T.C. Memo. 2010-74
UNITED STATES TAX COURT
PHILIP A. LEHMAN AND SARA A. MERRICK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16845-07. Filed April 14, 2010.
Robert A. Wise, for petitioners.
Richard J. Hassebrock and Gary R. Shuler, for respondent.
MEMORANDUM OPINION
HALPERN, Judge: Respondent has determined deficiencies in,
and penalties with respect to, petitioners’ Federal income tax
liabilities as follows:
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Penalties
Year Deficiency Sec. 6662(a) Sec. 6663(a)
1998 $74,320 $14,864 --
1999 89,478 17,896 --
2000 71,614 6,539 $29,190
2001 63,800 852 44,656
2002 29,586 861 18,962
Unless otherwise stated, section references are to the
Internal Revenue Code in effect for the years in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Some facts have been stipulated and are so found. The
stipulation of facts, with accompanying exhibits, is incorporated
herein by this reference. We need find few facts in addition to
those stipulated and therefore shall not separately set forth our
findings of fact. We shall make additional findings of fact as
we proceed.
Petitioners bear the burden of proof with respect to the
issues remaining for decision. See Rule 142(a). Petitioners
have not raised the issue of section 7491(a), which shifts the
burden of proof to the Commissioner in certain situations. We
conclude that section 7491(a) does not apply here because
petitioners have not produced any evidence that they have
satisfied the preconditions for its application.
Background
The parties have filed, and we accept, a stipulation of
settled issues that disposes of all but two issues in this case.
Those two issues relate to respondent’s adjustments disallowing
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net operating loss (NOL) deductions that petitioners claimed for
the years in issue. Respondent made those adjustments in part on
the ground that petitioners had failed to establish that
petitioner husband (Mr. Lehman) sustained NOLs in 1994 and 1995
or that, if he did, any of those losses carried over and were
available as NOL deductions for any year in issue. Respondent
further argues that, even if we find that any of those losses
carried over and were available as NOL deductions for any year in
issue, the passive activity loss rules of section 469 preclude
petitioners from claiming those deductions. Because we sustain
respondent’s adjustments disallowing the NOL deductions on the
ground that petitioners have failed to show that they are
entitled to NOL deductions for any year in issue, we need not
consider section 469.
Discussion
Section 172 provides for an NOL deduction. As they apply to
this case, the rules of section 172 can be stated summarily. An
NOL is the excess of the deductions allowed over the gross
income. Sec. 172(c). An NOL for any taxable year may be carried
back to each of the 3 taxable years preceding the taxable year of
the loss and carried over to each of the 15 taxable years
following the taxable year of the loss. Sec. 172(b). A taxpayer
may elect to waive the 3-year carryback period. Sec. 172(b)(3).
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On his 1994 and 1995 Federal income tax returns, Mr. Lehman
reported NOLs of $60,312 and $57,040, respectively. Petitioners
concede that Mr. Lehman made no effective elections to waive the
carryback period for those losses. Therefore, to prevail,
petitioners must prove (1) that Mr. Lehman incurred those losses
and (2) that those losses were not absorbed during the period
beginning with 1991 (the earliest carryback year) and ending with
1997 (the last year before the first year here in issue). To
carry that burden, petitioners must introduce convincing evidence
not only of Mr. Lehman’s NOLs for 1994 and 1995 but also of his
taxable income for the other years (the carry years) in the
period beginning with 1991 and ending with 1997. See, e.g.,
Leitgen v. Commissioner, T.C. Memo. 1981-525, affd. without
published opinion 691 F.2d 504 (8th Cir. 1982).
In the petition, petitioners aver nothing with respect to
either the losses Mr. Lehman reported for 1994 and 1995 or his
taxable income for the carry years. See Rule 34(b)(5) (requiring
in a deficiency case statements of the facts on which the
taxpayer bases his assignments of error (except with respect to
assignments of error for which the Commissioner bears the burden
of proof)). On brief, petitioners make 36 proposed findings of
fact, only 2 of which (remotely) address the 1994 and 1995 losses
or Mr. Lehman’s taxable income for the carry years. See Rule
151(e)(3) (briefs shall contain proposed findings of fact).
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Those two proposed findings concern “Byers Inn”, a tavern-
restaurant that petitioners claim Mr. Lehman operated at a loss.
Those two proposed findings are: (1) “Byers Inn never turned a
profit”, and (2) “Byers Inn incurred expenses that exceeded its
income.” On brief, petitioners allege that Mr. Lehman operated
Byers Inn at a loss from 1993 through 1999 and that a flood in
2003 destroyed the records of that operation. Petitioners argue
that, under the so-called Cohan rule, the net operating loss
deductions at issue should be allowed “despite the lack of
substantiating documentation.”
Under the Cohan rule, if a taxpayer establishes that an
expense is deductible but is unable to substantiate the precise
amount, the Court may estimate the amount, bearing heavily
against the taxpayer whose inexactitude is of his own making.
See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
To apply the Cohan rule, however, the Court must have some
information to estimate the proper deduction. See Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). Petitioners have
proposed no facts that, were we to so find, would allow us to
make a reasonable estimate of Mr. Lehman’s l994 and 1995 losses
from Byers Inn. Tax returns alone do not establish that a
taxpayer suffered a loss. E.g., Wilkinson v. Commissioner, 71
T.C. 633, 639 (1979). Even were we to accept Mr. Lehman’s vague
testimony that Byers Inn never turned a profit, we would still
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lack sufficient information to make a reasonable estimate of his
1994 and 1995 losses. Petitioners have failed to carry their
burden of proving an NOL for either 1994 or 1995. Moreover, Mr.
Lehman’s tax returns for the carry years are insufficient to
prove that any 1994 and 1995 NOLs (assuming such) were not
completely absorbed during the carry years. See, e.g., Stutsman
v. Commissioner, T.C. Memo. 1961-109. Indeed, petitioners fail
even to propose findings of fact with respect to 1991 and 1992,
the first 2 carry years.
We shall sustain respondent’s adjustments denying NOL
deductions for the years in issue because petitioners fail to
prove facts showing that they are entitled to those deductions.
Decision will be entered
pursuant to Rule 155.