the prior years’ computational
differences irrespective of their views as to whether the Court
would have jurisdiction to decide the correct amounts if the
parties had disagreed.
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the additions to tax7 and interest for the 1999 tax year. In
addition, petitioners contend that sanctions should be imposed
against respondent. Finally, petitioners have countered
respondent’s argument that the period of limitations for the 1999
tax year has expired by arguing that either the mitigation
provisions or the doctrine of equitable recoupment should be
applied. The global basis for petitioners’ contentions is that
respondent’s errors have caused delays resulting in an increase
in interest.
In order to address any of the issues petitioners raise,
other than whether respondent should be sanctioned, we must have
jurisdiction over the 1999 tax year.8 Respondent contends that
the Court does not have jurisdiction over the 1999 tax year and,
alternatively, if we did have jurisdiction, the period of
limitations has expired with respect to a refund claim for
petitioners’ 1999 tax year.
Before considering the jurisdictional question, we outline
the 1999 tax return filing history. A $4,798.54 overpayment
credit from petitioners’ 1998 tax year was credited to the 1999
tax year on April 23, 2001. The 1999 joint Federal income tax
7
We have already decided that petitioners are not liable for
the sec. 6651(a)(1) late-filing additions to tax for 2001 and
2002.
8
We note that petitioners’ 1998 tax year was the subject of
a case at docket No. 4542-04S, settled in July 2005.
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return was filed on August 22, 2003, reflecting a $3,502 balance
due. Respondent, however, assessed late-filing and late-payment
additions to tax and statutory interest. On September 12, 2005,
respondent reduced the amounts of the late-payment additions to
tax. No tax remains due for the 1999 tax year. For the 1999 tax
year there were late-filing and late-payment additions to tax of
$767.25 and $221.65, respectively, and accrued interest of
$361.69. Petitioners have asked the Court to abate or eliminate
these amounts.
Before we can consider the merits of petitioners’ arguments,
we must decide whether we have jurisdiction over the 1999 tax
year. Under certain circumstances the Court may consider the
merits of an earlier year and its effect on the year(s) before
the Court. One such example is where carryover losses are in
issue. However, petitioners were not entitled to petition the
underlying merits of their 1998 tax year, which was the subject
of prior litigation that has become final. The notice of
deficiency upon which this case is based contained determinations
for petitioners’ 2001 and 2002 tax years. To the extent that
prepayment credits and/or overpayments from 1998 to 1999 could
have any effect on the years before the Court, the parties have
resolved those differences and amounts. Accordingly, we lack
jurisdiction over the merits of the 1998 or 1999 tax year. See,
e.g., Normac, Inc. v. Commissioner, 90 T.C. 142, 146 (1988).
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Having decided that we lack jurisdiction over the 1999 tax
year, we need not address whether the period of limitations
expired or whether mitigation or estoppel applies.
Lastly, petitioners contend that respondent should be
sanctioned because of errors resulting in delays that occurred
during the processing of all of the tax years 1998, 1999, 2001,
and 2002. Although there were processing errors, petitioners’
late filing and holding of refund checks compounded and/or
contributed to the problems and complexity in the administrative
process. Ultimately, respondent’s counsel and petitioners have
worked together and resolved the liabilities, credits, and
overpayments from one year to another. Under these
circumstances, we hold that sanctions are not warranted.
To reflect the foregoing,
Decision will be entered
under Rule 155.