PURSUANT TO
Decision will be entered under Rule 155.
CARLUZZO,
In a notice of deficiency dated September 12, 2011 (notice), respondent determined a $6,488 deficiency in, and a $1,298 accuracy-related penalty with respect to, petitioner's 2009 Federal income tax.
After a concession,2 the issues for decision are: (1) whether any or all of petitioner's military retirement pay is excludable from income and (2) whether petitioner is liable for a section 6662(a) accuracy-related penalty.
Some of the2015 Tax Ct. Summary LEXIS 51">*52 facts have been stipulated and are so found. At the time the petition was filed, petitioner resided in Oklahoma.
After 26 years of active service in the U.S. Army, petitioner retired as a lieutenant colonel in 2002. At the time, petitioner qualified for and began to receive military retirement pay. That same year petitioner was divorced. Pursuant to the divorce, petitioner's former spouse was awarded a portion of his military retirement pay.
A Defense Finance and Accounting Service (DFAS) account statement shows petitioner's 2009 gross retirement pay as $48,966, which includes: (1) approximately $2,244.40 attributable to the portion of his military retirement pay that he was required to2015 Tax Ct. Summary LEXIS 51">*53 waive because of his election to receive VA disability compensation (VA waiver compensation);4 and (2) the portion of his military retirement pay awarded to his former spouse. The account statement also shows that petitioner did not elect to participate in the survivor benefit plan then available.
For 2009 DFAS issued to petitioner a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,2015 Tax Ct. Summary LEXIS 51">*54 etc., that shows $28,007 as the "taxable amount" of his military retirement pay. The VA waiver compensation is not included in the taxable amount shown on the Form 1099-R. Neither is the portion of petitioner's retirement pay awarded to his former spouse.
Before the preparation of his 2009 Federal income tax return, and upon the recommendation and advice of an acquaintance, petitioner submitted amended Federal income tax returns for 2006, 2007, and 2008 (amended returns).52015 Tax Ct. Summary LEXIS 51">*55 Apparently, on the original return for each of those years petitioner included in income the amount of the military retirement pay shown as taxable on the Forms 1099-R that DFAS issued to him. On each amended return petitioner claimed a refund computed by treating the taxable amount as excludable from income. Included with each amended return is a statement showing how the amount of the exclusion was computed. According to petitioner, the computations are based upon examples in
The $28,007 of military retirement pay reported as taxable on the Form 1099-R is shown on petitioner's self-prepared 2009 Federal income tax return but not included in the income reported on that return. After petitioner's 2009 return was filed, he provided to respondent a computation (2009 computation) showing how the exclusion was computed. As with the amended returns, the 2009 computation appears to be based upon examples in
In addition to an adjustment now agreed upon, in the notice respondent increased petitioner's income by the taxable portion of his military retirement pay and imposed a section 6662(a) penalty upon the ground that the underpayment of tax required to be shown on his return is a substantial understatement of income tax.
Section 61(a) provides that gross income means "all income from whatever source derived". Pensions and retirement allowances constitute gross income unless excluded by law. Sec. 61(a)(11);
According2015 Tax Ct. Summary LEXIS 51">*56 to petitioner, section 122 and its corresponding regulations allow for the exclusion of his military retirement pay from gross income. Section 122 provides for an exclusion for the amount of any reduction in an individual's military retirement pay pursuant to the individual's survivor's annuity election.
Section 6662(a) and (b)(2) imposes a penalty of 20% of the portion of the underpayment of tax attributable to a substantial understatement of income tax. An understatement of income tax is substantial within the meaning of section 6662 if, as relevant here, the understatement exceeds $5,000.
Section 6662(d)(1)(A) defines a "substantial understatement2015 Tax Ct. Summary LEXIS 51">*57 of income tax" as an understatement in an amount exceeding the greater of 10% of the tax required to be shown on the return or $5,000. The term "understatement" is defined as the excess of the amount of tax required to be shown on the return over the amount shown. Sec. 6662(d)(2)(A). Section 6662(d)(2)(B) reduces the amount of an understatement by the portion of the understatement for which: (1) there is substantial authority for the taxpayer's tax treatment of the item or (2) there is adequate disclosure of the relevant facts affecting the item's tax treatment and there is a reasonable basis for the taxpayer's treatment of the item. Petitioner's position is not supported by any substantial authority, nor did he adequately disclose on his 2009 return the reason he excluded the taxable portion of his military retirement pay.
Respondent bears the burden of production with respect to the imposition of the penalty here in dispute,
Section 6664(c)(1) provides that the section 6662(a) accuracy-related penalty does not apply to any portion of an underpayment if the taxpayer establishes that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the underpayment.
Petitioner's reliance upon section 122 and/or his reliance upon the advice received from an acquaintance would hardly support a finding that he had reasonable cause for, and acted in good faith with respect to, the exclusion of the taxable portion of his military retirement pay, which in turn resulted in a substantial portion of the underpayment of tax. But petitioner's good faith and the apparent reasonableness of his position are supported by the sequence of certain events that preceded the filing of his 2009 return. Specifically, not once, not twice, but three times petitioner claimed refunds computed by excluding the taxable portions of his military retirement pay2015 Tax Ct. Summary LEXIS 51">*59 previously included in income, and with each refund claim he provided the explanation for the exclusion that he relies upon here. Not once, not twice, but three times the refund claims were allowed. Technically, the apparently erroneous refund claim allowances say nothing about the merits of petitioner's position. Nevertheless, the allowances could lead a reasonable person to believe that the basis for the exclusion had merit.6
To reflect the foregoing,
1. Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, in effect for 2009. Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioner concedes that he failed to report interest income of $1,053 from the Internal Revenue Service in 2009 and that the entire amount is includable in his income for that year.↩
3. On October 1, 2002, petitioner filed a claim for service-connected disability compensation with the Department of Veterans Affairs (VA). On November 8, 2002, the VA determined that he was 70% disabled at the time of his retirement and was entitled to receive disability compensation of $1,081 a month from the VA starting on November 1, 2002 (disability compensation). The parties agree that petitioner's disability compensation is excludable from his gross income pursuant to sec. 104(a)(4).↩
4. Before 2004 a military retiree was not permitted to receive military retirement pay and VA disability compensation concurrently.
5. From what has been submitted, we are reluctant to find that all of the amended returns were submitted at once, but it would appear that is what happened.
6. We also note that nothing in the record suggests that the United States attempted to recover those refunds through a sec. 7405 proceeding.↩
7. In