T.C. Summary Opinion 2007-174



                      UNITED STATES TAX COURT



                  LILLIE M. TRIPP, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5257-06S.                Filed October 9, 2007.



     Lillie M. Tripp, pro se.

     Nancy P. Klingshirn and Dennis G. Driscoll, for respondent.



     JACOBS, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1   Pursuant to section 7463(b),

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


      1
       Unless otherwise indicated, subsequent section references
 are to the Internal Revenue Code in effect for the years in
 issue, and all Rule references are to the Tax Court Rules of
 Practice and Procedure.
                                 - 2 -

and this opinion shall not be treated as precedent for any other

case.

     Respondent determined deficiencies in petitioner’s Federal

income tax of $7,799, $10,001, and $3,290 for 2002, 2003, and

2004, respectively.   In addition, respondent determined that

petitioner was liable for accuracy-related penalties under section

6662 of $1,559.80 for 2002, $2,000.20 for 2003, and $658 for 2004.

The deficiencies arose as a consequence of respondent’s

disallowance of deductions petitioner claimed for losses in

connection with her partnership interest in the LB Tripp & Tripp

Group (the Tripp partnership).    Embedded in the 2003 loss was a

$24,052 salary expense deduction for the value of cash and

equipment transferred to a third party in exchange for services

rendered to the partnership.

     Respondent also determined a deficiency in the 2003 income

tax of petitioner’s former husband, Richard Powell Tripp (Mr.

Tripp), stemming from the disallowance of a deduction claimed for

a loss with respect to his interest in the Tripp partnership.2      Mr.

Tripp timely petitioned this Court, and his case at docket No.

5256-06S was consolidated with the instant case for trial.    After




        2
       The disallowed deduction for a loss in Mr. Tripp’s case was
 in part attributable to the same $24,052 deduction for a salary
 expense as in petitioner’s case.
                                 - 3 -

trial, respondent conceded the case involving Mr. Tripp.    That

case was thereafter severed from the instant case, and a

stipulated decision was entered.

     After concessions by respondent herein, the issues we must

decide are:     (1) Whether petitioner had a basis in her interest in

the Tripp partnership sufficient to entitle her to deduct her

distributive share of the Tripp partnership losses in 2002, 2003,

and 2004; (2) whether the Tripp partnership may deduct $24,052 as

a salary expense in 2003; and (3) whether petitioner is liable for

accuracy-related penalties under section 6662 for 2002, 2003, and

2004.

                               Background

     Some of the facts have been stipulated and are so found.      The

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

     During the years in issue, petitioner was employed full time

by a pharmaceutical company as a customer solutions manager.    She

timely filed income tax returns for 2002, 2003, and 2004 in which

she reported wage income of $80,291, $80,562, and $126,671

respectively.    During the same period, petitioner owned an 80-

percent interest in the Tripp partnership, a general partnership

which was formed under the laws of Ohio to provide personal care

hair services and nail services through a beauty salon.    Mr. Tripp

owned the remaining 20-percent partnership interest.
                                - 4 -

     The Tripp partnership agreement provided that petitioner’s

initial capital contribution would be $60,000 in cash and Mr.

Tripp’s contribution would be goods, property, and services valued

by the parties to the agreement at $15,000.    The Tripp partnership

commenced its beauty salon operation on January 1, 2002.    The

beauty salon did not generate income in any of the years in issue

and ceased operations in June of 2003.

     The Tripp partnership timely filed a Form 1065, U.S. Return

of Partnership Income, for each of the years in issue.    Attached

to each partnership return was a schedule showing each partner’s

distributive share of income or loss.    A schedule furnished to

respondent with the 2003 partnership return (but not with the 2002

or the 2004 return) reported petitioner’s basis in the Tripp

partnership.3   In accordance with the amounts that were reported on

each Form 1065, petitioner deducted $30,681 as her distributive

share of the Tripp partnership loss on her 2002 return, $26,342 as

her distributive share of the Tripp partnership loss on her 2003

return, and $9,302 as her distributive share of the Tripp

partnership loss on her 2004 return.4    Except for one item of


       3

 The schedule for 2003 showed that petitioner’s basis in her
 partnership interest at the beginning of the year was $4,332,
 that her partnership contributions during the year totaled
 $30,000, that her distributive share of the partnership’s loss
 was $26,342, and that her partnership basis at the end of the
 year was $7,990.
       4
        The beauty salon continued to generate losses after it
                                                     (continued...)
                              - 5 -

partnership expense (i.e., $24,052 as a salary expense in 2003),

respondent no longer contests the amount of losses reported by the

Tripp partnership for any of the years in issue.   However,

respondent posits that petitioner is not entitled to deduct her

distributive share of those losses, maintaining that she lacks a

sufficient basis in the partnership to do so.

     As stated above, respondent contests a $24,052 salary expense

that the Tripp partnership deducted in 2003.    That expense

represents the value of property (cash and used beauty salon

equipment) transferred to a cosmetologist who had rendered

services to the Tripp partnership.    Respondent does not dispute

that cash and equipment were transferred to the cosmetologist in

exchange for services rendered to the Tripp partnership but rather

contests the value claimed for the property transferred.

Moreover, respondent contends that Mr. Tripp, rather than the

Tripp partnership, was the owner of the property before the

transfer.

                            Discussion

     Rule 142(a)(1) provides that the burden of proof is on

respondent with respect to any new matter.    Respondent concedes

that the issue as to whether petitioner had a sufficient basis in

her interest in the Tripp partnership to use the partnership



     4
     (...continued)
 ceased operating, because of storage expenses for its equipment.
                               - 6 -

losses incurred in 2002, 2003, and 2004 is new matter and

therefore acknowledges that he bears the burden of proof with

respect to this issue.

     Section 704(d) limits the deductibility of a partner’s

distributive share of partnership losses.    Those losses are

deductible only to the extent of the adjusted basis of the

partner’s interest in the partnership.    Sennett v. Commissioner,

(1983), affd. 

(9th Cir. 1985).     A

partner’s adjusted basis in the partnership is essentially the

partner’s contribution to the partnership increased by the

partner’s distributive share of partnership income and decreased

by all cash distributions and the partner’s distributive share of

partnership losses.   Sec. 705(a).   If a partner’s distributive

share of partnership losses is greater than the partner’s

available adjusted basis, the excess loss cannot be deducted in

that year but must instead be carried forward until the partner

has an adjusted basis sufficient in amount to offset the amount of

the loss.   See sec. 1.704-1(d)(1), Income Tax Regs.

     Respondent contends that petitioner, notwithstanding her

obligation to contribute $60,000 to the Tripp partnership pursuant

to the partnership agreement, failed to establish that (1) she

made such an initial capital contribution (which would have given

her a basis in her partnership interest), or (2) she subsequently

paid any partnership liabilities which would be considered capital
                               - 7 -

contributions.   Continuing, respondent contends that as the Tripp

partnership never generated income, petitioner’s adjusted basis

was not sufficient to permit her to deduct her distributive share

of partnership losses in any of the years in issue.   In support of

his contention, respondent points to the lack of documentary

evidence regarding the initial contribution by petitioner as well

as the lack of evidence regarding her subsequent payment of

partnership debt.   While petitioner did not document her capital

contributions to the Tripp partnership, we are satisfied, after

observing her while she testified, that she did in fact make such

contributions.

     The Tripp partnership financial records, prepared using the

cash method of accounting, show, and respondent does not contest,

that the beauty salon the partnership operated was not profitable

during 2002 or 2003 and continued to generate losses in 2004 even

though it ceased operations in June of 2003.   The expenses of the

Tripp partnership routinely exceeded its revenues, and the record

reveals that virtually all of the partnership expenses were paid

in cash.   Depreciation was not significant because the partnership

leased its equipment and premises.

     Mr. Tripp did not have the resources to make meaningful cash

contributions to the partnership to cover its operating shortfall.

Rather, it was petitioner who had the resources (from her

substantial wage income), and she testified forcefully and
                              - 8 -

credibly that she paid the partnership’s shortfall.   In this

regard, when asked about her participation in the partnership’s

affairs, petitioner stated:

          I still am paying the bills out of my check from our
          401(k) for this business right now. I am still paying
          for it after it is gone. * * * I have given my money up
          through all of the money avenues that I had, whether it
          was my 401(k), or whether it was my equity loans, my
          cash, my own wages, my bonus checks, as well as credit
          cards. I have been paying, and paying, and paying to
          try and help keep the business afloat at the time that
          it was active, and afterwards I am paying because I like
          keeping my credit and everything being A-1.

     In any event, we find that respondent failed to carry his

burden of showing that petitioner did not make contributions to

the partnership in amounts sufficient to give her an adjusted

basis in her partnership interest at least equal to the claimed

deductions for losses for the taxable years in issue.

     With respect to the second issue–-i.e., the allowance of a

deduction for salary expense in 2003 for the value of property

(cash and equipment) transferred to the cosmetologist in exchange

for services--section 162(a)(1) allows as a deduction “a

reasonable allowance for salaries or other compensation for

personal services actually rendered”.

     Respondent does not dispute that a transfer of cash and

equipment took place and that the recipient was an experienced

cosmetologist with whom Mr. Tripp had had previous business
                                - 9 -

dealings.5   Mr. Tripp testified that the cosmetologist collaborated

with the Tripp partnership as an independent contractor and that

during a period in which Mr. Tripp was hospitalized, the

cosmetologist helped ensure the continued operation of the Tripp

partnership beauty salon.    Mr. Tripp stated that the Tripp

partnership, as opposed to Mr. Tripp personally, transferred cash

and used equipment to her.    Nothing in the record indicates that

the transfer was other than by the Tripp partnership and was other

than at arm’s length.

     While it is true, as respondent points out, that the record

does not contain any documentary substantiation as to the amount

of cash or the precise value of the transferred equipment, we are

satisfied from Mr. Tripp’s testimony that the value of the items

transferred was $24,052 as claimed by the Tripp partnership.    We

found Mr. Tripp’s testimony credible, and his testimony was

uncontroverted by any evidence submitted by respondent.6

     Because we hold that petitioner was entitled to the claimed

deductions for losses from her interest in the Tripp partnership

and that the Tripp partnership was entitled to a $24,052 salary



       5
       Mr. Tripp had contemplated the sale of a beauty salon
 (other than the one operated by the Tripp partnership) to the
 same cosmetologist in 1999 in an arm’s-length transaction. That
 sale was not consummated.
       6
       Moreover, we are mindful that respondent raised the same
 issue in Mr. Tripp’s case and subsequently conceded it. See
 supra note 2.
                                - 10 -

expense deduction, petitioner is not liable for accuracy-related

penalties under section 6662.



                                         Decision will be entered

                                    for petitioner.