                          T.C. Summary Opinion 2012-52



                         UNITED STATES TAX COURT



      WILLIAM L. WEAVER AND DOROTHY J. WEAVER, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8055-11S.                           Filed June 7, 2012.



      William L. Weaver and Dorothy J. Weaver, pro se.

      Jeffrey D. Heiderscheit, for respondent.



                              SUMMARY OPINION


      KROUPA, Judge: This case was heard pursuant to the provisions of section

74631 of the Internal Revenue Code in effect when the petition was filed. Pursuant


      1
        All section references are to the Internal Revenue Code in effect for 2007,
and all Rule references are to the Tax Court Rules of Practice and Procedure, unless
                                                                        (continued...)
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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.

      Respondent determined a $8,9092 deficiency in and a $1,782 penalty with

respect to petitioners’ Federal income tax for 2007. We are asked to decide two

issues. The first issue is whether a foreign consulate’s payment to petitioner wife

after she resigned from her position constituted self-employment income. We hold

the payment constituted self-employment income. The second issue is whether

petitioners are liable for an accuracy-related penalty under section 6662(a). We

hold they are liable.

                                      Background

      This case was submitted fully stipulated under Rule 122. The stipulation of

facts and the accompanying exhibits are incorporated by this reference. Petitioners

resided in Texas when they filed the petition.

      Petitioner Dorothy Weaver began working as a business-development officer

for the Consulate General of Canada in San Francisco (Consulate) in late 1991. In

December 2002 Mrs. Weaver became unable to work due to a medical disability



      1
       (...continued)
otherwise indicated.
      2
          All monetary amounts are rounded to the nearest dollar.
                                          -3-

and took a leave of absence from the Consulate. The Consulate was required to

keep Mrs. Weaver’s position open until she returned to work or relinquished her

position.

      Mrs. Weaver’s medical disability continued, and she eventually relinquished

her position with the Consulate in September 2006. The Consulate made a payment

to Mrs. Weaver of $66,851 in 2007 (payment). The Consulate characterized the

payment as a “severance payment” in a letter to Mrs. Weaver and calculated it

based on Mrs. Weaver’s length of service, annual salary and age.

      A tax professional prepared petitioners’ timely filed Federal income tax return

for 2007. Petitioners reported the payment as “other income” on the return.

Petitioners did not pay self-employment tax for 2007 although they previously had

paid self-employment tax on Mrs. Weaver’s income from the Consulate.

Respondent issued petitioners the deficiency notice determining that the payment

constituted self-employment income and was subject to self-employment tax.

Petitioners filed a timely petition for redetermination with this Court.

                                      Discussion

      We must decide whether the payment Mrs. Weaver received from the

Consulate after relinquishing her position constitutes self-employment income. We
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also must decide whether petitioners are liable for an accuracy-related penalty for

2007. We address each issue in turn.

I. Self-Employment Tax Liability

      Self-employment tax is imposed on an individual’s self-employment income.

Sec. 1401(a) and (b). Self employment income is defined as “net earnings from

self-employment.” Sec. 1402(b). Net earnings from self-employment is income

derived from a trade or business carried on by the individual, less any allowable

deductions. Sec. 1402(a).

      In general, compensation earned from the performance of services as an

employee is not self-employment income. Sec. 1402(a), (c) (2). An exception to

this general rule applies, however, to compensation earned in the employ of a

foreign government in the United States by a citizen of the United States. Secs.

1402(c)(2)(C), 3121(b)(11). Thus, Mrs. Weaver is required to pay self-employment

tax on the compensation she earned from the Consulate as an employee.

      Petitioners argue that the Consulate made the payment to Mrs. Weaver on

account of disability and therefore the payment is not wages subject to self-

employment tax. Certain payments on account of disability are not considered

wages for purposes of employment tax. Sec. 3121(a)(2)(A). Respondent argues
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that the payment was not made on account of disability. Instead, respondent asserts

that the payment was a severance payment and was therefore subject to self-

employment tax. We agree with respondent.

      Severance pay is a form of compensation for services. Sec. 1.61-2(a)(1),

Income Tax Regs. It is paid to an employee by an employer for termination of the

employer-employee relationship.3 Meehan v. Commissioner, 122 T.C. 396, 401-

403 (2004). This Court has previously characterized severance pay as a

replacement or substitute for salary or wages for Federal tax purposes.4 Id.; Gross

v. Commissioner, T.C. Memo. 2000-342; Keel v. Commissioner, T.C. Memo.

1997-278. Accordingly, the payment constitutes self-employment income if it is

properly characterized as a severance payment.

      We now turn to whether the payment is a severance payment. Severance pay

is typically calculated by reference to an employee’s salary and length of tenure.

Meehan v. Commissioner, 122 T.C. at 401; see also Laguaite v. Commissioner,

T.C. Memo. 2000-103; Donnel v. United States, 50 Fed. Cl. 375 (2001). The


      3
       Severance pay is generally considered to be ordinary gross income.
Metelski v. Commissioner, T.C. Memo. 2000-95, aff’d without published opinion,
263 F. 3d 159 (3d Cir. 2001).
      4
       This may be true even when the employee claims to have left employment
due to physical illness. See, e.g., Lubart v. Commissioner, 154 F.3d 539 (5th Cir.
1998), aff’g T.C. Memo. 1997-343.
                                        -6-

determination of whether a payment represents severance pay or some other form of

payment is ultimately a question of fact, and taxpayers bear the burden of

overcoming the deficiency notice’s presumption of correctness. Rule 142(a);

Ahmed v. Commissioner, T.C. Memo. 2011-295.

      The record as whole reflects that the payment was severance pay. The

Consulate was required to hold Mrs. Weaver’s job until she returned to or

relinquished her position and made the payment to Mrs. Weaver only after she

agreed to retire. The Consulate characterized the payment as a severance payment

in a confirmation letter issued to Mrs. Weaver and calculated the payment based on

Mrs. Weaver’s length of service and salary.

      In contrast, there is nothing in the record designating the payment as made on

account of Mrs. Weaver’s medical disability. The record does not reflect that the

Consulate made the payment to settle any claim Mrs. Weaver may have had

against the Consulate for her injuries. Indeed, Mrs. Weaver never filed a complaint

against the Consulate seeking tort damages for physical injury. More generally,

petitioners failed to show that the payment was made to her on account of her

disability. We find that the payment constitutes a severance payment and not a

payment made on account of Mrs. Weaver’s disability. Accordingly, we hold
                                        -7-

that the payment is self-employment income and therefore subject to self-

employment tax.

II. Accuracy-Related Penalty

      We now turn to respondent’s determination that petitioners are liable for an

accuracy-related penalty under section 6662(a) for 2007. The Commissioner has

the burden of production and must come forward with sufficient evidence that it

is appropriate to impose a penalty. Sec. 7491(c); see Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001). A taxpayer is liable for an accuracy-related penalty on

any part of an underpayment attributable to, among other things, a substantial

understatement of income tax. Sec. 6662(b)(2). There is a substantial

understatement of income tax if the amount of the understatement exceeds the

greater of either 10% of the tax required to be shown on the return, or $5,000. Sec.

6662(a), (b)(2), (d)(1)(A); sec. 1.6662-4(a), Income Tax Regs.

      Respondent has met his burden of production. The tax shown on

petitioners’ return was $15,904, and the tax required to be shown on the return

was $24,813. Accordingly, the Court’s decision that the payment was subject to

self-employment tax results in a understatement of income tax for 2007 that

exceeds the greater of either 10% of the tax required to be shown on the return, or
                                         -8-

$5,000. See Higbee v. Commissioner, 116 T.C. at 446; Jarman v. Commissioner,

T.C. Memo. 2010-285.

      A taxpayer is not liable for an accuracy-related penalty, however, if the

taxpayer acted with reasonable cause and in good faith with respect to any portion

of the underpayment. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. The

determination of whether the taxpayer acted with reasonable cause and in good faith

depends on the pertinent facts and circumstances, including the taxpayer’s efforts to

assess his or her proper tax liability, the knowledge and experience of the taxpayer,

and the taxpayer’s reliance on the advice of a professional. Sec. 1.6664-4(b)(1),

Income Tax Regs. The taxpayer bears the burden of proof with respect to the

reasonable cause and good faith defense. Sec. 7491(c); Rule 142(a); Higbee v.

Commissioner, 116 T.C. at 446.

      Petitioners ask that we not sustain the accuracy-related penalty because they

had a tax professional prepare the return for 2007. We have found that reliance on

a tax professional demonstrates reasonable cause when a taxpayer selects a

competent tax adviser, supplies the adviser with all relevant information and,

consistent with ordinary business care and prudence, relies on the adviser’s

professional judgment as to the taxpayer’s tax obligations. Sec. 6664(c)(1);

Estate of Young v. Commissioner, 110 T.C. 297 (1998); Am. Props., Inc. v.
                                           -9-

Commissioner, 28 T.C. 1100 (1957), aff’d, 262 F.2d 150 (9th Cir. 1958). All facts

and circumstances are considered in determining whether a taxpayer reasonably

relied in good faith on professional advice, including the taxpayer’s education,

sophistication and business experience. Sec. 1.6664-4(a) and (b), Income Tax

Regs.

         Petitioners have not established that their reliance on their return preparer was

reasonable and in good faith. This case was fully stipulated. That does not relieve

petitioners, however, of their burden. Petitioners failed to demonstrate that they

provided all the necessary and accurate information to the return preparer. We

cannot turn a blind eye to this oversight and simply accept petitioners’ assertion

alone that they relied upon the return preparer as a defense against the accuracy-

related penalty. See Peacock v. Commissioner, T.C. Memo. 2002-122. Moreover,

petitioners failed to otherwise show that their failure to report the payment as self-

employment income was due to reasonable cause and was in good faith.

Accordingly, we sustain respondent’s determination that petitioners are liable for

the accuracy-related penalty under section 6662(a) for 2007.

         We have considered all arguments made in reaching our decisions and,

to the extent not mentioned, we conclude that they are moot, irrelevant or without

merit.
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To reflect the foregoing,


                                           Decision will be entered

                                     for respondent.
