Chenault v. Comm'r

T.C. Memo. 2011-56

UNITED STATES TAX COURT

DELORES CHENAULT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22806-09L. Filed March 9, 2011.

Delores Chenault, pro se.

John S. Hitt and Mayer Y. Silber, for respondent.

MEMORANDUM OPINION

LARO, Judge: Petitioner petitioned the Court under section

6330(d) to review the determination of respondent’s Office of

Appeals (Appeals) sustaining a proposed levy upon petitioner’s

property.1 Respondent proposed the levy to collect Federal

1

Section references are to the Internal Revenue Code and

(continued...)

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income taxes which petitioner reported as due on her 2003 Federal

income tax return. We decide first whether petitioner is liable

for the taxes she reported as due on her return. We hold she is.

We decide second whether Appeals abused its discretion in

sustaining the proposed levy. We hold it did not.

Background

The parties’ stipulation of facts and the accompanying

exhibits are incorporated by this reference and are so found.

When the petition was filed, petitioner lived in Illinois.

Petitioner was born on September 11, 1936. She worked as a

principal stenographer for Cook County, Illinois, and the City of

Chicago, until her retirement in May 1993. At some time in or

around 1993 petitioner applied for and was approved to receive

monthly payments under two separate annuity contracts.

First, petitioner applied to the Retirement Board (city

board) of the Municipal Employees’ Annuity and Benefit Fund of

Chicago (city) for an annuity (city annuity). By letter dated

September 21, 1993, the city board approved a monthly annuity of

$389.67 payable to petitioner for life beginning on May 29, 1993.

The monthly payment under the city annuity increased by $11.69 in

September 1996 and in each September thereafter. The letter

stated that $27 in Federal income tax would be withheld each

1

(...continued)

Rule references are to the Tax Court Rules of Practice and

Procedure.

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month and that the city annuity would become “fully taxable” to

petitioner on January 29, 2015. Petitioner’s investment in the

city annuity was $6,507 and her expected return was $175,688.

Second, petitioner applied to the Retirement Board (county

board) of the County Employees’ Annuity and Benefit Fund of Cook

County (county) for an annuity (county annuity).2 By letter

dated September 1, 1993, the county board approved a monthly

annuity of $1,364.55 payable to petitioner for life beginning on

June 1, 1993. The monthly payment under the county annuity

increased by $40.94 in January 1997 and in each January

thereafter. The record does not establish petitioner’s

investment in or expected return on the county annuity.

The Northern Trust Co. (Trust), as the city’s paying agent,

issued to petitioner a 2003 Form 1099-R, Distributions From

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,

Insurance Contracts, etc. That form reported that during 2003

petitioner received gross distributions of $11,594.84, consisting

of a taxable amount of $11,383.76 and employee contributions or

insurance premiums of $211.08. The Trust withheld $864.

The Cook County Pension Fund also issued to petitioner a

2003 Form 1099-R. That form reported gross distributions of

$20,138.64, consisting of a taxable amount of $19,615.08 and

2

We refer to the city annuity and the county annuity

collectively as annuities.

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employee contributions or insurance premiums of $523.56. The

county withheld $1,268.10.

We understand that included in the amounts reported on the

Forms 1099-R were payments from annuity contracts with the city

and the county earned by petitioner’s biological father (father)

but payable to her. The record does not establish how petitioner

became entitled to these amounts, the amounts petitioner’s father

contributed (if any), or the expected return.

Petitioner did not timely file a Federal income tax return

for 2003, and respondent prepared a substitute for return on

behalf of petitioner for that year. See sec. 6020(b)(1).

Respondent also mailed to petitioner a Letter 2566 (SC/CG),

Proposed Individual Income Tax Assessment (30-day letter), for

2003. In the 30-day letter, respondent notified petitioner that

he had no record of having received petitioner’s 2003 Federal

income tax return and proposed an assessment using information

returns that respondent had received from third-party payors.

Respondent also requested that petitioner file a 2003 Federal

income tax return.

On or about October 13, 2006, petitioner sent to respondent

a Form 1040, U.S. Individual Income Tax Return, for 2003. That

return reported, among other things, taxable pensions and

annuities received by petitioner of $30,999 and Federal income

taxes owed of $649. Petitioner did not pay all of the resulting

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tax liability, and respondent assessed the liability as well as

additions to tax for failure to file a return timely and failure

to pay tax.3

On or about May 19, 2008, respondent issued to petitioner a

Final Notice--Notice of Intent to Levy and Notice of Your Right

to a Hearing (final levy notice). The final levy notice informed

petitioner that respondent proposed to levy upon petitioner’s

property to collect Federal income tax for 2003. The final levy

notice advised petitioner that she could request a collection due

process (CDP) hearing with Appeals as to the propriety of the

proposed levy.

On June 2, 2008, petitioner asked Appeals for the referenced

CDP hearing. She also requested that the proposed levy be

withdrawn. Appeals granted petitioner’s request for a CDP

hearing but did not withdraw the proposed levy. The CDP hearing

was held with an Appeals officer by telephone on August 4, 2009.

On August 25, 2009, Appeals issued to petitioner a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330, and a supporting attachment (notice of

determination). The notice of determination (1) sustained

respondent’s proposed levy, (2) stated that all procedural and

statutory requirements had been met, (3) recited reasons why

3

Petitioner filed for bankruptcy some time before November

29, 2007, on which date her bankruptcy was discharged.

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petitioner’s challenges to her underlying tax liability could not

be considered, and (4) determined that the proposed collection

action balanced the need for efficient collection of taxes with

petitioner’s concern that the collection action be no more

intrusive than necessary. In response to the notice of

determination, petitioner petitioned the Court on September 23,

2009. A trial was held on November 23, 2010, during which only

petitioner testified.

Discussion

I. Standard of Review

The applicable standard of review in an appeal brought under

section 6330(d) depends on whether the underlying tax liability

is properly at issue. Where the validity of the underlying tax

liability is at issue, we review the taxpayer’s liability de

novo. Hoffman v. Commissioner, 119 T.C. 140, 144-145 (2002);

Davis v. Commissioner, 115 T.C. 35, 39 (2000). Where the

underlying tax liability is not at issue, we review the

Commissioner’s administrative determination for abuse of

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

In general, a taxpayer may challenge the existence or amount of

an underlying tax liability if he or she did not receive a

statutory notice of deficiency for such liability or did not

otherwise have an opportunity to dispute that tax liability.

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Sego v. Commissioner, 114 T.C. 604, 609 (2000); see also sec.

6330(c)(2)(B).

Petitioner did not receive a statutory notice of deficiency

for 2003; and even though she reported taxes due on her 2003

Federal income tax return, she now asserts that she incorrectly

included as gross income certain annuity payments she received.

Because the underlying tax liability is properly at issue, we

review the validity of petitioner’s underlying tax liability de

novo. See Montgomery v. Commissioner, 122 T.C. 1, 9 (2004).

II. Underlying Tax Liability

Petitioner mainly argues that annuity payments which she

received in 2003 and reported as taxable on her tax return are

not taxable to her. Respondent argues that these payments are

taxable to petitioner as originally reported on her tax return.

We agree with respondent.

In general, amounts received by a taxpayer under an annuity

contract must be included in that taxpayer’s gross income. Sec.

72(a); see also sec. 61(a)(9). Where appropriate, a taxpayer may

exclude a portion of payments received under the annuity by

applying an “exclusion ratio” to the payments received. Sec.

72(b). The exclusion ratio is calculated by dividing the

taxpayer’s “investment in the contract” by the expected return of

the annuity contract. Sec. 72(b)(1); see also sec. 1.72-

4(a)(1)(i), Income Tax Regs. A taxpayer’s investment in the

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contract depends on the amount of premium or other consideration

paid for the contract. Sec. 72(c)(1). The nontaxable portion of

the annuity is determined by applying the exclusion ratio to the

payment received until the taxpayer has recovered his or her

investment in the contract. Sec. 72(b)(2). Effectively, the

nontaxable portion is a return of capital of the taxpayer’s

investment in the contract recovered proportionately over the

life of the annuity.

A. City Annuity

Petitioner argues that section 72(b) entitles her to exclude

all payments she received under the city annuity contract in

2003. We do not agree. Petitioner received two annuities from

the city, one related to her retirement and the second

attributable to her father. We consider each in turn.

For the portion of the city annuity which petitioner

received as part of her retirement, petitioner’s investment was

$6,507 and her expected return was $175,688. Thus, section 72(b)

authorizes petitioner to exclude 3.7 percent of those payments

received under the city annuity contract which are related to her

retirement.4 As part of her retirement package from the city,

petitioner was to receive $389.67 per month from May 1993 until

4

The exclusion ratio is calculated as petitioner’s

investment in the contract, $6,507, divided by her expected

return under the contract, $175,688, rounded to the nearest tenth

of a percent. See sec. 1.72-4(a)(2), Income Tax Regs.

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August 1996, increased by $11.69 in September 1996 and each

September thereafter. By the terms of the city annuity,

therefore, petitioner was to receive total payments of $5,704.56

for 2003.5 Section 72(b) entitled petitioner to recover 3.7

percent, or $211.08, as a nontaxable return of capital.6 The

balance of those proceeds, $5,493.48, is fully taxable to

petitioner under sections 72(a) and 61(a)(9).

As explained above, we understand petitioner to have also

received $5,890.28 in annuity payments from the city which were

attributable to her father.7 Petitioner does not dispute that

she received these payments and has not offered any evidence

which would allow us to conclude that they were not fully taxable

to her. See Rule 142(a); Swanton v. Commissioner, T.C. Memo.

2010-140. We conclude that the $5,890.08 petitioner received in

2003 is taxable to her under sections 72(a) and 61(a)(9).

5

As it related to her retirement, the city annuity was to

pay petitioner $471.50 per month from January until August 2003

and $483.19 from September until December 2003. Total payments

for 2003 of $5,704.56 are calculated by adding 8 months of

payments of $471.50, or $3,772, and 4 months of payments of

$483.19, or $1,932.76.

6

Total annuity payments received of $5,704.56 multiplied by

the exclusion ratio of 3.7 percent.

7

As it related to her father, we understand that the city

annuity paid to petitioner an additional $5,890.28 (gross

distribution of $11,594.84 less $5,493.48 payments received under

the city annuity less employee contribution or insurance premium

of $211.08).

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Form 1099-R issued to petitioner by the Trust is consistent

with our analysis. That form reported gross distributions of

$11,594.84, consisting of a taxable amount of $11,383.76 and

employee contributions or insurance premiums of $211.08. The

$211.08 reported as employee contributions or insurance premiums,

we believe, represents the nontaxable return of capital described

above. The $11,383.76 reported as taxable consists of the

payments petitioner received from her retirement and on account

of her father. Petitioner’s reporting of the annuities on her

2003 Federal income tax return is consistent with our analysis as

well as the Form 1099-R issued by the Trust. We conclude

therefore that with respect to the annuity payments received from

the city, petitioner’s underlying tax liability is valid.

B. County Annuity

Petitioner argues generally that the county annuity was not

taxable to her. We disagree. Petitioner has not demonstrated

what amount of the payments she received under the county annuity

(if any) is to be excluded from her gross income. See Rule

142(a); Swanton v. Commissioner, supra. Nor has she provided us

with sufficient information to make such a determination such as

her investments in the contract or her expected return under the

contract. Absent such evidence, we default to the general rules

of sections 61(a)(9) and 72(a), which require petitioner to

include in gross income the payments she received under the

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county annuity.8 Petitioner’s 2003 Federal income tax return is

consistent with this analysis. We therefore conclude that with

respect to the annuity payments received from the county,

petitioner’s underlying tax liability is valid.

C. Other Challenges to Underlying Tax Liability

Petitioner makes a number of other unpersuasive arguments to

reduce or extinguish her 2003 tax liability. First, she contends

that the payors of the annuities should be held liable for her

2003 Federal income tax liability because the Federal income

taxes withheld were not sufficient to satisfy her tax liability.

We disagree. The payor of an annuity is generally required to

withhold amounts paid under an annuity contract as if those

payments were wages paid by an employer to an employee.9 Sec.

3405(a)(1). But that withholding obligation does not excuse the

taxpayer from his or her duty to report income and pay the

resulting tax. See, e.g., Church v. Commissioner, 810 F.2d 19,

20 (2d Cir. 1987); Anderson v. Commissioner, T.C. Memo. 2007-265.

It is a fundamental principle of tax law that income is taxed to

the person who earns it. Commissioner v. Culbertson, 337 U.S.

8

Respondent does not challenge petitioner’s ability to

exclude from gross income the amount listed as employee

contributions or insurance premiums on Form 1099-R issued by the

county.

9

A taxpayer may elect not to have Federal income taxes

withheld from an annuity payment made to him or her. See sec.

3405(a)(2); see also sec. 35.3405-1T(d), Q&A-D1, Temporary

Employment Tax Regs., 47 Fed. Reg. 45873 (Oct. 14, 1982).

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733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111 (1930).

Petitioner, as the person who received payments under the

annuities, is liable for any taxes found to be due and owing

therefrom.

Second, petitioner argues that respondent may not enforce

collection of her 2003 Federal income tax liability by virtue of

her 2007 bankruptcy discharge. We are not persuaded. Petitioner

offered no objective evidence as to when she filed her bankruptcy

petition or whether her 2003 tax liability was discharged. But

it is more than petitioner’s lack of supporting evidence which

leads us to conclude that her testimony is not reliable.

According to her testimony, petitioner would have us believe that

a bankruptcy discharge under chapter 7 of the Bankruptcy Code

discharged all of her liabilities as a matter of law. We reject

petitioner’s misstatement of the law.

A debtor who files a chapter 7 bankruptcy petition is

generally discharged from personal liability for all debts

incurred before the bankruptcy petition was filed. 11 U.S.C.

sec. 727(b) (2006). However, that debtor is not discharged from

claims for income taxes due for a tax year for which the due date

for the return is within 3 years of the filing of the petition in

bankruptcy. 11 U.S.C. secs. 523(a)(1)(A), 507(a)(8) (2006); see

also Severo v. Commissioner, 129 T.C. 160, 165-166 (2007), affd.

586 F.3d 1213 (9th Cir. 2009). Petitioner’s 2003 Federal income

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tax return with extension was due by October 15, 2004. Secs.

6072(a), 6081(a). Thus, for petitioner’s 2003 Federal income tax

liability to have been dischargeable as a matter of law,

petitioner’s bankruptcy petition must have been filed after

October 15, 2007. Absent corroborating evidence, we reject as

improbable that petitioner’s bankruptcy petition was discharged

in just 45 days. Cf. Fed. R. Bankr. P. 4004(a) (affording

creditors 60 days within which to file a notice of objection

after the initial creditor’s meeting). Moreover, even if the due

date for petitioner’s 2003 Federal income tax return related to a

point outside the 3-year lookback period described above, her

2003 Federal income tax liability would still not have been

dischargeable because she filed her return untimely less than 2

years before she entered into bankruptcy. See 11 U.S.C. sec.

523(a)(1)(B)(ii) (2006); Severo v. Commissioner, supra at 168.

Petitioner has not proven that her 2003 income tax liability was

discharged in bankruptcy.

Third, petitioner argues that she is entitled to an

additional deduction by virtue of her age. Petitioner refers to

the additional standard deduction amount available to taxpayers

who reach the age of 65 before the close of the taxable year.

See sec. 63(f)(1)(A). That additional amount, however, is

available only to taxpayers who do not elect to itemize their

deductions for the taxable year. See sec. 63(c)(3). Because

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petitioner elected to itemize her deductions in 2003, she is not

entitled to an additional deduction on account of her age. See

id. In summary, we find petitioner liable for the taxes she

reported as due on her 2003 Federal income tax return.

III. Determination To Proceed With Levy

Where as here we have found the liability underlying a

proposed levy to be valid, we review Appeals’ determination to

proceed with the levy for abuse of discretion. Sego v.

Commissioner, 114 T.C. at 610. In order to prevail, a taxpayer

must prove that the Commissioner exercised his discretion

arbitrarily, capriciously, or without sound basis in law or fact.

Rule 142(a); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). We

hold that Appeals did not abuse its discretion.

Where a taxpayer neglects or refuses to pay any tax for

which he or she is liable within 10 days after notice and demand

for payment, the Commissioner is authorized to collect such tax

by levy upon the taxpayer’s property. Sec. 6331(a). The

Commissioner may not proceed with collection by levy until the

taxpayer has been given written notice and an opportunity for a

CDP hearing by Appeals. Sec. 6330(a) and (b); see also Davis v.

Commissioner, 115 T.C. at 37.

At the CDP hearing Appeals must take into consideration (A)

the verification that the requirements of applicable law and

administrative procedure have been met, (B) any relevant issue

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relating to the unpaid tax or the proposed levy, and (C) whether

any proposed collection action balances the need for efficient

collection of taxes with the legitimate concern of the taxpayer

that the collection be no more intrusive than necessary. Sec.

6330(c)(3). Following the CDP hearing Appeals must generally

issue a notice of determination which sets forth its findings and

decisions. See sec. 6330(c)(3); see also sec. 301.6330-1(e)(3),

Q&A-E8, Proced. & Admin. Regs.

As documented in the notice of determination, Appeals

complied with its obligations to petitioner under section 6330.

First, Appeals verified that respondent met the requirements of

applicable law and administrative procedure in assessing and

demanding payment from petitioner for the tax she reported as due

on her 2003 return. Second, Appeals invited petitioner to file

an amended return if she did not agree with the underlying tax

liability; but petitioner declined to do so. Nor did petitioner

request collection alternatives. See Cessna v. Commissioner,

T.C. Memo. 2009-301. Third, Appeals properly balanced the need

for efficient collection of taxes through the proposed levy

against the concern that any collection action be no more

intrusive than necessary. Petitioner has not demonstrated any

impropriety in Appeals’ decision to sustain the proposed levy

upon her property. We therefore sustain respondent’s

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determination to proceed with the proposed levy as a permissible

exercise of discretion.

We have considered all arguments raised by the parties and

have found those arguments not discussed herein to be irrelevant

or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.