FAIRCHILD v. COMMISSIONER

T.C. Memo. 2001-237

UNITED STATES TAX COURT

JOHN D. FAIRCHILD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21918-97. Filed September 10, 2001.

John D. Fairchild, pro se.

Linda R. Averbeck, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined a $19,724 deficiency

in petitioner’s Federal income tax for 1993 and a $4,931 addition

to tax under section 6651(a)(1)1 for failure to timely file his

1993 return.

1
Unless otherwise stated, section references are to the
Internal Revenue Code in effect in 1993, and Rule references are
to the Tax Court Rules of Practice and Procedure.
 - 2 -

After concessions,2 we must decide the following issues:

1. Whether we have jurisdiction to decide whether

petitioner’s 1993 tax liabilities were discharged in his 1999

bankruptcy proceeding. We hold that we do not. Neilson v.

Commissioner, 94 T.C. 1, 8-9 (1990).

2. Whether petitioner may deduct taxes and wages in amounts

greater than respondent allowed. We hold that he may not.

3. Whether petitioner is liable for self-employment tax on

income that he received from his business in 1993. We hold that

he is.

4. Whether petitioner recognized $5,369 of capital gain

income from the sale of stock in 1993. We hold that he did.

5. Whether petitioner is liable for the addition to tax

under section 6651(a)(1) for failure to timely file his 1993

return. We hold that he is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioner

Petitioner lived in Hurricane, West Virginia, when he filed

the petition in this case. He was married in 1993 and divorced

in 1995.

2
Respondent concedes that petitioner is entitled to a
dependency exemption for his spouse and that disability insurance
proceeds are not taxable income.
 - 3 -

B. Stan’s Pawn Shop

Petitioner owned Stan’s Pawn Shop. He occasionally went to

the shop to oversee its operations. His former best friend and

his nephew managed the shop. His parents also worked there.

Petitioner did not draw paychecks, have regular work hours, or

receive Forms W-2, Wage and Tax Statement, or Forms 1099-MISC,

Miscellaneous Income, from Stan’s Pawn Shop.

Stan’s Pawn Shop did not file a partnership return or

Schedule K-1, Partner’s Share of Income, Credits, Deductions,

Etc., for 1993.

C. Sale of Stock

In 1993, petitioner sold Hartmarx stock for $3,471, Keller

stock for $11,296.20, and TINT stock for $8,013.04. His basis

was $1,959.65 for the Hartmarx stock, $11,123.80 for the Keller

stock, and $5,315.52 for the TINT stock. In 1993, he also

received $12,560 from the sale of Cats 0% stock.3

D. Petitioner’s 1993 Income Tax Return

Petitioner received an extension to August 15, 1994, to file

his 1993 Federal income tax return. He filed his 1993 return on

February 2, 1995.

Petitioner deducted $900 for self-employment health

insurance on his 1993 Form 1040, Individual Income Tax Return.

3
There is no evidence in the record of petitioner’s basis
in the Cats 0% stock.
 - 4 -

On his 1993 Schedule C, Profit or Loss From Business (Sole

Proprietorship), for Stan’s Pawn Shop, petitioner reported a net

profit of $25,218 and deducted $29,978.80 for “Taxes and

Licenses” and $63,000 for “Cost of Labor”. Petitioner did not

report any capital gains or losses from the sale of stock or any

income from partnerships on his 1993 return. He did not attach a

Schedule E, Supplemental Income and Loss (from rental real

estate, royalties, partnerships, S corporations, estates, trusts,

REMICs, etc.), to his 1993 return. Petitioner’s spouse did not

sign the 1993 return.

E. Petitioner’s 1999 Bankruptcy Proceeding

Respondent issued a notice of deficiency to petitioner on

September 3, 1997. Petitioner filed a petition in this Court on

November 5, 1997, and an amended petition on January 2, 1998.

On March 2, 1998, respondent assessed $19,724 for

petitioner’s 1993 income taxes. On September 7, 1998, respondent

abated the $19,724 assessment, a $4,931 delinquency penalty, and

$9,899.15 in interest.

On April 8, 1999, the Tax Court calendared this case for

trial at a trial session beginning September 13, 1999.

Petitioner filed a petition in the United States Bankruptcy Court

for the Southern District of Ohio on July 30, 1999. On September

10, 1999, the Tax Court stayed proceedings in this case and

continued the case from the September 13, 1999, trial session.
 - 5 -

The bankruptcy court discharged petitioner’s bankruptcy petition

on November 3, 1999. The Tax Court lifted the stay of

proceedings on March 1, 2000.

OPINION

A. Whether the Tax Court Has Jurisdiction To Decide Whether
Petitioner’s 1993 Tax Liabilities Were Discharged in His
1999 Bankruptcy Proceedings

Petitioner contends that his 1993 Federal income tax

liabilities were discharged in his 1999 bankruptcy proceedings.

Respondent contends that only assessed taxes may be discharged in

bankruptcy. 11 U.S.C. sec. 507(a)(8)(A)(iii) (1994)).4 Neither

4
11 U.S.C. sec. 507(a)(8) (1994) provides in pertinent
part:

(a) The following expenses and claims have
priority in the following order:

* * * * * * *

(8) Eighth, allowed unsecured claims of
governmental units, only to the extent that such
claims are for--

(A) a tax on or measured by income or
gross receipts--

(i) for a taxable year ending on or
before the date of the filing of the
petition for which a return, if
required, is last due, including
extensions, after three years before the
date of the filing of the petition;

(ii) assessed within 240 days, plus
any time plus 30 days during which an
offer in compromise with respect to such
tax that was made within 240 days after
such assessment was pending, before the
 - 6 -

party contends that we lack jurisdiction to decide this issue.

However, we may question our jurisdiction sua sponte at any stage

of the proceedings. Moorhous v. Commissioner, 116 T.C. 263, 272

(2001); Neely v. Commissioner, 115 T.C. 287, 290 (2000); Smith

v. Commissioner, 96 T.C. 10, 13-14 (1991).

This is an income tax deficiency case. In a deficiency

case, we lack jurisdiction to decide whether petitioner’s tax

liability was discharged in bankruptcy. Moody v. Commissioner,

95 T.C. 655, 658 (1990); Neilson v. Commissioner, 94 T.C. at 8-9;

Graham v. Commissioner, 75 T.C. 389, 399 (1980); Swanson v.

Commissioner, 65 T.C. 1180, 1184 (1976); Fotochrome, Inc. v.

Commissioner, 57 T.C. 842, 847 (1972). Thus, we will deny

petitioner’s motion to dismiss on the grounds that his 1993

liability for income tax and additions to tax was discharged in

bankruptcy. We do, however, have jurisdiction to redetermine the

deficiencies and additions to tax that respondent determined in

this case. Neilson v. Commissioner, supra at 6-8; Graham v.

Commissioner, supra at 398-399.

date of the filing of the petition; or

(iii) other than a tax of a kind
specified in section 523(a)(1)(B) or
523(a)(1)(C) of this title, not assessed
before, but assessable, under applicable
law or by agreement, after, the
commencement of the case;
 - 7 -

In his brief, petitioner contends only that his 1993

liabilities were discharged in bankruptcy. He does not address

any of the issues raised in the notice of deficiency. We may

treat those issues as conceded by petitioner. Rothstein v.

Commissioner, 90 T.C. 488, 497 (1988); Burbage v. Commissioner,

82 T.C. 546, 547 n.2 (1984), affd. 774 F.2d 644 (4th Cir. 1985);

Reaves v. Commissioner, 31 T.C. 690, 721-722 (1958), affd. 295

F.2d 336 (5th Cir. 1961). However, for reasons discussed next,

the result would be the same if we did not treat those issues as

conceded.

B. Whether Petitioner May Deduct Expenses for Labor and Taxes
in Amounts Greater Than Respondent Allowed

Petitioner deducted labor expenses of $63,000 on Schedule C

of his 1993 return. Respondent determined that petitioner did

not substantiate $25,519 of those expenses.5 At trial,

petitioner testified that he had no evidence to support his

position, but he said that the Social Security Administration

does.

Petitioner deducted $29,978.80 for “Taxes and Licenses” on

his 1993 return. Respondent determined that petitioner did not

substantiate $19,896 of that amount.6 Petitioner testified

5
Respondent concedes that petitioner had labor costs of
$37,481.
6
Respondent concedes that petitioner paid taxes and
licenses expenses of $10,082.80 in 1993.
 - 8 -

generally that taxes were paid to the City of Louisville, the

County of Jefferson, and the Commonwealth of Kentucky. However,

he did not say when, how much, or by whom those taxes were paid,

or provide any corroboration for his testimony.

Petitioner did not meet his burden of proof.7 We conclude

that petitioner may not deduct the cost of labor and taxes in

amounts greater than respondent allowed for 1993.

C. Whether Stan’s Pawn Shop Was a Partnership in Which
Petitioner Held a One-Third Interest

Petitioner concedes that Stan’s Pawn Shop had a profit of

$25,218 in 1993. However, he contends that he is liable for

income tax on only one-third of that income because Stan’s Pawn

Shop was a partnership in which he held a one-third interest. He

testified that his partners were his former spouse and his former

best friend (otherwise unidentified in the record) who is now

deceased. We disagree that petitioner is liable for only one-

third of the income of Stan’s Pawn Shop.

Petitioner reported income and expenses for Stan’s Pawn Shop

as a sole proprietorship on Schedule C of his 1993 return.

Stan’s Pawn Shop did not file a partnership return or Schedules

7
Sec. 7491, relating to the burden of proof, applies to
court proceedings arising in connection with examinations
beginning after July 22, 1998. See Internal Revenue Service
Restructuring & Reform Act of 1998, Pub. L. 105-206, sec.
3001(a), (c), 112 Stat. 685, 726. The examination here began
before that date. Thus, sec. 7491 does not apply.
 - 9 -

K-1 for 1993, as would have been required if it had been a

partnership. Sec. 6031(a) and (b). Petitioner did not report

any partnership income on his 1993 return. Petitioner offered no

documents and called no witnesses to corroborate his testimony

that Stan’s Pawn Shop was a partnership in 1993. We are not

convinced that Stan’s Pawn Shop was a partnership in 1993.

Petitioner contends that he is not liable for tax on $25,218

because the business kept that amount and made no cash

distribution to him. We disagree. Stan’s Pawn Shop had net

income of $25,218. For tax purposes, a sole proprietorship has

no separate legal identity from its proprietor. Jaske v.

Commissioner, 823 F.2d 174, 176 (7th Cir. 1987), affg. T.C. Memo.

1986-454. Petitioner is liable for income tax on the $25,218,

whether or not Stan’s Pawn Shop distributed that amount in cash

to him. Id.

We conclude that petitioner is liable for tax on $25,218 of

net income from Stan’s Pawn Shop in 1993.

D. Whether Petitioner Is Liable for Self-Employment Tax

Petitioner contends that he is not liable for self-

employment tax on income from Stan’s Pawn Shop because it was a

partnership. We disagree for reasons discussed at paragraph C,

above.

Petitioner contends that he is not liable for self-

employment tax because he was not an employee of Stan’s Pawn Shop
 - 10 -

and did not receive Forms W-2 or Forms 1099. He testified that

he went to Stan’s Pawn Shop from time to time to oversee its

operations and did not work a specific schedule. He contends

that these facts show that he was not employed or self-employed.

We disagree.

Taxpayers who derive net earnings from self-employment of

$400 or more are liable for self-employment tax. Sec. 6017.

Self-employment income consists of the net earnings from a trade

or business carried on by an individual through a sole

proprietorship. Sec. 1.1401-1(c), Income Tax Regs.; see also

Parrish v. Commissioner, T.C. Memo. 1997-474, affd. 168 F.3d 1098

(3d Cir. 1999). Petitioner must take into account all of the

income and deductions of his sole proprietorship in computing his

1993 self-employment tax. Sec. 1402(a)(5)(A). The fact that he

received no wages from Stan’s Pawn Shop and did not work

regularly at Stan’s Pawn Shop does not affect whether he derived

income from his business because he and Stan’s Pawn Shop are not

separate legal entities for tax purposes. Jaske v. Commissioner,

supra. Thus, the net income that he derived from Stan’s Pawn

Shop is subject to self-employment tax. Sec. 1402. We conclude

that petitioner is liable for self-employment tax on the $25,218

that he reported on his 1993 tax return as net income of Stan’s

Pawn Shop in 1993.
 - 11 -

E. Whether Petitioner Realized $5,369 of Capital Gains From the
Sale of Stock in 1993

Respondent determined that petitioner is liable for capital

gains tax on $5,369 of capital gains that he realized from the

sale of stock in 1993. Petitioner contends that he had a $34,000

loss from the sale of stock in 1993 that offset any gain he may

have had in that year. We disagree.

Petitioner offered no evidence to corroborate his claim that

he had a $34,000 loss. We are not convinced that petitioner had

a $34,000 loss from the sale of stock in 1993.

Petitioner contends that proof of his claim that he had

losses in 1993 on stock sales can be obtained from his stock

brokerage firm. Petitioner did not identify the stock brokerage

firm. The record is now closed. Petitioner has not shown that

the brokerage records were not available for use at trial or

could not have been obtained with reasonable diligence. Merely

alleging that evidence can be obtained is not a sufficient basis

to reopen the record. See Zenith Radio Corp. v. Hazeltine

Research, Inc., 401 U.S. 321, 332-333 (1971); Purex Corp. v.

Procter & Gamble Co., 664 F.2d 1105, 1109 (9th Cir. 1981); Mayer

v. Higgins, 208 F.2d 781, 783 (2d Cir. 1953); Calcutt v.

Commissioner, 91 T.C. 14, 25 (1988); Dean v. Commissioner, 56

T.C. 895, 900 (1971).

We conclude that petitioner is liable for capital gains tax

on $5,369 that he realized from the sale of stock in 1993.
 - 12 -

F. Whether Petitioner Is Liable for the Addition to Tax For
Failure To Timely File His 1993 Return

Petitioner contends that he is not liable for the addition

to tax under section 6651(a)(1) for failure to timely file his

1993 return because he could not get information from his former

spouse. We disagree.

A taxpayer must show that late filing of a return was due to

reasonable cause and not due to willful neglect to avoid the

addition to tax under section 6651(a)(1) for failure to timely

file a return. Sec. 6651(a)(1). Petitioner did not show that he

took reasonable steps to obtain data from other sources, that he

could not have prepared his 1993 return without his former

spouse’s cooperation, or that he had reasonable cause for filing

his 1993 return late. We conclude that petitioner is liable for

the addition to tax under section 6651(a)(1) for failure to

timely file his 1993 return.

To reflect concessions and the foregoing,

An order will be issued

denying petitioner’s motion to

dismiss, and decision will be

entered under Rule 155.