T.C. Summary Opinion 2006-65
UNITED STATES TAX COURT
GEORGE B.N. AYITTEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20837-04S. Filed April 26, 2006.
George B.N. Ayittey, pro se.
Scott A. Hovey, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463.1 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, subsequent section references are
to the Internal Revenue Code in effect for the year in issue, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined a deficiency of $16,319 and a penalty
under section 6662 of $2,272.20 in petitioner’s 1999 Federal
income tax. The issue is whether petitioner is entitled to a
casualty loss deduction under section 165 in an amount greater
than $9,448 allowed by respondent.2 Petitioner resided in
Lorton, Virginia, at time the petition was filed.
Background
The facts may be summarized as follows. Petitioner is a
professor of economics. In addition, he has published books and
articles concerning Africa. In February, 1999, petitioner’s
office at the university at which he taught was destroyed by
fire. Included in the destruction were items of personal
property belonging to petitioner. On his 1999 Federal income tax
return, petitioner claimed a casualty loss deduction for the
following:
Books on economics $2,000
Books by “famous authors” 1,000
Books on Africa 5,000
African journals & magazines 3,000
Book manuscript 15,000
Memorabilia (awards, plaques, etc.) 3,000
Briefcases, fans, etc. 2,000
Computer printer 250
Labor/inconvenience/distress 2,000
2
Petitioner concedes that he received other income of $1,000, a
distribution from an individual retirement account of $24,792,
income from a discharge of indebtedness of $4,696, and interest
income of $36. On his 1999 Schedule A, Itemized Deductions,
petitioner claimed a deduction of $21,042.98 for miscellaneous
expenses. Petitioner concedes that $11,737 of those deductions
are not allowable. Respondent concedes that petitioner is
entitled to an additional prepayment credit of $4,958.
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Some of the books were given to him, as were the items shown as
memorabilia. Petitioner did not seek any expert advice
concerning the value of the items destroyed. Petitioner has no
records, receipts, or other documents concerning the cost of any
of the items destroyed nor did petitioner attempt to reconstruct
such cost. Petitioner did not seek any professional advice
concerning the preparation of his 1999 tax return. Petitioner
received $12,500 from the university’s insurance company for the
loss that he suffered from the fire.
Upon audit, respondent allowed a casualty loss deduction of
$9,448 and disallowed the remainder of the deductions claimed on
petitioner’s return.
Discussion
Generally, the burden of proving that respondent’s
determination is incorrect is on petitioner. Section 7491(a)
provides, in limited circumstances, that the burden shifts to
respondent. Petitioner does not fall within these limited
circumstances and the burden of proof is on petitioner.
Casualty Loss
Section 165(a) allows “as a deduction any loss sustained
during the taxable year and not compensated for by insurance or
otherwise.” The general rule for determining the amount of a
casualty loss, whether or not incurred in a trade or business or
in a transaction for profit, is the lesser of (i) the fair market
value before the casualty reduced by the fair market value after
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the casualty or (ii) the adjusted basis determined under section
1.1011-1, Income Tax Regs. Sec. 1.165-7(b)(1), Income Tax Regs.
The regulation also provides
However, if property used in a trade or business or held for
the production of income is totally destroyed by casualty,
and if the fair market value of such property immediately
before the casualty is less than the adjusted basis of such
property, the amount of the adjusted basis of such property
shall be treated as the amount of the loss for purposes of
section 165(a). [Id.]
For purposes here, the adjusted basis in the property destroyed
is the cost of such property. Secs. 1011 and 1012.
The parties apparently agree that, at least as far as the
majority of the items are concerned, the property destroyed was
used in a trade or business or was held for the production of
income and was totally destroyed. We, therefore, are concerned,
pursuant to section 1.165-7(b)(1), Income Tax Regs., with
petitioner’s bases or costs of the items destroyed. Petitioner,
however, has not produced any evidence as to what his bases or
costs in the various items may have been. Indeed, while they may
have had value to petitioner, it is clear that the memorabilia
had no costs to petitioner, and petitioner would have no bases in
these items. With respect to what petitioner describes as
“Labor/Inconvenience/Distress”, as we understand petitioner’s
testimony, the deduction was for mental upset, having to prepare
new lecture notes, etc., and for teaching. These are not items
of property the losses of which are deductible as casualty
losses.
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Turning to the item described as a book manuscript,
petitioner testified that the manuscript was the foundation for
three future books. He determined that it had a fair market
value of $15,000 because he had received advances from publishers
for previous books. But, petitioner admitted that he had no
record of the cost or expenses (apart from his time and labor) in
the creation of the manuscript. In short, he has not established
that he had a cost basis in the manuscript.
With regard to copies of magazines, journals, and books,
again petitioner has no records concerning the costs of these
items. Furthermore, petitioner admits that he would have
deducted the costs of at least some of the magazines, journals,
and books in prior years. We note also with respect to the other
claimed deductions, including particularly the manuscript, any
costs would appear to have been deducted in prior years. See,
e.g., sec. 263A(h); see also Hadley v. Commissioner, 819 F.2d 359
(2d Cir. 1987).
Turning to the remainder of the items claimed as a casualty
loss deduction, even if we assume that petitioner had bases or
costs in the amounts claimed, petitioner collected $12,500 from
insurance, and respondent allowed a casualty loss deduction of
$9,448. Under these circumstances, we fail to understand how the
bases or costs of these items would be deductible. We sustain
respondent’s determination with respect to the casualty loss
deduction.
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Section 6662--Penalty
Section 6662(a) provides a penalty in an amount equal to 20
percent of the portion of any underpayment attributable to, among
other things, “Any substantial understatement of income tax”.
Sec. 6662(b)(2). A substantial understatement of income tax
exists “if the amount of the understatement for the taxable year
exceeds the greater of--(i) 10 percent of the tax required to be
shown on the return for the taxable year, or (ii) $5,000.” Sec.
6662(d)(1)(A). For purposes of section 6662(a), an
understatement may be reduced if there is “substantial authority”
for the position taken, or if the facts were adequately disclosed
in the return and there was a “reasonable basis” for the position
taken. Sec. 6662(d)(2)(B). Further, no penalty will be imposed
if there was a reasonable cause for the understatement and the
taxpayer acted in good faith. Sec. 6664(c). There is no
substantial authority for the position taken here. The facts
concerning the unreported items of income that petitioner
conceded, supra note 2, were obviously not disclosed and are not
subject to the section 6662(d)(2)(B) exception from the penalty.
While petitioner did disclose the fact that there was a casualty
loss deduction, we cannot say there was a reasonable ground for
the amount of the deduction claimed as a loss. Petitioner made
no attempt to ascertain the correct tax treatment of the items
composing the casualty loss deduction claimed. A “reasonable”
basis or reasonable cause cannot be transmuted from intentional
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ignorance. We sustain respondent’s determination of the section
6662(a) penalty.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.