T.C. Memo. 2001-310
UNITED STATES TAX COURT
THOMAS C. SANDOVAL, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16395-98. Filed December 11, 2001.
Thomas C. Sandoval, Jr., pro se.
Elizabeth Owen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice dated August 20, 1998, respondent
determined a $23,474 deficiency, and a $4,695 section 6662(a)
penalty, relating to petitioner’s 1994 Federal income taxes.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
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Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions the remaining issues are whether
petitioner: (1) May deduct certain expenses relating to his
residential real estate, (2) has net operating losses to offset a
portion of his 1994 taxable income, (3) is allowed a depreciation
deduction for property purportedly used in his trade or business,
and (4) is liable for a section 6662(a) penalty relating to
negligence.
FINDINGS OF FACT
Petitioner resided in San Antonio, Texas, at the time he
filed his petition.
During the year in issue, petitioner was married to Bobbie
J. Sandoval; was the sole proprietor of Allied Electric and Air
Conditioning Co. (Allied Electric), an electric and air
conditioning business; and was the owner of real estate in San
Antonio located at 4330 Seabrook Drive (Seabrook), 320 Indiana
(Indiana), and a duplex at 137 and 139 El Monte Boulevard (El
Monte). Seabrook, Indiana, and El Monte were purchased in 1979,
1987, and 1988, respectively.
On petitioner’s 1994 Federal income tax return, received by
respondent on October 19, 1995, he omitted his rental activities,
incorrectly claimed single filing status, and did not review the
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return for accuracy. Dan Mitchell, a certified public
accountant, prepared petitioner’s 1994 tax return.
Respondent used a bank deposit analysis to reconstruct
petitioner’s income relating to Allied Electric; disallowed
$77,531 of Schedule C, Profit or Loss From Business, deductions,
relating to Allied Electric; and determined a deficiency in
petitioner’s 1994 taxes and a section 6662(a) accuracy-related
penalty.
OPINION
I. Petitioner’s Real Estate Activities
We sustain respondent’s determinations relating to
petitioner’s residential properties. Petitioner had the burden
of proof,1 yet presented unreliable documentary evidence and
contradictory testimony. Rule 142(a).
A. 139 El Monte
139 El Monte was not held for the production of income.
Armando Pineda occupied the property for part of 1994, while
petitioner’s daughter occupied it for the remainder of the year.
There is no credible evidence (i.e., rent payments, lease
agreements, canceled checks, general ledgers, etc.) establishing
that petitioner rented the property to those individuals.
Depreciation and maintenance expenses relating to a residence
1
Sec. 7491 is not applicable to this case.
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occupied on a rent-free basis are not deductible. Prince Trust
v. Commissioner, 35 T.C. 974 (1961).
B. Seabrook and Indiana
In determining the allocation of basis between land and
improvements for Seabrook and Indiana, respondent relied on 1994
city government tax assessment records. Petitioner complains
that respondent should have used tax assessment records for the
years in which each property was purchased, yet presented neither
those records nor any other credible evidence to rebut
respondent’s determinations.
Petitioner contends that he is entitled to a 15-year
recovery period for both Seabrook and Indiana. Respondent
contends, and we agree, that the appropriate recovery period for
Seabrook, placed in service in 1979, is 20 years (i.e., the
midpoint of the Class Life Asset Depreciation System’s asset
depreciation range, which is 16-24 years). See Sprint Corp. v.
Commissioner, 108 T.C. 384, 400 (1997); sec. 1.167(a)-
11(b)(4)(i), Income Tax Regs.; Rev. Proc. 77-10, 1977-1 C.B. 548.
The recovery period for Indiana, placed in service in 1987, is
27.5 years. Sec. 168(c). We also sustain respondent’s
determination that petitioner received $3,900 rental income
relating to Seabrook.
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II. Allied Electric Business Deductions
A. Net Operating Loss Carryforwards
Petitioner contends, but failed to establish, that his 1994
income is offset by net operating losses. See Jones v.
Commissioner, 25 T.C. 1100, 1104 (1956)(holding that a taxpayer
must prove the amount of the net operating loss carryforward
deductions claimed and that his gross income in other years did
not offset those losses), revd. and remanded on other grounds 259
F.2d 300 (5th Cir. 1958). Petitioner’s documentary evidence
consisted of his tax returns and a worksheet with figures
differing from those on the returns. See Wilkinson v.
Commissioner, 71 T.C. 633, 639 (1979)(holding that tax returns
alone do not establish a taxpayer’s entitlement to claimed
deductions). Respondent concedes petitioner had eligible net
operating losses of $15,546, $3,577, $35,791, and $9,573 in 1982,
1989, 1991, and 1992, respectively. These losses were absorbed
by income in carryback and carryover years prior to 1994. See
sec. 172(b)(stating that net operating losses must be carried
back 3 years and the remaining portion carried forward 15 years).
Accordingly, petitioner does not have a net operating loss
carryforward in 1994.
B. Additional Business Depreciation
Petitioner failed to establish that the Lincoln Town Car was
used for business purposes. We conclude, however, that the
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Freuhauf vans, trailer, and the canopy, were used in petitioner’s
business. Accordingly, depreciation deductions relating to these
items are allowed.
III. Negligence
Section 6662(a) and (b)(1) impose an accuracy-related
penalty on the portion of an underpayment of tax attributable to
negligence. Petitioner contends that no tax deficiency exists
and blames his accountant for errors and omissions on his tax
returns. We are unpersuaded. Petitioner overstated his
deductions, underreported income, failed to report his rental
activities, filed as single instead of married, failed to review
the return, and had no reasonable cause for any of these errors.
Petitioner did not exercise due care in the filing of his return
and thus is liable for the section 6662(a) penalty.
Contentions we have not addressed are moot, irrelevant, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.