                         T.C. Summary Opinion 2012-79



                        UNITED STATES TAX COURT



KENNETH MICHAEL FRANCIS AND SEDEF TARLAN FRANCIS, Petitioners
      v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 19986-10S.                          Filed August 8, 2012.



      Kenneth Michael Francis, pro se.

      Mistala G. Merchant and Maggie Stehn (student), for respondent.



                             SUMMARY OPINION


      ARMEN, 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.

      Respondent determined a deficiency in petitioners’ 2008 joint Federal income

tax of $6,491 and an accuracy-related penalty under section 6662(a) of $1,287.2

After a concession by petitioners,3 the issues for decision are: (1) Whether

petitioners must include an award of backpay in their gross income for 2008; and (2)

whether they are liable for the accuracy-related penalty under section 6662(a).

                                      Background

      Some of the facts have been stipulated, and they are so found. We

incorporate by reference the parties’ stipulation of facts and accompanying exhibits.

Petitioners resided in the State of California when the petition was filed.




      1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
          All dollar amounts are rounded to the nearest dollar.
      3
        Petitioners concede that they received but failed to report a taxable
retirement distribution of $290 on their 2008 joint Federal income tax return.
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      In 2005 Kenneth Michael Francis (petitioner) was granted an award of

backpay by the U.S. Air Force Board for the Correction of Military Records

(BCMR). The BCMR held, inter alia, that petitioner was wrongfully denied a

promotion to the rank of lieutenant colonel in the U.S. Air Force (promotion denial).

      In December 2008 petitioners received a payment of $24,566 (promotion

backpay) from the Defense Finance and Accounting Service (DFAS).4 The

promotion backpay represented the difference between the military pay and

allowances petitioner received as an Air Force major and the military pay and

allowances he would have received as an Air Force lieutenant colonel while he

served on active duty from October 1998 to April 2002.

      In February 2009 petitioner self-prepared and filed petitioners’ 2008 joint

Federal income tax return (joint return). Petitioners, however, did not report the

promotion backpay on their joint return.

      DFAS mailed petitioner a letter dated September 6, 2008 (DFAS letter), that

states: “The following are enclosed for your use and information * * * Treasury

Department Form W-2, Wage and Tax Statement, indicating taxable income that




      4
      The record is not clear as to why the payment was not made until
December 2008.
                                         -4-

must be reported on your next tax return”. Attached to the DFAS letter was a Form

W-2, Wage and Tax Statement, for 2008 reporting the promotion backpay as wages.

At trial petitioner testified that petitioners did not receive the DFAS letter and Form

W-2 until approximately April 2009 because DFAS had mailed the letter to his

mother’s address in Illinois (Illinois address). Petitioners were aware, however, that

DFAS typically sent tax correspondence to the Illinois address and that the Illinois

address was petitioner’s “permanent home of record” on file with DFAS.

      In or around April 2009 petitioner began treatment for melanoma and

remained in treatment for approximately a year thereafter. Petitioners never filed an

amended joint return for 2008 including the promotion backpay in their gross

income or otherwise reported the promotion backpay on any other tax return.

                                      Discussion

I.    Burden of Proof

      In general, the Commissioner’s determinations set forth in a notice of

deficiency are presumed to be correct, and the taxpayer bears the burden of

proving that those determinations are in error. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain circumstances.
                                         -5-

Petitioners have neither alleged that section 7491(a) applies, nor have they

established their compliance with its requirements. Accordingly, petitioners bear

the burden of proof. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115; cf. sec.

6201(d).5

II.   Unreported Income

      Section 61(a)(1) provides the general rule that gross income includes income

from whatever source derived, including compensation for services. Section 451(a)

generally provides that taxpayers, such as petitioners, who use the cash receipts and

disbursements method of accounting, must include any item of gross income in their

gross income for the taxable year in which the item is actually or constructively

received. See sec. 1.451-1(a), Income Tax Regs.

      Petitioners generally argue that the promotion backpay received in 2008

should be included in their gross income for the years 1998 through 2002 because

the promotion backpay is attributable to the services petitioner provided in those

years. Petitioners further contend that the promotion backpay should have been

allocated to the years 1998 through 2002 because their taxable income was subject

to a lower tax bracket during those years when compared to 2008. In this regard,

      5
         We note that petitioners do not allege that sec. 6201(d) applies and do not
dispute that they received all $24,566 of the promotion backpay in December 2008
reported on the 2008 Form W-2, Wage and Tax Statement, issued by DFAS.
                                         -6-

petitioners believe that by reporting the promotion backpay as taxable wages for

2008 on Form W-2, DFAS has placed an artificial tax burden on them that is

contrary to the purpose of the BCMR decision, i.e., to place petitioner in the same

position that he would be in if the promotion denial had never occurred.6

      The parties do not dispute that DFAS paid, and petitioners actually received,

the promotion backpay in 2008. Petitioners have failed to show, and the record

does not suggest, that the promotion backpay was constructively received by

petitioners in any prior year. Therefore, the promotion backpay is properly

includible in petitioners’ gross income for 2008. See sec. 451(a); Prewitt v.

Commissioner, T.C. Memo. 1995-24; sec. 1.451-1(a), Income Tax Regs.

      Petitioners’ argument that they should be entitled to retroactively allocate the

promotion backpay to their gross income for the years 1998 through 2002 because

their tax bracket for that period was lower than their tax bracket for 2008 has been

rejected by this Court in the past. See Prewitt v. Commissioner, T.C. Memo. 1995-

24. We acknowledge that the purpose of the BCMR decision was to place

      6
          Petitioners also argue that DFAS should have reduced the promotion
backpay by the amount of civilian pay petitioner earned during the period from April
1, 2002, through April 5, 2005 (civilian pay offset). The civilian pay offset does not
apply to petitioner’s promotion backpay, however, because the promotion backpay
relates to a period when petitioner was not engaged in civilian employment. See
Groves v. United States, 47 F.3d 1140, 1147-1148 (Fed. Cir. 1995); see also
Montiel v. United States, 40 Fed. Cl. 67, 69-74 (1998).
                                        -7-

petitioner in the same situation he would have been in if the promotion denial had

never occurred. Although not clear from the record, it may very well be that

petitioners would have paid less tax with respect to the promotion backpay if the

promotion denial had never occurred. Under the circumstances we can appreciate

petitioners’ dismay. Nevertheless, we are constrained to apply the law as written by

Congress to the facts as they occurred and not as they might have occurred. See

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

(1974). We cannot reallocate the promotion backpay petitioner received in 2008 to

prior years simply because doing so might provide favorable tax treatment for

petitioners. Therefore, we sustain respondent’s deficiency determination.

III.   Accuracy-Related Penalty

       Respondent determined that petitioners are liable for the accuracy-related

penalty under section 6662(a) for a substantial understatement of income tax for the

taxable year 2008.

       Section 6662(a) and (b)(2) imposes a penalty equal to 20% of the amount of

any underpayment that is due to a substantial understatement of income tax. An

individual substantially understates his or her income tax when the reported tax is
                                        -8-

understated by the greater of 10% of the tax required to be shown on the return or

$5,000. Sec. 6662(d)(1)(A).

      With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the Commissioner

to come forward with sufficient evidence indicating that it is appropriate to impose

the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the

Commissioner meets his burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect. See

Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

      Respondent has satisfied his burden of production because the record shows

that petitioners understated their income tax for 2008 by $6,491, which constitutes a

substantial understatement within the meaning of section 6662(d)(1)(A). See

Higbee v. Commissioner, 116 T.C. at 446.

      The accuracy-related penalty does not apply to any portion of an

underpayment, however, if the taxpayer proves that the taxpayer had reasonable

cause for that portion of the underpayment and that the taxpayer acted in good

faith with respect to such portion. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax

Regs. Petitioners bear the burden of proving that the accuracy-related penalty
                                         -9-

should not be imposed. See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at

446.

       The decision as to whether the taxpayer acted with reasonable cause and in

good faith is made on a case-by-case basis, taking into account the pertinent facts

and circumstances. See Neely v. Commissioner, 85 T.C. 934, 947-950 (1985).

Most important in this decision “is the extent of the taxpayer’s effort to assess the

taxpayer’s proper tax liability.” Sec. 1.6664-4(b)(1), Income Tax Regs. A taxpayer

must take reasonable steps to determine and apply the law. Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992); Campbell v. Commissioner, T.C. Memo.

2001-118.

       Petitioners contend that they should not be liable for the accuracy-related

penalty with respect to the portion of the underpayment attributable to the promotion

backpay.7 Although petitioners admit that they received the promotion backpay in

December 2008, they did not report the promotion backpay on their joint return

because they believed that the payment was nontaxable. Petitioners, however,

presented no evidence that they consulted a tax professional or took any other




       7
         As for the portion of the underpayment attributable to the unreported
retirement distribution, petitioners make no argument regarding the penalty and are
therefore deemed to have conceded that matter.
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reasonable steps to ascertain the proper tax treatment of the promotion backpay they

received.

      Moreover, although petitioners allege that they did not receive the DFAS

letter or the Form W-2 until April 2009, they still did not file an amended joint

return or contact a tax professional thereafter.8 Petitioners admitted at trial that they

should have filed an amended return once they received the DFAS letter and Form

W-2. Petitioners, however, point to petitioner’s yearlong treatment for melanoma

beginning in April 2009 as reasonable cause for not filing an amended joint return.

Petitioners provided no explanation as to why they did not file an amended joint

return once petitioner’s treatment for melanoma ended or why petitioner Sedef

Tarlan Francis could not have prepared an amended return for petitioner to sign.

      Although the record might support a finding of good faith on petitioners’

part, the standard we are obliged to apply also requires the existence of reasonable

cause. See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. Thus, petitioners

might have had a good faith belief that the promotion backpay was nontaxable.




      8
         Petitioner was aware that DFAS frequently sent tax correspondence to his
mother’s address in Illinois. Petitioner, however, presented no evidence that he
inquired whether his mother received the DFAS letter or Form W-2 before he filed
petitioners’ joint return in February 2009.
                                          - 11 -

However, they have failed to prove that they acted with reasonable cause under the

relevant facts and circumstances. Therefore, we sustain respondent’s determination

with respect to the accuracy-related penalty.

                                      Conclusion

      We have considered all of the arguments advanced by petitioners, and, to the

extent not expressly addressed, we conclude that those arguments do not support a

result contrary to our decision herein.

      To give effect to our disposition of the disputed issues as well as petitioners’

concession,


                                                         Decision will be entered

                                                   for respondent.
