Phillips v. Comm'r

T.C. Memo. 2013-42

UNITED STATES TAX COURT

ROGER PHILLIPS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 28324-10. Filed February 7, 2013.

Roger Phillips, pro se.

David L. Zoss, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In a notice of deficiency dated September 13, 2010,

respondent determined a deficiency in petitioner’s 2006 Federal income tax of

$51,864 and additions to tax under sections 6651(a)(1) and (2) and 6654(a) of
 -2-

[*2] $11,107, $9,873, and $2,323, respectively.1 After concessions,2 the issues for

decision are: (1) whether petitioner must include in taxable income a distribution

from his individual retirement account (IRA) of $127,074 and, if so, whether he is

liable for the 10% additional tax on early distributions under section 72(t); (2)

whether petitioner received tax-exempt interest income of $521 during 2006; (3)

whether petitioner substantiated his claimed deductions for moving expenses and

business expenses; and (4) whether petitioner is liable for additions to tax under

sections 6651(a)(1) and (2) and 6654 for 2006.

1
Unless otherwise indicated, section references are to the Internal Revenue
Code in effect for the year in issue, and Rule references are to the Tax Court Rules
of Practice and Procedure. Some monetary amounts have been rounded to the
nearest dollar.
2
In the notice of deficiency respondent determined that petitioner received
taxable distributions from his IRA of $157,074. Respondent concedes that
petitioner made a qualifying IRA rollover contribution of $30,000 and, to that
extent, he did not receive taxable income and is not liable for the sec. 72(t) addition
to tax.

Pursuant to the deemed stipulations, petitioner is entitled to a standard
deduction of $5,150 and a personal exemption of $3,300 for 2006.
 -3-

[*3] FINDINGS OF FACT

Some of the facts have been deemed established for purposes of this case in

accordance with Rule 91(f).3 The deemed facts are incorporated herein by this

reference. Petitioner resided in Minnesota when he filed his petition.

During 2006 petitioner maintained an IRA at Ameriprise Trust Co.

(Ameriprise). In June 2006 petitioner rolled over $30,000 of his Ameriprise IRA

into a qualifying IRA account at BankAnnapolis. Following the June 2006 rollover

petitioner directed Ameriprise to transfer $127,074, the remaining balance of his

IRA, to his existing savings account at BankAnnapolis. He elected to transfer the

funds to his savings account rather than to a qualified retirement account or IRA.

Petitioner received a total distribution from his Ameriprise IRA of $157,074 during

2006. Ameriprise withheld from this distribution $2,500 of Federal income tax.

3
On January 11, 2012, respondent filed a motion to show cause why proposed
facts and evidence should not be accepted as established under Rule 91(f) and
attached a proposed stipulation of facts. By order dated January 12, 2012, this
Court ordered that petitioner file a response to respondent’s motion in accordance
with Rule 91(f)(2) on or before February 1, 2012. Petitioner failed to file a response
to respondent’s motion that complied with Rule 91(f)(2). By order dated February
8, 2012, this Court made the order to show cause under Rule 91(f) absolute and
deemed established the facts and evidence set forth in respondent’s proposed
stipulation of facts.
 -4-

[*4] For 2006 respondent received the following information returns with respect

to petitioner: (1) a Form 5498, IRA Contribution Information, from BankAnnapolis,

reporting a $500 IRA contribution and a $30,000 IRA rollover contribution; (2) a

Form 5498 from Ameriprise, reporting that petitioner’s account had a fair market

value of $6; (3) a Form 1099-INT, Interest Income, from American Express Bank,

reporting interest income of $14; (4) Forms 1099-INT from BankAnnapolis,

reporting interest income of $88 and $520; and (5) a Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., from Ameriprise, reporting an IRA distribution of $157,074 and tax

withheld of $2,500.

Petitioner failed to timely file a Form 1040, U.S. Individual Income Tax

Return, for 2006. Respondent prepared a substitute for return pursuant to section

6020(b). On the basis of the substitute for return, respondent mailed to petitioner a

notice of deficiency for 2006 dated September 13, 2010, determining that petitioner

had received a taxable distribution from his IRA of $157,074 and interest income of

$622. Respondent also determined that petitioner was liable for: (1) a 10% tax

with respect to his $157,074 early distribution from his IRA; and (2) additions to tax

under sections 6651(a)(1) and (2) and 6654.
 -5-

[*5] On August 26, 2011, petitioner submitted to respondent a Form 1040 for

2006. On petitioner’s untimely filed return, he reported that he received tax-exempt

interest income of $521 and an IRA distribution of $157,239, including a taxable

IRA distribution of $78,125. He claimed moving expenses of $7,698. On an

attached Schedule C, Profit or Loss From Business, petitioner claimed a loss of

$82,603.4 Petitioner attached to his return: (1) the Form 1099-INT from American

Express Bank; (2) the Form 1099-INT from BankAnnapolis; (3) the Form 1099-R

from Ameriprise; and (4) the Form 5498 from BankAnnapolis.

OPINION

I. Burden of Proof and Burden of Production

Ordinarily, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that the

determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). The burden of proof shifts to the Commissioner, however, if the

taxpayer produces credible evidence to support the deduction or position, the

taxpayer complied with the substantiation requirements, and the taxpayer

4
The deemed stipulation of facts states that on his 2006 return petitioner
claimed a Schedule C loss of $88,603. Petitioner’s 2006 return, which is in the
record, shows that he actually claimed a loss of $82,603.
 -6-

[*6] cooperated with the Secretary5 with regard to all reasonable requests for

information. Sec. 7491(a); see also Higbee v. Commissioner, 116 T.C. 438, 440-

441 (2001).

Petitioner does not contend that section 7491(a)(1) should shift the burden

here, and the record establishes that he did not satisfy the section 7491(a)(2)

requirements. 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 evidence, in addition to the information return,

concerning the deficiency attributable to the income item. Petitioner has not raised

any reasonable dispute with respect to the accuracy of the information returns.

Consequently, the burden of production with respect to the income did not shift to

respondent under section 6201(d).

5
The term “Secretary” means “the Secretary of the Treasury or his delegate”,
sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer, employee,
or agency of the Treasury Department duly authorized by the Secretary of the
Treasury directly, or indirectly by one or more redelegations of authority, to perform
the function mentioned or described in the context”, sec. 7701(a)(12)(A)(i).
 -7-

[*7] II. IRA Distribution and Section 72(t) Penalty

A. Taxable Distribution Amount

Petitioner does not appear to contest that he received a distribution from his

Ameriprise IRA of $157,074 during 2006. He attached to his untimely filed 2006

return the Form 1099-R from Ameriprise, and he reported on his return that he

received a distribution from Ameriprise of $157,239. Respondent has conceded that

petitioner made a rollover contribution of $30,000 and that that amount is excluded

from petitioner’s taxable income. Accordingly, we need decide only whether

petitioner must include in income the remaining amount of the distribution.

Petitioner appears to contend that the remaining amount of the distribution is not

includable in gross income because he merely made an error in rolling over the

remaining balance of his Ameriprise account.

Generally, amounts distributed from an IRA are includable in a taxpayer’s

gross income as provided in section 72. Sec. 408(d)(1). However, section

408(d)(3) provides that a distribution is not includable in gross income if the entire

amount of the distribution an individual receives is paid into an IRA or other eligible

retirement plan within 60 days of the distribution. See Schoof v.

Commissioner, 110 T.C. 1, 7 (1998). This recontribution is known as a “rollover

contribution”. Sec. 408(d)(3).
 -8-

[*8] In Wood v. Commissioner, 93 T.C. 114, 115-118 (1989), the taxpayer’s

financial institution made a bookkeeping error and the taxpayer’s rollover

contribution was not transferred to an IRA within 60 days of the distribution. The

taxpayer took every reasonably expected step in order to roll over his lump-sum

distribution as required by law. Id. at 122. We held that the bookkeeping error did

not preclude rollover treatment because the taxpayer had, in substance, satisfied the

statutory requirements. Id. at 122-123. By contrast, in Schoof v. Commissioner,

110 T.C. at 10-11, we held that rollover treatment was precluded where the

distribution was rolled over to a trust that lacked a qualified IRA trustee. We stated:

“Where the requirements of a statute relate to the substance or
essence of the statute, they must be rigidly observed. On the other
hand, if the requirements are procedural or directory in that they do not
go to the essence of the thing to be done, but rather are given with a
view to the orderly conduct of business, they may be fulfilled by
substantial compliance.” [Citations omitted.]

Id. at 11 (quoting Rodoni v. Commissioner, 105 T.C. 29, 38-39 (1995)); see also

Crow v. Commissioner, T.C. Memo. 2002-178.

Petitioner testified that after rolling over $30,000 in June 2006 he sought to

transfer the balance of his Ameriprise IRA to BankAnnapolis. He further testified

that he structured the transfer in two parts in order to comply with what he
 -9-

[*9] believed was the applicable law. He testified that he intended that the value of

the second transfer would be invested into a certificate of deposit (CD) and

eventually moved from the CD to a qualifying retirement account or IRA. Petitioner

admitted that he received an early distribution from his Ameriprise IRA during

2006.

Even if we were to accept petitioner’s testimony as credible, his testimony

shows that he failed to roll over his remaining Ameriprise IRA balance into an IRA

or a qualified plan as required by section 408(d)(3). After Ameriprise transferred

the funds to BankAnnapolis, BankAnnapolis deposited the funds into petitioner’s

savings account. At that point, petitioner had direct control over the funds.

Petitioner introduced no evidence to show that the funds were later transferred

timely to a qualifying IRA. A fundamental requirement for a rollover contribution is

that the funds are actually rolled over to an IRA or other plan, see sec. 408(d)(3),

and petitioner failed to satisfy this requirement. Accordingly, we find that petitioner

failed to substantiate an IRA rollover contribution in an amount greater than

$30,000. Therefore the remaining amount of the distribution, or $127,074, is

includable in the calculation of petitioner’s taxable income.
 - 10 -

[*10] B. Section 72(t) Additional Tax

Section 72(t)(1) imposes a 10% additional tax when a qualified retirement

plan participant receives an early distribution that fails to satisfy one of the statutory

exceptions. Petitioner admitted that he received an early distribution from his IRA,

a qualified retirement plan for purposes of section 72(t), see sec. 4974(c)(4), and

that he was liable for the section 72(t) additional tax with respect to the portion of

the distribution that he failed to properly roll over into an IRA or a qualified plan.

Respondent determined that petitioner received an early distribution from his

IRA subject to the section 72(t) additional tax, and petitioner failed to prove that

respondent’s determination was erroneous. Petitioner’s distribution of $127,074 is

an early distribution from a qualified retirement plan. Accordingly, the 10%

additional tax applies to the $127,074 distribution unless petitioner qualifies for an

exception. See sec. 72(t)(1) and (2); see also Stipe v. Commissioner, T.C. Memo.

2011-92; Dollander v. Commissioner, T.C. Memo. 2009-187.

Petitioner has not alleged that any exception applies, nor has he introduced

any evidence that could allow us to conclude that an exception applies. Therefore,

petitioner is liable for the 10% additional tax on his early distribution of $127,074.
 - 11 -

[*11] III. Taxability of Interest Income

Petitioner does not appear to contest that he received interest income of $622

during 2006. He attached to his untimely filed 2006 return the Forms 1099-INT

from American Express Bank and BankAnnapolis. Petitioner appears to contend

that the $521 of interest income he received from BankAnnapolis is excluded from

taxable income because it is attributable to the funds he purportedly intended to roll

over into an IRA but which BankAnnapolis deposited into his savings account.

Accordingly, we need decide only whether petitioner must include in taxable income

the $521 of interest income he received from BankAnnapolis.

Gross income includes “all income from whatever source derived”,

including interest. Sec. 61(a). As discussed supra pp. 8-9, petitioner rolled over

IRA contributions of only $30,000 during 2006. The balance of petitioner’s

Ameriprise IRA was deposited into his savings account at BankAnnapolis.

Petitioner is not eligible to exclude from gross income the balance of the

Ameriprise IRA because he failed to comply with the requirements for making a

rollover contribution. Therefore, petitioner is not entitled to exclude the interest

earned on the balance of the Ameriprise IRA deposited into his BankAnnapolis

account. Petitioner has offered no other arguments regarding why the $521 of
 - 12 -

[*12] interest income qualifies for tax-exempt treatment. Accordingly, we sustain

respondent’s determinations with respect to petitioner’s interest income.

IV. Claimed Expense Deductions

Deductions are a matter of legislative grace, and ordinarily a taxpayer must

prove that he is entitled to the deductions he claims. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must maintain records to

substantiate claimed deductions and to establish the taxpayer’s correct tax liability.

Higbee v. Commissioner, 116 T.C. at 440; see also sec. 6001. The taxpayer must

produce such records upon the Secretary’s request. Sec. 7602(a); see also sec.

1.6001-1(e), Income Tax Regs. Adequate substantiation must establish the amount

and purpose of a claimed deduction. Higbee v. Commissioner, 116 T.C. at 440; see

also Hradesky v. Commissioner, 65 T.C. 87 (1975), aff’d per curiam, 540 F.2d 821

(5th Cir. 1976). In deciding whether a taxpayer adequately substantiated a claimed

deduction, we are not required to accept the taxpayer’s “self-serving, unverified,

and undocumented testimony.” Shea v. Commissioner, 112 T.C. 183, 189 (1999).

When a taxpayer establishes that he paid or incurred a deductible expense but

does not establish the amount of the expense, we may estimate the amount of the

deductible expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
 - 13 -

[*13] 1930). However, we cannot estimate the amount unless the taxpayer

introduces evidence that he paid or incurred the expense and the evidence is

sufficient for us to develop a reasonable estimate. Williams v. United States, 245

F.2d 559, 560 (5th Cir. 1957).

A. Claimed Schedule C Expenses

Petitioner testified that during 2006 he incurred expenses and sustained an

overall loss with respect to his Schedule C business activity. At the pretrial

conference petitioner described his business activity as “a consulting activity

which uses pro se litigation as part of its activity”. At trial he testified that his

business activity involved “intellectual property valuation”. Petitioner did not

testify regarding any of the expenses he purportedly incurred with respect to his

business activity. He also admitted that he had failed to introduce any

documentation to support any of the items he reported as expenses on his

Schedule C.

Petitioner did not introduce any documentation or other credible evidence to

substantiate his reported Schedule C expenses or to provide any reasonable basis for

estimating the expenses. Petitioner’s uncorroborated testimony is insufficient to

substantiate the expenses. Petitioner is not entitled to any deduction for Schedule C

business expenses.
 - 14 -

[*14] B. Claimed Moving Expenses

Petitioner testified that he moved his place of residence from Minnesota to

Maryland in April 2006. He further testified that the moving expenses included the

cost of renting a van to transport his personal belongings to Maryland. Petitioner

did not testify regarding any other moving expenses he paid. He admitted that he

had failed to introduce any documentation to support any of the moving expenses

that he claimed on his return.

Although petitioner has not offered any support for his contention, we infer

from his testimony that he is claiming that his moving expenses were a deductible

expense under section 217. Section 217 provides that a taxpayer is allowed a

deduction for “moving expenses paid or incurred during the taxable year in

connection with the commencement of work by the taxpayer as an employee or as a

self-employed individual at a new principal place of work.” Petitioner did not

testify as to why he moved from Minnesota to Maryland. Regardless, petitioner did

not introduce any documentation or other credible evidence to substantiate his

claimed moving expenses of $7,698 or to provide any reasonable basis for

estimating the expenses. Petitioner’s uncorroborated testimony is insufficient to

substantiate the claimed expenses. Petitioner is not entitled to any deduction for

moving expenses.
 - 15 -

[*15] V. Additions to Tax

If the taxpayer assigns error to the Commissioner’s determination that a

taxpayer is liable for an addition to tax, the Commissioner has the burden, under

section 7491(c), of producing evidence with respect to the liability of the taxpayer

for the addition to tax. See Higbee v. Commissioner, 116 T.C. at 446-447. To meet

his burden of production, the Commissioner must come forward with sufficient

evidence that it is appropriate to impose the addition to tax. Id. Once the

Commissioner meets his burden, the taxpayer must come forward with evidence

sufficient to persuade this Court that the determination is incorrect. Id.

Respondent determined that petitioner is liable for an addition to tax for

failure to timely file a return for 2006 under section 6651(a)(1). Section

6651(a)(1) authorizes the imposition of an addition to tax for failure to timely file

a return, unless it is shown that such failure is due to reasonable cause and not due

to willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985); United

States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994). Failure to timely file a

Federal income tax return is due to reasonable cause if the taxpayer exercised

ordinary business care and prudence but nevertheless was unable to file the return

within the prescribed time. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
 - 16 -

[*16] Willful neglect means a conscious, intentional failure to file, or reckless

indifference toward filing. Boyle, 469 U.S. at 245.

Petitioner admitted that he failed to timely file a return for 2006. In addition,

respondent introduced a copy of petitioner’s account transcript for 2006 which

confirms that petitioner failed to timely file returns for the year at issue.

Consequently, we conclude that respondent has satisfied his burden of production

under section 7491(c), and petitioner must come forward with evidence sufficient to

persuade the Court that respondent’s determination is erroneous. Although

petitioner testified that he did not timely file his 2006 return because he was

involved in litigation in Federal court, we find that he did not have reasonable cause

for failing to timely file his return and that he failed to file his return because of

willful neglect. See, e.g., Cook v. Commissioner, T.C. Memo. 2012-167.

Accordingly, we sustain respondent’s determinations as to the section 6651(a)(1)

addition to tax for 2006.

Respondent also determined that petitioner is liable for an addition to tax for

failure to pay tax shown on a return under section 6651(a)(2). Section 6651(a)(2)

imposes an addition to tax for failure to pay the amount of tax shown on a

taxpayer’s Federal income tax return on or before the payment due date, unless
 - 17 -

[*17] such failure is due to reasonable cause or willful neglect.6 A failure to pay

will be considered due to reasonable cause if the taxpayer makes a satisfactory

showing that he exercised ordinary business care and prudence in providing for

payment of his tax liability and was nevertheless unable to pay the tax or would

suffer undue hardship if he paid on the due date. See sec. 301.6651-1(c)(1), Proced.

& Admin. Regs. The section 6651(a)(2) addition to tax applies only when an

amount of tax is shown on a return filed by the taxpayer or prepared by the

Secretary. Sec. 6651(a)(2), (g)(2); Cabirac v. Commissioner, 120 T.C. 163, 170

(2003). When a taxpayer has not filed a return, the section 6651(a)(2) addition to

tax may not be imposed unless the Secretary has prepared a substitute for return that

satisfies the requirements of section 6020(b). See Wheeler v. Commissioner, 127

T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

Respondent introduced into evidence a substitute for return that satisfies the

requirements of section 6020(b), as well as a copy of petitioner’s account

transcript. The substitute for return and the account transcript establish that

petitioner failed to pay the tax shown on the substitute for return. Respondent has

satisfied his burden of production under section 7491(c). Petitioner did not

6
The sec. 6651(a)(2) addition to tax is 0.5% of the amount of tax shown on
the return, with an additional 0.5% per month during which the failure to pay
continues, up to a maximum of 25%.
 - 18 -

[*18] introduce any evidence that he was unable to pay the tax owed or that he

would have suffered undue hardship if he had paid the tax on the due date.

Accordingly, we sustain respondent’s determination as to the section 6651(a)(2)

addition to tax.

Respondent also determined that petitioner is liable for additions to tax for

failure to pay estimated tax under section 6654. Section 6654 imposes an addition

to tax on an individual who underpays his estimated tax.7 The addition to tax is

calculated with reference to four required installment payments of the taxpayer’s

estimated tax liability. Sec. 6654(c) and (d). In general, each required installment

of estimated tax is equal to 25% of the “required annual payment”. Sec. 6654(d).

A taxpayer has an obligation to pay estimated taxes only if he has a “required

annual payment”. Wheeler v. Commissioner, 127 T.C. at 211-212; see also

Mendes v. Commissioner, 121 T.C. 308, 324 (2003). The “required annual

payment” is equal to the lesser of (1) 90% of the tax shown on the individual’s

return for that year (or, if no return is filed, 90% of his tax for such year), see sec.

7
Unless a statutory exception applies, the sec. 6654(a) addition to tax is
mandatory, see sec. 6654(a), (e); Recklitis v. Commissioner, 91 T.C. 874, 913
(1988), and sec. 6654 does not contain a general exception for reasonable cause or
absence of willful neglect, see Grosshandler v. Commissioner, 75 T.C. 1, 21 (1980).
Petitioner does not contend that any of the statutory exceptions under sec. 6654(e)
are applicable to this case.
 - 19 -

[*19] 6654(d)(1)(B)(i), or (2) if the individual filed a return for the immediately

preceding taxable year, 100% of the tax shown on that return, see sec.

6654(d)(1)(B)(ii), see also sec. 6654(d)(1)(A) and (B) and (C). If, after the

Commissioner issues a notice of deficiency for a taxable year, a taxpayer files a

return for that year showing no tax due, the Court will disregard the return for

purposes of determining whether the taxpayer satisfies “the return-filed safe harbor

of section 6654(d)(1)(B)(i).” Mendes v. Commissioner, 121 T.C. at 328.

Because petitioner failed to file his 2006 return until after respondent issued

the notice of deficiency, we disregard his untimely filed 2006 return. Accordingly,

petitioner’s required annual payment was equal to the lesser of 90% of his tax for

2006 or, if he filed a return for the immediately preceding taxable year, 100% of the

tax shown on that return. See sec. 6654(d)(1)(B). Respondent introduced a copy of

an account transcript showing that petitioner did not file his 2005 return until 2011.

Because petitioner did not file his 2005 return until after respondent issued the

notice of deficiency for 2006, we disregard his untimely filed 2005 return.

Therefore, petitioner’s required annual payment was equal to 90% of his tax for

2006. Petitioner failed to make any estimated tax payments for 2006. We therefore

sustain respondent’s determination as to the section 6654 addition to tax for 2006.
 - 20 -

[*20] We have considered all the other arguments made by the parties, and to the

extent not discussed above, find those arguments to be irrelevant, moot, or without

merit.

To reflect the foregoing,

Decision will be entered under

Rule 155.