The opinion
T.C. Memo. 2004-158
UNITED STATES TAX COURT
THOMAS HENRY KOPPEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1590-03. Filed July 6, 2004.
Thomas Henry Koppel, pro se.
Michael E. Melone, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency in
petitioner’s 2000 Federal income tax in the amount of $8,296 and
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a section 6662(a) accuracy-related penalty in the amount of
$1,659.1 After concessions,2 the issues for decision are: (1)
Whether a distribution of Nortel Networks Corp. (Nortel) stock
that petitioner received from BCE, Inc. (BCE), is taxable as a
dividend and (2) whether petitioner is liable for a section
6662(a) accuracy-related penalty for substantial understatement
of tax.
FINDINGS OF FACT
Some of the facts have been stipulated. We incorporate the
stipulated facts into our findings by this reference. Petitioner
resided in Alameda, California, when he filed the petition.
As of February 29, 2000, BCE, a Canadian corporation, owned
539,854,492 shares, or 38.2 percent, of the outstanding common
stock of Nortel. On or before May 9, 2000, BCE distributed a
portion of its Nortel stock to BCE’s shareholders in a spinoff
transaction.3 According to BCE’s consolidated statement of
1
All 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
In a stipulation of settled issues, the parties agreed that
petitioner was liable for income taxes on the following items:
ordinary dividends in the amounts of $2,436.19, $3,015, $1,007,
and $421; a capital gain in the amount of $1,530; and unreported
taxable Social Security benefits in the amount of $1,065. The
parties also agreed that petitioner correctly reported an
ordinary dividend in the amount of $1,285.
3
The parties repeatedly refer to the transaction as a
spinoff but do not contend that it was a qualifying spinoff under
(continued...)
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retained earnings for 2000 (retained earnings statement), at the
end of 2000, BCE had retained earnings in the amount of
approximately $1.5 million.
During May 2000, petitioner held BCE stock in his Charles
Schwab & Co., Inc. account No. 51933001 (Charles Schwab account).
On May 9, 2000, pursuant to the spinoff transaction, petitioner
received from BCE 471 shares of Nortel stock. According to the
Form 1099-DIV, Dividends and Distributions, issued for the
Charles Schwab account for 2000, the value of the Nortel stock
that petitioner received was $27,641.81.
On Schedule B, Interest and Ordinary Dividends, of
petitioner’s 2000 Form 1040, U.S. Individual Income Tax Return,
petitioner reported total ordinary dividends from the Charles
Schwab account in the amount of $34,101.49. Petitioner then
subtracted the full amount of the Nortel stock distribution and
made the following notation: “LESS SPINOFF REPORTED AS ORDINARY
DIVIDEND (SEE EXHIBIT 1)”. The attached “Exhibit 1” was a copy
of petitioner’s Charles Schwab account statement for May 1-31,
2000, which indicated petitioner’s receipt of the Nortel stock on
May 9, 2000. On the statement, petitioner had drawn an arrow to
the Nortel stock transaction and written “NOT AN ORDINARY
3
(...continued)
sec. 355. Our use of the term “spinoff” does not mean the
transaction qualified for nonrecognition treatment under sec.
355(a)(1).
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DIVIDEND”. Petitioner did not include the Nortel stock
distribution in his gross income.
In a notice of deficiency dated December 9, 2002, respondent
determined that the full amount of the Nortel stock distribution
constituted a taxable ordinary dividend. Respondent also
determined that petitioner was liable for a section 6662(a)
accuracy-related penalty for substantial understatement of tax.
On January 29, 2003, petitioner filed a petition with this
Court contesting respondent’s determination. In his petition,
petitioner made the following allegation:
This stock distribution represents appreciated assets
of Canadian corporations. The intent and agreement of
NAFTA [the North American Free Trade Agreement] (Art.
1109.3) discourages the U.S. from taking earnings that
are part of Canadian corporations. The tax should be
taken when the stock is sold. Also, the tax code may
allow the payer to value the distribution based on the
net change in total market value. This would be needed
only in those rare cases when a corporation distributed
over half of its assets in a non-cash way.
Additionally, on August 12, 2003, petitioner filed an amendment
to petition, in which petitioner alleged that “a devaluation
required by the New York Stock Exchange for shares directly
related to the distribution * * * is a liability that may be
excluded from the distribution per the tax code.”
OPINION
I. Dividend Classification of the Nortel Stock Distribution
Section 61(a)(7) includes dividends in a taxpayer’s gross
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income. If a corporation distributes property4 to its
shareholders from the corporation’s accumulated earnings and
profits or its current earnings and profits for the taxable year,
the distribution constitutes a dividend. Secs. 301(a), (c)(1),
316(a). Section 301(b)(2) requires that the amount of the
distribution be reduced, but not below zero, by (1) the amount of
any corporate liabilities the shareholder assumed in connection
with the distribution and (2) the amount of liabilities to which
the property is subject immediately before and after the
distribution.
As we understand his position, petitioner principally relies
on the following two arguments:5 (1) BCE lacked sufficient
earnings and profits for the distribution to constitute a
dividend;6 and (2) petitioner’s obligation to accept BCE when-
issued shares is a liability that reduces the amount of the
4
Sec. 317(a) defines “property” as “money, securities, and
any other property; except that such term does not include stock
in the corporation making the distribution (or rights to acquire
such stock).”
5
At trial, petitioner also argued that, when BCE distributed
the Nortel stock to him, he received an “investment in Canada”,
exempt from taxation under the North American Free Trade
Agreement. In response to questioning by this Court, however,
petitioner conceded that he was unaware of any provision of U.S.
tax law that would exempt from tax his investment in a Canadian
corporation.
6
Although petitioner did not include this argument in his
petition or the amendment to his petition, respondent agrees that
the issue is fairly before the Court.
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distribution. Petitioner bears the burden of proof.7 Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
A. Sufficiency of BCE’s Earnings and Profits
Petitioner contends that BCE had insufficient earnings and
profits to make a dividend and that, as a result, the
distribution of Nortel stock constituted a return of capital.
According to petitioner, BCE’s retained earnings statement is
incorrect. The retained earnings statement describes the total
value of the Nortel shares distributed to BCE’s shareholders as
equal to approximately $10 billion. Petitioner asserts, however,
that the total value of the Nortel stock distribution was
actually approximately $59 billion, which amount exceeded BCE’s
earnings and profits.
We cannot accept petitioner’s argument. Not only has
petitioner failed to offer any credible evidence in support of
his contention, the retained earnings statement clearly reflects
that BCE made the Nortel stock distribution from BCE’s earnings
and profits.
B. Reduction of the Distribution Amount
As his second argument, petitioner contends that, on the
effective date of the Nortel stock distribution, BCE’s8 stock
7
Petitioner has not argued that respondent bears the burden
of proof, nor has petitioner satisfied the requirements of sec.
7491(a)(1).
8
Petitioner’s argument specifically mentioned BCE’s stock.
(continued...)
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traded “the regular way” and “as new ‘when issued’” stock.9
According to petitioner, he was obligated to accept lower priced,
when-issued shares, which obligation constituted a liability and
reduced the value of the Nortel stock distribution.
Again, we disagree. Petitioner has introduced no evidence
to establish that he received when-issued shares pursuant to the
Nortel stock distribution, let alone that the value of his shares
was somehow lessened. Moreover, petitioner has not shown that
this so-called liability was a corporate liability that
petitioner assumed or a liability to which the property was
subject immediately before and after the distribution. See sec.
301(b)(2). To the contrary, the record clearly demonstrates that
petitioner received a stock dividend includable at its fair
market value in his gross income. See secs. 61(a)(7), 301(a),
(b), and (c)(1), 316(a).
II. Section 6662(a) Accuracy-Related Penalty for Substantial
Understatement of Tax
If any portion of an underpayment of tax required to be
shown on a taxpayer’s return is attributable to any substantial
8
(...continued)
It is not clear whether the reference to BCE stock was a mistake
or whether petitioner was arguing that the value of the BCE stock
affected the Nortel stock he received. In any event, the lack of
clarity does not change the conclusion we reach.
9
In Walker v. Commissioner, 35 B.T.A. 640, 645 (1937), we
explained that “Dealings in stock on a ‘when issued’ basis are
not sales of stock, but merely sales of contracts to sell stock
which are made on the express condition that no delivery and
payment are required unless and until the stock is issued.”
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understatement of income tax, the taxpayer is liable for a
penalty equal to 20 percent of that portion of the underpayment.
See sec. 6662(a) and (b)(2). A substantial understatement of
income tax consists of an understatement that exceeds the greater
of (1) 10 percent of the tax required to be shown on the return
for the taxable year or (2) $5,000. Sec. 6662(d)(1)(A). The
amount of the understatement will be reduced to the extent that
the taxpayer (1) had substantial authority for the tax treatment
of an item or (2) adequately disclosed in the return or in an
attached statement the relevant facts affecting the tax treatment
and had a reasonable basis for the tax treatment. Sec.
6662(d)(2)(B)(i) and (ii). In addition, section 6664(c)(1)
provides an exception to the section 6662(a) accuracy-related
penalty where the taxpayer shows reasonable cause for, and that
the taxpayer acted in good faith with respect to, any portion of
the underpayment. See also sec. 1.6664-4(a), Income Tax Regs.
Pursuant to section 7491(c), the Commissioner must produce
sufficient evidence indicating that imposition of the section
6662(a) accuracy-related penalty against an individual is
appropriate. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent has met this burden of production. Petitioner now
must demonstrate that respondent’s determination is incorrect.
Id. at 447.
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Although petitioner disputed the section 6662(a) accuracy-
related penalty in his petition, petitioner has made no arguments
under section 6662(d)(2)(B) or 6664(c)(1) against imposition of
the penalty. Indeed, when provided the opportunity at trial to
address the penalty, petitioner responded: “I haven’t been that
concerned about it, so I guess the short answer is no, I have
nothing.” We conclude, therefore, that petitioner is liable for
a section 6662(a) accuracy-related penalty for substantial
understatement of tax.
We have considered the remaining arguments of both parties
for results contrary to those discussed herein and, to the extent
not discussed above, find those arguments to be irrelevant, moot,
or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.