                     T.C. Summary Opinion 2010-1



                       UNITED STATES TAX COURT



             HOWARD AND ANNE SLATER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15852-07S.             Filed January 11, 2010.



     Howard and Anne Slater, pro sese.

     John R. Bampfield and William W. Kiessling, for respondent.



     GOEKE, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
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this opinion shall not be treated as precedent for any other

case.

     Respondent determined a $32,834 deficiency in petitioners’

Federal income tax and a $6,567 section 6662(a) penalty for the

year 2005.    The issues for decision are:

     (1)    Whether an Internal Revenue Service (IRS) closing

notice issued 1 month after the issuance of a notice of

deficiency closed petitioners’ tax year.     We hold it did not;

     (2)    whether Howard Slater (petitioner) participated in a

nonqualified deferred compensation plan under section 409A.     We

hold he did not; and

     (3)    whether petitioners are liable for an accuracy-related

penalty under section 6662.    We hold they are not.

                              Background

     Petitioners resided in Florida at the time the petition was

filed.     Petitioner received a master’s degree in taxation and was

the sole owner and representative of Slater Financial Corp.

(Slater Financial), registered as a broker-dealer with the

Securities and Exchange Commission under section 15 of the

Securities Act of 1934, ch. 404, 48 Stat. 881 (current version at

15 U.S.C. secs. 78a-78oo (2006 & Supp. 2008)).

     Petitioner held four annuity accounts with Jackson National

Life Insurance Co.    During late April and early May of 2005 Tim

Gillis (Mr. Gillis) of GE Life & Annuity Assurance Co. (Genworth)
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approached Slater Financial to solicit new business.    Petitioner

had no business to transfer to Genworth other than his personal

annuity accounts.   Petitioner’s agreement to Genworth’s proposal

to transfer the annuity accounts entitled him to a commission

equal to a percentage of the value of the accounts.    Instead,

petitioner asked Mr. Gillis to promise that he could receive his

broker-dealer commission as interest prepaid into his annuity

accounts, thus allowing petitioner to defer paying tax on the

amount at issue.    Mr. Gillis agreed, and the parties signed

contracts outlining the details of their agreements.    Among the

terms addressed in these agreements is a schedule of surrender

charges to which petitioner would be subject if he withdrew

amounts from any of his Genworth accounts.    Petitioner executed

the transfers, and an amount equal to petitioner’s annuity

contracts plus commissions was paid into petitioner’s annuity

accounts at Genworth.   Following these transactions, Genworth

issued petitioner a Form 1099-MISC, Miscellaneous Income,

reporting $86,868 in nonemployee compensation.   Petitioner did

not receive the Form 1099-MISC because it was mailed to his prior

address.   On July 2, 2007, respondent mailed a notice of

deficiency to petitioners for 2005 in which respondent denied

petitioner nonqualified deferred compensation treatment.    On July

30, 2007, respondent’s automated underreporter (AUR) division in

Philadelphia issued a closing notice for petitioners’ case.
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      On December 4, 2007, petitioners filed a motion for entry of

decision.   The motion was denied by order dated January 2, 2008.

On January 14, 2008, petitioners filed a motion for

reconsideration of the order dated January 2, 2008.     This motion

was denied on January 18, 2008.   Petitioners filed a second

motion for entry of decision on November 17, 2008, and an amended

motion for entry of decision on February 17, 2009.     The amended

motion for entry of decision was denied by order on February 23,

2009, following a hearing.   A trial was held February 23, 2009,

in Tampa, Florida.

      Following the trial petitioners again filed a motion for

entry of decision on March 31, 2009.     For the reasons stated

herein, this motion will be denied.

                              Discussion

I.   Closing Notice

      Petitioners believe the closing notice respondent issued

after the issuance of the notice of deficiency closes their tax

year and precludes any further action.     They cite no authority

for this proposition.    Section 7121 provides the exclusive means

by which the Secretary may enter into a closing agreement as to a

determination of the taxpayer’s final tax liability.     Closing

agreements are final and, following the Secretary’s approval, bar

reopening of the case.   Sec. 7121(b).     A closing notice is to be

distinguished from a closing agreement under section 7121.
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Whereas closing agreements are final, conclusive, and binding on

the parties and generally may not be disregarded, closing notices

do not have the same force and effect.       Urbano v. Commissioner,

122 T.C. 384, 393-394 (2004).    Nor did the closing notice operate

to rescind the notice of deficiency under section 6212(d).      See

Wong v. Commissioner, T.C. Memo. 2000-88, affd. 13 Fed. Appx. 638

(9th Cir. 2001); Rev. Proc. 98-54, 1998-2 C.B. 529.

      Petitioners do not by name raise a defense of estoppel.

Nevertheless, considering the nature of their claim, we think

they raise that defense.   One of the elements of equitable

estoppel is reliance on the action of the Internal Revenue

Service (IRS) to the taxpayer’s detriment.      Because the Notice

CP-2005 was mailed to petitioners on July 30, 2007, after

petitioners had already filed their petition on July 13, 2007,

there was no detrimental reliance.       Petitioners’ reliance on the

closing notice to preclude any further collection action fails as

an estoppel defense.   See McCoy v. Commissioner, T.C. Memo. 2008-

91.   Accordingly, respondent’s inquiry into the 2005 tax year is

not closed.

II.   Nonqualified Deferred Compensation Treatment

      Section 61(a) provides that gross income includes “all

income from whatever source derived”.      Section 61(a) broadly

applies to any accession to wealth, and statutory exclusions from

income are narrowly construed.    See Commissioner v. Glenshaw
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Glass Co., 348 U.S. 426, 431 (1955).    Section 61(a)(1) lists

“Compensation for services, including fees, commissions” as items

includable in gross income.    Section 451(a) provides that any

item of income shall be included in gross income in the year

received.

     Taxpayers may elect to defer recognition of certain items of

income pursuant to nonqualified deferred compensation plans.      See

sec. 409A.    In order for compensation to be deferred under

section 409A, a nonqualified deferred compensation plan must meet

the requirements of section 409A(a)(2), (3), and (4) concerning

distributions, acceleration of benefits, and elections.

     An independent contractor may elect to defer commission

compensation for services provided only if the contractor is

unrelated to the recipient of the services.    An independent

contractor may not defer commission compensation under section

409A if the recipient of the services is a related party.      See

Notice 2005-1, 2005-1 C.B. 274.    There is an exception to this

rule if the contractor provides the service from which the

commission arises to both related and unrelated parties and the

same service is performed in the contractor’s ordinary course of

business.    See Notice 2005-1, 2005-1 C.B. 274.

     If the plan fails to meet the requirements of section

409A(a)(2), (3), and (4), all compensation deferred under the

plan shall be includable in gross income to the extent not
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subject to a substantial risk of forfeiture.    Sec. 409A(a)(1)(A).

Notice 2005-1, 2005-1 C.B. 274, provides that compensation is

subject to substantial risk of forfeiture when “entitlement to

the amount is conditioned on the performance of substantial

future services by any person or the occurrence of a condition

related to a purpose of the compensation, and the possibility of

forfeiture is substantial.”

     Petitioner argues that he meets the requirements for

exclusion under section 409A.    Respondent contends that the

commissions petitioner received from Genworth are not conditioned

upon the performance of any future service and thus not subject

to a substantial risk of forfeiture under section 409A.

Petitioner fails the election requirements of section

409A(a)(4)(B).   Petitioner’s commission arose from services he

performed as an independent contractor for the benefit of related

parties:   him and his wife.   Petitioner does not satisfy the

exception in Notice 2005-1, 2005-1 C.B. 274, because he has not

provided the same service for unrelated parties in his ordinary

course of business.

     Petitioner has failed to establish that his compensation is

substantially at risk.   Petitioner relies on the surrender

charge, which is unrelated to the commission itself and is

instead related to the nature of petitioner’s annuity.
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       We do not find that the surrender charge is within the

statutory meaning of substantial risk of forfeiture.    In

addition, the record does not establish that petitioner’s

commission was conditioned upon some future performance or

occurrence.    Petitioner’s self-directed decision to put the

commission into an annuity subject to a surrender charge is

incompatible with the risk required under section

409A(a)(1)(A)(i).    Petitioner has failed to produce evidence of a

substantial risk of forfeiture and thus cannot defer the

commission income under section 409A.

       Because petitioner has failed to meet the requirements of

section 409A(a)(4) and because the commission is not subject to a

substantial risk of forfeiture, petitioner’s commissions shall be

included in petitioners’ gross income under sections 61(a) and

409A(a)(1)(A).

III.    Accuracy-Related Penalty

       Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662.    Section 6662

imposes an accuracy-related penalty equal to 20 percent of any

portion of an underpayment of tax which is attributable to, among

other things, a substantial understatement of income tax.      See

sec. 6662(b)(2).    Section 6662(d)(1)(A) provides that a

substantial understatement of income tax exists if the
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understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return; or (2) $5,000.

     Section 6664(c)(1) provides that the accuracy-related

penalty shall not be imposed if it is shown that the taxpayer’s

underpayment was attributable to reasonable cause and that his

action was in good faith.   The determination of whether a

taxpayer acted with reasonable cause and in good faith is made on

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

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioner underreported his tax liability by $32,834, an

understatement that exceeds the amount provided under section

6662(d)(1)(A).   Petitioner, however, had reasonable cause for

taking the position with respect to the commission compensation,

despite our finding that he was ultimately liable for this

amount.   Petitioner reasonably relied on a Genworth

representative who negotiated the payment of his commission

compensation and authorized the transactions so they were paid

into his annuity accounts and provide him with the deferred

treatment he sought.   Genworth ultimately issued petitioner a

Form 1099-MISC, but the Form 1099-MISC was erroneously mailed to

his old address.   Petitioner could have reasonably believed that

the forms he exchanged with Genworth documenting his election for

deferred treatment guaranteed such treatment by the IRS.     After

considering petitioner’s knowledge of the facts and understanding
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of the law, we find petitioner’s error was made with reasonable

cause and in good faith.    Accordingly, we hold that petitioners

are not liable for the penalty pursuant to section 6662.

Conclusion

     For the reasons stated herein, we find respondent properly

issued a notice of deficiency and that petitioners’ case was not

closed upon respondent’s issuance of a closing notice.   In

addition, we shall sustain respondent’s deficiency determination

and find that petitioners are not liable for a section 6662

accuracy-related penalty.


                                          Decision will be entered

                                     for respondent as to the

                                     deficiency and for petitioners

                                     as to the section 6662

                                     accuracy-related penalty.
