McDonald v. Commissioner

T.C. Memo. 1995-503

UNITED STATES TAX COURT

MARY C. McDONALD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13217-93. Filed October 23, 1995.

Roderick L. MacKenzie, for petitioner.

Kathryn K. Vetter, for respondent.

MEMORANDUM OPINION

RUWE, Judge: Respondent determined a deficiency of $8,913

in petitioner's 1989 Federal income tax. Respondent further

determined an accuracy-related penalty pursuant to section

6662(a)1 in the amount of $1,747.

After concessions, the issues for decision are: (1) Whether

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

petitioner is entitled to a general business credit carryforward

for the taxable year 1989; and (2) whether petitioner is liable

for the accuracy-related penalty for negligence or disregard of

rules or regulations pursuant to section 6662(a)2 for the taxable

year 1989.

Some of the facts and issues have been stipulated and are so

found. The stipulation of facts, stipulation of settled issues,

and attached exhibits are incorporated herein by this reference.

Background

At the time petitioner filed her petition in this case, she

resided in Sacramento, California.

Petitioner was a partner in several partnerships. Two of

these partnerships (H.C. Muddox Co. and Zenith Clay Products Co.)

were related. Petitioner no longer holds interests in these

partnerships. Petitioner also held an interest in OKAL Foods, a

retail sandwich business. Petitioner no longer holds an interest

in OKAL Foods, because it has ceased operations.

2
In her notice of deficiency, respondent relied on the
following alternative bases to support her imposition of the
accuracy-related penalty: (1) Negligence or disregard of rules
or regulations, (2) substantial understatement of income tax, and
(3) substantial valuation overstatement. See sec. 6662(b).
However, on brief, respondent addresses only the first of these
bases (i.e., negligence or disregard of rules or regulations).
We find that respondent has abandoned the other bases for the
accuracy-related penalty and, therefore, address only the
negligence issue.
 - 3 -

In an attempt to substantiate entitlement to a general

business credit (investment tax credit) carryforward to 1989,

petitioner provided the following Schedules K-1 (Partner's Share

of Income, Credits, Deductions, etc.), which show her as a

partner and which reflect the cost of certain property qualifying

for the investment tax credit.

Partnership Year Basis in Investment Property
3-Year 5-Year 7-Year

H.C. Muddox 1976 $1,838.02 $ 50.05 $14,713.34
H.C. Muddox 1977 -- -- 12,930.95
H.C. Muddox 1978 -- 598.79 2,249.83
Zenith Clay 1977 -- -- 381.60
OKAL Foods 1978 -- -- 10,572.64

In addition, petitioner provided copies of her Federal

income tax returns for the taxable years 1984 through 1989.

Petitioner claimed and carried over general business credits as

follows:

Credit Carried Forward Credit Claimed
Year into Current Year in Current Year

1984 $ 1,885 -0-
1985 2,585 $173
1986 2,577 -0-
1987 2,577 -0-
1
1988 1,675 -0-
1989 1,675 589

1
This reduction in the general business credit carryforward
presumably reflects the 35-percent reduction required by sec.
49(c).

During each of the above years, petitioner did not receive any

new investment tax credits.
 - 4 -

Discussion

Pursuant to the stipulation of settled issues, the parties

agreed to be bound by the final decision of this Court in

McDonald v. Commissioner, docket Nos. 14892-91 and 13119-92, with

respect to whether petitioner's filing status for the taxable

year 1989 was "single" or "married filing separate". Bill

McDonald and petitioner were married in 1948. An interlocutory

decree of divorce was granted in 1975 for Bill McDonald and

petitioner, and in May 1993, a final decree of divorce was

entered nunc pro tunc as of December 1, 1975. On December 12,

1994, this Court issued an opinion wherein we held that the entry

of the nunc pro tunc order should not be given effect for Federal

tax purposes, and upheld the Commissioner's determination that

Mr. McDonald's filing status was married filing separate.

McDonald v. Commissioner, T.C. Memo. 1994-607.

Pursuant to the stipulation of settled issues, the parties

also agreed to be bound by the final decision of this Court in

McDonald v. Commissioner, docket No. 5458-93, with respect to the

amount of gain on the sale of certain rental property and the

allocation of the gain between petitioner and Denver W. McDonald.

Title to the rental property was in the name of Denver W. McDonald,

petitioner's son. Petitioner claimed that she had an ownership

interest in the property, and she reported a gain from the sale of

the property. On August 2, 1995, this Court issued an opinion

wherein we held that the entire gain was allocable to Denver W.

McDonald. McDonald v. Commissioner, T.C. Memo. 1995-359.
 - 5 -

The first issue for decision is whether petitioner is

entitled to a general business credit carryforward for the

taxable year 1989. Section 38 provides for a credit against tax

for the purchase of qualified investment property. Secs. 38(a)

and (b)(1), 46(a). "Qualified investment property" is defined to

include only property with respect to which depreciation is

allowable and which has a useful life of 3 years or more. Secs.

46(c)(1) and (2), 48(a)(1). To the extent that a credit

permitted by section 38 is not used in the current taxable year,

it may be carried back 3 years and then forward 15 years. Sec.

39(a). Moreover, if the qualified investment property is

disposed of, or otherwise ceases to be section 38 property,

before the end of the useful life which was taken into account in

computing the credit under section 38, the taxpayer must

recapture the amount of the unearned credit. This amount is the

difference between the credit actually claimed and the credit

that would have been claimed if the useful life had been

estimated correctly. Sec. 47(a)(1); sec. 1.47-1(a)(1), Income

Tax Regs.

Credits are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to the credit.

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593

(1943); Segel v. Commissioner, 89 T.C. 816, 842 (1987).

Taxpayers cannot rely on a mere notation of a carryover credit on

their tax returns to sustain their burden of proving entitlement

to such credit. Sherwood v. Commissioner, T.C. Memo. 1988-544.
 - 6 -

A tax return is merely a statement of the taxpayer's claim and

does not establish the truth of the matters set forth therein.

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.

Commissioner, 62 T.C. 834, 837 (1974); Halle v. Commissioner, 7

T.C. 245, 250 (1946), affd. 175 F.2d 500 (2d Cir. 1949).

Petitioner did not testify. Petitioner did not provide

partnership books and records or invoices to support the purchase

of qualified property for which a credit could have been

claimed;3 nor did she provide any evidence to show that the

alleged section 38 assets were used in a trade or business long

enough to avoid any recapture. Moreover, petitioner did not

provide copies of her tax returns for taxable years before 1984,

and she did not provide the Court with enough information to

determine whether any allowable credits would have otherwise been

absorbed in the intervening years. Indeed, the tax returns

provided by petitioner reflect several errors in calculating the

general business credit carryforward. Petitioner has not met her

burden of proving that she is entitled to the claimed credit.

Accordingly, we sustain respondent's determination regarding the

general business credit carryforward in 1989.

Respondent also determined that petitioner was liable for

the accuracy-related penalty pursuant to section 6662(a).

Section 6662 imposes an addition to tax equal to 20 percent of

3
Petitioner offered an undated, unsigned statement
regarding the purchase of some equipment in 1969 and 1970. The
source of this document is unknown. Respondent objected to this
document as hearsay, and we sustain the objection.
 - 7 -

the portion of the underpayment that is attributable to

negligence or disregard of rules or regulations. Sec. 6662(a)

and (b)(1). The Commissioner's determination that a taxpayer was

negligent is presumptively correct, and the burden is on the

taxpayer to show lack of negligence. Hall v. Commissioner, 729

F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo. 1982-337;

Marcello v. Commissioner, 380 F.2d 499, 506-507 (5th Cir. 1967),

affg. in part and remanding in part 43 T.C. 168 (1964) and T.C.

Memo. 1964-299; Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

The term "negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code. Sec. 6662(c). Negligence has also been defined as

the lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.

McGee v. Commissioner, 979 F.2d 66, 71 (5th Cir. 1992), affg.

T.C. Memo. 1991-510; Marcello v. Commissioner, supra at 506;

Neely v. Commissioner, 85 T.C. 934, 947 (1985).

Petitioner failed to substantiate her claimed credit.

Petitioner did not testify and offered no other evidence to show

that she was not negligent.

Petitioner argues that she was not negligent because she

relied on a certified public accountant to prepare her return.

Indeed, reliance upon the advice of experts may constitute a

defense to the addition to tax for negligence. Jackson v.

Commissioner, 86 T.C. 492, 539 (1986), affd. 864 F.2d 1521 (10th

Cir. 1989); Industrial Valley Bank & Trust Co. v. Commissioner,
 - 8 -

66 T.C. 272, 283 (1976). This is true even where the advice

relied upon was erroneous. Brown v. Commissioner, 47 T.C. 399,

410 (1967), affd. 398 F.2d 832 (6th Cir. 1968). However,

petitioner did not testify that she relied on her accountant.

Moreover, petitioner bears the burden of proving that she at

least supplied the accountant with the necessary information and

that the incorrect return resulted from the preparer's mistakes.

Pessin v. Commissioner, 59 T.C. 473, 489 (1972).

Petitioner's accountant, Mr. Maynard, testified that he

would have reviewed the prior returns and any information that

was in the file when he first started preparing petitioner's

returns in 1984, but he could not recall what information was in

petitioner's file. We find that petitioner has not met her

burden of showing that she was not negligent. Accordingly, we

sustain respondent's determination that petitioner is liable for

the accuracy-related penalty pursuant to section 6662(a).

Decision will be entered

under Rule 155.