                                                                                F I L E D
                                                                         United States Court of Appeals
                                                                                 Tenth Circuit
                         UNITED STATES COURT OF APPEALS
                                                                                 JAN 26 2005
                                      TENTH CIRCUIT
                                                                            PATRICK FISHER
                                                                                      Clerk

 LISA B. WILLIAMS,

           Petitioner-Appellant,
 v.
                                                              No. 03-9004
                                                              (Tax Court)
 COMMISSION OF INTERNAL
                                                          (T.C. No. 12030-99)
 REVENUE,

           Respondent-Appellee.


                                   ORDER AND JUDGMENT*


Before KELLY, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and LUCERO,
Circuit Judge.


       This is a tax case that started out as a criminal investigation. However, on

December 18, 1998, the Internal Revenue Service issued the taxpayer a “non-

prosecution” letter and opened a civil tax examination of her timely filed individual tax

returns for the years of 1993, 1994 and 1995.

       After completing its investigation, the Commission of Internal Revenue

(Commissioner) on April 13, 1999, issued Lisa B. Williams (taxpayer) and her husband,



       *
         This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. The court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 36.3.
Jeffrey Williams, a notice of tax deficiency, stating therein that the Commissioner

disagreed with the taxpayer’s exclusion from her gross income of three payments of

monies given her by her employer for the years 1993, 1994, and 1995.1 The

Commissioner, after hearing, determined that there were deficiencies in taxpayer’s returns

for 1993, 1994, and 1995 and assessed penalties therefor under 26 U.S.C. § 6662(a) On

July 6, 1999, the taxpayer filed a timely petition with the United States Tax Court seeking

a redetermination of the deficiencies and an abatement of the penalties. After a trial, the

Tax Court, on August 25, 2003, entered its decision which upheld the determination of

the Commissioner. 82 T.C.M. (CCH) 1113 (2003). On November 28, 2003, the

taxpayer filed a timely notice of appeal in the Tax Court. Jeffrey Williams did not file a

notice of appeal and is not a party to this appeal. We have jurisdiction pursuant to 26

U.S.C. § 7482.

       Taxpayer was employed as a staff radiation therapist by Deland & Noell, a

corporation in Lafayette, Louisiana, starting in 1985, when she was 21 years old. She

continued to work there through mid-1996, when she resigned, shortly after her sister,

who was also employed by the corporation, was discharged. The corporation provided

treatment to cancer patients and was owned and operated by Drs. Thomas Noell and

Maitland Deland, who were husband and wife. As the corporate business expanded and


       1
        For each of the three years, the taxpayer filled a joint return with her husband,
Jeffrey Williams. In 1993, their return was prepared and filed by a commercial return
preparer. The returns for 1994 and 1995 were prepared by taxpayer’s husband.

                                            -2-
opened multiple treatment centers, taxpayer was promoted in 1991 to Chief Therapist and

then in 1993 to Corporate Chief Therapist, where she supervised all of the corporation’s

radiation therapists. From 1991 through 1995, the corporation was in a period of

expansion and opened cancer treatment centers in multiple geographical locations.

During her employment at Deland & Noell, taxpayer became a close personal friend and

confidante of Dr. Deland, who was president and a shareholder of the corporation, and the

two women and their families frequently spent time together outside of the work place.

      Taxpayer received the following annual salary and bonuses from the corporation

from 1989 through 1995:


                              salary                      bonus

             1989           $38,000                     $ 1,000
             1990            41,800                       1,750
             l991            47,500                       2,500
             1992            51,100                     11,000
             1993            56,293                     25,000
             1994            59,243                     35,000
             1995            62,857                     35,000

      As we understand it, the bonuses received by the taxpayer through 1992 were

included by the taxpayer in her personal tax returns as being gross income, but they were

not included on her tax returns for 1993, 1994 and 1995, and therein lies our problem.

Taxpayer claims that under 26 U.S.C. § 102(a) the payments for the years here in

question qualified as a “gift” from her employer, Dr. Maitland Deland, and were not a

bonus, as such. Of the three checks with which we are concerned, two contained thereon

                                           -3-
the notation “bonus.” The W-2 forms that the taxpayer received for 1993, 1994 and 1995

did not include the amounts given the taxpayer for those years by her employer.

However, early in 1997, the corporation issued corrected W-2s to the taxpayer that

included the additional compensation for those years. The taxpayer made no effort to

thereafter file amended returns for the years here in question. The Commissioner

determined the amounts paid taxpayer by her employer for those years were not a gift, but

performance bonuses and that, accordingly, there were deficiencies in the taxpayer’s

federal income tax returns for the years 1993, 1994 and 1995, and assessed penalties

therefor, all of which were approved by the Tax Court. Those were as follows:

                                                           Penalty
                Year                 Deficiency           Sec. 6662 (a)
                1993                  $ 7,000                 $1,400
                1994                   10,437                  2,087
                1995                   10,725                  2,145

      Our jurisdiction to review decisions of the Tax Court appears at 26 U.S.C. § 7482,

which reads as follows:

             § 7482. Courts of review

               (a) Jurisdiction. –

                     (1) In general.–The United States Courts of
                     Appeals (other than the United States Court of
                     Appeals for the Federal Circuit) shall have
                     exclusive jurisdiction to review the decisions of
                     the Tax Court, except as provided in section
                     1254 of Title 28 of the United States Code, in
                     the same manner and to the same extent as
                     decisions of the district courts in civil actions

                                              -4-
                    tried without a jury; and the judgment of any
                    such court shall be final, except that it shall be
                    subject to review by the Supreme Court of the
                    United States upon certiorari, in the manner
                    provided in section 1254 of Title 28 of the
                    United States Code. (Emphasis added.)

      Concerning the burden of proof in a proceeding before the Tax Court, 26 U.S.C. §

7491 provides as follows:

             § 7491. Burden of proof

              (a) Burden shifts where taxpayer produces credible
             evidence.--

                    (1) General rule.–If, in any court proceeding, a
                    taxpayer introduces credible evidence with
                    respect to any factual issue relevant to
                    ascertaining the liability of the taxpayer for any
                    tax imposed by subtitle A or B, the Secretary
                    shall have the burden of proof with respect to
                    such issue.
                    (2) Limitations.–Paragraph (1) shall apply with
                    respect to an issue only if–
                           (A) the taxpayer has complied
                           with the requirements under this
                           title to substantiate any item;
                           (B) the taxpayer has maintained
                           all records required under this title
                           and has cooperated with
                           reasonable requests by the
                           Secretary for witnesses,
                           information, documents,
                           meetings, and interviews.
                           (Emphasis added.)

      On appeal, counsel for the taxpayer’s first, and perhaps main, argument is that the

Tax Court did not follow the mandate of 26 U.S.C. § 7491 and, on the contrary, the Tax

                                            -5-
Court placed the burden of proof on the taxpayer and not the government. In connection

with counsel’s argument on this particular matter, taxpayer seeks an order of this Court

vacating the decision of the Tax Court and remanding the case to the Tax Court, directing

it to reassess the question of any deficiency and penalty in accord with 26 U.S.C. §

7491(a). The Commissioner, inter alia, argues that §7491 does not apply to the present

case because of its effective date, and that, in any event, this issue was not raised in the

Tax Court and therefore, in accord with the general rule, may not be raised for the first

time on appeal in this Court. In this regard, the matter was mentioned by counsel for the

taxpayer in the Tax Court in his opening statement before any testimony was taken. The

colloquy between the Tax Court and counsel for the taxpayer, was, in its entirety, as

follows:

       THE COURT: All right. Now, is there any question about who has the
       burden of going forward this morning?

       MS. BARKLEY: Yes, I believe there is.

       THE COURT: All right. Well, maybe we should hear that first. Mr.
       Walker, do you want to address that?

       MR. WALKER: Yes, Your Honor. Counsel for the Petitioner has raised the
       changes in the federal tax code addressing burden of proof, contending that
       the examination here commenced after the effective date of – I believe it’s
       Section 74.

       THE COURT: 91?

       MR. WALKER: 91. Yes, Your Honor. And under that provision, it
       believes that the burden of proof falls with the Commissioner.


                                             -6-
       THE COURT: Well, you have to meet certain requirements, as I understand
       it. Are you prepared to show that your client has met those requirements?

       MR. WALKER: What we’d like to do, Your Honor, is provide a set of
       affidavits and briefings addressing just the burden of proof issue.

       THE COURT: Well, let me ask you this, Mr. Walker. I think that it’s
       important that you raise this at this time, as the trial begins. But, on the
       other hand, I would ask you – do you think that the burden of proof – or
       who goes forward with the evidence – is going to make a big difference in
       this case? And, if so, tell me how it will.

       MR. WALKER: (No response.)

       THE COURT: Is there going to be – is the Government going to, like – they
       could call your client as a witness and then the trial starts and you’re just
       where you were, depending on who called them. And, this – from what I
       see of the record here, this is a straightforward question. It’s a question of
       your client’s testimony and some documents.

       MR. WALKER: It’s a very factual issue.

       THE COURT: Right. It’s factual-driven. I’m going to hear the testimony
       of a witness and see some documents. And so it’s not going to be a
       situation where one party puts on some startling piece of evidence and rests.
       And then the other side is just stuck without a paddle or canoe, you know.
       It’s the kind of thing where I’m going to weigh the evidence.

       I mean, I don’t know – do you want to really use up a lot of transcript time
       arguing about who starts?

       MR. WALKER: Not particularly, Your Honor. We’re anxious to get to the
       testimony and have the trial go forward.

       As far as we can tell from the present record, the foregoing is the only mention of

26 U.S.C. § 7491(a) during the entire proceeding in the Tax Court. The matter was never

mentioned again during the ensuing trial, nor was it raised or referred to in any post-trial


                                            -7-
proceeding. It is on this basis that the Commissioner argues in this Court that the issue

was not raised in the Tax Court, and therefore cannot be raised in this Court for the first

time. We agree with the Commissioner.2 See Tele-Communications, Inc. v. C.I.R., 104

F.3d 1229, 1233 (10th Cir. 1997) (“Thus, an issue must be ‘presented to, considered [and]

decided by the trial court’ before it can be raised on appeal.”)

       In connection with the “burden of proof” referred to in 26 U.S.C. § 7491(a), the

statute states that the “shifting” occurs only after the “taxpayer introduces credible

evidence with respect to any factual issue relevant to ascertaining the liability of the

taxpayer. . . .” As far as we can tell, in the instant case there was really no dispute as to

the “facts.” Taxpayer and Dr. Deland were indeed “close friends.” The real question is

whether, under the tax statutes, the facts of this case show a genuine “gift,” or, on the

contrary, a taxable “bonus payment.” Such, in this case, although a mixed question of

fact and law, is primarily a legal question, which we review de novo. Armstrong v.

Commissioner, 15 F.3d 970, 973 (10th Cir. 1994). We shall proceed to the ultimate

question in this case of whether the payments in 1993, 1994 and 1995 by the corporation

to the taxpayer were under applicable law, taxable income which should have been



       2
        In arguing for a remand and reconsideration by the Tax Court, after placing the
burden of proof on the Commissioner, counsel relies on Griffin v. C. I. R., 315 F.3d 1017
(8th Cir. 2003). However, in that case 26 U.S.C. § 7491 was definitely raised in the Tax
Court, in fact it was raised by the Commissioner. In that case the Eighth Circuit reversed
the Tax Court which had found that the taxpayer had not introduced “credible evidence,”
and hence no “shifting” was required.

                                              -8-
included as gross income on taxpayer’s income tax returns.

       In this regard, 26 U.S.C. § 102(a) provides that as a general rule “gross income

does not include the value of property acquired by gift, bequest, devise or inheritance.”

However, 26 U.S.C. § 102(c)(1) provides as follows:

              (c) Employee gifts –
                  (1) In general – Subsection (a) shall not exclude from
              gross income any amount transferred by or for an employer
              to, or for, the benefit of, an employee. (Emphasis added.)

       There are certain exceptions to 26 U.S.C. § 102(c)(1), none of which have any

present pertinency.

       Counsel for taxpayer in this Court argues that § 102(c)(1) is not dispositive of the

matter, and that the payments in 1993, 1994 and 1995 from taxpayer’s employer to the

taxpayer were, in fact, and in law, a gift and governed by 102(a). We disagree. We

believe this argument is foreclosed by 102(c)(1), which rather clearly states that amounts

transferred by an employer to and for an employee are not to be excluded from

employee’s gross income. The fact that the taxpayer in our case and Dr. Deland were

close personal friends does not change the result. It was still a payment by an employer to

an employee. Whether they were close friends or casual friends makes no difference in

the tax consequences of such a payment.3 We note that Dr. Deland filed no gift tax



      In the Tax Court, the taxpayer called two witnesses, herself and her sister. The
       3

Commissioner called two witnesses, Marvin K. Sullivan, chief operating officer of the
company, and an accountant from an independent accounting firm, which in 1996
examined the company’s books and records. Dr. Maitland Deland, the alleged donor, did

                                            -9-
returns for the amounts here in issue.

       Taxpayer’s final argument is that the Tax Court erred in assessing penalties for her

failure to include as gross income the amounts received in 1993, 1994 and 1995 from her

employer in excess of her salary. Taxpayer claims that she relied on the W-2s issued by

her employer therefore she was not negligent in failing to report this income. This issue,

though set forth in taxpayer’s opening brief, (no reply brief was filed) was not addressed

by either counsel at oral argument. The Commissioner, in his answer brief in this Court,

contends that the record justified the penalties imposed.

       26 U.S.C. § 6662 provides as follows:

              § 6662. Imposition of accuracy-related penalty.

                     (a) Imposition of penalty.–If this section applies
                     to any portion of an underpayment of tax
                     required to be shown on a return, there shall be
                     added to the tax an amount equal to 20 percent
                     of the portion of the underpayment to which this
                     section applies.
                     (b) Portion of underpayment to which section
                     applies.–This section shall apply to the portion
                     of any underpayment which is attributable to 1



not testify. At trial it was disclosed that Sullivan, himself, had received W-2s from the
corporation that did not disclose his bonuses, which were $75,000, $100,000 and
$125,000 for the years 1993, 1994 and 1995. Sullivan later pleaded guilty to filing a false
return for 1995, and, inter alia, made restitution of the omitted amounts for all three
years. In her own testimony, taxpayer made no statement that the amounts here in
question were “gifts” from Dr. Deland, and there is no other evidence in the record that
these payments were made “exclusively for personal reasons . . . and entirely unrelated to
the employment relationship and reflect[ing] no anticipation of business benefit.” T.C.
Memo. 2003-97 at 8. Under any burden of proof, the payments were not gifts.

                                           - 10 -
                     or more of the following:
                           (1) Negligence or disregard of
                           rules or regulations.

       In assessing the penalties the Commissioner imposed, the Tax Court concluded

that taxpayer was “negligent” in the sense that the taxpayer failed “to do what [a]

reasonable and ordinarily prudent person would do under the circumstances,” amounting

to a “disregard of rules and regulations,” citing Korshin v. Commissioner, 91 F.3d 670,

672 (4th Cir. 1996.) See also Anderson v. C.I.R., 62 F.3d 1266, 1271 (1995). In so doing,

the Tax Court opined that “‘negligence’ includes the failure to make a reasonable attempt

to comply with the provisions of the Internal Revenue Code.” Under the facts and

circumstances of the case at hand, we conclude that the Tax Court did not err in its

imposition of penalties under 26 U.S.C. § 6662. We agree with counsel that the

taxpayer may avoid a penalty if “she had a reasonable cause for the understatement and

acted in good faith.” However, the Tax Court found that the taxpayer had not so acted,

and the record, viewed in its entirety, supports its determination.

       Taxpayer again argues, in her brief, that §7491 applies and that the Tax Court

applied the wrong burden of proof. In this regard, 26 U.S.C. §7491(c) provides as

follows:

              (c) Notwithstanding any other provision of this title, the
              Secretary shall have the burden of production in any court
              proceeding with respect to the liability of any individual for
              any penalty, addition to tax, or additional amount imposed by
              this title.


                                            - 11 -
       Commissioner again argues that the effective date of §7491(c) precludes its

application here, and that in any event, the issue was not raised in the Tax Court. Be that

as it may, we agree that the Commissioner presented sufficient evidence of taxpayer’s

negligence to warrant the imposition of the penalty under either burden of proof.

       Judgment affirmed.

                                                    ENTERED FOR THE COURT

                                                    Robert H. McWilliams
                                                    Senior Circuit Judge




                                           - 12 -
