T.C. Memo. 2005-160
UNITED STATES TAX COURT
ROBERT C. DAVIS, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19813-03. Filed June 29, 2005.
Robert C. Davis, Jr., pro se.
Jeffrey E. Gold, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following defi-
ciency in, and additions to, petitioner’s Federal income tax
(tax):
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Additions to Tax
Year Deficiency Sec. 6651(a)(1)1 Sec. 6651(a)(2) Sec. 6654(a)
2000 $103,811 $21,728.92 $12,071.62 $5,150.77
The issues remaining for decision are:
(1) Is petitioner entitled to deduct for 2000 a theft loss
under section 165? We hold that he is not.
(2) Is petitioner liable for 2000 for the addition to tax
under section 6651(a)(1)? We hold that he is.
(3) Is petitioner liable for 2000 for the addition to tax
under section 6654(a)? We hold that he is to the extent stated
herein.
FINDINGS OF FACT
Most of the facts have been stipulated by the parties and
are so found.
At the time petitioner filed the petition in this case, he
resided in Annapolis, Maryland.
On May 24, 2000, petitioner and June Davis (Ms. Davis), his
wife, executed a contract (custom house contract) with Mona
Builders & Developers, Inc., (Mona Builders). That contract
provided in pertinent part:
ARTICLE ONE -- THE WORK
MONA BUILDERS & DEVELOPERS, INC. [Mona Builders] shall
perform all work required by the Contract Documents for
1
All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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the complete construction of the home described in the
plans attached hereto and to be built on Lot #30 Perder
Lane, South River Colony, Anne Arundel County, Mary-
land. The lot is not part of this contract.
* * * * * * *
ARTICLE FOUR -- CONTRACT SUM
The Owner [petitioner and Ms. Davis] shall pay to MONA
BUILDERS & DEVELOPERS, INC. for the performance of the
work, subject to additions and deductions by change
order as provided in the General Conditions, in current
funds, the sum of $935,000.00 (Nine Hundred Thirty Five
Thousand Dollars).
ARTICLE FIVE -- PAYMENT
The Contract sum will be paid as follows:
1. Upon ratification of Contract. $ 15,000.00
2. Upon installation of foundation, 1st 159,240.00
floor joists and decking installed.
3. Upon installation of exterior walls, 184,000.00
roof sheathed and interior partitions
framed.
4. Upon rough-ins of plumbing, mechani- 230,000.00
cal and electric, roof shingles in-
stalled and installation of windows
and doors.
5. Upon drywall being finished, exterior 230,000.00
walls completed, and house trimmed
out.
6. Upon plumbing, electrical, mechanical 116,760.00
fixtures installed; kitchen cabinets
installed; flooring installed; paint-
ing completed and approval by Anne
Arundel County inspector.
TOTAL $ 935,000.00
MONA BUILDERS & DEVELOPERS, INC. will adhere to the
lending institution’s draw schedule; MONA BUILDERS &
DEVELOPERS, INC. will be a named party on each draw
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check. The above is our standard draw schedule. We
would prefer 8 to 10 draw payments due to the amount of
the contract.
ARTICLE SIX -- CHANGE ORDERS
1) Every custom home has a few change orders. As the
project evolves, you will probably want to make
some changes. That’s one of the great opportuni-
ties you have by custom building. The Project
Manager is available to discuss any changes you
consider. On average, change orders amount to 4-
9% of the Proposal Price. We suggest you plan
accordingly.
* * * * * * *
6) Please note, a fee of 15% for overhead and profit
will be added to the actual and/or estimated cost
for all change orders. The fee is waived for
change orders that result in a credit. [Handwrit-
ten addition.] Upon substantial completion of the
Contract, all amounts due to Owner as a credit
shall be increased by 10% for reimbursement to
Owner of overhead and profit previously included
in the contract sum.
* * * * * * *
ARTICLE ELEVEN -- MONA BUILDERS & DEVELOPERS, INC.
11.1 MONA BUILDERS & DEVELOPERS, INC. shall supervise
and direct the Work, using best skill and attention.
MONA BUILDERS & DEVELOPERS, INC., shall be solely
responsible for all construction means, methods, tech-
niques, sequences and procedures for coordinating all
portions of the Work under the Contract.
* * * * * * *
11.3 MONA BUILDERS & DEVELOPERS, INC. shall at all
times enforce strict discipline and good order among
employees, and shall not employ on the Work any unfit
person or anyone not skilled in the task assigned to
him.
* * * * * * *
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ARTICLE SEVENTEEN -- PAYMENTS
17.1 Payments shall be made as provided in Article five
of this agreement.
17.2 Payments may be withheld on account of (1) defec-
tive Work not remedied, (2) claims filed, (3) failure
of MONA BUILDERS & DEVELOPERS, INC. to make payments
properly to Subcontractors for labor, materials, or
equipment or (4) damage to another contractor.
17.3 The making of final payment shall constitute a
waiver of all claims by the Owner except these arising
from (1) unsettled liens, (2) faulty or defective Work
discovered after Substantial Completion, (3) failure of
the Work to comply with the requirements of the Con-
tract Documents and code or (4) terms of any special
guarantees required by the Contract Documents. The
acceptance of final payment shall constitute a waiver
of all claims by MONA BUILDERS & DEVELOPERS, INC.
except these previously made in writing and still
unsettled.
* * * * * * *
ARTICLE NINETEEN -- MONA BUILDERS & DEVELOPERS, INC.
LIABILITY INSURANCE
MONA BUILDERS & DEVELOPERS, INC. shall purchase and
maintain such insurance as will protect from claims
under workman’s compensation acts and other employee
benefit acts, from claims for damages because of bodily
injury, including death, and from claims for damages to
property which may arise out of or result from MONA
BUILDERS & DEVELOPERS, INC. operations under this
Contract.
* * * * * * *
ARTICLE TWENTY TWO -- CHANGES IN THE CONTRACT
22.1 The Purchaser [petitioner and Ms. Davis] without
invalidating the Contract may order Changes in the Work
consisting of additions, deletions, or modifications,
the Contract Sum and the Contract Time being adjusted
accordingly. All such Changes in the Work shall be
authorized by written Change Order signed by the Pur-
chaser and Builder.
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22.2 The Contract Sum and Contract Time may be changed
only by Change Order.
22.3 The cost or credit to the Purchaser from a Change
in the Work shall be determined by mutual agreement.
ARTICLE TWENTY THREE -- CORRECTION OF WORK
MONA BUILDERS & DEVELOPERS, INC. shall correct any Work
that fails to conform to the requirements of the Con-
tract Documents where such failure to conform appears
during the progress of the Work, and shall remedy any
defects due to faulty materials, equipment or workman-
ship which appear within a period of one year from the
Date of Substantial Completion of the Contract or
within such longer period of time as may be prescribed
by law or by the terms of any applicable special guar-
antee required by the Contract Documents. The provi-
sions of the Article Twenty Three apply to Work done by
Subcontractors as well as to Work done by direct em-
ployees of MONA BUILDERS & DEVELOPERS, INC.
* * * * * * *
ARTICLE TWENTY FIVE -- TERMINATION BY THE PURCHASER
If MONA BUILDERS & DEVELOPERS, INC. defaults or ne-
glects to carry out the Work in accordance with the
Contract Documents or fails to perform any major provi-
sions of the Contract, the Purchaser may, after seven
days written notice to MONA BUILDERS & DEVELOPERS,
INC., and without prejudice to any other remedy he may
have, make good such deficiencies and may deduct the
cost thereof from the payment then or thereafter due
MONA BUILDERS & DEVELOPERS, INC. or, at his option, may
terminate the Contract.
At a time not disclosed by the record after petitioner and
Ms. Davis executed the custom house contract, Mona Builders began
construction of the house (custom house) described in that
contract. Mona Builders obtained certain insurance policies from
State Auto Property & Casualty Insurance Company (State Auto) in
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order to maintain the insurance required by the custom house
contract.
The workmanship in constructing the custom house was gener-
ally poor. In addition, during construction of the custom house
Mona Builders (1) used in certain structural components of that
house materials that were inferior to those required by the
custom house contract and (2) failed to install certain other
required structural components. (We shall refer to the inferior
and missing structural components as the structural defects of
the custom house.) As a result of the structural defects of the
custom house, the custom house was structurally unsound.
On or about August 29, 2001, petitioner and Ms. Davis moved
into the custom house. Thereafter, at the request of petitioner
and Ms. Davis, Mona Builders continued to perform services in
connection with finishing and repairing the custom house. On or
about September 25, 2001, Mona Builders stopped work on the
custom house.
Sometime after petitioner and Ms. Davis moved into the
custom house, petitioner discovered the structural defects of the
custom house.
In October 2001, Mona Builders commenced litigation in the
Circuit Court for Anne Arundel County, Maryland (Maryland Circuit
Court) against petitioner and Ms. Davis with respect to the
custom house (custom house litigation) in which it sought payment
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from them of $23,065. In December 2001, petitioner and Ms. Davis
filed a counterclaim (custom house litigation counterclaim) in
the custom house litigation in which petitioner and Ms. Davis
alleged, inter alia, that Mona Builders violated the Maryland
Custom Home Protection Act and breached the custom house con-
tract.
On June 7, 2002, petitioner sent a letter (June 7, 2002
letter) by certified mail, return receipt requested, to State
Auto. That letter stated in pertinent part:
We are involved in litigation with Mona Builders
and Developers, Inc. (Mona), the company that built our
house. A copy of our Amended Counter-Complaint is
attached. As part of that litigation, we recently
discovered serious structural problems with our house.
We have been told by our experts that Mona failed to
build our house in compliance with the architectural
drawings that were part of our agreement with them. At
present we do not know the full extent of the problems,
nor do we have cost estimates for necessary remedial
action. * * *
We understand that Mona purchased from the State
Auto Insurance Companies a commercial general liability
policy, and an excess liability umbrella policy, to
cover the construction of our house. The number of
those policies is PBP1005193. We do not know whether
Mona has notified the State Auto Ins. Companies of the
pending litigation and our claims against Mona.
(We shall refer to petitioner’s claim to any of the proceeds from
the insurance policies that State Auto issued to Mona Builders in
connection with the construction of the custom house as peti-
tioner’s insurance claim.)
On November 8, 2002, petitioner and Ms. Davis sent a letter
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(November 8, 2002 letter) to the Maryland Attorney General with
respect to Mona Builders and the custom house. That letter
stated in pertinent part:
On May 24, 2000, we entered into a Contract with
Mona Builders and Developers, Inc. (Mona), for the
construction of a custom home on a lot we had previ-
ously purchased. The initial Contract price was
$935,000. With change orders and upgrades, we paid
more than $1,000,000 for the construction of our resi-
dence.
We are currently in the midst of a civil suit
against Mona. However, in spite of the disclosure
requirements of the Custom Home Protection Act (CHPA),
and tens of thousands of dollars expended in formal
discovery efforts, Mona has yet to disclose the names
and addresses of many of the suppliers and subcontrac-
tors who worked on our home. * * *
* * * * * * *
We have been in our house for a little over one
year, and are continuing to discover that Mona deviated
very significantly and very seriously from the archi-
tectural plans we provided, and which were incorporated
into our Contract. The house we paid Mona to build was
not the house they constructed. Mona’s misrepresenta-
tions, acts of malfeasance, and deliberate acts of
fraud in building our home were, and continue to be,
egregious.
In summary, Mona deliberately and deceptively,
without our knowledge or approval, failed to comply
with the plans and specifications agreed to under our
Contract. As a result of Mona’s deliberate failure to
adhere to our construction plans, our house is struc-
turally unsound and unsafe. * * *
* * * * * * *
Mona’s acts of fraud go beyond the substitutions
and omissions in the physical construction of our home.
Information obtained through our discovery efforts
suggest [sic] that Mona may have fraudulently altered a
subcontractor’s invoice, and may have fraudulently
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overcharged us for materials and supplies. * * *
On February 3, 2003, State Auto commenced litigation in the
Maryland Circuit Court against petitioner and Mona Builders
(insurance litigation) in which it sought a declaratory judgment
that petitioner’s insurance claim was not covered by the insur-
ance policies that State Auto had issued to Mona Builders. At a
time not disclosed by the record after February 3, 2003, peti-
tioner and Ms. Davis filed a second amended counterclaim2 (insur-
ance litigation counterclaim) in the insurance litigation in
which they alleged, inter alia, that State Auto intentionally and
negligently misrepresented the terms of certain insurance poli-
cies that State Auto had issued to Mona Builders with respect to
the construction of the custom house. Petitioner and Ms. Davis
alleged in the insurance litigation counterclaim:
33. After taking occupancy of the residence [custom
house] in late August 2001, Davis [petitioner and
Ms. Davis] discovered numerous items of defective
or deficient work performed by MBD [Mona Builders]
that resulted in damages throughout the residence
to other parts of the residence. * * *
Petitioner did not file a tax return (return) for taxable
year 2000. Nor did he file a return for any of the taxable years
1995, 1996, 1997, 1998, and 1999.3 On March 20, 2003, respondent
2
The record does not disclose any information about any
counterclaim that petitioner and Ms. Davis filed in the insurance
litigation before they filed the second amended counterclaim.
3
Ms. Davis did not file a return for any of the taxable
(continued...)
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prepared a substitute for return with respect to petitioner’s
taxable year 2000.
On April 11, 2003, petitioner filed a document entitled
“Application for Statement of Charges” (April 11, 2003 applica-
tion) with the District Court of Maryland for Anne Arundel
County. In that application, petitioner declared under oath:
Between July 25, 2001 and Aug 8, 2001, Garrett
Mona, Patrick Mona and Nick Mona intentionally misrep-
resented their intent to complete work on our [peti-
tioner’s and Ms. Davis’] house and repair defective
work that existed at that time. As a result of their
intentional misrepresentations, we paid an additional
$120,543.00 to them. We discovered and confirmed the
extent of the structural defects between July & Oct
2002.
On April 22, 2003, petitioner received a copy of a letter
from the Department of Inspection and Permits, Anne Arundel
County, in which it voided the certificate of occupancy that it
had issued with respect to the custom house.
On May 1, 2003, petitioner and Mona Builders entered into a
settlement agreement (May 1, 2003 settlement agreement) with
respect to the custom house litigation. As part of that settle-
ment agreement, Mona Builders agreed to purchase the custom house
from petitioner and Ms. Davis for $1,500,000. On May 29, 2003,
pursuant to the May 1, 2003 settlement agreement, petitioner and
Ms. Davis transferred the custom house to Mona Builders in
3
(...continued)
years 1995, 1996, 1998, 1999, and 2000.
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exchange for $1,500,000.
On August 20, 2003, respondent issued to petitioner a notice
of deficiency (notice) with respect to petitioner’s taxable year
2000. In that notice, respondent determined, inter alia, that
petitioner is liable for the taxable year at issue for the
respective additions to tax under sections 6651(a)(1) and
6654(a).
On October 26, 2004, respondent received Form 1040, U.S.
Individual Income Tax Return, with respect to petitioner’s
taxable year 2000 (petitioner’s Form 1040 for 2000), which
respondent did not process as a return. In that form, peti-
tioner, inter alia, claimed a $256,975 deduction under section
165 for a theft loss with respect to the custom house.
On November 1, 2004, a jury awarded petitioner and Ms. Davis
$524,727 in compensatory damages (insurance litigation verdict)
with respect to the insurance litigation counterclaim. The jury
found, inter alia, that the property damages that petitioner and
Ms. Davis sustained were not fully satisfied by the $1,500,000
paid to them pursuant to the May 1, 2003 settlement agreement.
As of the time of the trial in this case, the Maryland Circuit
Court was considering in the insurance litigation numerous
posttrial motions and had not reduced the insurance litigation
verdict to final judgment.
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OPINION
We first address section 7491(a). The parties agree that
the examination in this case commenced after the effective date
of section 7491. The parties disagree, however, over whether the
burden of proof shifts to respondent under that section. Section
7491(a)(1) may shift the burden of proof to the Commissioner of
Internal Revenue with respect to any factual issue relevant to
determining the tax liability of a taxpayer provided that the
taxpayer has introduced credible evidence with respect to any
such issue and has complied with the applicable requirements of
section 7491(a)(2).
As we understand petitioner’s position under section
7491(a), he contends that he introduced credible evidence con-
cerning the factual issues presented under section 165 (viz, when
he discovered the alleged theft loss with respect to the custom
house (alleged custom house theft loss) for which he is claiming
a deduction for taxable year 2000; the amount of the alleged
custom house theft loss; and the absence at the end of 2000 of a
reasonable prospect of recovery of the alleged custom house theft
loss) and that he complied with the applicable requirements of
section 7491(a)(2).4 Therefore, according to petitioner, the
4
Petitioner also contends that he introduced credible evi-
dence concerning the factual issue presented under sec.
6651(a)(1) (viz, whether he filed a return for taxable year 2000)
and that the burden of proof shifts to respondent under sec.
(continued...)
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burden of proof with respect to such factual issues shifts to
respondent under section 7491(a)(1).
Respondent counters that petitioner has not introduced
credible evidence concerning the factual issues presented under
section 165 and that he has not complied with the applicable
requirements of section 7491(a)(2).
Credible evidence is evidence which, after critical analy-
sis, the Court would find sufficient upon which to base a deci-
sion on the issue if no contrary evidence were submitted. Higbee
v. Commissioner, 116 T.C. 438, 442 (2001) (quoting H. Conf. Rept.
105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995). Evidence
is not credible if the Court is not convinced that such evidence
is worthy of belief. Id.
Petitioner relies on his testimony with respect to the
factual issues presented under section 165. As discussed below,
we found petitioner’s testimony regarding the time of his discov-
4
(...continued)
7491(a) with respect to the addition to tax under that section.
Petitioner does not contend that he introduced credible evidence
concerning the factual issues presented under sec. 6654(a) and
that the burden of proof shifts to respondent under sec. 7491(a)
with respect to the addition to tax under that section. Even if
petitioner were to advance such contentions with respect to sec.
6654(a), we would reject them, just as we reject petitioner’s
contention that the burden of proof with respect to the factual
issue presented under sec. 6651(a)(1) shifts to respondent under
sec. 7491(a). That is because sec. 7491(a) does not apply to
additions to tax and penalties under subtitle F of the Internal
Revenue Code. Higbee v. Commissioner, 116 T.C. 438, 447 n.6
(2001).
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ery of the alleged custom house theft loss, the amount of the
alleged custom house theft loss, and the absence at the end of
2000 of a reasonable prospect of recovery of the alleged custom
house theft loss to be questionable, inconsistent with certain
other evidence, conclusory, vague, and/or general. We shall not
rely on such testimony to establish the facts with respect to
such matters. On the record before us, we find that petitioner
did not introduce credible evidence with respect to the factual
issues presented under section 165. Having found that petitioner
did not introduce credible evidence with respect to such factual
issues, we need not resolve the dispute between the parties over
whether petitioner has complied with the applicable requirements
of section 7491(a)(2). On the record before us, we find that the
burden of proof does not shift to respondent under section
7491(a)(1) with respect to any factual issues presented under
section 165.
We turn next to whether petitioner is entitled to deduct
under section 165 for taxable year 2000 the alleged custom house
theft loss. Section 165(a) allows a deduction for any loss
sustained during a taxable year and not compensated for by
insurance or otherwise. Section 165(c)(3) limits the deduction
allowed by section 165(a) in the case of an individual to a loss
that arises from, inter alia, theft. The amount of a loss that a
taxpayer is entitled to deduct under section 165 is the lesser of
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(1) the difference between the fair market value of the property
before the loss and the fair market value of the property after
the loss, the latter value in the case of loss by theft being
zero, or (2) the adjusted basis provided in section 1011 for
determining the loss from the sale or other disposition of the
property which was the subject of the loss. Sec. 165(b); secs.
1.165-7(b)(1), 1.165-8(c), Income Tax Regs. The basis for
determining the amount of the deduction for any loss is the
adjusted basis provided in section 1011 for determining the loss
from the sale or other disposition of the property which was the
subject of the loss. Sec. 165(b). With respect to a claimed
theft loss, such loss is sustained during the taxable year in
which a taxpayer discovers it. Sec. 165(e). Moreover, as we
concluded in Viehweg v. Commissioner, 90 T.C. 1248, 1255-1256
(1988):
If in the year of the discovery of the loss there
exists a claim for reimbursement with respect to which
there is a reasonable prospect of recovery, then there
is no closed and completed transaction fixed by identi-
fiable events and thus no deductible loss. * * *
A reasonable prospect of recovery exists when the taxpayer has a
bona fide claim for recoupment and there is a substantial possi-
bility that such claim will be decided favorably for the tax-
payer. Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795, 811
(1974), affd. 521 F.2d 786 (4th Cir. 1975). Whether a reasonable
prospect of recovery exists is determined as of the end of the
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taxable year for which the deduction is claimed. Id.
Petitioner bears the burden of proving that the alleged
custom house theft loss occurred and that the requirements of
section 165 have been met. Allen v. Commissioner, 16 T.C. 163,
166-167 (1951). In order to carry his burden, petitioner must
establish, inter alia, the existence of a theft within the
meaning of section 165 and the amount of the claimed theft loss.
See Elliott v. Commissioner, 40 T.C. 304, 311 (1963). Whether
certain actions constitute theft for purposes of section 165
depends on the law defining the crime of theft in the jurisdic-
tion where the alleged theft occurred. Monteleone v. Commis-
sioner, 34 T.C. 688, 692 (1960).
It is petitioner’s position that he is entitled to a deduc-
tion under section 165 for taxable year 2000 with respect to the
alleged custom house theft loss in an unspecified amount in
excess of the $256,975 deduction that he claimed in petitioner’s
Form 1040 for 2000. In support of that position, petitioner
argues that (1) Mona Builders’ actions with respect to the custom
house constituted theft under applicable Maryland law;
(2) petitioner discovered the alleged custom house theft loss in
October 2000; (3) the amount of the alleged custom house theft
loss exceeds by an unspecified amount the $256,975 theft loss
that petitioner claimed as a deduction in petitioner’s Form 1040
for 2000; and (4) petitioner did not have at the end of 2000 a
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reasonable prospect of recovery of the alleged custom house theft
loss.
It is respondent’s position that petitioner is not entitled
to a deduction under section 165 for taxable year 2000 with
respect to the alleged custom house theft loss. In support of
that position, respondent argues that petitioner has failed to
carry his burden of establishing (1) that Mona Builders’ actions
with respect to the custom house constituted theft under applica-
ble Maryland law; (2) that petitioner discovered the alleged
custom house theft loss in October 2000 or at any other time in
2000; (3) the amount of the alleged custom house theft loss; and
(4) that petitioner did not have at the end of 2000 a reasonable
prospect of recovery of the alleged custom house theft loss.
In the instant case, the parties agree that the law of
Maryland determines whether the actions of Mona Builders with
respect to the custom house constituted theft. However, they
disagree over whether such actions constituted theft under such
law. We need not resolve that disagreement. That is because,
assuming arguendo that we were to find that the actions of Mona
Builders with respect to the custom house constituted theft under
applicable Maryland law, on the instant record, we nonetheless
would, and do below, reject petitioner’s position that he is
entitled to a deduction under section 165 for taxable year 2000
with respect to the alleged custom house theft loss.
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With respect to when petitioner discovered the alleged
custom house theft loss, petitioner claims that, because of the
ongoing nature of Mona Builders’ actions that resulted in the
alleged custom house theft loss, he became aware of different
aspects of that loss at different times. According to peti-
tioner, for purposes of section 165 his discovery of the alleged
custom house theft loss occurred in October 20005 when he claims
he first became aware of certain aspects of that loss by deter-
mining that Mona Builders had (1) failed to give him credit for
certain amounts by which the allowance for bricks in the custom
house contract exceeded the amounts that Mona Builders actually
paid for such bricks (alleged brick theft) and (2) not installed
certain humidifiers as provided for in the custom house contract
(alleged humidifier theft). Petitioner does not cite, and we
have not found, any authority supporting petitioner’s contention
that for purposes of section 165 his discovery of the alleged
custom house theft loss occurred when he first became aware of
any aspect of that loss.
Assuming arguendo that petitioner had carried his burden of
establishing that it is appropriate for purposes of section 165
5
At trial, on direct examination petitioner testified that
the alleged brick theft occurred in October 2004. According to
petitioner, that was when he had a conversation with Mona Build-
ers concerning the price that Mona Builders had charged Ms. Davis
and petitioner for bricks used in the custom house. However, the
record establishes that the custom house litigation counterclaim
was settled in May 2003.
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to treat the time when he first became aware of any aspect of the
custom house theft loss as the time when he discovered such loss,
we turn to petitioner’s claim that he discovered the custom house
theft loss in October 2000. In support of that claim, petitioner
relies on his testimony with respect to the alleged brick theft
and the alleged humidifier theft. We found petitioner’s testi-
mony regarding the alleged brick theft to be questionable and
inconsistent with certain other testimony of petitioner. Peti-
tioner testified:
In October 2004,[6] we were discussing with Mona Build-
ers the price that we had been charged and a payment we
had made to them for bricks.
The [custom house] contract specifies in the
allowance paragraph that the bricks were supposed to be
charged at $450,000. Excuse me. $450 per 1,000
bricks. At that point we knew that we had already just
paid them for about 40,000 bricks.
We visited the brick dealer because we recognized
that the price we had been quoted by the brick subcon-
tractor was $310 per 1,000. * * *
* * * * * * *
* * * Despite asking for them, we received no
invoices certifying the price of the bricks, and the
only way we were ultimately able to obtain those in-
voices was through the litigation that we started with
Mona Builders over the problems with the house.
When we received those invoices, they showed that
the bricks were in fact charged that $310 per 1,000.
[Emphasis added.]
6
See supra note 5.
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As we understand the foregoing testimony of petitioner, he
claims that he became aware of the invoices detailing the price
that Mona Builders had paid for the bricks used in the custom
house as a result of the discovery that he conducted in connec-
tion with the custom house litigation counterclaim.7 Although
the record does not disclose when discovery in the custom house
litigation counterclaim began, such discovery could not have
begun before petitioner filed that counterclaim in December
2001.8 Since petitioner claims that it was only as a result of
discovery by him in connection with the custom house litigation
counterclaim that he was able to obtain the information which led
him to conclude that Mona Builders had overcharged him for
7
Our understanding is consistent with the November 8, 2002
letter that petitioner and Ms. Davis sent to the Maryland Attor-
ney General. That letter stated in pertinent part:
We are currently in the midst of a civil suit
against Mona [custom house litigation counterclaim].
However, in spite of the disclosure requirements of the
Custom Home Protection Act (CHPA), and tens of thou-
sands of dollars expended in formal discovery efforts,
Mona has yet to disclose the names and addresses of
many of the suppliers and subcontractors who worked on
our home. * * *
* * * * * * *
* * * Information obtained through our discovery
efforts suggest [sic] that Mona may have fraudulently
altered a subcontractor’s invoice, and may have fraudu-
lently overcharged us for materials and supplies. * * *
8
In October 2001, Mona Builders commenced the custom house
litigation in which petitioner filed the custom house litigation
counterclaim.
-22-
bricks, it would have been impossible for him to have obtained
such information in 2000.
With respect to petitioner’s testimony regarding the alleged
humidifier theft, such testimony was vague as to when he became
aware of that alleged theft. Indeed, petitioner did not even
give a timeframe in such testimony. Petitioner’s only testimony
with respect to the alleged humidifier theft was that “We also
were charged for humidifiers that were not installed. That was
$1,000 that we asked for verification for and did not receive
verification for.”
On the record before us, we find that petitioner has failed
to carry his burden of establishing that he became aware of the
alleged brick theft and the alleged humidifier theft in October
2000 or at any time in that year.9 On that record, we further
9
Petitioner declared under oath (petitioner’s declaration)
in the April 11, 2003 application filed with the District Court
of Maryland for Anne Arundel County that “Between July 25, 2001
and Aug 8, 2001, Garrett Mona, Patrick Mona and Nick Mona inten-
tionally misrepresented their intent to * * * repair defective
work that existed at that time” in the custom house. That
declaration indicates to us that petitioner became aware of
certain unspecified defective work in the custom house sometime
prior to his moving into that house around Aug. 29, 2001. We
infer from petitioner’s declaration in the April 11, 2003 appli-
cation that petitioner became aware of certain defective work in
the custom house sometime in the summer of 2001. That inference
is consistent with other statements that petitioner made (1) in
the April 11, 2003 application, (2) in the November 8, 2002
letter to the Maryland Attorney General, and (3) in the insurance
litigation counterclaim. Petitioner’s declaration in the April
11, 2003 application does not evidence that petitioner became
aware of any defective work in the custom house in 2000.
-23-
find that petitioner has failed to carry his burden of establish-
ing that he discovered the alleged custom house theft loss in
October 2000 or at any other time in that year.
Assuming arguendo that petitioner had carried his burden of
establishing that he discovered the alleged custom house theft
loss in 2000, we turn to whether petitioner established the
amount of the alleged custom house theft loss which he claims he
is entitled to deduct under section 165. As discussed above, the
amount of a loss that a taxpayer is entitled to deduct under
section 165 is the lesser of (1) the difference between the fair
market value of the property before the loss and the fair market
value of the property after the loss, the latter value in the
case of loss by theft being zero, or (2) the adjusted basis
provided in section 1011 for determining the loss from the sale
or other disposition of the property which was the subject of the
loss. Sec. 165(b); secs. 1.165-7(b)(1), 1.165-8(c), Income Tax
Regs.
With respect to the fair market value of the custom house
before the alleged custom house theft, petitioner introduced an
appraisal report prepared by Robert H. Campbell & Associates,
LLC, that was dated October 28, 2002 (October 28, 2002 appraisal
report) and that was prepared and provided to petitioner in
connection with the custom house litigation counterclaim. That
appraisal report did not purport to establish the fair market
-24-
value of the custom house before the time in October 2000 when
petitioner alleges he discovered certain aspects of the alleged
custom house theft. Instead, the October 28, 2002 appraisal
report purported to determine the diminished value of the custom
house as of October 1, 2002.
With respect to the adjusted basis of Ms. Davis and peti-
tioner in the custom house, in the November 8, 2002 letter that
Ms. Davis and petitioner sent to the Maryland Attorney General,
they stated that they paid more than $1 million for the custom
house. Petitioner failed to introduce any evidence that corrobo-
rated that statement. Nor did petitioner introduce any evidence
that otherwise established the adjusted basis of Ms. Davis and
himself in the custom house (or in any property that was part of
the custom house and that was allegedly stolen, including the
bricks and humidifiers that were the subject of the alleged brick
theft and the alleged humidifier theft).
On the record before us, we find that petitioner has failed
to carry his burden of establishing the fair market value of the
custom house before the time in October 2000 when petitioner
alleges he discovered certain aspects of the alleged custom house
theft and the adjusted basis of Ms. Davis and petitioner in the
custom house (or in any property that was part of the custom
house). On that record, we further find that petitioner has
failed to carry his burden of establishing the amount of the loss
-25-
which he claims he is entitled to deduct under section 165.
Assuming arguendo that petitioner had carried his burden of
showing (1) that he discovered the alleged custom house theft
loss in 2000 and (2) the amount of the loss which he claims he is
entitled to deduct under section 165, we turn now to whether at
the end of 2000 petitioner had a reasonable prospect of recovery
of the alleged custom house theft loss. The determination of
whether there is a reasonable prospect of recovery is made upon
facts known or reasonably foreseeable at the end of the taxable
year for which the theft loss deduction is claimed. Ramsay
Scarlett & Co. v. Commissioner, 61 T.C. at 811-812.
At trial, petitioner testified that as a result of the
discovery that he conducted in connection with the custom house
litigation counterclaim he became aware that Mona Builders had
only $75,000 in assets and was thinly capitalized (Mona Builders’
alleged financial condition). Based on that testimony, peti-
tioner argues that Mona Builders was always thinly capitalized
and that therefore petitioner never had a reasonable prospect of
recovery from Mona Builders of the alleged custom house theft
loss.
We found petitioner’s testimony with respect to Mona Build-
ers’ alleged financial condition to be questionable, conclusory,
vague, and general. That testimony also appeared to be inconsis-
tent with Mona Builders’ ability on May 29, 2003, to purchase the
-26-
custom house from petitioner and Ms. Davis for $1,500,000. Even
if we were to accept petitioner’s testimony about Mona Builders’
alleged financial condition, the argument that petitioner ad-
vances based on such testimony assumes that Mona Builders’
alleged financial condition requires the conclusion that peti-
tioner did not have a reasonable prospect of recovery of the
alleged custom house theft loss. That Mona Builders may have had
only $75,000 in assets and/or been thinly capitalized does not
require the conclusion that petitioner did not have a reasonable
prospect of recovery of the alleged custom house theft loss.
Assuming arguendo that we were to accept petitioner’s
testimony regarding Mona Builders’ alleged financial condition,
on the record before us, we find that petitioner did not carry
his burden of establishing that at the end of 2000 he did not
have a reasonable prospect of recovery of the alleged custom
house theft loss (or any portion thereof, including the alleged
brick theft and the alleged humidifier theft) by, for example,
withholding future payments to Mona Builders under article
seventeen of the custom house contract, requiring Mona Builders
to correct its work under article twenty-three of that contract,
or terminating the custom house contract under article twenty-
five and suing Mona Builders for breach of contract. On that
record, we further find that petitioner did not carry his burden
of establishing that at the end of 2000 he did not have a reason-
-27-
able prospect of recovery of the alleged custom house theft loss
(or any portion thereof).
Based upon our examination of the entire record before us,
we find that petitioner has failed to carry his burden of estab-
lishing that he is entitled to a deduction under section 165 for
taxable year 2000 with respect to the alleged custom house theft
loss (or any portion thereof).
We turn next to whether petitioner is liable for the addi-
tion to tax under section 6651(a)(1). Section 6651(a)(1) imposes
an addition to tax for failure to file a return on the date
prescribed for filing, unless petitioner proves that such failure
to file was due to reasonable cause, and not willful neglect.
Sec. 6651(a)(1); Higbee v. Commissioner, 116 T.C. at 447.
Respondent must carry the burden of production with respect
to the addition to tax under section 6651(a)(1). Sec. 7491(c);
Higbee v. Commissioner, supra at 446-447. To satisfy respon-
dent's burden of production, respondent must come forward with
"sufficient evidence indicating that it is appropriate to impose"
the addition to tax. Higbee v. Commissioner, supra at 446.
We have found that petitioner did not file a return for
taxable year 2000.10 In finding that petitioner did not file a
10
We have also found (1) that petitioner did not file a
return for any of the taxable years 1995, 1996, 1997, 1998, and
1999 and (2) that Ms. Davis did not file a return for any of the
taxable years 1995, 1996, 1998, 1999, and 2000. Respondent
(continued...)
-28-
return for taxable year 2000, we reject petitioner’s uncorrobo-
rated and questionable testimony that on August 10, 2001, he
mailed petitioner’s Form 1040 for 2000 to respondent by deposit-
ing such form in a mailbox.11
Based upon our examination of the entire record before us,
we find that respondent has carried respondent’s burden of
production under section 7491(c) with respect to the addition to
tax under section 6651(a)(1) that respondent determined in the
notice.
Petitioner introduced no evidence and advances no argument
that his failure to file a return for 2000 was due to reasonable
cause, and not willful neglect.
Based upon our examination of the entire record before us,
we find that petitioner has failed to carry his burden of showing
that his failure to file a return for taxable year 2000 was due
to reasonable cause, and not willful neglect. Based upon that
10
(...continued)
introduced respective Forms 3050, Certification of Lack of Record
(Forms 3050), for petitioner’s taxable years 1995 through 2000
and Ms. Davis’s taxable years 1995, 1996, 1998, 1999, and 2000.
Absent a showing of some irregularity in such Forms 3050, which
petitioner has not made, we may rely on such forms. See, e.g.,
Davis v. Commissioner, 115 T.C. 35, 40-41 (2000).
11
It is noteworthy that petitioner, an attorney, was aware
of the importance of using certified mail in connection with
mailing important documents. Indeed, petitioner sent the June 7,
2002 letter notifying State Auto of petitioner’s insurance claim
by certified mail, return receipt requested.
-29-
examination, we further find that petitioner has failed to carry
his burden of demonstrating error in respondent’s determination
that he is liable for taxable year 2000 for the addition to tax
under section 6651(a)(1).
We turn finally to whether petitioner is liable for the
addition to tax under section 6654(a). Section 6654(a) imposes
an addition to tax in the case of an underpayment of estimated
tax by an individual.
Respondent has the burden of production with respect to the
addition to tax under section 6654(a).12 Sec. 7491(c); Higbee v.
Commissioner, supra at 446-447. We find that the record contains
evidence from which the parties, in the computations under Rule
155, will be able to calculate the amount of any required in-
stallment by petitioner within the meaning of section 6654(d)(1)
with respect to taxable year 2000 and the amount, if any, of an
underpayment of estimated tax for that year. In the event that
such calculation were to establish that petitioner underpaid his
12
For purposes of sec. 6654(a), it is necessary to determine
whether there is an underpayment of a required installment of
estimated tax. See sec. 6654(a) and (b). In this connection,
the amount of any required installment is 25 percent of the
required annual payment. Sec. 6654(d)(1)(A). The required
annual payment is equal to the lesser of (1) 90 percent of the
tax shown in the return for the taxable year or, if no return was
filed, 90 percent of the tax for such year, or (2) if the indi-
vidual filed a return for the preceding taxable year, 100 percent
of the tax shown in such return. Sec. 6654(d)(1)(B). We have
found that petitioner did not file a return for 2000, the taxable
year at issue, or for 1999, the preceding taxable year.
-30-
estimated tax for taxable year 2000, we find that respondent has
satisfied respondent's burden of production with respect to the
addition to tax under section 6654(a) for that year. In that
event, we further find on the instant record (1) that none of the
exceptions in section 6654(e) applies13 and (2) that petitioner
is liable for the addition to tax under section 6654(a) for
taxable year 2000.
In the event that the calculation relating to section 6654
were to establish that petitioner did not underpay his estimated
tax for taxable year 2000, we find that respondent has not
satisfied respondent's burden of production with respect to the
addition to tax under section 6654(a) for that year and that
petitioner is not liable for such addition to tax.
We have considered all of the contentions and arguments of
petitioner that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
13
Petitioner does not take the position that one or more of
the exceptions in sec. 6654(e) apply in the instant case.