T.C. Memo. 2003-244
UNITED STATES TAX COURT
ALLAN & JUDY N. GREEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7158-02. Filed August 14, 2003.
Chester A. Swart, for petitioners.
Vicken Abajian and Guy Glaser, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine deficiencies of $31,962 and $6,647 in their 1998 and
1999 Federal income taxes, respectively. Following concessions,
we decide whether petitioners may deduct for those years net
operating losses (NOLs) which purportedly arose in earlier years.
We hold they may not. Unless otherwise stated, section
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references are to the applicable versions of the Internal Revenue
Code. Rule references are to the Tax Court Rules of Practice and
Procedure. Dollar amounts are rounded to the nearest dollar.
FINDINGS OF FACT
Some facts were stipulated. The stipulated facts and the
accompanying exhibits are incorporated herein by this reference.
We find the stipulated facts accordingly. Petitioners are
husband and wife, and they resided in Long Beach, California,
when their petition was filed.
In May 1980, petitioners and a third individual formed an S
corporation named Gilliflower’s Shoppe, Ltd. (GF I). During
August 1981, GF I opened a 1,500-square-foot retail store in
Sunnyside, New York. In October 1981, the carpeting, inventory,
and leasehold improvements in that store were damaged by fire.
On February 14, 1982, a second fire destroyed a wall in the store
and the rest of the store’s inventory. Petitioners received no
reimbursement as to the fires, and the store operated at a loss
in 1981 and 1982. The building in which the store was located
later burned to the ground in April 1983. Petitioners received
no reimbursement as to this fire, and the store closed
permanently. The record does not establish the income or loss of
GF I for any of its taxable years. Nor does the record establish
the amount of the income or loss of GF I that passed through to
petitioners.
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During 1982, petitioners formed a second S corporation named
Gilliflower’s Shoppe Steinway Street, Ltd. (GF II). In October
1982, GF II opened a 3,500-square-foot retail store in Astoria,
New York. This store operated at a loss in 1982 and closed in
July 1984. GF II later opened two other stores. The record does
not establish the income or loss of GF II for any of its taxable
years. Nor does the record establish the amount of the income or
loss of GF II that passed through to petitioners.
On June 23, 1983, petitioners filed a chapter 11 petition in
the name of GF II in the United States Bankruptcy Court for the
Eastern District of New York.1 On the same date, they filed in
the same court a chapter 11 petition in their own names. On
April 5, 1984, they filed in that court a chapter 11 petition in
the name of GF I.2 All three proceedings were converted to
chapter 7 proceedings on November 16, 1984, and each of these
proceedings was closed in or about 1987.
Petitioners reported on their 1988 through 1997 Federal
income tax returns the following negative amounts of adjusted
gross income:
1
At the time of this filing, petitioners each owned 50
percent of the stock of GF II. Also at that time, GF II reported
in its filings that its assets and liabilities on June 20, 1983,
totaled $722,850 and $448,640, respectively.
2
At the time of this filing, petitioners were the sole
shareholders of GF I.
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Negative Amounts of
Taxable Year Adjusted Gross Income
1988 $662,246
1989 601,726
1990 545,994
1991 518,707
1992 468,723
1993 443,339
1994 497,225
1995 617,510
1996 682,840
1997 738,081
Included in these amounts were wages of $117,412, $137,272,
$140,435, $130,440, $154,509, $122,322, $110,766, $125,600,
$138,291, and $84,233, respectively. The record does not
establish the amounts that petitioners reported as their taxable
income for any of the years 1988 through 1997. Nor does the
record establish petitioners’ income (either adjusted gross or
taxable) for years before 1988.
For the subject years, petitioners filed with the
Commissioner Federal income tax returns using the filing status
of “Married filing joint return”. They claimed on those
respective returns deductions for NOL carryovers of $832,503 and
$719,564. Neither the 1998 nor the 1999 return details the
composition of the NOL carryovers, e.g., the amounts of the
purported NOLs included within the reported NOL carryovers or the
years in which those NOLs purportedly arose. Petitioners
ascertained their NOL carryover from each year after 1980 by
deducting in full any NOL carryover to that year and treating the
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loss as shown on the taxable income line of their Federal income
tax return for that year as the NOL carryover to the next year.3
Without taking into account the claimed NOL carryovers to 1998
and 1999, petitioners reported total income for 1998 and 1999 of
$207,102 and $120,479, respectively.
The Commissioner determined in the notice of deficiency that
petitioners were not entitled to deduct any part of the NOL
deductions claimed for 1998 and 1999. The notice of deficiency
provides as to these determinations:
Your loss flow-through from your S corporation is
limited to your basis.
For tax years beginning before August 5, 1997 the
period to which you can carry a Net Operating Loss
(NOL) back is 3 tax years. The period to which you can
carry an NOL forward is 15 tax years.
We disallowed your net operating loss deduction because
the carry-over period expired.
OPINION
Petitioners made no attempt at trial or on brief to
establish the composition of the NOL carryovers at issue.
Instead, petitioners point to the notice of deficiency and argue
3
For example, petitioners ascertained their NOL carryover
from 1998 to 1999 in the following manner. First, they claimed a
deduction on their 1998 Federal income tax return as “Other
income” a “Prior Year Carry-Over” of ($832,503), and they
reported their adjusted gross income for that year as ($625,401).
Second, they subtracted from the reported figure $88,763 for
itemized deductions and $5,400 for personal exemptions to arrive
at “taxable income” for 1998 (and the NOL carryover to 1999) of
($719,564).
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that the Commissioner did not in the notice of deficiency dispute
that they had NOL carryovers to 1998 and 1999 in the amounts so
claimed. Petitioners conclude from their reading of the notice
of deficiency that they may deduct the NOLs in the amounts
claimed on the subject returns if they establish: (1) Their
basis in the S corporations and (2) that the carryover period for
the NOLS has not expired. When this case was tried on May 9,
2003, respondent’s counsel in his opening statement stated
specifically that the substantiation of the existence, amounts,
and years of petitioners’ NOLs was in issue. Respondent also
stated similarly in his trial memorandum served upon petitioners’
counsel on April 17, 2003.
Section 172 allows a taxpayer to deduct an NOL for a taxable
year. The amount of the NOL deduction equals the sum of the NOL
carryovers plus NOL carrybacks to that year. Sec. 172(a).
Absent an election to the contrary, an NOL for any taxable year
must first be carried back 3 years and then carried over 15
years. Sec. 172(b)(1)(A), (2), and (3).4 A taxpayer claiming an
NOL deduction for a taxable year must file with his return for
that year a concise statement setting forth the amount of the NOL
deduction claimed and all material and pertinent facts, including
4
In 1997, sec. 172(b)(1)(A) was amended to generally
require a 2-year carryback and a 20-year carryover for NOLs
incurred in taxable years beginning after Aug. 5, 1997. Neither
party asserts that this amendment is applicable here, and we
conclude it is not.
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a detailed schedule showing the computation of the NOL deduction.
Sec. 1.172-1(c), Income Tax Regs.
Section 172(c) defines the term “net operating loss” as “the
excess of the deductions allowed by this chapter over the gross
income. Such excess shall be computed with the modifications
specified in subsection (d).” In the case of individuals such as
petitioners, the list of modifications in subsection (d) includes
that “No net operating loss deduction shall be allowed”, that “No
deduction shall be allowed under section 151 (relating to
personal exemptions)”, and that “the deductions allowable by this
chapter which are not attributable to a taxpayer’s trade or
business shall be allowed only to the extent of the amount of the
gross income not derived from such trade or business”. Sec.
172(d)(1), (3), and (4).
Petitioners’ counsel acknowledged at trial that petitioners
bear the burden of proof in this case. Petitioners, as taxpayers
attempting to deduct NOLs, bear the burden of establishing both
the existence of the NOLs and the amount of any NOL that may be
carried over to the subject years. Rule 142(a)(1); United States
v. Olympic Radio & Television, Inc., 349 U.S. 232, 235 (1955);
Keith v. Commissioner, 115 T.C. 605, 621 (2000); Jones v.
Commissioner, 25 T.C. 1100, 1104 (1956), revd. and remanded on
other grounds 259 F.2d 300 (5th Cir. 1958). Such a deduction is
a matter of legislative grace; it is not a matter of right.
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United States v. Olympic Radio & Television, Inc., supra at 235;
Deputy v. Du Pont, 308 U.S. 488, 493 (1940). Whereas petitioners
argue that the composition of the NOLs is not in issue, we
conclude to the contrary. Respondent indicated both in his trial
memorandum and in his opening statement at trial that
petitioners’ substantiation of the existence, amounts, and years
of the NOLs underlying the disputed NOL carryovers was in issue.
Moreover, petitioners alleged in their petition as to each
subject year that “Petitioners did have a [sic] N.O.L. deduction
as set forth on the income tax return for the taxable year, or
some greater amount”. (Emphasis added.) The fact that
petitioners included in their pleading the phrase “some greater
amount” indicates that they contemplated specifically that the
Court would redetermine the amount of the NOL deduction for each
year. We also note that petitioners claim to have incurred NOLs
in numerous years, two of which are 1981 and 1982, and that we
understand petitioners at the least to have acknowledged that
part of the disputed NOL carryovers is attributable to 1981 and
1982 NOLs.5 In that 1981 and 1982 are both more than 15 years
5
Ms. Green testified vaguely that the NOL carryovers
consisted of losses from 1981, 1982, 1983, 1984, and 1986, and
that these losses were attributable to “operating losses, the
cost of selling goods, the leasehold improvements, [and] the
investments.” Petitioners acknowledged on brief that they
continued to carry over to the subject years NOLs that arose in
1982. Petitioners’ counsel stated at trial that “this case is
regarding a net operating loss that started out in 1982".
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before 1998, the first year in issue, and that respondent
determined in the notice of deficiency that the 15-year carryover
period had expired, we cannot fathom how petitioners could
otherwise establish their entitlement to deduct any part of the
subject NOL carryovers were they not to substantiate the
composition of those carryovers.
Petitioners have made no attempt to substantiate their
claimed deductions of NOL carryovers,6 and the record does not
establish that any portion of an NOL that petitioners incurred
before 1998 was applied properly to 1998 or 1999. Petitioners
must prove not only that they had an NOL in a year before 1998,
but that a portion of an NOL was properly deductible in 1998
and/or 1999. See Jones v. Commissioner, supra; see also sec.
6001; sec. 1.6001-1(a), (e), Income Tax Regs. (taxpayers must
keep sufficient records to establish the amount of any item
reported on their Federal income tax returns). Although
petitioners have consistently attempted to manifest on their tax
returns for at least 1988 through 1999 that they were carrying
over NOLs to those returns, these representations are not enough
for petitioners to meet their burden.7 Wilkinson v.
6
Petitioners, for example, have failed to introduce any
evidence establishing the years in which they purportedly
incurred NOLs or the amount of those purported NOLs.
7
In fact, petitioners calculated incorrectly the amounts of
those represented NOL carryovers; e.g., petitioners included in
(continued...)
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Commissioner, 71 T.C. 633, 639 (1979); Jones v. Commissioner,
supra at 1104. Petitioners’ burden requires at a minimum that
they establish that: (1) They had an NOL in at least one
specified taxable year before 1998, (2) they elected to forgo a
carryback of that NOL, see sec. 172(b)(3),8 or, if they made no
such election, the NOL could not be fully applied against income
in the 3 taxable years immediately preceding the taxable year of
the NOL, (3) the NOL (as adjusted by the amounts applied in
carryback years) could not be applied against income in the
taxable years immediately and chronologically following the
taxable year of the NOL, and (4) that 1998 is no more than 15
taxable years after the taxable year of the NOL that they seek to
apply in 1998, and 1999 is no more than 15 taxable years after
the taxable year of the NOL that they seek to apply in 1999. As
we explained in Lassiter v. Commissioner, T.C. Memo. 2002-25:
Under a plain reading of section 172(b)(1)(A)(i),
a taxpayer * * * must first apply an NOL loss to his
third taxable year preceding the loss, then apply any
remaining portion of that loss to his second taxable
year preceding the loss, and then apply any portion of
the loss that still remains to his taxable year
immediately preceding the loss. If the NOL is not
7
(...continued)
those calculations a deduction for personal exemptions. See sec.
172(d)(3).
8
Sec. 172(b)(3) allows a taxpayer to elect to relinquish
the carryback period. Such an election must be made, in a
prescribed manner, by the due date (including extensions) for
filing the taxpayer’s return for the NOL year in which the
election is to be in effect. Id.
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fully absorbed in those 3 carryback years, or if the
taxpayer elects under section 172(b)(3) to waive the
carryback of the NOL, section 172(b)(1)(A)(ii) mandates
that the unabsorbed NOL be carried forward to, and
applied in, the first taxable year postdating the loss.
Section 172(b)(1)(A)(ii) further mandates that this
carryover procedure follow for each of the next 14
years until the NOL is applied in full. With the
exception of section 172(b)(3), and certain other
specialized rules set forth in section 172(b), none of
which are applicable here, the statute does not provide
explicitly any rule that would allow a taxpayer to
decline to apply an NOL in the year which is next in
line under the statutory scheme.
The record does not establish any of these requirements.
Accordingly, we sustain respondent’s determination as to this
issue in full.9 In so doing, we note again that 1981 and 1982
are outside of the applicable 15-year period and that petitioners
have chosen to structure the record so as not to allow us to
attribute any specific portion of the NOL carryovers to years
other than 1981 and 1982. We also note that any NOL that
petitioner incurred in 1983 could not be carried over to 1999.
9
We also are unpersuaded that petitioners had basis in the
S corporations to support a deduction of any losses passed
through to them from those corporations. Whereas Ms. Green
testified at trial that petitioners’ basis in the S corporations
totals $1,150,000, we find that testimony incredible and
unsupported by the record. We decline to rely upon it. We note,
however, that even if petitioners had basis in those S
corporations, the record does not establish the amount of any
loss that the S corporations may have incurred, let alone the
amount of any loss that passed through to petitioners.
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All arguments made by the parties and not discussed herein
have been rejected as meritless. To reflect concessions,
Decision will be
entered under Rule 155.