T.C. Memo. 2001-159
UNITED STATES TAX COURT
GEORGE VAJDA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
THOROUGHBRED BREEDERS PARTNERSHIP, GEORGE VAJDA,
TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket Nos. 5065-00, 5066-00. Filed June 29, 2001.
Kenneth R. Cohen, for petitioner.
William T. Lyons, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: The docketed cases are before the Court
consolidated for trial, briefing, and opinion. Respondent
determined deficiencies of $4,540, $1,849, and $1,204 in George
Vajda’s (petitioner’s) 1994, 1995, and 1996 Federal income taxes,
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respectively. Respondent also determined that petitioner was
liable for section 6662(a) accuracy-related penalties of $908,
$370, and $241 for the respective years and a $120 addition to
his 1996 tax under section 6651(a)(1).1 Respondent’s
determinations stem in part from adjustments that respondent made
to depreciation deductions claimed by Thoroughbred Breeders
Partnership (TBP), a partnership in which petitioner is a
partner. For 1994, TBP was subject to the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat.
648. Petitioner also petitioned the Court for that year in his
capacity as TBP’s tax matters partner.
We decide first whether TBP may deduct the disputed
depreciation. We hold it may not. We decide second whether
petitioner had sufficient basis to deduct losses which passed
through to him from his wholly owned S corporation, Calvary
Equities, Inc. (Calvary). We hold he did.2
1
Section references are to the Internal Revenue Code in
effect for the subject years. Rule references are to the Tax
Court Rules of Practice and Procedure. Dollar amounts are
rounded.
2
The pleadings in this case raise three additional issues:
(1) Whether petitioner is liable for the addition to tax under
sec. 6651(a), (2) whether petitioner is liable for the accuracy-
related penalties under sec. 6662(a), and (3) whether respondent
is barred by the period of limitation under sec. 6501 from
assessing tax for the subject years. As to the first of these
issues, we hold for petitioner on the basis of our finding that
he filed his 1994 return timely. As to the other two issues, we
(continued...)
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FINDINGS OF FACT
Many facts were stipulated. The parties’ stipulation of
facts and the exhibits submitted therewith are incorporated
herein by this reference. The stipulated facts are found
accordingly. When petitioner’s petition was filed, his mailing
address was in Hackensack, New Jersey. TBP’s mailing address was
also in Hackensack, New Jersey, when a petition was filed on its
behalf.
In 1975, Alpha Farms, Inc. (Alpha), an entity whose
principal shareholder is petitioner, purchased 93.97 acres of
unimproved land (land) in Upper Freehold, New Jersey, for
$197,337. The only structure on the land was a hay barn that was
built around 1900. From 1978 to 1980, Alpha erected various
buildings (buildings) on the land to transform the land into a
horse breeding farm (collectively, the buildings and land are
referred to as the farm). These buildings included: (1) A two
bedroom, two bath house, (2) a grooms’ quarters and office
consisting of eight rooms and a double and single bath, (3) a
concrete barn with 16 stalls, (4) a steel barn with 22 stalls and
an x-ray room, (5) a training arena with 10 stalls and an indoor
exercise area with an artificial surface, (6) an equipment shed,
2
(...continued)
hold for respondent. The record contains no evidence that would
support a holding for petitioner as to those issues. See Rule
142(a).
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and (7) a concrete manure pit. Alpha conveyed the farm to TBP in
1986, reflecting on the certified deed that the conveyance was
made in return for Alpha’s receipt of money in the amount of
$350,000. TBP made no capital improvements to the farm
afterwards.
For 1994 through 1996, petitioner filed timely individual
income tax returns, and TBP filed timely partnership returns of
income. Each partnership return claimed a $48,763 depreciation
deduction for the buildings. TBP’s 1994 return reported that the
buildings had been “placed in service” in 1986 and had a
depreciable basis of $926,500.3 TBP calculated this depreciation
using the straight line recovery method and a 19-year recovery
period. As of December 31, 1993, TBP had claimed $390,104 of
depreciation on the buildings.
Respondent determined that TBP was not entitled to deduct
any of the depreciation claimed for the subject years. As stated
in the notice of deficiency issued to petitioner (and as stated
similarly in the FPAA issued to TBP for 1994):
Thoroughbred Breeders Partnership is claiming a total
basis in the 93 acre thoroughbred horse farm as
follows:
Land $300,000
Buildings 926,500
3
TBP’s 1995 and 1996 returns claimed on their face the same
$48,763 deduction for depreciation, but provided no specifics as
to that deduction.
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Fencing 81,365
Track System 130,000
Furniture & Equipment 62,135
Total 1,500,000
* * * * * * *
It is determined that the depreciation expense
deductions of $48,763.00 claimed on the 1995 and 1996
partnership returns are not allowed because the
partnership claimed depreciation expenses deductions in
excess of its basis due to overvaluation of the
property. The deed for purchase of the entire farm
from Alpha Farm, Inc. on November 3, 1986 shows a
purchase price of $350,000.00 instead of $1,500,000.00
as claimed. It has not been established the
partnership completely paid $1,500,000.00 for the
property or continued to be liable for any debt to pay
such amount. Consequently, the original cost of the
asset of $350,000.00 is allowed as a basis for
depreciation. Since accumulated depreciation of
$390,104.00 previously claimed for years 1986 through
1993 exceeds the original cost, the asset is considered
fully depreciated and no additional depreciation
expenses deduction is allowable.
For 1994, 1995, and 1996, petitioner claimed on his personal
returns respective losses of $35,654, $29,376, and $62,709 as
passthrough items from Calvary. Respondent determined that
petitioner had insufficient basis in Calvary to deduct any of
these losses. On or about July 15, 1993, petitioner borrowed
$250,000 from Fleet Bank and transferred this money to Calvary
either as a loan from him to Calvary or as a contribution to its
equity. On June 17, 1996, Fleet filed a lawsuit against
petitioner for the $250,000, plus interest, late fees, collection
costs, and attorney’s fees, alleging that petitioner failed to
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make timely payments on the loan. Fleet filed the lawsuit
against no other person or entity.
OPINION
1. Depreciation
Respondent determined that TBP’s depreciable basis in the
buildings was $350,000 and that the buildings were fully
depreciated as of the beginning of the subject years. Petitioner
argues that TBP’s depreciable basis in the buildings was $926,500
and that they were not fully depreciated during any of the
subject years. We agree with respondent.
The depreciable basis of property is generally its cost, see
secs. 167(g), 1011, and 1012; Weis v. Commissioner, 94 T.C. 473,
482 (1990), and a taxpayer such as petitioner bears the burden of
proving the depreciable basis in property, see Rule 142(a).4
Section 6001 mandates that taxpayers keep permanent records
sufficient to establish their claims to all deductions.
Petitioner produced no records at trial establishing TBP’s
depreciable basis in the buildings. He attempted to prove that
basis primarily through his testimony. Petitioner testified
vaguely that the buildings cost Alpha “in excess of a million
4
Contrary to petitioner’s assertion on brief, we do not
find respondent’s determination arbitrary or without foundation.
We disagree with petitioner’s assertion on brief that “the
replacement cost figures introduced by respondent [at trial] were
so unrealistic that they amounted to an arbitrary and capricious
valuation”.
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dollars” and that Alpha encountered “unusual circumstances” in
constructing the buildings resulting in this cost. These
circumstances, petitioner testified, were due mainly to the need
to construct the buildings in accordance with expert
specifications, the unavailability of “competent tradespeople” in
the locale of the farm, and Alpha’s incurring of tremendous legal
expenses. Petitioner provided no specifics as to the “in excess
of a million dollars” cost. Nor did he provide any specific
dollar amount as to any of the costs attributable to the “unusual
circumstances”.
Petitioner also relies on the testimony of his expert, Jess
A. Salmon. Mr. Salmon testified that the estimated cost of the
buildings was $413,500, without regard to most of the “unusual
circumstances” described by petitioner, and attributed the
estimated cost to the following items, each of which he assumed
was built between 1978 and 1980:
Items Cost
House $81,200
Quarters and office 74,800
Concrete barn 85,700
Steel barn 83,500
Training area 72,800
Hay barn 7,237
Equipment shed 7,163
Manure pit 1,100
Total 413,500
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Petitioner concludes from Mr. Salmon’s testimony that the
$413,500 estimate is consistent with the claimed basis of
$926,500 when viewed in the light of the “unusual circumstances”.
We disagree with petitioner for two reasons. First,
petitioner focuses inappropriately on the construction costs to
ascertain TBP’s basis in the buildings. Given the fact that all
of these costs were incurred between 1978 and 1980 and that TBP
did not purchase the farm from Alpha until 1986, none of these
costs enter into TBP’s depreciable basis in the buildings. TBP’s
basis in the farm, which by our definition includes both the
buildings and the land, equals the amount that it paid Alpha for
the sale. That amount is stated clearly in the deed as $350,000.
Petitioner makes little attempt to explain the $350,000
price set forth in the deed other than to assert on brief that
the Court need not accept that figure as TBP’s depreciable basis.
In his petition, petitioner did allege that TBP received the farm
from Alpha in exchange for Alpha’s receipt of an interest in TBP
and, accordingly, that section 723 operated to give TBP a
transferred basis in the farm. Respondent, however, denied that
allegation in answer. The allegation, therefore, is not
evidence. See Rule 143(b). Petitioner’s counsel also informed
the Court during his opening statement at trial that petitioner
would show that he had caused Alpha to contribute the farm to TBP
in exchange for a partnership interest. Petitioner never made
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any such showing. In fact, petitioner neither elicited any
testimony in support of his counsel’s statement, nor attempted to
introduce any other type of supporting evidence.
Second, even if the construction costs had any bearing on
TBP’s depreciable basis, we disagree with petitioner that these
costs aggregated $926,500. We do not rely on petitioner’s
testimony on this subject for it is vague, uncorroborated, and
self-serving. See Diamond Bros. Co. v. Commissioner, 322 F.2d
725, 730-731 (3d Cir. 1963), affg. T.C. Memo. 1962-132; Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986). The only other evidence
on this subject, namely, the testimony of Mr. Salmon, does not
support petitioner’s claim to the $926,500 basis. Mr. Salmon
testified that the estimated cost of the buildings was $413,500,
a figure that was inflated by $7,237 in that it incorrectly
included the cost of the hay barn. The cost of the hay barn
should not have been included in his calculation because the hay
barn was constructed before even Alpha acquired the land. We
also note an inconsistency between the cost factors used by Mr.
Salmon to perform his calculations and the factors used by
respondent's expert, Harriett Watts, to arrive at her conclusion
that the estimated cost of the buildings was $286,258. Although
both experts used the same valuation guide to perform their
calculations, only Ms. Watts applied the cost factors for Newark,
New Jersey, a city which is proximate to the situs of the farm.
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Mr. Salmon, on the other hand, applied the cost factors for the
eastern region of the United States, which were greater than the
Newark cost factors. Mr. Salmon’s application of the greater
cost factors obviously resulted in his greater cost estimate. We
believe that Mr. Salmon’s application of the greater cost factors
was wrong.
We conclude that petitioner has failed to disprove
respondent’s determination that the depreciable basis of the
buildings at the start of the subject years was less than the
$390,014 of depreciation taken as of that date. We sustain
respondent's determination on this issue.
2. $250,000 Loan
We must determine whether petitioner has sufficient tax
basis in his Calvary stock to allow him to deduct the passthrough
losses. A shareholder of an S corporation may utilize the losses
from an S corporation only to a limited extent. The losses may
not exceed the sum of the adjusted basis of the shareholder’s
stock in the S corporation plus his or her adjusted basis of any
indebtedness of the S corporation to the shareholder. See sec.
1366(d)(1).
Petitioner again relies on his testimony to support his
assertion that the $250,000 loan from Fleet enters into this
computation. In contrast with petitioner’s testimony on the
first issue, we find petitioner’s testimony on this issue is
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adequately supported by other reliable evidence in the record.
The record as a whole establishes to our satisfaction that Fleet
lent the $250,000 to petitioner personally, that petitioner
transferred those proceeds to Calvary, that petitioner recorded
on Calvary’s books that it (and not he) had received those
proceeds directly from Fleet in the form of a loan, and that
petitioner erroneously recorded the loan as between Fleet and
Calvary. We hold for petitioner on this issue.
We have considered each of the parties’ arguments and have
rejected those arguments not discussed herein as irrelevant or
without merit. Accordingly,
Decisions will be entered
under Rule 155.