2001 Tax Ct. Summary LEXIS 178">*178 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DINAN, SPECIAL TRIAL JUDGE: This case was heard pursuant to the provisions of
Respondent determined deficiencies in petitioner's Federal income taxes of $ 8,228, $ 3,439, and $ 4,096, and accuracy-related penalties of $ 1,646, $ 688, and $ 819 for the taxable years 1995, 1996, and 1997.
After concessions, 12001 Tax Ct. Summary LEXIS 178">*180 the issues for decision are: (1) Whether petitioner had unreported discharge of indebtedness income; (2) whether petitioner has properly substantiated various2001 Tax Ct. Summary LEXIS 178">*179 items for the years in issue, namely entitlement to (a) dependent exemption deductions for his parents, (b) head of household filing status, (c) certain charitable contribution deductions, (d) certain limited liability company losses, (e) the deduction of certain business expenses and the subtraction from gross receipts of an amount of cost of goods sold, and (f) a carryforward of a net operating loss from 1994 to the years in issue; (3) whether, and if so to what extent, petitioner must include in income a State income tax refund he received; and (4) whether petitioner is liable for accuracy-related penalties for negligence or disregard of rules or regulations. 2
Some of the facts have been stipulated and are so found. The stipulations of fact and the attached exhibits are incorporated herein by this reference. Petitioner resided in Trevor, Wisconsin, on the date the petition was filed in this case. Petitioner's audit commenced on May 28, 1998.
The first issue for decision is whether petitioner had unreported discharge of indebtedness (DOI) income. Respondent determined that petitioner had unreported DOI income of $ 6,005 in 1995.
Gross income generally includes all income from whatever source derived including gains from dealings in property and income from DOI. See
A piece of equipment (a "Bobcat") was purchased by petitioner, a friend of petitioner, and petitioner's father for use in the friend's business. A financing statement was filed naming petitioner as a debtor on a loan secured by the Bobcat and other property. In 1995, the Bobcat was repossessed by the creditor which financed the purchase, Associates Commercial Corporation (Associates), formerly Clark Credit Corporation. A Form 1099-A, Acquisition or Abandonment of Secured Property, was issued to petitioner in 1995. This form reflects an outstanding principal balance of $ 18,581 on a recourse debt, and the Bobcat's fair market value of $ 12,575. For several2001 Tax Ct. Summary LEXIS 178">*182 months after receiving the form, petitioner attempted to make payments for the Bobcat. He then retained the services of an attorney in order to advance his argument that he never signed a contract regarding the purchase of the Bobcat and that he did not own it. On February 14, 1996, a Release of All Claims and Indemnification Agreement was executed by Associates. Pursuant to this agreement, Associates agreed to release petitioner and his father from any claim based on the Bobcat sales contract. Petitioner paid Associates $ 1,000 as settlement proceeds in exchange for this release.
Petitioner argues that he did not own the Bobcat. However, he presented no corroborating evidence of his testimony to this effect, and he did not call either his father or his friend as a witness. We decline to accept petitioner's uncorroborated, self- serving testimony in light of both the Form 1099-A and the financing statement showing petitioner as debtor. Accordingly, we find that petitioner was indebted in the amount of $ 18,581 at the time of the repossession in 1995. On the other hand, we accept petitioner's testimony that he paid Associates an additional $ 1,000 as settlement proceeds because corroborating2001 Tax Ct. Summary LEXIS 178">*183 references to the receipt of the settlement proceeds were made both in the release and in a letter from counsel for Associates.
Respondent determined that petitioner received the DOI income in 1995. Debt is considered discharged the moment it is clear that it will not be repaid. See
Finally, we find that petitioner recognized only $ 5,006 in DOI income, rather than $ 6,005 as determined by respondent. The Bobcat, with a fair market value of $ 12,575, was obtained by Associates in 1995, and petitioner paid Associates $ 1,000 in 1996. Therefore, petitioner transferred $ 13,575 in cash and property to Associates in exchange for the discharge of $ 18,581 of indebtedness.
The second issue for decision is whether petitioner has properly substantiated various items on his Federal income tax returns for the years in issue.
A taxpayer generally must keep records sufficient to establish the amounts of the items reported on his Federal income tax return. See
The first item for which substantiation is at issue is petitioner's entitlement to dependent exemption deductions for his parents. The second item is petitioner's entitlement to head of household filing status. In 1996 and 1997, petitioner filed as head of household, claiming dependent exemption deductions for his parents. For both years, respondent disallowed the deductions and changed petitioner's filing status to single.
A dependent exemption deduction is allowed under
Petitioner testified that he lives in the same home as his parents and that his parents' sole source of income is their monthly Social Security payments of approximately $ 1,000. He provided copies of various invoices, primarily for medical expenses of his parents, but did not show if or when he paid these expenses. Nothing in the record shows or even estimates an amount which petitioner actually provided for his parents' support or to maintain the home. We find that petitioner did not provide over half his parents' support for either 1996 or 1997. Furthermore, because petitioner's parents do not qualify petitioner for dependent exemption deductions for either year, petitioner is not entitled to head of household filing status in those years. We uphold respondent's determinations with respect to both of these items.
The next item at issue is petitioner's entitlement to certain charitable contribution deductions. Petitioner claimed a charitable contribution deduction of $ 500 in each of 1996 and 1997. Respondent disallowed these deductions in full.
A deduction is allowed for charitable2001 Tax Ct. Summary LEXIS 178">*188 contributions made during the taxable year to certain types of organizations only if the deductions are verified under regulations prescribed by the Secretary. See
Petitioner presented only vague testimony to substantiate his claimed charitable contribution deductions. He testified only that he "would say United Way got some" and that he also made contributions to his church. He could not recall the exact amounts of such contributions. In the absence of any written records or other substantiation for the charitable contributions, we uphold respondent's disallowance of the deductions therefor.
The next item at issue is petitioner's entitlement to certain limited liability company (LLC) losses. Petitioner claimed partnership losses of $ 21,600 and $ 20,763 in 1996 and 1997, respectively, for an LLC. Respondent disallowed these losses in full.
An LLC with more than one member is treated as a partnership for Federal income tax purposes unless the2001 Tax Ct. Summary LEXIS 178">*189 LLC elects otherwise. See
The LLC in which petitioner was a member did not file a partnership return in either year. In 1996, petitioner filed a Schedule E, Supplemental Income and Loss, reflecting a partnership loss. In 1997, petitioner completed a Schedule C, Profit or Loss From Business, and then claimed approximately 56 percent of the net loss reported on this form as his distributive share of the LLC's loss. Petitioner presented no evidence to support the claimed losses or the underlying expenses listed on the Schedule E or C. Furthermore, at least a portion of the expenses listed on the schedules, if actually incurred, were not related to any business. For example, legal and professional fees of $ 14,500 were reported in 1997. Asked at trial if he paid an attorney $ 14,500 in legal fees, petitioner replied: "Yes, I did. It wasn't legal fees -- well, most of -- about $ 5,000 of that was legal fees" used to "save my home from being foreclosed." We uphold respondent's disallowance of the LLC losses.
The next item at issue is petitioner's entitlement to the deduction of certain business expenses and the subtraction from gross receipts2001 Tax Ct. Summary LEXIS 178">*190 of an amount of cost of goods sold. Petitioner filed a Schedule C in 1995 for a business engaged in "brick and patio construction". Petitioner subtracted from zero gross receipts cost of goods sold of $ 13,719 and deducted expenses of $ 3,500. Respondent disallowed both the cost of goods sold adjustment and the expenses deduction.
Expenses which are ordinary and necessary in carrying on a trade or business generally may be deducted in the year in which they are paid. See
Petitioner provided nothing to support the deductions or the cost of goods sold on the Schedule C. We therefore uphold respondent's disallowance. We note briefly that the business activity referenced on this Schedule C actually may have been that of a corporation named Simblu Brick & Patio Company. A corporation is a separate legal entity, and an individual generally may not claim deductions for expenses incurred by a corporation. See
The final item for which substantiation is at issue is petitioner's entitlement to a carryforward of a net operating loss from 1994 to the years in issue. Petitioner argues in the petition that there was a "1994 loss [which] was greater than anticipated which was not carried forward into 1995." Petitioner did not claim any deduction for such a loss on his return, and consequently the issue is not addressed in the notice of deficiency.
As a general rule, net operating loss carryovers are allowed as deductions under
Petitioner briefly testified concerning this issue, but provided no details and presented no corroborating documentation concerning the amount of any losses in 1994. Amended returns filed by petitioner with the Internal Revenue Service for taxable years 1992 through 1997, presumably showing these and other losses, are in the record. The assertions in2001 Tax Ct. Summary LEXIS 178">*192 these documents, however, are merely statements by petitioner and are not corroborating evidence. With no evidence of a net operating loss in 1994, we hold that petitioner is not entitled to a deduction for a net operating loss carryover in any of the years in issue. We also note that nothing in the record indicates petitioner either carried back the loss to prior taxable years or elected to waive the carryback, as required under
The third issue for decision is whether, and if so to what extent, petitioner must include in income a State income tax refund he received. Petitioner did not include in income any State tax refund in 1997. Respondent determined that petitioner received an unreported State income tax refund in that year in the amount of $ 2,073.
Under the judicially created tax benefit doctrine, a taxpayer generally must include in income the recovery or refund of an amount deducted in a prior year. See
Petitioner claimed an itemized deduction for State and local income taxes in the amount of $ 1,116 in 1996. Petitioner must include in gross income in 1997 the State income tax refund received in that year to the extent he received a tax benefit from the deduction of the State income taxes in 1996. 3 However, the amount included in gross income is limited to the $ 1,116 deduction; the remainder of the $ 2,073 refund reflected in the notice of deficiency is not includable, contrary to respondent's determination. See
The final issue for decision is whether petitioner is liable for accuracy-related penalties for negligence or disregard of rules or regulations. Respondent determined that petitioner was liable for the penalty for an underpayment equal to the total amount of the deficiency in each year in issue.
Petitioner failed both to keep adequate books and records reflecting income of his businesses and to properly substantiate the numerous and varied2001 Tax Ct. Summary LEXIS 178">*195 items reported on his return. See
Reviewed and adopted as the report of the Small Tax Case Division.
To reflect the foregoing,
Decision will be entered under Rule 155.
1. Petitioner concedes that he received unreported dividend income of $ 26 in 1995 and that an early distribution in 1997 of $ 4,924 from a qualified retirement plan is income, but is not wages, and is subject to the 10-percent additional tax under sec. 72(t). The parties also agree that the adjustments to capital gains in the statutory notice of deficiency should be reduced from $ 11,496, $ 2,044, and $ 1,649 for 1995, 1996, and 1997 to $ 2,923, $ 39, and $ 143 for each respective year.↩
2. The adjustment to petitioner's deduction of medical expenses in 1996 is computational and will be resolved by the Court's holding on the issues in this case.↩
3. The final amount of the inclusion will be calculated in the Rule 155 computation required in this case.↩