Judges: "Swift, Stephen J"
Attorneys: James J. Gatziolis , for petitioner. Jeffrey S. Luechtefeld , for respondent.
Filed: Mar. 16, 2009
Latest Update: Dec. 05, 2020
Summary: T.C. Memo. 2009-57 UNITED STATES TAX COURT ROBERT J. KENNEDY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 14021-04. Filed March 16, 2009. James J. Gatziolis, for petitioner. Jeffrey S. Luechtefeld, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined a deficiency in petitioner’s 1998 Federal income tax and additions to tax as follows: Additions to Tax Sec. Sec. Sec. Deficiency 6651(a)(1) 6651(a)(2) 6654(a) $3,516,772 $791,273 $826,
Summary: T.C. Memo. 2009-57 UNITED STATES TAX COURT ROBERT J. KENNEDY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 14021-04. Filed March 16, 2009. James J. Gatziolis, for petitioner. Jeffrey S. Luechtefeld, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined a deficiency in petitioner’s 1998 Federal income tax and additions to tax as follows: Additions to Tax Sec. Sec. Sec. Deficiency 6651(a)(1) 6651(a)(2) 6654(a) $3,516,772 $791,273 $826,4..
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T.C. Memo. 2009-57
UNITED STATES TAX COURT
ROBERT J. KENNEDY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14021-04. Filed March 16, 2009.
James J. Gatziolis, for petitioner.
Jeffrey S. Luechtefeld, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency in
petitioner’s 1998 Federal income tax and additions to tax as
follows:
Additions to Tax
Sec. Sec. Sec.
Deficiency 6651(a)(1) 6651(a)(2) 6654(a)
$3,516,772 $791,273 $826,441 $8,325
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1998, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
After concessions of some issues, the primary issue for
decision is whether for 1998 petitioner has substantiated various
carry forward losses from 1994, 1995, and 1997.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
Florida.
From 1989 through 1993 petitioner owned and managed several
retail music stores in Hawaii.
In 1990 petitioner purchased a home on Oahu. In connection
with the Oahu home purchase petitioner obtained a mortgage loan
from a bank. The record does not adequately establish the
purchase price of the home, the amount and terms of the mortgage
loan, or petitioner’s intended use of the Oahu home.
After purchasing the Oahu home and without moving into the
home, petitioner hired a contractor to remodel the home. Before
the home remodeling was completed, petitioner’s retail music
stores went out of business, and in 1994 petitioner stopped
making payments on the mortgage loan. In 1995 the bank
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foreclosed on the Oahu home and discharged petitioner’s mortgage
loan obligation.
From 1994 through 1998 petitioner traded securities on his
own account, and petitioner was involved in other business
activities in Illinois.
On his 1994 individual Federal income tax return petitioner
reported zero taxable income and claimed a $131,748 long-term
capital loss from worthless securities. None of the claimed
capital loss was used to offset 1994 capital gain income, and
petitioner reported the claimed capital loss as available for
carry forward to 1995.
On his 1995 individual Federal income tax return petitioner
reported zero taxable income and the above $131,748 capital loss
carryforward from 1994. None of the claimed $131,748 long-term
capital loss carryforward was used to offset 1995 capital gain
income, and petitioner reported the claimed capital loss from
1994 as available for carry forward to 1996.
Also on his 1995 tax return petitioner claimed a $1,088,448
net operating loss (NOL) deduction. The claimed $1,088,448 NOL
related to the following items:
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Item Amount
Oahu home
Passive activity loss ($403,123)
Long-term capital loss (441,444)
Illinois business property
Passive activity loss (273,151)
Miscellaneous deductions (31,449)
Miscellaneous interest income 60,719
Total claimed 1995 NOL ($1,088,448)
The claimed $1,088,448 1995 NOL was reported on petitioner’s
1995 individual Federal income tax return as carried back to 1993
and as carried forward to 1996 in the amounts reflected below:
Claimed 1995 NOL
Carried back/forward to Amount
1993 ($273,910)
1996 (814,538)
Total ($1,088,448)
On his 1996 individual Federal income tax return petitioner
reported zero taxable income and zero losses, and petitioner
reported the unused claimed $131,748 1994 long-term capital loss
carryforward and the unused claimed $814,538 1995 NOL
carryforward. On his 1996 tax return, petitioner used none of
the claimed loss carryforwards, and petitioner reported the
losses as available for carry forward to 1997.
On his 1997 individual Federal income tax return petitioner
reported zero taxable income, and petitioner reported the unused
claimed 1994 long-term capital loss carryforward and the unused
claimed 1995 NOL carryforward. Also on his 1997 tax return
petitioner claimed a $32,347 short-term capital loss for 1997
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relating to the sale of securities, and an $18,075 NOL for 1997,1
and petitioner reported that he used none of the claimed loss
carryforwards and none of the claimed 1997 losses. Petitioner
reported the following carryforwards to 1998:
Carryforward
Claimed to 1998
1994 Long-term capital loss ($131,748)
1995 NOL (814,538)
1997 Short-term capital loss (32,347)
1997 NOL (18,075)
Although petitioner received substantial income in 1998 from
various activities, he did not timely file a 1998 Federal income
tax return.
On audit for 1998 using information obtained from third
parties respondent determined that petitioner received $8,939,449
in income from wages, interest, dividends, capital gains, and
pensions. Respondent did not take into account any of the loss
carryforwards that had been reflected on petitioner’s 1997
individual Federal income tax return as available for carry
forward to 1998.
On May 3, 2004, respondent mailed to petitioner a notice of
deficiency in which respondent charged petitioner with the above
$8,939,449 in income and determined a $3,516,772 deficiency in
petitioner’s 1998 Federal income tax.
1
The record does not establish the alleged source of the
claimed $18,075 1997 NOL.
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On August 2, 2004, petitioner filed his petition herein.
On March 3, 2006, petitioner filed with respondent a
document purporting to be his 1998 individual Federal income tax
return on which petitioner reported $70,452 in income and on
which petitioner claimed carryforwards of the claimed $131,748
1994 long-term capital loss, the claimed $814,538 1995 NOL, the
claimed $32,347 1997 short-term capital loss, the claimed $18,075
1997 NOL, miscellaneous itemized deductions, and taxable income
and tax due, as follows:
Petitioner’s 1998 Tax Return Income (Losses)
Income
Taxable interest $70
Ordinary dividends 9,270
Net capital gain 46,112
Pensions 15,000
Deductions
1994 Long-term capital loss carryforward (131,748)
1995 NOL carryforward (814,538)
1997 Short-term capital loss carryforward (32,347)
1997 NOL carryforward (18,075)
Miscellaneous itemized deductions (75,595)
Taxable income -0-
Tax due -0-
During pretrial respondent’s representatives reviewed
petitioner’s late-filed 1998 individual Federal income tax
return, petitioner’s 1994 through 1997 individual Federal income
tax returns, and the claimed 1994, 1995, and 1997 losses
petitioner reported as carried forward to 1998.
The parties agreed to some of the above income and losses
claimed. For lack of substantiation, respondent disallowed two
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components of the claimed $1,088,448 1995 NOL, thereby reducing
the allowable NOL carryforward from 1995 to 1998 to zero. The
schedule below reflects the portion of petitioner’s claimed
$1,088,448 1995 NOL that respondent allowed and the portion
respondent disallowed:
Claimed 1995 NOL
Description Allowed Disallowed
Oahu home
Passive activity loss -0- ($403,123)
Long-term capital loss -0- (444,144)
Illinois business property
Passive activity loss ($273,151) -0-
Miscellaneous deductions (31,449) -0-
Miscellaneous interest income 60,719 -0-
1995 NOL carryforward ($243,881) ($847,267)
On the basis of the above reduction of the claimed 1995 NOL
to $243,881, respondent determined that the allowable $243,881
portion of petitioner’s claimed 1995 NOL was carried back to 1993
and exhausted, leaving no 1995 NOL to carry forward to 1996,
1997, and 1998. Also, for lack of substantiation respondent
disallowed the claimed $18,075 1997 NOL carryforward to 1998. As
a result, respondent determined that for 1998 petitioner was not
entitled to the claimed $814,538 1995 and the claimed $18,075
1997 NOL carryforwards reported on petitioner’s late filed 1998
tax return.
In addition respondent determined that petitioner had not
substantiated and was not entitled to the claimed long- and
short-term capital loss carryforwards from 1997 to 1998 and to
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some of petitioner’s claimed miscellaneous itemized deductions
for 1998.
After some concessions by respondent, still in dispute are
two components of the claimed $1,088,448 1995 NOL (the $403,123
passive activity loss and the $441,444 long-term capital loss
relating to the Oahu home), the claimed $131,748 1994 long-term
and the claimed $32,347 1997 short-term capital loss
carryforwards, the claimed $18,075 1997 NOL carryforward, two
claimed miscellaneous itemized deductions for 1998 ($9,842 in
real estate taxes and $5,380 in unreimbursed employee expenses),
and the section 6651(a)(1) addition to tax.
OPINION
Generally, determinations made by respondent in a notice of
deficiency are presumed correct, and a taxpayer bears the burden
of proving otherwise.2 See Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933); Feldman v. Commissioner,
20 F.3d 1128, 1132
(11th Cir. 1994), affg. T.C. Memo. 1993-17.
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of substantiating the amount and purpose of a
claimed deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); Keith v. Commissioner,
115 T.C. 605, 621 (2000);
Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), affd.
540 F.2d
2
Petitioner makes no claim that he qualifies for a shift
in the burden of proof under sec. 7491(a).
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821 (5th Cir. 1976). A filed Federal income tax return does not
establish a taxpayer’s entitlement to the amounts reported
thereon. Lawinger v. Commissioner, 103 T.C. 428, 438 (1994);
Wilkinson v. Commissioner,
71 T.C. 633, 639 (1979); Roberts v.
Commissioner,
62 T.C. 834, 837 (1974).
Where appropriate, the Court may estimate the amount of a
taxpayer’s losses and allow deductions therefor. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v.
Commissioner,
85 T.C. 731, 742-743 (1985).
$1,088,448 Claimed 1995 NOL
We first analyze the two components of the claimed
$1,088,448 1995 NOL which remain in dispute–-the $403,123 passive
activity loss and the $441,444 long-term capital loss relating to
the Oahu home. In an attempt to substantiate these losses
petitioner submitted a February 5, 1992, credit application he
prepared in connection with refinancing a mortgage loan on his
Illinois business property. On the credit application petitioner
listed the bank from which he apparently obtained the mortgage
loan on the Oahu home, the alleged monthly mortgage payment due
on the mortgage loan for the Oahu home, and an estimated value of
the Oahu home.
Petitioner argues that the information reported on his
Federal income tax returns for 1995 through 1998 together with
information on the February 5, 1992, credit application relating
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to the Illinois business property substantiate that in 1995 he
realized the claimed $403,123 passive activity loss and the
claimed $441,444 long-term capital loss relating to the Oahu
home. Petitioner also argues that we should estimate the amount
of his allowable losses from the amounts reported on his Federal
income tax returns and on the credit application.
Petitioner’s Federal income tax returns alone do not
adequately substantiate that in 1995 petitioner realized a
$403,123 passive activity loss and a $441,444 long-term capital
loss relating to the 1995 bank foreclosure on the Oahu home. See
Lawinger v. Commissioner, supra at 438. The February 5, 1992,
credit application does not contain adequate and credible
financial information relating to the 1995 bank foreclosure on
the Oahu home and does not establish that in 1995 petitioner
realized either a $403,123 passive activity loss or a $441,444
long-term capital loss relating thereto. Further, petitioner’s
Federal income tax returns for 1995 through 1998 and his credit
application do not provide sufficient information for us to
estimate petitioner’s claimed losses. See Vanicek v.
Commissioner, supra at 742-743.
Petitioner has not come close to properly substantiating the
claimed $403,123 passive activity loss and the $441,444 long-term
capital loss relating to the Oahu home, and petitioner is not
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allowed the claimed 1995 carry forward losses to 1998 relating
thereto.
Remaining Disputed Items
With regard to the claimed $131,748 1994 long-term and the
claimed $32,347 1997 short-term capital loss carryforwards, the
claimed $18,075 1997 NOL carryforward, the $9,842 in real estate
taxes, and the $5,380 in unreimbursed employee expenses,
petitioner again argues that his Federal income tax returns
substantiate and establish his entitlement thereto.
Again, petitioner’s Federal income tax returns do not
provide adequate substantiation of these items. See Lawinger v.
Commissioner, supra at 438. Because petitioner has not submitted
credible documentation and other evidence to substantiate his
claimed long- and short-term capital losses and NOL carryforwards
and miscellaneous itemized deductions, we sustain respondent’s
disallowance thereof.
Section 6651(a)(1) imposes an addition to tax for a
taxpayer’s failure to timely file a Federal income tax return
unless the taxpayer proves that such failure is due to reasonable
cause and not willful neglect. See United States v. Boyle, 469
U.S. 241, 245 (1985). By virtue of our finding that petitioner’s
return for 1998 was filed late, respondent has carried his burden
of production under section 7491(c) as to this addition to tax.
Petitioner has provided no explanation and has submitted no
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evidence to suggest that his failure to timely file his 1998
Federal income tax return was due to reasonable cause.
Respondent’s imposition of the section 6651(a)(1) addition to tax
is sustained.3
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and sec.
6651(a)(1) addition to tax and for
petitioner as to the secs. 6651(a)(2)
and 6654(a) additions to tax.
3
Respondent concedes the additions to tax under secs.
6651(a)(2) and 6654(a).
