T.C. Memo. 2003-259
UNITED STATES TAX COURT
STEPHEN P. ARNOLD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12911-01. Filed September 4, 2003.
Stephen P. Arnold, pro se.
Martha J. Weber, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioner petitioned the Court to redetermine
respondent’s determination of a $47,036 deficiency in his 1998
Federal income tax and additions thereto of $10,279, $2,970, and
$2,067 under sections 6651(a)(1) and (2) and 6654(a),
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respectively.1 Following concessions and respondent’s assertion
in the answer that petitioner is liable for an additional amount
as to the addition to tax under section 6651(a)(1), we are left
to decide:
1. Whether petitioner may use the filing status of “Married
filing joint return”. We hold that he may not.
2. Whether petitioner realized losses on certain stock
transactions. We hold that he did not.
3. Whether petitioner may deduct a loss of $86,889 from an
S corporation named Only Kids, Inc. (Only Kids). We hold that he
may not.
4. Whether petitioner may deduct certain itemized expenses
in amounts greater than allowed by respondent. We hold that he
may not.
5. Whether petitioner is liable for the additions to tax
under sections 6651(a)(1) and 6654(a) included in the notice of
deficiency and for the increase in the addition to tax under
section 6651(a)(1) asserted by respondent in answer. We hold
that petitioner is liable only for the amounts included in the
notice of deficiency.
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, Rule references
are to the Tax Court Rules of Practice and Procedure, and dollar
amounts are rounded to the nearest dollar.
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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. Petitioner was married
throughout the subject year and resided in Memphis, Tennessee,
when his petition was filed. He has not filed a Federal income
tax return for 1995 through 2000.
Petitioner is the president, chief executive officer, and
sole shareholder of Only Kids. Only Kids was incorporated on
November 4, 1988, and it filed a 1998 Form 1120S, U.S. Income Tax
Return for an S Corporation, reporting a loss of $86,889. That
return also reported that Only Kids had been an S corporation
since the year of its incorporation and that as of the end of its
1998 taxable year, December 31, 1998, its balance sheet included
capital stock, additional paid-in-capital, and a retained deficit
in the amounts of $425,000, $2,049,649, and $2,053,361,
respectively. That balance sheet did not list any loans to Only
Kids from petitioner.
Only Kids paid wages of $99,692 to petitioner during 1998.
Petitioner also received during 1998 other items of gross income.
First, he received interest and dividends of $99 and $463,
respectively. Second, he received $39,056 from Donaldson Lufkin
& Arnold (DLA) and $16,349 from U.S. Clearing (USC) for sales of
stock. The proceeds from DLA were for sales in the respective
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amounts of $3,237, $10,255, $3,354, $2,512, $3,193, $9,775, and
$6,730. The proceeds from USC were for sales in the respective
amounts of $6,487 and $9,862. As to the sales of $3,237,
$10,255, $3,193, and $9,775, petitioner’s basis in the underlying
stock was $4,371, $8,738, $3,775, and $10,493, respectively, and
his gain or loss on the sales was ($1,134), $1,517, ($582), and
$718, respectively. The record does not establish petitioner’s
basis as to the stock underlying any of the other sales. Nor
does the record establish petitioner’s holding period as to any
of the sales.
In the notice of deficiency, respondent determined
petitioner’s gross income on the basis of income reported to
respondent by petitioner’s payors. That income included the
amounts of wages, interest, dividends, and stock proceeds stated
above.2 Respondent also determined in the notice of deficiency
that petitioner’s filing status was “Married filing separate
return”.
OPINION
1. Burden of Proof
Taxpayers generally must prove the Commissioner’s
determinations wrong in order to prevail. Rule 142(a)(1); Welch
v. Helvering, 290 U.S. 111, 115 (1933). As one exception to this
2
As to the stock proceeds, respondent gave petitioner
credit for the bases mentioned above and treated the gains and
losses as short-term capital gains and losses.
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rule, section 7491(a) places upon the Commissioner the burden of
proof with respect to any factual issue if the taxpayer
maintained adequate records, satisfied applicable substantiation
requirements, cooperated with the Commissioner, and introduced
during the court proceeding credible evidence on the factual
issue. The legislative history of section 7491(a) clarifies that
taxpayers must prove that they have satisfied the adequate
records, substantiation, and cooperation requirements before that
section places the burden of proof upon the Commissioner. H.
Conf. Rept. 105-599, at 240 (1998), 1998-3 C.B. 747, 994 (“The
taxpayer has the burden of proving that it meets each of these
conditions, because they are necessary prerequisites to
establishing that the burden of proof is on the Secretary.”); see
also Prince v. Commissioner, T.C. Memo. 2003-247. The text of
the statute requires that the taxpayer satisfy the remaining
(credible evidence) requirement as a condition of placing the
burden of proof upon the Commissioner.
We do not find that petitioner maintained adequate records,
satisfied applicable substantiation requirements, or cooperated
with respondent. Accordingly, we hold that section 7491(a) does
not apply here to place the burden of proof upon respondent.
2. Filing Status
Section 1(a) allows married individuals to elect to compute
their Federal income tax liability on the basis of a joint
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return. We conclude that petitioner is not entitled to compute
his 1998 Federal income tax liability as such in that he has
never filed a 1998 tax return. See Thompson v. Commissioner,
78 T.C. 558, 561 (1982). Although petitioner gave respondent’s
counsel a copy of his purported joint return for 1998, that
“return” was not a joint return in that it was signed by neither
him nor his wife. Weber v. Commissioner, T.C. Memo. 1995-125;
Gudenschwager v. Commissioner, T.C. Memo. 1989-6. We sustain
respondent’s determination that petitioner’s filing status for
1998 is "Married filing separate return".
3. Stock Sales
A taxpayer such as petitioner must recognize gain or loss on
each sale of stock in an amount equal to the difference between
the amount realized and his basis. Secs. 1001, 1012. Gain or
loss on the sale of stock held for more than one year is
considered long-term. Sec. 1222(3) and (4). Gain or loss on all
other sales of stock is considered short-term. Sec. 1222(1) and
(2). Taxpayers who fail to prove a basis in a sold asset are
considered to have a zero basis in that asset. Garret v.
Commissioner, T.C. Memo. 1997-231; see also Reeve v.
Commissioner, a Memorandum Opinion of this Court dated March 27,
1947.
Petitioner argues that he is entitled to recognize losses on
sales of stock not mentioned above. We disagree. The record
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does not establish that petitioner had any other such sales of
stock during the relevant year. In that petitioner has not
disproved respondent’s determination that his stock proceeds are
taxable in full, with the exception of our findings above as to
basis, that those proceeds were the only sales proceeds received
by petitioner during the subject year, and that petitioner’s
gains and losses from his stock sales were short-term capital
gains and losses, we sustain respondent’s determination as to
this issue.
4. Loss From Only Kids
The pro rata share of an S corporation’s loss passes through
to its shareholders. Sec. 1366(a)(1). A shareholder may deduct
such a loss to the extent that it does not exceed the
shareholder’s adjusted basis in (1) the shareholder’s stock in
the corporation plus (2) any debt owed by the corporation to the
shareholder. Sec. 1366(d)(1). A taxpayer such as petitioner
must establish that he has acquired basis in the referenced stock
and debt and, to the extent that he does, that his basis in those
items was not reduced to zero because of losses claimed in years
predating the subject year. Hogan v. Commissioner, T.C. Memo.
1999-365. Taxpayers who fail to prove that they have any basis
in an S corporation are considered to have a zero basis in that
corporation. Thomson v. Commissioner, T.C. Memo. 1983-279, affd.
without published opinion 731 F.2d 899 (11th Cir. 1984).
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Petitioner argues that he is entitled to deduct an $86,889
loss from Only Kids and that the 1998 Form 1120S, a single bank
statement, and his testimony establish his basis in Only Kids.
We disagree with petitioner when he asserts that he has
established that he has a basis in Only Kids. The Form 1120S
does not contain sufficient information for us to establish that
he has any basis in Only Kids. Fehlhaber v. Commissioner,
94 T.C. 863, 869 (1990), affd. 954 F.2d 653 (11th Cir. 1992).
Nor does the bank statement, which simply lists Only Kids’
deposits and other credits for April 1998, establish that
petitioner had any such basis. Although petitioner observes
correctly that the statement reports that funds of $105,000 were
wired into Only Kids’ bank account during April 1988, the
statement does not indicate the source of those wire transfers.
In that petitioner testified vaguely and incoherently that the
deposits were from his personal account, and that the record does
not otherwise support that testimony, we decline to find the
subject matter of that testimony as a fact. We conclude that
petitioner’s adjusted basis in Only Kids was zero for 1998 and,
hence, that he was not entitled to deduct the referenced loss.3
3
We are mindful that petitioner, as the only shareholder of
Only Kids, obviously had to have at least once invested in the
corporation and that Only Kids’ 1998 Form 1120S reported that
Only Kids’ balance sheet as of December 31, 1998, listed capital
stock and additional paid-in-capital of $425,000 and $2,049,649,
respectively. In that the record contains no credible evidence
(continued...)
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5. Itemized Expenses
Petitioner argues that he is entitled to deduct certain
itemized expenses (i.e., medical expenses, real estate taxes, and
home mortgage interest) in amounts greater than allowed by
respondent. In addition to his general burden of proof discussed
above, petitioner must prove his entitlement to any deduction,
e.g., by maintaining sufficient records to substantiate his
claimed deductions. New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934); Lychuk v. Commissioner, 116 T.C. 374, 384
(2001); see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Petitioner has failed to carry his burden of proof. The record
does not establish that petitioner is entitled to deduct any
itemized expense in an amount greater than allowed by respondent.
Lobe v. Commissioner, T.C. Memo. 2001-204, and cases cited
therein.
6. Additions to Tax
a. Section 6651(a)(1)
Section 6651(a)(1) imposes an addition to tax for failing to
file a return on or before the specified filing date unless it is
3
(...continued)
to persuade us that the amounts listed on the balance sheet are
correct, we decline to find those amounts as facts. We also note
that petitioner has never filed a tax return for 1995 through
2000 and that the record does not establish his taxable income
for any of the nondocketed years. Petitioner, therefore, has
failed to establish that any basis that he may have acquired in
Only Kids’ stock and debt before the subject year was not reduced
to zero because of losses claimed in those earlier years.
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shown that this failure is due to reasonable cause and not due to
willful neglect. Reasonable cause may exist if a taxpayer
exercised ordinary business care and prudence and was nonetheless
unable to file the return within the date prescribed by law.
Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect
means a “conscious, intentional failure or reckless
indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).
Respondent bears the burden of production with respect to
this addition to tax. Sec. 7491(c). In order to meet this
burden of production, respondent must produce sufficient evidence
establishing that it is appropriate to impose this addition to
tax. Once respondent has done so, the burden of proof is upon
petitioner, Higbee v. Commissioner, 116 T.C. 438, 449 (2001),
except for the increased portion of the addition to tax asserted
by respondent in the answer. Respondent bears the burden of
proof as to that portion of the addition to tax. Rule 142(a)(1).
Petitioner’s burden of proof requires that he prove that his
failure to file a timely 1998 tax return was due to reasonable
cause and was not due to willful neglect. Sec. 6651(a)(1);
United States v. Boyle, supra at 245. Respondent’s burden of
proof requires that he prove the contrary; i.e., that
petitioner’s failure to file timely was not due to reasonable
cause or was due to willful neglect. Sec. 6651(a)(1); United
States v. Boyle, supra at 245; Bruner Woolen Co. v. Commissioner,
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6 B.T.A. 881, 882 (1927); see also Banks v. Commissioner, T.C.
Memo. 2001-48; Collins v. Commissioner, T.C. Memo. 1994-409;
Taylor v. Commissioner, T.C. Memo. 1989-201; McCanless v.
Commissioner, T.C. Memo. 1987-573.
Respondent has satisfied his burden of production in that
the record establishes that petitioner has never filed a 1998 tax
return. Petitioner must establish reasonable cause in order to
prevail as to the portion of the addition to tax for which he
bears the burden of proof. Petitioner has failed to present any
persuasive evidence establishing that his failure to file that
return timely was due to reasonable cause and was not due to
willful neglect. Respondent, in turn, also has failed to
introduce any evidence establishing to the contrary; i.e., that
petitioner’s failure to file timely was not due to reasonable
cause or was due to willful neglect. We sustain respondent’s
determination as to the addition to tax under section 6651(a)(1)
included in the notice of deficiency but hold for petitioner as
to the portion of that addition to tax asserted in the answer.
b. Section 6654
Section 6654 imposes an addition to tax on an underpayment
of estimated tax. This addition to tax is mandatory unless the
taxpayer establishes that one of the exceptions listed in section
6654(e) applies. Recklitis v. Commissioner, 91 T.C. 874, 913
(1988).
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The record establishes that petitioner failed to pay the
required amount of estimated tax for 1998. We conclude that
respondent has met his burden of production as to this issue.
Given that the record does not establish that any of the
referenced exceptions applies, we conclude that petitioner has
failed to meet his burden of proof and sustain respondent's
determination as to this issue. See Motley v. Commissioner, T.C.
Memo. 2001-257.
___________________________________
All arguments made by the parties and not discussed herein
have been rejected as meritless.
Decision will be
entered under Rule 155.