Brennan v. Comm'r ( 2011 )

T.C. Memo. 2011-276
UNITED STATES TAX COURT
JOHN J. AND TERESA M. BRENNAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8981-10. Filed November 21, 2011.
Eugene A. Steger, Jr., for petitioners.
James H. Harris, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The IRS issued to petitioners, John J. and
Teresa M. Brennan, a notice of deficiency for tax year 2004 which
determined that the Brennans are liable for a $14,368.62 penalty
under section 6662A. Unless otherwise indicated, all references
to sections are to the Internal Revenue Code in effect for the
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year at issue. The Brennans petitioned the Court under section
6214 for redetermination of the deficiency.
FINDINGS OF FACT
The parties stipulated some of the facts; and those facts
are so found.
The Brennans resided in Pennsylvania when they filed their
petition. During 2004, John Brennan was the sole shareholder of
J.J. Brennan, Inc., an S corporation.
On November 17, 2004, J.J. Brennan, Inc., adopted the J.J.
Brennan, Inc. 412(i) Defined Benefit Plan (the “plan”). The plan
was effective as of January 1, 2004. It provided coverage to
John and Teresa Brennan, who were the only employees of J.J.
Brennan, Inc. The plan provided death benefits of $927,022 to
Teresa Brennan and $844,664 to John Brennan. J.J. Brennan, Inc.,
paid $223,802 in life-insurance premiums related to the plan. As
the parties have stipulated, in 2004 the Brennans engaged in a
listed transaction of the type described in Rev. Rul. 2004-20,
2004-1 C.B. 546 (defining as a listed transaction the
participation by employers in certain employee-benefit plans
providing death benefits and holding life insurance contracts).
On March 20, 2005, J.J. Brennan, Inc., filed its federal
income-tax return for 2004. On this return, it deducted $223,802
for life-insurance premium payments.
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On their federal income-tax return for 2004, the Brennans
reported flowthrough income from J.J. Brennan, Inc., to John
Brennan of $14,200, net of deductions.1 The return reported an
income-tax liability of $28,748, an amount that they paid as of
the due date of the return. The Brennans did not attach a Form
8886, Reportable Transaction Disclosure Statement, to their
return. Nor did they otherwise disclose the listed transaction
on their return.
The Brennans filed an amended return which showed an
increase in their taxable income of $155,209.2 A Form 8886 was
attached to the amended return.
On February 4, 2009, the IRS mailed a notice of deficiency
to the Brennans reflecting the IRS’s determination that they are
liable for a section 6662A penalty of $14,368.62. In computing
this amount, the IRS assumed that the increase in taxable income
resulting from the Brennans’ improper tax treatment of a section
6662A transaction was $136,8443 and that the highest marginal tax
1
Neither party asserts that this amount is inconsistent with
the J.J. Brennan, Inc. return.
2
The record is not clear, but the increase in taxable income
may have been the result of the Brennans’ calculation of their
taxable income without the $223,802 deduction that had been
claimed on the return of J.J. Brennan, Inc.
3
The IRS now asserts that the use of $136,844 in this
calculation was an error--and that $155,209 should have been used
instead. However, the IRS does not assert an increased penalty
to correct for this supposed error.
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rate was 35 percent. Thus, the reportable transaction
understatement was calculated to be $47,895.40, which is 35
percent of $136,844. The section 6662A penalty was calculated to
be 30 percent of the $47,895.40 reportable transaction
understatement, which is $14,368.62. The deficiency notice did
not reflect that the IRS determined a deficiency in income tax
separate from the penalty.4
On May 4, 2009, the IRS assessed $47,166 of additional
income tax. The Brennans paid the $47,166--and interest on the
$47,166--by an offset of their 2008 refund and by a $51,724.72
payment made on July 28, 2009. The record does not disclose how
the $47,166 was calculated. One could surmise that $47,166 was
the additional tax liability, beyond the $28,748 reported on the
2004 return, that the Brennans would owe if the $223,802
deduction that had been claimed on the return of J.J. Brennan,
Inc., were disallowed.
OPINION
Section 6011(a) provides that taxpayers must file the forms
and statements required by the regulations promulgated by the
Treasury Department. One such regulation is section 1.6011-4,
Income Tax Regs., which requires every taxpayer who has
participated in a “reportable transaction”, including a “listed
4
The parties have not explained why the deficiency notice
did not determine a deficiency in income tax other than the
penalty.
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transaction”, to attach to its annual tax return a Form 8886.
Sec. 1.6011-4(a), (d), Income Tax Regs. This disclosure
statement must be attached to the tax return for each taxable
year in which the taxpayer participated in the reportable
transaction. Sec. 1.6011-4(e)(1), Income Tax Regs. The
disclosure statement must also be attached to any amended return
that reflects the taxpayer’s participation in a reportable
transaction. Id.
Section 6662A(a) provides that “If a taxpayer has a
reportable transaction understatement for any taxable year, there
shall be added to the tax an amount equal to 20 percent of the
amount of such understatement.” As is relevant to the Brennans’
2004 tax return, the term “reportable transaction understatement”
is defined as
the product of--
(i) the amount of the increase (if any) in
taxable income which results from a difference
between the proper tax treatment of an item to
which this section applies and the taxpayer’s
treatment of such item (as shown on the taxpayer’s
return of tax), and
(ii) the highest rate of tax imposed by
section 1 * * *
Sec. 6662A(b)(1)(A). Giving content to the words “an item to
which this section applies”, section 6662A(b)(2) provides that
“This section shall apply to any item which is attributable to” a
“listed transaction” or certain other types of transactions. A
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listed transaction for the purposes of section 6662A(b)(2) is the
same as a listed transaction for the purposes of section 1.6011-
4, Income Tax Regs. Secs. 6662A(d), 6707A(c)(2).
Section 6664(d)(1) provides that “No penalty shall be
imposed under section 6662A with respect to any portion of a
reportable transaction understatement if it is shown that there
was a reasonable cause for such portion and that the taxpayer
acted in good faith with respect to such portion.” However,
section 6664(d)(2) provides:
Paragraph (1) [i.e., section 6664(d)(1)] shall not
apply to any reportable transaction understatement
unless--
(A) the relevant facts affecting the tax
treatment of the item are adequately disclosed in
accordance with the regulations prescribed under
section 6011,
(B) there is or was substantial authority for
such treatment, and
(C) the taxpayer reasonably believed that
such treatment was more likely than not the proper
treatment.
Section 6662A(c) provides that a 30-percent penalty rather
than a 20-percent penalty is imposed “with respect to the portion
of any reportable transaction understatement with respect to
which the requirement of section 6664(d)(2)(A) is not met.”
Section 6664(d)(2)(A) requires the taxpayer to disclose the
transaction in order to qualify for the reasonable cause
exception.
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Under section 7491(c), the IRS bears the burden of
production with regard to a penalty. This means that it must
come forward with sufficient evidence indicating that a penalty
is appropriate. Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001). The parties stipulated that the Brennans engaged in a
listed transaction described in Rev. Rul. 2004-20, supra, and
that they did not disclose the transaction on their 2004 return.
The Brennans do not dispute that $136,844 was the amount by which
their 2004 taxable income should be increased as a result of
their improper tax reporting of the listed transaction.5 The
parties do not dispute the marginal tax rate to be used in
computing the reportable transaction understatement. Therefore,
the IRS has met the burden of showing that there was a reportable
transaction understatement for 2004 and that therefore it is
appropriate to impose a penalty on the Brennans under section
6662A.
If the IRS meets the burden of production regarding a
penalty, the taxpayer bears the burden of proving the penalty is
inappropriate because the taxpayer acted with reasonable cause
and good faith. See Williams v. Commissioner, 123 T.C. 144, 153
(2004); Higbee v. Commissioner, supra at 446-447. The evidence
5
As already explained, the notice of deficiency determined
the amount was $136,844. The IRS asserts that this was an error
and the correct amount was $155,209. However, the IRS does not
seek the increased penalty that would result if this error were
corrected.
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adduced by the Brennans in support of the reasonable cause
exception is insufficient. It showed only that they were unaware
that they had to attach a disclosure statement to their 2004
return. This lack of awareness does not satisfy any of the three
conditions imposed by section 6664(d)(2) for the reasonable cause
exception. First, section 6664(d)(2)(A) requires the Brennans to
have attached a disclosure statement to their 2004 return. They
did not attach a disclosure statement. Second, section
6664(d)(2)(B) requires the Brennans to show that there was
substantial authority for the tax treatment of the listed
transaction on their 2004 tax return. They did not do so.
Third, section 6664(d)(2)(C) requires the Brennans to show that
they reasonably believed that their 2004 tax return more likely
than not reflected the correct tax treatment of the listed
transaction. They did not make such a showing.
We hold that the Brennans do not qualify for the section
6664(d) reasonable cause exception to the section 6662A penalty
that was determined by the IRS. They are therefore liable for
the penalty. In reaching our decision, we have considered all
arguments made by the parties. To the extent not mentioned or
addressed, they are irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.