T.C. Summary Opinion 2007-179
UNITED STATES TAX COURT
LAZAR SIMOV KOVACHEVICH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4480-06S, 4481-06S. Filed October 24, 2007.
Lazar Simov Kovachevich, pro se.
Patricia A. Rieggar, for respondent.
DEAN, Special Trial Judge: These consolidated cases were
heard pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petitions were filed.
Pursuant to section 7463(b), the decisions to be entered are not
reviewable by any other court, and this opinion shall not be
treated as precedent for any other case. Unless otherwise
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indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined deficiencies of $4,123 and $13,379 in
petitioner’s 2002 and 2003 Federal income taxes, respectively.
With respect to petitioner’s 2002 taxable year, the issues for
decision are whether petitioner is entitled to the following:
(1) $6,000 in dependency exemption deductions; (2) a $3,800
deduction for alimony; and (3) a $6,905 casualty and theft loss
deduction. With respect to petitioner’s 2003 taxable year, the
issues for decision are whether petitioner is: (1) Entitled to
claim a $71,200 loss; and (2) liable for a $2,675.80 accuracy-
related penalty under section 6662(a).1
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petitions
were filed, petitioner resided in Flushing, New York.
Petitioner timely filed his 2002 and 2003 Federal income tax
returns. On his 2002 tax return, petitioner claimed personal
exemption deductions for his two sons who were ages 23 and 25 and
full-time students attending European schools. Petitioner also
1
Respondent conceded that petitioner was entitled to a
$1,900 moving expense deduction for 2002 and that he did not
receive $2,887 as nonemployee compensation in 2003.
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claimed a $3,800 alimony deduction, for which he listed his sons’
Social Security numbers in the area titled “Recipient’s SSN”.
Lastly, petitioner claimed a $6,905 casualty and theft loss, for
which he attached a Form 4684, Casualties and Thefts, to his 2003
tax return. Petitioner’s Form 4684 listed the values of various
personal and business properties that he alleges were damaged or
stolen from his storage shed. Petitioner stored the items from
1998-2002.
On his 2003 return, petitioner claimed a $71,200 casualty
and theft loss, for which he had handwritten “Pro Se in Court
Proceedings.” Similarly, on his Schedule C, Profit or Loss From
Business, he claimed the $71,200 as a “legal and professional
services” expense, for which he had handwritten “Pro Se (Court).
(Three) months for extraordinary writ to be filed in S. Co. U.S.
shall appear in 2004 tax return.”
Discussion
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer has the burden to prove
that the determinations are in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on
factual issues that affect a taxpayer’s tax liability may be
shifted to the Commissioner where the “taxpayer introduces
credible evidence with respect to * * * such issue.” Sec.
7491(a)(1). The burden will shift only if the taxpayer has
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complied with the substantiation requirements and has cooperated
with the Commissioner’s reasonable requests for witnesses,
information, documents, meetings, and interviews. Sec.
7491(a)(2). Petitioner has not alleged or proven that section
7491(a) applies; accordingly, the burden remains on him to show
that he is entitled to the claimed deductions.
A. 2002 Taxable Year
I. Dependency Exemption Deduction
Section 151(c), in pertinent part, allows a taxpayer to
claim as a deduction the exemption amount for each individual who
is a “dependent” of the taxpayer as defined in section 152 and
who is the taxpayer’s child and satisfies certain age
requirements.2
In pertinent part, section 152(a) defines “dependent” to
include the taxpayer’s son who either received or is treated as
receiving over half of his support from the taxpayer for the
calendar year in which the taxpayer’s taxable year begins.
Section 152(b) excepts from the definition of “dependent” any
individual who is not a U.S. citizen or national unless the
individual is a resident of the United States or of a country
contiguous to the United States. The term “resident of the
2
The child has not attained the age of 19 or is a student
who has not attained the age of 24 at the close of the calendar
year in which the taxable year of taxpayer begins. Sec.
151(c)(1)(B).
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United States” is defined as an individual who: (1) Is a lawful
permanent resident of the United States at any time during the
calendar year; (2) meets the substantial presence test (i.e.,
present in the United States at least 31 days during the calendar
year and the total of the number of days that the individual was
present during the calendar year and the 2 preceding years equals
or exceeds 183 days when multiplied by the applicable
multiplier); or (3) makes a first-year election as prescribed by
section 7701(b)(4). Sec. 7701(b)(1).
The Court concludes that petitioner is not entitled to
either dependency exemption deduction. The oldest son had
already attained the age of 24 before petitioner’s 2002 taxable
year began, which excludes the son from the definition of a
dependent. Petitioner merely testified that he thought that his
younger son came to the United States in the middle of the year
or at the end of June after school. Petitioner did not establish
the residency of his younger son to bring him within the
definition of a dependent. Given the disposition of this issue
on these elements, we need not discuss the other elements.
Accordingly, respondent’s determination is sustained.
II. Alimony Deduction
Section 215(a) allows a deduction for alimony paid during
the taxable year. Generally, alimony is defined to include any
payment in cash if: (1) The payment is received by or on behalf
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of a spouse under a divorce or separation instrument; (2) the
instrument does not designate the payment as a payment that is
not includable in the recipient’s gross income and not allowable
as a deduction to the payor; (3) the payee and payor are not
members of the same household at the time of payment; and (4)
there is no liability to make any payments after the payee’s
death. Secs. 71(b), 215(b).
Because petitioner offered no evidence to show that the
payments were made under a divorce or separation instrument, the
payments do not constitute alimony, and he is not entitled to the
deduction. See Prince v. Commissioner, 66 T.C. 1058, 1067
(1976); Herring v. Commissioner, 66 T.C. 308, 311 (1976); Clark
v. Commissioner, 40 T.C. 57, 58 (1963). Given the disposition of
this issue on this element, we need not discuss the other
elements. Accordingly, respondent’s determination is sustained.
III. Casualty Loss
Section 165(a) allows a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. With respect to individuals, deductions for losses
are limited to losses: (1) Incurred in a trade or business; (2)
incurred in a transaction for profit; or (3) of property not
connected with a trade or business or a transaction entered into
for profit, if the losses arise from fire, storm, shipwreck, or
other casualty, or from theft. Sec. 165(c). In order for the
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loss to be deductible, the loss must be evidenced by closed and
completed transactions, fixed by an identifiable event, and
actually sustained during the taxable period year. See sec.
1.165-1(b), Income Tax Regs. Case law has defined the term
“casualty” to include an event that is “due to some sudden,
unexpected, or unusual cause” similar in nature to a fire, storm,
or shipwreck. Matheson v. Commissioner, 54 F.2d 537, 539 (2d
Cir. 1931), affg. 18 B.T.A. 674 (1930); see Rosenberg v.
Commissioner, 198 F.2d 46, 49 (8th Cir. 1952), revg. 16 T.C. 1360
(1951).
Petitioner testified that his $6,905 casualty and theft
loss deduction was for damages sustained to his personal and
business properties from raccoons, birds, vandals, and thieves.
On his Form 4684, petitioner represented that the storage shed
was “built of wood material with a 1 foot high opening all along
the wall” below the roof and that he had insisted that the owner
close the opening of the wall, but the owner never did.
Petitioner testified that some of the damage was due to vandals
in either 2000 or 2001. With respect to the vandalism, the
damages were not sustained in the 2002 taxable year; therefore,
they are not deductible.
Generally, a loss arising from theft is treated as sustained
“during the taxable year in which the taxpayer discovers such
loss.” See sec. 165(e); secs. 1.165-1(d)(3), 1.165-8(a)(2),
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Income Tax Regs. The amount of the deductible loss is limited to
the lower of: (1) The fair market value of the property
immediately before the theft reduced by its fair market value
immediately after the theft (i.e., zero); or (2) its adjusted
basis, and if the property was used in a trade or business or for
the production of income and the fair market value of the
property immediately before the theft is less than its adjusted
basis, then its adjusted basis is treated as the amount of the
loss. See secs. 1.165-7(b)(1), 1.165-8(c), Income Tax Regs. And
with respect to property that is neither used in a trade or
business nor for the production of income, the amount of the loss
is limited to that portion of the loss that is in excess of $100.
See sec. 1.165-8(c), Income Tax Regs. Petitioner must establish,
inter alia, both the existence of a theft and the amount of the
claimed theft loss. See Elliott v. Commissioner, 40 T.C. 304,
311 (1963).
In his Form 4684, petitioner failed to identify specifically
the items of property that he alleges were stolen. Petitioner
also failed to establish the year that he discovered the theft.
He merely stated, in his Form 4684, that “Probably somethings
were stolen” when his storage shed was vandalized in 2001, and at
trial, he merely testified that “Somebody took” the 5,500 square
feet of marble he had stored. Finally, petitioner failed to
prove the amount of his loss by establishing the lower of the
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properties’ adjusted bases (i.e., by receipts) or their fair
market values immediately before the loss. Therefore, petitioner
is not entitled to a deduction for a theft loss.
Generally, damages resulting from animals and insects are
not deductible because they occur not from a sudden event but
rather gradually over time, unless it can be shown that the
destruction was occasioned by a sudden invasion that occurred in
a relatively short time (i.e., 1-3 months or 1 year). Cf.
Rosenberg v. Commissioner, supra at 50; Fay v. Helvering, 120
F.2d 253 (2d Cir. 1941), affg. 42 B.T.A. 206 (1940); United
States v. Rogers, 120 F.2d 244, 246 (9th Cir. 1941).
The destruction of petitioner’s properties that was caused
by animals’ entering the wall’s opening is not a type of “sudden,
unexpected, or unusual cause” within the definition of a
casualty. Without evidence to the contrary, the Court surmises
that petitioner’s damages were not occasioned by a sudden
invasion of raccoons and birds within a short period of time but
rather occurred gradually over time (i.e., from 1998-2002).
Additionally, the damages resulting from the inadequacy of the
structure are neither unexpected nor unusual. Therefore, they
are not deductible, and accordingly, respondent’s determination
is sustained.
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B. 2003 Taxable Year
I. $71,200 Loss
In general, a taxpayer’s “loss of time” or “value of his
time” is not deductible as a casualty loss or otherwise. Cf.
Pfalzgraf v. Commissioner, 67 T.C. 784 (1977) (stating that in
using a valuation method to compute a loss for purposes of
section 165, the value of a person’s “loss of time” cannot be
included in the computation); Wilhelm v. Commissioner, T.C. Memo.
1991-513 (disallowing a taxpayer’s “time spent” handling an
estate from his net operating loss computation); O’Connor v.
Commissioner, T.C. Memo. 1981-151 (disallowing a taxpayer’s
deduction for the uncompensated “value of his time” as a
classroom expense and a job-related expense). The disallowance
of a claimed deduction arising from the taxpayer’s loss of time
or the value thereof results from the fact that he has not
included any amount in gross income, and therefore, he has no tax
cost basis in the item that he can deduct. See Hutcheson v.
Commissioner, 17 T.C. 14, 19 (1951).
Petitioner testified that his itemized deductions
represented, in part, a $71,200 casualty or damages for his time
fighting crime and criminals and defending himself and his
business pro se in the courts against the Government. Petitioner
concluded that since attorneys are paid “when [they] practice in
the court,” he too should be similarly compensated or rewarded
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for his pro se appearances. Petitioner is claiming a deduction
for his loss of time or the value thereof, and he is not entitled
to it. Accordingly, respondent’s determination is sustained.
II. Accuracy-Related Penalty
Initially, the Commissioner has the burden of production
with respect to any penalty, addition to tax, or additional
amount. Sec. 7491(c). The Commissioner satisfies this burden of
production by coming forward with sufficient evidence that
indicates that it is appropriate to impose the penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the
Commissioner satisfies this burden of production, the taxpayer
must persuade the Court that the Commissioner’s determination is
in error by supplying sufficient evidence of reasonable cause,
substantial authority, or a similar provision. Id.
In pertinent part, section 6662(a) imposes an
accuracy-related penalty equal to 20 percent of the underpayment
that is attributable to: (1) Negligence or disregard of the
rules or regulations; or (2) a substantial understatement of
income tax. Section 6662(c) defines the term “negligence” to
include “any failure to make a reasonable attempt to comply with
the provisions of this title”, and the term “disregard” to
include “any careless, reckless, or intentional disregard.” In
interpreting section 6662, this Court has defined the term
“negligence” as a “‘lack of due care or the failure to do what a
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reasonable and ordinarily prudent person would do under the
circumstances’”. Freytag v. Commissioner, 89 T.C. 849, 887
(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.
1964-299), and citing Zmuda v. Commissioner, 731 F.2d 1417, 1422
(9th Cir. 1984), affg. 79 T.C. 714 (1982)). If a “taxpayer fails
to make a reasonable attempt to ascertain the correctness of a
deduction, credit or exclusion on a return which would seem to a
reasonable and prudent person to be ‘too good to be true’ under
the circumstances”, then there is a strong indication of
negligence. Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.
Section 6664(c)(1) is an exception to the section 6662(a)
penalty: no penalty is imposed with respect to any portion of an
underpayment if it is shown that there was reasonable cause
therefor and the taxpayer acted in good faith. Section
1.6664-4(b)(1), Income Tax Regs., incorporates a facts and
circumstances test to determine whether the taxpayer acted with
reasonable cause and in good faith. The most important factor is
the extent of the taxpayer’s effort to assess his proper tax
liability. Id. “Circumstances that may indicate reasonable
cause and good faith include an honest misunderstanding of fact
or law that is reasonable in light of * * * the experience,
knowledge and education of the taxpayer.” Id.
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The Court concludes that respondent has met his burden of
production and that petitioner failed to persuade us that the
determination was in error. The Court finds that petitioner was
negligent because he failed to make a reasonable attempt to
ascertain the correctness of his deduction since he merely
testified, without more, that he thought he should be compensated
for his pro se work in the courts: “somebody has to pay this.
It is damage. It is a casualty.” Because petitioner failed to
make a reasonable attempt to ascertain the correctness of his
deduction, he cannot establish a reasonable cause and good faith
defense. Accordingly, respondent’s determination is sustained.
To reflect the foregoing,
Decision will be entered for
respondent in docket No. 4480-06S,
and decision will be entered under
Rule 155 in docket No. 4481-06S.