T.C. Summary Opinion 2010-96
UNITED STATES TAX COURT
MARTHA ANN OLSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4954-08S. Filed July 19, 2010.
Martha Ann Olson, pro se.
Stewart Todd Hittinger, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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Respondent determined an $8,133 deficiency in petitioner’s
2000 Federal income tax and a $1,475 addition to tax under
section 6651(a)(1). The issues we must decide are: (1) Whether
petitioner is entitled to a $38,3222 bad debt deduction; (2)
whether petitioner is entitled to a $120 depreciation deduction;
(3) whether petitioner is entitled to a $6,920 amortization
deduction; and (4) whether petitioner is liable for an addition
to tax pursuant to section 6651(a)(1).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference.
At the time the petition was filed, petitioner resided in
Indiana.
In July 1996 petitioner purchased a check cashing business
which she operated under the name Checkrite. Although a written
memorandum of understanding was prepared, there was no formal
written contract for the purchase of the business. A portion of
the purchase price was satisfied by the transfer of a parcel of
2
On Schedule C, Profit or Loss From Business, petitioner
claimed a $38,322 bad debt deduction. However, on the Form 5278,
Statement--Income Tax Changes, and the Form 886-A, Explanation of
Adjustments, attached to the notice of deficiency respondent
adjusted petitioner’s income by $38,332 for the disallowed bad
debt deduction. Although this discrepancy will not bear upon our
decision of whether petitioner is entitled to a bad debt
deduction, it will need to be addressed in the final
computations.
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real estate containing a pole barn. Included in the purchase of
the business were some outstanding receivables. The business was
operated in a building Checkrite leased.
The Checkrite business consisted of making “pay day” loans
to customers at an interest rate of approximately 11 percent per
week.3 Petitioner decided to close the Checkrite business at the
end of October 1997 because the local laws regarding “pay day”
loans had changed.
Petitioner continued paying rent on the business premises
for “quite a few months after * * * [she] closed the business”
because she initially had planned on reopening the business.
Although the specific date has not been disclosed, the parties
stipulate that some time during 1999 petitioner decided to sell
to her brother some of the furniture and equipment she acquired
when she purchased the business in 1996. After she had closed
the Checkrite business, petitioner’s brother, who was also in the
business of making “pay day” loans, sublet the business premises
from her.
Petitioner and her husband filed joint Federal income tax
returns for the years 1996 and 1997. Using the cash method of
3
Although the parties stipulate that the business consisted
of making loans for very short periods for a significant fee in
relation to the amount of the loan and cashing checks for which
petitioner charged a 10-percent fee, petitioner’s testimony,
corroborated by record evidence, establishes that the fee (or
interest rate) was 11 percent per week.
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accounting, petitioner reported her husband’s wages and his
muffler shop business income on the 1996 and 1997 joint returns.
However, petitioner did not report any of the operations of
Checkrite on the 1996 and 1997 returns. Petitioner did not
believe that she needed to report anything from the Checkrite
business on the 1996 and 1997 returns because, in her view, she
reinvested all the income back into the business; i.e., as
customers would make payments against their outstanding
liabilities, petitioner would collect the payments and then make
additional loans to new or existing customers.
Before filing her 2000 return petitioner had not reported
any income or expenses regarding Checkrite. Petitioner and her
husband’s 2000 joint Federal income tax return was filed on April
15, 2003.4 On the Schedule C, Profit or Loss From Business,
attached to the 2000 return petitioner reported that Checkrite
used the cash method of accounting. On the Schedule C for the
Checkrite business, petitioner reported zero gross income but
also claimed deductions of $38,322 for bad debts, $120 for
depreciation, $200 for legal and professional services, and
$6,920 for amortization of goodwill. The 2000 return reported a
$45,562 loss from Checkrite. At trial petitioner provided
numerous canceled checks from third parties dated in 1996 and
1997 that indicate they were dishonored because of insufficient
4
Petitioner’s husband died in 2004.
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funds or closed accounts. Petitioner testified that the
dishonored checks represent bad debts but she did not produce any
other records to establish that they were related to unpaid
loans.
Discussion
A. Schedule C Deductions
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving that she is entitled to any
deductions claimed.5 Rule 142(a); see also INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Deputy v. du Pont, 308 U.S.
488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934).
1. Bad Debts
In the case of a noncorporate taxpayer, section 166 permits
a deduction for a business debt that becomes worthless during the
taxable year. Sec. 166(a), (d)(1)(A).
On the 2000 Schedule C for Checkrite petitioner reported
zero gross income. Petitioner operated Checkrite in 1996 and
1997 and terminated the business around October 1997. Petitioner
did not report income from Checkrite on either the 1996 or 1997
returns or on any other return before the 2000 return.
Petitioner has not established the existence of bad debts, or if
5
Petitioner does not contend that the burden should shift
under sec. 7491(a), and the record shows no basis for such a
contention.
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they existed, when the amounts claimed as bad debts became
worthless. Although the record contains what appear to be
dishonored checks dated in 1996 and 1997, petitioner has failed
to offer anything more than her self-serving testimony that they
represent debts that became worthless in 2000. At trial
petitioner testified that she determined that the debts became
worthless in 2000 because she had verified that some of the
people she had lent money to had either filed bankruptcy or died
and she also believed that 3 years was the statutory period
within which she could submit any claim to the local prosecutor.
This Court is not bound to accept a taxpayer’s self-serving,
unverified, and undocumented testimony. Shea v. Commissioner,
112 T.C. 183, 189 (1999); Tokarski v. Commissioner, 87 T.C. 74,
77 (1986). Accordingly, we hold that petitioner is not entitled
to the claimed $38,322 bad debt deduction.
2. Depreciation Expense
Section 167(a) generally allows as a depreciation deduction
a reasonable allowance for the exhaustion, wear and tear, and
obsolescence of: (1) Property used in a trade or business, or
(2) property held for the production of income. Trask v.
Commissioner, T.C. Memo. 2010-78. In addition a taxpayer must
establish the property’s depreciable basis by showing the cost of
the property, its useful life, and the previously allowable
depreciation. Cluck v. Commissioner, 105 T.C. 324, 337 (1995).
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Petitioner, however, has failed to provide documentary or
testimonial evidence establishing the property subject to
depreciation, the adjusted basis of the property, see secs.
167(c), 1011, the applicable depreciation method, see sec.
168(b), the applicable recovery period, see sec. 168(c), and the
applicable convention, see sec. 168(d). In fact, petitioner did
not address this issue at trial, and the record indicates that
the Checkrite business ended in 1997. Accordingly, petitioner
has failed to satisfy her burden of proof, and, therefore, we
sustain respondent’s determination disallowing the claimed $120
depreciation deduction. See Rules 142(a), 149(b); Petzoldt v.
Commissioner, 92 T.C. 661, 683 (1989).
3. Amortization Deduction
Section 197(a) generally provides that a taxpayer is
entitled to an amortization deduction with respect to any
amortizable section 197 intangible. For this purpose section
197(d) defines the term “section 197 intangible” as, inter alia,
goodwill. Section 197(c)(1) defines the term “amortizable
section 197 intangible” as any section 197 intangible: (A) Which
is acquired by the taxpayer after the date of the enactment of
this section, and (B) which is held in connection with the
conduct of a trade or business or an activity described in
section 212.
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Petitioner claimed a $6,920 amortization deduction for
goodwill acquired upon the purchase of Checkrite. The Checkrite
business ended in 1997. Petitioner did not provide any
documentary or testimonial evidence establishing the acquisition
of goodwill when she purchased Checkrite in 1996. On her 2000
return she described goodwill related to Checkrite with a basis
of $103,800 and an acquisition date of July 1, 1996, but has not
established how the basis was determined nor how it is deductible
in 2000 after she closed the business in 1997. Petitioner did
not address this issue at trial. Accordingly, petitioner has
failed to satisfy her burden of proving respondent’s
determination is incorrect, and, therefore, we sustain
respondent’s determination disallowing the $6,920 amortization
deduction. See Rules 142(a), 149(b); Petzoldt v. Commissioner,
supra at 683.
B. Addition to Tax Under Section 6651(a)(1)
Section 6651(a)(1) imposes an addition to tax for failure to
file a return unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. See United
States v. Boyle, 469 U.S. 241, 245 (1985).
Petitioner filed her 2000 return on April 15, 2003,
approximately 2 years after its due date, April 15, 2001.
Respondent has satisfied his burden of production with respect to
the section 6651(a)(1) addition to tax. See sec. 7491(c).
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Petitioner did not address this issue at trial.
Accordingly, we sustain respondent’s determination with respect
to the section 6651(a)(1) addition to tax. See Rules 142(a),
149(b); Petzoldt v. Commissioner, supra at 683.
To reflect the foregoing,
Decision will be entered
under Rule 155.