Snyder v. Comm'r

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined a deficiency in, and an accuracy-related penalty under section 6662(a)¹ on, petitioner's Federal income tax (tax) for her taxable year 2001 of $ 66,497 and $ 12,926, respectively.

In an amendment to answer, respondent asserted (1) an increase in (a) the deficiency in, and (b) the accuracy-related penalty under section 6662(a) on, petitioner's tax for her taxable year 2001 of $ 1,273 and $ 628, respectively, and (2) an increased (a) deficiency in, and (b) accuracy-related penalty under section 6662(a) on, petitioner's tax for that year of $ 67,770 and $ 13,554, respectively.

The only issue remaining for decision is whether petitioner is liable for her*94 taxable year 2001 for the accuracy-related penalty under section 6662(a). We hold that she is.

FINDINGS OF FACT

Many of the facts have been stipulated and are so found.

Petitioner resided in Ellicott City, Maryland, at the time she filed the petition.

Petitioner, who attended three years of college where she majored in education, and E. Bruce Snyder (decedent) were married for about 38 years when he died after a long illness in May 2001. During their marriage, decedent retained Robert Hopkins (Mr. Hopkins) with A.G. Edwards & Sons, Inc. (A.G. Edwards) as their financial advisor.

With Mr. Hopkins's assistance, in December 1994, decedent and petitioner each opened an individual retirement account (IRA) with A.G. Edwards. Petitioner was the primary beneficiary of decedent's IRA, and decedent was the primary beneficiary of petitioner's IRA. The four children of petitioner and decedent were the contingent beneficiaries of both decedent's IRA and petitioner's IRA.

At a time or times not disclosed by the record, decedent purchased from Sun Life Assurance Company of Canada (Sun Life) two annuity contracts, viz., the MFS Regatta Gold Fixed Annuity (contract no. 76-7600-474212) and the*95 MFS Regatta Gold Fixed/Variable Annuity (contract no. 76-7600-574550), that were in effect when he died on May 14, 2001. ² (We shall refer to (1) decedent's MFS Regatta Gold Fixed Annuity as decedent's fixed annuity contract, (2) decedent's MFS Regatta Gold Fixed/Variable Annuity as decedent's fixed/variable annuity contract, and (3) both such contracts collectively as decedent's annuity contracts.) Mr. Hopkins of A.G. Edwards was the plan administrator for each of decedent's annuity contracts.

In May or June 2001, Sun Life was notified that decedent had died. Upon receiving notice of decedent's death, Sun Life sent to the plan administrator for each of decedent's annuity contracts (1) a letter dated June 18, 2001, with respect to decedent's fixed annuity contract (Sun Life's June 18, 2001 letter) and (2) a letter dated June 19, 2001, with*96 respect to decedent's fixed/variable annuity contract (Sun Life's June 19, 2001 letter). The respective bodies of those letters, which were virtually identical, stated in pertinent part:

   After review of this contract, it has been determined that Anne

   Snyder is entitled to the death benefit options. It is important

   that she [Anne Snyder] consult a tax or legal advisor before

   making a decision. Please have her choose one of the following

   options:

     (1) Immediate lump Minimum Death Benefit.

     The Minimum Death Benefit is calculated by Sun Life and

     will pay the greatest of the following:

     o Contributions accruing at a rate of 5% annually, minus

      withdrawals also accruing at a rate of 5% annually. This

      accrual will continue until the first day of the month

      following the 80th birthday of the annuitant or until the

      contributions or withdrawals have doubled as a result of

      the accumulation.

     o 100% of the accumulated value on the date of death

      notification*97 and elected option paperwork is received by

      Sun Life in good order.

     o Account value on the most recent 7th contract

      anniversary, plus any contributions, minus any

      withdrawals since that 7th year anniversary.

     o Cash Surrender Value. This includes any applicable

      surrender penalties and Market Value adjustment

      (MVA -- applies to fixed series only)

     Note: If the Lump Sum option is chosen, we ask that the

     beneficiary provide the tax withholding information. Sun

     Life can withhold between 10%-50% for taxes only upon

     request.

     (2) Defer the lump sum payment.

     The lump sum payment may be taken anytime within five years

     of the date of death. A new beneficiary can be named for

     the deferral period.

     (3) Annuitize the contract.

     This option may be chosen within one year of the

     annuitant's date of death. If this option is chosen, it is

     irrevocable. For additional*98 information regarding

     annuitization, please see the enclosed annuitization kit.

     (4) Re-register the contract.

     In order to proceed, we ask that Anne Snyder send a letter

     of instruction that includes the following information:

     o chosen Death Benefit Option (listed above) Note: If

      the Re-registration option is chosen please have her

      [Anne Snyder] include her date of birth and new

      beneficiary designation.

     o an original signature

     o mailing address

     o Social Security number

     o Signature Guarantee -- needed only if the

      re-registration option is chosen or if the payout

      is $ 250,000.00 or greater.

           *   *   *   *   *   *   *

Please forward the following documents in addition to the letter of instruction:

   o certified copy of the annuitant's [decedent's] death

    certificate.

On July 9, 2001, petitioner signed and dated Form W-4P, Withholding Certificate for Pension*99 or Annuity Payments (Form W-4P), for her taxable year 2001 with respect to decedent's fixed annuity contract (petitioner's 2001 Form W-4P for decedent's fixed annuity contract). In that form, petitioner directed that no tax was to be withheld from any distribution with respect to decedent's fixed annuity contract. The instructions for petitioner's 2001 Form W-4P for decedent's fixed annuity contract stated in pertinent part:

   Withholding From Pensions and Annuities

   Generally, Federal income tax withholding applies to the taxable

   part of payments made from pension, profit-sharing, stock bonus,

   annuity, and certain deferred compensation plans; from

   individual retirement arrangements (IRAs); and from commercial

   annuities. The method and rate of withholding depends on the

   kind of payment you receive. Also, because your tax situation

   may change from year to year, you may want to refigure your

   withholding each year. You can change the amount to be withheld

   by using lines 2 and 3 of Form W-4P.

   Choosing not to have income-tax withheld. You * * * can

   also choose not to have income tax*100 withheld from your payments

   by using line 1 of Form W-4P. * * *

           *   *   *   *   *   *   *

Caution: There are penalties for not paying enough tax during the year, either through withholding or estimated tax payments.

           *   *   *   *   *   *   *

   Nonperiodic payments-10% withholding. Your payer must

   withhold a flat 10% from nonperiodic payments (but see Eligible

   rollover distribution-20% withholding below) unless you choose

   not to have income tax withheld. Distributions from an IRA that

   are payable on demand are treated as nonperiodic payments. You

   can choose not to have income tax withheld from a nonperiodic

   payment by submitting Form W-4P (containing your correct TIN) to

   your payer and checking the box on line 1.

           *   *   *   *   *   *   *

   Eligible rollover distribution-20% withholding.

   Distributions you receive from qualified pension or annuity

   plans (e.g., 401(k) pension plans) or tax-sheltered annuities

   that are eligible to be rolled over tax*101 free to an IRA or

   qualified plan are subject to a flat 20% withholding. The 20%

   withholding is required and you cannot choose not to have income

   tax withheld for eligible rollover distributions. See Pub. 505

   for more details. However, the payer will not withhold income

   tax if the entire distribution is transferred by the plan

   administrator in a direct rollover to a traditional IRA,

   qualified pension plan, or tax-sheltered annuity. * * *

On July 9, 2001, petitioner signed and dated Form W-4P for her taxable year 2001 with respect to decedent's fixed/variable annuity contract (petitioner's Form W-4P for fixed/variable annuity contract). In that form, petitioner directed that no tax was to be withheld from any distribution with respect to decedent's fixed/variable annuity contract. The instructions for petitioner's 2001 Form W-4P for decedent's fixed/variable annuity contract were identical to the instructions for petitioner's 2001 Form W-4P for decedent's fixed annuity contract.

On July 17, 2001, Sun Life received an undated letter from petitioner with respect to decedent's fixed annuity contract (petitioner's July 17, 2001 letter*102 with respect to decedent's fixed annuity contract). In that letter, petitioner elected what she referred to as a "lump sum death benefit payment" under decedent's fixed annuity contract and requested that Sun Life "not withhold any taxes from this distribution." Petitioner enclosed with petitioner's July 17, 2001 letter with respect to decedent's fixed annuity contract, inter alia, petitioner's 2001 Form W-4P for decedent's fixed annuity contract, including the instructions to such form, a form entitled "ANNUITIZATION DATA FORM" on which no information was contained and which had been crossed out, and a form entitled "Direct Deposit Authorization" in which petitioner directed Sun Life to deposit directly into her checking account at Bank of America (petitioner's Bank of America checking account) ³ any payments that Sun Life made to her under decedent's fixed annuity contract.

*103 On July 17, 2001, Sun Life received an undated letter from petitioner with respect to decedent's fixed/variable annuity contract (petitioner's July 17, 2001 letter with respect to decedent's fixed/variable annuity contract). In that letter, petitioner elected what she referred to as a "lump sum death benefit payment" under decedent's fixed/variable annuity contract and requested that Sun Life "not withhold any taxes from this distribution." Petitioner enclosed with petitioner's July 17, 2001 letter with respect to decedent's fixed/variable annuity contract, inter alia, petitioner's 2001 Form W-4P for decedent's fixed/variable annuity contract, including instructions to such form, and a form entitled "Direct Deposit Authorization" in which petitioner directed Sun Life to deposit directly into her Bank of America checking account any payments that Sun Life made to her under decedent's fixed/variable annuity contract.

On November 16, 2001, the plan administrator of decedent's fixed annuity contract and decedent's fixed/variable annuity contract sent to Sun Life a letter (A.G. Edwards November 16, 2001 letter) with respect to both of those contracts, which Sun Life received on November 19, 2001. Included*104 with that letter were two death certificates for decedent. A.G. Edwards November 16, 2001 letter stated in pertinent part:

   As per our conversation today, please find the enclosed original

   death certificates to liquidate the above policies.

   Also, Mrs. Snyders bank account number is 007071707352, you have

   the rest of the information on file.

   I am under the assumption that these will be liquidated on

   November 19, 2001, and all any monies due per your calculation

   will be deposited into the above account on Tuesday, November

   20th, 2001. If this is NOT a correct assumption, please advise

   Robert Hopkins or myself immediately at (800) 688-9334.

On November 26, 2001, petitioner received into her Bank of America checking account a payment of $ 25,940.28 from Sun Life with respect to decedent's fixed annuity contract.

On November 26, 2001, petitioner received into her Bank of America checking account a payment of $ 170,429.52 from Sun Life with respect to decedent's fixed/variable annuity contract.

Sun Life reported to respondent for petitioner's taxable year 2001 the gross distributions of $ 25,940.28 and*105 $ 170,429.52 that it made to petitioner during that year with respect to decedent's fixed annuity contract and decedent's fixed/variable annuity contract, respectively. In this connection, Sun Life prepared separate Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc. (Sun Life Form 1099- R), for 2001 that showed Sun Life as the payer and petitioner as the recipient of such respective gross distributions. The address for petitioner shown in each such form was the same as the address shown in (1) the tax return that petitioner filed for her taxable year 2001 and (2) the petition that she filed with the Court. One Sun Life Form 1099-R showed a "Gross Distribution" of $ 25,940.28 and a "Taxable Amount" of $ 25,940.28, which was the amount of the distribution that Sun Life paid to petitioner in 2001 with respect to decedent's fixed annuity contract. The other Sun Life Form 1099-R showed a "Gross Distribution" of $ 170,429.52 and a "Taxable Amount" of $ 170,429.52, which was the amount of the distribution that Sun Life paid to petitioner in 2001 with respect to decedent's fixed/variable annuity contract. The "Distribution*106 Code(s)" shown in each Sun Life Form 1099-R was "4", and the box entitled "IRA/SEP/SIMPLE" was checked. ⁴

During 2001, petitioner received interest of $ 400 and other income of $ 1,365 from American General Life Insurance Company (American General).

During 2001, A.G. Edwards made the following gross distributions totaling $ 8,500 from decedent's IRA, with respect to which an election had been made to withhold tax of 10 percent, by issuing the following checks to decedent:

Date of A.G.       Normal     Tax        Gross

Edwards Check     Distribution   Withheld     Distribution

______________    ____________   ________     _____________

February 2, 2001    $ 1,125     $ 125       $ 1,250

February 9, 2001   *107    405      45         450

March 1, 2001       1,530      170        1,700

April 3, 2001       1,530      170        1,700

May 1, 2001        1,530      170        1,700

June 12, 2001       1,530      170        1,700

            ______     ____        ______

 Subtotals       $ 7,650     $ 850       $ 8,500

   Total                       $ 8,500

The above-described checks issued by A.G. Edwards were deposited into petitioner's Bank of America checking account. ⁵

On June 12, 2001, petitioner sent to A.G. Edwards a death certificate for decedent and a preprinted*108 form prepared by A.G. Edwards entitled "A.G. Edwards Self-Directed IRA Request Form" (A.G. Edwards IRA request form). In that form, petitioner directed A.G. Edwards to make a total distribution rollover of decedent's IRA into petitioner's IRA because of decedent's death.

In July 2001, petitioner requested A.G. Edwards to make gross distributions to her from petitioner's IRA of $ 1,700 a month. Pursuant to that request, during 2001, A.G. Edwards made the following gross distributions totaling $ 10,200 from petitioner's IRA, with respect to which an election had been made to withhold tax of 10 percent, by issuing the following checks to petitioner:

Date of A.G.      Normal      Tax        Gross

Edwards Check     Distribution   Withheld     Distribution

_____________     ____________   ________     ____________

July 10, 2001      $ 1,530     $ 170       $ 1,700

August 6, 2001      1,530      170        1,700

August 31, 2001      1,530      170        1,700

September 28, 2001    1,530      170        1,700

November 16, 2001  *109    1,530      170        1,700

December 3, 2001     1,530      170        1,700

            ______     ______       _______

 Subtotals       $ 9,180    $ 1,020      $ 10,200

   Total                      $ 10,200

The above-described checks issued by A.G. Edwards were endorsed by petitioner and deposited into petitioner's Bank of America checking account.

A.G. Edwards prepared and issued to decedent and petitioner separate Forms 1099-R (A.G. Edwards Form 1099-R) for 2001 with respect to the gross distributions of $ 8,500 and $ 10,200 that A.G. Edwards made during that year from decedent's IRA and petitioner's IRA, respectively. The address for decedent and for petitioner shown in the respective A.G. Edwards Forms 1099-R issued to them was the same as the address shown in (1) the tax return that petitioner filed for her taxable year 2001 and (2) the petition that she filed with the Court. A.G. Edwards Form 1099-R issued to decedent showed A.G. Edwards as the payer and decedent as the recipient of a "Gross Distribution" of*110 $ 8,500 and a "Taxable Amount" of $ 8,500, which was the total amount of the gross distributions that A.G. Edwards made to decedent during 2001 from decedent's IRA. A.G. Edwards Form 1099-R issued to petitioner showed A.G. Edwards as the payer and petitioner as the recipient of a "Gross Distribution" of $ 10,200 and a "Taxable Amount" of $ 10,200, which was the total amount of the gross distributions that A.G. Edwards made to petitioner during 2001 from petitioner's IRA. The "Distribution Code(s)" shown in the respective A.G. Edwards Forms 1099-R issued to decedent and petitioner was "7", and the box entitled "IRA/SEP" was checked. ⁶

Petitioner and decedent timely filed a joint Form 1040, U.S. Individual Income Tax Return, for their taxable year 2001 (2001 joint return).*111 In that return, petitioner reported wages of $ 18,672 paid to petitioner by Chateau Builders of Maryland Inc., taxable interest of $ 62, ordinary dividends of $ 21, total IRA distributions of $ 11,111 paid to petitioner by Allfirst Bank, and Social Security benefits of $ 20,802, of which petitioner reported $ 4,134 was taxable. In the 2001 joint return, petitioner reported total income of $ 34,000, total tax of $ 3,158, tax withheld of $ 2,956, estimated tax payments of $ 700, and an overpayment of $ 498.

In the 2001 joint return, petitioner did not report interest income of $ 400 and other income of $ 1,365 paid during 2001 by American General. Nor did petitioner report in the 2001 joint return the gross distributions of $ 25,940.28 and $ 170,429.52 paid during 2001 by Sun Life with respect to decedent's fixed annuity contract and decedent's fixed/variable annuity contract, respectively. In addition, petitioner did not report in the 2001 joint return the gross distributions of $ 8,500 and $ 10,200 made during 2001 by A.G. Edwards from decedent's IRA and petitioner's IRA, respectively.

In the notice of deficiency (notice) that respondent issued to petitioner for her taxable year*112 2001, respondent determined to include in gross income for that year: (1) Interest income of $ 400 paid by American General, (2) other income of $ 1,365 paid by American General, (3) a gross distribution of $ 25,940 paid by Sun Life with respect to decedent's fixed annuity contract, (4) a gross distribution of $ 170,429 paid by Sun Life with respect to decedent's fixed/variable annuity contract, and (5) gross distributions of $ 10,200 made by A.G. Edwards from petitioner's IRA. ⁷ Respondent also determined in the notice that petitioner is liable for her taxable year 2001 for a $ 12,926 accuracy-related penalty under section 6662(a).

In the amendment to answer, respondent asserted*113 an increased deficiency in, and an increased accuracy-related penalty under section 6662(a) on, petitioner's tax for her taxable year 2001 of $ 67,770 and $ 13,554, respectively. ⁸

OPINION

The only issue remaining for our consideration is whether petitioner is liable for her taxable year 2001 for the accuracy- related penalty under section 6662(a).

Pursuant to section 7491(c), respondent bears the burden of production with respect to the issue presented under section 6662. In order to meet respondent's burden of production, respondent must come forward with sufficient evidence indicating that it is appropriate to impose the accuracy-related penalty in this case. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The burden of proof remains with petitioner with respect to the accuracy-related penalty that respondent determined in the notice.⁹ See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112 (1933); Higbee v. Commissioner, supra at 446-447.*114 Respondent bears the burden of proof with respect to the increase in that accuracy-related penalty that respondent asserted in the amendment to answer. ¹⁰Rule 142(a). However, our resolution of whether petitioner is liable for the accuracy-related penalty does not depend on who has the burden of proof.

*115 Section 6662(a) imposes an accuracy-related penalty equal to 20 percent of the underpayment to which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to (1) negligence or disregard of rules or regulations, sec. 6662(b)(1), or (2) a substantial understatement of tax, sec. 6662(b)(2).

It is respondent's position that petitioner's underpayment for her taxable year 2001 was attributable to (1) negligence or disregard of rules or regulations and (2) a substantial understatement of tax. We shall address only whether petitioner's underpayment for 2001 was attributable to a substantial understatement of tax. That is because our resolution of that question is determinative of whether petitioner is liable for the accuracy-related penalty under section 6662(a). ¹¹

For purposes of section 6662(b)(2), an understatement is equal to the excess of the amount of tax required to be shown in the tax return over the amount of tax shown in such return, sec. 6662(d)(2)(A), *116 and is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown in the return for that taxable year or $ 5,000, sec. 6662(d)(1)(A). The amount of the understatement is to be reduced by that portion of the understatement which is attributable to (1) "the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment", sec. 6662(d)(2)(B)(i), or (2) any item if (a) "the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return", sec. 6662(d)(2)(B)(ii)(I), and (b) "there is a reasonable basis for the tax treatment of such item by the taxpayer", sec. 6662(d)(2)(B)(ii)(II).

The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, such portion. Sec. 6664(c)(1). The determination of whether the taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the*117 taxpayer's efforts to assess such taxpayer's proper tax liability, the knowledge and experience of the taxpayer, and the reliance on the advice of a professional, such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioner concedes that she should have reported in the 2001 joint return the respective distributions that Sun Life, A.G. Edwards, and American General made during 2001. Petitioner does not dispute that the understatement of tax in the 2001 joint return exceeds the greater of 10 percent of the tax required to be shown in that return or $ 5,000. See sec. 6662(d)(1)(A). On the record before us, we find that respondent has satisfied respondent's burden of production under section 7491(c) with respect to the accuracy-related penalty.

In support of her position that she is not liable for the accuracy-related penalty under section 6662(a), petitioner claimed at trial ¹² that she never received: (1) The separate Sun Life Forms 1099-R showing the gross distributions made by Sun Life during 2001 of $ 25,940 and $ 170,429 with respect to decedent's fixed annuity contract and decedent's fixed/variable annuity contract, respectively; (2) the*118 separate A.G. Edwards Forms 1099-R showing the gross distributions made by A.G. Edwards during 2001 totaling $ 8,500 and $ 10,200 from decedent's IRA and petitioner's IRA, respectively; and (3) the separate Forms 1099 showing the distributions made by American General during 2001 of $ 400 of interest income and $ 1,365 of other income, respectively.

In further support of her position that she is not liable for the accuracy-related penalty under section 6662(a), petitioner claimed at trial that she believed that the respective gross distributions of $ 25,940 and $ 170,429 made by Sun Life during 2001 with respect to decedent's annuity contracts and the respective gross distributions of $ 8,500 and $ 10,200 made by A.G. Edwards during 2001 from decedent's IRA and petitioner's IRA were death*119 benefits that are not taxable. Petitioner explained at trial that she held that belief because some of her friends who were widows told her during informal discussions that death benefits are not taxable. ¹³

We turn first to petitioner's claim at trial that she did not receive any of the Forms 1099 from Sun Life, A.G. Edwards, or American General showing the respective distributions that those companies made during 2001. Petitioner's claim that she received none of those forms strains credulity, and we reject it. The record does not establish, and petitioner does not contend, that the separate Sun Life Forms 1099-R showing the respective gross distributions made by Sun Life during 2001 with respect to decedent's annuity contracts and the separate A.G. Edwards*120 Forms 1099-R showing the respective gross distributions made by A.G. Edwards during 2001 from decedent's IRA and petitioner's IRA were addressed to an incorrect address. ¹⁴ Nor does the record establish, and petitioner does not contend, that she was having any problems in receiving mail around the time the payers in question (viz., Sun Life, A.G. Edwards, and American General) would have been required to issue Forms 1099 (i.e., by no later than January 31, 2002).

We turn now to petitioner's claim at trial that she believed that the respective gross distributions made by Sun Life and A.G. Edwards during 2001 were death benefits that are not taxable because some of her widowed friends told her during informal discussions that death benefits are not taxable. We find that it was unreasonable for petitioner to rely on any such informal statements*121 of her friends in concluding that the respective gross distributions that Sun Life and A.G. Edwards made during 2001 are not taxable. In determining whether a taxpayer acted with reasonable cause and in good faith, generally the most important factor to consider "is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability." Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioner should have consulted a professional, and not her friends, about the tax treatment of the respective gross distributions that Sun Life and A.G. Edwards made during 2001. ¹⁵*122 The record does not establish, and petitioner does not contend, that she consulted a professional about the tax treatment of such distributions. ¹⁶

On the record before us, we find that petitioner did not have reasonable cause for, and did not act in good faith with respect to, any portion of the underpayment for her taxable year 2001. See sec. 6664(c)(1); *123 sec. 1.6664-4(b)(1), Income Tax Regs.

Based upon our examination of the entire record before us, we find that petitioner is liable for her taxable year 2001 for the accuracy-related penalty under section 6662(a) that is attributable to petitioner's underpayment for that year. ¹⁷

We have considered all of the contentions and arguments of the parties that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

To reflect the foregoing,

Decision will be entered under Rule 155.