T.C. Memo. 1996-412
UNITED STATES TAX COURT
ANTHONY MARTINEZ II, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10823-94. Filed September 12, 1996.
Steven K. Ledbetter, for petitioner.
Michele F. Leichtman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice dated March 22, 1994, respondent
determined the following deficiencies, additions, and accuracy-
related penalties with respect to petitioner's Federal income
tax:
- 2 -
Addition To Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)1
1990 $7,168 $1,400 $1,243
1991 3,049 17 610
1
Respondent appears to have miscalculated this penalty.
Twenty percent of the $7,168 deficiency is $1,434.
Unless otherwise indicated, all 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.
After concessions, the issues for decision are as follows:
1. Whether petitioner, pursuant to section 165(f), is
entitled to a deduction for losses purportedly incurred in
connection with a gas station and a minimarket business. We hold
that he is not.
2. Whether petitioner, pursuant to section 1244, is
entitled to a deduction for losses relating to stock he
purportedly owned in Three Del Rey, Inc. We hold that he is not.
3. Whether petitioner, pursuant to section 6651(a), is
liable for additions to tax for failure to file his 1990 and 1991
Federal income tax returns in a timely manner. We hold that he
is.
4. Whether petitioner, pursuant to section 6662(a), is
liable for accuracy-related penalties. We hold that he is.
- 3 -
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The Stipulation of Facts is incorporated by this reference.
Petitioner resided in Long Beach, California, at the time he
filed his petition.
I. Purported Acquisition of Gas Station and Minimarket
On June 7, 1989, petitioner signed an agreement with
Glendale Federal Savings and Loan Association (the Agreement).
The Agreement modified the terms of an escrow arrangement
previously entered into by petitioner. Petitioner did not submit
documents relating to the earlier arrangement. The Agreement
pertained to petitioner's proposed acquisition from Israel and
Sonya Dakar of a gas station and minimarket (the Business)
located at 2990 Pacific Avenue in Long Beach, California. The
Agreement indicated that petitioner was to purchase the Business
but that the Dakars would retain ownership of the physical
premises on which the Business was located. The Agreement
further indicated that petitioner had deposited $10,000 in an
escrow account, planned to deposit an additional $140,000 in the
account, and would execute a $175,000 promissory note and
security agreement obligating him to make monthly payments to the
Dakars. Petitioner did not submit documentary evidence to
establish that he ultimately transferred the funds in the escrow
account to the Dakars or that he purchased the Business.
- 4 -
II. Rental Payments
In June of 1989, petitioner began operating the Business and
paying rent of $5,000 per month to the Dakars. In November of
1989, petitioner failed to make the required rent payment. In
December of 1989, he paid the November rent but failed to make
the December rent payment. As a result, the Dakars filed an
unlawful detainer complaint against him in the Municipal Court of
Long Beach, California. On March 26, 1990, the court entered a
default judgment against petitioner and issued a writ of
possession to the Dakars with respect to the property.
III. Three Del Rey, Inc.
On December 21, 1988, Steven K. Ledbetter, petitioner's
attorney in this proceeding, filed with the California secretary
of state's office articles of incorporation for "R/C JET
SPECIALTIES, INC.". Petitioner's name did not appear on the
document. The articles indicated that the corporation was formed
"to engage in any lawful act or activity for which a corporation
may be organized" under California law. It also indicated that
the corporation was authorized to issue 10,000 shares of stock.
The corporation, however, never issued any stock, nor did it
elect any directors.
On March 28, 1989, Mr. Ledbetter filed an amendment to the
articles of incorporation changing the corporation's name to
"Three Del Rey, Inc." (the Corporation). The Corporation filed a
- 5 -
Federal income tax return for the 1989 tax year that reported
sales of $707,231 and a net loss of $159,139. Petitioner did not
sign the return but was designated on it as the Corporation's
"tax matters person".
IV. Petitioner's 1990 and 1991 Tax Returns
Petitioner filed both his 1990 and 1991 Federal income tax
returns after the due date. His 1990 return was signed on
January 15, 1992, and received by respondent on February 14,
1992. His 1991 return was signed on April 27, 1992, and received
by respondent on April 29, 1992.
On his returns, petitioner reported that he owed no tax in
either 1990 or 1991. He reached this result by offsetting his
income with the Corporation's net operating losses. Respondent
disallowed petitioner's use of the Corporation's losses on the
ground that the Corporation had not made a valid subchapter S
election, and as a result, the Corporation's losses did not pass
through to its shareholders.
Petitioner ultimately conceded that he was not entitled to
deduct the losses of the Corporation on his 1990 and 1991
individual income tax returns. He claims, however, that he was
entitled to deduct losses that more than offset his tax liability
for those years.
- 6 -
OPINION
Petitioner bears the burden of proof with respect to each of
the four issues to be decided by this Court. Rule 142(a); see
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
I. Capital Loss Deduction
Petitioner claims that he invested $152,000 in the Business,
that he lost all of his investment, and that he therefore is
entitled to deduct $152,000 as a capital loss pursuant to
section 165(f).
Petitioner does not advance a plausible theory, however, to
explain why he is entitled to a capital loss deduction.
Petitioner did not produce any documentary evidence to establish
that he invested $152,000. He did not present a contract or
closing agreement relating to his alleged purchase of the
Business. He did not present any canceled checks, receipts, or
other documentary evidence of a transfer of funds. He did not
produce any books or records detailing the operations of the
Corporation, nor did he produce any business licenses. In short,
petitioner has failed to meet his burden of proof.
In an attempt to substantiate his eligibility for a
deduction, petitioner submitted several pages of amended escrow
instructions and a copy of the unlawful detainer complaint filed
against him by Israel Dakar in the Municipal Court of Long Beach,
- 7 -
California. Neither document, however, is sufficient to satisfy
petitioner's burden of proof.
The existence of an escrow agreement merely shows that, at
one point in time, property was held by a third party for
purposes of transfer to another upon the performance of specified
conditions. See Cal. Civ. Code sec. 1057 (West 1982). Unless
and until the conditions are satisfied, legal title does not pass
to the grantee.
Petitioner claims that Mr. Dakar's unlawful detainer
complaint against him substantiates his investment in the
Business. In fact, the unlawful detainer complaint proves merely
that petitioner defaulted on an obligation to pay $5,000 in
monthly rent to Mr. Dakar. It describes neither the nature nor
the amount of petitioner's investment in the Business.
Petitioner has presented sufficient evidence to lead us to
believe that he operated the Business, but he has not presented
sufficient evidence regarding the nature of his ownership
interest or the amount of his investment to justify a capital
loss deduction. Therefore, we reject petitioner's claim that he
is entitled to such a deduction.
II. Stock Loss Deduction
Petitioner claims that he is entitled to a $1,500 stock loss
deduction pursuant to section 1244. We disagree.
- 8 -
As discussed above, petitioner bears the burden of proving
that he is entitled to deductions and therefore must provide
sufficient evidence to substantiate his claims. In cases where
shareholders of a corporation may seek to claim stock loss
deductions pursuant to section 1244, the corporation should
maintain records indicating "The persons to whom stock was
issued, the date of issuance to these persons, and a description
of the amount and type of consideration received from each".
Sec. 1.1244(e)-1(a)(2)(i), Income Tax Regs.
Petitioner has submitted no evidence that the Corporation
ever issued stock. In fact, the Amendment to the Certificate of
Incorporation, dated March 17, 1989, expressly states that "The
corporation has issued no shares."1 Even if the Court were to
find that stock had been issued, however, petitioner has not
substantiated the amount of money or the basis of any property he
transferred to the Corporation in exchange for such stock.
Therefore, we reject petitioner's claim that he is entitled
to a stock loss deduction pursuant to section 1244.
III. Additions to Tax Under Section 6651(a)(1)
1
Petitioner claims that he owned 75 percent of the stock of
the Corporation. His statements regarding ownership of the other
25 percent of the stock, however, have not been a model of
clarity. When asked at trial who owned the remaining 25 percent,
he replied: "[M]y second brother [owned] 10 percent, and my
third brother [owned] five percent -- or 20 percent." By
contrast, the Corporation's 1989 Federal income tax return
indicated that one person, not two, owned the remaining
25-percent interest in the Corporation.
- 9 -
Section 6651(a)(1) imposes an addition to tax for failure to
file a timely return unless it is shown that such failure was due
to reasonable cause and not due to willful neglect. Petitioner
bears the burden of proving that his failure to file a timely
return was reasonable. Rule 142(a); Larsen v. Commissioner, 765
F.2d 939, 941 (9th Cir. 1985).
Petitioner did not request an extension of time to file
either his 1990 or 1991 Federal income tax return, and both
returns were filed after the due date. His 1990 return was
signed on January 15, 1992 (i.e., 9 months after the due date)
and received by respondent on February 14, 1992. His 1991 return
was signed on April 27, 1992 (i.e., 12 days after the due date)
and received by respondent on April 29, 1992. Petitioner did not
argue that his failure to file timely returns was reasonable.
Therefore, we conclude that petitioner is liable for
additions to tax pursuant to section 6651(a)(1).
IV. Accuracy-Related Penalties Under Section 6662(a)
Section 6662(a) imposes an accuracy-related penalty of 20
percent of any underpayment attributable to negligence or
disregard of rules or regulations. Negligence is defined as the
failure to exercise the care that a reasonable and ordinarily
prudent person would exercise under the circumstances. Allen v.
- 10 -
Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1
(1989).
In the present case, petitioner claimed large net operating
losses of the Corporation that eliminated his tax liability in
both 1990 and 1991. Petitioner acknowledges, however, that he
was not entitled to deduct the losses of the Corporation, because
the Corporation had not filed a valid subchapter S election. In
claiming the Corporation's losses as deductions on his individual
income tax returns, petitioner was negligent in failing to follow
the provisions of the Internal Revenue Code.
Therefore, we conclude that petitioner is liable for
accuracy-related penalties pursuant to section 6662(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.