                          T.C. Summary Opinion 2017-23



                         UNITED STATES TAX COURT



WILLIAM A. ALEXANDER, JR. AND DIANE C. ALEXANDER, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23493-15S.                         Filed April 10, 2017.



      William A. Alexander, Jr., and Diane C. Alexander, pro sese.

      Michael T. Garrett and Matthew A. Houtsma, for respondent.



                              SUMMARY OPINION


      JACOBS, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed. 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.
                                         -2-

      Respondent determined a deficiency in petitioners’ Federal income tax of

$11,831 and an accuracy-related penalty under section 6662(a) of $2,366 for 2012.

The deficiency is the result of respondent’s determinating that petitioners received

$18,000 in unreported nonemployee compensation and $40,956 in unreported

Social Security disability benefits and making corresponding computational

adjustments. At trial respondent conceded that petitioners received $15,800,

rather than $18,000, in unreported nonemployee compensation.

      Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) for the year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                                    Background

      The parties filed a stipulation of facts and accompanying exhibits that are

incorporated by this reference. When they timely filed their petition, petitioners,

husband and wife, resided in Colorado.

      Mr. Alexander is a former attorney who practiced law in the fields of

workers’ compensation and Social Security disability matters for approximately 35

years. He considers himself an expert in these fields. In 2011 Mr. Alexander

ceased practicing law because (1) he was suffering from serious medical problems
                                       -3-

and (2) the State of Colorado had suspended him from the practice of law. On

May 8, 2012, Mr. Alexander was permanently disbarred from the practice of law.

      Mrs. Alexander is a registered nurse. In 2012 she worked at the cardiac unit

of a local hospital and taught nursing students. She used her nursing background

to treat Mr. Alexander’s medical problems.

      By 2012 Mr. Alexander’s health had improved to the point he was able to

work for Steven Mullens, another workers’ compensation attorney. Messrs.

Alexander and Mullens were well known to each other in the workers’

compensation community. Indeed, after Mr. Alexander ceased practicing law,

most of his former clients were referred to Mr. Mullens’ firm.

      Mr. Mullens was involved in a Federal class action lawsuit against Wal-

Mart and Concentra Health on behalf of all injured Colorado residents that had

worked for Wal-Mart. Mr. Mullens asked Mr. Alexander to assist him in the

litigation even though Mr. Mullens was aware that Mr. Alexander had been

disbarred. Mr. Alexander agreed to help Mr. Mullens and asked to be paid $100

per week for gas and meals expenses while working on the case. Mr. Mullens

agreed to Mr. Alexander’s request.

      Mr. Alexander reviewed materials and documents in 30 boxes of Wal-

Mart’s claims adjusters’ files. Each box was three feet long and one foot wide.
                                        -4-

Mr. Alexander prepared written summaries of each file in an attempt to document

Mr. Mullens’ and his beliefs that insurance adjusters working for Wal-Mart had

often dictated the medical care to be provided by Concentra doctors to the injured

workers. Mr. Alexander worked at Mr. Mullens’ office approximately four hours

a day, four or five days per week, for eight weeks. Mr. Alexander estimated he

worked 160 hours on the Wal-Mart litigation. Mr. Mullens requested Mr.

Alexander to submit a bill for the hours he worked on the case. On the eve of trial

the lawsuit was settled.

      After completing his Wal-Mart work, Mr. Alexander did “private work” for

Mr. Mullens. Mr. Alexander’s work consisted of performing legal research,

drafting briefs and responses, and preparing memoranda for Mr. Mullens during

the latter part of 2012. It was agreed that Mr. Mullens would pay Mr. Alexander

according to the value of the case and the percentage of Mr. Alexander’s

contribution. Mr. Alexander worked between 50 and 100 hours on Mr. Mullens’

“private work” in 2012.

      In addition to paying Mr. Alexander $800 in reimbursements ($100 a week

for eight weeks), Mr. Mullens made two payments to Mr. Alexander: (1) a $5,000

check, on an unspecified date in 2012, which Mr. Alexander at one time

characterized as a loan that was ultimately forgiven and at another time as an
                                       -5-

advance for his “private work” and (2) a $10,000 check dated April 18, 2012. The

$10,000 check was endorsed by both petitioners with the notation “Pay to Diane

C. Alexander” and deposited into petitioners’ joint bank account.

      Mr. Mullens’ office issued a Form 1099-MISC, Miscellaneous Income, to

Mr. Alexander for nonemployee compensation totaling $18,000. Respondent

concedes that Mr. Alexander received $15,800 rather than $18,000 from Mr.

Mullens during 2012. Petitioners claim that they did not receive a Form 1099-

MISC from Mr. Mullens.

      Mr. Alexander believed that Mr. Mullens had paid him less than he was

worth as an experienced workers’ compensation attorney, stating: “If he had told

me that he was paying me this amount of money [i.e., the $15,800] I would have

walked out of the office.” Mr. Alexander asserts that the payments he received

from Mr. Mullens were merely gifts.

      When Mr. Alexander learned that Mr. Mullens had received more than $1

million in legal fees for the Wal-Mart litigation, Mr. Alexander confronted him,

demanding more money. Mr. Alexander testified that in a “hysterical” telephone

conversation, Mr. Mullens told Mr. Alexander: “‘I don’t owe you a goddamn

thing.’ And, you know, ‘I chose to give you $15,000 and that’s all I’m going to

give you.’ And those were his exact words, ‘give you.’” Mr. Alexander followed
                                         -6-

up the phone call with a letter to Mr. Mullens stating that Mr. Mullens owed him

“a reasonable wage.” And when Mr. Mullens’ office mailed the Form 1099-MISC

to an out-of-date address, Mr. Alexander believed that the mistake was made

deliberately “just to be difficult, probably in the hopes I wouldn’t get it, because

he knew I would be in his office in a minute if I got a 1099 saying that he had paid

me that money.” At this point, we note that Mr. Mullens died before trial and

therefore was not available to testify as to his intent (gift or compensation) in

making the payments to Mr. Alexander.

        Although he was working for Mr. Mullens, Mr. Alexander received $40,956

in Social Security disability benefits in 2012. The disability checks were

deposited into petitioners’ joint bank account. The Social Security Administration

issued a Form 1099-G, Certain Government Payments, documenting these

disability benefit payments, although petitioners do not remember receiving this

form.

        Mrs. Alexander handled the family’s finances. She opened the family’s

mail, balanced the family’s checking account, and paid the bills. She was well

aware of the family’s finances and knew that the checks from Social Security, as

well as the checks from Mr. Mullens, were deposited in the family’s checking

account.
                                        -7-

      Petitioners filed a joint 2012 Form 1040, U.S. Individual Income Tax

Return, prepared by Roy Kirmer, a certified public accountant and petitioners’

longtime tax return preparer. Mrs. Alexander took the lead in working with Mr.

Kirmer to prepare petitioners’ tax return, meeting with him and providing him

with documents and necessary records. Petitioners did not disclose either the

Social Security disability payments or Mr. Mullens’ payments to Mr. Kirmer; thus,

petitioners’ Form 1040 reported only Mrs. Alexander’s wages of $57,200. In a

conversation Mr. Kirmer had with petitioners in 2014, Mr. Kirmer first learned

that petitioners had received some kind of disability payments. Since Mr. Kirmer

had no specific information about the payments, he told petitioners that the

payments probably were not taxable. But when Mr. Kirmer later learned that the

payments were Social Security benefits, and therefore taxable, he told petitioners:

“[T]hey [the IRS] will pick that up in the matching program, and you’re going to

be taxed, and you just need to pay it. And we are not going to prepare an amended

return.” At trial Mr. Kirmer stated that if petitioners had informed him of the

Social Security disability payments, he “absolutely” would have reported the

amounts of the payments on the tax return.
                                         -8-

                                    Discussion

      In an unreported income case, such as the instant matter, a presumption of

correctness attaches to the Commissioner’s determination after he provides a

minimal evidentiary foundation. See Rule 142(a); United States v. McMullin, 948

F.2d 1188, 1192 (10th Cir. 1991). However, we do not decide this case by

reference to the placement of the burden of proof.1

I.    Mr. Mullens’ Payments to Mr. Alexander

      Section 61(a)(1) provides that compensation for services is included in

gross income for Federal income tax purposes. The parties agree that Mr.

Alexander was paid $15,800 in 2012 for performing work for Mr. Mullens.

Respondent determined that these payments were taxable nonemployee

compensation. Petitioners, in contrast, claim these payments were gifts and thus

nontaxable pursuant to section 102(a).

      Section 102 provides that gross income does not include amounts acquired

by gift. Whether a payment is a gift under section 102(a) or gross income under

section 61(a) is a factual question. See Banks v. Commissioner, T.C. Memo.


      1
       In certain circumstances the burden of proof with respect to factual matters
may shift to the Commissioner. Sec. 7491(a). Petitioners do not argue that sec.
7491(a) applies herein, nor do they show that they met its requirements for shifting
the burden of proof.
                                         -9-

1991-641. The Supreme Court has held that distinguishing a gift from taxable

income “does not lend itself to any more definitive statement that would produce a

talisman for the solution of concrete cases.” Commissioner v. Duberstein, 363

U.S. 278, 284-285 (1960). The Supreme Court concluded that the transferor’s

intent is the most critical consideration and there must be an objective inquiry into

the transferor’s intent. Id. at 285-286. Generally, the transfer must be made from

a “‘detached and disinterested generosity’ * * * ‘out of affection, respect,

admiration, charity, or like impulses.’” Id. at 285 (citations omitted). We must

make “an objective inquiry as to whether what is called a gift amounts to it in

reality. * * * It scarcely needs adding that the parties’ expectations or hopes as to

the tax treatment of their conduct in themselves have nothing to do with the

matter.” Id. at 286 (citations omitted). In applying these principles to the facts of

the case, we find that Mr. Alexander received taxable nonemployee compensation

from Mr. Mullens.

      Mr. Mullens died before trial; hence, we cannot know for certain his intent

in making the payments to Mr. Alexander. However, the objective facts

demonstrate that Mr. Alexander: (1) was paid after he performed work for Mr.

Mullens; (2) submitted a timesheet showing the number of hours he worked, so

that Mr. Mullens could submit the timesheets to the trial court “as a cost and get
                                       - 10 -

me paid.”; (3) expected to be paid for his work on Mr. Mullens’ “private work”

according to the value of the cases he worked on and his contribution towards

their success; (4) characterized the $5,000 payment first as a loan that was

forgiven, which would not be a gift, see sec. 61(a)(12) (discharge of indebtedness

constitutes gross income),2 and then as an advance paid in anticipation of work he

was to perform, which would also not be a gift; and (5) considered himself to be

underpaid and confronted Mr. Mullens both on the telephone and by letter

demanding a reasonable wage. The totality of these objective facts convinces us

that Mr. Mullens did not intend the payments he made to Mr. Alexander to be gifts

made from a detached and disinterested generosity.

      Petitioners assert that because the notice of deficiency was incorrect in that

respondent had determined that Mr. Alexander was paid $18,000, rather than

$15,800, the burden of proof shifted to respondent to prove petitioners’ correct

taxable income. Petitioners’ assertion is not sustainable. As we noted supra page

8, this case does not turn on the burden of proof. Respondent concedes that his

$18,000 determination is erroneous, and petitioners concede that Mr. Alexander


      2
       Sec. 108(a) excludes the discharge of indebtedness from gross income if
the debt was discharged under five specific circumstances. Petitioners have not
argued, or provided evidence to demonstrate, that they meet the requirements of
any of the exceptional circumstances.
                                        - 11 -

received $15,800 from Mr. Mullens. The question we must decide is the

characterization of the $15,800; is it a nontaxable gift or is it taxable income?

Respondent’s concession as to the amount Mr. Alexander received from Mr.

Mullens does not affect its characterization.

      Next, petitioners argue that the moneys that Mr. Alexander received could

not be compensation because the amount was insufficient to induce him to work

for Mr. Mullens. Mr. Alexander maintains that the motivation for rendering his

services was “for the duty that he felt that he owed to the community of injured

workers that have given him an acceptable lifestyle for more than 30 years.” Mr.

Alexander’s motives are not in question, but we are mindful that when he

performed his work for Mr. Mullens, he was a disbarred attorney and Mr. Mullens

knew this. Mr. Alexander was paid $15,000 for 210 to 260 hours3 of work, which

amounted to $58 to $71 per hour. We do not believe this to be an unreasonably

low rate of pay for a disbarred attorney. The $800 expense reimbursement that

Mr. Alexander received is also includible in his income. See Commissioner v.

Kowalski, 434 U.S. 77 (1977) (cash meal allowance is taxable income); Goldstein

v. Commissioner, 73 T.C. 164 (1979) (stipends are taxable income).


      3
       These hours are the sum of 160 hours working on the Wal-Mart case and
50 to 100 hours working on Mr. Mullens’ “private work”.
                                          - 12 -

      Mr. Alexander also asserts that if he were an injured worker in a workers’

compensation case, the judge would not consider him to be an employee eligible

to receive workers’ compensation benefits. Petitioners have not cited any specific

statute or case to support this bold assertion. Rather they refer to two unreported

cases with no citations. Nor do petitioners attempt to establish that the standard

for determining employment under Colorado’s workers’ compensation laws is

similar to the rules set forth in the Code.

      In sum, we find that the $15,800 that Mr. Mullens paid to Mr. Alexander is

includible in petitioners’ 2012 income.

II.   Mr. Alexander’s Social Security Disability Payments

      Section 86 requires the inclusion in gross income of up to 85% of Social

Security benefits, including disability benefits, received during the taxable year.

See sec. 86(a), (d);4 see also Reimels v. Commissioner, 123 T.C. 245, 247 (2004),

aff’d, 436 F.3d 344 (2d Cir. 2006); Watts v. Commissioner, T.C. Memo. 2009-

103. Petitioners concede that Mr. Alexander received $40,956 in Social Security

disability benefits, and they do not dispute respondent’s determination that,

because of petitioners’ other income, 85% of Mr. Alexander’s Social Security

      4
       Sec. 86(d)(1)(A) defines Social Security benefits to include amounts
received under tit. II of the Social Security Act, 42 U.S.C. secs. 401-434 (2000), as
amended, which include Social Security disability benefits. Id. sec. 423.
                                        - 13 -

benefits is taxable. See sec. 86(a)(2)(B). Thus, petitioners concede that $34,813

of Mr. Alexander’s Social Security disability benefits constitutes taxable income

and that they owe tax as respondent determined.

      Petitioners claim that if the Court were to find that the payments that Mr.

Alexander received constituted taxable income, which we have found, Mr.

Alexander would be obligated to repay the Social Security Administration the

amounts he received. Consequently, petitioners seek an equitable adjustment to

Mr. Alexander’s taxable Social Security disability payments. In this respect,

petitioners argue:

             This Court may state that it is not a Court of Equity. The
      undersigned takes offense at such a holding. This Court does equity
      on a routine basis. The Innocent Spouse Doctrine is regularly
      determined by This Court. That doctrine is no less equitable than the
      ruling requested herein.

             The amount paid to W. Alexander by the SSA [Social Security
      Administration] is not disputed. In fact, Petitioners admit that they
      owe taxes on that amount. The only reason that those taxes have not
      all ready been paid is that any amount paid by Mullens as taxable
      income should be deducted from those payments. Even though the
      government would like a double payment, it cannot be expected. If
      the payments received from Mullens were taxable, then W. Alexander
      should not have received that amount from SSDI.

Despite petitioners’ conviction, this Court is not a court of equity. See

Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Paxman v. Commissioner, 50 T.C.
                                         - 14 -

567, 576 (1968), aff’d, 414 F.2d 265 (10th Cir. 1969). Our decisions in innocent

spouse cases are governed by statute, not by equitable doctrines. See sec. 6015.

And we are mindful that the Code provides for Social Security benefits to be

adjusted for repayments during the tax year. Section 86(d)(2)(A) provides:

       For purposes of this section, the amount of social security benefits
       received during any taxable year shall be reduced by any repayment
       made by the taxpayer during the taxable year of a social security
       benefit previously received by the taxpayer (whether or not such
       benefit was received during the taxable year).

Section 86(d)(1) defines the term “Social Security benefit” as “any amount

received by the taxpayer by reason of entitlement to--(A) a monthly benefit under

title II of the Social Security Act, or (B) a tier 1 railroad retirement benefit.” Thus,

section 86(d)(2)(A) allows a taxpayer to reduce the amount of Social Security

benefits includible in income if the taxpayer repays the Social Security benefits

received during the same tax year. Petitioners, however, have not done so.

       We therefore find that 85% of Mr. Alexander’s Social Security disability

payments is includible in petitioners’ 2012 income as provided by section 86.

III.   Section 6662(a) Accuracy-Related Penalty

       Respondent determined that petitioners are liable for a section 6662(a)

accuracy-related penalty of $2,366 for 2012. Section 6662(a) imposes a 20%

accuracy-related penalty on any portion of an underpayment attributable to, inter
                                        - 15 -

alia, negligence or disregard of rules or regulations, subsec. (b)(1), or a substantial

understatement of income tax, subsec. (b)(2).

      Negligence as used in section 6662(b)(1) is defined as any failure to make a

reasonable attempt to comply with the Code and any failure to keep adequate

books and records or to substantiate items properly. Sec. 6662(c); sec 1.6662-

3(b)(1), Income Tax Regs. An understatement of income tax is substantial for

purposes of section 6662(b)(2) if it exceeds the greater of 10% of the tax required

to be shown on the return or $5,000. Sec. 6662(d)(1)(A).

      Section 7491(c) provides that the Commissioner bears the burden of

production with regard to penalties and must come forward with sufficient

evidence indicating that it is appropriate to impose the section 6662(a) accuracy-

related penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once

the Commissioner has met his burden of production, the taxpayers bear the burden

of proving that the penalty is inappropriate, by demonstrating for example, that

their position was supported by substantial authority under section

6662(d)(2)(B)(i) or that they had reasonable cause for the underpayment and acted

in good faith under section 6664. See Rule 142(a); Higbee v. Commissioner, 116

T.C. at 446-447. Reasonable cause and good faith are determined on a case-by-
                                        - 16 -

case basis, taking into account all pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs.

      Respondent has met his burden of production with respect to petitioners’

substantial understatement of income tax. Petitioners reported taxable income of

$57,200 on their 2012 tax return. Respondent has established that petitioners’

income was $107,813 for 2012 (i.e., the sum of $57,200 in reported wages, plus

$34,813 as the taxable portion of Mr. Alexander’s Social Security disability

benefits, plus Mr. Alexander’s compensation from Mr. Mullens of $15,800).

Thus, petitioners reported approximately 53% of their total 2012 income.

      Petitioners do not assert that there is substantial authority supporting their

position. Rather, they argue that they had reasonable cause and acted in good faith

in taking their position. In this regard, they claim that: (1) they relied on Mr.

Kirmer in filing their 2012 tax return and (2) they could not provide Mr. Kirmer

with all of their tax information because they did not timely receive Forms 1099

from the Social Security Administration and Mr. Mullens.

      Reliance on professional advice may constitute reasonable cause and good

faith, but “it must be established that the reliance was reasonable.” Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011
                                       - 17 -

(5th Cir. 1990), aff’d, 501 U.S. 868 (1991); sec. 1.6664-4(b)(1), Income Tax Regs.

We have defined “reasonable” as follows:

             In sum, for a taxpayer to rely reasonably upon advice so as
      possibly to negate a section 6662(a) accuracy-related penalty
      determined by the Commissioner, the taxpayer must prove by a
      preponderance of the evidence that the taxpayer meets each
      requirement of the following three-prong test: (1) The adviser was a
      competent professional who had sufficient expertise to justify
      reliance, (2) the taxpayer provided necessary and accurate
      information to the adviser, and (3) the taxpayer actually relied in good
      faith on the adviser’s judgment. * * *

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002).

      Petitioners meet the first prong of the Neonatology Assocs., P.A. test; Mr.

Kirmer is a competent and experienced tax adviser. However, petitioners do not

meet either the second prong of the test in that they did not provide necessary and

accurate information to Mr. Kirmer or the third prong of the test in that they did

not rely on Mr. Kirmer’s advice.

      With respect to the second prong of the Neonatology Assocs., P.A. test,

petitioners acknowledge that they did not provide Mr. Kirmer with full

information. However, they argue that they should be excused for this failure

because they did not timely receive the Forms 1099. Petitioners’ position is
                                        - 18 -

unreasonable as they were in possession of all the information necessary to

properly report their income.

      With respect to Mr. Alexander’s Social Security disability benefits, because

he was a former attorney who had practiced in the field of Social Security

disability benefits for 35 years, it is unreasonable to believe he needed a Form

1099-G to know that the benefits were taxable. Moreover, the $40,956 in benefits

Mr. Alexander received throughout the year was a significant portion of

petitioners’ income for 2012. It was not something that could be forgotten. Mrs.

Alexander was also aware, or should have been aware, that petitioners had

received Social Security disability benefits. She had full access to petitioners’

joint bank account, and at trial she answered when asked whether she was aware

of the Social Security benefit deposits: “I probably could have [known] if I paid

attention.”

      With respect to the payments received from Mr. Mullens, petitioners were

well aware that Mr. Alexander had received $15,800 from him, yet they never

disclosed this fact to Mr. Kirmer. And Mr. Alexander’s two “confrontations” with

Mr. Mullens, wherein he demanded additional money on the basis of the benefits

of his work, make it clear that Mr. Alexander did not consider Mr. Mullens’

payments to be a gift when he received them. Mr. Alexander stated that he was
                                       - 19 -

not a tax lawyer, yet he did not seek Mr. Kirmer’s expert opinion as to the taxation

of the payments he received from Mr. Mullens. We previously noted that Mrs.

Alexander was aware of the payments. She had access to petitioners’ joint bank

account, and she endorsed Mr. Mullens’ $10,000 check with the notation “Pay to

Diane C. Alexander”.

      We have held that “[t]he ultimate responsibility for a correct return lies with

the taxpayer, who must at least furnish the necessary information to his agent who

prepared the return.” Enoch v. Commissioner, 57 T.C. 781 (1972). And we have

held that the fact that a taxpayer did not timely receive information returns does

not allow the taxpayer to claim the reasonable cause defense. See Brunsman v.

Commissioner, T.C. Memo. 2003-291 (rejecting the reasonable cause defense

where the taxpayer received only one Form 1099-MISC but knew he had held two

jobs); Du Poux v. Commissioner, T.C. Memo. 1994-448 (“[F]ailure to receive tax

documents [such as Form 1099-MISC] does not excuse taxpayers from the duty to

report income.”).

      Petitioners also fail to meet the third prong of the Neonatology Assocs.,

P.A. test. Not only did they not seek Mr. Kirmer’s advice regarding the

unreported income; at trial Mr. Kirmer stated that had petitioners informed him of
                                       - 20 -

the Social Security disability benefits, he would have reported the amount on the

tax return.

      In conclusion, we hold that petitioners failed to show that they had

reasonable cause for, or acted in good faith with respect to, the underpayments.

      To reflect the foregoing and concessions by respondent,


                                                Decision will be entered under

                                      Rule 155.
