T.C. Summary Opinion 2001-74
UNITED STATES TAX COURT
RICHARD WILLIAM CORDUAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 920-00S. Filed May 31, 2001.
Richard William Corduan, pro se.
Mark J. Miller and Mark D. Petersen, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure. Dollar amounts are
rounded to the nearest dollar.
Respondent determined deficiencies in petitioner’s Federal
income taxes of $8,228, $3,439, and $4,096, and accuracy-related
penalties of $1,646, $688, and $819 for the taxable years 1995,
1996, and 1997.
After concessions,1 the issues for decision are: (1)
Whether petitioner had unreported discharge of indebtedness
income; (2) whether petitioner has properly substantiated various
items for the years in issue, namely entitlement to (a) dependent
exemption deductions for his parents, (b) head of household
filing status, (c) certain charitable contribution deductions,
(d) certain limited liability company losses, (e) the deduction
of certain business expenses and the subtraction from gross
receipts of an amount of cost of goods sold, and (f) a
carryforward of a net operating loss from 1994 to the years in
issue; (3) whether, and if so to what extent, petitioner must
include in income a State income tax refund he received; and (4)
1
Petitioner concedes that he received unreported dividend
income of $26 in 1995 and that an early distribution in 1997 of
$4,924 from a qualified retirement plan is income, but is not
wages, and is subject to the 10-percent additional tax under sec.
72(t). The parties also agree that the adjustments to capital
gains in the statutory notice of deficiency should be reduced
from $11,496, $2,044, and $1,649 for 1995, 1996, and 1997 to
$2,923, $39, and $143 for each respective year.
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whether petitioner is liable for accuracy-related penalties for
negligence or disregard of rules or regulations.2
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Trevor, Wisconsin, on the date the petition was filed in this
case. Petitioner’s audit commenced on May 28, 1998.
The first issue for decision is whether petitioner had
unreported discharge of indebtedness (DOI) income. Respondent
determined that petitioner had unreported DOI income of $6,005 in
1995.
Gross income generally includes all income from whatever
source derived including gains from dealings in property and
income from DOI. See sec. 61(a)(3), (12); sec. 1001. Where a
debt is discharged upon the debtor’s transfer of property to his
creditor, such transaction is treated as a sale or exchange of
the debtor’s property. See Gehl v. Commissioner, 102 T.C. 784
(1994), affd. without published opinion 50 F.3d 12 (8th Cir.
1995). In the case of recourse indebtedness, the debtor
recognizes gain on the transfer of the property in an amount
equal to the excess of the fair market value over the basis of
the property. See id. Such gain is includable in gross income
2
The adjustment to petitioner’s deduction of medical
expenses in 1996 is computational and will be resolved by the
Court’s holding on the issues in this case.
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under section 61(a)(3). See id.; sec. 1001; sec. 1.1001-2,
Income Tax Regs. The excess of the amount of the discharged
recourse indebtedness over the fair market value is DOI income
includable under section 61(a)(12). See sec. 1.1001-2(a)(2) and
(c) Example (8), Income Tax Regs.
A piece of equipment (a “Bobcat”) was purchased by
petitioner, a friend of petitioner, and petitioner’s father for
use in the friend’s business. A financing statement was filed
naming petitioner as a debtor on a loan secured by the Bobcat and
other property. In 1995, the Bobcat was repossessed by the
creditor which financed the purchase, Associates Commercial
Corporation (Associates), formerly Clark Credit Corporation. A
Form 1099-A, Acquisition or Abandonment of Secured Property, was
issued to petitioner in 1995. This form reflects an outstanding
principal balance of $18,581 on a recourse debt, and the Bobcat’s
fair market value of $12,575. For several months after receiving
the form, petitioner attempted to make payments for the Bobcat.
He then retained the services of an attorney in order to advance
his argument that he never signed a contract regarding the
purchase of the Bobcat and that he did not own it. On February
14, 1996, a Release of All Claims and Indemnification Agreement
was executed by Associates. Pursuant to this agreement,
Associates agreed to release petitioner and his father from any
claim based on the Bobcat sales contract. Petitioner paid
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Associates $1,000 as settlement proceeds in exchange for this release.
Petitioner argues that he did not own the Bobcat. However,
he presented no corroborating evidence of his testimony to this
effect, and he did not call either his father or his friend as a
witness. We decline to accept petitioner’s uncorroborated, self-
serving testimony in light of both the Form 1099-A and the
financing statement showing petitioner as debtor. Accordingly,
we find that petitioner was indebted in the amount of $18,581 at
the time of the repossession in 1995. On the other hand, we
accept petitioner’s testimony that he paid Associates an
additional $1,000 as settlement proceeds because corroborating
references to the receipt of the settlement proceeds were made
both in the release and in a letter from counsel for Associates.
Respondent determined that petitioner received the DOI
income in 1995. Debt is considered discharged the moment it is
clear that it will not be repaid. See Cozzi v. Commissioner, 88
T.C. 435 (1987). Determining when this moment occurs requires an
assessment of the facts and circumstances surrounding the
likelihood of repayment. See id. “Any ‘identifiable event’
which fixes the loss with certainty may be taken into
consideration.” Id. at 445. Respondent based his determination
on the Form 1099-A issued to petitioner. The Court takes
judicial notice of the document “Instructions for Forms 1099,
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1098, 5498, and W-2G” provided by the Internal Revenue Service
for 1995. A Form 1099-A is intended to be used only as
notification of the acquisition of an interest in secured
property in full or partial satisfaction of debt, or of the
abandonment of secured property; it is not meant to necessarily
imply that the debtor received DOI income. The form designed to
be used in the case of DOI is Form 1099-C, Cancellation of Debt.
If both forms apply, only Form 1099-C need be filed. In this
case, after petitioner received the Form 1099-A, he continued to
attempt to make payments on the debt. Furthermore, petitioner
was not released from all further claims by Associates until he
made a final $1,000 payment the following year. We find that,
contrary to respondent’s determination, the debt was not
discharged until 1996.
Finally, we find that petitioner recognized only $5,006 in
DOI income, rather than $6,005 as determined by respondent. The
Bobcat, with a fair market value of $12,575, was obtained by
Associates in 1995, and petitioner paid Associates $1,000 in
1996. Therefore, petitioner transferred $13,575 in cash and
property to Associates in exchange for the discharge of $18,581
of indebtedness.
The second issue for decision is whether petitioner has
properly substantiated various items on his Federal income tax
returns for the years in issue.
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A taxpayer generally must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. See sec. 6001; sec. 1.6001-1(a), (e), Income Tax
Regs. However, in the event that a taxpayer establishes that a
deductible expense has been paid but is unable to substantiate
the precise amount, we generally may estimate the amount of the
deductible expense bearing heavily against the taxpayer whose
inexactitude in substantiating the amount of the expense is of
his own making. See Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). We cannot estimate a deductible expense,
however, unless the taxpayer presents evidence sufficient to
provide some basis upon which an estimate may be made. See
Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) imposes stricter requirements and supersedes
the Cohan doctrine. See Sanford v. Commissioner, 50 T.C. 823,
827 (1968), affd. 412 F.2d 201 (2d Cir. 1969). Section 274(d)
provides that, unless the taxpayer complies with certain strict
substantiation rules, no deduction is allowable (1) for traveling
expenses, (2) for entertainment expenses, (3) for expenses for
gifts, or (4) with respect to listed property. To meet the
strict substantiation requirements, the taxpayer must
substantiate the amount, time, place, and business purpose of the
expenses. See sec. 274(d); sec. 1.274-5T, Temporary Income Tax
Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).
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The first item for which substantiation is at issue is
petitioner’s entitlement to dependent exemption deductions for
his parents. The second item is petitioner’s entitlement to head
of household filing status. In 1996 and 1997, petitioner filed
as head of household, claiming dependent exemption deductions for
his parents. For both years, respondent disallowed the
deductions and changed petitioner’s filing status to single.
A dependent exemption deduction is allowed under section
151(a) for a parent of a taxpayer only if, among other
requirements, the taxpayer provides over half of the parent’s
support for the year. See secs. 151(c) and 152(a). A taxpayer
is considered a head of household with respect to a parent only
if, among other requirements, the taxpayer maintains a household
which constitutes the principal place of abode of that parent,
and the taxpayer is entitled to a dependent exemption deduction
for the parent for that taxable year. See sec. 2(b)(1).
Although the taxpayer is not required to reside with his parents
for purposes of section 2(b), he must maintain the household,
which means that he must pay more than one-half the cost of
maintaining the household for the taxable year. See sec. 1.2-
2(c), Income Tax Regs.
Petitioner testified that he lives in the same home as his
parents and that his parents’ sole source of income is their
monthly Social Security payments of approximately $1,000. He
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provided copies of various invoices, primarily for medical
expenses of his parents, but did not show if or when he paid
these expenses. Nothing in the record shows or even estimates an
amount which petitioner actually provided for his parents’
support or to maintain the home. We find that petitioner did not
provide over half his parents’ support for either 1996 or 1997.
Furthermore, because petitioner’s parents do not qualify
petitioner for dependent exemption deductions for either year,
petitioner is not entitled to head of household filing status in
those years. We uphold respondent’s determinations with respect
to both of these items.
The next item at issue is petitioner’s entitlement to
certain charitable contribution deductions. Petitioner claimed a
charitable contribution deduction of $500 in each of 1996 and
1997. Respondent disallowed these deductions in full.
A deduction is allowed for charitable contributions made
during the taxable year to certain types of organizations only if
the deductions are verified under regulations prescribed by the
Secretary. See sec. 170(a). Under the regulations, a deduction
for charitable contributions generally is not allowed without
written records. See sec. 1.170A-13, Income Tax Regs. See also
sec. 1.6001-1(a), (e), Income Tax Regs.
Petitioner presented only vague testimony to substantiate
his claimed charitable contribution deductions. He testified
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only that he “would say United Way got some” and that he also
made contributions to his church. He could not recall the exact
amounts of such contributions. In the absence of any written
records or other substantiation for the charitable contributions,
we uphold respondent’s disallowance of the deductions therefor.
The next item at issue is petitioner’s entitlement to
certain limited liability company (LLC) losses. Petitioner
claimed partnership losses of $21,600 and $20,763 in 1996 and
1997, respectively, for an LLC. Respondent disallowed these
losses in full.
An LLC with more than one member is treated as a partnership
for Federal income tax purposes unless the LLC elects otherwise.
See sec. 301.7701-3, Proced. & Admin. Tax Regs.
The LLC in which petitioner was a member did not file a
partnership return in either year. In 1996, petitioner filed a
Schedule E, Supplemental Income and Loss, reflecting a
partnership loss. In 1997, petitioner completed a Schedule C,
Profit or Loss From Business, and then claimed approximately 56
percent of the net loss reported on this form as his distributive
share of the LLC’s loss. Petitioner presented no evidence to
support the claimed losses or the underlying expenses listed on
the Schedule E or C. Furthermore, at least a portion of the
expenses listed on the schedules, if actually incurred, were not
related to any business. For example, legal and professional
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fees of $14,500 were reported in 1997. Asked at trial if he paid
an attorney $14,500 in legal fees, petitioner replied: “Yes, I
did. It wasn’t legal fees--well, most of--about $5,000 of that
was legal fees” used to “save my home from being foreclosed.” We
uphold respondent’s disallowance of the LLC losses.
The next item at issue is petitioner’s entitlement to the
deduction of certain business expenses and the subtraction from
gross receipts of an amount of cost of goods sold. Petitioner
filed a Schedule C in 1995 for a business engaged in “brick and
patio construction”. Petitioner subtracted from zero gross
receipts cost of goods sold of $13,719 and deducted expenses of
$3,500. Respondent disallowed both the cost of goods sold
adjustment and the expenses deduction.
Expenses which are ordinary and necessary in carrying on a
trade or business generally may be deducted in the year in which
they are paid. See sec. 162(a). Cost of goods sold is
subtracted from gross receipts in determining a taxpayer’s gross
income. See Sullenger v. Commissioner, 11 T.C. 1076 (1948).
Petitioner provided nothing to support the deductions or the
cost of goods sold on the Schedule C. We therefore uphold
respondent’s disallowance. We note briefly that the business
activity referenced on this Schedule C actually may have been
that of a corporation named Simblu Brick & Patio Company. A
corporation is a separate legal entity, and an individual
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generally may not claim deductions for expenses incurred by a
corporation. See Gantner v. Commissioner, 91 T.C. 713, 725
(1988), affd. 905 F.2d 241 (8th Cir. 1990).
The final item for which substantiation is at issue is
petitioner’s entitlement to a carryforward of a net operating
loss from 1994 to the years in issue. Petitioner argues in the
petition that there was a “1994 loss [which] was greater than
anticipated which was not carried forward into 1995.” Petitioner
did not claim any deduction for such a loss on his return, and
consequently the issue is not addressed in the notice of
deficiency.
As a general rule, net operating loss carryovers are allowed
as deductions under section 172(a). However, unless the taxpayer
elects otherwise, a net operating loss for any taxable year
generally must be carried back to each of the 2 taxable years
preceding the year of loss before being carried forward to each
of the next 20 years following the year of loss. See sec.
172(b)(1)(A), (b)(2), and (b)(3).
Petitioner briefly testified concerning this issue, but
provided no details and presented no corroborating documentation
concerning the amount of any losses in 1994. Amended returns
filed by petitioner with the Internal Revenue Service for taxable
years 1992 through 1997, presumably showing these and other
losses, are in the record. The assertions in these documents,
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however, are merely statements by petitioner and are not
corroborating evidence. With no evidence of a net operating loss
in 1994, we hold that petitioner is not entitled to a deduction
for a net operating loss carryover in any of the years in issue.
We also note that nothing in the record indicates petitioner
either carried back the loss to prior taxable years or elected to
waive the carryback, as required under section 172.
The third issue for decision is whether, and if so to what
extent, petitioner must include in income a State income tax
refund he received. Petitioner did not include in income any
State tax refund in 1997. Respondent determined that petitioner
received an unreported State income tax refund in that year in
the amount of $2,073.
Under the judicially created tax benefit doctrine, a
taxpayer generally must include in income the recovery or refund
of an amount deducted in a prior year. See Hillsboro Natl. Bank
v. Commissioner, 460 U.S. 370 (1983). However, a taxpayer is not
required to include in income such recovery or refund to the
extent that it did not provide the taxpayer with a tax benefit in
the prior year. See id.; sec. 111(a).
Petitioner claimed an itemized deduction for State and local
income taxes in the amount of $1,116 in 1996. Petitioner must
include in gross income in 1997 the State income tax refund
received in that year to the extent he received a tax benefit
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from the deduction of the State income taxes in 1996.3 However,
the amount included in gross income is limited to the $1,116
deduction; the remainder of the $2,073 refund reflected in the
notice of deficiency is not includable, contrary to respondent’s
determination. See sec. 111(a).
The final issue for decision is whether petitioner is liable
for accuracy-related penalties for negligence or disregard of
rules or regulations. Respondent determined that petitioner was
liable for the penalty for an underpayment equal to the total
amount of the deficiency in each year in issue.
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
one of which is negligence or disregard of rules or regulations.
See sec. 6662(b)(1). “Negligence” includes any failure to make a
reasonable attempt to comply with the provisions of the Internal
Revenue Code, including any failure to keep adequate books and
records or to substantiate items properly. See sec. 6662(c);
sec. 1.6662-3(b)(1), Income Tax Regs. Section 6664(c)(1)
provides that the penalty under section 6662(a) shall not apply
to any portion of an underpayment if it is shown that there was
reasonable cause for the taxpayer’s position and that the
taxpayer acted in good faith with respect to that portion. The
3
The final amount of the inclusion will be calculated in the
Rule 155 computation required in this case.
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determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. See sec.
1.6664-4(b)(1), Income Tax Regs. The most important factor is
the extent of the taxpayer’s effort to assess his proper tax
liability for the year. See id.
Petitioner failed both to keep adequate books and records
reflecting income of his businesses and to properly substantiate
the numerous and varied items reported on his return. See sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. We hold that the
record supports respondent’s determination of negligence in this
case, and nothing in the record indicates petitioner acted with
reasonable cause and in good faith.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.