T.C. Summary Opinion 2004-32
UNITED STATES TAX COURT
HAROLD AND DOREEN SILK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16009-02S. Filed March 18, 2004.
Shawn A. Silk, for petitioners.
Frank N. Panza, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
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Respondent determined deficiencies in petitioners’ Federal
income taxes, additions to tax, and accuracy-related penalties as
follows:
Sec. Sec.
Year Deficiency 6651(a)(1) 6662(a)
1996 $12,707 $920.25 $2,541.40
1997 742 234.00 148.40
1999 5,222 --- 1,044.40
After concessions by the parties, the issue for decision by
the Court is whether petitioners properly elected, under section
172(b)(3), to waive the carryback of a net operating loss (NOL)
from 1995.
Background
Some of the facts have been stipulated, and they are so
found. At the time that the petition was filed, petitioners
resided in San Francisco, California.
During 1995, because of a downturn in the economy,
petitioners incurred significant financial losses with respect to
their real estate activities. Properties used by petitioners in
their real estate activities were subject to possible
foreclosure. Petitioners were also being sued by their financial
institution.
Using tax software, Harold Silk (hereinafter referred to as
petitioner) prepared what, at best, may be described as a 10-page
“draft income tax return” for the 1995 taxable year (the so-
called draft return). Petitioner allegedly mailed the so-called
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draft return, together with a letter dated April 4, 1996, to
respondent.
Petitioners no longer have a copy of the so-called draft
return. However, at trial, petitioners introduced a copy of the
April 4, 1996 letter that allegedly accompanied the so-called
draft return.
Petitioner’s April 4, 1996 letter stated, in part as
follows:
Our tax return for the tax year 1995 is being
filed using TurboTax software and the return is printed
using the program. The enclosed return is submitted,
although there appears to be a flaw in the program that
prevents us from representing operating losses for 1995
and working these losses into the calculations for
correctly determining our tax obligations. * * * But we
know we have sustained significant operating losses
during 1995 and are now attempting to accurately
ascertain their value and declare our intention to
carry forward those losses into future tax years. When
our data collection is complete, an amended return will
be filed to correctly adjust our return(s).
Respondent did not receive either the so-called draft return
or the April 4, 1996 letter.
On or about April 3, 1996, petitioners filed an application
for an extension of time to file their 1995 return. The
application was consistent with petitioners’ actions taken in
prior taxable years. Respondent received petitioners’
application for extension.
At trial, petitioners introduced a “Receipt for Certified
Mail” (the postal receipt), indicating postage paid of 32 cents
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and bearing a U.S. Postal Service stamp dated April 3, 1996.
On March 27, 1997, petitioners jointly filed a Form 1040,
U.S. Individual Income Tax Return, for the 1995 taxable year (the
1995 return). The 1995 return did not purport to be an amended
tax return. On an attached Form 8582, Passive Activity Loss
Limitations, petitioners reported a total passive activity loss
of $159,683. On line 17 of the 1995 return, petitioners claimed
a rental real estate loss in the amount of $25,000. Petitioners
did not submit with the 1995 return an election to forgo the
carryback period with respect to an NOL, and nothing on the 1995
return itself suggested that petitioners intended to make such an
election.
Petitioners jointly filed a Form 1040 for the 1996 taxable
year (the 1996 return) on April 13, 2001. On line 21 of the 1996
return, petitioners claimed a loss in the amount of $59,032. A
statement attached to the 1996 return indicated that such loss
was an NOL “from a prior year”.
In the notice of deficiency, respondent disallowed the
$59,032 NOL carryover claimed by petitioners on their 1996
return. Respondent determined that petitioners had not elected
under section 172(b)(3) to waive the carryback of the 1995 NOL.
Petitioners contend that the April 4, 1996 letter allegedly
mailed to respondent with the so-called draft return was a valid
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election to waive the carryback period.2
Discussion
In general, the determinations of the Commissioner in a
notice of deficiency are presumed correct, and the burden is on
the taxpayer to show that the determinations are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).3
Section 172(a) permits taxpayers to carry NOL deductions
from one taxable year to another. In general, taxpayers who
sustain NOLs must first carry such losses back 3 years, and, if
unabsorbed in the earlier years, then the losses may be carried
forward for as long as 15 years.4 Sec. 172(b)(1)(A) and (2).
However, taxpayers may elect to waive or relinquish the 3-year
carryback period and only carry forward their NOLs. Sec.
172(b)(3). To make this election, the statute expressly requires
taxpayers to file an election relinquishing the carryback period
by the return due date, including any extensions of time, for the
2
Petitioners concede that if no valid sec. 172(b)(3)
election was made, then their gross income for the 3 taxable
years prior to 1995 would absorb the entire amount of the 1995
NOL.
3
Sec. 7491(a) does not serve to place the burden of proof
on respondent because petitioners failed to introduce credible
evidence of an election to waive the carryback of the 1995 NOL.
See Higbee v. Commissioner, 116 T.C. 438 (2001).
4
For purposes of this case involving a 1995 net operating
loss and a 1996 taxable year, we consider sec. 172(b)(1)(A) prior
to its amendment by the Taxpayer Relief Act of 1997, Pub. L. 105-
34, sec. 1082(a)(1) and (2), 111 Stat. 950.
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taxable year in which the NOL was incurred. Id.; see sec.
301.9100-12T(b), Temporary Proced. & Admin. Regs., 57 Fed. Reg.
43896 (Sept. 23, 1992). Once made, the election is irrevocable.
Id. The statute directs the Secretary to prescribe the manner in
which taxpayers shall make the election. Id.
The Secretary promulgated the following regulation
concerning a taxpayer’s election to waive NOL carrybacks:
[The election] shall be made by a statement attached to
the return (or amended return) for the taxable year.
The statement required when making an election pursuant
to this section shall indicate the section under which
the election is being made and shall set forth
information to identify the election, the period for
which it applies, and the taxpayer’s basis or
entitlement for making the election. [Sec. 301.9100-
12T(d), Temporary Proced. & Admin. Regs., 57 Fed. Reg.
43896 (Sept. 23, 1992) (redesignating sec. 7.0,
Temporary Income Tax Regs., 42 Fed. Reg. 1470 (Jan. 7,
1977)).]
The Court analyzed these statutory and regulatory
requirements under section 172 in Young v. Commissioner, 83 T.C.
831 (1984), affd. 783 F.2d 1201 (5th Cir. 1986). In Young, the
Court held that to be in substantial compliance with the election
requirements, “as an absolute minimum, the taxpayer must exhibit
in some manner, within the time prescribed by the statute, his
unequivocal agreement to accept both the benefits and burdens of
the tax treatment afforded by that section.” Id. at 839.
Petitioners contend that the postal receipt is evidence that
the so-called draft return and the April 4, 1996 letter were
mailed to respondent and, thus, the election requirements under
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section 172(b)(3) were satisfied. We are not persuaded that the
postal receipt demonstrates that the so-called draft return and
the April 4, 1996 letter were mailed to, and received by,
respondent. First, the postal receipt bears a date earlier than
the date of the April 4, 1996 letter. Second, the postal receipt
indicates postage paid of 32 cents. The postal rate in effect
for 1996 was 32 cents for the first ounce and 23 cents for each
additional ounce. Thus, the postal receipt does not reflect the
proper amount of postage necessary to mail the 10-page so-called
draft return and the April 4, 1996 letter. Third, petitioner
admitted that such letter may have been mailed to respondent with
the so-called draft return, with the 1995 extension application,
or independently of either document. Finally, respondent did not
receive either the so-called draft return or the April 4, 1996
letter. Therefore, we cannot accept petitioners’ claim that the
postal receipt demonstrates that the so-called draft return and
the April 4, 1996 letter were ever mailed to, or received by,
respondent.5
On March 27, 1997, petitioners filed the 1995 return.
However, petitioners did not attach any statement to the 1995
5
We note that the postal receipt does support the fact
that petitioners mailed to respondent their 1995 extension
application on Apr. 3, 1996. Even if we were to assume arguendo
that the letter was attached to the extension application, this
would still be insufficient to satisfy the statutory and
regulatory requirements under sec. 172(b)(3).
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return that indicated their intention to make an election under
section 172(b)(3) to waive the NOL carryback period. Likewise,
nothing on the 1995 return itself suggested that petitioners
intended to make such an election.
Accordingly, we hold that petitioners did not satisfy the
requirements under section 172(b)(3) for making a valid election
to waive the NOL carryback period. We therefore sustain
respondent’s disallowance of the NOL carryover claimed by
petitioners on their 1996 return.
Reviewed and adopted as the report of the Small Tax
Division.
To reflect the foregoing,
Decision will be
entered under Rule 155.