Howard & Anne Slater, Petitioner

T i .C . Summary' Opinion 2010- 1

UNITED STATES TAX COUR T

HOWARD AND ANNE SLATER, Petitioners v . COMMISSIOt1ER OF INTERNAL REVENUE, Responden t Docket No . 15852-07S .

Filed January 11, 2010 .

Howard and Anne Slater, pro sese .

John R . Bampfield and William W .-Kiesslina , for respondent .

GOEKE, Judge :

This case was heard pursuant to th e provisions of secti n 7463 of the Internal Revenue Code in effec t when the petition wiIgs filed .' Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, an d .'Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue .

SERVED JAN 112010

this opinion shall not be treated as precedent for any other case .

Respondent determined a $32,834 deficiency in petitioners ' Federal income tax and a $6,567 section 6662(a) penalty for the year 2005 . The issues for decision are :

(1) Whether an Internal Revenue Service'''(IRS) closin g notice issued 1 month after the issuance of a notice of II deficiency closed petitioners' tax year . We hold it did not ; (2) whether Howard Slater (petitioner) participated in a nonqualified deferred compensation plan under section 409A .

hold he did not ; an d (3) whether petitioners are liable for an accuracy-related penalty under section 6662 . We hold they are !not .

Backgroun d Petitioners resided in Florida at the time the petition wa s filed . Petitioner received a master's degree in taxation and was the sole owner and representative of Slater Financial Corp .

(Slater Financial), registered as a broker-dealer with the Securities and Exchange Commission under section 15 of the Securities Act of 1934, ch . 404, 48 Stat . 881 (current version at

" Petitioner held four annuity accounts with Jackson Nationa l Life Insurance Co . During late April and early May of 2005 Ti m Gillis (Mr . Gillis) .of GE Life & Annuity Assurance Co . (Genworth) approached Slater Financial to solicit new business .

Petitioner had no business to transfer to Genworth other than his personal annuity accounts .

Petitioner ' s agreement to Genworth ' s proposa l to transfer the annuity accounts entitled him to a commission equal to a percentage of the value of .the accounts . Instead, petitioner asked Mr .fGillis to promise that he could receive his broker-dealer commission as .interest prepaid into his annuity accounts, thus allowing petitioner to defer paying tax on the amount at issue . Mr!. Gillis agreed, and the parties signed contracts outlining the details of their agreements . Among th e terms addressed in these agreements is a schedule of surrender charges to which petitioner would be subject if he withdrew amounts from any of his Genworth accounts . Petitioner executed the transfers, and an amount equal to petitioner's annuit y contracts plus commissions was paid into petitioner's annuity accounts at Genworth . Following these transactions, Genworth issued petitioner aForm 1099-MISC, Miscellaneous Income , reporting $86,868 in nonemployee compensation . Petitioner did not receive the Form 1099-MISC because it was mailed to his prio r address . On July 2 ;, 2007, respondent mailed a notice o f deficiency to petitioners for 2005 in which respondent denie d petitioner nonqualified deferred compensation treatment . On Jul y 30, 2007, respondent's automated underreporter (AUR) division i n Philadelphia issued a closing notice for petitioners' case .

4 - On December 4, 2007, petitioners filed a!motion for entry of decision . The motion was denied by order dated January 2, 2008 .

On January 14, 2008, petitioners filed a motion for reconsideration of the order dated January 2,2008 . This motion was denied on January 18, 2008 . Petitioners filed a second motion for entry of decision on November 17, 2008, and an amended motion for entry of decision on February 17, 2009 . The amended motion for entry of decision was denied by order on February 23, 2009, following a hearing . A trial was held February 23, 2009, in Tampa, Florida .

Following the trial petitioners again filed a motion fo r entry of decision on March 31, 2009 . For the„Treasons stated herein, this motion will be denied .

Discussio n I .

Closing Notic e Petitioners believe the closing notice respondent issued after the issuance of the notice of deficiency closes their tax year and precludes any further action . They cite no authority for this proposition . Section 7121 provides the exclusive means by which the Secretary may enter into a closing agreement as to a determination of the taxpayer's final tax liability . Closing agreements are final and, following the Secretary's approval, bar reopening of the case . Sec . 7121(b) . A closing notice is to b e distinguished from a closing agreement under section 7121 .

Whereas closing agreements are final, conclusive, and binding on the parties and generally may not be disregarded, closing notices do not have the same force and effect .

Urbano v . Commissioner , 122 T .C . 384, 393-394 (2004) . Nor did the closing notice operat e to rescind the notice ; of deficiency under section 6212(d) . Se e Wong v . Co mm issioner , I T .C . Memo . 2000 - 88, affd . 13 Fed . Appx . 638 (9th Cir . 2001 ) ; Rev l . ;Proc . 98-54 , 1998 - 2 C .B . 529 .

Petitioners do not by name raise a defense of estoppel .

Nevertheless, conside ring the nature of their claim, we thin k they raise that defense . One of the-elements-of equitable .

estoppel is reliance on the action of the Internal Revenue Service (IRS) to they taxpayer's detriment . Because the Notic e CP-2005 was mailed tq petitioners on July 30, 2007, afte r petitioners had already filed their petition on July 13, 2007, there was no detrimental reliance . Petitioners' reliance on the closing notice to prclude any further collection action fails as an estoppel defense ., See McCoy v . Commissioner , T .C . Memo . 2008- 91 . Accordingly, respondent's inquiry into the 2005 tax year is not closed .

i II .

Nonqualified Deferred Compensation Treatmen t Section 61(a) provides that gross income includes "al l income from whatever source derived" . Section 61(a) broadl y applies to any accession to wealth, and statutory exclusions from income are narrowly construed . See Commissioner v . Glenshaw I I Glass Co . , 348 U .S . 426, 431 (1955) . Section 61(a)(1) list s "Compensation for services, including fees, commissions" as items includable in gross income . Section 451(a) provides that any item of income shall be included in gross income in the year received .

Taxpayers may elect to defer recognition of certain items o f income pursuant to nonqualified deferred compensation plans . Se e sec . 409A . In order for compensation to be deferred unde r section 409A, a nonqualified deferred compens i~ ation plan must mee t the requirements of section 409A(a)(2), (3), :and (4) concernin g distributions, acceleration of benefits, and elections .

An independent contractor may elect to defer commissio n compensation for services provided only if the contractor is unrelated to the recipient of the services . An independent contractor may not defer commission compensation under section 409A if the recipient of the services is a related party . See Notice 2005-1, 2005-1 C .B . 274 . There is an'exception to thi s rule if the contractor provides the service from which the commission arises to both related and unrelated parties and the same service is performed in the contractor's ordinary course of business . See Notice 2005-1, 2005-1 C .B . 274 .

If the plan fails to meet the requirements of section 409A(a)(2), (3), and (4), all compensation deferred under the plan shall be includable in gross income to the extent not i subject to a substantial risk of forfeiture .

Sec . 409A ( a)(1)( A Notice 2005-1, 2005-1C .B . 274, provides that compensation is subject to .substantial risk of forfeiture when "entitlement to the amount is conditi p'ned .on the performance of substantia l i 'future services by any person or the occurrence of a condition related to a purpose I of the compensation, and the possibility of forfeiture is substantial . " Petitioner arguels that he meets the requirements fo r exclusion under secti; on 409A . Respondent contends that th e commissions petitioner received from Genworth are not conditione d upon the performance of any future service and thus not subjec t to a substantial ri s of forfeiture under section 409A .

Petitioner fails the election requirements of sectio n 409A(a)(4)(B) . Petitioner's commission arose from services h e performed as an independent contractor for the benefit of related parties : him and his wife . Petitioner does not satisfy the exception in Notice 2005-1, 2005-1 C .B . 274, because he has not provided the same service for unrelated parties in his ordinary course of business .

Petitioner has ;failed to establish that his compensation is substantially at risk .

Petitioner relies on the surrender charge , which is unrelated to the commission itself .,and i s instead related to the nature of petitioner's annuity .

We do not find that the surrender charge is within th e statutory meaning of substantial risk of forfeiture . In addition, the record does not establish that, petitioner' s commission was conditioned upon some future performance o r occurrence . Petitioner's self-directed decision to put th e commission into an annuity subject to a surrender charge is incompatible with the risk required under section 409A(a)(1)(A) .(i) . Petitioner has failed to produce evidence of a substantial risk of forfeiture and thus cannot defer the commission income under section 409A .

Because petitioner has failed to meet the requirements of section 409A(a)(4) and because the commissionl~is not subject to a substantial risk of forfeiture, petitioner's commissions shall be included in petitioners' gross .income under sections 61(a) and 409A(a) (1) (A )

III .

Accuracy-Related Penalt y Respondent determined that petitioners are liable for th e accuracy-related penalty under section 6662 . ;!Section 666 2 imposes an accuracy-related penalty equal to 20 percent of any portion of an underpayment of tax which is attributable to, amon g other things, a substantial understatement of',II'income tax . See sec . 6662(b)(2) .

Section 6662 (d) (1) (A) provides that a substantial understatement of income tax exists if the understatement exceeds the greater of (1) 10 .percent of the tax required to be shown on the return ; or (2) $5,000 .

Section 6664(c)(1) provides that the accuracy-relate d penalty shall not be imposed if it is shown that the taxpayer's underpayment was'attrbutable to reasonable cause and that his action was in good faith . The determination of whether a - taxpayer acted .with reasonable cause and in good faith is made o n .a case-by-case basis,i taking into account all pertinent facts and circumstances . Sec .11 .6664-4(b)(1), Income Tax Regs .

Petitioner underreported his tax liability by $32,834, an understatement that exceeds the amount provided under sectio n 6662(d)(1)(A) . Petitioner, however, had reasonable cause fo r taking the position with respect to the commission compensation, despite our finding that he was ultimately liable for this amount . Petitioner reasonably relied on a Genworth representative who negotiated the payment of his commission compensation and authorized the transactions so they were pai d I into his annuity accounts and provide him with the deferred treatment he sought! Genworth ultimately issued petitioner a Form 1099-MISC, but the Form .1099-MISC was erroneously mailed t o his old address . Petitioner could have reasonably believed that the forms he exchanged with Genworth documenting . his election fo r deferred treatment guaranteed such treatment by the IRS . Afte r considering petitioner' s knowledge , of the facts and understanding of the law, we find petitioner's error was made with reasonabl e cause and in good faith . Accordingly, we hold that petitioner s are not liable for the penalty pursuant to section 6662 .

Conclusio n For the reasons stated herein, we find respondent properl y issued a notice of deficiency and that petitioners' case was not closed upon respondent's issuance of a closing notice . In addition, we shall sustain respondent's deficiency determination and find that petitioners are not liable for a section 666 2 accuracy-related penalty .

la Decision'will be entere d for respondent as to th e deficiency and for petitioners as to the section 6662 accuracy-related penalty .

II i ie

15. U .S .C . secs . 78a-78oo (2006 & Supp . 2008)) .