Miller v. Commissioner
| Decision Date | 06 March 2001 |
| Docket Number | Docket No. 12095-98. |
| Citation | 81 T.C.M. 1258 |
| Parties | Taylor Miller v. Commissioner. |
| Court | U.S. Tax Court |
Patrick W. Martin, for the petitioner.
Timothy F. Salel, for the respondent.
Respondent determined a deficiency of $75,180 in petitioner's 1992 Federal income tax. The deficiency is primarily attributable to respondent's determination that the proceeds of petitioner's settlement of a sex discrimination class action lawsuit, Kraszewski v. State Farm Gen. Ins. Co., 38 Fair Empl. Prac. Cas. (BNA) 197 (N.D. Cal. 1985), affd. in part, revd. in part and remanded 912 F.2d 1182 (9th Cir. 1990) (), are included in her gross income.1
Petitioner concedes that the gross proceeds of her settlement of the State Farm class action law suit—$283,543—are not excluded from her gross income under section 104(a)(2),2 but she attacks the validity of respondent's notice of deficiency on multiple grounds: That respondent violated his reopening procedures, that respondent performed a second inspection of petitioner's books of account in violation of section 7605(b), and that respondent is equitably estopped from issuing the notice of deficiency. Petitioner also claims, if the validity of the notice should be sustained, that she is entitled to deduct, as section 162 business expenses, two items she did not claim on her 1992 income tax return: Her contribution to a private pension plan and her attorney's fees and costs in the State Farm class action lawsuit.
We sustain the validity of respondent's notice and reject petitioner's claims to the private pension plan contribution deduction and above-the-line treatment of the deduction for her attorney's fees and costs, which respondent allowed in the notice of deficiency as an itemized deduction subject to the 2-percent limitation of section 67.
Some of the facts have been stipulated and are so found. The stipulations of fact and accompanying exhibits are incorporated by this reference. For clarity and convenience, findings of fact and discussion with respect to the validity of respondent's notice and petitioner's deduction claims are combined under two separate headings. Monetary amounts have been rounded to the nearest whole dollar.
Petitioner resided in Poway, California, when the petition in this case was filed.
During 1975, petitioner sold insurance products as an employee of Fidelity Union Life Insurance Company (Fidelity). During 1976 and 1977, petitioner operated as a sole owner and paid for the costs of operating her business as an independent insurance salesperson with Fidelity. Petitioner reported her 1976 and 1977 earnings from the sale of Fidelity insurance products on Schedule C of her 1976 and 1977 Federal income tax returns. After 1977, petitioner never again sold insurance, but worked off and on, sometimes as an employee and sometimes as an independent contractor, in various selling jobs in, among other things, the financial products, mortgage brokerage, and real estate businesses.
In fall 1976 or January 1977, petitioner applied to become a State Farm trainee agent. As part of her job application, petitioner had a series of interviews and took a test with State Farm. Petitioner was never hired by State Farm, nor did she ever provide services for State Farm.
In 1988, petitioner applied to become a class member of the State Farm class action lawsuit and thereafter became a class member. On March 6, 1992, petitioner executed a settlement agreement and general release (settlement agreement), regarding her claim in the State Farm class action lawsuit. In the settlement agreement, petitioner and State Farm characterized the settlement as "the compromise of a claim for agent earnings"; by entering into the settlement agreement, petitioner waived "any and all right she might have * * * respecting instatement".
Petitioner received a $223,935 check from the law firm of Saperstein, Mayeda, Larkin, and Goldstein as the net proceeds of settlement of her claim in the State Farm class action lawsuit. Petitioner has stipulated that she received $283,543 as the gross proceeds of the settlement (not reduced by attorney's fees and costs) during the 1992 tax year. Of that amount, State Farm reported $283,178 on Form 1099-MISC and the remaining $425 on Form W-2. State Farm negotiated and reported the $283,178 of settlement proceeds on Form 1099-MISC as the amount it would have paid petitioner if she had become its independent insurance agent. State Farm negotiated and reported the $425 of settlement proceeds on Form W-2 with payroll taxes properly withheld as the amount it would have paid petitioner if it had initially hired her as a trainee agent.
Petitioner timely filed her Federal income tax return, Form 1040, for the 1992 tax year with the Internal Revenue Service Center in Fresno, California. Petitioner attached to her 1992 return a Schedule C and a Form 8275 disclosure statement reporting her receipt of settlement proceeds of $1,383,118 from State Farm companies in 1992 on account of personal injuries or sickness from a "very serious auto accident and an intentional personal discrimination claim", which were excludable from gross income under section 104(a)(2). Of this total amount, petitioner received approximately $1,100,000 from State Farm Mutual Auto Insurance Company in settlement of a claim for personal injuries suffered in an auto accident. These personal injury settlement proceeds are not at issue in this case.
On October 7, 1993, respondent's District Director mailed petitioner a letter and Information Document Request (Form 4564) informing her that her 1992 income tax return had been selected for examination. On April 8, 1994, petitioner's counsel mailed respondent a 16-page memorandum arguing that the State Farm class action lawsuit settlement proceeds received by petitioner are excluded from gross income under section 104(a)(2). On April 25, 1994, respondent mailed petitioner a "no change" form letter (Letter 590 (DO) (Rev. 4-92)) stating: "We examined your tax return for the above period and made no changes to the tax year reported." Respondent's form letter goes on to advert to the possibility of a later change in the taxpayer's tax if the taxpayer is a shareholder of an S corporation, a beneficiary of a trust, or a partner in a partnership whose return is changed on examination.
Respondent and petitioner never executed a closing agreement, pursuant to section 7121, for petitioner's 1992 tax year.
On March 29, 1995, respondent's Fresno Service Center mailed petitioner a 30-day letter regarding her alleged failure to report bartering proceeds of $2,894 on her 1992 income tax return for the 1992 tax year. The 30-day letter regarding the bartering proceeds was unrelated to the examination regarding the State Farm class action lawsuit settlement proceeds. On April 19, 1995, petitioner's representative, David W. Stevenson, C.P.A. (Stevenson), in response to this 30-day letter, mailed a letter to respondent's Fresno Service Center, attaching thereto copies of the Schedule D of petitioner's 1992 income tax return and the front page of the 30-day letter. After receiving Stevenson's letter, respondent agreed that petitioner had properly reported $2,894 in bartering proceeds on Schedule D of her 1992 income tax return.
On September 28, 1995, respondent's District Director mailed petitioner a 30-day letter for the 1992 tax year regarding the State Farm class action lawsuit settlement proceeds. The statement of examination changes accompanying this 30-day letter proposed to treat petitioner's State Farm class action lawsuit settlement proceeds, in the amount of $283,117, as income from self-employment for the 1992 tax year, and to allow legal fees of $56,623 paid to obtain the settlement as an above-the-line Schedule C deduction. This 30-day letter proposed no adjustment related to bartering proceeds.
In November 1995, petitioner and her counsel signed a Consent to Extend the Time to Assess Tax (Form 872) that extended the period of limitations on assessment for the 1992 tax year until June 30, 1997.
On July 17, 1996, a tax technician in respondent's District Director's Office mailed petitioner's counsel a letter enclosing a revised examination report (not included in the record) deleting self-employment tax on the settlement proceeds and downgrading petitioner's legal fees from an above-the-line Schedule C deduction to a below-the-line itemized deduction. The letter also asserted that two criteria applied in respondent's decision "to reopen Ms. Miller's case for re-examination": First, there had "been a substantial error both in amount and in relation to total tax liability" and, second, "other circumstances exist indicating that failure to reopen the case would be a serious administrative omission".
On October 2, 1996, petitioner signed another Consent to Extend the Time to Assess Tax (Form 872), which extended the period of limitations on assessment for the 1992 tax year until April 30, 1998.
On January 16, 1997, petitioner's counsel mailed respondent's Riverside, California, Appeals Office a 9-page memorandum arguing two grounds on which the no change letter should stand. The first ground was that there was no justifiable basis for reopening the case under Rev. Proc. 94-68, 1994-2 C.B. 803, and section 4023 of the Internal Revenue Manual (the Manual), which in his view were binding on the Internal Revenue Service. The second ground was that respondent had conducted a second investigation of petitioner's 1992 return, without notifying her of the need thereof, in violation of section 7605(b).
On June 16, 1997, the Chief, Examination Division, Laguna Niguel, California, mailed petitioner a letter stating, with regard to the 1992 tax year:
We are required by law to notify taxpayers in writing if we need to reexamine their...
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