T.C. Memo. 2000-189
UNITED STATES TAX COURT
THOMAS C. SANDOVAL, JR. AND BOBBIE J. SANDOVAL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21220-96. Filed June 27, 2000.
Thomas C. Sandoval, Jr., pro se.
Elizabeth A. Owen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioners’ Federal income tax and additions to tax and
penalties as follows:
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Additions to tax and penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6661(a) Sec. 6662(a)
1985 $27,673 $3,362 $6,918 --
1987 21,865 2,722 5,466 --
1989 10,017 –- –- $2,003
1990 50,643 10,910 –- 10,129
Respondent filed an amended answer asserting that petitioners’
tax liability is as follows:1
Additions to tax and penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6661(a) Sec. 6662(a)
1985 $27,642 $3,889 $3,888 --
1987 21,865 2,935 2,935 --
1989 10,017 2,420 –- $1,936
1990 50,643 10,911 –- 10,129
After concessions, the issues for decision are:
1. Whether petitioners have a basis of $233,408 in
additions to a building. We hold that their basis in the
additions is $20,000.
2. Whether petitioners have a basis of $130,000 (or any
other amount) in real property for two outdoor advertising signs
on the property. We hold that they do not.
3. Whether the Babcock Road and Warfield Drive properties
qualify under section 1033 as replacement property for property
sold under threat of condemnation. We hold that they do not.
4. Whether petitioner placed certain vehicles in service
when he bought them for his business, as respondent contends, or
when he began to use them in his business, as petitioners
1
Respondent bears the burden of proof with respect to new
matter alleged in the amended answer. Rule 142(a).
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contend. We hold that petitioner placed the vehicles in service
when he bought them for his business.
5. Whether petitioners may deduct depreciation for their
business property in an amount greater than respondent allowed.
We hold that they may not.
6. Whether petitioners may claim net operating loss
carrybacks or carryforwards or investment tax credit
carryforwards for the years in issue. We hold that they may not.
7. Whether petitioners are liable for an addition to tax
under section 6651 for failure to timely file their Federal
income tax returns for the years in issue. We hold that they
are.
8. Whether petitioners are liable for additions to tax for
substantial understatement of income tax under section 6661 for
1985 and 1987 and for accuracy-related penalties for substantial
understatement of tax under section 6662(b)(2) and (d) for 1989
and 1990. We hold that they are for the years they substantially
underpaid tax.
References to petitioner are to Thomas C. Sandoval, Jr.
Section references are to the Internal Revenue Code in effect
during the years in issue. Unless otherwise noted, Rule
references are to the Tax Court Rules of Practice and Procedure.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioners
Petitioners lived in San Antonio, Texas, when they filed
their petition.
During the years in issue, petitioner was sole proprietor of
Allied Electric and Air Conditioning Co. (Allied Electric)
located on Hoefgen Avenue (Hoefgen Avenue property) in San
Antonio. There was a billboard and a commercial sign (the two
outdoor advertising signs) on the Hoefgen Avenue property.
Petitioner bought the following vehicles for Allied
Electric because he thought he needed them for contracts on which
he had bid, but which he did not win:
Vehicle Date acquired
1973 Ford Digger October 1982
1972 Ford Bucket truck February 1983
1977 GMC Bobtail April 1983
1977 GMC Bobtail April 1983
1985 Ram Charger October 1984
He maintained them, but he did not register or insure them until
he began to use them for his business in 1985.
B. The Hoefgen Avenue Property
1. Addition of Storage Space and Office
Between January 1, 1982, and December 31, 1984, petitioner
added warehouse storage space and an office addition to the
second story of the Hoefgen Avenue property. Richard Zamora
(Zamora) drafted plans for the storage space addition in November
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1981 and plans for the office addition in March 1983 and oversaw
construction of both. Petitioner signed the building permit for
the office addition which stated that the addition was estimated
to cost $10,400.
Petitioners’ county property tax statement states that
improvements (i.e., everything but the land) at the Hoefgen
Avenue property were worth $112,020 in 1984 and $158,800 in 1985
and 1986.
2. Condemnation Sale of the Hoefgen Avenue Property
The City of San Antonio threatened to condemn the Hoefgen
Avenue property in the summer of 1990. Petitioner hired John
Neal (Neal), a real estate appraiser, to appraise the
improvements on that property. Neal estimated that the
replacement cost of those improvements as of June 8, 1990, was as
follows:
Structures Replacement cost
Office building $193,011
Transit warehouse 77,012
Additions (e.g., sheds, fans
& openers, canopy area,
stairs, fencing, etc.) 36,499
Total 306,522
The City of San Antonio bought the Hoefgen Avenue property
under threat of condemnation for $425,000 on September 17, 1990.
Petitioner received net proceeds of $371,486 from the sale (the
condemnation proceeds). Petitioner elected to defer the gain he
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realized from the condemnation sale by buying replacement
property under section 1033.
C. Properties That Petitioners Contend or That Respondent
Concedes Are Replacement Properties
1. Properties That Respondent Concedes Are Replacement
Properties
Petitioner bought real property on Jones Maltsberger Road
(Jones Maltsberger Road property) in San Antonio on September 26,
1990, and 3.164 acres of land in Bexar County on October 7, 1991.
Respondent concedes that these properties qualify under section
1033 as replacement properties for the Hoefgen Avenue property.
2. The Babcock Road Property
Gary A. Burnett (Burnett) and petitioner each paid a total
of $84,107 to buy 1.329 acres of real property on Babcock Road
(Babcock Road property) in San Antonio. They made those payments
on October 30 and December 2 and 3, 1991. On December 4, 1991,
petitioner and Burnett agreed in writing (Babcock Road property
agreement) to create a joint venture called “TGR Partnership a
Texas general partnership” (TGR I), with a principal place of
business at the Jones Maltsberger Road property. Petitioner and
Burnett signed Exhibit A to the Babcock Road property agreement
which states: “This partnership is formed for the purpose of
purchasing the property as described in Exhibit ‘B’”. Exhibit B
describes the Babcock Road property. The Babcock Road property
agreement provided: (a) “Joint venture I” began on December 3,
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1991; (b) its purpose was short-term investment (6 to 12 months)
in the Babcock Road property; (c) all allocations would be 50
percent each to petitioner and Burnett; (d) real property was to
be owned in the name of the joint venture or any joint venturer
as nominee or trustee of the joint venture; (e) each joint
venturer waived the right to partition joint venture property;
(f) the joint venturers had equal right to control and manage the
Babcock Road property; (g) the joint venturers’ rights to sell,
assign, transfer, encumber, or otherwise dispose of interests in
the Babcock Road property were restricted; and (h) each of the
joint venturers had the option to buy the other’s interest upon
the other’s death, adjudication of the other’s incompetency, the
other’s bankruptcy, or gift of part or all of the other’s
interest in the property.
The Babcock Road property settlement statement dated
December 5, 1991, names TGR I as the borrower for the property.
On March 20, 1992, petitioner registered TGR I as his
assumed name. Petitioner did not include Burnett’s name on the
assumed name certificate. A City of San Antonio statement of
property taxes for 1992 lists the TGR I as the owner of record of
the Babcock Road property.
On December 15, 1992, petitioner and Burnett sold the
Babcock Road property for $318,000 plus $429 in taxes. The
settlement statement listed TGR I as the seller. Petitioner and
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Burnett each signed the settlement statement as a partner of TGR
I. The settlement company issued two checks for $143,250 each
payable to TGR I. Petitioner and Burnett each endorsed one check
payable to the other.
3. The Warfield Drive Property
On May 14, 1993, petitioner and Burnett agreed to form a
joint venture under the name “TGR Partnership a Texas general
partnership” (TGR II) to buy real property to hold for 3 to 5
years to generate rental income.
On May 17, 1993, petitioner and Burnett signed a written
agreement (Warfield Drive property agreement), and bought
property on Warfield Drive (Warfield Drive property) in San
Antonio. On May 17, 1993, petitioner and Burnett each paid about
$123,000 for a 50-percent interest in TGR II. Petitioner and
Burnett signed Exhibit A to the Warfield Drive property agreement
which states: “This partnership is formed for the purpose of
purchasing the property as described in Exhibit ‘B’”. Exhibit B
describes the Warfield Drive property. The Warfield Drive
property settlement statement identified “Gary Burnett and Tom
Sandoval dba TGR and Partnership” as the borrower for the
property. The Babcock Road and Warfield Drive property
agreements are identical except for the description of, and the
stated purpose for holding, the properties.
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D. Petitioners’ Tax Returns
Petitioners asked to extend the times to file, deposited
amounts with their requests, and filed their returns for the
years in issue as follows:
Date Date
Tax Date of Amount of extension petitioners
year request deposit granted to filed
1985 Apr. 15, 1986 $14,000 Aug. 15, 1986 Sept. 20, 1993
1987 Apr. 15, 1988 10,000 Aug. 15, 1988 Sept. 27, 1993
1989 Apr. 15, 1990 Aug. 15, 1990
1989 Aug. 15, 1990 Oct. 15, 1990 Oct. 1, 1993
1990 Apr. 15, 1991 7,000 Aug. 15, 1991
1990 Aug. 15, 1991 Sept. 16, 1991 Oct. 1, 1993
The following chart shows the amount of the depreciation and
section 179 deductions that petitioners’ accountant calculated
and that petitioners reported on Schedules C, Profit or (Loss)
From Business or Profession, of petitioners’ returns for 1985,
1987, 1989, and 1990:
Depreciation and Section 179 Deductions
Accountant’s Petitioners’
Year schedules Schedules C
1985 $48,855 $51,308
1987 54,789 53,513
1989 47,693 53,413
1990 35,741 59,463
Petitioners filed their 1983 return in 1992 and their 1984,
1986, and 1988 returns in 1993. Petitioners claimed 3 months
depreciation for the Ram Charger on their 1984 return.
On Schedules E, Supplemental Income Schedule, of their
Federal individual income tax returns for 1993, 1994, 1996, and
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1997, petitioners reported nonpassive income or loss relating to
TGR II in the partnership income section.
OPINION
A. Whether Petitioners Have a Basis of $233,408 in the Storage
and Office Additions to the Hoefgen Avenue Property
Petitioners contend that they paid $233,408 in the early
1980's to add storage and office space to the Hoefgen Avenue
property. Respondent contends that petitioners have failed to
show that they are entitled to any basis in the additions to the
Hoefgen Avenue property.2
Petitioners rely in part on Zamora’s and Neal’s testimony to
substantiate their basis for the storage and office additions.3
Zamora credibly testified that he designed and oversaw the
construction of the storage addition at the Hoefgen Avenue
property in 1981 and 1982, and the office addition in 1983 and
1984. Zamora testified that the storage addition was not
significant because petitioners did not change the exterior or
roof structure of the building. Zamora did not testify about the
cost of the additions. Neal estimated that the replacement cost
2
Respondent allowed depreciation deductions for 15-year
property costing $22,895, for 5-year property costing $12,083,
and for 3-year property costing $48,044, which petitioners
reported on their 1982 return was placed in service in 1981 and
1982.
3
Petitioners offered no evidence to prove their contention
that they lost petitioner’s records when moving to the Jones
Maltsberger Road property.
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of all improvements to the Hoefgen Avenue property was $306,522
as of June 8, 1990. He did not estimate how much petitioners
spent to build the storage and office additions.
Petitioners point out that the Bexar County property tax
statements for the Hoefgen Avenue property show that the
improvements to that property were worth $112,020 in 1984 and
$158,800 in 1985 and 1986. Petitioners also point out that
petitioner signed a building permit which states that the
estimated cost for the office addition was $10,400. These facts
are not sufficient evidence of basis.
Respondent contends that the record provides no basis to
estimate petitioners’ costs for the storage and office additions.
We disagree. We may estimate petitioners’ basis in those
additions “bearing heavily * * * upon the taxpayer whose
inexactitude is of his own making." See Cohan v. Commissioner,
39 F.2d 540, 544 (2d Cir. 1930), affg. in part and remanding 11
B.T.A. 743 (1928); see also Bayou Verret Land Co. v.
Commissioner, 450 F.2d 850, 858 (5th Cir. 1971), affg. 52 T.C.
971 (1969). We estimate that petitioners paid $20,000 to add the
office and that it was completed in 1984. Petitioners may
increase their basis in the Hoefgen Avenue property for the
office addition using a 15-year useful life and a placed-in-
service date of July 1984.
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We do not have sufficient information to estimate how much
petitioners paid for the storage addition that was completed in
1982. Also, petitioners have failed to show that they did not
include the cost of the storage addition on the depreciation
schedule attached to their 1982 return, for which respondent
already concedes an allowance for depreciation. Finally,
petitioners have not shown that they did not fully depreciate the
cost of the storage addition before 1985. Thus, petitioners may
not increase their basis in the Hoefgen Avenue property for 1985
or any later year to include any costs of building the storage
addition.
B. Whether Petitioners Have Basis in the Hoefgen Avenue
Property for Outdoor Advertising Signs
Petitioners contend that the two outdoor advertising signs
on the Hoefgen Avenue property had a future contract value of
$130,000 and that we should increase their basis in the Hoefgen
Avenue property by that amount. We disagree.
The basis of property is generally its cost. See sec. 1012;
Better Beverages, Inc. v. United States, 619 F.2d 424, 428 (5th
Cir. 1980); Winn-Dixie Montgomery, Inc. v. United States, 444
F.2d 677, 683-684 (5th Cir. 1971). Future contract value is not
the cost of the two outdoor signs.4 There is no evidence of the
4
Future contract value is not a proper grounds for
computing gain. See sec. 1012; Better Beverages, Inc. v. United
States, 619 F.2d 424, 428 (5th Cir. 1980); Winn-Dixie Montgomery,
(continued...)
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cost of the signs, who paid for them, or when those payments were
made. We conclude that petitioners may not increase the basis in
the Hoefgen Avenue property based on the future contract value of
the two outdoor signs.
C. Whether the Babcock Road and Warfield Drive Properties
Qualify as Replacement Property for the Hoefgen Avenue
Property Under Section 1033
1. Background and Contentions of the Parties
A taxpayer who sells under threat of condemnation real
property held for business use or investment may defer
recognition of the gain if he or she buys property of like kind
to the converted property within 3 years after the closing of the
first taxable year in which any part of the gain from the sale is
realized. See sec. 1033(a)(1), (g)(1), and (g)(4). Principles
used for deciding whether an exchange is like kind under section
1031 also apply in deciding whether replacement property is
property of a like kind under section 1033. See sec. 1.1033(g)-
1(a), Income Tax Regs. An exchange of a fee interest in real
property for an interest in a partnership does not qualify as an
exchange of like-kind property. See M.H.S. Co. v. Commissioner,
T.C. Memo. 1976-165, affd. 575 F.2d 1177 (6th Cir. 1978); sec.
1.1031(a)-1(b), Income Tax Regs.
4
(...continued)
Inc. v. United States, 444 F.2d 677, 683-684 (5th Cir. 1971).
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Petitioners contend that they may defer all of their gain
from the sale of the Hoefgen Avenue property because they bought
replacement properties that qualify under section 1033.
Respondent contends that petitioners used proceeds from the
Hoefgen Avenue sale to buy interests in partnerships and not in
real property. Petitioners contend that petitioner and Burnett
bought the Babcock Road and Warfield Drive properties, then
decided to form a joint venture to manage them. We disagree with
petitioners.5
2. Whether Petitioner Acquired an Interest in the Babcock
Road and Warfield Drive Properties, or an Interest in
Partnerships
Petitioners contend that petitioner and Burnett acquired an
interest in and held the Babcock Road and Warfield Drive
properties in fee simple as tenants in common. Petitioner and
Burnett testified that they did not intend to form partnerships
until after they bought the real property. However, we give more
weight to the objective facts than to that testimony. The
objective facts, such as the written agreements and petitioner’s
and Burnett’s conduct, show that petitioners formed a partnership
under Texas and Federal law, that the partnerships acquired the
5
In light of our conclusion, we need not decide
respondent’s contention that the rule stated in Commissioner v.
Danielson, 378 F.2d 771, 775 (3d Cir. 1967), vacating and
remanding 44 T.C. 549 (1965) (the Danielson rule), precludes
petitioners from claiming that their interests in the Babcock
Road and Warfield Drive properties are not partnership interests.
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properties, and that petitioner used the proceeds from the
Hoefgen Avenue sale to buy partnership interests.
Under Texas law, a partnership is "an association of two or
more persons to carry on as co-owners a business for profit."
Tex. Rev. Civ. Stat. Ann. art. 6132b, sec. 6(1) (West 1990).6 For
Federal tax purposes, generally, a partnership exists when
persons combine their money, goods, labor, or skill to carry on a
trade, profession, or business and there is a community of
interest in the profits or losses. See Commissioner v.
Culbertson, 337 U.S. 733, 742 (1949); see also sec. 7701(a)(2).
Under Texas law, a joint venture is in the nature of a
partnership, but it is usually limited to one particular
enterprise. See State v. Houston Lighting & Power Co., 609
S.W.2d 263, 267 (Tex. Civ. App. 1980).
a. The Babcock Road Property
Petitioners contend that they acquired the Babcock Road
property as cotenants. They contend the fact that they labeled
TGR I as a partnership does not control. See, e.g., Coastal
Plains Dev. Co. v. Micrea, Inc., 572 S.W.2d 285, 288 (Tex. 1978);
Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 586 (Tex.
App. 1999); Ben Fitzgerald Realty Co. v. Muller, 846 S.W.2d 110,
121-122 (Tex. App. 1993). They point out that coownership of
6
Texas adopted the Texas Uniform Partnership Act (TUPA) in
1961, effective Jan. 1, 1962. See Humphrey v. Bullock, 666
S.W.2d 586, 588 (Tex. App. 1984).
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property is not necessarily a partnership. See Demirjian v.
Commissioner, 54 T.C. 1691, 1697 (1970), affd. per curiam 457
F.2d 1 (3d Cir. 1972). We disagree that petitioner and Burnett
acquired the Babcock Road property as cotenants.
Petitioners contend that petitioner and Burnett formed TGR I
after they bought the property to help manage it. We disagree.
Petitioner and Burnett formed TGR I on December 3, 1991,
according to the terms of the written agreement which they signed
the following day. Under Texas law, a partnership can exist
without a written agreement. See Valero Energy Corp. v. Teco
Pipeline Co., supra at 584-585; Shindler v. Marr & Associates,
695 S.W.2d 699, 703 (Tex. App. 1985); Cavazos v. Cavazos, 339
S.W.2d 224, 226 (Tex. Civ. App. 1960).
The written agreement that they signed on December 4, 1991,
stated that their “Joint Venture I” began on December 3, 1991.
In the written partnership agreement, petitioner and Burnett
agreed (1) to contribute equal sums to own equal interests in TGR
I; (2) to share equally in profits, and bear equal responsibility
for losses in TGR I; (3) that TGR I would own the real property;
(4) to waive their rights to require partition of partnership
property; (5) to share equally management and control over TGR I;
and (6) to restrict transferring their interests in TGR I. They
specified a principal place of business. They acquired the
Babcock Road property in the name of TGR I, then sold it for a
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profit and divided the net proceeds equally. Thus, petitioner
and Burnett formed TGR I as a partnership to hold real property
for profit.
Real property acquired in the name of the partnership is
partnership property. See Tex. Rev. Civ. Stat. Ann. art. 6132b,
sec. 2.05(a)(1) (West 1999). A copy of the deed for the Babcock
Road property is not in the record. However, it appears from the
settlement documents that TGR I bought the Babcock Road property
on December 5, 1991, in TGR I’s name. Petitioners do not dispute
this fact. A City of San Antonio statement of property taxes for
1992 states that TGR I was the owner of record of the Babcock
Road property. The documents evidencing the sale of the Babcock
Road property name TGR I as the seller. Thus, TGR I, and not
petitioner and Burnett, acquired and held title to the Babcock
Road property. See Tex. Rev. Civ. Stat. Ann. art. 6132b, sec.
2.05(a)(1) (West 1999).
We conclude that the Babcock Road property does not qualify
as replacement property for the Hoefgen Avenue property under
section 1033.
b. The Warfield Drive Property
Petitioners contend that they acquired the Warfield Drive
property as cotenants. Petitioners point out that petitioner and
Burnett testified that they did not intend to form a partnership.
The objective facts show otherwise.
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Petitioner and Burnett agreed to form TGR II on May 14,
1993. They signed the Warfield Drive property agreement on May
17, 1993, which memorialized their May 14, 1993, agreement. The
terms of the Warfield Drive property agreement are essentially
the same as those in the Babcock Road property agreement, except
for the purpose for acquiring the real property. Exhibits A and
B to the Warfield Drive property agreement state that petitioner
and Burnett formed TGR II to acquire the Warfield Drive property.
The Warfield Drive property agreement stated that petitioner and
Burnett intended to collect rental income from that property for
many years and to hold it to appreciate in value. TGR II bought
and held the Warfield Drive property to carry on a business.
Petitioner and Burnett adopted the TGR name, acquired the
property under that name, and held out TGR II as a partnership.
Petitioners reported active partnership income and loss from TGR
II for 1993, 1994, 1996, and 1997. Petitioner and Burnett
intended to and did operate a real estate rental business
together.
Petitioners contend that TGR II did not buy the Warfield
Drive property because petitioner and Burnett signed the joint
venture agreement after they bought the property. We disagree.
The written agreement that petitioner signed on May 17, 1993,
states that Burnett and petitioner agreed on May 14, 1993, to
establish TGR II to buy and hold rental real property for 3 to 5
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years. The record does not show whether petitioner and Burnett
signed the agreement or bought the property first. However, both
of those events occurred on May 17, 1993, after they agreed to
form the partnership.
Petitioners contend that petitioner and Burnett took title
to the Warfield Drive property in their individual names. A copy
of the deed is not in the record, and it is not clear how title
to the Warfield Drive property is recorded. The settlement
statement shows “Gary Burnett and Tom Sandoval dba TGR and
Partnership” as borrowers. However, even if we assume that title
to the Warfield Drive property is recorded in petitioner’s and
Burnett’s names, we believe that they were TGR II’s agents when
they bought the Warfield Drive property. The property agreement
provides for buying and renting out one parcel of real property
for 3 to 5 years and that the property of TGR II may be held in
the name of petitioner or Burnett. Under Texas law, title to
partnership property may be held in the name of the partnership
or in the name of one or more of the partners. See Tex. Rev.
Civ. Stat. Ann. art. 6132b, sec. 10 (West 1990). Partnership
property, nonetheless, belongs to the partnership and not to the
individual partners. See Littleton v. Littleton, 341 S.W.2d 484,
488 (Tex. Civ. App. 1960); In re Cooper, 128 Bankr. 632, 636
(Bankr. E.D. Tex. 1991).
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Petitioners point out that petitioner filed a certificate of
assumed name for “TGR” without including Burnett’s name and
contend that this shows that Burnett and petitioner were not
partners in TGR II. We disagree. This fact is not enough to
convince us that petitioner and Burnett did not use condemnation
proceeds to pay for an interest in the partnership known as TGR
II which in turn bought and owned the Warfield Drive property.
Also, the assumed name certificate does not affect TGR II because
petitioner and Burnett created the TGR II partnership after
petitioner filed the assumed name certificate.
We conclude that petitioners acquired an interest in TGR II
and that the Warfield Drive property was an asset of TGR II, not
an asset owned as tenants in common by the joint venturers.
Thus, the Warfield Drive property does not qualify as replacement
property for the Hoefgen Avenue property under section 1033.
D. Whether the Placed-In-Service Date for a Vehicle Is the Date
Acquired or the Date Used in Business
The parties disagree about when petitioner placed five
vehicles in service for depreciation purposes. Petitioners
contend that the placed-in-service date for each vehicle is the
date petitioner began using the vehicle in his business. We
disagree.
Generally, an asset is placed in service for depreciation
purposes when it is acquired and available for use in business
even if it is not actually used in the business. See Sears Oil
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Co. v. Commissioner, 359 F.2d 191, 198 (2d Cir. 1966), affg. in
part, revg. in part, and remanding T.C. Memo. 1965-39;
P. Dougherty Co. v. Commissioner, 159 F.2d 269 (4th Cir. 1946),
affg. 5 T.C. 791 (1945). All five vehicles were available for
use in petitioner’s business when he bought them. Petitioner
placed each vehicle in service for depreciation purposes when he
bought it.
E. Whether Petitioners May Deduct More Depreciation for
Business Property Than Respondent Allowed
Petitioners contend that they may depreciate shop and office
equipment in amounts greater than they claimed on their returns
for the years in issue and greater than respondent allowed.
Petitioners contend that respondent did not allow them to
depreciate certain shop and office equipment that had useful
lives and cost bases which had not been fully recovered as of the
beginning of 1985. We disagree. Petitioners did not identify
the equipment to which their contention applies or show that
respondent had not already allowed a depreciation deduction for
that equipment.
F. Whether Petitioners May Deduct Net Operating Loss
Carryforwards and Carrybacks and Use Investment Tax Credit
Carryforwards
Petitioners contend they may deduct net operating loss (NOL)
carryforwards and carrybacks and use investment tax credit
carryforwards. We disagree. Petitioners must prove the amount
of the NOL carryforward or carryback deductions claimed and that
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their gross income in other years did not offset those losses.
See Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and
remanded on other grounds 259 F.2d 300 (5th Cir. 1958).
Dan Mitchell, petitioners’ return preparer, testified that
petitioners’ tax returns show that they are entitled to NOL
carryforwards and carrybacks and investment tax credit
carryforwards. Tax returns alone do not establish that a
taxpayer is entitled to NOL carryforwards or carrybacks or
investment tax credit carryforwards. See Wilkinson v.
Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,
62 T.C. 834, 837, 839 (1974). Petitioners offered no other
evidence about their NOL carryforwards or carrybacks or
investment tax credit carryforwards. We conclude that
petitioners may not claim NOL carryforward or carryback
deductions or investment tax credits carried forward to the years
in issue.
G. Whether Petitioners Are Liable for the Addition to Tax for
Late Filing
Petitioners contend that they are not liable for the
addition to tax under section 6651(a)(1) for their failure to
file timely their income tax returns for each year in issue
because: (1) They correctly reported that there was no tax due
for the years in issue, (2) they had reasonable cause to file
their returns late because petitioner had problems keeping office
staff who could provide the necessary information to help prepare
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the returns and it took him additional time to replace his return
preparer, and (3) they showed their good faith by filing timely
extension requests and by paying cash deposits with those
requests. We disagree.
Petitioners are liable for an addition to tax for failure to
timely file a tax return unless they show that their failure to
timely file is due to reasonable cause and not due to willful
neglect. See sec. 6651(a)(1); United States v. Boyle, 469 U.S.
241, 245 (1985).
Petitioners had extensions of time to file their returns for
the years in issue, but they filed them long after the extended
time had passed. Making cash deposits does not substitute for
timely filing a return. Petitioners did not show that they had
reasonable cause to file their returns late or that they
exercised good faith in filing their returns. Thus, petitioners
are liable for the additions to tax for failure to timely file
their tax returns for each year in issue.
H. Whether Petitioners Are Liable for the Addition to Tax or
Penalty for Substantial Understatement
Petitioners contend that they are not liable for additions
to tax for substantial understatement of tax under section
6661(a) for 1985 and 1987 and accuracy-related penalties for
substantial understatement of tax under section 6662(b)(2) and
(d) for 1989 and 1990 because they had reasonable cause for the
understatements and they acted in good faith. They rely on their
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reasons for failing to file timely, which we have found to be
unconvincing. Petitioners do not contend that they had
substantial authority for the understatements or that their tax
returns disclosed enough facts to enable respondent to identify
the potential controversy. See sec. 6662(d)(2)(B); Schirmer v.
Commissioner, 89 T.C. 277, 285-286 (1987). We conclude that
petitioners are liable for the additions to tax under section
6661(a) for 1985 and 1987 and the accuracy-related penalties
under section 6662(b)(2) and (d) for 1989 and 1990 if the
calculations under Rule 155 show that the understatements are
substantial for purposes of section 6661(a) or section
6662(d)(1).
To reflect concessions and the foregoing,
Decision will be entered
under Rule 155.