T.C. Memo. 2000-162
UNITED STATES TAX COURT
ANGELO F. DEJOY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10893-98. Filed May 18, 2000.
Angelo F. DeJoy, pro se.
Thomas J. Kerrigan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioner's Federal income taxes, additions to tax, and
accuracy-related penalties as follows:
- 2 -
Accuracy-Related
Additions To Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6654 Sec. 6662(a)
1989 $36,815 $9,204 $2,492 $7,363
1990 21,990 5,498 1,447 4,398
1991 15,062 3,766 867 3,012
1992 22,471 5,618 979 4,494
1993 26,804 5,361 1,122 5,361
After settlement of a number of issues, the issues for
decision involve a claimed capital loss for 1990 of $8,275, a
claimed capital loss for 1991 of $47,391, and the late filing
additions to tax under section 6651(a)(1) for each of the years
shown in the schedule above.
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.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
Melville, New York. From 1987 to 1989, petitioner was the sole
shareholder of three S corporations, namely, Papa Angelos Home
and Car Audio Inc. of Coram, Inc. (Car Audio), Papa Angelos
Discount Car Stereo, Inc. (Car Stereo), and Mobile Audio
Distributors, Inc. (Audio Distributors).
In 1987 and 1988, a downturn in the economy occurred and
affected the automobile accessory parts industry in which
- 3 -
petitioner’s corporations were engaged. Car Audio apparently
operated until 1988 when it ceased operations. Car Stereo
apparently went into involuntary bankruptcy in 1989, and
apparently by 1989, Audio Distributors had gone out of business.
In August of 1990, petitioner sold a parcel of real estate
that he owned personally located in Bayshore, New York, and
petitioner used $8,275 of the sales proceeds to pay to the State
of New York an outstanding sales tax liability of Car Stereo.
The State of New York had previously obtained a judgment against
petitioner personally with regard to the outstanding sales tax
liability of Car Stereo and had filed a judgment lien against the
above real property. Upon petitioner’s payment of the $8,275 to
New York State, the lien on the property was released, and
petitioner’s personal liability to the State with respect to the
outstanding New York State sales tax liability of Car Stereo was
paid off.
In early 1991, petitioner paid the State of New York a total
of $23,730 in outstanding sales tax liabilities of Car Stereo and
of Car Audio.
Also in 1991, petitioner paid the United States a total of
approximately $23,662 in section 6672 responsible officer
penalties that had been assessed by respondent against petitioner
relating to unpaid trust fund Federal employment taxes owed by
petitioner’s S corporations.
- 4 -
For 1988 and subsequent years, the record contains little
reliable evidence as to petitioner's tax bases in, and the value
of, petitioner’s stock of each of the S corporations.
As of the end of 1987, petitioner apparently had received
from Car Stereo and/or the other S corporations $148,574 in the
form of a corporate loan. The evidence is unclear as to whether
and, if so, to what extent petitioner ever repaid this purported
loan.
In the late 1980's or early 1990's, the accountant who
maintained petitioner’s books and records and who was to prepare
Federal income tax returns for petitioner personally and for
petitioner’s S corporations closed his accounting practice and
disappeared. Many of the financial records relating to
petitioner’s individual Federal income tax liabilities and
relating to petitioner’s S corporations were never recovered from
the accountant. Also, during these years, petitioner experienced
significant personal and family problems that interfered with
petitioner’s ability to timely file his Federal income tax
returns.
Petitioner untimely filed his individual Federal income tax
returns for 1989 through 1993.
On his 1990 individual Federal income tax return, petitioner
did not reflect the $8,275 that he paid to the State of New York
relating to the outstanding sales tax liability of Car Stereo.
- 5 -
Petitioner now claims that this $8,275 should be allowed to him
as an additional capital loss for 1990.
On his 1991 individual Federal income tax return, petitioner
did not reflect the $47,391 that he paid to New York State and to
the United States relating to the sales and employment tax
liabilities of his S corporations. Petitioner now claims that
this $47,391 should be allowed to him as an additional capital
loss for 1991.
The parties now agree that the payments of $8,275 in 1990
and the total of $47,391 in 1991 that petitioner made regarding
the delinquent sales and employment tax liabilities of his
S corporations represent additional capital contributions to
petitioner’s S corporations and an increase in petitioner's bases
in his stock of the S corporations. Respondent, however,
disallows the claimed capital losses relating thereto on the
grounds that petitioner has established neither his bases in nor
the worthlessness of his stock in the S corporations. Respondent
also has imposed the additions to tax under sections 6651(a)(1),
6654, and 6662(a) with respect to which petitioner contests only
the additions to tax under section 6651(a)(1) for late filing his
tax returns.
OPINION
Payments made by shareholders on behalf of corporations
generally increase the shareholders’ stock bases in the
- 6 -
corporations. See sec. 1012. Distributions by S corporations
without accumulated earnings and profits, on the other hand,
decrease the shareholders’ bases in their stock in the
corporations. See sec. 1367(a)(2)(A).
Under section 165, taxpayers may take deductions for losses
sustained in sales or exchanges of capital assets and for
worthless securities. See sec. 165(a), (f), and (g). Such
losses and deductions are limited, however, to the extent
prescribed by the Code. Taxpayers other than corporations may
offset capital gains by capital losses. See sec. 1211(b).
Capital losses in a given year are limited by the amount of the
capital gains plus $3,000. See id. In addition, taxpayers are
allowed flow-through losses and deductions in connection with S
corporations only to the extent of their adjusted bases in the S
corporations. Individual taxpayers may carry over excess capital
losses to subsequent years. See sec. 1212(b).
In this case, the evidence does not adequately establish
petitioner’s tax bases in, or the worthlessness of, petitioner’s
stock in the S corporations to entitle petitioner to the losses
claimed. Although the payments petitioner made on behalf of his
S corporations would increase petitioner’s bases in the stock of
the S corporations, petitioner has not adequately established his
bases in the stock. For example, petitioner has not established
whether the $148,574 purported corporate loan to petitioner was
- 7 -
ever repaid and whether or not that loan should be treated in
substance as a corporate distribution that would have reduced
petitioner’s stock bases to zero.
Further, aside from his bases in the stock of the S
corporations, petitioner has not established the worthlessness of
such stock. The mere fact that petitioner’s S corporations had
ceased operating and owed outstanding sales and employment tax
liabilities does not necessarily establish the worthlessness of
the related corporate stock. We conclude that petitioner is not
entitled to the claimed capital losses for 1990 and 1991.
With regard to the section 6651 late filing additions to
tax, we find petitioner’s testimony credible and persuasive.
Under the facts of this case, the disappearance of the accounting
firm with many of petitioner’s and the S corporations’ business
and financial records and petitioner’s significant personal and
family problems constitute reasonable cause for the untimely
filing of petitioner’s Federal income tax returns for the years
in issue. We do not sustain respondent’s imposition of the
section 6651 late filing addition to tax.
To reflect the foregoing,
Decision will be entered
under Rule 155.