CARUSO v. COMMISSIONER

T.C. Summary Opinion 2006-117

UNITED STATES TAX COURT

DAVID E. CARUSO, JR. AND BARBARA CARUSO, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17087-04S. Filed July 24, 2006.

David E. Caruso, Jr., and Barbara Caruso, pro se.

Scott T. Welch, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority. Petitioners

seek a review under section 6330(d) of respondent’s decision to

1

Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year at issue.

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proceed with collection of petitioners’ Federal income tax

liability for the 1999 tax year.

Some of the facts were stipulated. Those facts, with the

exhibits annexed thereto, are so found and made part hereof.

Petitioners’ legal residence at the time the petition was filed

was New Orleans, Louisiana.

Petitioners live and work in Louisiana. Mr. Caruso is a

practicing attorney who specializes in personal injury law.

During the year at issue, Mr. Caruso was a salaried employee at a

small local firm. He worked at this firm until June 2002, when

he left that firm and joined another local firm. Mrs. Caruso is

also an attorney licensed in California but did not practice law

during the year at issue. Instead, she was employed part time as

a paralegal for several New Orleans firms.

Petitioners did not file their 1999 joint Federal tax return

until March 17, 2003. They had previously filed for, and been

granted, an extension to file until October 15, 2000.

Petitioners did not file for additional extensions after October

15, 2000, nor did they make any estimated tax payments. On their

1999 return, petitioners reported a tax liability of $91,200 and

withholding credits of $8,677. Petitioners did not remit payment

for the remaining $82,523 balance due.

On May 12, 2003, petitioners were assessed a section

6651(a)(1) addition to tax in the amount of $18,635, a section

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6651(a)(2) addition to tax of $15,266.75, and a section 6654(a)

addition to tax in the amount of $3,917.03. On May 27, 2003,

petitioners were assessed a tax liability of $82,820 plus

interest.2 In a letter dated May 23, 2003, petitioners requested

relief of the additions to tax and interest charges and included

payment of $82,820 of the amount assessed by respondent.3

On August 2, 2003, respondent notified petitioners of an

intent to levy with respect to petitioners’ unpaid tax liability

for 1999. The notice listed $61,689.39 due for 1999.

Petitioners filed a timely Form 12153, Request for a

Collection Due Process Hearing. In their request, petitioners

stated they contested the levy because their tax was fully paid,

and they had previously requested abatement of additions to tax

and interest by the IRS. Petitioners attached the letter, dated

2

Respondent’s assessment disallowed the $297 tax credit for

child and dependent care expenses petitioners claimed on their

tax return because petitioners did not include a correct Social

Security number, employer identification number, or IRS

individual taxpayer identification number for their child care

provider; therefore, the tax assessed was $297 higher than the

amount reported on petitioners’ Federal income tax return.

Respondent, in a letter dated May 12, 2003, notified petitioners

of the error and gave petitioners an opportunity to supply the

correct information. Petitioners did not respond to the letter

and did not challenge the adjustment.

3

The assessment petitioners received from respondent, dated

May 27, 2003, listed the tax liability, additions to tax, and

interest owed as of that date; however, it did not indicate

receipt of the $82,820 petitioners sent. Because the assessment

notice was mailed a mere 4 days after petitioners mailed their

payment, it appears to the Court that respondent had no notice of

this payment prior to the assessment.

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May 23, 2003, sent to the IRS that had requested removal and

abatement of additions to tax and interest and had included the

payment of $82,820. In that letter, petitioners explained:

the 1999 return involved very unusual circumstances in its

complexity and need for documents involving sales of

renovated real estate. Unfortunate events kept interrupting

our efforts to file in a timely manner, including death of a

parent and estate duties, loss of job, and health problems.

The Appeals officer assigned to petitioners’ case

experienced numerous delays in reaching petitioners and receiving

documentation from them. Finally, on August 9, 2004, the Appeals

officer issued a notice of determination sustaining the levy. In

the notice, the Appeals officer noted that petitioners had not

requested either an installment agreement or an offer-in-

compromise, nor were they eligible for either because they were

delinquent in filing Federal income tax returns for several

years. Petitioners filed a timely petition with this Court

appealing the decision.

The Court must decide whether petitioners are entitled to

relief from the Appeals officer’s determination. Where the

underlying tax liability is properly at issue before the Appeals

officer, this Court reviews that issue on a de novo basis. Goza

v. Commissioner, 114 T.C. 176, 181-182 (2000). Although

petitioners did not receive a notice of deficiency and were

entitled to challenge the underlying tax liability, they

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stipulated the correctness of the Commissioner’s assessment.

Therefore, where the underlying tax liability is not at issue, as

in this case, this Court reviews the determination under an abuse

of discretion standard. Sego v. Commissioner, 114 T.C. 604, 610

(2000). An abuse of discretion is defined as any action that is

unreasonable, arbitrary or capricious, clearly unlawful, or

lacking sound basis in law, taking into account all the facts and

circumstances. E.g., Thor Power Tool Co. v. Commissioner, 439

U.S. 522, 532-533 (1979); Swanson v. Commissioner, 121 T.C. 111,

119 (2003).

Petitioners seek an abatement of the additions to tax and

interest with respect to taxable year 1999 and claim that

respondent’s failure to do so amounts to an abuse of discretion.

With respect to abatement of the interest due by

petitioners, the Appeals officer notified petitioners in

correspondence that “interest is charged by law. Even if I am

able to provide you with a favorable decision, you must pay the

interest due on the tax paid after it was due on 4/15/2000.”

A taxpayer may, under certain circumstances, qualify for an

abatement of interest under section 6404. A taxpayer, however,

is not eligible for such consideration if he files a return but

does not pay the taxes due. Downing v. Commissioner, 118 T.C. 22

(2002); H. Conf. Rept. 99-841 (Vol. II), at II-811 (1986), 1986-3

C.B. (Vol.4) 1, 811. Petitioners filed their 1999 Federal income

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tax return in March 2003 and did not pay the reported tax

liability until more than 2 months later. They are clearly not

eligible for abatement of interest; therefore, respondent did not

abuse his discretion in refusing to consider abatement of

interest during petitioners’ hearing.

As to the additions to tax, the Appeals officer sustained

the determination of respondent, stating:

You failed to establish that you exercised due

diligence and prudent business care or that you were

not able to pay or would have suffered an undue

hardship if you paid on the due date* * *. Mr.

Caruso’s medical condition did not disable him to the

point that rendered him unable to attend to his day-to-

day activities. Mr. Caruso’s loss of 30-year

employment occurred two years after the due date of the

subject tax and tax return.

The section 6651(a)(1) addition to tax applies where there

is a failure to file a timely return, unless the taxpayer can

establish that the failure “is due to reasonable cause and not

due to willful neglect.” Sec. 6651(a)(1). Willful neglect is

defined as “a conscious, intentional failure, or reckless

indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).

A taxpayer may establish reasonable cause by showing that,

despite the exercise of ordinary care and prudence, the taxpayer

was unable to file the required tax return within the prescribed

time. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; see United

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States v. Boyle, supra at 246; Crocker v. Commissioner, 92 T.C.

899 (1989).

Petitioners filed their 1999 Federal income tax return

almost 3 years late. At the appeals hearing and at trial,

petitioners presented numerous reasons for the delay.

Petitioners testified that they sold three properties during 1999

and knew they would owe tax for capital gains on the sales.

Because petitioners made renovations to each of the properties,

they had valuation difficulties in the computation of their

gains. Petitioners further testified that they experienced

difficulty in gathering the necessary documentation. Petitioners

filed for, and were granted, two extensions to file; however,

they did not file for additional extensions after October 15,

2000.

Beyond the complexity of their Federal income tax return,

petitioners complained of numerous other difficulties that kept

them from filing their return timely. In June 2000, petitioners

moved into a new residence, due to rising crime in their former

neighborhood. In July 2000, Mr. Caruso’s father died and he

claimed he had to “spend nearly a year and most nights and

weekends sorting through family belongings from * * * [his

parents’] 68 years of marriage. Also, bills had to be paid for

the estate, and that house sold, with great difficulty and

delays.” Mr. Caruso testified that, although he had siblings, he

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shouldered the bulk of that burden. In addition, Mr. Caruso

apparently suffers from high blood pressure and panic attacks.

The attacks “near incapacitated” him; however, he managed to

maintain full-time employment continually, despite the panic

attacks. Lastly, petitioners testified they finally sent

information to their certified public accountant (C.P.A.) in

February 2002 to complete their Federal income tax return. The

C.P.A., however, requested additional information. Before

petitioners could locate that information, Mr. Caruso lost his

job and had to “devote substantial time to finding new employment

and then starting a new job.” Therefore, he was not able to

locate the additional information for nearly a year.

Although petitioners experienced some difficult

circumstances, the Court is not convinced that their delay of

almost 3 years was due to reasonable cause and not “willful

neglect”. Petitioners employed a C.P.A. for the preparation of

their tax return. All that was required of petitioners was that

they find and send the appropriate documentation to their C.P.A.,

which they neglected to do in a timely fashion.

Petitioners were not incapacitated by Mr. Caruso’s health

problems. As previously noted, Mr. Caruso managed to maintain

full-time employment, leave what he considered to be a bad job,

and successfully find a new one during the 3 years. In addition,

the Court is not convinced that dealing with the affairs of Mr.

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Caruso’s deceased father could monopolize so much time that

petitioners were unable to find and send the required

documentation to enable their C.P.A. to prepare their tax return

timely. As for the 1 year it took petitioners to locate the

additional documentation requested by their C.P.A., the Court

rejects petitioners’ explanations for this exorbitant delay.

Respondent’s determination is sustained.

The Appeals officer also sustained the section 6651(a)(2)

determination against petitioners. Section 6651(a)(2) imposes an

addition to tax when a taxpayer fails to pay the amount shown as

tax on any return specified in paragraph (1) on or before the

date prescribed for payment of such tax, unless it is shown that

such failure is due to reasonable cause and not due to willful

neglect. With respect to any return, the amount of the addition

under section 6651(a)(2) reduces the amount of the addition under

section 6651(a)(1) for any month to which an addition to tax

applies under both paragraphs. Sec. 6651(c)(1).

A taxpayer has reasonable cause for failure to pay a tax

timely if the taxpayer has made a satisfactory showing that he

exercised ordinary business care and prudence in providing for

payment of his tax liability and was nevertheless either unable

to pay the tax or would suffer an undue hardship, as described by

section 1.6161-1(b), Income Tax Regs., if he paid on the due

date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. An undue

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hardship is defined as more than an inconvenience to the

taxpayer. Sec. 1.6161-1(b), Income Tax Regs. An undue hardship

will result to the taxpayer if, for instance, he or she will

suffer a substantial financial loss; for example, a loss due to

the sale of property at a distress price. Downing v.

Commissioner, 118 T.C. at 29; see also Fran Corp. v. United

States, 164 F.3d 814, 816-817 (2d Cir. 1999).

As previously discussed, petitioners’ alleged hardships did

not amount to reasonable cause. Furthermore, petitioners

reported a $531,661 capital gain on the sale of their properties,

and the Court declines to believe they would have suffered a

substantial financial loss had they paid their liability timely.

Petitioners were aware they would have a substantial tax

liability for the year 1999, and, even if they were unsure of the

exact amount, they could have submitted an estimated payment when

they filed their request for an extension. Therefore, respondent

is sustained.

Lastly, the Court reviews the Appeals officer’s decision to

sustain respondent’s section 6654 determination. A taxpayer is

subject to this addition to tax “in the case of any underpayment

of estimated tax by an individual.” Sec. 6654. Subject to

certain statutory exceptions, the addition to tax is

automatically applied if the amount of withholding and estimated

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tax payments do not equal statutorily designated amounts.

Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).

The statute, however, provides an exception to this

automatic imposition under certain circumstances. Petitioners

presented no evidence, either to the Appeals officer or at trial,

that they met the statutory exceptions. Petitioners’ only

arguments during appeals and at trial were the hardship arguments

discussed above. The Court sustains the determination.

Petitioners received an appropriate hearing under section

6330(b)(1). Day v. Commissioner, T.C. Memo. 2004-30; Leineweber

v. Commissioner, T.C. Memo. 2004-17; sec. 301.6330-1(d)(2), Q&A-

D6, Proced. & Admin. Regs. Respondent properly verified that the

requirements of applicable law and administrative procedures were

met and balanced the need for efficient collection of taxes with

the legitimate concern of petitioners that the collection action

be no more intrusive than necessary. On this record, the Court

holds that there was no abuse of discretion in sustaining the

notice of intent to levy. Respondent, therefore, is sustained.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.