Hugh G. & Norma J. King v. Comm. IRS

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS FILED
U.S. COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT ELEVENTH CIRCUIT
________________________ OCT 31, 2007
THOMAS K. KAHN
No. 06-16699 CLERK
________________________
Tax Court No. 10334-03
HUGH G. KING,
NORMA J. KING,
Petitioners-Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
________________________
Appeal from the Decision of the
United States Tax Court
_________________________
(October 31, 2007)
Before MARCUS and PRYOR, Circuit Judges, and HANCOCK,* District Judge.
PER CURIAM:
*
Honorable James Hughes Hancock, United States District Judge for the Northern
District of Alabama, sitting by designation.
At issue in this case is whether the United States Tax Court properly affirmed
the tax deficiencies and penalties assessed against appellants, Hugh G. King, Norma
J. King, and King’s Appliances, Inc. (“the Kings”), for taxable years 1995-1998.
After thorough review, we affirm.
I.
Hugh G. King and Norma J. King are Alabama residents who own, or once
owned, a number of commercial properties and operate an appliance store in Dothan,
Alabama (“King’s Appliances, Inc.”). Appellee, the Commissioner of Internal
Revenue (“the Commissioner”), issued a notice of deficiency against the Kings on
April 16, 2003, for income the Kings allegedly received, but did not report, during
taxable years 1995-1998. According to the Commissioner, the Kings owe
considerable sums in unpaid taxes both for income received from the appliance store
and for the value of their two principal real estate investments, the South Oates
Building and the Ross Clark Building.
The Kings elected to challenge this deficiency in the United States Tax Court
in 2003. After a trial in 2006, that court ruled against the taxpayers on six of the seven
primary issues in the case.1 The Kings timely appealed to this Court raising three
1
On the issue of the adjusted basis for the Kings’ South Oates Street Property, the Tax
Court’s final figure included $30,000 more than the Commissioner allowed. The Commissioner
does not contest this finding on appeal.
2
principal objections to the Tax Court's ruling: first, they say that the Commissioner
failed to issue a notice of deficiency against them before the expiration of the
three-year statute of limitations; second, they contend that the Commissioner’s tax
deficiency assessment, and its affirmance by the Tax Court, was incorrect for taxable
years 1995-1998; and, finally, they contest the Tax Court’s imposition of an
accuracy-related penalty on the grounds that they reasonably relied on the advice of
tax professionals.
We review the Tax Court’s factual findings for clear error. Blohm v. Comm’r,
994 F.2d 1542, 1548 (11th Cir. 1993). “A finding of fact is clearly erroneous ‘if the
record lacks substantial evidence to support it,’” Id. (citing Thelma C. Raley, Inc. v.
Kleppe, 867 F.2d 1326, 1328 (11th Cir. 1989)), “such that our review of the entire
record leaves us ‘with the definite and firm conviction that a mistake has been
committed.’” Id. (citing United States v. U.S. Gypsum Co., 333 U.S. 364, 395
(1948)). A Tax Court’s conclusions, however, with respect to the interpretation and
application of the Tax Code present questions of law, which we review de novo. Id.;
Feldman v. Comm’r, 20 F.3d 1128, 1132 (11th Cir. 1994).
II.
First, the Kings contend that the statute of limitations to assess taxes against
them expired before the Commissioner issued the notice of deficiency on April 16,
3
2003. We are unpersuaded.
As a general matter, once a taxpayer has filed tax returns, the Commissioner
has three years to assess taxes against that taxpayer. 26 U.S.C. § 6501(a).2 However,
if the Commissioner and the taxpayer consent in writing3 to extend the statute of
limitations before the three-year period expires, the tax may be assessed at any time
prior to the expiration of the newly designated period. 26 U.S.C. § 6501(c)(4)(A).4
2
That section provides as follows:
Except as otherwise provided in this section, the amount of any tax
imposed by this title shall be assessed within 3 years after the return was
filed (whether or not such return was filed on or after the date prescribed)
or, if the tax is payable by stamp, at any time after such tax became due
and before the expiration of 3 years after the date on which any part of
such tax was paid, and no proceeding in court without assessment for the
collection of such tax shall be begun after the expiration of such period.
For purposes of this chapter, the term "return" means the return required
to be filed by the taxpayer (and does not include a return of any person
from whom the taxpayer has received an item of income, gain, loss,
deduction, or credit).
26 U.S.C. § 6501(a).
3
This is accomplished by signing a consent form, entitled Tax Form 872.
4
That section provides as follows:
Where, before the expiration of the time prescribed in this section for the
assessment of any tax imposed by this title, except the estate tax
provided in chapter 11, both the Secretary and the taxpayer have
consented in writing to its assessment after such time, the tax may be
assessed at any time prior to the expiration of the period agreed upon.
The period so agreed upon may be extended by subsequent agreements in
writing made before the expiration of the period previously agreed upon.
26 U.S.C. § 6501(c)(4)(A).
4
Importantly, the fact that a taxpayer’s name is signed to a document is “prima facie
evidence for all purposes that the return, the statement, or other document was
actually signed by him.” 26 U.S.C. § 6064.
In this case, the three-year periods to assess taxes against the Kings expired on
(1) October 15, 1999 for 1995; (2) October 20, 2000 for 1996; (3) October 19, 2001
for 1997; and (4) October 18, 2002 for 1998. It is undisputed that the Commissioner
issued the notice of deficiency on April 16, 2003, which is later than those dates.
However, the Tax Court found that the Commissioner's notice of deficiency was
timely for two reasons. First, it determined that the Kings had signed thirteen Forms
872 prior to the expiration of the original statute of limitations. And second, the Tax
Court found that the Commissioner’s notice of deficiency was mailed to and received
by the Kings prior to the expiration of the newly designated periods,5 in accordance
with 26 U.S.C. § 6501(c)(4)(A). The record amply supports the Tax Court’s findings.
Next, the Kings contend that the Commissioner improperly calculated their
income, cost of goods sold, deductions for depreciation in the South Oates and Ross
Clark Buildings, deductions for water and soil expenses, and deductions for other
expenses, for taxable years 1995-1998. Again, we are unpersuaded.
5
The 13 Forms 872 extend the time to assess tax deficiencies against the Kings until
December 31, 2003.
5
In suits before the Tax Court, the Commissioner's determination with respect
to most alleged tax deficiencies is entitled to a presumption of correctness, and the
taxpayer bears the burden of proving by a preponderance of the evidence that the
determination is incorrect. Welsh v. Helvering, 290 U.S. 111, 115 (1933); Bone v.
Comm’r, 324 F.3d at 1293. Before relying on this presumption, however, this Court
must find that the record contains some evidence linking the taxpayer to an
income-producing activity. Blohm, 994 F.2d at 1549. “Although a determination that
is unsupported by such a foundation is clearly arbitrary and erroneous, the required
showing is minimal.” Id. (quotation marks omitted). In this case, the Commissioner
has successfully established that the Kings were engaged in income-producing
enterprises during the years in question. Therefore, the burden lies with the Kings to
refute the Commissioner's determination. Plainly, the Kings have failed to meet this
burden. For none of the years at issue have the Kings provided any evidence, aside
from their own uncorroborated testimony, to verify their claims. As a result, the Tax
Court affirmed the Commissioner’s determination, and the record amply supports its
judgment.
Finally, the Kings argue that they are not liable for the accuracy-related
penalty, imposed despite their less than meticulous book-keeping, because they
reasonably relied on the advice of their accountants and other tax professionals.
6
The Internal Revenue Code imposes a twenty-percent penalty on any
underpayment of tax attributable to the taxpayer’s “[n]egligence or disregard of rules
and regulations,” including “any failure to make a reasonable attempt to comply with”
the Internal Revenue Code or any “careless, reckless, or intentional disregard” of the
rules and regulations. 26 U.S.C. § 6662(b), (c). The Commissioner bears the “burden
of production in any court proceeding with respect to liability for any penalty”
imposed. 26 U.S.C. § 7491(c).6 However, “determinations of negligence by the
Commissioner are presumed to be correct,” and “the taxpayers bear the burden of
proving that the penalties are erroneous.” Kikalos v. Comm’r, 434 F.3d 977, 986 (7th
Cir. 2006); Neonatology Associates, P.A. v. Comm’r, 299 F.3d 221, 233 (3d Cir.
2002) (“[T]he Tax Court was justified in concluding as a matter of fact that the
individual taxpayers were liable for the section 6662 accuracy-related penalties
because they did not meet their burden of proving due care.”). In this case, the Tax
Court found that the Commissioner met his burden by establishing that the Kings kept
inadequate records and used inadequate bookkeeping methods, that they overstated
costs of goods sold and deductions, and that they understated gross receipts and
6
That Section provides: “Notwithstanding any other provision of this title, the Secretary
shall have the burden of production in any court proceeding with respect to the liability of any
individual for any penalty, addition to tax, or additional amount imposed by this title. 26 U.S.C. §
7491(c).” 26 U.S.C. § 7491(c).
7
income. Moreover, the Kings provided no evidence to the contrary. The record amply
supports the Tax Court’s findings.
Nevertheless, the Kings argue that the penalty should not be imposed because
they reasonably relied on the advice of their accountants and tax professionals. In
support, the Kings point to 26 U.S.C. § 6664(c)(1), which states that “[n]o penalty
shall be imposed under section 6662 or 6663 with respect to any portion of an
underpayment 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.” Reliance on a tax
advisor is not reasonable, however, where the taxpayer has failed to adequately
disclose “all necessary information” affecting the tax evaluation. Ellwest Stereo
Theatres of Memphis, Inc. v. Comm’r, 70 T.C.M. 1655, 1660 (1995). The
Kings bore the burden of demonstrating that they acted with “reasonable cause” and
in “the absence of willful neglect.” Id. at 1655.
The Tax Court determined that the Kings’ reliance on their tax advisors was
not reasonable and in good faith because they did not provide their accountants either
with records of their layaway payments or with any supporting documentation
concerning their sales, purchases, and expenses for the years in question. The record
8
supports the imposition of the twenty-percent penalty.7
AFFIRMED.
7
In the alternative, the Kings contend that they are not liable for the accuracy-related
penalty because they used the same record-keeping practices in 1995-1997 that were approved by
the Commissioner in a 1969 no-change letter. However, the Kings failed to offer in evidence the
no-change letter they describe. As a result, the Tax Court lacked the opportunity to determine
whether, in fact, the letter approved of the specific record-keeping practices the Kings employed
during the years in question.
9