Lionel E. LaRochelle & Molly B. LaRochelle ( 2022 )

United States Tax Court
T.C. Summary Opinion 2022-12LIONEL E. LAROCHELLE AND MOLLY B. LAROCHELLE,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 10416-20S. Filed July 12, 2022.
—————
Arthur Lander, for petitioners.
William J. Gregg, for respondent.
SUMMARY OPINION
LEYDEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code 1 in effect
when the petition was filed. Pursuant to section, 7463(b), the decision
to be entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case.
The Internal Revenue Service (IRS) 2 examined petitioners’ 2017
joint federal income tax return. The IRS issued a notice of deficiency
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 The Court uses the term “Internal Revenue Service” or “IRS” to refer to
administrative actions taken outside of these proceedings. The Court uses the term
“respondent” to refer to the Commissioner of Internal Revenue, who is the head of the
IRS and is respondent in this case, and to refer to actions taken in connection with this
case.
Served 07/12/22
2
dated January 6, 2020, and determined a deficiency of $72,177 and a
section 6662 accuracy-related penalty of $9,075 for 2017. Petitioners
timely filed a Petition for redetermination pursuant to section 6213(a).
Petitioners concede the proposed 2017 federal income tax
deficiency. Petitioners fully paid the proposed deficiency before filing
their Petition. The sole issue for decision is whether for 2017 petitioners
are liable for a section 6662 accuracy-related penalty.
Background
Some of the facts have been stipulated and are so found. The
Stipulation of Facts is incorporated herein by this reference. At trial
respondent introduced Proposed Trial Exhibits 1000-R, 1001-R, 1002-R,
1003-R, 1004-R, 1005-R, and 1006-R. Petitioners did not object to the
admission of Proposed Trial Exhibits 1000-R and 1001-R. Petitioners
objected to the admission of Exhibits 1002-R, 1003-R, 1004-R, 1005-R,
and 1006-R. The Court overruled petitioners’ objections to Exhibits
1003-R, 1004-R, 1005-R, and 1006-R and admitted these Exhibits into
evidence. Petitioners objected to the admission of Exhibit 1002-R, on
the basis of hearsay. Respondent argued that it qualified for the
exception to hearsay under Federal Rule of Evidence 803(6) as a
business record and indicated that he would have a witness testify as to
why it was a business record. However, respondent never called a
witness to so testify. During trial the Court reserved ruling on
respondent’s Proposed Trial Exhibit 1002-R. Petitioners’ objection is
sustained.
Petitioners resided in Florida when they timely filed the petition.
I. Petitioners’ 2017 Tax Return
Petitioners requested an extension of time to file their 2017 tax
return until October 15, 2018, and filed it on October 14, 2018. To
prepare their federal income tax returns petitioners collected documents
that they had received and provided them to their tax professional, Mr.
Lander. 3 Petitioners followed this procedure for both 2016 and 2017.
3 Arthur Lander represents petitioners in this case. At trial the Court apprised
the parties of Rule 24(g)(2)(A), which provides that “[c]ounsel may not represent a
party at trial if the counsel is likely to be a necessary witness within the meaning of
the ABA Model Rules of Professional Conduct,” with several narrow exceptions.
Petitioners stated that Mr. Lander was not likely to be a necessary witness, and Mr.
Lander did not testify.
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Beyond that, petitioners relied on Mr. Lander to prepare and submit
their federal income tax returns.
II. Petitioners’ Move to Florida
During 2016 petitioners moved from Washington, D.C., to
Florida. During 2017 petitioners lived in Florida, but they also owned a
house in Washington, D.C. Petitioners signed up for and used mail
forwarding through the U.S. Postal Service to forward mail from their
Washington, D.C., house to their new residence in Florida. After
starting mail forwarding, petitioners received mail at their Florida
residence that had been mailed to their Washington, D.C., house,
including monthly bills.
Petitioners received a Form 1099–R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, from Fidelity
with respect to a distribution of $60,000 during 2016 from an Individual
Retirement Account (IRA). That Form 1099–R listed petitioners’
address in Florida. Petitioners reported that distribution on their 2016
tax return. National Financial Services, LLC, 4 issued a Form 1099–R
to Mr. LaRochelle with respect to a distribution of $238,000 from an IRA
during 2017. That Form 1099–R listed petitioners’ Washington, D.C.,
address.
III. Mr. LaRochelle’s Businesses
During 2017 Mr. LaRochelle was professionally engaged in more
than ten business partnerships. He was required to report taxes for
those partnerships in more than five states. With respect to one
partnership, which held hotel real estate assets, Mr. LaRochelle was the
overseeing general manager and was in charge of its day-to-day
operations, as well as its recordkeeping.
IV. IRS Correspondence
The IRS Automated Underreporter (AUR) program detected a
mismatch between the income reported on petitioners’ 2017 tax return
and the amount that petitioners’ IRA custodian, National Financial
Services, LLC, reported to the IRS. As a result the IRS issued
petitioners a computer-generated CP2000 notice and proposed a
deficiency stemming from the missing $238,000 IRA distribution.
4 The Court takes judicial notice that National Financial Services, LLC, is a
subsidiary of Fidelity.
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Petitioners did not respond to the CP2000 notice. The IRS subsequently
issued petitioners the notice of deficiency. Petitioners gave the notice of
deficiency to Mr. Lander and asked him to investigate and verify the
proposed deficiency. After Mr. Lander verified that the proposed
deficiency was correct, petitioners paid it in full on January 27, 2020.
On February 5, 2020, petitioners requested that the IRS abate the
accuracy-related penalty. The IRS sent petitioners a Letter 2626C
denying the request to abate the penalty because the information
petitioners provided did not establish reasonable cause.
Discussion
Section 6662(a) and (b)(2) imposes an accuracy-related penalty
equal to 20% of the amount of any underpayment of tax that is
attributable to any substantial understatement of income tax. An
understatement is a “substantial understatement” if it exceeds the
greater of $5,000 or 10% of the tax required to be shown on the return.
I.R.C. § 6662(d)(1)(A). Respondent has determined the section 6662(a)
penalty on the basis of a substantial understatement of income tax.
I. Burden of Production
The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for any penalty. I.R.C. § 7491(c);
Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). Once the
Commissioner meets his burden of production, the taxpayer must come
forward with persuasive evidence that the Commissioner’s
determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933).
The Court has held that substantial understatement penalties
determined by an IRS computer program without human review are
“automatically calculated through electronic means” and are thus
exempt from the written supervisory approval requirement that
generally applies to such penalties. See Walquist v. Commissioner, 152
T.C. 61, 73 (2019). This exception includes returns processed through
the AUR program, when the IRS issues a CP2000 notice to a taxpayer
and the taxpayer fails to respond to the notice. See Walton v.
Commissioner, T.C. Memo. 2021-40, at *9–10; Ball v. Commissioner,
T.C. Memo. 2020-152, at *12–13.
Respondent has asserted, and the record supports him, that the
accuracy-related penalty at issue was automatically calculated through
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electronic means and, therefore, falls within the section 6751(b)(2)(B)
exception to the written supervisory approval requirement.
Further, the record shows, and the parties do not dispute, that
there was an understatement of tax, attributable to the unreported
retirement distribution, which meets the definition of a substantial
understatement of income tax. See I.R.C. § 6662(d). Thus, respondent
has met his burden of production with respect to the accuracy-related
penalty.
II. Reasonable Cause and Good Faith
A taxpayer may avoid a section 6662(a) penalty by showing that
there was reasonable cause for the underpayment and that the taxpayer
acted in good faith. I.R.C. § 6664(c)(1). This determination is made on
a case-by-case basis, taking into account all pertinent facts and
circumstances. Treas. Reg. § 1.6664-4(b)(1). In making that
determination, “the most important factor” is usually “the extent of the
taxpayer’s effort to assess the taxpayer’s proper tax liability.” Id.Petitioners assert that they should not be liable for the penalty
because they did not remember receiving the Form 1099–R for the
unreported retirement distribution. However, petitioners did not
dispute that they received the $238,000 distribution sometime in 2017.
Nonreceipt of tax information forms, such as a Form W–2, Wage and
Tax Statement, or a Form 1099, does not excuse a taxpayer from his or
her duty to report the income. See Du Poux v. Commissioner, T.C.
Memo. 1994-448 (“[F]ailure to receive tax documents [such as Form
1099–MISC] does not excuse taxpayers from the duty to report
income.”). Further, nonreceipt of a Form 1099–R does not constitute
reasonable cause to prevent the application of a section 6662(a)
accuracy-related penalty. See Ashmore v. Commissioner, T.C. Memo.
2016-36 (holding that any error by the company responsible for issuing
the taxpayer a Form W–2 did not provide reasonable cause because the
taxpayer should have known of his missing second Form W–2); Jones v.
Commissioner, T.C. Memo. 2010-112 (failure to receive a Schedule K did
not constitute reasonable cause where the taxpayer acknowledged she
received a distribution from the entity); Brunsman v. Commissioner,
T.C. Memo. 2003-291 (rejecting the reasonable cause defense where the
taxpayer received only one Form 1099–MISC but knew he had held two
jobs).
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Mr. LaRochelle asserted that petitioners relied on their tax
professional, Mr. Lander, to handle their tax return. The decision as to
whether a taxpayer acted with reasonable cause and in good faith takes
into account the pertinent facts and circumstances, including the
taxpayer’s knowledge, education, and experience, as well as the
taxpayer’s reliance on professional advice. Thomas v. Commissioner,
T.C. Memo. 2013-60, at *7; Treas. Reg. § 1.6664-4(b)(1). Mr. LaRochelle
did not explain what was meant by petitioners’ relying upon Mr. Lander
to handle their tax return. Mr. LaRochelle is a sophisticated
businessperson who during 2017 was the general manager of a real
estate partnership, was involved in more than ten other partnerships,
and was responsible for recordkeeping for those partnerships.
Therefore, Mr. LaRochelle was aware of the need to keep records
concerning financial receipts.
The record shows that petitioners did not provide Mr. Lander
with all of the information that was necessary to prepare an accurate
income tax return, namely information about the $238,000 IRA
distribution that petitioners acknowledged they received, or even any
information that they had an IRA account. Reliance on the professional
advice of a tax return preparer does not constitute reasonable cause
where the taxpayer did not provide the representative with all the
information necessary to prepare an accurate income tax return. Enoch
v. Commissioner, 57 T.C. 781, 802 (1972). Other than handing over most
of their documents to Mr. Lander, petitioners did not appear to actively
participate in the return preparation process. Further, the record does
not show that petitioners reviewed the completed return before it was
filed.
III. Conclusion
Clearly, petitioners made a mistake. However, on the totality of
the facts and circumstances, petitioners have not proven that they had
reasonable cause for their substantial understatement of income tax or
acted in good faith. Accordingly, petitioners are liable for the accuracy-
related penalty for an underpayment due to a substantial
understatement of income tax for taxable year 2017.
To reflect the foregoing,
Decision will be entered for respondent.