                         T.C. Memo. 2007-283



                       UNITED STATES TAX COURT



                RICHARD S. COTLER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11565-05L.             Filed September 19, 2007.



     Charles L. Ruffner, for petitioner.

     Derek P. Richman, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Pursuant to section 6330(d),1 petitioner,

Richard S. Cotler (Mr. Cotler), seeks review of respondent’s

determination to proceed with collection of his 1997 and 1998 tax

liabilities.   The issue for decision is whether the disability


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                   - 2 -

benefits Mr. Cotler received in 1997 and 1998 are excludable from

income under section 104(a)(3).

                             FINDINGS OF FACT

       Some facts have been stipulated and are so found.       The

stipulated facts and the attached exhibits are incorporated

herein by this reference.       At the time he filed the petition, Mr.

Cotler resided in Hollywood, Florida.

           Since 1974, Mr. Cotler was a practicing attorney in the

State of Florida.       Mr. Cotler was a shareholder in Cotler &

Baseman, P.A. (the firm).2      At all times, Mr. Cotler was either a

99-percent or a 100-percent shareholder of the firm.

       Beginning on November 1, 1993, the firm held a long-term

group disability insurance policy with Standard Insurance Company

(Standard).       The firm wrote the checks to pay the premiums on the

Standard policy.       The portion of the Standard disability monthly

premium attributable to Mr. Cotler was $81 per month.

       In 1996, Mr. Cotler began experiencing constant and severe

headaches, which were diagnosed as chronic intractable headaches.

The headaches left Mr. Cotler unable to focus for long periods,

unable to work, and caused the firm to struggle.       After

traditional medicine did not alleviate his pain, Mr. Cotler

traveled to Chicago and Italy to receive alternative medical



       2
            At some point, the firm was known as Richard S. Cotler,
P.A.
                                - 3 -

treatments.   Mr. Cotler worked hard to achieve success and hoped

to find a cure that would allow him to continue his business.

     In order to keep the firm operational, Mr. Cotler began

lending the firm money in 1996.    At the end of 1996, the balance

of Mr. Cotler’s loan to the firm was $5,027.    As Mr. Cotler’s

health deteriorated, he was unable to work and had to lend more

money to the firm.    By the end of 1997, the firm owed Mr. Cotler

$74,934.   By the end of 1998, the firm owed Mr. Cotler $177,770.

As of the date of trial, Mr. Cotler’s condition had not improved.

Mr. Cotler closed the firm in 2000 and subsequently filed for

bankruptcy.   Mr. Cotler expects never to work in his profession

again.

     Mr. Cotler filed a long-term disability claim with Standard

on April 8, 1997.    On the disability claim application, Mr.

Cotler stated that he paid 100 percent of the premiums.     Standard

declared Mr. Cotler disabled and waived premiums on the policy,

in August 1997.   The total amount of Standard premiums

attributable to Mr. Cotler in 1997 was $567.

     From approximately 1994 until 2000, Mr. Cotler employed

Arline Marlane as an outside bookkeeper for the firm.     Ms.

Marlane wrote all the checks for the firm, completed the payroll

tax returns, and reconciled bank statements.    After each check

was written, the amount of the check would then be entered into a

specific column, representing a particular expense category.      The
                                 - 4 -

cash disbursements journal included a specific column for

insurance expenses.   The checks made out to Standard for the

disability insurance were initially entered into the insurance

expense column.

     In either January or February, after the close of the year,

Mr. Cotler, in consultation with Bruce Gladstone (Mr. Gladstone),

a certified public accountant employed by the firm, would make

adjusting entries to the cash disbursements journal.    Mr. Cotler

would reduce the amount of the insurance expense column by the

amount of the Standard premium that was attributable to him;

i.e., $81 per month (thereby subtracting the firm’s insurance

expenses).   The $81 per month was concurrently subtracted from

Mr. Cotler’s shareholder loan account to the firm (which

subtracted the amount the firm owed to Mr. Cotler) to reflect the

fact that he personally paid for his disability insurance.

Furthermore, at the end of the year, Mr. Cotler had a consistent

practice of going through the cash disbursements journal and

subtracting his personal expenses from the expense columns to

ensure that they were not deducted on the firm’s Form 1120, U.S.

Corporation Income Tax Return.

     Mr. Gladstone prepared a document entitled “Loan

Receivable--Stockholder” that reflected that Mr. Cotler’s

personal expenses were subtracted from his loan account to the

firm.   For 1997, Mr. Gladstone subtracted $567 from Mr. Cotler’s
                                - 5 -

loan account to the firm for the total amount of disability

premiums paid in 1997 to Standard on Mr. Cotler’s behalf.     These

adjustments normally took place when Mr. Gladstone prepared the

firm’s Form 1120.   For the 1997 year, the adjustments were made

about the time the firm’s tax return for 1997 was filed.    Mr.

Cotler’s insurance premiums that he paid were not deducted on the

firm’s 1997 Form 1120.

     For 1997, Standard issued Mr. Cotler a Form W-2, Wage and

Tax Statement.3   On October 19, 1998, Mr. Cotler filed his Form

1040, U.S. Individual Income Tax Return, for 1997.   Mr. Cotler’s

1997 tax return reported taxable income of $144,294.   This

included $72,445 that Mr. Cotler received from Standard as

disability payments.   At the time that Mr. Cotler signed and

filed his 1997 tax return, he was very ill and did not review the

return carefully.   Mr. Cotler’s wife, Judy Cotler (Mrs. Cotler),

gathered the tax materials for 1997 and gave them to the return

preparer.

     On October 22, 1999, Mr. Cotler filed his tax return for

1998.    The $72,000 received from Standard in 1998 by Mr. Cotler

was reported as taxable income on his 1998 tax return.   At the

time that Mr. Cotler signed and filed his 1998 tax return, he

still was very ill and did not review the return carefully.



     3
        We do not understand why Standard would issue Mr. Cotler
a Form W-2, but they did.
                               - 6 -

Again, Mrs. Cotler gathered the tax materials for 1998 and gave

them to the return preparer.

     On August 23, 2004, Rick Leone (Mr. Leone), an attorney,

sent Steven Poindexter, a disability claims specialist for

Standard, a letter disputing the characterization of Mr. Cotler’s

1997 and 1998 disability benefits.     Mr. Poindexter responded

informing Mr. Leone that there was nothing Standard could do and

that Mr. Cotler should take his claim up with the Internal

Revenue Service (IRS).

     In May 2003, after a series of storms, the climate-

controlled storage facility where Mr. Cotler kept his personal

records, and the firm’s records, flooded.     When the storage

facility notified Mr. Cotler about the flooding, he and Mrs.

Cotler went to the facility to attempt to salvage the water-

soaked records.   Because the mildew aggravated Mr. Cotler’s

illness, he was unable to help recover the records.     As a result

of the flooding, many of Mr. Cotler’s records and the firm’s

records were destroyed.

     On February 12, 2004, Mr. Cotler submitted a Form 656, Offer

in Compromise (OIC), to respondent for his 1997, 1998, and 1999

tax years.   The OIC was based on doubt as to liability.

Respondent returned Mr. Cotler’s OIC because respondent

determined it to be not processable.
                                  - 7 -

      On August 31, 2004, respondent issued Mr. Cotler a Final

Notice--Notice of Intent to Levy and Notice of Your Right to a

Hearing (notice of intent to levy) regarding his outstanding 1997

and 1998 income tax liabilities.

      On September 1, 2004, respondent filed a Notice of Federal

Tax Lien (NFTL) for years 1997 and 1998.     On September 3, 2004,

the IRS provided Mr. Cotler with a Notice of Federal Tax Lien

Filing and Your Right to a Hearing Under IRC 6320 (notice of

lien).    Mr. Cotler timely submitted to respondent a Form 12153,

Request For Collection Due Process Hearing, contesting his

underlying liability.

      On May 20, 2005, respondent issued a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330

sustaining the notice of intent to levy and the filing of the

NFTL.    Mr. Cotler timely petitioned the Court.

                                 OPINION

I.   Collection

      Petitioner has neither claimed nor shown that he satisfied

the requirements of section 7491(a) to shift the burden of proof

to respondent with regard to any factual issue relevant to

ascertaining his liability for any tax imposed under subtitle A

of the Code.      Accordingly, petitioner bears the burden of proof.

Rule 142(a).
                                - 8 -

     Section 6320 provides that the Secretary will furnish the

person described in section 6321 with written notice (i.e., the

hearing notice) of the filing of a notice of lien under section

6323.   Section 6320 further provides that the taxpayer may

request administrative review of the matter (in the form of a

hearing) within a 30-day period.   The hearing generally will be

conducted consistent with the procedures set forth in section

6330(c), (d), and (e).   Sec. 6320(c).

     Pursuant to section 6330(c)(2)(A), a taxpayer may raise at

the section 6330 hearing any relevant issue with regard to the

Commissioner’s collection activities, including spousal defenses,

challenges to the appropriateness of the Commissioner’s intended

collection action, and alternative means of collection.     Sego v.

Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114

T.C. 176, 180 (2000).    If a taxpayer received a statutory notice

of deficiency for the years in issue or otherwise had the

opportunity to dispute the underlying tax liability, the taxpayer

is precluded from challenging the existence or amount of the

underlying tax liability.   Sec. 6330(c)(2)(B); Sego v.

Commissioner, supra at 610-611; Goza v. Commissioner, supra at

182-183.

     When the Commissioner issues a determination regarding a

disputed collection action, section 6330(d) permits a taxpayer to

seek judicial review in this Court.     If the underlying tax
                                 - 9 -

liability is properly at issue, we review that issue de novo.

Sego v. Commissioner, supra at 610; Goza v. Commissioner, supra

at 181.   If the validity of the underlying tax liability is not

at issue, we review the Commissioner’s determination for abuse of

discretion.    Sego v. Commissioner, supra at 610.   Mr. Cotler did

not receive a notice of deficiency for 1997 or for 1998, he

raised his underlying liability at the section 6330 hearing, and

he is entitled to contest the underlying tax liability for 1997

and 1998.4    Montgomery v. Commissioner, 122 T.C. 1, 5 (2004).

II.   Disability Benefits

      Mr. Cotler argues that the disability benefits that he

received in 1997 and 1998 are excludable from gross income

pursuant to section 104(a)(3).    Respondent determined that the

amounts are not excluded from gross income.

      Gross income includes income from whatever source derived.

Sec. 61(a).    Gross income, however, does not include amounts

received through accident and health insurance for personal

injuries or sickness other than amounts received by an employee,

to the extent such amounts:    (1) Are attributable to

contributions by the employer which were not includable in the

gross income of the employee, or (2) are paid by the employer.

Sec. 104(a)(3); see also Tuka v. Commissioner, 120 T.C. 1 (2003),



      4
        Respondent does not argue that Mr. Cotler is precluded
from challenging his underlying liability.
                              - 10 -

affd. 85 Fed. Appx. 875 (3d Cir. 2003).

     Mr. Cotler argues that although the firm wrote the checks

that paid for the Standard policy, he reimbursed the firm for the

amount of his premiums by deducting these amounts from his

shareholder loan account.   In Bouquett v. Commissioner, T.C.

Memo. 1994-212, a corporation paid the premiums on the taxpayer’s

disability policy.   In Bouquett, we held that the corporation was

nothing more than a conduit that paid the premiums nominally and

then collected the premium payments from the employees.    Mr.

Cotler reimbursed the firm by subtracting the amounts of the

insurance premiums from his loan to the firm.   Mr. Cotler’s firm

was nothing more than a conduit.

     Ms. Marlane and Mr. Gladstone credibly testified that Mr.

Cotler had a longstanding and consistent practice of not paying

personal expenses with corporate funds.   From the inception of

the Standard policy until premiums were waived, Mr. Cotler

treated the premiums as personal items, he paid his share of the

premiums during the years in issue through his loan account, and

the firm never deducted them on its Forms 1120.

     Respondent argues that Mr. Cotler failed to reimburse his

firm for the premiums on the Standard policy.   Respondent further

argues that the bookkeeping entries and the shareholder loan

receivable document do not demonstrate that Mr. Cotler actually

paid the premiums on the Standard policy.   We disagree.   Since
                              - 11 -

1993, when the Standard policy began, until premiums were waived

in 1997, Mr. Cotler paid the premiums on the Standard policy.

Mr. Cotler, and not the firm, bore the economic burden of the

disability premiums.   Accordingly, we conclude that Mr. Cotler

was bearing the economic burden, and therefore the disability

payments Mr. Cotler received in 1997 and 1998 are excludable from

income under section 104(a)(3).

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we find them to be irrelevant or without merit.

     It is unclear from the record, however, whether after

application of our holding that Mr. Cotler did not have to report

the disability payments from Standard in 1997 and 1998, if his

tax liabilities for 1997 and 1998 remain unpaid.   Accordingly, we

will direct the parties to submit computations showing the

correct amount of Mr. Cotler’s tax liabilities for 1997 and 1998.

     To reflect the foregoing,


                                         An appropriate order will

                                    be issued.
