T.C. Memo. 2009-35
UNITED STATES TAX COURT
PATRICK T. AND LEANNE S. FUREY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13459-06. Filed February 12, 2009.
Patrick T. and Leanne S. Furey, pro sese.
David L. Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined $14,310, $7,089, and
$31,872 deficiencies in petitioners’ respective Federal income
taxes for 2002, 2003, and 2004.
The two primary issues for decision are whether petitioners
have substantiated claimed partnership income, losses, and
expenses and whether securities trading losses that petitioners
-2-
reported on their Federal income tax returns as capital losses
may now be treated as ordinary losses.
Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Many of the circumstances in this case are vague and unclear.
At the time the petition was filed, petitioners resided in
Minnesota.
On their 2002, 2003, and 2004 joint Federal income tax
returns petitioners reported taxable income and taxes paid and
claimed tax overpayments, as follows:
Year
2002 2003 2004
Taxable income -0- -0- $95,732
Taxes due -0- -0- 21,470
Taxes paid $18,226 $18,067 53,028
Overpayment 18,226 18,067 31,558
Upon receipt respondent processed petitioners’ Federal
income tax returns and refunded to petitioners the claimed tax
overpayments.
During respondent’s audit of petitioners’ 2002, 2003, and
2004 Federal income tax returns, Patrick T. Furey (petitioner),
-3-
informally provided respondent’s revenue agent what appeared to
be partially amended 2002, 2003, and 2004 joint Federal income
tax returns (amended tax returns). The amended tax returns were
not signed by petitioners, were undated, and were not filed with
respondent.
Petitioners’ filed tax returns and the amended tax returns
were prepared by a retired accountant (preparer) whose title was
shown on petitioners’ tax returns as “C.P.A.” despite the fact
that his C.P.A. license had expired.
On petitioners’ filed tax return for each year, petitioner’s
occupation is reported as “corporate executive”. On the amended
tax returns petitioner’s occupation is shown as “trader in
securities”.
Harmony Malting
On their 2002 and 2003 filed joint Federal income tax
returns petitioners reported income, capital gains, losses, and
expenses relating to petitioner’s alleged interest in a
partnership by the name of Harmony Malting (HM), as follows:
Year
Harmony 2002 2003
Interest income --- $922
Ordinary dividends --- 5,859
Net long-term capital gain $30,201 ---
Net sec. 1231 gain 35,896 ---
Sec. 179 expense (163) (754)
Nonpassive ordinary loss (173,260) (158,303)
-4-
Petitioner claims that an individual by the name of Robert
Saterdalen was his partner in HM. Petitioner claims that in 2003
Mr. Saterdalen disappeared and HM went out of business.
Petitioner explains that if Mr. Saterdalen is not someday found
he (petitioner) might be liable for the debts of HM approximating
$510,000. Although it is not completely clear, petitioner’s
claimed losses relating to HM apparently are based on this
alleged speculative liability.
Petitioner’s tax return preparer claims that he prepared for
HM 2002 and 2003 informational Forms 1065, U.S. Return of
Partnership Income, showing that petitioner had an interest in
HM. The preparer, however, acknowledges that these Forms 1065
were never filed with respondent, and the preparer explained at
trial that if respondent wanted the Forms 1065 filed, respondent
should have asked him to do so.
Copies of the alleged Forms 1065 that the preparer submitted
to respondent during respondent’s audit show identification
numbers for HM that were either nonexistent numbers or that were
assigned to other taxpayers, and respondent has no record of the
existence of HM. HM did not file with respondent Federal income
tax returns for the years in issue.
On audit, for lack of substantiation respondent removed from
the computation of petitioners’ taxable income for 2002 and 2003
-5-
the above reported income, section 179 expense, and nonpassive
ordinary loss items relating to HM.
Becker Sunset Farms
On their 2002, 2003, and 2004 filed joint Federal income tax
returns, petitioners reported income, section 179 expenses, and
nonpassive ordinary losses relating to petitioner’s alleged
partnership or corporate interest in an entity named Becker
Sunset Farms (BSF), as follows:
BSF Item Claimed Year
by Petitioner 2002 2003 2004
Interest income --- $2,512 ---
Nonpassive ordinary income $15,363 18,512 ---
Sec. 179 expense (982) (1,052) ---
Nonpassive ordinary loss --- --- ($56,311)
A company by the name of BSF that operated a game farm was
licensed to do business in Minnesota in the 1990s, but that
company was dissolved in 1999. No credible evidence in the
record substantiates that BSF existed in any form during 2002,
2003, and 2004 and that petitioner had any ownership interest
therein.
Neither the State of Minnesota nor respondent has any record
during 2002, 2003, and 2004 of the existence of BSF, and BSF did
not file with respondent Federal income tax returns for those
years.
-6-
On audit, for lack of substantiation respondent removed from
the computation of petitioners’ taxable income for 2002, 2003,
and 2004 the above reported income, section 179 expense, and
nonpassive ordinary loss items relating to BSF.
Securities Trading Activity
Over the years petitioner invested frequently in the stock
market for his own account (securities trading activity).
On each of petitioners’ 2002, 2003, and 2004 filed Federal
income tax returns, petitioner’s securities trading activity was
treated as an investment, nonbusiness activity. Petitioners did
not claim any deductions that on the tax returns were identified
as related to petitioner’s securities trading activity, and
petitioners attached to each of their tax returns a Schedule D,
Capital Gains and Losses, relating to petitioner’s securities
trading activity and reported thereon capital gains and losses,
as follows:
Capital Gains and Losses
2002 2003 2004
($214,608) $23,780 $28,345
Petitioner did not conduct securities trades for others.
Petitioner never made a timely and proper election under section
475(f) to use the mark-to-market method of accounting with regard
to his securities trading activity.
-7-
However, attached to petitioners’ 2002, 2003, and 2004
amended joint Federal income tax returns were Schedules C, Profit
or Loss from Business, on which petitioner reported different
total amounts for his securities trading gains and losses and on
which petitioner changed the character thereof from capital to
ordinary, as follows:
Ordinary Gains and Losses
2002 2003 2004
($102,385) ($1,430) $27,609
In connection with the trial, petitioners continue to assert
the business nature of petitioner’s securities trading activity
and for 2002 petitioners again revise the total ordinary losses
claimed relating thereto (namely for 2002 $121,201).
On audit, respondent treated petitioner’s securities trading
activity as a nonbusiness investment activity and petitioner’s
gains and losses as capital gains and losses. Also relating
thereto, respondent determined that for 2002 petitioner failed to
report $30,901 of short-term capital gains and that petitioner
was entitled to annual capital losses for 2002, 2003, and 2004 of
$3,000, to short-term capital loss carryovers (from 2002 to 2003-
-$246,804, from 2003 to 2004--$220,024, and from 2004 to 2005--
$186,865), and to a long-term capital loss carryforward from 2004
to 2005 of $7,000.
-8-
At trial petitioners claimed yet different amounts for the
ordinary net losses petitioner allegedly realized in his
securities trading activity for each year in issue. Petitioners
also now claim cost of goods sold deductions relating to
petitioner’s securities trading activity.
In the notice of deficiency respondent made a number of
other adjustments to petitioners’ 2002, 2003, and 2004 Federal
income tax returns. Petitioners have offered evidence regarding
only the HM and BSF losses and the securities trading activity
set forth above.
Before trial, petitioners did not answer respondent’s
interrogatories, and petitioners did not file a pretrial
memorandum.
At trial, petitioners did not testify, and petitioners
called as their only witness their preparer.
OPINION
Generally, respondent’s determinations are presumed correct,
and petitioners bear the burden of proving that the adjustments
set forth in respondent’s notice of deficiency were erroneous.
See Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
Petitioners make no claim nor showing that under section 7491(a)
any shift in the burden of proof should occur.
As has been said repeatedly, deductions are a matter of
legislative grace. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
-9-
84 (1992). Taxpayers are expected to maintain books and records
and to substantiate claimed deductions with credible source
documentation such as invoices and receipts and books and
records.
In order to deduct partnership losses, a partner must
establish his basis in the partnership. Sec. 704(d). Further,
an individual partner may deduct partnership losses only to the
extent he is at risk, sec. 465, and passive partnership losses
are deductible only to the extent of passive partnership income,
sec. 469.
Under section 1221, the term “capital assets” includes all
assets other than assets expressly excluded. Dealers in
securities who sell to customers may recognize ordinary income or
ordinary loss on their securities trading activity. Dealers’
securities are considered to be inventory held for sale to
customers. Sec. 1221(a)(1). Apart from dealers, however, only
traders in securities whose trading activity rises to the level
of a trade or business and who make a valid election under
section 475(f) are entitled to treat gains and losses from the
sale of securities as ordinary. See generally United States v.
Diamond, 788 F.2d 1025, 1028-1030 (4th Cir. 1986); Vines v.
Commissioner, 126 T.C. 279, 288 (2006).
As is apparent, the testimonial and documentary evidence in
this case is incomplete and lacking in credibility. Petitioners’
-10-
evidence relating to HM and to BSF--their existence, their
business activity, their income and expenses, their books and
records, the partners therein--is highly suspect and completely
inadequate.
Petitioners offer implausible explanations and evidence
relating to the losses and expenses in question. For example,
petitioner states that he has HM documents in his possession at
home but that he could not produce them at trial because he
simply left them at home. Petitioner’s explanation does not
begin to explain why petitioner, if he actually had such
documents, never produced them to respondent’s revenue agent or
to respondent’s trial counsel before the trial.
Petitioner has not adequately established, for the years in
issue, the existence of HM and BSF as partnerships or otherwise
and what losses, if any, petitioner is entitled to relating to HM
and BSF.
We sustain each of respondent’s adjustments relating to HM
and BSF.
With regard to his securities trading activity, petitioner
contends that during 2002, 2003, and 2004 his securities trading
activity was so frequent and extensive that it qualifies as a
trade or business and that the ordinary losses shown on the
Schedules C attached to the unsigned partial amended tax returns
should be allowed.
-11-
Respondent contends that petitioner’s claimed securities
trading ordinary losses should be disallowed because petitioner’s
securities trading activity did not rise to the level of a trade
or business, because the losses are not substantiated, and
because petitioner did not make a section 475(f) election with
regard thereto.
For all of respondent’s reasons, we sustain respondent’s
adjustments relating to petitioner’s securities trading activity.
Petitioner has not established that his activity was anything
other than a nonbusiness investment activity with respect to
which petitioner realized only capital gains and losses.
Respondent’s other adjustments are sustained for lack of
proof. See Rule 149(b). Petitioners’ failure to call
corroborating witnesses and failure to produce at trial
documentation that is purportedly in their possession is
particularly troubling, and we assume that such evidence, if
produced, would not be favorable to petitioners. See Wichita
Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),
affd. 162 F.2d 513 (10th Cir. 1947).
Further, we deny any claims for refund made by petitioners
other than those allowed by respondent.
-12-
For the reasons stated,
Decision will be
entered under Rule 155.