T.C. Memo. 1998-328
UNITED STATES TAX COURT
EMIL FANKHAUSER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11192-95. Filed September 21, 1998.
Kenneth J. Freeman, for petitioner.
Carol A. Szczepanik, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182. Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year 1993. Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner's 1993
Federal income tax in the amount of $4,422, an addition to tax
under section 6651(a) in the amount of $3, and an accuracy-
related penalty under section 6662(a) in the amount of $884.
The issues for decision are: (1) Whether petitioner is
entitled to a deduction for a loss from an S corporation; and
(2) whether the understatement, if any, of tax required to be
shown on petitioner's 1993 Federal income tax return was due to
his negligence or disregard of rules or regulations. The
resolution of the first issue depends upon whether a valid S
corporation election was filed by the corporation to which the
loss is attributable.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner filed an untimely Federal income tax return for the
year 1993, on May 6, 1994. At the time the petition was filed,
he resided in Westlake, Ohio.
In 1992 petitioner established and incorporated under Ohio
law Fankhauser Management, Inc. (Management). Petitioner was the
sole shareholder of Management during all relevant periods.
Management was formed in order to operate a teenage activity
center. Although there is conflicting evidence on the precise
date, it appears that the business of Management began in January
1993.
On January 8, 1993, petitioner met with John Herman, a
certified public accountant, in Mr. Herman's office. On behalf
of Management, Mr. Herman had prepared and signed a Form SS-4,
Application for Employer Identification Number. Mr. Herman also
prepared a Form 2553, Election by a Small Business Corporation,
that was signed by petitioner in his capacity as a consenting
shareholder and president of Management. The Form 2553 listed
the effective date of the election to be January 2, 1993. Mr.
Herman placed both forms in an envelope addressed to respondent's
Cincinnati Service Center (the service center) and gave the
envelope to petitioner.
Mr. Herman prepared a Form 1120S, U.S. Income Tax Return for
an S Corporation, on behalf of Management for the year 1993.
After accounting for various items of income and deductions, the
return reflected an ordinary loss from business activities in the
amount of $16,843. The return was received by the service center
on March 10, 1994. In a letter dated April 14, 1994, Management
was notified by the service center that the return could not be
processed because the Internal Revenue Service had no record of
Management's election to be treated as an S corporation. The
letter invited Management to forward certain information in order
to verify that a timely S corporation election had been filed.
Mr. Herman responded to the letter from the service center
in a letter dated May 11, 1994. In his letter Mr. Herman
indicated that the Management's S corporation election was
filed with the service center at the same time that the Form SS-4
was mailed. A copy of the previously prepared Form 2553 was
enclosed with this letter. Mr. Herman also forwarded a letter
dated May 9, 1994, that was prepared by petitioner, as president
of Management, in response to the letter from the service center.
In that letter petitioner represented that the Form 2553 was
filed at the same time that the Form SS-4 was filed.
Respondent's records do not indicate that a Form 2553 was
received from Management during 1993 with respect to that year.
The records do acknowledge that such a form was received on
May 17, 1994, but the application was denied. It appears that
the reference in respondent's records to the Form 2553 received
in 1994 relates to the copy forwarded to the service center by
Mr. Herman with his letter dated May 11, 1994.
The copy of the Form SS-4 received on behalf of Management
and retained by respondent indicates that the document was
transmitted to the service center via facsimile (fax) on January
14, 1993. Respondent permits such applications to be made by
fax, and an employer identification number was assigned to
Management. Forms 2553 transmitted to respondent by fax are not
processed.
On a Schedule E included with his 1993 Federal income tax
return, petitioner claimed a $16,843 loss attributable to
Management. In the notice of deficiency, respondent disallowed
the entire loss and provided the following explanation for the
disallowance:
Since we have no record of a valid Small Business
Election filed on Form 2553 to elect sub-chapter S, the
loss claimed on your Form 1040 has been disallowed for
1993.
Respondent further determined that petitioner was liable for the
addition to tax under section 6651(a)(1) because his 1993 return
was filed late, and that petitioner was liable for the negligence
penalty under section 6662(a).
OPINION
Management's S Election
The dispute between the parties focuses upon whether
Management made a timely election to be treated as an S
corporation. See sec. 1362. If so, then petitioner properly
claimed a loss attributable to Management on his 1993 Federal
income tax return. See sec. 1366. If not, then respondent
properly disallowed the loss so claimed.
An election to be treated as an S corporation must "be made
in such manner as the Secretary shall by regulations prescribe."
Sec. 1377(c). Pursuant to section 1.1362-6(a)(2), Income Tax
Regs., a corporation elects under section 1362(a) to be treated
as an S corporation by filing a Form 2553. Generally, a document
is considered filed with the Internal Revenue Service when it is
received by that agency. United States v. Lombardo, 241 U.S. 73,
76 (1916).
Direct evidence of actual receipt of a document by the
Internal Revenue Service, however, is not always necessary in
order to effectuate its filing. We have held that proof that a
document was properly mailed gives rise to a presumption that the
document was delivered to, and received by, the person to whom it
was addressed. Estate of Wood v. Commissioner, 92 T.C. 793, 798
(1989), affd. 909 F.2d 1155 (8th Cir. 1990). This presumption of
delivery can operate as a substitute for direct evidence of
actual receipt with respect to the filing of a document in
situations where the taxpayer can establish that the document has
been properly mailed, but the Internal Revenue Service denies
having received the document.
Furthermore, with respect to certain documents, including
Forms 2553, proof that the envelope that contained the document
was properly addressed and sent by registered mail or certified
mail constitutes prima facie evidence that the document was
delivered and therefore filed. Sec. 7502(c); sec. 301.7502-
1(d)(1), Proced. & Admin. Regs.
In situations where the Commissioner denies receipt of a
document, the Court of Appeals for the Sixth Circuit, to which an
appeal in this case lies, has held that section 7502(c) provides
the exclusive means for a taxpayer to establish that the document
has been mailed and thereby filed. See Carroll v. Commissioner,
71 F.3d 1228 (6th Cir. 1995), affg. T.C. Memo. 1994-229; Surowka
v. United States, 909 F.2d 148 (6th Cir. 1990); Miller v. United
States, 784 F.2d 728 (6th Cir. 1986) (holding that the provisions
of section 7502 supersede and extinguish the common law
presumption of delivery); accord Deutsch v. Commissioner, 599
F.2d 44 (2d Cir. 1979). But see Anderson v. United States, 966
F.2d 487 (9th Cir. 1992); Estate of Wood v. Commissioner, 909
F.2d 1155 (8th Cir. 1990) (holding the enactment of section 7502
had no effect on the common law presumption of delivery).
According to petitioner, when he left Mr. Herman's office on
January 8, 1993, the Forms 2553 and SS-4 were in a single
envelope addressed to the service center. Petitioner claims that
he walked to a nearby U.S. post office and mailed the envelope.
The documents were not sent by certified or registered mail.
Petitioner argues that because respondent received and processed
the Form SS-4, respondent must have received, but misplaced or
lost, the Form 2553.
Respondent denies having received an original Form 2553 on
behalf of Management during 1993. Respondent kept no record to
establish whether such a form was also received by fax at the
time the Form SS-4 was; however, if so the form would not have
been processed. Petitioner does not claim to have faxed the Form
2553 to respondent or argue that transmission by fax was an
appropriate way to file such a document.
There are obvious inconsistencies between petitioner's
testimony and respondent's records. Petitioner claims that he
mailed the Form SS-4 on January 8, 1993, but respondent's records
indicate the document was received by fax on January 14, 1993.
Petitioner claims that he also mailed the Form 2553 on January 8,
1993, but respondent's records indicate that no such document was
received in 1993.
Under different circumstances, we would be compelled to
resolve these factual disputes. However, there is no need to do
so in this case. Because we are bound to follow the above-cited
line of cases decided by the Court of Appeals for the Sixth
Circuit, Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445
F.2d 985 (10th Cir. 1971), petitioner's testimony regarding what
he did is not so important as his testimony as to what he did not
do; that is, send the Form 2553 by certified or registered mail.
Because respondent has denied receipt of the Form 2553 in 1993,
and because petitioner did not send that form by certified or
registered mail, the form cannot be considered filed. Carroll v.
Commissioner, supra; Surowka v. United States, supra; Miller v.
United States, supra; Deutsch v. Commissioner, supra. Absent the
filing of a valid Form 2553, Management cannot be treated as an S
corporation for the year 1993, and petitioner is not entitled to
deduct any loss attributable to the corporation. It follows that
respondent's adjustment in this regard must be sustained.
Negligence Penalty
Section 6662(a) imposes a penalty in an amount equal to 20
percent of the portion of the underpayment of tax attributable to
a taxpayer's negligence or disregard of rules or regulations.
Sec. 6662(a) and (b)(1). Negligence is defined to include any
failure to make a reasonable attempt to comply with the
provisions of the Internal Revenue Code. Sec. 6662(c). It is
further defined as the failure to do what a reasonable person
with ordinary prudence would do under the same or similar
circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985).
A taxpayer can avoid the imposition of the negligence penalty by
demonstrating that the underpayment of tax was due to reasonable
cause and that the taxpayer acted in good faith with respect to
the underpayment. Sec. 6664(c).
Regardless of how Management's Form 2553 was actually
transmitted to respondent, we are satisfied that petitioner, in
good faith, believed that a valid S election had been made prior
to the time that he filed his 1993 return. Consequently, the
imposition of the section 6662(a) negligence penalty is not
warranted.
To reflect the foregoing and a concession by petitioner,
Decision will be entered
for respondent with respect to the
deficiency and the addition to tax
under section 6651(a) and for
petitioner with respect to the
section 6662(a) accuracy-related
penalty.