                          T.C. Summary Opinion 2013-3



                         UNITED STATES TAX COURT



          FILLMORE L. CARR AND DARLENE CARR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20898-10S.                        Filed January 7, 2013.



      Fillmore L. Carr, pro se.

      Matthew A. Williams, for respondent.



                              SUMMARY OPINION


      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the
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petition was filed.1 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.

      In a notice of deficiency dated July 19, 2010 (notice), respondent determined

a $5,797 deficiency in, and a $1,159 section 6662(a) accuracy-related penalty with

respect to, petitioners’ 2008 Federal income tax. The issues for decision are: (1)

whether an amount paid to Fillmore L. Carr (petitioner) during 2008 in settlement of

a claim against his former employer is excludable from petitioners’ income; and (2)

whether petitioners are liable for a section 6662(a) accuracy-related penalty.

                                     Background

      Some of the facts have been stipulated and are so found. At all times

relevant, petitioners were married to each other.2 Their self-prepared 2008 joint




      1
      Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the year in issue. Rule references are to the
Tax Court Rules of Practice and Procedure.
      2
        Darlene Carr did not execute the stipulation of facts and did not appear at
trial. Accordingly, the Court dismissed this action as to her for lack of prosecution
on December 13, 2011. Nevertheless, the decision entered with respect to her will
reflect the resolution of the issues here under consideration. See Rule 123.
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Federal income tax return (return) was timely filed. They were residents of

California on the date that the petition was filed.

      In 2000 petitioner, a former revenue agent for the Internal Revenue Service

(IRS), filed an employment-based complaint against the IRS. The claim was

resolved by a settlement during 2002. According to the terms of the settlement, the

IRS agreed to pay to petitioner a lump sum of $20,000 (settlement payment),

subject, according to the settlement agreement, to “all necessary and required

withholdings, taxes, deductions, offsets and adjustments”.

      For reasons not apparent from the record, the settlement payment was not

made until the year in issue. Meanwhile, $8,237.39 in interest had accrued.

The settlement payment, plus interest, minus Federal income tax and other

withholdings, was paid to petitioner by a U.S. Treasury check dated January 31,

2008, for $21,307.39. For 2008 the IRS issued petitioner: (1) a Form W-2, Wage

and Tax Statement, reflecting the settlement payment of $20,000; and (2) a Form

1099-INT, Interest Income, reporting interest paid of $8,237.39.

      Petitioners did not include any portion of the settlement payment or the

accrued interest in the income reported on their return. The income tax refund

claimed on their return, however, takes into account the Federal income tax withheld

from the settlement payment.
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      According to the notice, both the settlement payment and the accrued interest

are includable in petitioners’ 2008 income. Furthermore, according to the notice,

because the underpayment of tax required to be shown on petitioners’ 2008 return is

a substantial understatement of income tax, petitioners are liable for a section

6662(a) accuracy-related penalty.3

                                      Discussion

      Generally, determinations made in a notice of deficiency are presumed

correct, and the taxpayer bears the burden of proving that those determinations are

erroneous.4 Rule 142(a); see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).

      The term “income” as used in the Internal Revenue Code means income from

any source, including any accretion to the taxpayer’s wealth. See sec. 61(a);

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Certain accretions

to a taxpayer’s wealth are, by statute, made excludable from the taxpayer’s income,

but those statutory exclusions are narrowly construed. See, e.g., O’Gilvie v.




      3
       Other adjustments made in the notice are computational and need not be
discussed.
      4
      Petitioners do not argue that the burden of proof should be placed upon
respondent. See sec. 7491(a).
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United States, 519 U.S. 79 (1996); Commissioner v. Schleier, 515 U.S. 323, 328

(1995).

       According to the petition, the “Form 1099-INT” and the “Form W-2” are “in

error”, but no allegations of facts in support of these assignments of error are made

in the petition. Petitioners’ inartful pleading, their failure to submit a pretrial

memorandum, and petitioner’s vague presentation at trial make it difficult for us to

understand the precise nature of their challenge to the deficiency here in dispute. As

best we can determine from what is included in the record, it appears that petitioners

challenge the deficiency upon the following grounds: (1) the settlement payment

and the interest are specifically excludable from income pursuant to some provision

of the Internal Revenue Code; and (2) if the settlement payment and the interest that

accrued on that settlement payment are includable in their income, then the proper

year of inclusion is 2002, the year the settlement agreement was entered into, and

not 2008, the year the payment was made.

Whether the Settlement Payment or the Interest Is Excludable From Petitioners’
Income

       The simple answer is no; neither item is excludable from petitioners’

income.
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      At trial petitioner argued that section 61 allowed for the exclusion of both

items. We have encountered that section countless times in the past and fail to see

how its provisions in any way allow for the result that petitioner suggests. The

settlement payment, a clear accretion to petitioners’ wealth, constitutes “income

from any source”, and section 61 includes a specific reference to interest. See sec.

61(a)(4).

      Petitioner is not an unsophisticated taxpayer; as noted, he is a former IRS

revenue agent. We would expect that if petitioners’ position was supported by one

of the exclusions from income set forth in one of the sections included in subtitle A,

chapter 1, subchapter B, part III of the Internal Revenue Code, our attention would

have been directed to that section. Nevertheless, keeping in mind petitioners’ status

as unrepresented litigants, we consider, without specific reference by petitioners,

whether any of the exclusions from income set forth in various sections of the

Internal Revenue Code applies here. In so doing, we note that only section 104

need be mentioned, and then only briefly and only with reference to the settlement

payment.

      Section 104(a)(2) allows for the exclusion from a taxpayer’s income of “the

amount of any damages (other than punitive damages) received (whether by suit or

agreement and whether as lump sums or as periodic payments) on account of
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personal physical injuries or physical sickness”. See, e.g, Espinoza v.

Commissioner, 636 F.3d 747, 749-750 (5th Cir. 2011), aff’g T.C. Memo. 2010-53;

sec. 1.104-1(c), Income Tax Regs. The settlement payment qualifies as an amount

of “damages” received by “agreement” within the meaning of section 104(a)(2), but

the record in this case would hardly support a finding that the settlement payment

was made “on account of personal physical injuries or physical sickness” petitioner

suffered as a result of any action by his former employer. Section 104 does not

allow the settlement payment to be excluded from petitioners’ income.

      Otherwise, we find no support in any other provision of the Internal Revenue

Code for petitioners’ position that the settlement payment and the interest received

in 2008 are excludable from their income.

Proper Year of Inclusion: 2002 or 2008

      According to petitioners, if the settlement payment and interest are includable

in their income, then the proper year of inclusion is 2002, not 2008. Nothing in the

record suggests that any portion of the settlement payment or the interest was

actually included in petitioners’ income for 2002 or any other year for that matter.

Furthermore, their position in this regard makes no sense with respect to the interest.

As of the close of 2002, the amount of interest reported on the Form 1099-INT

would not yet have accrued on the settlement payment.
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      Petitioners admit that their taxable income and Federal income tax liability for

the year in issue are properly computed with reference to the cash receipts and

disbursements method of accounting (cash basis). That being so, they are required

to recognize income in the year they “actually or constructively” receive it. See sec.

451; sec. 1.451-1(a), Income Tax Regs. Nothing in the record suggests that

petitioner “constructively” received the settlement payment or interest before 2008,

the year those items of income were actually received. That being so, the settlement

payment and the interest on the settlement payment are includable in petitioners’

2008 income as respondent determined.

Accuracy-Related Penalty

       Section 6662(a) imposes a 20% accuracy-related penalty on any

underpayment of Federal income tax attributable, among other things, to a

substantial understatement of income tax. As relevant here, section 6662(d)(1)(A)

defines “substantial understatement of income tax” as an amount exceeding $5,000.

Respondent bears the burden of production with regard to the imposition of this

penalty. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

      In this case the underpayment of tax and the understatement of income tax are

equal to the deficiency, see secs. 6211, 6662(d)(2), 6664(a), which exceeds $5,000.
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That being so, the underpayment of tax required to be shown on petitioners’ return

is a substantial understatement of income tax, and respondent has met his burden of

production with respect to the imposition of the penalty on that ground.

      According to petitioners, however, the penalty is not applicable because they

relied upon substantial authority, acted in good faith, and had reasonable cause for

the exclusion of the settlement payment and interest from the income reported on

their 2008 return. The burden of proof in this regard rests with them. See sec.

6664(c)(1); Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

      Whether a taxpayer acted with reasonable cause and in good faith is decided

on a case-by-case basis, taking into account all of the pertinent facts and

circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. “Circumstances that

may indicate reasonable cause and good faith include an honest misunderstanding of

fact or law that is reasonable in light of all of the facts and circumstances, including

the experience, knowledge, and education of the taxpayer.” Id.

      According to petitioners, the settlement payment and the interest that

accrued on that settlement payment are excludable from income pursuant to some

provision of the Internal Revenue Code. They have not called our attention to any

such provision, and we have found none. Their claim that the disputed items of
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income, if includable in income, are includable for 2002 rather than 2008 is hardly

compelling when considered against their acknowledgment of being cash basis

taxpayers.

      Petitioners have failed to establish that there was reasonable cause and that

they acted in good faith with respect to the underpayment of tax, or any portion of it,

required to be shown on their 2008 return. Accordingly, respondent’s imposition of

an accuracy-related penalty is sustained.

      To reflect the foregoing, and to allow the parties the opportunity to resolve

between themselves petitioners’ untimely suggestion that the income actually

reported on their 2008 return is overstated,


                                                       Decision will be entered

                                                 under Rule 155.
