T.C. Memo. 2001-190
UNITED STATES TAX COURT
EDWARD C. TIETIG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5884-98. Filed July 25, 2001.
Edward C. Tietig, pro se.
Michael D. Zima, for respondent.
MEMORANDUM OPINION
RUWE, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes, accuracy-related penalties,
and additions to tax as follows:
Penalty Addition to Tax
Year Deficiency Sec. 6662(c) Sec. 6651(a)(1)
1990 $45,519 $9,104 $11,380
1991 42,441 8,488 -0-
1992 15,111 3,022 -0-
1993 6,848 1,370 1,027
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After concessions,1 the issues for decision are: (1)
Whether petitioner is entitled to a $32,241 deduction for amounts
purportedly paid to Mark Tietig for use of his securities as loan
collateral in 1993; (2) whether Farm & Grove Realty, Co. (Farm &
Grove) earned income of $215,922 on the sale of 53 lots in 1990;
(3) whether petitioner had unreported capital gains of $57,531.25
in 1991; (4) whether petitioner is allowed a $179,937 net
operating loss carryforward deduction in 1993; (5) whether
petitioner is entitled to deduct $19,995 as a casualty loss in
1993; (6) whether petitioner is liable for the self-employment
tax under section 14012 for 1990, 1991, and 1993; (7) whether
petitioner is entitled to correcting entries relating to flow-
through income reported from a partnership in 1990 and a flow-
through loss reported from the same partnership in 1991; and
(8) whether petitioner is liable for the accuracy-related penalty
pursuant to section 6662(a) for the years 1990, 1991, 1992, and
1993.
For purposes of order and clarity, after a brief general
background, each of the issues submitted for our consideration is
set forth below with separate background and discussion.
1
See appendixes A and B.
2
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.
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General Background
Some of the facts have been stipulated and are so found.
The stipulations of fact, the supplemental stipulations of fact,
and the stipulation of settled issues are incorporated by this
reference. Petitioner resided in Florida at the time he filed
his petition.
Petitioner earned a bachelor’s degree in marketing from the
University of Cincinnati in 1951 and a juris doctor degree from
the University of Michigan in 1956.
Petitioner was the sole stockholder and director of Eureka
Field Nursery, Inc. (Eureka Field Nursery), Tropstock, Inc.
(Tropstock), and Kiddies 50 Corp. Each corporation was involved
in the sale and care of plants.
Petitioner was also the sole shareholder of Farm & Grove,
holding 100 percent of its stock, and was entitled to 100 percent
of the profits or losses of Farm & Grove during the years 1989
through 1993. Farm & Grove, an S corporation, was organized in
1978 to sell real estate.
In March of 1985, petitioner formed a partnership referred
to as the Kiddies-CKE 38 Joint Venture.3 Petitioner and his
three minor children (Brian, Erik, and Kris Tietig) were all
3
The association was labeled a joint venture on its Form
1065, U.S. Partnership Return of Income. For Federal income tax
purposes, joint ventures are partnerships. Sec. 7701(a)(2).
Thus, throughout this opinion we refer to it as a partnership.
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partners in the partnership. The partnership was formed to
acquire 38 lots for immediate sale.
On December 30, 1990, the Kiddies-CKE 38 Joint Venture
acquired equitable title to 53 additional lots and changed its
name to the Kiddies 91 Joint Venture4 (Kiddies 38/91
partnership).5
In February of 1989, petitioner formed the Edward Tietig/
Mark Tietig 100 Lot Joint Venture (100-lot partnership).6 The
partnership’s principal business activity was land resales.
I. Issue 1. Payments for Use of Collateral
A. Background
In 1982, petitioner had a series of loans that were coming
due that were cross-collateralized by various properties.
Petitioner needed to either pay off or refinance the loans but
found that he could do neither. Petitioner did not have
sufficient liquid funds to pay off the loans, and no institution
would lend him the money. As a result, petitioner sought the
4
The name changed because of the increased number of lots
held by the joint venture (38 + 53 = 91).
5
The association was labeled a joint venture on its Form
1065. For Federal income tax purposes, joint ventures are
partnerships. Sec. 7701(a)(2). Thus, throughout this opinion we
refer to it as a partnership.
6
The association was labeled a joint venture on its Form
1065. For Federal income tax purposes, joint ventures are
partnerships. Sec. 7701(a)(2). Thus, throughout this opinion we
refer to it as a partnership.
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help of his son Mark Tietig. At the time, Mark Tietig had cash
reserves stemming from a settlement he had received from the
Chris Craft Corp. on account of a boating accident.
Petitioner secured a loan from Westfield Financial Corp.
(Westfield Financial) in July 1983. Westfield Financial agreed
to modify an existing $550,000 loan to City National Bank of
Miami as trustee (trust loan) and to lend petitioner $2 million
(Tietig loan). The trust loan was guaranteed by petitioner, Mark
Tietig, Emerald Lake of Delray, Inc., Emerald Lake Development &
Construction Co., Farm & Grove, TropStock, Kiddies 50 Corp., and
Eureka Field Nursery. The loans were both secured, in part, by
real property owned by petitioner in Kissimmee, Florida
(Kissimmee property), and by land in Lakeland, Florida. Both
loans were also secured, in part, by securities worth
approximately $800,000 pledged by Mark Tietig in 1983.7
Petitioner signed a promissory note agreeing to pay his son
$800,000, plus interest at “the highest legal rate under the laws
of Florida.” The unpaid principal balance and the interest were
due and payable on the earlier of July 20, 1985, or the date that
Westfield Financial exercised its rights to realize upon the
bonds pledged by Mark Tietig.
7
The securities consisted of 600 units in E.F. Hutton and
Co., Inc., Tax-Exempt Trust National Series #76 and 245 units in
E.F. Hutton and Co., Inc., Tax-Exempt Trust National Series #77.
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The promissory note would be deemed null and void if the
bonds were released to Mark Tietig, and he was released from all
liability without incurring any loss. Pledging the bonds as
collateral for the loan to petitioner was consideration for
executing the promissory note. Petitioner gave Mark Tietig a
“surety loan or a surety note and mortgage” secured by real
property owned by petitioner in five Florida counties. All
dividends and interest paid on account of the pledged securities
were to be paid to Mark Tietig.
On September 19, 1983, Mark Tietig paid $200,000 to Eureka
Field Nursery for an interest in 8,000 trees ($25 per tree).
Additionally, Mark Tietig was required to pay $56,000 per year
($7 per tree) for maintenance of the trees, pursuant to a joint
venture agreement between Mark Tietig and Eureka Field Nursery.
Out of the sales of any trees, Mark Tietig was to receive his
cost8 plus 6 percent, plus 50 percent of any profit after a $10
commission was paid to the nursery.
In August 1985, petitioner secured a loan from Caribank of
$3,430,000. From the Caribank loan proceeds, $1,900,000 was
given to Westfield Financial, reducing the amount of that loan
balance to approximately $500,000 and removing the Kissimmee and
Lakeland properties from the Westfield Financial mortgage. The
8
The initial fee plus a prorated amount to reimburse him for
maintenance of the trees.
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remainder of the loan from Caribank was to fund the construction
of 27 condominium units on the Kissimmee property.
As security for the Caribank loan, a portion of the
securities previously pledged by Mark Tietig for the Westfield
Financial loan was allocated to part of the collateral for the
Caribank loan.
In March 1988,9 petitioner, Eureka Field Nursery, Farm &
Grove, and Mark Tietig entered into a “First Amendment and
Supplement to Joint Venture Agreement” (amended joint venture
agreement). The agreement amended the terms of the joint venture
created in the September 19, 1983, agreement between Mark Tietig
and Eureka Field Nursery, and stated that Eureka Field Nursery
owed Mark Tietig $68,786.41 ($56,000 plus $12,786.41 interest),
which represented his original investment in the joint venture.
The agreement also provided that petitioner owed Mark Tietig
$230,000 for the “past and future use” of his securities. In
total, Mark Tietig was owed $298,786.41 under the agreement.10
Mark Tietig, however, was not limited to this amount in the event
that the remaining pledged securities were taken by Westfield
Financial. Paragraph 3 of the amended agreement stated that the
9
The agreement states that it was made on Sept. 30, 1987;
however, in the upper left-hand corner of the agreement the date
Mar. 14, 1988, appears. Whether the agreement was in effect in
1987 or 1988 is irrelevant for the purpose of our analysis.
10
Consisting of: $230,000 + $68,786.41 = $298,786.41.
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$298,786.41 due to Mark Tietig was not to draw interest and was
to be Mark Tietig’s contribution to the joint venture.
Mark Tietig’s investment return was to come from joint
venture sales (various lots and trees) and from any proceeds
received from the State of Florida on account of the canker
settlement.11
Caribank eventually released to Mark Tietig its portion of
the securities pledged by him, the value being approximately
$500,000. The remainder of the collateral was taken by Westfield
Financial in 1989, with Mark Tietig losing $300,000 worth of
securities.
As of June 6, 1991, the balance owed Mark Tietig by
petitioner and the entities that he controlled was listed as
$445,000. Petitioner, Mark Tietig, and various other entities in
which petitioner owned an interest entered into an agreement
called the “Settlement Agreement and Amendment to Blanket Surety
Mortgage” (settlement agreement) for the stated purpose of
restating the parties’ “mutual obligations”. The agreement was
dated August 5, 1992.
Under the terms of the settlement agreement, petitioner and
the various entities that he controlled owed Mark Tietig
11
According to the amended joint venture agreement, a
portion of the trees which were subject to the original joint
venture agreement was destroyed, with little or no compensation,
by the State of Florida pursuant to the citrus canker eradication
program.
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$371,600. Interest was provided for at 10 percent.
Additionally, petitioner agreed to make principal only payments
of $5,000 to Mark Tietig each month beginning November 1, 1992.
There was a dispute between Mark Tietig and a law firm over
fees incurred in petitioner’s bankruptcy case.12 The settlement
agreement provided that if it was determined that Mark Tietig
owed any additional attorney’s fees, then petitioner would pay
them to Mark Tietig, and this amount would be added to the amount
petitioner owed Mark Tietig under the original 1983 promissory
note and agreement and secured by the same collateral.
B. Discussion
Deductions are a matter of legislative grace, and the burden
of showing the right to deductions is on the taxpayer. Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
Petitioner argues that he is entitled to a $32,241 deduction in
1993 for payments that he allegedly made to his son Mark Tietig.
The deduction was not claimed on petitioner’s Federal income tax
return for that year or disallowed by respondent in his notice of
deficiency; rather, the issue was raised for the first time by
petitioner in his petition to the Tax Court. Petitioner did not
explain in his petition or on brief how he arrived at $32,241 as
a deduction or why it is deductible.
12
Petitioner filed for bankruptcy on Sept. 22, 1988.
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Petitioner does indicate that his claim is somehow based
upon transactions in which Mark Tietig pledged certain securities
as collateral in order to help petitioner secure loans from
banks. In support of petitioner’s argument, he submitted a
handwritten accounting sheet entitled “Mark E. Tietig
Accounting”.13 On the accounting sheet, the “beginning balance”
before June 6, 1991, is listed as $445,000. Petitioner did not
explain how this figure was derived.
A check number appears next to most, but not all, of the
reported payments. There is nothing on the accounting sheet to
indicate what entity made the payments, and petitioner did not
provide copies of the checks or bank statements.
If the payments were, in fact, made, then some or all of the
payments could have been made by corporations controlled by
petitioner, rather than petitioner himself. For instance, the
very first payment reflected on the accounting sheet is a $54,230
payment made by Eureka Field Nursery on June 6, 1991. That check
was written on and drawn from Eureka Field Nursery’s bank
account. Mark Tietig testified that Eureka Field Nursery owed
him approximately $256,000 and that he had fully collected that
debt. Thus, additional payments reflected on the accounting
sheet, if made, may have come from and on behalf of a debt owed
13
See appendix C. The author of the accounting sheet and
the date of its creation are unknown.
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by Eureka Field Nursery. If so, these payments may already have
been deducted as expenses on Eureka Field Nursery’s corporate
income tax returns.
Indeed, petitioner could not recall whether the 1993
payments reflected on the accounting sheet were made from a
personal bank account or an account from a corporation controlled
by petitioner. When petitioner was pressed on this point, he
indicated that Judy Fox could provide additional details
regarding the payments. Ms. Fox testified that she has been the
office manager for Farm & Grove, the Tietig 4 Land Trust, Kiddies
38 partnership, Edward C. Tietig, PA, Villasol Realty, and
Emerald Lake Utilities since 1990 and that she is the primary
custodian of the canceled checks and bank statements.
Nevertheless, petitioner did not ask Ms. Fox during her testimony
to establish the source of the checks. The inference we draw is
that the testimony would have been unfavorable to petitioner.
See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,
1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
Moreover, petitioner testified that he had bank statements
and checks reflecting the payments in his business office at the
time of the trial.14 A party’s failure to introduce evidence
within his possession and which, if true, would be favorable to
him gives rise to the presumption that if produced it would be
14
Petitioner testified that all payments were made by check.
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unfavorable. Recklitis v. Commissioner, 91 T.C. 874, 890 (1988);
Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d
409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.
Commissioner, supra at 1165.
Assuming arguendo that the payments were made, and from
petitioner’s personal account, it is not clear that the payments
were not moneys paid to Mark Tietig’s attorneys by petitioner as
the result of the settlement agreement executed in 1992.
Payments made for this purpose have not been shown to be
deductible. We hold that petitioner is not entitled to the
$32,241 deduction.
II. Issue 2. Farm & Grove’s Sale of 53 Lots in 1990
A. Background
Farm & Grove reported $249,723 in gross income on its 1990
Form 1120S, U.S. Income Tax Return for an S Corporation.
In a series of transactions between 1981 and the end of
1990, Farm & Grove acquired a large inventory of unimproved land
lots in Brevard County, Florida. Included in the series was Farm
& Grove’s 1987 acquisition of a fee simple interest in 539 lots
in the Cape Kennedy Estates real estate development from the
Atlantic Ridge Corp. for a purchase price of $317,272.
On December 30, 1990, Farm & Grove transferred equitable
title of 53 of the Brevard County lots to the Kiddies 38
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partnership.15 The transfer was accomplished with the execution
of the First Amendment to Kiddies 38 Agreement (sales agreement).
Petitioner, Farm & Grove, and petitioner as guardian of his minor
children (Brian, Erik, and Kris Tietig) were parties to the sales
agreement.16 Petitioner and his minor children were all partners
in the Kiddies 38 partnership, which was now called the Kiddies
91 partnership.
The sales agreement provided, in part, as follows:
3. The consideration to be paid by the Joint Venture
to * * * [Edward C.] Tietig and Farm & Grove is as
follows:
a. The payment by the Joint Venture of the
note and mortgage attached hereto * * * in the
total amount of $174,900 which represents
$3,300.00 per lot release price of these lots from
the lien of the County Bank mortgage.
b. A further sum of $72,822.00 cash
representing additional consideration of $1,374.00
per lot. Said cash shall be paid by the sale
and/or hypothecation of existing mortgages
receivable * * *. When each of these notes and
mortgages shall be hypothecated and upon what
terms shall be at the discretion of Tietig; but,
provided however, that a net cash flow of no less
than $1,250.00 per month shall remain * * *
15
Before this transaction, the partnership was referred to
as the Kiddies-CKE 38 Joint Venture. Afterwards, its new name
was Kiddies 91 Joint Venture. The name changed because of the
increased number of lots held by the joint venture (38 + 53 =
91).
16
Petitioner signed the agreement individually, as president
of Farm & Grove, and as natural father and duly appointed
guardian of his three minor children (Brian, Erik, and Kris
Tietig).
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The attached unexecuted Mortgage Deed listed Farm & Grove as
the mortgagor (debtor) and petitioner as mortgagee (lender). The
Mortgage Deed, which was not executed, also provided as follows:
Random releases for each parcel encumbered herein shall
be given at any time upon payment of $3,300.00
principal [p]lus accrued interest upon such amount.
All regular paymenbts [sic] and prepayments of
principal shall be credited towards such releases.
The note provided the following terms:
FOR VALUE RECEIVED the undersigned promises to pay to
the order of Edward C. Tietig the principal sum of One
hundred seventy-four thousand nine hundred Dollars
($174,900) together with interest thereon from March 1,
1991 at the rate of 8.9% per cent, per ANNUM until
maturity, said interest being payable monthly on the
1st day of March, 1991 and payment both principal and
interest being payable in lawful money of the United
States or its equivalent to Farm & Grove Realty. * * *
Payments of principal and interest of $1,393.95 on the
first (1st) day of April, 1991, and on the first (1st)
day of each month thereafter until the first (1st) day
of March 2021, when the entire remaining balance will
become due and payable.
This Note may be prepaid in whole or in part, at any
time, without penalty.
As a result of the transaction, Farm & Grove held only the
legal title to the lots, as trustee for the Kiddies 38/91
partnership. Farm & Grove did not report any gain from the sale
of the equitable interest in the 53 lots to the partnership on
its 1990 Form 1120S.
The Kiddies 38/91 partnership appears to have been solvent
in 1990 and 1991. On Schedule L, Balance Sheets, of its 1991
Form 1065, U.S. Partnership Return of Income, the partnership
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reported assets in excess of liabilities of $442,480. The
partnership also reported ordinary income of $48,072.84 and
$91,092 on its 1990 and 1991 Forms 1065, respectively.
B. Discussion
Respondent asserts that petitioner realized $216,524.6117 of
gain on the transfer of 53 lots from Farm & Grove to the Kiddies
38/91 partnership in 1990.18 Petitioner argues that either gain
from the transfer should be recognized in a year subsequent to
1990 or, in the alternative, no gain at all should be recognized.
We address petitioner’s arguments in turn.
17
Gain on the transfer was calculated by subtracting Farm &
Grove’s basis in the 53 lots from the purchase price. Farm &
Grove paid $317,272 to acquire the 539-lot parcel which included
the 53 lots whose equitable interest was transferred to the
Kiddies-CKE 38 partnership. Respondent assumed that the lots
were equal in value, and petitioner has not asserted otherwise.
Thus, Farm & Grove’s basis in the 53 lots whose equitable
interest was transferred was $31,197.39 or $588.63 per lot.
Respondent calculated the purchase price by adding the
amount Farm & Grove was to eventually receive upon the sale of
each lot to third parties ($1,374 x 53 lots = $72,822) to the
amount required for the release of the County Bank mortgage lien
($174,900). According to respondent, the total amount received
by Farm & Grove was $247,722 ($72,822 + $174,900 = $247,722).
Therefore, respondent calculated petitioner’s gain on the
transfer to be $216,524.61 ($247,722 - $31,197.39 = $216,524.61)
18
The notice of deficiency determined gain of $215,922.
According to respondent, the difference between the $216,524.61
gain asserted on brief and the $215,922 used in the notice of
deficiency is attributable to rounding. Originally, respondent
rounded the price per lot paid by Farm & Grove for the
acquisition of the lots up from $588.63 to $600 (53 x $600 =
$31,800) and ($247,722 - $31,800 = $215,922).
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1. Timing
Petitioner offers two arguments why gain from the sale
should not be recognized in 1990. First, petitioner asserts that
the Kiddies 38/91 partnership’s $174,900 payment to Farm & Grove
for the 53 lots was contingent upon County Bank’s reducing
petitioner’s debt to the bank by $174,900 or $3,300 per lot.
According to petitioner, when County Bank refused to transfer the
debt obligation to the partnership, payment was treated as a
contingent sale from resales starting in 1991. We find no such
language in the sales agreement.
Consideration for the transfer consisted of $174,900 ($3,300
per lot) through the assumption of debt,19 plus $1,374 per lot to
be paid upon the sale and/or hypothecation of the existing
mortgage on those lots. Nothing in the agreement indicates that
the transfer was contingent upon County Bank’s reducing
petitioner’s debt by $174,900. Rather, the agreement explicitly
provides that consideration for the transaction was to be paid by
the partnership to petitioner and Farm & Grove. The attached
Mortgage Deed and note, while not executed, provides further
evidence that the agreement was not contingent upon County Bank’s
reducing petitioner’s debt by $174,900. Farm & Grove and
petitioner were named as parties on the Mortgage Deed and on the
19
This amount is the same amount that was required to
release a lot from the County Bank mortgage lien.
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note. The Mortgage Deed provided for random releases upon the
payment of $3,300 principal plus accrued interest. Absent from
the Mortgage Deed and the note is any mention of County Bank.
Thus, we conclude that when the transaction was structured and
executed, it was not contingent upon County Bank’s reducing
petitioner’s debt by $174,900.
The agreement was dated December 31, 1990. Therefore, the
sale was made in 1990, and Farm & Grove must recognize income
from the sale in 1990.20
Petitioner’s second timing argument is that the sale should
be recognized under the installment method provided under section
453. For Federal income tax purposes, gain from qualifying
installment sales of property can be reported under the
installment method subject to certain exceptions. Sec.
453(a)(1). Dealer dispositions are excepted from the definition
of “installment sale” by section 453(b)(2)(A). A dealer
disposition includes any disposition of real property which is
held by the taxpayer for sale to customers in the ordinary course
of the taxpayer’s business. Sec. 453(l)(1)(B).
Petitioner does not dispute that Farm & Grove was engaged in
the trade or business of selling real estate. However,
20
Farm & Grove did not report any gain from the sale of the
equitable interest in the 53 lots to the partnership on its 1990
Form 1120S, U.S. Income Tax Return for an S Corporation.
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petitioner argues that Farm & Grove satisfies the exception for
sales of residential lots to individuals.
The sale of a residential lot to an individual in the
ordinary course of a taxpayer’s business is not considered a
dealer disposition if neither the seller nor any person related
to the seller can make any improvements on the lot. Sec.
453(l)(2)(B)(ii)(II). In the instant case, the transfer of lots
was not made to an individual. The property transfer was to a
partnership, the Kiddies 38/91 partnership. The common,
ordinary, and plain meaning of section 453(l)(2)(B)(ii)(II)
requires that the transfer be made to an individual. The
language seems to be so unambiguous as to give no alternative but
to apply it precisely as written. We find nothing that would
support an interpretation of section 453(l)(2)(B)(ii)(II) that
differs from the words of the statute, and petitioner has not
provided us with any reasoning to support his argument.
Petitioner also has not provided sufficient evidence that
the 53 lots transferred were residential lots. For purposes of
section 453(l)(2)(B)(ii)(II), a residential lot is a parcel of
unimproved land upon which the purchaser intends to construct (or
intends to contract to have another person construct) a dwelling
unit for use as a residence by the purchaser. Wang v.
Commissioner, T.C. Memo. 1998-127.
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In petitioner’s proposed findings of fact relating to this
issue, he did not assert any facts or point to any exhibits or
testimony that would indicate that the lots in question were
zoned so that a buyer would be permitted to construct a house on
the property if the buyer desired or that the lots were marketed
to potential purchasers as residential lots suitable for building
dwelling units on the land as opposed to a speculative
investment. Id. Petitioner has not met his burden of showing
that he satisfied the residential real estate exception for
dealer dispositions.
Since section 453 is substantively unavailable to Farm &
Grove, the established realization and recognition principles
under section 1001 are controlling. Under section 1001(b), the
amount realized from the sale or other disposition of property
shall be the sum of any money received plus the fair market value
of the property (other than money) received.
2. Fair Market Value of Cash Equivalent
Petitioner argues, in the alternative, that the gain to Farm
& Grove is not the face value of the note but its market value.
Petitioner asserts that the note had no value, and therefore, no
gain accrued to Farm & Grove.
To establish that the note had a fair market value of zero,
petitioner testified that the note had no value because County
Bank would not accept it. Petitioner further testified that
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finance companies would not take the note and that the lots were
unmarketable because $3,300 had to be put up in order to obtain
good title to a lot.
By contending that the note had no fair market value upon
receipt, petitioner assumes the burden of establishing that
contention. See Rule 142(a). We do not consider the fact that
petitioner failed to convince County Bank to accept the note as
having any weight. There may have been other reasons aside from
the marketability of the note which prevented County Bank from
accepting it. Petitioner did not offer into evidence anything
from County Bank indicating its refusal to accept the note and
why. No expert witnesses testified that there was no market for
the note.
Petitioner does assert on brief that he “testified as to his
past experience in selling or hypothecating notes of this type”.
When we review the testimony cited by petitioner, we note that he
testified only with regard to his experience with this note, not
any past experiences with other similar notes. With regard to
his experience with the note in question, he did not provide any
corroborating evidence to support his testimony (e.g., testimony
from a representative of County Bank indicating that County Bank
refused to accept the note because it had no value).
In our opinion, the evidence does not sustain petitioner’s
contention. Petitioner has not established any lesser value or
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shown by a preponderance of the evidence that the note had no
fair market value; therefore, we must affirm respondent’s
determination.
Moreover, the solvency of the maker of a note is of prime
importance in determining whether it is worth its face value.21
Pack v. Commissioner, T.C. Memo. 1980-65. In the instant case,
the partnership was solvent. On Schedule L of its 1991 Form
1065, the partnership reported “partnership equity accounts” in
excess of $400,000 for 1990 and 1991. Additionally, petitioner
testified that his three minor children, who were partners in the
partnership, had “considerable funds of their own.” Petitioner
was a partner in the partnership. He signed the First Amendment
to Kiddies 38 Agreement individually, as president of Farm &
Grove, and as guardian of his three minor children, stating that
the consideration for the lots would be paid by the partnership
to petitioner personally and to Farm & Grove. Thus, we have no
reason to believe that the partnership or its partners would not
make good on the payments contemplated by the sales agreement and
the promissory note.
21
Respondent argues on brief that he determined that the
fair market value of the contractual promise and the note was the
face amount.
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III. Issue 3. 1991 Capital Gains
A. Background
A two-story structure was constructed in Miami, Florida
(Miami property), during 1984. Eureka Field Nursery, Tropstock,
and Kiddies 50 Corp. (corporations) were to share the
construction costs of the Miami property, which combined office
and residential space.
The corporations resolved that the expenses of building the
structure would be allocated as follows:
Corporation Percentage of Expenses
Eureka Field Nursery, Inc. 47.5
Tropstock, Inc. 47.5
Kiddies 50 Corp. 5.0
Additionally, the corporations resolved that the three
corporations could demand contributions from Farm & Grove or any
other entity which used the facilities.
In order to facilitate the construction of the structure,
petitioner obligated himself as mortgagor to AmeriFirst Mortgage
Co. as mortgagee, in the amount of $214,000.
On Eureka Field Nursery’s 1985 Form 1120S, it claimed a
depreciation allowance of $16,555.04 on the property. The
accompanying depreciation schedule reports a cost basis in the
structure of $446,985.19 and an 18-year recovery period. Eureka
Field Nursery used the straight-line method of depreciation in
1985 in calculating its allowable depreciation deduction.
- 23 -
On Schedule L of Eureka Field Nursery’s 1985 Form 1120S, the
company reported “Buildings and other depreciable assets” of
$508,207.32 at the end of the tax year. On Schedule L of Eureka
Field Nursery’s 1986 Form 1120S, the company reported “Buildings
and other depreciable assets” of $61,597.13 before depreciation
of $42,592.07 at the end of the tax year.
A judgment of foreclosure was ordered on December 2, 1991,
with respect to the Miami property. Resolution Trust Corporation
(RTC) was the plaintiff. The Circuit Court for Dade County,
Florida, determined that RTC was due $206,044.77 in principal
under the note and mortgage sued upon, interest on the date of
judgment of $47,944.02, and unpaid real estate taxes from the
years 1989, 1990, and 1991 of $14,386.85, plus other costs of the
suit.
B. Discussion
Petitioner did not report any capital gains or losses on his
1991 Federal income tax return. Respondent argues that
petitioner had unreported capital gains of $57,531.25 in 1991.
This figure results from respondent’s netting long-term capital
gains of $90,534.25 with short-term capital losses of $33,003.
We address the long-term gains and short-term losses in turn.
1. Long-Term Capital Gains
Respondent computed long-term capital gains of $90,534.25 by
netting a long-term capital gain of $90,720.25 with a long-term
- 24 -
capital loss of $186. The parties dispute the amount of gain
that petitioner should have recognized when the Miami property
was foreclosed and the amount of loss that petitioner should have
recognized when Eureka Field Nursery ceased doing business. We
address the gain on the Miami property first.
a. Miami Property
Respondent argues that petitioner realized a $90,720.25
long-term capital gain when the Miami property was foreclosed in
1991.
Petitioner does not dispute that relinquishment of the Miami
property by means of a foreclosure sale is treated as a sale or
exchange. Chilingirian v. Commissioner, 918 F.2d 1251 (6th Cir.
1990), affg. T.C. Memo. 1986-463. Petitioner does dispute: (1)
The percentage of gain or loss attributed to business versus
personal use; (2) petitioner’s basis in the structure; and (3)
whether real estate taxes and mortgage interest forgiven should
be part of the amount realized. We turn to petitioner’s
arguments in turn.
i. Business v. Personal Use
In the notice of deficiency, respondent determined that the
structure on the Miami property was used 59 percent in a trade or
business. Petitioner argues that the entire structure was used
in a trade or business despite the fact that he lived there.
- 25 -
In determining whether there is gain or loss on the
foreclosure of petitioner’s property in 1991, an allocation must
be made for tax purposes between the portion of the structure’s
use devoted to personal use and the portion devoted to
petitioner’s business. See Snyder v. Commissioner, T.C. Memo.
1975-221.
According to petitioner, the entire structure should be
treated as property used in a trade or business despite the fact
that he lived there. In support of his argument, petitioner
cites four Tax Court cases.22 In each cited case, the taxpayer
was seeking an exclusion from gross income under section 61 for
either lodging or meals provided by his employer pursuant to
section 119.
Under section 119(a)(2), the value of lodging furnished to
an employee is excluded from the employee’s gross income if “the
employee is required to accept such lodging on the business
premises of his employer as a condition of his employment.”
Here, however, the fair rental value of the lodging provided to
petitioner has not been included in his income by respondent.
Rather, respondent determined that petitioner realized a capital
gain when the Miami property was foreclosed. Thus, section 119
as an exception to section 61 does not apply in the instant case.
22
Giesinger v. Commissioner, 66 T.C. 6 (1976); Lindeman v.
Commissioner, 60 T.C. 609 (1973); Olkjer v. Commissioner, 32 T.C.
464 (1959); and Stone v. Commissioner, 32 T.C. 1021 (1959).
- 26 -
Petitioner has not met his burden of showing that
respondent’s business use determination was incorrect.
ii. Basis
Petitioner asserts that his basis in the Miami property
(excluding land and fill costs) was $491,182, of which $446,000
was depreciable.23 In the notice of deficiency, respondent
determined that petitioner’s cost basis in the structure was
$214,000, which represented the amount of the mortgage and note
executed by petitioner in favor of Amerifirst Mortgage Co.24
23
We note that a depreciation schedule for Eureka Field
Nursery for the end of the fiscal year Dec. 31, 1985, reports a
cost basis of $446,985.19 in the structure, not $446,000 as
asserted on page 10 of his brief and not $445,182 as asserted on
page 13 of his brief.
24
The notice of deficiency also adjusted petitioner’s cost
basis in the Miami property for allowed or allowable depreciation
on the basis of the business portion of the structure and using
the straight-line method with a recovery period of 18 years. In
his petition, petitioner calculates depreciation deductions on
the Miami property for the years 1988 through 1991 under the
straight-line method with a recovery period of 18 years.
Petitioner makes no reference in his trial memorandum to how
allowable depreciation deductions for the Miami property are to
be treated.
In petitioner’s posttrial briefs, he calculates allowable
depreciation for the period 1986 through 1991 for the first time
using a 31.5-year recovery period but makes no argument as to why
31.5 years is the correct recovery period.
The petition filed in this case, as it relates to this
issue, does not satisfy the requirements of Rule 34. The
petition did not provide any indication that petitioner intended
to make the recovery period an issue, nor did it contain a clear
and concise assignment of error on the part of the Commissioner.
See Rule 34(a) and (b)(4). Any issue not raised in the
(continued...)
- 27 -
A taxpayer is required to maintain records sufficient to
show whether he or she is liable for Federal income taxes. Sec.
6001. Petitioner has not provided any invoices from contractors
or canceled checks showing the billing or payment of any cost.
No documentation other than the foreclosure has been presented
with respect to petitioner’s cost basis in the structure.
Petitioner testified that he lacked adequate records to
substantiate his costs because his records were stolen in 1991.
Petitioner did not try to reconstruct his records from other
sources.25 Instead, petitioner offered his own testimony, the
testimony of his son, Mark Tietig, and a letter from an architect
to substantiate his claimed cost basis in the Miami property.
Petitioner’s testimony included his personal estimates of
the actual cost to build the structure based on a price per
square foot. Petitioner’s estimates were derived by taking the
basis figure reported on a depreciation schedule prepared for
Eureka Field Nursery’s 1985 Form 1120S and then backing into this
figure by estimating the square footage cost of the structure.
24
(...continued)
assignment of error shall be deemed to be conceded. Rule
34(b)(4). Therefore, no adjustment to the recovery period
applied in the notice of deficiency is required.
25
Petitioner testified that he could not locate the general
contractor. However, he did not attempt to contact any of the
subcontractors even though he knew them by name and, in some
instances, had written checks payable to both the general
contractor and the subcontractor.
- 28 -
Petitioner’s testimony was not based on his actual recollection
of the costs incurred; rather, it was calculated to corroborate
the figure listed on the tax return.
Mark Tietig’s testimony, like petitioner’s, included
personal estimates of the actual cost to build the structure
based on a price per square foot. His testimony was not based on
his actual recollection of the costs incurred, nor did he specify
the cost of individual items26 that were computed as part of the
total cost of construction.
We find that the personal estimates provided by petitioner
and Mark Tietig are neither persuasive nor conclusive evidence of
petitioner’s actual cost to build the structure.27
26
He testified regarding the different prices per square
foot for different sections of the structure (e.g., garage, first
floor, second floor) but not for individual components such as
concrete, framing, etc.
27
Even if the estimated cost per square foot were close to
what a person would pay to build this particular structure, it
does not follow in this case that petitioner actually incurred
those costs. Petitioner took great pride in his ability to build
the structure at the “lowest price”. Petitioner acknowledged
that as a contractor, he saved money by doing some aspects of the
construction, and much of the procurement of materials, himself.
- 29 -
Petitioner also provided a letter dated October 10, 1996,
written by Architect Alan Lerner.28 According to the letter, the
cost of the structure was $400,000.29
Mr. Lerner’s letter was not written near the time the Miami
property was built; it was written approximately 12 years after
the structure was completed. Furthermore, according to
petitioner’s own testimony, Mr. Lerner did not bill for the cost
of construction materials or services, nor did he pay them.
Moreover, Mr. Lerner’s letter does not indicate that he consulted
any of the contractors who did the work or that he referenced a
written record or source documents to determine the structure’s
actual cost.
Petitioner has not established that respondent’s
determination that petitioner’s cost basis in the structure was
greater than $214,000 was in error.30
28
The parties included this letter as an exhibit in their
stipulation of facts. The stipulation stated that respondent did
not stipulate the truth of the letter’s content.
29
We note that the estimated cost provided by Mr. Lerner
($400,000) cannot be reconciled with petitioner’s estimated cost
of $446,000 as asserted on page 10 of his brief, or $445,182 as
asserted on page 13 of his brief, or $446,985.19 as reported on a
depreciation schedule attached to Eureka Field Nursery’s 1985
income tax return.
30
Consistent with respondent’s determination, 59 percent or
$126,260 of petitioner’s $214,000 cost basis in the structure is
allocated to business use, while the remaining 41 percent or
$87,740 is allocated to personal use.
(continued...)
- 30 -
iii. Past Due Taxes and Interest
In determining the amount realized by petitioner upon
foreclosure of the Miami property, the notice of deficiency did
not include past due taxes of $14,386.85 and interest of
$47,944.02. This is a new matter upon which respondent has the
burden of proof. Rule 142(a).
Petitioner asserts in his petition that the principal
balance of $206,044.77 at the time of foreclosure represents the
total consideration for purposes of determining gain or loss.
However, petitioner appears to have abandoned this argument on
brief. Indeed, petitioner in an exhibit contained in his reply
brief under the heading “Calculation of Foreclosure Loss” treats
the $47,944.02 of past due interest and the $14,386.85 in past
due taxes as amounts realized. Petitioner does not argue, in
either his opening or rely brief, that these items should not be
included in the amount realized. We find that the amount
30
(...continued)
Respondent then adjusted petitioner’s cost basis of $126,260
as follows:
Cost basis $126,260.00
Depreciation already claimed
(1985 Form 1120S) (16,555.04)
Allowable depreciation not claimed
between 1986 and 1991 (42,084.00)
Petitioner’ adjusted basis 67,620.96
We note that respondent, in adjusting petitioner’s basis by
$16,555 for depreciation already claimed, rounded to the nearest
dollar. We have added 4 cents to respondent’s figure for
consistency.
- 31 -
petitioner realized upon the disposition of the Miami property in
foreclosure includes the accrued interest of $47,944.02 and real
estate taxes of $14,386.85.31
We hold that petitioner realized $268,375.6432 upon
foreclosure of the Miami property, and as stated above, the
amount realized is to be apportioned 59 percent business and 41
percent personal. Thus, petitioner’s capital gain on the
foreclosure of the Miami property in 1991 is $90,720.66.33
b. Long-Term Capital Loss
Respondent determined that petitioner incurred a long-term
capital loss of $186 on his Eureka Field Nursery stock when the
31
The notice of deficiency stated that if these costs were
claimed as a deduction, then the amount realized would be
increased by the same amount. Petitioner argues that he is
entitled to an itemized deduction for the past due real estate
taxes and mortgage interest. Respondent concedes petitioner’s
entitlement to these deductions but apportions the expenses as 59
percent business and 41 percent personal. Consistent with our
earlier finding regarding apportioning business versus personal
use of the structure, we find that petitioner is entitled to the
deductions but on a prorated basis as determined by respondent.
32
The $206,044.77 of principal, $47,944.02 of accrued
interest to the date of judgment, and $14,386.85 of real estate
taxes for a total of $268,375.64 ($206,044.77 + $47,944.02 +
$14,386.85 = $268,375.64).
33
Amount realized (see supra note 32) $268,375.64
Business use of property x .59%
158,341.62
Less adjusted basis (see supra note 30) 67,620.96
Net gain 90,720.66
We note that a 41-cent difference exists between our
calculation and respondent’s ($90,720.66 - $90,720.25 = $0.41).
- 32 -
company ceased business in 1991. Petitioner argues that the
amount of the capital loss is $140,800.
The principal dispute between the parties turns on whether
petitioner’s basis34 in Eureka Field Nursery stock was reduced by
a reported $155,440.09 reduction in Eureka Field Nursery’s
accumulated adjustment account (the undistributed earnings on
which tax has been paid by Eureka Field Nursery’s shareholders)
in 1986.35
Petitioner asserts that the 1986 reduction in the
accumulated adjustment account was not a distribution; rather, it
was an accounting entry to correct a prior error. According to
34
Respondent determined petitioner’s adjusted stock basis in
Eureka Field Nursery by using the figures reported on the
company’s Forms 1120S for the years 1983 through 1990, inclusive.
Respondent made two variations from strict adherence to the
income tax returns. The first variation involves the treatment
of the reported $155,440.09 reduction in Eureka Field Nursery’s
accumulated adjustment account in 1986 (discussed above). The
second variation involves a $43 adjustment to petitioner’s stock
basis in 1990, which petitioner has not disputed. Thus, we
consider the $43 adjustment conceded by petitioner.
35
Respondent determined that petitioner’s adjusted basis of
$145,151 in his Eureka Field Nursery stock was reduced to zero as
a result of the $155,440.09 distribution. See sec.
1367(a)(2)(A). As a result, petitioner realized no gross income
from the distribution to the extent of $145,151, his basis in the
Eureka Field Nursery stock. See sec. 1368(b)(1). Accordingly,
respondent asserts that petitioner should realize the amount in
excess of his adjusted basis in his Eureka Field Nursery stock,
$10,289, as gain ($155,440.09 - $145,151 = $10,289.09). See sec.
1368(b)(2). Respondent concedes that his examiner erred by
applying this excess against petitioner’s shareholder loans with
Eureka Field Nursery. Instead, this figure constituted gain to
petitioner. See id.
- 33 -
petitioner, his outside accountant incorrectly assumed that
Eureka Field Nursery owned the Miami property since it claimed
depreciation on the structure in 1985. This assumption led the
outside accountant to increase Eureka Field Nursery’s assets by
$491,182.26 on Schedule M of its 1985 Form 1120S. Petitioner
states that he discovered this mistake in 1986 and then ordered
the outside accountant to remove the item from the Schedule L
balance sheet. This led, according to petitioner, to reductions
in the accumulated adjustment account of $155,440.09 in 1986 and
$31,543 in 1987 and an increase of $698 in 1988.
We have already found that petitioner has not established
that his cost basis in the Miami property was $446,985.19.
However, even if we were to accept petitioner’s assertion that
his cost basis in the structure was $446,985.19, it does not
necessarily follow that the subsequent reductions in the
accumulated adjustment account related to the Miami property. If
the “other reductions” entry on Eureka Field Nursery’s 1986 Form
1120S was an entry to remove the structure from the Schedule L
balance sheet, then the entry would have been approximately
$491,182.26, not $155,440.09.
Petitioner did not offer any evidence to substantiate his
claim. Petitioner did not call the outside accountant as a
witness. We can only presume that any testimony supplied by that
- 34 -
individual would not have been favorable. See Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. at 1165.
We sustain respondent’s determination that petitioner’s
long-term capital loss on the Eureka Field Nursery Stock is $186
in 1991.
2. Short-Term Capital Loss
Respondent determined that petitioner incurred a bad debt
loss in 1991 of $22,714 due to unpaid shareholder loans by Eureka
Field Nursery when it ceased operations in 1991. On brief,
respondent argues that petitioner’s loss is $33,003.36
In his petition, petitioner asserted that respondent erred
in determining the amount of nonbusiness bad debt in 1991, but he
makes no arguments in his brief regarding this issue. Petitioner
asserts in his reply brief that respondent concedes the amount
stated, $22,714, but that the true amount in dispute is $60,36837
as set forth in “Petitioner’s Recap, Exhibit 1 hereto.” However,
36
The amount of the loss is based on a $55,567 outstanding
shareholder loan reported on Schedule L of Eureka’s 1990 income
tax return with two modifications: An increase of $4,800 in 1990
and a decrease of $27,365 in 1991.
Petitioner does not dispute the $4,800 increase in
shareholder loans to $60,367 in 1990, and the $27,365 decrease in
shareholder loans in 1991 was stipulated by the parties. Thus,
the total loss is $33,003 ($55,567 + $4,800 = $60,367 - $27,365 =
$33,002. We note a $1 difference.).
37
Apparently, petitioner neglected to reduce the total loan
amount due of $60,367 by the stipulated loan repayments totaling
$27,365. See supra note 36.
- 35 -
petitioner’s recap states as follows: “Short Term Capital Loss -
Worthlessness of Shareholders Loans - EFN ($33,003.00)”.
Petitioner makes no arguments in his reply brief regarding this
issue. We conclude that petitioner’s bad debt loss in 1991 is
$33,003. See Money v. Commissioner, 89 T.C. 46, 48 (1987).
IV. Issue 4. 1993 Net Operating Loss
A. Background
On Schedule E, Supplemental Income and Loss, of petitioner’s
original 1990 Federal income tax return, he reported nonpassive
losses from Schedule K-1, Partner’s Share of Income, Credits,
Deductions, Etc., of $130,722 and passive and nonpassive income
from Schedule K-1 of $52,633. This resulted in a loss on
Schedule E of $78,089. On Schedule 1, petitioner reported that
$78,386 of the $130,722 nonpassive losses was from Farm & Grove.
On page 1 of petitioner’s 1990 Federal income tax return, he
reported a negative adjusted gross income of $77,183, which
consisted of the $78,089 loss from Schedule E, taxable interest
income of $844.05, and dividend income of $61.08.
On petitioner’s amended 1990 return, he increased the
reported loss from Farm & Grove by $4,506 to $82,892 and reported
additional income of $32,172 from the 100-lot partnership.
On Schedule E of petitioner’s 1992 Federal income tax
return, he reported nonpassive losses from Schedule K-1 of
$122,867 and passive and nonpassive income from Schedule K-1 of
- 36 -
$8,939. This resulted in a loss on Schedule E of $113,928. On
Schedule 2, petitioner reported that $104,675 of the $122,867
nonpassive losses was from Farm & Grove. After adjusting for
$24,600 in income reported on Form 1099-MISC, Miscellaneous
Income, and $597 in interest income, petitioner reported a
negative adjusted gross income of $89,26938 on page 1 of his 1992
Federal income tax return.
On his 1993 income tax return, petitioner claimed a net
operating loss carryover deduction of $179,937. On a supporting
schedule for line 22, other income, petitioner included a
statement showing that the $179,937 claimed deduction was the sum
of an alleged $90,07139 loss in 1990 and an alleged $89,866 loss
in 1992.40
Petitioner’s amended income tax return for 1991 removed the
net operating loss carryforward deduction he had claimed on his
original 1991 Federal income tax return. The amended 1991 tax
return bore the notation that the 1990 net operating loss had
been carried back in full to 1988 and 1989.
B. Discussion
Respondent increased petitioner’s 1993 gross income by
disallowing a $179,937 net operating loss carryforward
38
We note that $597 + $24,600 + ($113,928) = ($88,731).
39
It is unclear how petitioner arrived at this amount.
40
It is unclear how petitioner arrived at this amount.
- 37 -
deduction.41 Petitioner’s deduction was based on alleged losses
in 1990 and 1992.
According to respondent, the adjustments reflected in the
notice of deficiency, many of which have been conceded by
petitioner, disclose that petitioner’s income in 1990 and 1992
was in amounts sufficient to absorb the claimed net operating
loss carryforward. Thus, petitioner would not be entitled to a
net operating loss deduction in 1993.
The loss reported by petitioner for 1990 principally
involved a flow-through loss from Farm & Grove. Petitioner
reported an $82,892 loss from Farm & Grove in 1990. After
accounting for issues conceded by the parties, issues considered
conceded under Rule 34(b)(4), and the fact that we sustained one
of respondent’s determinations regarding the sale of lots to
Kiddies-CKE 38 partnership, petitioner’s distributive share of
income from Farm & Grove in 1990 is $104,636, not an $82,892 loss
as reported.42
The loss reported by petitioner for 1992 also principally
involved a flow-through loss from Farm & Grove. Petitioner
reported a $104,675 loss from Farm & Grove in 1992 but concedes
41
A net operating loss deduction is the excess of allowable
deductions over gross income, computed under the law in effect
for the loss year, with the required adjustments. Sec. 172(c)
and (d).
42
See appendix D.
- 38 -
that his loss from this entity in 1992 was only $7,083, which is
the same amount of loss that respondent determined in the notice
of deficiency.
We agree with respondent that all these adjustments and
concessions should be taken into account. When that is done, it
is clear that there are no losses in 1990 and 1992 that are
available to be carried forward to 1993 pursuant to section 172.
V. Issue 5. Casualty Loss
A. Background
On October 2, 1991, petitioner’s son Brian Tietig, who was
17 years old at the time, discovered that a theft and extensive
vandalism had occurred at the Miami property. Brian Tietig
called the Metro-Dade Police Department and reported the crime on
that date. Petitioner completed a property loss report for the
Metro-Dade Police Department on January 20, 1992. Petitioner
gave what he considered the “replacement costs” of the property
stolen from his house in the property loss report he signed on
January 20, 1992.
Petitioner brought a lawsuit against TransAmerica Premier
Insurance Co. (TransAmerica) in 1992 in the Circuit Court for
Brevard County, Florida. Petitioner recovered $1,500 from
TransAmerica. Petitioner and TransAmerica executed a Property
Damage Release on October 4, 1993. After October 4, 1993,
- 39 -
petitioner no longer had any reasonable prospect of recovering
the remainder of the theft loss.
Petitioner reported the loss on his 1993 Federal income tax
return. Petitioner claimed on Form 4684, Casualties and Thefts,
that the cost or basis of the property stolen was $38,822.
B. Discussion
Section 165(a) allows as a deduction “any loss sustained
during the taxable year and not compensated for by insurance or
otherwise”.43 In general, the amount of the deduction equals
the adjusted basis of the property involved. Sec. 165(b).
Petitioner has the burden of proving the adjusted basis of the
property. See Rule 142(a).
Petitioner asserts the proper loss amount is $19,995, while
respondent asserts the proper amount of the loss is $20,149
before the limitation imposed by section 165(h)(2).44
In determining the amount of petitioner’s deduction,
respondent accepted petitioner’s representations as to the cost
or fair market value of all artwork reported stolen and adjusted
the business property reported stolen for depreciation.
43
The parties agree that the theft loss was deductible in
1993, not 1991 as originally determined by respondent.
44
Sec. 165(h)(2) provides that losses from property used for
personal purposes are allowed for a taxable year only to the
extent that they exceed 10 percent of the adjusted gross income
of the individual. In the present case, petitioner’s 1993
adjusted gross income will be determined in a Rule 155
computation.
- 40 -
Respondent then reduced this amount by the $1,500 insurance
reimbursement and by $100 in accordance with section 165(h)(1).45
This brings the allowable loss to $20,149 before application of
section 165(h)(2).
Petitioner presented no arguments on brief as to why
respondent’s computation was incorrect. Petitioner’s sole
argument regarding the proper amount of the deduction is
contained in his reply to respondent’s proposed findings of fact,
in which he states: “Parties have agreed that the proper loss
figure is $19,995.” Therefore, respondent’s determination is
sustained.
VI. Issue 6. 1990 Self-Employment Tax
A. Background
Petitioner did not report any self-employment tax due on his
1990 through 1993 Federal individual income tax returns
(including the amended returns for 1990 and 1991).
On the Schedule K-1 attached to the 1990 Form 1065 for the
100-lot partnership and the Kiddies 38/91 partnership, petitioner
was listed as a general partner. Also on the 1990 and 1991
Schedules K-1 for the same partnerships, petitioner reported that
he was entitled to 100 percent of the 100-lot partnership’s gains
or losses and 75 percent of the Kiddies 38/91 partnership’s gains
45
Sec. 165(h)(1) provides that theft losses with respect to
personal property must be further reduced by $100.
- 41 -
or losses. Both partnerships were engaged in the business of
selling real estate.
On their 1990 and 1991 Forms 1065, the partnerships reported
the following:
1990 1991
100-Lot Kiddies 38/91 100-Lot Kiddies 38/91
Interest
income $15,717 $21,582.58 $13,191 $23,195
Ordinary
income 11,372 48,071.84 (17,339) 91,092
Guaranteed
payments to
petitioner
as partner 20,800 15,000.00 19,200 15,100
Petitioner provided management services to Eureka Field
Nursery during 1991. Petitioner was paid $6,421 in management
fees for the services that he provided Eureka Field Nursery
during 1991.
Petitioner managed and acted as a consultant for a number of
his S corporations and partnerships, negotiating most, if not
all, of their land sales.
On the Kiddies 38/91 Form 1065 for 1993, the partnership
reported $52,748 of ordinary income and that it made $8,900 of
guaranteed payments to partners.
B. Discussion
Petitioner argues that he is not subject to the self-
employment tax on moneys that he received from the 100-lot and
Kiddies 38/91 partnerships in 1990, 1991, and 1993.
- 42 -
Section 1401 provides that a tax shall be imposed, in
addition to other taxes, on the self-employment income of every
individual. Self-employment income generally includes an
individual’s net earnings from self-employment in any trade or
business, a partner’s distributive share of income or loss from
any trade or business carried on by a partnership of which he is
a member, and guaranteed payments from such a partnership. Sec.
1402; sec. 1.1402(a)-1, Income Tax Regs. Section 1402(a)(2)
specifically excludes interest from the term “net earnings from
self-employment.” Petitioner bears the burden of proving that he
is not liable for the self-employment tax. See Rule 142(a).
Petitioner argues that he acted as a mere conduit in
collecting funds distributed by the partnerships and that in his
role as guardian, he simply transferred the funds to his minor
children. Petitioner asserts that he did not have property
rights in the funds distributed by the partnerships.
The Federal income tax returns filed on behalf of both
partnerships report petitioner’s entitlement to a percentage of
the profits and losses and guaranteed payments from each
partnership. Petitioner has not demonstrated that by virtue of
his guardianship role, his rights in the funds distributed by
these partnerships were restricted, and he has submitted no
evidence that he distributed the money to his minor children.
- 43 -
Petitioner also argues that the only services that he
provided were for Farm & Grove. This argument ignores the fact
that during the years in issue, petitioner was a general partner
at both the 100-lot and the Kiddies 38/91 partnerships. During
the years in issue, the partnerships conducted businesses and
reported distributing profits and losses as well as guaranteed
payments to petitioner. Thus, petitioner is liable for the self-
employment tax.
We hold that petitioner is liable for the self-employment
tax based on moneys that he received from the 100-lot and Kiddies
38/91 partnerships in 1990, 1991, and 1993.46
VII. Issue 7. Flow-Through Adjustment
A. Background
On Schedule K-1 of its 1990 and 1991 Form 1065, the 100-lot
partnership reported petitioner’s share of income as $11,372 in
1990 and a loss of $17,339 in 1991. Petitioner reported the
$11,372 in income from the 100-lot partnership on his amended
1990 Federal income tax return, and he reported the $17,339 loss
on his 1991 Federal income tax return.
B. Discussion
Petitioner argues that the reported income and loss from the
100-lot partnership should be stricken from his 1990 and 1991
46
Petitioner is entitled to a deduction in 1990, 1991, and
1993 for paying the self-employment tax. See sec. 164(f).
- 44 -
Federal income tax returns.47 Petitioner did not provide any
documentation or testimony indicating why his 1990 and 1991
Federal income tax returns should be treated other than as he
originally reported them. Petitioner has not met his burden and
established that correcting entries should be made as he asserts.
VIII. Issue 8. Accuracy-Related Penalty
A. Background
Petitioner did not prepare his personal income tax returns
or those of the corporations and partnerships in which he held an
interest with respect to the years in issue. Petitioner’s
employee, Ms. Fox, prepared his tax returns for the years 1990
through 1993. In preparing the returns, Ms. Fox had assistance
from an outside accountant in each year.
In preparing the returns, Ms. Fox had access to petitioner’s
business files in the Brevard County office. Petitioner was not
customarily in the Brevard County office when Ms. Fox was
preparing the returns.
Ms. Fox collected the information to be placed on the
return, and petitioner was available to speak to her and the
assisting accountant in the event they had questions concerning
an item of income or a transaction.
47
This issue does not relate to an adjustment made in the
notice of deficiency. Instead, it relates to a claim that
petitioner initially made in his petition.
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No preparer is listed in the signature block on any of the
initial Federal income tax returns or the amended income tax
returns for the years in issue.
B. Discussion
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662(a) for the years
1990, 1991, 1992, and 1993. Section 6662(a) imposes a penalty in
an amount equal to 20 percent of the portion of the underpayment
of tax attributable to a taxpayer’s negligence or disregard of
rules or regulations. Sec. 6662(a) and (b)(1).
Section 6662(c) provides that the term “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 of
rules or regulations. The Commissioner’s determination that a
taxpayer was negligent is presumptively correct, and the burden
is on the taxpayer to show lack of negligence. Hall v.
Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.
1982-337.
Petitioner asserts that he relied upon Ms. Fox to prepare
his Federal income tax returns. A taxpayer cannot avoid its duty
to file accurate returns by shifting responsibility to its
bookkeeper or its employee when the taxpayer makes an inadequate
effort to see that the books and records are being kept
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correctly. Leroy Jewelry Co., Inc. v. Commissioner, 36 T.C. 443,
445 (1961). In the instant case, petitioner did not present
sufficient evidence to justify a finding that the accuracy-
related penalty for negligence is not applicable. In addition to
the several holdings in this opinion in favor of respondent,
petitioner conceded48 that several income items representing
substantial amounts were omitted from his Federal income tax
returns. Such omissions included the failure to report
substantial amounts of interest income, a guaranteed payment from
a partnership, taxable Social Security benefits, and distributive
shares of income from S corporations. These omissions were due
to errors petitioner did not attempt to check.
No accuracy-related penalty shall be imposed with respect to
any portion of an underpayment if it is shown that there was
reasonable cause for such portion and that the taxpayer acted in
good faith with respect to such portion. Sec. 6664(c)(1).
Petitioner argues that he also relied upon outside accountants
and, thus, he should not be liable for the accuracy-related
penalty. In order for a taxpayer’s reliance on advice to be
reasonable so as to negate a section 6662(a) accuracy-related
penalty, this Court requires that the taxpayer prove by a
preponderance of the evidence that the adviser was a competent
professional who had sufficient expertise to justify reliance;
48
See appendixes A and B.
- 47 -
the taxpayer gave to the adviser the necessary and accurate
information; and the taxpayer actually relied in good faith on
the adviser’s judgment. Neonatology Associates, P.A. v.
Commissioner, 115 T.C. 43, 99 (2000).
We are not convinced that petitioner reasonably relied on
his outside accountant in reporting the items in issue. The
record does not contain evidence of what specific information
petitioner provided the outside accountant. Indeed, it was Ms.
Fox who provided the information to the outside accountant.
Petitioner has not established that the incorrect returns were
the result of advice provided by the outside accountant.
Accordingly, we find that petitioner has failed to prove that any
portion of his underpayments was due to reasonable cause or that
substantial authority existed for his various tax positions.
Petitioner also argues that he is protected by the automatic
stay provision of 11 U.S.C. sec. 362 (1994) from the accuracy-
related penalty for negligence. As a general rule, the filing of
a petition in bankruptcy operates to stay the commencement or
continuation of any action or proceeding against the debtor. 11
U.S.C. sec. 362(a) (1994). However, 11 U.S.C. sec. 362(b)(9)
(1994) provides an exception to the automatic stay for audits
conducted by the Government to determine tax liability. We find
that petitioner’s involvement in a bankruptcy proceeding did not
prevent respondent from determining that petitioner was liable
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for the accuracy-related penalty pursuant to section 6662(a) and
(b)(1).
To reflect the foregoing,
Decision will be entered
under Rule 155.
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APPENDIX A
All the following issues were conceded by the parties in the
stipulation of settled issues.
Petitioner concedes that he had unreported interest income
of $42,175 in 1990, $41,734 in 1991, $21,251 in 1992, and $40,724
in 1993. Petitioner concedes that he received taxable management
fee income of $6,420.70 from Eureka Field Nursery during 1991.
Petitioner concedes that his flow-through loss from the S
corporation Villa Sol during 1990 was $750. Additionally,
petitioner concedes that his distributive share from the S
corporation Brevard Specialities was $2,531 in 1990, $800 in
1991, and $535 in 1992.
Petitioner concedes that he did not report a $19,200
guaranteed payment from a partnership in 1991. Petitioner
concedes that he received taxable Social Security benefits
(subject to Code limitations) of $3,371.50 in 1991 and $3,816 in
1992.
Petitioner concedes that he realized a capital gain of
$23,865.68 as a result of the condemnation by the Florida
Department of Transportation of .46 acres petitioner owned in
1992. Petitioner concedes that he received a short-term capital
gain of $225 from the closing out of the bank account of Eureka
Field Nursery in 1992.
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Petitioner concedes that he is liable for the addition to
tax pursuant to section 6651(a)(1) relating to 1990 and 1993, if
there is any tax due for those years before the application of
any net operating losses from other years.
Respondent concedes that petitioner is entitled to an
itemized deduction for investment interest of $26,750 in 1991,
$20,309 in 1992, and $10,022 in 1993. Respondent also concedes
that a $54,229.76 payment by Eureka Field Nursery to Mark Tietig
in 1991 was not a distribution to petitioner, that it does not
reduce petitioner’s basis in Eureka Field Nursery stock, and that
it does not reduce the loans owed petitioner by Eureka Field
Nursery.
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APPENDIX B
All the following issues were either conceded on brief or
deemed conceded.
Respondent concedes that Eureka Field Nursery’s $54,229.76
payment to Mark E. Tietig was a return of capital to Mark Tietig
and therefore should be excluded from the computation of
petitioner’s gain from Eureka Field Nursery. Respondent also
concedes that the $54,229.76 did not actually belong to Eureka
Field Nursery but instead to the joint venture entered into by
Eureka Field Nursery and Mark Tietig. Respondent concedes that
the $54,229.76 was not income to Eureka Field Nursery.
Respondent concedes that the subsequent transfer of this amount
to Mark Tietig was not really a payment to Mark Tietig by Eureka
Field Nursery of money it had earned but a distribution from the
joint venture to Mark Tietig. Respondent concedes that the
$54,229.76 payment should not be included in the calculation of
petitioner’s distributive share from Eureka Field Nursery in
1991.
Respondent determined that petitioner’s distributive share
of income from Farm & Grove should be increased by $1,755 in 1990
because of realized gains on foreclosed properties. Petitioner
did not specifically allege an error by respondent regarding this
issue in his petition. Thus, we consider the issue conceded.
See Rule 34(b)(4).
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We note that in petitioner’s reply brief, he considers
several issues conceded. We list below all the issues that
petitioner considered conceded in his reply brief.
The $1,755 gain in 1990 due to realized gains on foreclosed
properties was not listed as one of the issues not in
controversy. Another issue, gain on the sale of 53 lots, was
conceded by petitioner in his reply brief because it was not
petitioned. However, in his petition, petitioner alleged error
by respondent on the sale of the 53 lots and argued the issue in
his brief and reply brief. In light of the inconsistency, we
shall view the matter in the light most favorable to petitioner,
and we consider his arguments in the opinion.
With respect to the other issues considered not in
controversy by petitioner in his reply brief, we consider the
following issues conceded.
Petitioner concedes that in 1990, Farm & Grove earned income
of $168,567 on account of installment sales made during 1989.
Petitioner concedes that in 1990, Farm & Grove earned income of
$50,987 on account of installment sales made during 1990.
Petitioner concedes that his distributive share of income
from Farm & Grove in 1991 is a loss of $97,501, in 1992 is a loss
of $7,083, and in 1993 is a loss of $75,072.
Petitioner concedes that he is liable for an $8,259 self-
employment tax in 1991 and a $6,848 self-employment tax in 1993.
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Petitioner concedes that he is not entitled to a net
operating loss deduction in 1991 stemming from his 1990 tax year.
In his petition, petitioner asserted that he filed a Form
1040, U.S. Individual Income Tax Return, for the year 1994, which
resulted in a net operating loss eligible for carryback to 1991
of $253,889. The notice of deficiency did not cover 1994, and
petitioner on brief has abandoned this assertion. Indeed,
petitioner listed this issue as one of the issues he considered
“not in controversy” in his reply brief. Therefore, we consider
the issue conceded.
Respondent concedes that petitioner is entitled to self-
employment tax deductions for the years 1990, 1991, and 1993.
Petitioner concedes that he had interest income from Eureka
Field Nursery of $33,043 in 1991.
Petitioner concedes that the correct amount of flow-through
income from the Kiddies 38/91 partnership during 1991 is $83,419.
Petitioner concedes that his distributive share from Eureka
Field Nursery in 1990 is $43.
The parties agree on the formula to be used for calculating
interest due under section 453(l)(3) for the years 1990, 1991,
and 1992. The parties also agree that deductions allowed
petitioner for interest paid pursuant to section 453(l)(3) for
the years 1990, 1991, and 1992 will be determined under a Rule
155 computation.
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Finally, petitioner asserted in his petition that a
deduction is allowable for 1990 for an unprocessed claim for
refund filed with the Internal Revenue Service. Petitioner
introduced no evidence at trial regarding this issue, and
petitioner’s opening and reply briefs make no reference to this
issue. Since this possible issue was not argued on brief, it is
deemed conceded. See Money v. Commissioner, 89 T.C. 46 (1987).
- 55 -
APPENDIX C
Mark E. Tietig
Accounting
Beginning Balance $445,000
1
Payment EFN 104 6/6/91 54,230 390,770
Payment MET 195 9/19/91 5,000 385,770
Payment MET 206 2/6/92 5,000 380,770
Cadallac 2,400 378,370
Kluger 7,000 371,370
_____________________________________________________________________
_____________________________________________________________
Per Agreement Balance as of 8/5/92 $371,600
Installment Check Monthly
Due Date No. Amount Owed Paid Balance
_________________________________________________________________
92 November 5,000 5,000 5,000 366,600
December 5,000 10,000 5,000 361,600
93 January 5,000 15,000 5,000 356,600
February 5,000 20,000 5,000 351,600
March Partial 5,000 820 350,780
9-21-92 P-7105
Osceola County 20,820
3-8-93
Bal. March 1005 5,000 4,180 4,180 346,600
4-5-93 April 1007 5,000 5,000 5,000 341,600
5-6-93 May 5,000 5,000 5,000 336,600
6-8 June 1012 5,000 5,000
6-8 July 1012 5,000 10,000
6-8 Payment Find 10,000 326,600
8-5 August 1013 5,000 5,000 5,000 321,600
9-5 September 1014 5,000 5,000 5,000 316,600
10-5 October 1015 5,000 5,000 5,000 311,600
11-5 November 1016 5,000 5,000 5,000 306,600
12-5 December 1017 5,000 5,000 5,000 301,600
1-5-94 Jan. 1018 5,000 5,000 5,000 296,600
2-5 Feb. 1019 5,000 5,000 5,000 291,600
3-5 March 5,000 5,000 5,000 286,600
4-5 April 5,000 5,000 5,000 281,600
5-5 May 5,000 5,000 5,000 276,600
6-5 June 5,000 5,000 5,000 271,600
6-27 Payment 271,500 100
Paid in Full
1
All figures are rounded to the nearest dollar.
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APPENDIX D
Below we compare the notice of deficiency adjustments to
Farm & Grove’s 1990 income with the final treatment per the
concessions and our findings.
TYE Final
12/31/90 Treatment
Ordinary income per return as filed ($82,892)
Increases (Decreases) to income:
1
a. 1989 installment sales 168,587 168,587
2
b. Current years installment sales 50,987 50,987
3
c. Gain on foreclosures 1,755 1,755
4
d. K-38 lot sales 215,922 215,922
e. Less amounts reported (249,723) (249,723)
Ordinary income as corrected 104,636 104,636
Your distributive share of
ordinary income 104,636 104,636
Less: Ordinary income reported on
your return (82,892) (82,892)
Increase (Decrease) in taxable income 187,528 187,528
1
Conceded.
2
Conceded.
3
Considered conceded per Rule 34(b)(4).
4
Respondent’s determination sustained.