                         T.C. Memo. 2012-36



                   UNITED STATES TAX COURT



              LISA LAFLAMME, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 4464-10.                           Filed February 6, 2012.



       During 2006 P, a self-employed individual, made a contribution
to her pension plan. P deducted the contribution on her Schedule C,
Profit or Loss From Business. R disallowed the deduction on her
Schedule C but permitted P to deduct the contribution from gross
income on her Form 1040, U.S. Individual Income Tax Return.
Respondent also determined that P was liable for an accuracy-related
penalty under I.R.C. sec. 6662.

       Held: P is entitled to deduct her pension contribution when
calculating her income tax liability but not when calculating her self-
employment tax liability. P is not liable for the accuracy-related
penalty.
                                          -2-

      Lisa LaFlamme, pro se.

      D’Aun E. Clark, for respondent.



                            MEMORANDUM OPINION


      VASQUEZ, Judge: Respondent determined a $6,089 deficiency in

petitioner’s Federal income tax for 2006 and a $1,218 accuracy-related penalty

under section 6662(a).1 After a stipulation of settled issues,2 the issues remaining

for decision are: (1) whether, for the purpose of calculating her self-employment tax

liability, petitioner is entitled to deduct the contributions she made to her pension

plan; and (2) whether petitioner is liable for an accuracy-related penalty under

section 6662(a).3




      1
         Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All amounts are rounded to the
nearest dollar.
      2
          The parties stipulated that petitioner is not entitled to a charitable
contribution deduction on her Schedule A, Itemized Deductions, and petitioner is
entitled to deduct $16,648 of car and truck expenses that she claimed on her
Schedule C, Profit or Loss From Business.
      3
        Adjustments made to petitioner’s self-employment tax, adjusted gross
income, and itemized deductions are computational and will be resolved by our
holding herein.
                                           -3-

                                      Background

      The parties submitted this case fully stipulated under Rule 122. The

stipulation of facts, the stipulation of settled issues, and the attached exhibits are

incorporated herein by this reference. Petitioner resided in Florida at the time the

petition was filed.

      During 2006 petitioner was a self-employed real estate agent. That year she

contributed $34,408 to the Lisa K. LaFlamme Defined Benefit Pension Plan and

Trust (pension contribution). Petitioner claimed a deduction for the pension

contribution on line 19, Pension and profit sharing plans, of the Schedule C she

attached to her Form 1040, U.S. Individual Income Tax Return, for 2006.4

Petitioner did not claim a deduction for the pension contribution on line 28, Self-

employed SEP, SIMPLE, and qualified plans, of her Form 1040. Respondent

subsequently issued petitioner a notice of deficiency disallowing the pension

contribution deduction that she claimed on her Schedule C but allowing her to

deduct the pension contribution on line 28 of her Form 1040. The notice of

deficiency also determined an accuracy-related penalty under section 6662(a) on the

basis of negligence or disregard of the rules and regulations.


      4
        Schedule C deductions reduce net earnings from self-employment, thereby
reducing a taxpayer’s self-employment tax liability. See secs. 1401 and 1402.
                                         -4-

                                     Discussion

I. Pension Contribution

      The self-employment tax imposed by chapter 2, Tax on Self-Employment

Income, of subtitle A of the Code is distinct from the income tax imposed by chapter

1, Normal Taxes and Surtaxes. See Eades v. Commissioner, 79 T.C. 985, 992 n.7

(1982); Ross v. Commissioner, T.C. Memo. 1995-599. When a taxpayer deducts

an expense on her Schedule C, it reduces her net earnings from self-employment,

thereby reducing her self-employment tax liability. The deductions on Schedule C

also reduce the taxpayer’s income tax liability by lowering the business income

included in her gross income. Petitioner argues that she is entitled to deduct the

pension contribution on her Schedule C because she believes the Code permits a

deduction for contributions made by a self-employed taxpayer to her pension plan in

computing both the income tax and the self-employment tax.

      A. Income Tax

      Section 1 imposes a tax on the taxable income of individuals. Taxable

income is gross income minus the deductions allowed by chapter 1, Normal Taxes

and Surtaxes. Sec. 63(a). Section 62 enumerates the deductions permitted from

gross income.
                                          -5-

      Section 404 governs the deductibility of an employer’s contribution to an

employee pension plan. In general, an employer is permitted to deduct a

contribution to a pension plan if the contribution satisfies section 162 (relating to

trade or business expenses) or 212 (relating to expenses for production of income).

Sec. 404(a); sec. 1.404(a)-1(b), Income Tax Regs.

      Historically, self-employed taxpayers were not considered to be their own

employers and employees, and the contributions they made to their pension plans

were not business expenses. See Gale v. United States, 768 F. Supp. 1305, 1309

(N.D. Ill. 1991) (stating that “such contributions have never before been considered

business expenses”). Thus, self-employed taxpayers were unable to deduct the

contributions they made to their pension plans. See S. Rept. No. 87-992 (1961),

1962-3 C.B. 303, 310 (discussing the then-existing “discrimination in present law

under which self-employed individuals--sole proprietors and partners

--are prevented from participating in retirement plans established for the benefit of

their employees although owner-managers of corporations may do so”). In 1962

Congress enacted the Self-Employed Individuals Tax Retirement Act of 1962 (1962

Act), Pub. L. No. 87-792, 76 Stat. 809, to allow self-employed taxpayers to
                                          -6-

deduct from gross income the contributions they made to their pension plans.5 S.

Rept. No. 87-992 supra, 1962-3 C.B. at 303. To allow the deduction, 1962 Act sec.

3, 76 Stat. at 819, provides that a self-employed individual is considered to be her

own employer and her own employee and contributions made by a self-employed

taxpayer to her pension plan “shall be considered to satisfy the conditions of section

162 or section 212”.6 S. Rept. No. 87-992, supra, 1962-3 C.B. at 341-342; see sec.

404(a)(8). Further, 1962 Act sec. 7, 76 Stat. at 828, amended section 62 to provide

that self-employed individuals were entitled to the deduction from gross income

allowed by section 404. S. Rept. No. 87-992, supra, 1962-3 C.B. at 356; see sec.

62(a)(6). Thus, petitioner, for the purposes of calculating her income tax liability, is

entitled to deduct the pension contribution from gross income.

      5
          The legislative history to the 1962 Act states:

“[This bill] is designed to encourage the establishment of voluntary retirement plans
by self-employed persons by allowing self-employed individuals to be covered by
qualified plans and by extending to them some of the favorable tax benefits present
law now provides in the case of qualified retirement plans established by employers
for their employees.”

S. Rept. No. 87-992 (1961), 1962-3 C.B. 303, 303.
      6
          The contribution is considered to satisfy sec. 162 or sec. 212 only to the
extent of the earned income the individual derived from the trade or business to
which the pension plan relates. Sec. 404(a)(8)(C). Respondent does not dispute
that petitioner had sufficient earned income to allow her entire pension contribution
to be considered to satisfy sec. 162 in the context of the sec. 404 deduction.
                                           -7-

      B. Self-Employment Tax

      Section 1401 imposes a tax on the “self-employment income” of every

individual. “[S]elf-employment income” is generally defined as the “net earnings

from self-employment derived by an individual”. Sec. 1402(b). The term “net

earnings from self-employment” is defined as “the gross income derived by an

individual from any trade or business carried on by such individual, less the

deductions allowed by this subtitle [i.e., subtitle A of title 26] which are attributable

to such trade or business”. Sec. 1402(a). Thus, for the purposes of determining her

self-employment tax, petitioner can deduct the amount of the pension contribution

only if the pension contribution is (1) a deduction allowed by subtitle A, Income

Taxes, of the Code and (2) attributable to her trade or business. Subtitle A allows

petitioner a deduction for the pension contribution. See supra pp. 4-6. Thus,

petitioner is entitled to deduct the pension contribution when computing self-

employment tax liability if it is attributable to her trade or business.

      Before the 1962 Act contributions made by self-employed taxpayers to their

pension plans historically were not considered business expenses and were not
                                         -8-

deductible under section 162. See supra p. 5; see also Gale, 768 F. Supp. at 1308-

1309 (discussing the treatment of such contributions before the 1962 Act). It

appears that petitioner is arguing that because the 1962 Act treats the pension

contribution as a business expense satisfying section 162 for the purpose of

computing her income tax liability under chapter 1, the contribution should be

treated as a business expense for the purpose of computing her self-employment tax

liability under chapter 2.

      Deductions are a matter of legislative grace and are construed narrowly.

Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-149

(1974); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934) (stating “only as there is clear provision

therefor can any particular deduction be allowed”). Taxpayers bear the burden of

proving their entitlement to deductions. See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Except for the special rule in section 404(a)(8), a self-

employed taxpayer’s contribution is not an expense attributable to the taxpayer’s

trade or business. Petitioner points us to no authority, and we have discovered

none, that provides that the special rule in section 404 (a)(8) applies outside the
                                          -9-

context of that section.7 Petitioner’s pension contribution is not attributable to her

trade or business. Thus, petitioner’s pension contribution is not deductible on her

Schedule C. See Hough v. Commissioner, T.C. Memo. 1997-361 (stating that the

self-employed taxpayer’s contribution to his pension plan was not deductible on his

Schedule C), aff’d without published opinion, 162 F.3d 1151 (3d Cir. 1998). II.

Accuracy-Related Penalty

      Pursuant to section 6662(a) and (b)(1), a taxpayer may be liable for a penalty

of 20% of the portion of an underpayment of tax due to negligence or disregard of

rules or regulations. “Negligence” is defined as any failure to make a reasonable

attempt to comply with the provisions of the Code. Sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to

exercise due care or the failure to do what a reasonable person would do under the

circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d, 925 F.2d

348, 353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

“Disregard” means any careless, reckless, or intentional disregard. Sec. 6662(c).

The burden of production is on the Commissioner to produce evidence that it is


      7
        The legislative history suggests that the sec. 404(a)(8) rule is limited to the
income tax, stating that the 1962 Act “allows contributions to retirement plans to be
a deduction for income tax purposes”. S. Rept. No. 87-992, supra, 1962-3 C.B. at
310.
                                        - 10 -

appropriate to impose the relevant penalty. See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). We find that respondent has met his

burden of production.

      The accuracy-related penalty is not imposed with respect to any portion of the

underpayment as to which the taxpayer shows that he or she acted with reasonable

cause and in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448.

We find that petitioner had reasonable cause for the position taken on her return

regarding the pension contribution and acted in good faith. See sec. 6664(c)(1).

Petitioner, knowing that she was entitled to deduct her pension contribution,

mistakenly believed she was entitled to deduct it on line 19 of her Schedule C which

was labeled as “Pension and profit-sharing plans”. See sec. 1.6664-4(b), Income

Tax Regs. (stating that a honest mistake of law may indicate reasonable cause and

good faith).

      To reflect the foregoing,

                                                           Decision will be entered

                                                    under Rule 155.
