                         T.C. Summary Opinion 2017-4



                        UNITED STATES TAX COURT



               JAMES RAMONE TAYLOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7137-13S.                        Filed February 6, 2017.



      James Ramone Taylor, pro se.

      Michael R. Connelly and John Q. Walsh, Jr., for respondent.



                             SUMMARY OPINION


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

provisions of section 7463 of the Internal Revenue Code in effect when the
                                          2

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 December 31, 2012, the Internal Revenue

Service (IRS)2 determined a deficiency in petitioner’s 2010 Federal income tax of

$7,310 and a section 6662(a) accuracy-related penalty of $1,462.

      After concessions by petitioner and respondent,3 the sole remaining issue is

whether respondent is estopped from denying that petitioner’s military retirement

pay is excludable from gross income for 2010 because the IRS accepted

petitioner’s amended tax returns for 2006, 2007, and 2008 on which he excluded

his military retirement pay from gross income.


      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for 2010. Rule references are to the Tax
Rules of Practice and Procedure.
      2
        The Court uses the term “IRS” to refer to administrative actions taken
outside of these proceedings. The Court uses the term “respondent” to refer to the
Commissioner of Internal Revenue, who is the head of the IRS and is respondent
in this case, and to refer to actions taken in connection with this case.
      3
        The Court held a telephone conference with the parties on June 29, 2016, to
clarify the issues in the case. Petitioner conceded the military retirement pay at
issue was not excludable from gross income under sec. 104(a)(4) or sec. 122.
Respondent conceded the accuracy-related penalty for an underpayment due to a
substantial understatement of income tax under sec. 6662(a) and (b)(2). The Court
issued an order dated June 30, 2016, confirming the sole remaining issue.
                                          3

                                    Background

      This case was submitted fully stipulated by the parties pursuant to Rule 122.

The first stipulation of facts filed on May 9, 2016, and the attached exhibits are

incorporated herein by reference. At the time the petition was filed, petitioner

resided in Oklahoma.

      Petitioner is retired from the U.S. Army (Army). Petitioner separated from

the Army on September 30, 2002, with a rank of lieutenant colonel after having

sufficient length of service to qualify for retirement. His separation from the

Army was not due to disability. Neither the Army nor the U.S. Department of

Defense determined that petitioner was disabled or unfit for duty in the Army at

the time of his separation.

      On October 1, 2002, after his separation from the Army, petitioner filed an

application with the U.S. Department of Veterans Affairs (VA) for compensation

for service-connected disabilities (disability compensation). On November 8,

2002, the VA determined that petitioner was entitled to disability compensation

and that petitioner had a combined disability rating of 70%.
                                          4

I.    Petitioner’s 2010 Tax Return

      In 2010 petitioner received disability compensation payments from the VA.4

Petitioner did not report the payments on his 2010 tax return. The VA did not

report the payments to the IRS, and the IRS did not determine the payments were

includable in petitioner’s gross income for 2010.

      In 2010 petitioner also received $28,740.03 from the Defense Finance and

Accounting Service (DFAS) as net military retirement pay due to his previous

service in the Army. Petitioner’s gross military retirement pay was reduced by

$1,059.95 attributable to the portion of military retirement pay petitioner was

required to waive because of his election to receive VA disability compensation5


      4
       On November 8, 2002, the VA determined that petitioner was entitled to
receive disability compensation of $1,081 per month starting on November 1,
2002. The parties have not stipulated the amount of disability compensation that
the VA paid to petitioner in 2010.
      5
       Before 2004 a military retiree was not permitted to receive military
retirement pay and VA disability compensation concurrently. See 10 U.S.C. sec.
1413 (2000 & Supp. 2001-2003); see also 38 U.S.C. secs. 5304 and 5305 (2000 &
Supp. 2001-2006). In this regard a retiree was required to waive military
retirement pay in an amount equal to any VA disability compensation. See S.
Rept. No. 108-265, at 39 (2004). In the National Defense Authorization Act for
Fiscal Year 2004, Pub. L. No. 108-136, sec. 641(a)-(c), 117 Stat. at 1511-1514,
Congress repealed 10 U.S.C. sec. 1413 (2000) and amended 10 U.S.C. sec. 1414
(2000) to eliminate (over a 10-year period beginning January 1, 2004) the
concurrent receipt restriction outlined above as applied to military retirees with
                                                                        (continued...)
                                          5

and reduced by $19,160.02 attributable to the portion of military retirement pay

awarded to his former spouse. DFAS filed a 2010 Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., with the IRS and issued the form to petitioner reporting the

military retirement pay of $28,740.03 as a taxable distribution. Petitioner timely

filed his 2010 tax return electronically. Petitioner did not include the $28,740.03

of military retirement pay he received in 2010 that was reported to him by DFAS

on the Form 1099-R.

II.   Petitioner’s Original and Amended 2006, 2007, and 2008 Tax Returns

      On his original 2006, 2007, and 2008 tax returns petitioner included his

military retirement pay in gross income. Sometime after filing the original tax

returns petitioner spoke with a friend who was also a lieutenant colonel. He also

spoke with an individual to whom his friend referred him. The individual advised

petitioner that he could exclude some portion of his military retirement pay from

gross income. On the basis of this advice, petitioner decided he should exclude

his military retirement pay from gross income for these years.




      5
       (...continued)
service-connected disabilities rated by the VA at not less than 50%. See 10 U.S.C.
sec. 1414(c) (2012).
                                         6

       In 2009 petitioner filed claims for tax refunds for 2006, 2007, and 2008 by

filing amended tax returns on which he excluded his military retirement pay from

gross income. The individual who had given petitioner advice prepared

petitioner’s 2006, 2007, and 2008 amended tax returns. Petitioner included with

his amended tax returns worksheets entitled “Statement Regarding Military

Retirement” showing how he computed the amount of the excluded military

retirement pay.

       On November 23, 2009, the IRS processed petitioner’s refund claims for

2006, 2007, and 2008 and refunded the following amounts:

                  Year               Income tax            Interest

                  2006                 $4,307             $698.60

                  2007                  3,365              256.55

                  2008                  5,015               98.22

III.   The IRS’ Examination of Petitioner’s 2010 Tax Return

       The IRS examined petitioner’s 2010 tax return. During the examination

petitioner created a worksheet to show how he had calculated the amount of the

military retirement pay he had excluded from gross income for 2010. This

worksheet was similar to the worksheets petitioner filed with his amended tax

returns.
                                           7

      In a notice of deficiency dated December 31, 2012, the IRS determined

petitioner’s military retirement pay of $28,740.03 was includable in gross income

for 2010.

                                      Discussion

      Petitioner concedes, see supra note 2, that his military retirement pay is not

excludable from gross income for 2010 under section 104(a)(4) or section 122 as

he initially asserted.6 Nonetheless, petitioner asserts that even if his military

retirement pay is not excludable from gross income, under section 104(a)(2) or

122, respondent is estopped under the doctrines of equitable estoppel and

promissory estoppel from denying that petitioner’s military retirement pay is

excludable from gross income for 2010. Petitioner points to the IRS’ acceptance

of his amended tax returns for 2006, 2007, and 2008, on which he excluded his




      6
        Also, petitioner did not include the military retirement pay he received in
2009 on his tax return for 2009. The IRS issued petitioner a notice of deficiency
dated September 12, 2011, for 2009 that determined his military retirement pay
was includable in gross income for 2009. Petitioner filed a timely petition with
this Court for 2009. On August 24, 2015, this Court issued an opinion in Taylor v.
Commissioner, T.C. Summary Opinion 2015-51. In that opinion the Court
determined that petitioner’s military retirement pay was includable in gross
income for 2009 and that petitioner was not liable for a sec. 6662(a) accuracy-
related penalty with respect to the excluded taxable portion of his 2009 military
retirement pay.
                                          8

military retirement pay from gross income and for which the IRS issued him

refunds.

      The burden of proof is on the party claiming estoppel against the

Government. See Rule 142(a); Hofstetter v. Commissioner, 98 T.C. 695, 701

(1992). The Court concludes that petitioner has not met his burden of proof and

respondent is not estopped from including petitioner’s military retirement pay in

gross income for 2010.

I.    Equitable Estoppel

      Equitable estoppel is a judicial doctrine that “precludes a party from

denying his own acts or representations which induced another to act to his

detriment.” Graff v. Commissioner, 74 T.C. 743, 761 (1980), aff’d, 673 F.2d 784

(5th Cir. 1982); see Megibow v. Commissioner, T.C. Memo. 2004-41, 2004 Tax

Ct. Memo LEXIS 43, at *23. “The doctrine of equitable estoppel is based upon

the grounds of public policy, fair dealing, good faith, and justice and is designed

to aid the law in the administration of justice where without its aid injustice might

result.” Graff v. Commissioner, 74 T.C. at 761.

      The Supreme Court has held that “the Government may not be estopped on

the same terms as any other litigant.” Heckler v. Cmty. Health Servs., 467 U.S.

51, 60 (1984); see OPM v. Richmond, 496 U.S. 414, 419 (1990). The general rule
                                         9

is that the Government is neither bound nor estopped by the acts of its officers and

agents in entering into an agreement or arrangement to do or cause to be done

what the law does not permit or sanction. Graff v. Commissioner, 74 T.C. at 762.

Equitable estoppel has been applied against the Government only where justice

and fair play require it. Id. at 761.

       It has also been recognized that invoking the doctrine of equitable estoppel

against the Government “must be treated with utmost caution, since its sanction in

any case would result in having individual tax liability depend, not upon the

factors and measures prescribed by Congress as applicable to all, but upon the

statements and conduct of a particular Government officer in respect of each

individual.” Couzens v. Commissioner, 11 B.T.A. 1040, 1148 (1928). Thus the

doctrine of equitable estoppel is applied against the Commissioner only with

utmost caution and restraint. Schuster v. Commissioner, 312 F.2d 311, 317 (9th

Cir. 1962), aff’g in part, rev’g in part 32 T.C. 998 (1959); McCorkle v.

Commissioner, 124 T.C. 56, 68 (2005); Hoffstetter v. Commissioner, 98 T.C. at

700; Graff v. Commissioner, 74 T.C. at 761.

      Petitioner asserts that respondent should be equitably estopped from

denying petitioner’s exclusion of his military retirement pay from gross income
                                         10

because the IRS accepted his amended tax returns for 2006, 2007, and 20087 and

he relied on these actions to his detriment when he excluded his military

retirement pay from gross income on his 2010 tax return. Specifically, petitioner

emphasizes that the actions by the IRS “promoted the expectations of the

petitioner that the amendment process/law used by the petitioner was just.”

Petitioner asserts that because the IRS accepted his 2006, 2007, and 2008

amended tax returns, which excluded his military retirement pay from gross

income, the IRS is estopped from taking a different position for 2010.

      In order to invoke the doctrine of equitable estoppel against the United

States petitioner must establish: “(1) conduct constituting a representation of

material fact; (2) actual or imputed knowledge of such fact by the representor; (3)

ignorance of the fact by the representee; (4) actual or imputed expectation by the

representor that the representee will act in reliance upon the representation; (5)

actual reliance thereon; and (6) detriment on the part of the representee.”

Hofstetter v. Commissioner, 98 T.C. at 700.

      The IRS’ acceptance of petitioner’s amended 2006, 2007, and 2008 tax

returns, which excluded petitioner’s military retirement pay from gross income,

      7
       Petitioner asserts that he also filed a 2011 amended tax return to exclude
his military retirement pay and that the IRS accepted the amended tax return.
Respondent has not agreed with this statement, and it has not been stipulated.
                                        11

however, was a mistake of law by the IRS, not a mistake of fact. Equitable

estoppel does not bar or prevent the IRS from correcting a mistake of law. Auto.

Club of Mich. v. Commissioner, 353 U.S. 180, 183-184 (1957); Schuster v.

Commissioner, 312 F.2d at 317; see Wilkins v. Commissioner, 120 T.C. 109, 113

(2003).

      Gross income means “all income from whatever source derived”. Sec.

61(a). Pensions and retirement allowances constitute gross income unless

excluded by law. Sec. 61(a)(11); sec. 1.61-11(a), Income Tax Regs. Military

retirement pay is pension income within the meaning of section 61(a)(11).

Wheeler v. Commissioner, 127 T.C. 200, 205 n.11 (2006), aff’d, 521 F.3d 1289

(10th Cir. 2008). In general the law does not permit military retirement pay for

length of service to be excluded from gross income. See Scarce v. Commissioner,

17 T.C. 830, 833 (1951); Holt v. Commissioner, T.C. Memo. 1999-348, 1999 Tax

Ct. Memo LEXIS 402, at *7-*8.

      By accepting petitioner’s amended tax returns and issuing refunds for 2006,

2007, and 2008, employees of the IRS incorrectly applied the law requiring

military retirement pay be included in gross income. The IRS may correct

mistakes of law “even where a taxpayer may have relied to his detriment on the

* * * [IRS’] mistake.” Dixon v. United States, 381 U.S. 68, 73 (1965); see
                                         12

Greenfeld v. Commissioner, T.C. Memo. 1966-83, 1966 Tax Ct. Memo LEXIS

201, at *5 (holding IRS not estopped from disallowing net losses after failing to

make such changes during audits of prior year tax returns). The IRS has the power

to correct mistakes of law because an IRS employee by neglect or otherwise

cannot bind the IRS to an erroneous interpretation of law. Graff v. Commissioner,

74 T.C. at 762. Thus respondent is not estopped from correcting the mistake of

law for 2010. Accordingly, the Court concludes that equitable estoppel is not

applicable and respondent is not estopped from determining that petitioner’s

military retirement pay is includable in gross income for 2010.

II.   Promissory Estoppel

      Petitioner also contends that the doctrine of promissory estoppel applies to

enforce a promise the IRS made to petitioner that the exclusion of his military

retirement pay from gross income for 2010 was correct by accepting his amended

tax returns for 2006, 2007, and 2008. Petitioner uses the terms “equitable

estoppel” and “promissory estoppel” interchangeably to refer to his estoppel

theory. The Court has concluded that equitable estoppel does not apply in this

case. To the extent petitioner asserts that the separate doctrine of promissory

estoppel prevents the IRS from including his military retirement in gross income
                                         13

for 2010, the Court also concludes that promissory estoppel does not apply in this

case.

        Promissory estoppel is different from equitable estoppel. Equitable estoppel

is based on a representation of fact rather than a promise. Black’s Law Dictionary

631 (9th ed. 2009). “[P]romissory estoppel is used to create a cause of action,

whereas equitable estoppel is used to bar a party from raising a defense or

objection it otherwise would have, or from instituting an action which it is entitled

to institute.” Jablon v. United States, 657 F.2d 1064, 1068 (9th Cir. 1981).

        The Court understands petitioner’s contention to be that respondent should

be barred from objecting to the exclusion of his military retirement pay from gross

income because the IRS previously allowed the exclusions on his prior year

amended tax returns. Petitioner misunderstands the doctrine of promissory

estoppel. Petitioner’s argument is based on equitable estoppel.

        However, to the extent petitioner invokes the theory of promissory estoppel,

and without deciding whether this Court has jurisdiction to hear such a claim, the

doctrine is not applicable in this case. The IRS did not make any promise to

petitioner to exclude his military retirement pay from gross income by accepting

his amended tax returns for 2006, 2007, and 2008. The notices petitioner received

in response to his 2007 and 2008 amended tax returns state: “As you requested,
                                          14

we changed your account for * * * [2007 and 2008] to correct your pensions and

annuities.”8 This statement is neither a statement of fact nor a promise to

petitioner that his military retirement pay was properly excluded from gross

income. These statements by the IRS were the result of actions by IRS employees

and, as discussed above, those actions were the result of a mistake of law.

      The IRS is not required for any given year to allow a tax benefit permitted

for a previous or subsequent year. See Pekar v. Commissioner, 113 T.C. 158, 166

(1999). Each taxable year stands alone, and the IRS may challenge for a

succeeding year what was condoned or agreed to for a prior year. Jeanmarie v.

Commissioner, T.C. Memo. 2003-337, 2003 Tax Ct. Memo LEXIS 338, at *10;

see Pekar v. Commissioner, 113 T.C. at 166; Kiourtsis v. Commissioner, T.C.

Memo. 1996-534, 1996 Tax Ct. Memo LEXIS 552, at *15 (applying the principle

in the context of a section 104(a)(4) case).

      In his opening brief petitioner contends that under the Taxpayer Bill of

Rights the IRS promised him “[t]he right to a fair and just tax system”. Although

the Court can appreciate petitioner’s frustration, respondent is not precluded from

      8
       In the stipulation of facts the parties include copies of these notices only for
2007 and 2008. Petitioner did not provide a copy of the 2006 notice he received
from the IRS in response to his amended tax return. However, neither petitioner
nor respondent has provided any documents to indicate that the 2006 notice would
be any different from the 2007 and 2008 notices.
                                           15

including petitioner’s military retirement pay in gross income for 2010 despite the

IRS’ acceptance of his amended tax returns and issuance of refunds for prior

years.

         The Court has considered all of the parties’ arguments, and, to the extent not

addressed herein, the Court concludes that they are moot, irrelevant, or without

merit. The Court sustains respondent’s determination except to the extent of

respondent’s concession.

         To reflect the foregoing, including respondent’s concession,


                                                Decision will be entered for

                                         respondent as to the deficiency in tax

                                         and for petitioner as to the accuracy-

                                         related penalty under section 6662(a).
