# Koppel v. Comm'r

> United States Tax Court · July 6, 2004 · 88 T.C.M. 3

URL: https://www.frixlaw.com/law-library/cases/4335002

## Case

- **Full name:** THOMAS HENRY KOPPEL v. COMMISSIONER OF INTERNAL REVENUE
- **Court:** United States Tax Court
- **Decided:** July 6, 2004
- **Citations:** 88 T.C.M. 3; 2004 T.C. Memo. 158; 2004 Tax Ct. Memo LEXIS 163
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Judges:** "Marvel, L. Paige"
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

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).
- 4 -

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4335002. Public record. Not legal advice.