Hogan v. Commissioner

T.C. Memo. 1999-365

UNITED STATES TAX COURT

THOMAS E. HOGAN, III AND SHEILA M. HOGAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15929-97. Filed November 3, 1999.

Thomas E. Hogan, III and Sheila M. Hogan, pro se.

Angela J. Kennedy, for respondent.

MEMORANDUM OPINION

POWELL, Special Trial Judge: Respondent determined

deficiencies in petitioners' 1991 and 1992 Federal income taxes

in the respective amounts of $1,613 and $2,974 and accuracy-

related penalties under section 6662(a) in the amounts of $322.60

and $594.80, respectively.1 Respondent also determined an

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue.
 - 2 -

addition to tax under section 6651(a)(1) for 1992 in the amount

of $9.

The issues are: (1) Whether petitioners had sufficient

bases in the stock and indebtedness of Electronic Business

Systems (EBS), a subchapter S corporation, to claim loss

carryovers from the corporation in the years in issue; (2)

whether this Court has jurisdiction to review respondent's

application of claimed overpayments for 1991 and 1992; and (3)

whether petitioners are liable for the accuracy-related penalties

and the addition to tax.

The facts may be summarized as follows. Petitioners resided

in Fort Wayne, Indiana, at the time the petition was filed.

EBS Losses

Prior to the years at issue, Thomas E. Hogan III

(petitioner) was employed by EBS. Petitioner owned 33.33 percent

of the stock in EBS for which he had paid approximately $3,500.

In June of 1990, EBS filed for chapter 11 bankruptcy. EBS ceased

business activities during 1990.

For 1990, EBS reported a loss of which petitioner's aliquot

share reported on a Schedule K-1 was $18,222. On their 1990

joint Federal income tax return petitioners claimed $3,989 of the

$18,222 loss. EBS had incurred losses in years prior to 1990.

While petitioners have claimed aliquot shares of those losses in
 - 3 -

prior years, petitioner does not know the amounts of those losses

that were claimed.

Petitioner testified that from 1983 to 1989 he lent EBS

approximately $52,000, which he had borrowed from the Fort Wayne

National Bank (the bank), and that EBS repaid approximately

$36,000. Petitioner introduced into evidence 11 bank notes that

he contends represent his loans from the bank, the proceeds of

which he in turn lent to EBS. Of these notes, two $5,500 notes

and a $3,000 note are clearly renewals of earlier executed loans.

Another note indicates that the proceeds were used in part to pay

off another loan.

On their 1991 and 1992 joint Federal income tax returns

petitioners claimed carryover losses from EBS in the amounts of

$10,781 and $24,400, respectively. Respondent disallowed those

losses.

Overpayments

Petitioners filed their 1991 joint Federal income tax return

on April 18, 1995. Petitioners claimed an overpayment of $2,148

that they requested be refunded to them. On April 18, 1995,

respondent applied the claimed overpayment to an outstanding

liability for a "responsible person" liability assessed against

petitioner pursuant to section 6672 during 1989. In September of

1995, petitioners filed an amended Federal income tax return for
 - 4 -

1991, requesting that the claimed overpayment be applied to their

1992 estimated tax liability.

Petitioners filed their 1992 joint Federal income tax return

on April 17, 1996. Petitioners claimed an overpayment in the

amount of $5,103.2 Petitioners requested that the overpayment be

applied to their 1993 estimated tax liability. On April 17,

1996, respondent applied $2,955, the portion of the claimed

overpayment relating to petitioner's 1992 wage withholdings, to

petitioner's outstanding section 6672 liability.

Discussion

EBS Losses

Generally, shareholders of a subchapter S corporation are

entitled, inter alia, to deduct their pro rata share of the

corporation's losses. See sec. 1366(a). The losses may be

carried over to subsequent years under section 1366(d)(2). The

amount of losses claimed by a shareholder cannot, however, exceed

the amount of the adjusted bases in the shareholder's stock and

in any indebtedness of the corporation to the shareholder. See

sec. 1366(d)(1).

A taxpayer's adjusted bases in stock and debt are determined

under section 1367. Relevant here, section 1367(a)(2)(B)

provides that a taxpayer's basis in stock shall be reduced by

2
This amount, $5,103, consisted of $2,955 from petitioner's
1992 wage withholdings and the amount of overpayment claimed by
petitioners for 1991 of $2,148.
 - 5 -

losses described in section 1366(a), and, under section

1367(b)(2)(A), a taxpayer's basis in any indebtedness of the

corporation is similarly reduced after the shareholder's basis in

the stock is exhausted.

Petitioner here is faced with two problems. First, he must

establish his bases in his stock and in the indebtedness of the

corporation to him. Second, he must establish that his bases in

these items had not been reduced to zero because of losses

claimed in prior years.

Even if we view the record most charitably in petitioner's

favor, petitioner cannot establish that he had any bases

remaining in his stock or in the indebtedness of the corporation.

Turning first to the debt, we start with the claim that the

amount of the loans represented by the notes totaled

approximately $52,000. But, it is clear that the $5,500 notes of

August 15 and November 7, 1985, and the $3,000 note of January 8,

1987, were renewals of earlier notes. In addition, $1,450 of a

$3,450 note of November 7, 1985, was used to repay an earlier

loan from the bank. The maximum advanced to the corporation

would have been $36,550 ($52,000 minus $15,450). We also know

that before 1990, petitioner was repaid $36,000. Petitioner's

basis in his loans to EBS, therefore, could not have been more

than $550.
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Petitioner's original basis in the stock of EBS was

approximately $3,500. On the other hand, petitioners claimed a

loss in the amount of $3,989 on their 1990 return. Without

considering any losses claimed prior to 1990, petitioner's bases

in the stock and debt could not have been more than $61 ($3,500

for the stock plus $550 for the debt minus $3,989). We are

confident that any loss claimed prior to 1990 would have exceeded

that amount. Accordingly, petitioners are not entitled to claim

any loss carryovers from EBS for 1991 and 1992.

Overpayments

Petitioners dispute respondent's authority to set off the

claimed overpayments in 1991 and 1992 against petitioner's

outstanding section 6672 liability. Section 6402(a) provides:

SEC. 6402(a). General Rule.--In the case of any
overpayment, the Secretary, within the applicable period of
limitations, may credit the amount of such overpayment,
including any interest allowed thereon, against any
liability in respect of an internal revenue tax on the part
of the person who made the overpayment and shall, subject to
subsections (c) and (d), refund any balance to such
person.[3]

Furthermore, section 6512(b)(4) provides that "The Tax Court

shall have no jurisdiction under this subsection to restrain or

3
Sec. 6402(a) was amended by sec. 3711(a) of the Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, 112 Stat. 685, 779, to include a reference to subsec.
(e). That amendment applies to refunds payable after Dec. 31,
1999, and is not applicable to this case.
 - 7 -

review any credit or reduction made by the Secretary under

section 6402."4

Respondent contends that pursuant to section 6512(b)(4) this

Court has no jurisdiction to review the action with regard to the

application of the overpayments. There is no question that

respondent offset the overpayments for 1991 and 1992 against the

section 6672 liability pursuant to section 6402(a). Under the

literal language of section 6512(b)(4), this Court is without

jurisdiction "to * * * review any * * * reduction made by the

Secretary under section 6402." We must agree, therefore, with

respondent's contention.

We have held that section 6512(b)(4) does not prevent this

Court from reviewing Commissioner's failure to offset

underpayments by agreed overpayments, thus preventing the netting

of interest in years that are before the Court. See Winn-Dixie

Stores, Inc. v. Commissioner, 110 T.C. 291 (1998). But, that is

a totally different situation from the facts here. In Winn-Dixie

the overpayment had been refunded to the taxpayer rather than

credited against another year. See Savage v. Commissioner, 112

T.C. 46, 50 (1999). Moreover, we noted in Winn-Dixie that

section 6512(b)(4) restricts our jurisdiction in two situations.

4
Sec. 6512(b)(4) was added to the Code by sec. 1451(b) of the
Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788, 1054.
 - 8 -

"First, we may not restrain or prevent respondent from reducing a

refund by way of credit or reduction pursuant to section 6402.

Second, we may not review the validity or merits of any reduction

of a refund under section 6402 after such a reduction has been

made by respondent." Winn-Dixie Stores, Inc. v. Commissioner,

supra at 294; see also Steinberg v. Commissioner, T.C. Memo.

1999-311 (no jurisdiction when the taxpayer claimed an

overpayment made for a year not at issue, 1973, should be applied

to the year at issue, 1980).

Addition to Tax and Penalties

Section 6651(a)(1) imposes an addition to tax for failure to

timely file returns "unless it is shown that such failure is due

to reasonable cause and not due to willful neglect". To show

reasonable cause petitioners must demonstrate that they exercised

ordinary business care and prudence but were unable to file their

returns in time. See United States v. Boyle, 469 U.S. 241, 246

(1985). Willful neglect is a conscious, intentional failure, or

reckless indifference. See id. at 245.

It is undisputed that petitioners' 1992 return was not

timely filed. Petitioners claim they did not file their return

because they were involved in a dispute with respondent involving

the section 6672 liability. Involvement in such disputes or

litigation does not excuse petitioners from their obligation to

timely file income tax returns. See, e.g., Osijo v.
 - 9 -

Commissioner, T.C. Memo. 1998-38. Respondent's determination as

to the addition to tax under section 6651(a)(1) for 1992 is

sustained.

Respondent also determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for 1991 and

1992 for negligence. Section 6662(a) provides that "there shall

be added to the tax an amount equal to 20 percent of the portion

of the underpayment to which this section applies." Section 6662

applies to "the portion of any underpayment which is attributable

to", inter alia, negligence or disregard of the rules or

regulations. Sec. 6662(b)(1). Negligence "includes any failure

to make a reasonable attempt to comply with the provisions * * *

[of the Internal Revenue Code], and the term 'disregard' includes

any careless, reckless, or intentional disregard." Sec. 6662(c).

Respondent determined the accuracy-related penalties under

section 6662(a) for 1991 and 1992 based on petitioner's failure

to review carefully the availability of the claimed losses from

EBS.

Petitioners claim they employed a new accountant to compute

their 1991 and 1992 Federal income taxes. In some circumstances

reliance upon a qualified return preparer may alleviate a

taxpayer's liability for penalties. See sec. 1.6664-4(b)(1),

Income Tax Regs.; see also Ewing v. Commissioner, 91 T.C. 396,

423-424 (1988), affd. without published opinion 940 F.2d 1534
 - 10 -

(9th Cir. 1991). The taxpayer must advise the preparer of all

facts that are relevant to the tax treatment of an item. See

Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-

610. The advice must not be based upon unreasonable factual or

legal assumptions. See id. It does not appear disputed that EBS

suffered losses. The limitations of the deductibility of losses

from an S corporation depend on a taxpayer's bases in the stock

and indebtedness. A taxpayer's bases in an S corporation's stock

and indebtedness is a fairly complicated subject. Under these

circumstances we do not believe that the imposition of the

section 6662(a) penalties is warranted.

Decision will be entered

for respondent with respect to the

deficiencies and addition to tax

under section 6651(a)(1) and for

petitioners with respect to the

penalties under section 6662(a).