T.C. Summary Opinion 2002-106
UNITED STATES TAX COURT
CHARLES J. AND HYLA J. PORTALUPPI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5558-00S. Filed August 12, 2002.
Charles J. and Hyla J. Portaluppi, pro se.
William J. Gregg, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. Unless otherwise
indicated, subsequent section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioners’ 1995
Federal income tax of $7,277. The issue for decision is whether
petitioners are entitled to a claimed loss deduction of $35,000.1
Petitioners resided in Alexandria, Virginia, at the time
they filed the petition. The stipulation of facts and attached
exhibits are incorporated herein by this reference. We combine
the findings of fact and conclusions for convenience. All
references to petitioner are to Charles J. Portaluppi.
Petitioners formed CJP Systems, a sole proprietorship, in
1988. On March 8, 1989, petitioners incorporated CJP Systems and
organized it as a corporation under subchapter C for Federal
income tax purposes. Petitioners were the sole stockholders of
CJP Systems, Inc. CJP Systems and CJP Systems, Inc. primarily
provided roofing and general repair work as a prime or sub-
contractor for the U.S. Army Corps of Engineers at Fort Belvoir,
Virginia. CJP Systems, Inc. was dissolved in June 1991.
Petitioners assert the following as background to the
formation and operation of their business: They initially
contributed $25,000 of borrowed funds to the capital of CJP
1
Respondent also adjusted the taxable portion of Social
Security and railroad retirement benefits. This adjustment is
computational and dependent on the adjustment to income;
therefore, we need not address this adjustment.
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Systems; by March 1989, they contributed an additional $97,000 to
the capital of CJP Systems; the assets of CJP Systems were
transferred to CJP Systems, Inc. upon its incorporation; and they
contributed $173,000 to the capital of CJP Systems, Inc. from
March 1989 through September 1990.
CJP Systems, Inc. used the same checking account as CJP
Systems from the time of its incorporation until June 1991.
Petitioners produced a copy of the checking account register
which begins with a deposit of $25,000 made on September 15,
1988, and ends on September 28 of an unspecified year. The
register reflects that nonsequentially numbered checks were
written on the account. The years in which the checks were
written, the checking account number, and the name of the bank
are not identified in the register. Petitioners did not provide
copies of cancelled checks or underlying documents supporting the
checks.
Petitioners did not file a corporate Federal income tax
return on behalf of CJP Systems, Inc. because, as petitioner
claimed, CJP Systems, Inc. did not have a profit. Petitioners
also did not report any income received from or deduct any
expenses of CJP Systems and CJP Systems, Inc. on their individual
returns.
Petitioners claimed a business loss deduction of $35,000 on
their jointly filed Form 1040, U.S. Individual Income Tax Return,
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for the 1995 taxable year. Although petitioners deducted the
business loss on line 12 of the return as a Schedule C loss, they
did not attach a Schedule C, Profit or Loss From Business, to the
return.
The notice of deficiency determined that petitioners were
not entitled to the claimed loss deduction.2 The notice of
deficiency further determined the following:
[The nonbusiness bad debt] can be deducted as a short-term
capital loss. Capital losses are deductible only to the
extent of capital gains plus $3,000 * * *. We have adjusted
your loss accordingly, and you may carry any unused loss
forward to future years. Accordingly, your taxable income
is increased $35,000 for tax year 1995.
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). The burden of proof may shift to the Commissioner
under section 7491 if the taxpayer establishes that he complied
with the requirements of section 7491(a)(2)(A) and (B) to
substantiate items, maintain required records, and fully
cooperate with the Secretary’s reasonable requests. Section 7491
is effective with respect to court proceedings arising in
connection with examinations by the Commissioner commencing after
July 22, 1998, the date of its enactment by section 3001(a) of
the Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, 112 Stat. 685, 726.
2
The adjustment resulted in a net decrease in petitioners’
income of $32,000.
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It is not clear from the record when respondent commenced
the audit of petitioners’ return. Even if we were to conclude
that section 7491 were applicable, petitioners have not complied
with the requirements of section 7491. Accordingly, the burden
of proof remains upon petitioners.
Petitioners generally allege that the loss was incurred as
the result of an uncollectible judgment of $195,000 awarded to
CJP Systems, Inc. pursuant to a cross-claim filed in United
States v. Certified Sur. Mgmt., Inc. et al., docket No. 91-0093-
A. Petitioners have neither explained why they are entitled to
deduct on their individual return the loss allegedly incurred by
their corporation, nor demonstrated how the loss was incurred.
For example, petitioners have not argued that they are entitled
to a worthless stock deduction under section 165(g), that the
loss represents a deductible bad debt under section 166, or any
other theory. Petitioners also have not explained their position
as to the proper characterization of the loss. Petitioner
testified that they contributed money to CJP Systems, Inc. as
capital contributions, not as loans. As petitioner explained at
trial: “Any money that had been invested in the company I think
should be considered a capital loss.”
Petitioners assert that even if they are not entitled to
deduct a loss with respect to contributions made to CJP Systems,
Inc. they are nevertheless entitled to deduct a loss with respect
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to contributions made to CJP Systems prior to its incorporation,
which may be carried over. Petitioners, however, have failed to
provide a theory under which they could deduct the loss under
these facts.
Taxpayers are required to maintain records that are
sufficient to enable the Commissioner to determine their correct
tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,
90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a),
Income Tax Regs.
Petitioners have not made any comprehensible argument or
produced sufficient evidence to show that they actually incurred
a loss and that the loss is deductible as other than a capital
loss, and there is nothing in the record that would lead us to
conclude that the claimed loss is deductible as an ordinary loss.
Respondent’s determination is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.