T.C. Summary Opinion 2008-36
UNITED STATES TAX COURT
RODOLFO C. UY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24177-05S. Filed April 8, 2008.
Paul Iannone, for petitioner.
Michelle Maniscalco, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
On his income tax returns for 2003 and 2004, petitioner
claimed the following rental real estate and pass-through loss
deductions which respondent disallowed:
2003 2004
Rental real estate $49,896 $5,400
Pass-through loss
from S corporation 63,176 54,393
Total 113,072 59,793
As a result of these disallowances, respondent determined
deficiencies in petitioner’s income taxes of $36,091 for 2003,
and $24,098 for 2004. In computing the deficiencies respondent
increased the amounts of alternative minimum tax shown on the
returns and recomputed the amount of itemized deductions
allowable, taking into account the limitations due to adjusted
gross income under section 67.
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After concessions,2 the remaining issues for decision are:
(1) Whether we may consider petitioner’s argument that he is
entitled to deduct a current net passive activity loss and prior
years’ losses for 2003, and if so, whether petitioner has met his
burden of proof with respect to these claims; and (2) whether
petitioner is entitled to deduct certain other suspended passive
activity losses for 2003.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and the accompanying exhibits.
At the time the petition was filed, petitioner resided in
New York, New York.
During the taxable year in issue, petitioner worked for
Wakefield Medical Professionals, P.C., as a physician
2
Respondent concedes that petitioner is entitled to a
$113,072 passive activity loss deduction for 2003. This amount
represents the aggregate of petitioner’s rental real estate loss
of $49,896 and a pass-through loss of $63,176 stemming from his
ownership of an S corporation. Respondent acknowledges that
petitioner is entitled to deduct the aforementioned amounts as a
passive activity loss on the basis of the $136,509 of passive
activity gain that petitioner reported for 2003. Petitioner
concedes that he is not entitled to a deduction for either rental
real estate losses or a pass-through loss for the taxable year
2004. On brief petitioner concedes that for 2003 his S
corporation activity was a passive activity. Inasmuch as
petitioner failed to appear at trial and present credible
evidence to support his contention that he was an active
participant in his real estate activity for 2003, we deem this
issue conceded.
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specializing in pediatric medicine. In this capacity petitioner
managed five medical offices and a staff comprising five
pediatricians and two interns.
In 2003 and 2004, in addition to working as a physician,
petitioner was the sole owner of R & D Super Laundromat, an S
corporation, located in Bronx, New York.
On his returns and in his petition, petitioner maintained
that he actively participated in rental real estate and S
corporation activities in 2003 and 2004.
Rental Real Estate Activities
Petitioner attached to his 2003 return a Schedule E,
Supplemental Income and Loss, which listed six rental income
properties. Petitioner reported deductible losses for five of
these properties on line 23, Deductible rental real estate loss,
as follows: (1) Residential co-op, 67-105 Burns Street,
Apartment 105-3B--$5,845; (2) residential co-op, 67-109 Burns
Street, Apartment 109-1B--$6,081; (3) residential building, 4409
Byron Avenue, Bronx, New York--$1,862; (4) residential condo, 301
W. 57th Street, Apartment #18B, New York--$15,346; and (5) condo,
201 Ohua Avenue, #1813, Honolulu, Hawaii--$20,762. Petitioner
reported the $49,896 total of deductible rental real estate
losses for the five properties on line 17, Rental real estate,
royalties, partnerships, S corporations, trusts, etc., of his
2003 Form 1040, U.S. Individual Income Tax Return. Petitioner
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did not report as deductible a $3,150 loss for the sixth
property, a residential condo located at 5401 Collins Avenue,
Miami, Florida (the Collins Avenue property), which he listed on
line 22, Income or (loss) from rental real estate or royalty
properties of his Schedule E. Petitioner sold the Collins Avenue
property on March 20, 2003, and the residential co-op located at
67-105 Burns Street, Apartment 105-3B (the Burns Street property)
on June 23, 2003. Petitioner reported the sales on Form 4797,
Sales of Business Property, as follows:
Burns Street Collins Avenue
Property Property
Gross sale price $100,000 $220,711
Cost or other basis 77,820 157,755
Depreciation 20,474 30,899
Adjusted basis 57,346 126,856
Total gain 42,654 93,855
Petitioner’s total gain from the sale of business property
for 2003 was $136,509.
Current and Prior Years’ Losses
On Form 8582, Passive Activity Loss Limitations, which he
attached to his 2003 return, petitioner reported a $3,150 net
loss for rental real estate activities with active participation
(line 1b) and a $74,218 loss for unallowed losses for prior years
(line 1c). Petitioner computed these figures using Worksheet 1-
-For Form 8582, Lines 1a, 1b, and 1c (Worksheet 1), which he
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attached to his 2003 return and on which he reported the
following:
Current year Prior years Overall gain
or loss
Name of activity Net income Net loss Unallowed loss Gain Loss
Residential co-op --- --- $26,018 --- $26,018
Residential co-op --- --- 6,862 --- 6,862
Residential building --- --- 28,267 --- 28,267
Residential condo --- $3,150 13,071 --- 16,221
Total --- 3,150 74,218 --- 77,368
Petitioner entered $77,368, the total of current and prior
years’ losses, on line 4 of Form 8582. On the basis of this
entry, the form instructed petitioner to complete Part II,
Special Allowance for Rental Real Estate With Active
Participation. Because petitioner’s modified adjusted gross
income for 2003--as reported on Part II--was $299,805, petitioner
could not deduct any portion of the $77,368 from his nonpassive
income for that year.3
Petitioner’s Failure To Appear
This case was set for trial on February 5, 2007, at the
Court’s trial session in New York, New York. Petitioner did not
appear at the calendar call. Petitioner’s counsel, Mr. Iannone,
appeared and asked for a continuance on the grounds that
petitioner was out of town and that Mr. Iannone had been retained
3
A taxpayer who “actively participated” in a rental real
estate activity may deduct a maximum loss of $25,000 per year
related to the activity. Sec. 469(i)(1) and (2). This exception
is fully phased out, however, when adjusted gross income (AGI)
equals or exceeds $150,000. Sec. 469(i)(3)(A), (F). Petitioner
reported AGI of $299,805. Under sec. 469(i)(3)(F)(iv), AGI is
determined without regard to any passive activity or any loss
allowable by reason of sec. 469(c)(7).
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as counsel 2 days before the calendar call. The Court denied
this motion, set the case for recall, and firmly instructed Mr.
Iannone to meet with his client before trial.
When this case was recalled for trial, Mr. Iannone and
respondent’s counsel appeared and were heard. The parties filed
a stipulation of facts with attached exhibits. Petitioner did
not appear in court, and Mr. Iannone was unable to present any
meaningful evidence as to the issues. The Court closed the
proceedings and provided the parties with the opportunity to file
posttrial briefs.
Discussion
The Commissioner’s determination as set forth in a notice of
deficiency is generally presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant
to section 7491(a) the burden of proof as to factual matters
shifts to the Commissioner where the taxpayer complies with
substantiation requirements, maintains records, and cooperates
fully with reasonable requests for witnesses, documents, and
other information. On the basis of our review of the record, and
for the reasons discussed infra, we conclude that petitioner did
not comply with these requirements, and thus, the burden of proof
remains with petitioner.
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On brief petitioner argues that respondent carries the
burden of proof as a result of his concession for 2003. We do
not agree. Rule 142(a)(1) would place the burden of proof on
respondent only if respondent pleaded a new matter in his answer.
For the reasons discussed infra, we conclude that respondent did
not plead or raise on brief any new matter, and therefore,
respondent bears no additional burden of proof.
Deductions are a matter of legislative grace, and a taxpayer
generally bears the burden of proving that he is entitled to the
deductions claimed. See Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). A taxpayer bears the burden of
proof with respect to his entitlement to claimed loss deductions.
Lee v. Commissioner, T.C. Memo. 2006-70. A taxpayer is required
to maintain records that are sufficient to enable the
Commissioner to determine his correct tax liability. See sec.
6001; sec. 1.6001-1(a), Income Tax Regs.
Petitioner’s Contentions
Petitioner’s argument is based on a two-pronged approach.
First, petitioner argues that he is entitled--at a minimum--to a
$23,437 passive activity loss deduction for 2003. This amount--
$23,437--if coupled with the amount respondent conceded as
petitioner’s passive activity loss for 2003, $113,072, equals
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$136,509 of petitioner’s total gain from passive activities,
namely real estate, for 2003.
The $23,437 figure represents the $3,150 loss associated
with the Collins Avenue property, which petitioner reported on
line 22 of his Schedule E (but did not actually report as a
deductible loss on line 23) and included on line 1b of his Form
8582, and $20,287 of the $74,218 of prior years’ losses, which
petitioner included on line 1c of his Form 8582.
Petitioner argues that the Forms 1040, for taxable years
1997 through 2002 which were attached as exhibits to his reply
brief, substantiate adequately the $74,218 of prior years’
losses.
Second, petitioner argues in the alternative that he is
entitled to a $42,239 suspended loss deduction for 2003.
Specifically, petitioner argues his claim to current and
cumulative suspended losses of $26,018 and $16,221 ($42,239
total) for the Collins Avenue property and the Burns Street
property, respectively, on the basis that he disposed of his
entire interest in each activity in 2003.4 Petitioner claims
that because he sold both of the properties in 2003, the unused
or suspended passive activity losses associated with those
properties should first be used to offset his passive income gain
4
Although not contained in the petition, this argument was
raised by petitioner’s counsel during opening statements.
Respondent’s reply brief is responsive to this issue.
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and, to the extent that gain is exceeded (in this case by
$17,802, or $42,239 - $24,437), his nonpassive income for that
year.
Respondent’s Contentions
With respect to the deductible losses raised for the first
time in petitioner’s posttrial briefs, respondent contends that
petitioner is barred from raising as a new issue for decision
either his entitlement to deduct the current year loss associated
with the Collins Avenue property or the prior years’ losses for
the taxable years 1997 through 2002 because: (1) The petition
seeks relief specifically and only under section 469(c)(7) and;
(2) even if petitioner were entitled to raise as an issue the
aforementioned losses, he has not met his burden of proof.
Furthermore, respondent contends that petitioner is not
entitled to suspended loss deductions of $26,018 and $16,221 for
2003 from his sale of the properties in that year because
Worksheet 1 does not identify sufficiently the properties listed
on Schedule E, and petitioner has failed to substantiate the
suspended passive activity losses reported on Worksheet 1.
Current and Prior Years’ Losses
With respect to petitioner’s argument that he is entitled to
claim current and prior years’ losses for 2003, we agree with
respondent that this issue was raised for the first time in
petitioner’s opening brief. The Court has consistently held that
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it will not consider issues raised for the first time on brief.
Estate of Kleemeier v. Commissioner, 58 T.C. 241, 248-249 (1972).
Contrary to petitioner’s belief, this issue was not raised by
respondent directly or by respondent’s concession but was raised
for the first time on brief by petitioner.
Assuming arguendo that we may consider this issue,
petitioner cannot prevail. Petitioner argues on brief his
entitlement to these losses on the basis that: (1) Respondent
conceded that his rental real estate and S corporation activities
were passive activities for 2003; (2) had he characterized these
activities as passive activities when he filed his 2003 return,
he would have claimed the $3,150 net passive loss deduction for
the Collins Avenue property at that time; and (3) respondent had
sufficient information in petitioner’s return to adequately
compute any allowable passive activity loss for 2003.
Respondent’s concession that petitioner’s rental real estate
and S corporation activities were passive activities for 2003
does not entitle petitioner to claim additional passive loss
deductions for that year; and even if it were to have this
effect, petitioner would still be required to provide adequate
substantiation for the claimed deductions. Petitioner has
provided no proof establishing any amount of the current net
passive activity loss deduction of $3,150 to which he now claims
that he is entitled. Second, as petitioner admits, he did not
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claim this net passive loss deduction for 2003. Respondent’s
concession, in itself, does not permit petitioner to
recharacterize the items of income and loss reported on his 2003
return. It is not respondent’s duty, as petitioner argues, to
recompute the losses a taxpayer may be entitled to claim
following a concession by respondent. On the basis of the
foregoing, we conclude that petitioner is not entitled to any
additional amount of current net passive loss deduction for 2003
above the amount respondent conceded.
Regarding the prior years’ losses, we note that the petition
very clearly--and very narrowly--limited petitioner’s claim to
entitlement for relief to that provided for under sections 465,
469(c)(7), and 1016, thereby excluding from our consideration
section 469(d), which governs prior years’ passive activity
losses. Moreover, the petition requests no overpayment but
merely states that petitioner is “entitled to all of the
deductions claimed on his 2003 and 2004 1040 tax returns”.
In general, no deduction is allowed in a year for an
individual taxpayer’s passive activity losses in excess of
passive activity income. However, excess losses may be carried
forward to subsequent years to offset subsequent passive activity
income. Sec. 469(a), (b), (d).
The prior years’ passive losses at issue were not claimed on
petitioner’s 2003 return and therefore do not fall among those
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deductions that petitioner seeks entitlement to in his petition.
We again correct petitioner’s misguided argument that the losses
in issue should be allowed on the basis of the figures listed on
petitioner’s 2003 return and the returns for taxable years 1997
through 2002. Not only did petitioner fail to substantiate any
of the loss figures reported on his 2003 return; the returns for
taxable years 1997 through 2002, which were attached to
petitioner’s reply brief, are not part of the evidence in this
case. See Rule 143(b); Logsdon v. Commissioner, T.C. Memo. 1997-
8.
Even if the Court had admitted these returns into evidence,
they, by themselves, cannot substantiate the loss figures
reported on petitioner’s 2003 return. See Widemon v.
Commissioner, T.C. Memo. 2004-162 (applying principle to capital
losses). Accordingly, we conclude that petitioner is not
entitled to raise these purported prior years’ losses as an issue
and that even if he were so entitled, he has failed to provide
any substantiation to support the losses to which he claims he is
entitled.
Suspended Passive Activity Losses
With regard to the treatment of a suspended passive activity
loss, section 469(g)(1)(A) provides for such a loss when a
taxpayer disposes of his entire interest in a passive activity in
a transaction where all of the gain or loss realized on the
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disposition of the interest is recognized. Section 469(g)(1)(A)
provides that the excess of--
(i) any loss from such activity for the
taxable year (determined after the
application of subsection (b)), over
(ii) any net income or gain for such
taxable year from all other passive
activities (determined after the application
of subsection (b)),
shall be treated as a loss which is not from a passive
activity.
Accordingly, the usual result upon a taxable disposition of
a passive activity is that the taxpayer may use any remaining
suspended passive activity loss allocated to that activity first
against passive income from the same activity, then against net
passive income from other passive activities, and then as a
nonpassive loss.
On Worksheet 1, petitioner reported overall losses of
$26,018 for a “residential co-op” and $16,221 for a “residential
condo”. No further description of these properties was included
on Worksheet 1. Since petitioner’s Schedule E characterizes
three of the six total listed properties as “condo” and two of
the six total listed properties as “co-op”, it is impossible for
the Court to ascertain definitively which of the Schedule E
properties correspond to the figures reported on Worksheet 1. As
previously stated, petitioner raised these suspended losses as a
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new issue, and therefore bears the burden of proof as to the
amounts claimed.
Petitioner has not met his burden with respect to the
standard for record keeping under section 6001. Petitioner
provided no proof as to the amounts of the suspended losses to
which he now claims that he is entitled. The only exhibits
pertinent to this issue are petitioner’s tax returns for 2003 and
2004. Contrary to petitioner’s belief, a tax return alone is not
proof of a taxpayer’s entitlement to a deduction claimed therein;
a tax return merely sets forth the taxpayer’s claim. See Roberts
v. Commissioner, 62 T.C. 834, 837 (1974); Seabord Commercial
Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957). Without
substantive evidence, we simply cannot determine whether
petitioner is entitled to deduct losses for 2003 from the
properties that he sold in that year.
After concessions, it is agreed that petitioner’s rental
real estate activities were passive activities during the years
in issue. While we agree that under section 469(g)(1)(A)
petitioner would be entitled to claim a suspended loss deduction
for 2003 on the basis of his disposition of his entire interest
in the aforementioned passive activities, he did not do so on his
2003 return. This issue was first raised on brief. Moreover, we
lack the necessary proof that he did, in fact, incur these
losses. Accordingly, and on the basis of the foregoing, we hold
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that petitioner has not met his burden with respect to this
issue, and is therefore not entitled to claim a suspended loss
deduction for the dispositions of his interests in the
aforementioned passive activities for 2003.
To reflect the foregoing, including all concessions,
Decision will be entered
under Rule 155.