                        T.C. Memo. 2014-126



                  UNITED STATES TAX COURT



        CHRIS ALLEN AMBROSIUS, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 22029-12.                          Filed June 23, 2014.



       R included in P's gross income a portion of P's salary received
from his employment as a Junior Reserve Officers' Training Corps
instructor that P claims represents nontaxable amounts received as
military allowances.

      1. Held: P did not receive any nontaxable "allowances" from
the Federal Government because he was employed by the Baltimore
City Public School System and was not on active duty.

      2. Held, further, P is liable for an accuracy-related penalty.



Chris Allen Ambrosius, pro se.

Nancy M. Gilmore, for respondent.
                                        -2-

[*2]                       MEMORANDUM OPINION


       HALPERN, Judge: Respondent determined a deficiency in petitioner's

2010 Federal income tax of $6,300 and an accuracy-related penalty of $1,269.

       Unless otherwise stated, all section references are to the Internal Revenue

Code in effect for 2010, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                                    Background

Introduction

       The parties have submitted this case for decision on stipulated facts without

a trial pursuant to Rule 122. On September 30, 2013, we ordered the parties to file

simultaneous opening briefs by November 26, 2013, and reply briefs by January

10, 2014. Petitioner failed to file his opening brief, and we allowed him an

additional month in which to file. He again failed to do so.

       Petitioner resided in Pennsylvania when he filed the petition. Respondent's

principal adjustment giving rise to his determination of a deficiency in petitioner's

tax results from his inclusion in petitioner's gross income of $32,742 petitioner

received from his employment as a Junior Reserve Officers' Training Corps

(JROTC) instructor. Respondent made other minor adjustments to certain
                                         -3-

[*3] deductions and credits that petitioner claimed on his return. Because

petitioner does not challenge these adjustments in the petition, we deem him to

have conceded them and will not address them. Swain v. Commissioner, 118 T.C.

358, 362 (2002). Respondent concedes that petitioner is entitled to an additional

deduction of $3,437 on Schedule A, Itemized Deductions, for taxes paid to the

State of Pennsylvania in 2010.

Petitioner's employment

      In 2003 petitioner retired as a first sergeant from the U.S. Army (Army).

During 2010, petitioner was employed by the Baltimore City Public School

System (BCPSS) as a JROTC instructor. For that work, BCPSS paid him $69,735

in salary in 2010. Petitioner reported on his 2010 return salary payments of only

$36,993.

JROTC instructor pay

      Pursuant to Department of Defense directives concerning the pay of JROTC

instructors, petitioner was paid a salary as a JROTC instructor equal to the

difference between his retired pay and the amount he would have been paid if he

were still on active duty, including basic pay plus active duty allowances.

Petitioner argues in his petition that, although some portion of his salary is

includible in his 2010 gross income, the remainder represents nontaxable amounts
                                          -4-

[*4] received as military subsistence, uniform allowances, and commutation of

quarters.

                                      Discussion

I.    Introduction

      We are left with only two issues to decide, and, although we could declare

petitioner in default with respect to those issues for failure to file a brief, see Rule

123; Stringer v. Commissioner, 84 T.C. 693 (1985), aff'd without published

opinion, 789 F.2d 917 (4th Cir. 1986), we will nevertheless address those issues to

provide petitioner with guidance for later years.

II.   Exclusion for subsistence, uniform, and quarter "allowances"

      Petitioner does not dispute the receipt of the omitted income but rather its

characterization as taxable compensation. Section 61(a) defines gross income as

all income from whatever source derived. Generally, pay of persons active in the

armed forces falls within the scope of section 61(a) and is taxable. See sec. 1.61-

2(a)(1), Income Tax Regs. Moneys received as military subsistence, uniform

allowances, and amounts received as commutation of quarters, however, are

excluded from gross income. See sec. 1.61-2(b)(1), Income Tax Regs.

      To be entitled to the allowance for subsistence and housing one must be a

member of a uniformed service entitled to basic pay. See 37 U.S.C. secs. 402-403
                                         -5-

[*5] (2006). To qualify for basic pay one must be on active duty, or if not on

active duty, be participating in full-time training, training duty with pay, or other

full-time duty, as provided by law. See id. sec. 204(a). Title 37 U.S.C. secs.

415(a)(1) and (2) and 416(a) provide an allowance for uniforms under certain

conditions, but both require the officer to be on "active duty" to be eligible for the

allowance. Military retirees who are JROTC instructors "are members of the

Armed Forces not on active duty." Army Regulation (AR) 145-2, para. 4-3 (Feb.

24, 2000).

      The Army has set forth regulations specifying the manner in which retired

members hired as JROTC instructors will be paid by the employing secondary

school. See id. para. 4-19. In particular, the pay of retired military personnel

hired as JROTC instructors is calculated "in the amount that, when added to their

retired pay will equal the amount of their active duty pay and allowances". Id.

para. 4-19(a). AR 145-2, para. 4-20 states: "Although an instructor may receive

an amount 'equal' to the military pay and allowances he or she would receive if on

active duty, the payments he or she receives are not, in fact, military pay and

allowances paid by the Army."

      We assume that petitioner would argue that the parity in the compensation

of retired and active duty members entitles him to the same exclusion afforded to
                                        -6-

[*6] active duty military members. However, the issue petitioner raises has

already been addressed by this Court. See Lyle v. Commissioner, 76 T.C. 668

(1981), aff'd without published opinion, 673 F.2d 1326 (5th Cir. 1982).

      In Lyle v. Commissioner, 76 T.C. at 674-675, we explained that retired

service members serving as JROTC instructors do not receive nontaxable

"allowances". As discussed above, members of the military entitled to receive

"basic pay" are permitted an allowance for military subsistence and amounts

received as commutation of quarters. See 37 U.S.C. secs. 402-403. Petitioner

does not qualify for the allowance because he does not receive "basic pay". He

did not receive "basic pay" because he was not on "active duty" in tax year 2010.

See id. sec. 204(a). Petitioner was not on "active duty" because, as a retired

military JROTC instructor, he is considered a member of the armed forces who is

"not on active duty." AR 145-2, para. 4-3; see also 10 U.S.C. sec. 2031(d)(2)

(2006).

      We further noted in Lyle v. Commissioner, 76 T.C. at 674:

             Although the Federal Government reimburses the school
      districts for one-half the "additional amount" paid to the retired
      officers, the responsibility for disbursing these funds and determining
      the ultimate amount of the retired officers' compensation rests with
      the employing school. Since the school, and not the Federal
      Government, is the employer, it is difficult to see how any
      compensation petitioner received from the school could be considered
                                       -7-

       [*7] a subsistence or quarters allowance received from the Federal
       Government. * * *

Here too, while petitioner served as a JROTC instructor, his sole employment

relationship was with the BCPSS. Therefore, although petitioner's pay as a

JROTC instructor was computed on the basis of his hypothetical basic pay and

allowances, he did not receive any nontaxable quarters, uniform, or subsistence

"allowances" from the Federal Government.

III.   Penalty

       Section 6662(a) provides for an accuracy-related penalty equal to 20% of

any underpayment of tax required to be shown on a return. That penalty is added

to the portion of any underpayment which is attributable to, among other things, a

substantial understatement of income tax. Sec. 6662(b)(2). The term

"understatement" means the excess of the amount of the tax required to be shown

on the return for the taxable year, over the amount of the tax imposed which is

shown on the return, reduced by any rebate. Sec. 6662(d)(2)(A). There is a

substantial understatement of income tax for any taxable year if the amount of the

understatement for the taxable year exceeds the greater of 10% of the tax required

to be shown on the return for the taxable year or $5,000. Sec. 6662(d)(1)(A).
                                          -8-

[*8] Petitioner did not specifically challenge respondent's application of the

section 6662(a) penalty. By challenging the deficiency that gives rise to the

penalty, however, he impliedly challenges the penalty itself. Respondent bears the

burden of production; i.e., he must come forward with evidence that imposition of

the penalty is appropriate. See sec. 7491(c); see also Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001). Petitioner substantially understated his income tax

for the 2010 taxable year. Respondent provided the amount and source of the

unreported gross income determined in the 2010 notice of deficiency and

respondent's brief. Even given the $3,437 Schedule A deduction respondent

concedes that petitioner is entitled to, it appears to us that petitioner's

understatement of income tax for 2010 exceeds the $5,000 threshold, which is

greater than 10% of the tax required to be shown on the return. Any disagreement

can be settled in the Rule 155 computation.1 Accordingly, we conclude that

respondent has produced sufficient evidence to show that the section 6662(a)

penalty is appropriate unless petitioner proves that there was reasonable cause for

the underpayment and that he acted in good faith. See sec. 6664(c).


      1
       If the Rule 155 computation determines that there is no substantial
understatement under sec. 6662(d)(1)(A), petitioner will not be liable for the
accuracy-related penalty. In this connection we note, because the penalty was not
sought on the basis of negligence, we need not address that issue.
                                        -9-

[*9] Petitioner bears the burden of proving that he is not liable for the accuracy-

related penalty because he acted with reasonable cause and in good faith. See

Higbee v. Commissioner, 116 T.C. at 446-448. That determination is based on all

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

presented no evidence indicating reasonable cause for the underreported income or

that he acted in good faith. Moreover, he did not challenge the penalty in his

petition. Consequently, we find that petitioner failed to carry his burden of

proving he acted with reasonable cause and in good faith with respect to his failure

to report all income earned. Therefore, he is liable for the accuracy-related penalty

under section 6662(a).


                                                    Decision will be entered under

                                              Rule 155.
