T.C. Memo. 2008-182
UNITED STATES TAX COURT
STANLEY A. COOK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24547-06. Filed July 30, 2008.
Stanley A. Cook, pro se.
William J. Gregg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DEAN, Special Trial Judge: Respondent determined a $12,104
deficiency in petitioner’s 2003 Federal income tax and additions
to tax of $162.67 and $93.99 under section 6651(a)(1) and (2),
respectively.
Unless otherwise indicated, all section references are to
the Internal Revenue Code (IRC), as in effect for the year at
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issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Petitioner has conceded that he received in 2003: (1) Wages
of $65,662.90; (2) gross rental income of $6,450; (3) taxable
dividend income of $822.26, of which $707.51 is qualified
dividends; (4) $75.91 of taxable interest; (5) a capital gain
distribution of $67; (6) self-employment income of $909.52; and
(7) taxable individual retirement account (IRA) distributions of
$338.97.
Respondent has conceded that petitioner is entitled to:
(1) A $3,000 capital loss deduction; (2) a $900 deduction for an
IRA contribution; (3) a $64.26 deduction for self-employment
taxes; (4) a $5,900 standard deduction; (5) an $11,033.16 expense
deduction on Schedule E, Supplemental Income and Loss; (6) a
$3,050 personal exemption; (7) a foreign tax credit of $19; and
(8) a prepayment credit of $11,383. Respondent also concedes
that only $338.97 of the $1,486.97 IRA distribution is taxable
and that petitioner is not liable for the section 6651(a)(1) and
(2) additions to tax.
The issues remaining for decision are whether:
(1) Respondent erred in using a zero basis and determining a $972
capital gain with respect to petitioner’s sale of his “Sonera”
stock; and (2) petitioner is entitled to deduct rental real
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estate expenditures and losses greater than the amounts to which
respondent has agreed.
The stipulated facts and exhibits received into evidence are
incorporated herein by reference. At the time the petition was
filed, petitioner resided in Virginia.
FINDINGS OF FACT
During 2003 petitioner was employed by the U.S.
Environmental Protection Agency, he provided financial services
to others, and he rented a townhouse to third parties (rental
activity). Although petitioner received $75,314.04 in gross
income in 2003 from these activities and other sources, he did
not report the items on a timely filed Form 1040, U.S. Individual
Income Tax Return.
Respondent, from third-party payor records, determined that
petitioner received the following income items in 2003:
Item Amount
Compensation for services $65,662
Deferred compensation (nontaxable) 11,658
Gain on stock sale 972
Interest 73
Ordinary dividends 115
Qualified dividends 706
IRA distributions 1,486
Capital gain 67
Self-employment income 700
Total 81,439
Respondent reduced the $81,439 figure by $11,658 (nontaxable
deferred compensation), determining an adjusted gross income
(AGI) of $69,781. As determined by respondent, petitioner’s
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taxable income was $60,781.50.1 He also determined a $12,104
deficiency.2 After applying $11,381 in “PRE-PAID CREDITS”, he
determined a net tax due of $723. He also determined additions
to tax of $162.67 and $93.99 under section 6651(a)(1) and (2),
respectively. Respondent issued a deficiency notice to
petitioner on September 5, 2006.
In response to the deficiency notice, petitioner mailed a
Form 1040 for 2003 to the Internal Revenue Service (IRS); it was
received on April 6, 2007. Petitioner reported the previously
unreported income items (some of which he reported in greater
amounts than respondent had determined). He, however, claimed
that only $338.97 of the $1,486.97 IRA distribution was taxable.
He also claimed a $2,427.93 loss on the stock sale rather than
the $972 gain that respondent had determined. On Schedule E he
reported $6,450 in rents received less $11,608.63 in “Total
expenses” for a $5,158.63 loss with respect to his rental
activity. He reported the $5,158.63 loss as a reduction of gross
income. He reported an AGI of $58,686.67, taxable income of
$49,736.67, and a “total tax” of $8,732.23. His tax was offset
1
$69,781 (total income) less $3,050 (personal exemption),
$5,900 (standard deduction), and $49.50 (“ADJUSTMENT TO INCOME”).
2
$12,005 (income tax) plus $99 (self-employment tax).
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by $11,383.43 in withholdings, and he claimed a $2,651.20
refund.3
OPINION
I. Burden of Proof
Generally, 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 if the taxpayer introduces
credible evidence with respect to the issue. See sec.
3
The Court has jurisdiction to determine petitioner’s
overpayment. See sec. 6512(b). The deficiency notice, dated
Sept. 5, 2006, appears to have been mailed during the third year
after the Apr. 15, 2004, due date (including extensions) for
filing petitioner’s return. See sec. 6512(b)(3). Although
petitioner included a copy of a Form 4868, Application for
Automatic Extension of Time To File U.S. Individual Income Tax
Return, with his trial memorandum, it does not contain a date
stamp “Received” by the IRS (and it was not received into
evidence at trial). Accordingly, the Court assumes that
petitioner did not receive an extension and that he is entitled
to the benefit of a 3-year lookback period. Petitioner’s tax was
paid within the 3-year lookback period. See secs. 6513(b)(1)
(any tax actually deducted and withheld at the source under
chapter 24 is deemed to have been paid by the income recipient on
the 15th day of April following the close of the taxable year),
6611(d) (provisions of sec. 6513 apply for purposes of
determining the date of payment for purposes of subsec. (a),
relating to interest on overpayments); see also Baral v. United
States, 528 U.S. 431, 437-439 (2000) (withheld amounts are “paid”
on the due date of the taxpayer’s Federal income tax return,
notwithstanding that the tax has not been assessed).
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7491(a)(1). Petitioner has neither alleged nor proven that
section 7491(a) applies; accordingly, the burden remains on him.
II. Consequences of Petitioner’s Failure To Timely File: $972
Gain and Zero Basis
Respondent determined a $972 amount realized, a zero basis,
and a $972 capital gain with respect to petitioner’s “Sonera”
stock. See secs. 1001(a), (c), 1012.
Petitioner, on his untimely Form 1040, reported a $972.79
amount realized, a $3,400.72 cost basis, and a $2,427.93 long-
term capital loss.
If the taxpayer fails to file a return, “‘the amount shown
as the tax by the taxpayer upon his return’ shall be considered
as zero * * * and the deficiency is the amount of the income tax
imposed by” the IRC. Sec. 301.6211-1(a), Proced. & Admin. Regs.;
see also Laing v. United States, 423 U.S. 161, 174 (1976) (“Where
there has been no tax return filed, the deficiency is the amount
of tax due”); Schiff v. United States, 919 F.2d 830, 832 (2d Cir.
1990); Roat v. Commissioner, 847 F.2d 1379, 1381 (9th Cir. 1988)
(“If no return is made the Commissioner simply proceeds with his
independent calculation”); Hartman v. Commissioner, 65 T.C. 542,
546 (1975); Widemon v. Commissioner, T.C. Memo. 2004-162.
To overcome respondent’s determinations, petitioner must
prove that he is entitled to claim a $2,427.93 long-term capital
loss, and he must prove a basis greater than zero. See Rule
142(a); Welch v. Helvering, supra at 115; Karara v. Commissioner,
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T.C. Memo. 1999-253, affd. without published opinion 214 F.3d
1358 (11th Cir. 2000); Bennett v. Commissioner, T.C. Memo.
1997-145 (and cases cited therein), affd. without published
opinion 141 F.3d 1149 (1st Cir. 1998); see also Laing v. United
States, supra at 174; Roat v. Commissioner, supra at 1381.
Citing certain IRS publications that refer to the time
within which one may timely file a refund claim, petitioner
argues that his Form 1040 was timely filed and therefore the
IRS’s “policy” of using a zero basis “leads [the] IRS to make
false claims of indebtedness.”
The language he refers to does not, however, negate a
taxpayer’s obligation to file a timely Federal income tax return.
See United States v. Boyle, 469 U.S. 241, 249 (1985) (Congress
placed upon taxpayers the “obligation to ascertain the statutory
deadline and then to meet that deadline”); Miller v.
Commissioner, 114 T.C. 184, 195 (2000). An individual over age
65 is required to file a Federal income tax return if his gross
income for the taxable year equals or exceeds the sum of the
exemption amount, the basic standard deduction, and an additional
standard deduction. Sec. 6012(a)(1)(A)(i), (B). In the case of
returns filed pursuant to section 6012, calendar year returns
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“shall be filed on or before the 15th day of April following the
close of the calendar year”. Sec. 6072(a).4
Petitioner did not provide any evidence to respondent or to
the Court to substantiate the $3,400.72 amount that he claimed as
his basis or the claimed $2,427.93 long-term capital loss, as
required by the IRC and the regulations.5 See secs. 6001,
6011(a); secs. 1.6001-1(a), 1.6011-1(a) and (b), Income Tax Regs.
Accordingly, respondent’s determinations as to a zero basis and a
$972 capital gain are sustained.
III. Petitioner’s Deductions for Expenditures Paid or Incurred
in His Rental Activity
Ordinary and necessary expenses paid or incurred during the
taxable year in carrying on a trade or business are generally
deductible, sec. 162(a), while personal, living, and family
expenses are not deductible, sec. 262(a). An individual’s rental
real estate activity can constitute a trade or business for
purposes of section 162(a). See, e.g., Hazard v. Commissioner, 7
4
Petitioner’s gross income exceeded his $8,950 filing
threshold, and his return was not filed until Apr. 6, 2007.
5
At the calendar call, petitioner stated that he would
like to call a certain witness (a local broker) to testify as to
“what are legitimate costs for basis.” He was not allowed to
call the witness because he did not comply with the Court’s Rules
or the Federal Rules of Evidence or Procedure. See Rule 143(a),
(f) (regarding the submission of expert witness reports); see
also Fed. R. Evid. 602 (requiring witnesses to have personal
knowledge; there was no indication that the local broker had
personal knowledge as to petitioner’s basis in his “Sonera”
stock).
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T.C. 372 (1946). But see, e.g., Balsamo v. Commissioner, T.C.
Memo. 1987-477 (the taxpayer’s rental real estate activity did
not constitute a trade or business; rather, the property was held
for the production of income within the meaning of section
212(1)).
As used in the IRC, the term “ordinary” means normal, usual,
or customary; the transaction that gives rise to the expense must
be a common or frequent occurrence within the activity involved.
Deputy v. du Pont, 308 U.S. 488, 495 (1940). The term
“necessary” means the expenditures are appropriate and helpful.
Welch v. Helvering, 290 U.S. at 113.
Respondent conceded that petitioner was entitled to deduct
$11,033.16 in “Total Expenses” with respect to his rental
activity. The allowed expenditures offset the $6,450 rental
income, generating a $4,583.16 loss.
Petitioner contends that he is entitled to deduct
expenditures, and their related losses, greater than the amounts
to which respondent has agreed. The expenditures at issue
include a $500 deduction for legal and professional fees with
respect to the towing of petitioner’s automobile and a $148.80
deduction for a telephone installed in the basement of the
townhouse, which was used “like [a] storage room.”
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A. The Telephone Expense
Petitioner testified that the $148.80 expense was incurred
for a telephone used “when I would get into town”6 for conducting
business with contractors, prospective tenants, etc. while the
townhouse was vacant. Tenants also had access to the phone
because it was not kept behind a locked door. He also testified
that a “C.P.A.” said to just take “half [of the telephone
expense] and that should be fair.”
Petitioner failed to show that the expenditure was an
ordinary and necessary expense of a rental real estate activity.
See secs. 162(a), 212(1) and (2), 262(a); see also secs.
1.162-1(a), 1.212-1(a)(1) and (2), 1.262-1(a) and (b), Income Tax
Regs. He also failed to establish the amount of his business
versus personal use (i.e., by percentage or increments of time).
See secs. 162(a), 212(1) and (2), 262(a); secs. 1.162-1(a),
1.212-1(a)(1) and (2), 1.262-1(a) and (b), Income Tax Regs.
Accordingly, respondent’s disallowance of the expense is
sustained.
B. $500 Legal Fee With Respect To Petitioner’s Automobile
The Court must inquire into the origin and character of the
$500 legal fee to determine whether petitioner is entitled to
deduct the expense. See United States v. Gilmore, 372 U.S. 39,
6
Petitioner testified that the townhouse was in
Charlottesville, Virginia.
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51 (1963); see also secs. 162, 212, 262(a), 263; secs.
1.212-1(k), 1.263(a)-2(c), Income Tax Regs. (discussing certain
expenditures that must be capitalized). The “origin-of-the-
claim” rule requires an examination of the facts and
circumstances to determine out of what kind of transaction the
litigation arose. Boagni v. Commissioner, 59 T.C. 708, 713
(1973). The Court also considers the issues, the action’s nature
and objectives, the defenses asserted, the purpose for the legal
fees, and the background of the litigation. Id.
In order for the $500 legal fee to be deductible, the origin
of the claim must be proximately related to petitioner’s rental
activity. See United States v. Gilmore, supra at 51; D’Angelo v.
Commissioner, T.C. Memo. 2003-295. Petitioner testified that he
kept a car “adjacent” to his rental property “for when I was
there”, see supra note 6, to “take care of the property, [and to]
go get things.” He further explained that “There was this feud”
with the homeowner’s association over the car being there, and
the association had the car towed. I “had to sue”, he testified,
thereby incurring the fees in dispute. It was “declared
illegally towed, and I did get the property back.”
The Court finds that the origin and character of the $500
legal fee are personal; therefore, the expense is not deductible.
See sec. 262(a); cf. Lare v. Commissioner, 62 T.C. 739 (1974)
(discussing a personal dispute unrelated to defending the
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taxpayer’s interest in the estate), affd. without published
opinion 521 F.2d 1399 (3d Cir. 1975). Accordingly, respondent’s
disallowance of the expense is sustained, and petitioner is not
entitled to a business loss greater than the amount to which
respondent has agreed.
To reflect the foregoing,
Decision will be entered under
Rule 155.