Robert R. Doggart

United States Tax Court

T.C. Summary Opinion 2023-25

ROBERT R. DOGGART,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 6928-21S. Filed July 27, 2023.

—————

Robert R. Doggart, pro se.

Phillip A. Lipscomb and John S. Hitt, for respondent.

SUMMARY OPINION

MARSHALL, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when

the Petition was filed. 1 Pursuant to section 7463(b), the decision to be

entered is not reviewable by any other court, and this Opinion shall not

be treated as precedent for any other case.

Respondent determined a deficiency of $9,910 and additions to

tax pursuant to sections 6651(a)(1) and (2) and 6654 of $1,434, $1,147,

and $143, respectively, for petitioner’s 2017 tax year. 2 After

concessions, the issues remaining for decision are (1) whether petitioner

received constructive distributions of income from two life insurance

policies; (2) whether petitioner is entitled to deduct rental property

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, and Rule references are to

the Tax Court Rules of Practice and Procedure.

2 All monetary amounts have been rounded to the nearest dollar.

Served 07/27/23

2

expenses reported on Schedule E, Supplemental Income and Loss; and

(3) whether petitioner is liable for the additions to tax under sections

6651(a)(1) and (2) and 6654.

Background

On February 16, 2017, petitioner was incarcerated. He remained

incarcerated through the time of trial. Petitioner resided at his home in

Signal Mountain, Tennessee (Signal Mountain Property), for some years

before 2017 and through February 16, 2017. The Signal Mountain

Property was then left vacant until September 15, 2017. As of that date

through the end of 2017, petitioner rented the Signal Mountain Property

to his daughter for $500 per month. Petitioner concedes that $500 per

month was significantly below the fair market rental value of the

property.

Before 2017 petitioner took out a series of loans against two life

insurance policies that he held with Prudential Insurance Co. of

America (Prudential). The cash value of his policies served as collateral

for the loans. While incarcerated, petitioner stopped paying premiums

on the two policies. As a result, each policy lapsed and Prudential used

the cash values of the policies to repay the loans plus interest due.

Prudential subsequently issued petitioner Form 1099–R, Distributions

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

Insurance Contracts, etc., for 2017 with respect to each policy and

reported taxable distributions from life insurance to the Internal

Revenue Service (IRS). 3 The amounts reported as taxable on the Forms

1099–R were $13,214 and $5,366, calculated with respect to each policy

as the outstanding loan amount repaid by the cash value of the policy

less the total premiums petitioner paid with respect to the policy. Upon

inquiry by petitioner, Prudential issued to petitioner a letter dated

September 1, 2021, with respect to each policy explaining these

calculations.

Petitioner failed to file an income tax return for the 2017 tax year

and to make estimated tax payments or otherwise fully pay his tax due.

Petitioner also failed to file an income tax return for the 2016 tax year. 4

3 The Forms 1099–R were cited in the notice of deficiency issued to petitioner

and addressed by the parties at trial. There is no dispute that the Forms 1099–R were

issued. We note, however, that the parties did not submit the forms into evidence.

4 Petitioner concedes that in years before 2016 he was aware that there were

due dates for filing returns and paying tax.

3

On or around March 9, 2020, the IRS prepared a substitute for return

(SFR) pursuant to section 6020(b) for petitioner’s 2017 tax year. 5 On

November 30, 2020, respondent issued petitioner a notice of deficiency

for the 2017 tax year, which, inter alia, included in petitioner’s gross

income the taxable distribution amounts reported by Prudential. On

February 25, 2021, while residing in Kentucky, petitioner timely filed a

Petition with this Court.

On or about September 2, 2021, petitioner prepared a proposed

income tax return for the 2017 tax year, which he provided to

respondent. The proposed return claimed a rental real estate loss

deduction of $77,675 in connection with the Signal Mountain Property.

In calculating the loss on Schedule E, petitioner claimed deductions for

the following alleged expenses: $1,762 for insurance for the entire 2017

tax year; $650 for repairs paid for by his daughter in exchange for an

offset in rent; $3,670 for utilities for January 1 through September 15,

2017; and $73,593 for depreciation that petitioner calculated using the

appraised value of the property and a seven-year cost-recovery table,

which he selected because it corresponded to the length of his remaining

prison sentence. At trial petitioner conceded that the amount of his

claimed loss was limited to $25,000. See § 469(i). Petitioner did not

provide any documentation to substantiate the alleged expenses.

Discussion

I. Burden of Proof, In General

Generally speaking, the Commissioner’s determinations in a

notice of deficiency are presumed correct, and the taxpayer bears the

burden of proving by a preponderance of the evidence that the

determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). Section 7491(a) provides that if, in any court

proceeding, a taxpayer introduces credible evidence with respect to any

factual issues relevant to ascertaining the liability of the taxpayer for

any tax imposed by subtitle A or B of the Code and meets other

prerequisites, the burden of proof shall shift to the Commissioner with

respect to that issue. Higbee v. Commissioner, 116 T.C. 438, 440–41

(2001). Petitioner has neither argued nor shown that he has satisfied

5 With respect to the SFR, respondent introduced into evidence a signed IRC

Section 6020(b) ASFR Certification and corresponding Letter 2566–ASFR-30-Day

Proposed Assessment, along with petitioner’s transcript of account for 2017.

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the requirements of section 7491(a) to shift the burden of proof to

respondent and thus bears the burden of proof in this case.

II. Income from Life Insurance

We first decide whether petitioner received constructive

distributions of $13,214 and $5,366 as reported on Forms 1099–R with

respect to two life insurance policies. When a case involves unreported

income and is appealable to the U.S. Court of Appeals for the Sixth

Circuit, as is this case, the presumption of correctness does not attach

to the Commissioner’s determination of such income unless the

Commissioner can provide at least a “minimal” factual predicate or

foundation of substantive evidence linking the taxpayer to the income-

producing activity or to the receipt of funds. See United States v. Walton,

909 F.2d 915, 918–19 (6th Cir. 1990); Garavaglia v. Commissioner, T.C.

Memo. 2011-228, slip op. at 47–48, aff’d, 521 F. App’x 476 (6th Cir.

2013). Once the Commissioner makes the required threshold showing,

the burden shifts to the taxpayer to prove by a preponderance of the

evidence that the Commissioner’s determination is erroneous or

arbitrary. Walquist v. Commissioner, 152 T.C. 61, 67–68 (2019) (citing

Helvering v. Taylor, 293 U.S. 507, 515 (1935)).

The $13,214 and $5,366 taxable distribution amounts reported on

the Forms 1099–R are linked to life insurance policies petitioner held

with Prudential and are supported by Prudential’s letters explaining

their calculations. Petitioner admits to holding the policies and to

having outstanding loans against them. Petitioner also admits that the

policies lapsed in 2017 and raises no dispute with respect to the

derivation or computation of the amounts reported on the Forms 1099–R

upon the policies’ termination. Cf. § 6201(d). Respondent’s

determination of unreported income is therefore entitled to the

presumption of correctness, and petitioner must come forward with

proof that the determination is in error. See Martinez v. Commissioner,

T.C. Memo. 2016-182, at *4–5; Feder v. Commissioner, T.C. Memo. 2012

10, slip op. at 7; see also Banister v. Commissioner, T.C. Memo. 2008 201,

slip op. at 5 (holding that a notice of deficiency indicating third-party

payers paid the taxpayer the specific amounts in question satisfied the

minimal evidentiary burden even though direct evidence was not in the

record), aff’d, 418 F. App’x 637 (9th Cir. 2011).

Gross income includes income derived from life insurance

contracts. § 61(a)(9); Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 429 (1955). Amounts received from life insurance contracts other

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than as a death benefit or annuity are included in gross income to the

extent that they exceed the investment in the contract. §§ 72(b),

(e)(1)(A), (5)(A), (C), 101(a). The “investment in the contract” is the

aggregate amount of the premiums paid less amounts previously

received as income from the contract but excluded from gross income

calculations. § 72(e)(6).

A taxpayer can receive a constructive distribution from the

termination of his life insurance policy, which must be included in gross

income, even if the taxpayer does not physically receive cash or other

property from the policy during the tax year. Black v. Commissioner,

T.C. Memo. 2014-27, at *8–9; Brown v. Commissioner, T.C. Memo. 2011

83, slip op. at 10–12, aff’d, 693 F.3d 765 (7th Cir. 2012); Sanders v.

Commissioner, T.C. Memo. 2010-279, slip op. at 2–6; McGowen v.

Commissioner, T.C. Memo. 2009-285, slip op. at 7–12, aff’d, 438 F. App’x

686 (10th Cir. 2011); Barr v. Commissioner, T.C. Memo. 2009-250, slip

op. at 3; Atwood v. Commissioner, T.C. Memo. 1999-61, slip op. at 4–6.

The termination of both a life insurance policy and indebtedness against

the policy functions as the application of the cash value of the insurance

policy against the debt owed. McGowen, T.C. Memo. 2009 285, slip op.

at 8–12. The application of the cash value of a life insurance policy

against an outstanding loan is no different from distributing the

proceeds of the policy to the taxpayer to permit the taxpayer to use those

proceeds to pay off the loan. Feder, T.C. Memo. 2012-10, slip op. at 11.

A constructive distribution is included in gross income insofar as it

exceeds the taxpayer’s investment in the life insurance contract.

Sanders, T.C. Memo. 2010-279, slip op. at 5.

When petitioner stopped paying the premiums on his two life

insurance policies, Prudential notified him that the lack of payments

resulted in the termination of his loans and underlying policies. The

terminations effectively applied the cash values of his policies against

the loans in extinction of both. Petitioner’s investment in the two

contracts is equal to the sum of his premiums paid. When the policies

were terminated and the cash values of the policies were taken to repay

the loans, petitioner constructively received the cash values of the

policies. The amounts constructively received in excess of his

investments in the contracts are therefore includible in gross income.

Accordingly, we conclude that petitioner, who disputes neither the

amounts of the loans extinguished by the policies’ cash values nor the

amounts of his investments in those policies, received and failed to

report life insurance income from the two lapsed policies as Prudential

calculated.

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Petitioner contends that termination of his life insurance policies

should not result in income for the 2017 tax year because he did not

actually receive any money at the time the policies were terminated.

Petitioner argues that distributions were instead taxable, if at all, when

he initiated the loans with Prudential and received cash. Petitioner has

not, however, argued or otherwise shown that his policy loans were not

true loans. And it is well established that the receipt of cash in the form

of a bona fide loan does not constitute income so long as an obligation to

repay the borrowing remains. Commissioner v. Indianapolis Power &

Light Co., 493 U.S. 203, 207–08 (1990); Commissioner v. Tufts, 461 U.S.

300, 307 (1983). Loans taken out against life insurance policies can

constitute bona fide loans. Black, T.C. Memo. 2014-27, at *8. Because

petitioner’s borrowings had an obligation of repayment at the time they

were taken, they did not constitute income when initially received.

While petitioner did not physically receive money upon the lapse of his

policies, he no longer had to repay the loans, so it is “irrelevant that no

money changed hands.” Brown v. Commissioner, 693 F.3d at 768. As

physical receipt of cash does not dictate taxability, the initial

disbursement of the loans was not taxable. Likewise, the lack of

distribution of cash to petitioner does not render untaxable the

termination of his life insurance policies.

III. Rental Property Deductions

We next decide whether petitioner is entitled to deduct rental real

estate expenses reported on his proposed Schedule E with respect to the

Signal Mountain Property. Petitioner bears the burden of proving

entitlement to any deductions claimed. See Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992); Deputy v. du Pont, 308 U.S.

488, 493 (1940).

Respondent disputes petitioner’s entitlement to the Schedule E

deductions for the reported expenses on multiple grounds. He primarily

contends that the expenses are nondeductible because of petitioner’s use

of the Signal Mountain Property as a residence during 2017. 6 Because

we agree, we do not address respondent’s other arguments on this point.

6 Respondent also contends that petitioner failed to substantiate the expenses

and that the expenses were personal. As to the depreciation expense, respondent

further argues that petitioner used the incorrect cost basis and the incorrect recovery

period for calculating the expense. Finally, he argues that any rental real estate loss

petitioner did incur would be nondeductible pursuant to the general passive activity

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Taxpayers must comply with the specific requirements for any

deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S.

at 84; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Personal expenses may not be deducted unless there is an explicitly

provided exception. § 262(a). Under section 212, ordinary and necessary

expenses paid or incurred for the managing or maintaining of property

held to produce income shall be deductible. Where a taxpayer uses a

dwelling as a personal residence during the taxable year, however,

deductions under section 212 are not allowed. §§ 262(a), 280A(a), (d);

Hunter v. Commissioner, T.C. Memo. 2014-164, at *6 (citing Osborne v.

Commissioner, T.C. Memo. 1987-553). A dwelling is considered the

personal residence of the taxpayer for this purpose if the taxpayer used

the dwelling for personal purposes for a period exceeding the greater of

14 days or 10% of the days the dwelling was rented at fair market value

during the tax year. § 280A(d).

Petitioner resided at the property from January 1 until February

16, 2017, exceeding the 14-day maximum for this reason alone.

Petitioner is also considered to have used the Signal Mountain Property

for personal purposes on the days it was rented to his daughter for less

than fair market value. See § 280A(d)(2)(A), (C), (3)(A). The Signal

Mountain Property is thus classified as petitioner’s personal residence

for the 2017 tax year. Accordingly, petitioner may not deduct any of the

alleged expenses he reported with respect to the Signal Mountain

Property.

IV. Additions to Tax

Also at issue are additions to tax for failure to file under section

6651(a)(1), failure to pay the amount shown under section 6651(a)(2),

and failure to pay estimated tax under section 6654. Pursuant to section

7491(c), respondent bears the burden of production with respect to

petitioner’s liability for these additions to tax. In order to satisfy his

burden, respondent must produce sufficient evidence indicating that it

is appropriate to impose the relevant addition to tax. Higbee, 116 T.C.

at 446.

A. Section 6651(a)(1)

Section 6651(a)(1) provides for an addition to tax if a taxpayer

fails to file timely a required income tax return, unless the taxpayer

loss limitation of section 469(a) and that petitioner failed to show that the $25,000

offset of section 469(i) applies.

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proves that such failure is due to reasonable cause and is not due to

willful neglect. United States v. Boyle, 469 U.S. 241, 245 (1985).

Respondent introduced evidence demonstrating that petitioner was

obligated to file a tax return for the 2017 tax year but that he did not do

so. See § 6012. This is sufficient to satisfy respondent’s burden of

production. See Wheeler v. Commissioner, 127 T.C. 200, 207–08 (2006),

aff’d, 521 F.3d 1289 (10th Cir. 2008).

Petitioner testified that he had “no valid excuse” for not having

filed except for ignorance of the requirement to file while incarcerated.

Petitioner had knowledge of a general duty to file as he testified he had

done so in previous years. Incarceration is not a reasonable cause for

failure to file. See Llorente v. Commissioner, 74 T.C. 260, 268–69 (1980),

aff’d in part, rev’d in part on other grounds and remanded, 649 F.2d 152

(2d Cir. 1981); George v. Commissioner, T.C. Memo. 2019-128, at *9–12,

aff’d, 821 F. App’x 76 (3d Cir. 2020). In the absence of evidence of

reasonable cause, we conclude that petitioner is liable for the addition

to tax for failure to file under section 6651(a)(1).

B. Section 6651(a)(2)

Section 6651(a)(2) imposes an addition to tax for failure to pay

timely the amount shown as tax due on a return. In a case such as this,

where the taxpayer did not file a return, the Commissioner must

introduce evidence that an SFR satisfying the requirements of section

6020(b) was made. Wheeler, 127 T.C. at 210. A return made under

section 6020(b) is treated as “the return filed by the taxpayer for

purposes of determining the amount of the addition” under section

6651(a)(2). § 6651(g)(2).

Respondent produced evidence that the IRS prepared an SFR

satisfying the requirements of section 6020(b) for petitioner’s 2017 tax

year and that petitioner failed to pay the amount shown on the SFR.

Respondent has therefore met his burden of production for the addition

to tax under section 6651(a)(2). See Burnett v. Commissioner, T.C.

Memo. 2023-46, at *6 n.7; Rivera v. Commissioner, T.C. Memo. 2009 215,

slip op. at 7. Petitioner’s only argument with respect to the addition is

that he was ignorant of the law requiring him to continue paying tax

while incarcerated. As with the failure to file a return, incarceration is

not a reasonable cause for the failure to pay tax. See George, T.C. Memo.

2019-128, at *9–12; Kohn v. Commissioner, T.C. Memo. 2009-117,

slip op. at 11–14, aff’d, 377 F. App’x 578 (8th Cir. 2010). Accordingly,

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petitioner is liable for the addition to tax for failure to pay under section

6651(a)(2).

C. Section 6654

Section 6654 imposes an addition to tax on an individual taxpayer

who underpays his estimated tax. The addition to tax is calculated with

reference to four required installment payments of the taxpayer’s

estimated tax liability. § 6654(c)(1). Each required installment of

estimated tax is equal to 25% of the required annual payment.

§ 6654(d)(1)(A). The required annual payment is equal to the lesser of

(1) 90% of the tax shown on the individual’s return for that year (or, if

no return is filed, 90% of his tax for such year), or (2) if the individual

filed a return for the immediately preceding taxable year, 100% of the

tax shown on that return. § 6654(d)(1)(B). In order to satisfy the burden

of production under section 7491(c) regarding an individual’s liability for

the section 6654 addition to tax, the Commissioner, at a minimum, must

produce evidence necessary to enable the Court to conclude that the

individual had a required annual payment under section 6654(d)(1)(B).

Wheeler, 127 T.C. at 210–11.

Respondent has met his burden by introducing evidence

demonstrating that petitioner had a tax liability for the 2017 tax year,

that petitioner did not file a return for the 2017 or 2016 tax year, and

that petitioner did not make any estimated tax payments for the 2017

tax year. Cf. id. at 211–12. Petitioner did not contest this evidence but

rather reiterated his claim that he had reasonable cause for his failure

to pay: his ignorance of the requirement to pay tax while incarcerated.

Even if we were to find this argument persuasive, section 6654 provides

no general exception for reasonable cause or lack of willful neglect. See

Mendes v. Commissioner, 121 T.C. 308, 323 (2003). Accordingly,

petitioner is liable for the addition to tax for failure to pay estimated tax

under section 6654.

In reaching the holdings herein, we have considered all

arguments put forth by the parties, and to the extent they are not

discussed above, we consider them moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.