T.C. Memo. 2005-140
UNITED STATES TAX COURT
RANDON J. SCHOLET, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4879-03. Filed June 15, 2005.
R. Lawrence Heinkel, for petitioner.
Michael D. Zima, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a deficiency of
$463,386 in petitioner’s Federal income tax for 1998 and
additions to tax under section 6651(a)(1) for failure to timely
file of $112,138 and under section 6654(a) for failure to pay
estimated tax of $20,449.58.
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After concessions, the issues for decision are:
1. Whether the notice of deficiency was arbitrary. We
hold that it was not.
2. Whether petitioner’s capital gain from the sale of
stock in 1998 was $408,092.98. We hold that it was.
3. Whether petitioner may carry forward to 1998 a capital
loss from 1997. We hold that he may not.
4. Whether petitioner may deduct charitable contributions
of $2,141 for 1998. We hold that he may not.
5. Whether petitioner’s filing status is married filing
separately for 1998. We hold that it is.
6. Whether petitioner is liable for additions to tax for
failure to timely file his 1998 income tax return under section
6651(a)(1)1 and for failure to pay estimated tax under section
6654(a) for 1998. We hold that he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner
Petitioner lived in Clearwater, Florida, when he filed his
petition. Petitioner was married throughout 1998. Petitioner
has a bachelor’s degree in computer science and mathematics. In
1998, petitioner earned wages from IBM of $99,739. Petitioner
1
Section references are to the Internal Revenue Code in
effect for the year in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
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took an income tax return preparation course at H & R Block at a
time not specified in the record.
B. Petitioner’s Stock Sales in 1998
1. Petitioner’s IBM Stock Transactions
a. Purchases of IBM Stock
Petitioner participated in the IBM Employees Stock Purchase
Plan (ESPP) from July 13, 1979, through August 31, 1995. He
typically bought shares of IBM stock each quarter at a price of
10-15 percent below the market price and withdrew the stock
certificates from the plan. Petitioner’s bases in certain shares
of IBM stock were as follows:
Stock certificate No. No. of shares Cost basis
479321 4 $214.22
711752 1 54.82
184316 1 71.09
331109 3 291.14
492586 3 290.87
687965 14 1,577.33
246717 11 1,421.24
674021 23 2,622.38
41127 38 4,605.45
370058 7 891.63
695343 50 4,939.29
529572 57 5,340.54
895652 65 5,975.89
431763 46 4,220.50
431764 1 91.75
Total 324 32,608.14
Petitioner also acquired 335 shares of IBM stock under an
IBM Investor Services Program (the program). Petitioner made
quarterly purchases of IBM stock under that program. From March
13, 1980, to January 27, 1992, he bought 46.541 shares of IBM
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stock through the program for a total cost of $5,130.94. On
January 27, 1992, petitioner sold .541 shares of IBM stock held
through the program.
On May 27, 1997, the IBM stock in the program split, and 46
shares of petitioner’s IBM stock became 325 shares. Petitioner
bought an additional 10.895 shares through the program for a
total cost of $1,090.43. After selling .895 shares, petitioner
had 335 shares of IBM stock (represented by stock certificate No.
156716) for which he had a basis of $6,133.78 ($6,221.37 paid
minus $87.59 basis in the .541 and .895 shares sold).
Petitioner maintained an investment account at Charles
Schwab & Co. (Schwab account). On August 1, 1997, petitioner
held 110 shares of IBM stock in that account. Petitioner’s basis
in those shares is not in the record.
Petitioner bought IBM stock in 1997 and 1998 as follows:
Date No. of shares Total price
1
9/11/97 .2275 $22.00
10/28/97 100 8,944.00
1
12/10/97 .2145 22.05
1/12/98 100 9,831.50
1/12/98 100 9,844.00
2/xx/98 100 10,229.95
1
3/11/98 .6311 62.09
1
6/11/98 1.1112 130.70
6/11/98 500 58,529.95
6/16/98 500 55,967.45
1
9/11/98 1.6355 204.64
1
Petitioner acquired these shares with reinvested
dividends.
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The following shares of IBM stock were transferred to
petitioner’s Schwab account:
Date No. of shares
4/9/98 324
4/17/98 133
4/17/98 26
5/18/98 335
Petitioner’s 324 shares of IBM stock transferred to his
Schwab account on April 9, 1998, were purchased through the ESPP.
His basis in those 324 shares was $32,608.14. The record does
not indicate petitioner’s basis in the 159 shares (133 shares +
26 shares) of IBM stock transferred to his Schwab account on
April 17, 1998. Petitioner’s 335 shares of IBM stock received by
his Schwab account on May l8, 1998, were those he had acquired
under the IBM investors program and for which he had a basis of
$6,133.78.
b. Sales of IBM Stock
Petitioner sold shares of IBM stock held in his Schwab
account in 1997 and 1998 as follows:
Date No. of shares Proceeds
11/4/97 100 $10,124.41
4/21/98 300 34,468.90
7/21/98 1,000 128,340.77
9/22/98 300 38,781.25
10/12/98 600 78,042.44
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2. Petitioner’s Merck Stock Transactions
a. Purchases of Merck Stock
On August 1, 1997, petitioner held 1,276.4571 shares of
Merck stock in his Schwab account. The record contains no
information from which to compute petitioner’s basis in that
stock. Petitioner bought additional shares of Merck stock in
1997 and 1998 as follows:
Date No. of shares Total price
8/15/97 50 $4,701.88
1
10/2/97 5.9803 596.91
10/31/97 100 8,244.00
1
1/5/98 6.0173 644.60
2/xx/98 100 12,911.20
2/26/98 100 12,679.95
3/6/98 80 9,979.75
1
4/2/98 5.305 692.30
4/16/98 300 36,329.95
4/27/98 500 57,467.45
6/16/98 500 62,029.95
1
7/2/98 14.271 1,900.69
7/22/98 300 38,279.95
7/23/98 300 37,229.95
8/4/98 400 48,029.95
1
10/2/98 5.7624 711.20
1
Petitioner acquired these shares with reinvested
dividends.
On April 9, 1998, 1,800 shares of Merck stock were
transferred to petitioner’s Schwab account. Petitioner’s basis
in that stock is not in the record.
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b. Sales of Merck Stock
On January 20, 1998, petitioner sold 100 shares of Merck
stock for $110.625 per share. His net proceeds were $11,032.18.
These shares were part of the 1,276.4571 shares he held on August
1, 1997, for which the record contains no evidence of his basis.
After the sale, petitioner had 1,176.4571 shares of Merck stock
with a basis not established in the record and a total of
1,338.4547 shares of Merck stock.
Petitioner sold other shares of Merck stock in 1998 as
follows:
Date No. of shares Proceeds
6/10/98 800 $100,766.69
7/1/98 2,000 261,931.26
8/6/98 175 21,263.97
8/7/98 655 80,400.48
8/12/98 391 48,080.65
8/17/98 400 51,968.31
9/15/98 500 67,780.28
10/12/98 600 79,317.40
3. Other Sales of Stock
Petitioner received the following amounts from the sale of
stocks or bonds in 1998: $35 from the Vanguard Group, Inc.
(Vanguard); $104 from the First Chicago Trust Co. of New York
(First Chicago); $1,099,313 from Schwab; and $1,074 from Schwab
(separate from the amount described above).
Petitioner had the following amounts of capital gains on
sales of certain stocks in 1998:
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Stock Amount realized
Ascend Communications, Inc. $2,020.96
Apple Computer Co. 1,000.93
Medical Manager Corp. 799.16
Excel Communications 916.69
Vitesse Semiconductor 2,439.70
Petitioner had capital losses in 1998 of $23,990.08 on the
sale of Ucarb International, Inc. stock, and of $60,577.93 on the
sale of Boston Chicken, Inc. stock.
Petitioner received cash of $32.15 in lieu of stock in
Cisco, Inc., in 1998.
Petitioner had net capital losses of $77,358.42 in 1998 from
sales or other disposition of stocks other than IBM and Merck.
He had net capital gain of $408,092.98 in 1998.
C. Petitioner’s Dividends and Interest in 1998
Petitioner had dividends of $6,632 and interest of $149 in
1998.
D. Petitioner’s Failure To File a 1998 Tax Return
Petitioner filed income tax returns for 1979 through 1997.
He claimed a $15,547 net operating loss carryover on Schedule D,
Capital Gains and Losses, attached to his 1997 return, but he did
not state from which year or years he was carrying the loss. He
did not file an income tax return for 1998.
On April 15, 1999, petitioner mailed a letter to the
Internal Revenue Service (IRS), stating that he and his wife were
seeking legal advice as to whether they were required to file a
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return for 1998. On May 25, 1999, petitioner wrote to the IRS,
stating that he and his wife “have chosen to follow the
instructions in your 1040 Booklet and file our annual response in
the form of a statement in accordance with the new Privacy Act
Notice for 1998.” They stated that they were not filing a tax
return for 1998 because: “We still sincerely believe that we are
not a person liable or required to file a 1040 U.S. Individual
Income Tax Return for 1998.”
Federal income tax of $14,833 was withheld from petitioner’s
wages in 1998. Petitioner paid home mortgage interest of
$9,342.20, real estate taxes of $4,168.74, and investment
interest of $25,582 in 1998.
In the notice of deficiency, respondent determined that
petitioner had capital gain of $1,100,526, consisting of $35 from
Vanguard, $104 from First Chicago, $1,099,313 from Schwab, and an
additional $1,074 from Schwab. Respondent determined that
petitioner’s gain on the sale of stocks was equal to the net sale
price of those stocks.
E. Posttrial Procedures
At trial, petitioner lacked substantiation of his bases in
some of his IBM and Merck stock. Respondent agreed to our
holding the record open for 90 days to receive a supplemental
stipulation from the parties relating to petitioner’s bases in
certain IBM and Merck stock, the amount of petitioner’s
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charitable contributions, and the capital loss carryforward
issue. The Court later granted both parties’ motions to hold the
record open. The record was held open 4 more weeks, during which
time the parties filed a supplemental stipulation of facts.
OPINION
A. Whether the Notice of Deficiency Was Arbitrary
Petitioner contends2 that the notice of deficiency was
arbitrary. We disagree. Respondent’s determination of the
amount of petitioner’s capital gain was based on the amounts of
petitioner’s proceeds from sales of capital assets in 1998 as
reported to respondent on Forms 1099-B, Proceeds From Broker and
Barter Exchange Transactions. Petitioner does not dispute those
amounts. Petitioner failed to file a tax return for 1998 and
thus failed to report the capital transactions at issue. It was
not arbitrary for respondent to determine a deficiency based on
sale prices under these circumstances.
2
At trial, we ordered the parties to file posttrial briefs.
Respondent complied with this order; petitioner did not. Under
these circumstances, we may default petitioner on all issues for
which he bears the burden of proof. See Stringer v.
Commissioner, 84 T.C. 693, 704-708 (1985), affd. without
published opinion 789 F.2d 917 (4th Cir. 1986); Furniss v.
Commissioner, T.C. Memo. 2001-137; McGee v. Commissioner, T.C.
Memo. 2000-308; Pace v. Commissioner, T.C. Memo. 2000-300;
Hartman v. Commissioner, T.C. Memo. 1999-176. However, we decide
this case on the record as it stands. Our understanding of
petitioner’s position is based on his petition, opening
statement, and trial testimony.
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Respondent’s determination is presumed to be correct, and
petitioner bears the burden of proof.3 See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
B. Whether Petitioner’s Capital Gain From the Sale of Stock in
1998 Was $408,092.98
Respondent determined that petitioner had capital gain of
$1,100,526 from the sale of stock in 1998, but now contends that
he had capital gain of $408,092.98. Respondent concedes that
petitioner had capital losses of $77,358.42 in 1998 and that he
had substantial bases in his IBM and Merck stock, instead of zero
as determined in the notice of deficiency. Petitioner did not
establish his basis in the first 10 shares of IBM stock he sold
in 1998 or in the 159 shares of IBM stock transferred to his
Schwab account on April 17, 1998. Similarly, petitioner did not
prove his basis in the 1,276.4571 shares of Merck stock held in
his Schwab account on August 1, 1997, or in the 1,800 shares of
Merck stock transferred to his Schwab account on April 9, 1998.
Petitioner does not dispute respondent’s calculation of gain on
his sales of IBM and Merck stock. Thus, we hold that petitioner
had capital gain of $408,092.98 in 1998.
3
Petitioner bears the burden of proof on the basis, capital
loss carryforward, charitable contributions, and filing status
issues. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). The burden of proof for a factual issue may shift to the
Commissioner under certain circumstances. Sec. 7491(a).
Petitioner does not contend that sec. 7491(a) applies in this
case.
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C. Whether Petitioner May Carry Forward a Capital Loss From
1997 to 1998
Petitioner contends that he may carry forward to 1998 a
$15,547 capital loss from 1997. We disagree.
Petitioner reported on his 1997 return that he had a $15,547
net operating loss carryover. He did not identify on the return
or testify about the year or years from which he was carrying
that loss. To carry forward or carry back net operating losses,
the taxpayer must prove the amount of the net operating loss
carryforward or carryback and that his or her gross income in
other years did not offset that loss. Sec. 172(c); Jones v.
Commissioner, 25 T.C. 1100, 1104 (1956), revd. and remanded on
other grounds 259 F.2d 300 (5th Cir. 1958). A tax return is not
evidence of the truth of the facts stated in it. Lawinger v.
Commissioner, 103 T.C. 428, 438 (1994); Wilkinson v.
Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,
62 T.C. 834, 837 (1974). Petitioner did not establish the amount
of his 1997 net operating loss or that his income in the
carryback years before 1997 did not fully offset any net
operating loss.
We conclude that petitioner may not carry forward a net
operating loss from 1997 to 1998.
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D. Whether Petitioner May Deduct Charitable Contributions for
1998
Petitioner contends that he may deduct charitable
contributions of $2,141 for 1998. More specifically, petitioner
testified that he made weekly donations of $20 to a church, that
his wife made similar weekly contributions, and that his son and
daughter each made weekly contributions of $1.
Respondent contends that he may not deduct any of those
amounts. We agree because petitioner has not substantiated the
contributions as required. See sec. 170(a)(1) (taxpayer must
verify claimed contribution under regulations prescribed by the
Secretary). The Court gave petitioner every opportunity at trial
to offer evidence of his contributions and held the record open
for 4 months to receive evidence, but he provided no evidence of
them. Petitioner did not identify the church to which
contributions were made. See id. Under Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930), we may estimate the amount
of a deductible expense if a taxpayer establishes that he or she
paid the expense but cannot substantiate the precise amount.
Petitioner’s uncorroborated testimony is the only evidence
supporting his claim. He did not give us an adequate basis to
estimate the amount of his contributions under Cohan. More than
half of the charitable contributions petitioner claims were
attributable to family members and thus are not deductible by
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petitioner. We conclude that petitioner may not deduct any of
these claimed contributions for 1998.
E. Whether Petitioner’s Filing Status Was Married Filing
Separately for 1998
Respondent determined petitioner’s filing status to be
married filing separately. Petitioner was married throughout
1998. He did not file a return for 1998, joint or otherwise. To
elect the benefit of the joint return rates, taxpayers must file
a joint return. Thompson v. Commissioner, 78 T.C. 558, 561
(1982). Thus, petitioner’s filing status for 1998 is married
filing separately. Sec. 1(d).
F. Whether Petitioner Is Liable for Additions to Tax
1. Burden of Production
In court proceedings arising in connection with examinations
beginning after July 22, 1998, section 7491(c) places on the
Commissioner the burden of producing evidence that it is
appropriate to impose the addition to tax under section
6651(a)(1). Petitioner did not file an income tax return for
1998, even though he had wages from IBM, interest and dividend
income, and capital gains from sales of stock in 1998. Federal
income tax of $14,833 was withheld from petitioner’s wages in
1998. However, petitioner made no payments of estimated tax
relating to the interest, dividends, and capital gain income he
received in 1998. Respondent has met the burden of production
under section 7491(c) as to the additions to tax under section
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6651(a) for failure to file and under section 6654 for failure to
pay estimated tax for 1998.
2. Failure To File Under Section 6651(a)(1)
A taxpayer is liable for an addition to tax of up to 25
percent for failure to file a Federal income tax return unless
the failure was due to reasonable cause and not willful neglect.
Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245
(1985).
Petitioner contends that the statement he and his wife
submitted to the IRS satisfies his obligation to file a return or
other statement under the Code. We disagree. Petitioner’s
statement was not made in accordance with the forms and
regulations prescribed by the Secretary as required by section
6011(a) and did not include the dollar amounts or any other
information needed to determine tax liability. See Beard v.
Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th
Cir. 1986).
Petitioner was well aware of his responsibility to file
returns as evidenced by his timely filing of returns for 1979
through 1997. His claim that the filing of an income tax return
is voluntary is frivolous. Petitioner wrote to the IRS stating
his belief that filing a return is voluntary and purporting to
give the IRS 30 days to refute his conclusion or he would proceed
accordingly. Petitioner’s claim that the IRS is collaterally
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estopped, by its failure to respond within 30 days to his letter,
from arguing that he is liable for income tax is also frivolous
and does not excuse his failure to file his 1998 return. We
conclude that petitioner is liable for the addition to tax under
section 6651(a) for failure to file for 1998.
3. Failure To Pay Estimated Tax Under Section 6654(a)
Respondent determined that petitioner is liable for the
addition to tax under section 6654(a) for failure to pay
estimated tax for 1998. We have jurisdiction to review this
determination because petitioner did not file a return for 1998.
Sec. 6665(b)(2); Meyer v. Commissioner, 97 T.C. 555, 562 (1991).
To be liable for the addition to tax under section 6654, a
taxpayer must have underpaid or failed to pay estimated tax for
the year in issue. Sec. 6654(a). A taxpayer is liable for the
addition to tax for failure to pay estimated tax unless he or she
meets one of the exceptions provided in section 6654(e), none of
which applies here.
Petitioner alleged in the petition that all of respondent’s
adjustments were wrong, but he offered no evidence and made no
argument directed specifically to his liability for the section
6654 addition to tax. We conclude that petitioner is liable for
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the addition to tax under section 6654 for failure to pay
estimated tax for 1998.
To reflect concessions and the foregoing,
Decision will be entered
under Rule 155.