Karara v. Commissioner

T.C. Memo. 1999-253

UNITED STATES TAX COURT

SAID MAHMOUD KARARA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6547-98, 6548-98. Filed July 29, 1999.

Said Mahmoud Karara, pro se.

Ross M. Greenburg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COUVILLION, Special Trial Judge: These consolidated cases

were heard pursuant to section 7443A(b)(3)1 and Rules 180, 181,

and 182.

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

Respondent determined deficiencies in petitioner's Federal

income taxes and additions to tax as follows:

Additions to Tax
Year Deficiency Sec. 6651(a) Sec. 6654(a)

1993 $2,696 $674.00 $112.93
1994 1,489 372.25 -0-

The issues for decision are: (1) Whether the period of

limitations under section 6501(a) bars respondent from making

assessments against petitioner for the years 1993 and 1994;

(2) whether, for 1993 and 1994, petitioner realized a gain,

pursuant to section 1001(a), on the redemption of certain shares

of Citizens Federal Bank Non-Cumulative Preferred Stock (Citizens

Federal Stock); (3) whether, for 1993 and 1994, petitioner was

engaged in a trade or business activity under section 162(a);

(4) whether petitioner is liable for the addition to tax under

section 6651(a) for failure to file returns for 1993 and 1994;

and (5) whether, for 1993, petitioner is liable for the addition

to tax under section 6654(a) for failure to make estimated tax

payments.2

2
Issue number 1 was presented by petitioner at trial by
way of a motion to dismiss for lack of jurisdiction on the ground
that respondent was barred by the period of limitations under
sec. 6501(a). Respondent filed an objection, affirmatively
alleging that the notices of deficiency were not barred because
petitioner did not file Federal income tax returns for the 2
years at issue. The Court denied petitioner's motion to dismiss
(continued...)
 - 3 -

FINDINGS OF FACT

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioner's

legal residence was Naples, Florida.

In 1993, petitioner earned wages of $17,751 working in a

convenience store at Naples, Florida. Petitioner also realized

$143 of interest income and $4,896 of Social Security income in

1993. Finally, petitioner received gross receipts of $5,277 from

the redemption of 209 shares of Citizens Federal Stock.

In 1994 petitioner continued to be employed at the same

convenience store in Naples, Florida, and earned wages of

$14,815. Petitioner also realized $60 of interest income and $21

of dividend income in 1994. Finally, petitioner realized gross

receipts of $1,287 from the redemption of 51 shares of Citizens

Federal Stock in 1994.

Petitioner did not file income tax returns for 1993 and

1994. The Internal Revenue Service (IRS) issued the notices of

2
(...continued)
for the reason that the statute of limitations is not a
jurisdictional question but is a defense in bar or an affirmative
defense to be considered on the merits. See United Bus. Corp. of
Am. v. Commissioner, 19 B.T.A. 809, 831 (1930), affd. 62 F.2d 754
(2d Cir. 1933). The Court agreed that petitioner's statute of
limitations defense would be considered on the merits.
 - 4 -

deficiency based on reports filed by payers of income. The

notices of deficiency were issued on January 28, 1998.

OPINION

1. Whether Respondent Is Barred by the Section 6501(a) Period of

Limitations

Petitioner did not file Federal income tax returns for 1993

and 1994. The notices of deficiency for 1993 and 1994 were both

issued on January 28, 1998. Petitioner contends that respondent

is barred from making assessments against him because the notices

of deficiency were issued more than 3 years from the dates the

taxes were due for each of the years at issue. Petitioner

contends the 1993 taxes were due on January 1, 1994, and the 1994

taxes were due on January 1, 1995. Since the notices of

deficiency were issued more than 3 years from those dates,

petitioner contends that respondent is barred from making

assessments against him.

Section 6501(a) provides generally that taxes imposed by the

Internal Revenue Code shall be assessed within 3 years after the

return is filed, whether or not such return was filed on or after

the date prescribed. Section 6501(c)(3) provides that, in the

case of failure to file a return, the tax may be assessed, or a

proceeding in Court for the collection of such tax may be begun

without assessment at any time.
 - 5 -

The Court rejects petitioner's contention that respondent is

barred from making assessments against him for the 2 years in

question. Since no returns were filed, section 6501(c)(3)

provides expressly that assessment may be made at any time.

Moreover, petitioner is in error in claiming that the taxes were

due on January 1, 1994, and on January 1, 1995. Calendar year

taxpayers are, under section 6072(a), required to file their

income tax returns and pay the taxes thereon on or before April

15th following the close of the taxable year. The Court,

therefore, rejects petitioner's claim that respondent is barred

by the period of limitations under section 6501(a).

2. Gain on Redemption of Stock

Under section 1001(a), gain from the sale or other

disposition of property is the excess of the amount realized over

the adjusted basis of the property. In this case, the parties

agree that petitioner realized $5,277 and $1,287 in 1993 and

1994, respectively, on the redemption of Citizen's Federal Stock

owned by petitioner. At issue is the adjusted basis of the

redeemed stock in the hands of petitioner.

Generally, under section 1012, the basis of property is its

cost. The cost is the amount paid for such property in cash or

other property. See sec. 1.1012-1(a), Income Tax Regs. Thus,

petitioner must demonstrate the economic outlay necessary for
 - 6 -

shareholders to claim basis. See, e.g., Estate of Leavitt v.

Commissioner, 875 F.2d 420, 422 (4th Cir. 1989), affg. 90 T.C.

206 (1988); Underwood v. Commissioner, 535 F.2d 309, 311 (5th

Cir. 1976), affg. 63 T.C. 468 (1975). In the notice of

deficiency, respondent determined that petitioner had a zero

basis in the redeemed stock. Petitioner testified that he had a

basis of $25 per share or a total of $5,225 and $1,025 for the

shares redeemed in 1993 and 1994, respectively.

In an attempt to substantiate his basis in the redeemed

securities, petitioner submitted a copy of a certificate issued

by the Citizens Federal Bank. The certificate shows that

petitioner owned 163 shares of Citizens Federal Stock, that the

stock was 8 percent Series C Non-Cumulative Preferred Stock, and

that the stock's par value was $.01. Additionally, petitioner

submitted a copy of a letter from the Citizens Federal Bank

declaring its intent to redeem some of its outstanding shares

from shareholders. This letter indicates that the redemption

price of the stock was 101 percent of the preference value, or

$25.25 per share. Petitioner did not submit any other evidence

to support his claimed basis in the redeemed shares of stock.

Petitioner's testimony regarding the purchase of the stock

at issue was vague. In fact, he was unable to provide any

details regarding his purchase of the stock other than the

claimed $25 per share purchase price that he surmised from the
 - 7 -

letter the bank sent him. The documents submitted by petitioner

in no way established the amount or amounts petitioner paid for

the shares or the amounts he originally deposited for such

shares. Petitioner contended that the stock was no more than a

savings account and that the redemption was nothing more than a

return of his money plus the 1 percent in excess of his original

deposit. However, he presented no evidence to show when such

moneys had been deposited or the amount that had been deposited.

Petitioner, therefore, failed to establish the economic outlay

necessary to claim basis. Thus, the Court finds that petitioner

had a zero basis in the 260 shares of Citizens Federal Stock that

were redeemed in 1993 and 1994. Accordingly, respondent's

determination is sustained.

3. Section 162 Trade or Business Activity

Petitioner claimed that he incurred deductible trade or

business expenses during 1993 and 1994 in connection with an

engineering business. He did not describe what type of

engineering activities he was engaged in or what kinds of

engineering services he performed, if any, during the years in

question. He admitted having no gross receipts for either year

from such an activity.

Section 162(a) provides: "There shall be allowed as a

deduction all the ordinary and necessary expenses paid or
 - 8 -

incurred during the taxable year in carrying on any trade or

business". In order for an expenditure to be deductible as a

business expense, the expenditure must relate to an activity that

amounts to the present carrying on of an existing business.

Koons v. Commissioner, 35 T.C. 1092, 1100 (1961). Thus, in order

for petitioner to meet his burden of proof, it is necessary to

establish that the expenditures in question related to activities

that amounted to the present carrying on of a business.

Reisinger v. Commissioner, 71 T.C. 568, 572 (1979); Koons v.

Commissioner, supra. Whether a taxpayer is engaged in a trade or

business, and the nature of such trade or business, are questions

of fact. Ford v. Commissioner, 56 T.C. 1300, 1307 (1971), affd.

per curiam 487 F.2d 1025 (9th Cir. 1973); Corbett v.

Commissioner, 55 T.C. 884, 887 (1971); Canter v. United States,

173 Ct. Cl. 723, 354 F.2d 352 (1965). The Supreme Court has

interpreted the trade or business terminology of section 162 to

mean that the taxpayer must be involved in the activity with

continuity and regularity and that the taxpayer's primary purpose

for engaging in the activity must be for income or profit.

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). In

Commissioner v. Groetzinger, supra at 35, the Supreme Court

stated "that to be engaged in a trade or business, the taxpayer

must be involved in the activity with continuity and regularity
 - 9 -

and that the taxpayer's primary purpose for engaging in the

activity must be for income or profit."

Petitioner did not establish that he was engaged in a trade

or business during 1993 and 1994. Petitioner earned no gross

receipts from the purported activity during the 2 years at issue

and presented no documentary information to establish exactly

what type of an activity he was purportedly engaged in. He

testified he was engaged in an engineering activity but presented

no evidence as to the nature of the engineering services he

provided, the nature of his clients, the date the activity

commenced, and why, during 1993 and 1994, he had no gross income

from such an activity. Petitioner testified he had an

engineering background and had taught engineering at two or three

colleges, and, although the Court has no reason to doubt such

testimony, the Court is not satisfied that petitioner's

background established a trade or business during 1993 and 1994.

On this record, the Court holds that petitioner failed to

establish that he was engaged in a trade or business activity

during 1993 and 1994.

4. Sec. 6651(a) Failure-to-File Addition to tax

The next issue is whether petitioner is liable for the

additions to tax under section 6651(a)(1) for his failure to file

Federal income tax returns for 1993 and 1994. Section 6651(a)(1)

imposes an addition to tax for a taxpayer's failure to file
 - 10 -

timely returns, unless the taxpayer can establish that such

failure "is due to reasonable cause and not due to willful

neglect". The addition to tax is 5 percent of the amount

required to be shown on the return for each month beyond the

return's due date, not to exceed 25 percent. See sec.

6651(a)(1).

Reasonable cause exists where a taxpayer exercises ordinary

business care and prudence and still is unable to file a timely

return. See Crocker v. Commissioner, 92 T.C. 899, 913 (1989);

Estate of Vriniotis v. Commissioner, 79 T.C. 298, 310 (1982);

sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect is

viewed as a conscious, intentional failure or reckless

indifference to the obligation to file. See United States v.

Boyle, 469 U.S. 241, 245-246 (1985); Estate of Newton v.

Commissioner, T.C. Memo. 1990-208. Whether petitioner has shown

reasonable cause and no willful neglect is a question of fact to

be decided on the entire record. See Estate of Duttenhofer v.

Commissioner, 49 T.C. 200, 204 (1967), affd. per curiam 410 F.2d

302 (6th Cir. 1969).

Section 6011(a) provides that any person made liable for any

tax imposed by Title 26 shall make a return or statement

according to the forms and regulations prescribed by the

Secretary. Section 6012(a) requires that every individual having

gross income that equals or exceeds the exemption amount must
 - 11 -

file a tax return, except (as relevant here) that a return shall

not be required of an individual who is not married, is not a

surviving spouse, is not a head-of-household, and for the taxable

year has gross income of less than the sum of the exemption

amount plus the basic standard deduction applicable to such

individual. Individual tax returns are due on or before the 15th

day of the fourth month following the close of the tax year. See

sec. 1.6072-1(a), Income Tax Regs.

The term "gross income" means "all income from whatever

source derived." Sec. 61. The exemption amounts applicable to

petitioner for the tax years 1993 and 1994 were $2,350 and

$2,450, respectively. See sec. 151(d). The standard deduction

amounts applicable to petitioner for tax years 1993 and 1994 were

$3,700 and $3,800, respectively. See sec. 63(c). Thus,

petitioner was required to file for 1993 and 1994 if his gross

income in those years exceeded $6,050 and $6,250, respectively.

Petitioner stipulated the fact that he had gross income in 1993

and 1994 of $28,440 and $14,896, respectively. Petitioner,

therefore, was required to file a return in the years at issue

since his gross income for those years clearly exceeded the

minimum statutory amounts for filing.

Petitioner claimed that he did not file returns for 1993 and

1994 because, based on his reading of the instructions

accompanying his tax return forms for the years in question, he
 - 12 -

did not have enough income to be required by law to file a

return. Petitioner believed that in calculating his income to

determine whether he was required to file a return he was

entitled to deduct his claimed expenses in arriving at the income

figure. In support of this contention, petitioner submitted a

copy of the tax return instructions that he claimed he relied on

in reaching his decision not to file. The instructions read, in

relevant part, as follows:

You must file a return if your gross income was at least the
amount shown in the last column.[3] Gross income means all
income you received in the form of money, goods, and
services that is not exempt from tax, including any gain on
the sale of your home (even if you may exclude or postpone
part of all of the gain). * * *

Petitioner's claim is not supported by the instructions he

purportedly relied on. He misread or misconstrued the above-

quoted language. The instructions clearly state that a taxpayer

must file a return if his gross income for the year equals or

exceeds a specified dollar amount. In the next sentence, the

term "gross income" is clearly defined. Importantly, the

definition of "gross income" in the instructions does not in any

way state or even mention the deduction of any expenses in

arriving at "gross income". Petitioner's claim cannot be

3
The amount shown in the last column is $6,050 and $6250
for 1993 and 1994, respectively.
 - 13 -

sustained. Nothing in the above-cited language supports the

netting of expenses against gross income to determine whether or

not income tax returns were required to be filed for the years in

question.

Petitioner was required to file income tax returns for 1993

and 1994. He has failed to show that the failure to file was due

to reasonable cause and was not due to willful neglect.

Petitioner, therefore, is liable for the failure-to-file addition

to tax under section 6651(a). Therefore, respondent's

determination on this issue is sustained.

5. Sec. 6654(a) Addition to tax for Failure to pay Estimated tax

Respondent determined the addition to tax under section

6654(a) for failure to make estimated tax payments for 1993.

Section 6654(a) provides for an addition to tax "in the case of

any underpayment of estimated tax by an individual". There is no

exception contained therein relating to reasonable cause and lack

of willful neglect. Subject to certain exceptions provided by

statute and not pertinent here, this addition to tax is otherwise

automatic if the amounts of the withholdings and estimated tax

payments do not equal statutorily designated amounts. See

Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).

Petitioner produced no evidence to show that respondent's

determination of his liability for the addition to tax under
 - 14 -

section 6654(a) was in error. Consequently, because petitioner

failed to make any estimated tax payments for 1993, respondent's

determination on this issue is sustained.

To reflect the foregoing,

Decisions will be entered

for respondent.4

4
The total amount of stipulated income attributed to
petitioner for 1993 exceeded the amount determined in the notice
of deficiency by $4,027. Respondent did not file responsive
pleadings to increase the deficiency against petitioner for this
additional income. Accordingly, the deficiencies and additions
to tax for 1993 will be the amounts determined in the notice of
deficiency.