T.C. Mem o. 2 01 6- 15 7

UNITED STAT ES TAX COURT

GREGORY A. POW ER AND AMY S. POW ER, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 21 90 3- 14
. Fi le d Au gu st22 , 20 16
.

W il li am J. So ll m an n, fo r pe ti ti on ers . Gary R. Sh ul er, J r., forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE , Ju dg e: In t wo s ep arat e n ot ic es of d efi ci en cy , res po nd en t de te rm in edde fic ie nc ie s, ad di ti on s t o t ax , andaccu racy-rela te d p en al ti es as fo ll ows :- 2 -

[* 2] Greg ory A. Power Add it io n t o Tax Accu racy-Rel at edPen al ty Year Defici en cy Sec. 6 65 1( a)(1 ) Sec. 6 66 2( a) 20 07 $1 10 ,56 6 $26 ,79 1.5 0 $2 2,1 13 .20

Greg ory A. Poweran d Amy

S. Powe r Add it io n t o Tax Accu racy-Rel at edPen al ty Year Defici en cy Sec. 6 65 1( a)(1 ) Sec. 6 66 2( a) 20 10 $2 0,4 11 $5 ,10 2.7 5 $4 ,08 2.2 0 20 11 18 ,43 4 4,6 08 .50 3,68 6.8 0 Afte r co nc es si on s, th e is su es rem ai ni ng for de ci si on are: (1) whethe r Mr. Po wer 1 in cu rredne t o pe rat in g l os se s (NOL) i n t he tax ab le y ears 19 99 -2 00 2 wh ic h wo ul d be av ai labl e as carry ov er NOL de du ct io ns ag ai ns t i nc om e fo r th e ta xabl e y ears 20 07 -1 1; (2) whet he r Mr. Po wer rec ei ve d d is tri bu ti on s fr om hi s wh ol ly owne d
subc hapt er S co rp or at io n i n e xc es s o f hi s s to ckba si s i n t he co rp or at io n fo r th e ta xabl e y ears 20 07 -1 1; an d (3 ) whe th er p et it io ne rs are l iabl e fo r acc ur acy-rela te d pe na lt ie s und er s ect io n 6 66 2( a) fo r th e ta xabl e y ears 20 07 , 20 10 , and20 11
.

At tria l o n S ep te m

be r 23 , 20 15 , th e p art ie s fi le d ast ip ul at io n o f se tt le d 1 is su es in whi chpe ti ti on ers co nc ed e v ari ou s ad jus tm en ts th atres po nd en t m ad e in th e n ot ic es of d efi ci en cy , in cl ud in g t ha t (1 ) Mr. Po wer i s l iabl e fo r th e ad di ti on to ta x u nd er s ec. 6 65 1( a)(1 ) fo r th e ta xabl e y ear 2 00 7 a nd(2) pe ti ti on ers are l iabl e fo r th e ad di ti on s t o t ax un de r se c. 66 51 (a)( 1) forth e ta xabl e y ears 20 10 an d 2 01 1.- 3 -

[* 3] Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) in effe ctforall rel ev an t years, an d a ll Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s, the st ip ul at io n o f se tt le d i ss ue s, an d t he att ach edex hi bi ts are i nc or po rat ed he rei n b y th is refe ren ce. Pet it io ne rs res id edin Ohi o a t the ti m e th ei r pe ti ti on was fi le d. Mr. Po wer i s a c omm erci al real est at e b ro ke r, an d M rs . Powe r is a fo rm er
sc ho ol tea ch er. Mr. Po wer g radua te d fr om hi gh sch oo l i n 1 97 2 a ndth erea fte r
en ro ll edin a ge ne ral bu si ne ss de gr ee p ro gr am at M iam i Un iv ers it y

inth e fal l o f 19 72 . In the su m

m er o f 19 73 Mr. Po wer en ro ll edinth e b us in es s s tu di es pro gr am atth e Uni ve rs ity

of C in ci nn at i, b uthe lef

t co ll eg e aft er the sp rin g s em es te r of 19 74 witho utco m

pl et in g ade gr ee. The Sta te of Oh io an d t he Co m m on weal th of Ke ntuc ky iss ue d M r. Po wer real est at e b ro ke r li cen se s o n M arch 5, 1 97 6, an d Dec em be r 10 , 19 80 , res pe ct iv el y . Mr. Po wer h as m ai nt ai ne d b ot h l ic en se s s in ce the res pe ct iv e d at es of is su an ce.- 4 -

[* 4] Po wer Rea lt y

Adv is or s In19 93 Mr. Po wer s ta rte d h is own real est at e b ro ke rag e fi rm , Powe r Rea lt y Adv is or s, In c. (Po wer Rea lty ). On Feb ru ary 2, 1 99 3, Po wer Rea lt y fil edart ic le s 2 of in co rp or at io n wi thth e Ohi o s ecre ta ry of s ta te , anditele ct edto be tre at edas a
subc hapt er S co rp or at io n o n F eb ru ary 19 , 19 93 . Mr. Po wer i s t he so le sh areh ol de r of Po wer Rea lt y . On No ve m

be r 6, 2 00 6, Po wer Rea lt y lea se d a n o ffi ce s ui te on Mo nt go m ery Ro adin Cin ci nn at i, Oh io . In 2 00 7 P owe r Rea lt y ha d t wo em

pl oyees a ndus ed Paychex as i ts th ird -p arty pa yro ll pro vi de r. Debb ie Berg er, a s ecre tary who is no t
a certi fie d p ub li c acc ou nt an t (C .P.A.), kep t an d m ai nt ai ne d t he bo ok s an d re co rd s fo r Po wer Rea lty . In 2 01 1 P owe r Rea lt y letMs . Berg er g o anddo wns iz edto a
sm al le r of

fic e su it e o n Ho sb ro okRo adinCin ci nn at i, Oh io . For t he tax ab le y ears 20 07 -1 1 M r. Po wer m ai nt ai ne d “ Ite m iz edPro fitan d Lo ss ” an d “ Tran sa ct io ns by Acco un t” do cu m en ts forPo wer Rea lt y . Mr. Po wer h as no form al tra in in g i n t ax or
acco un ti ng .

Mr. Po wer h as be ena li cen se d re al est at e b ro ke r fo r 40 y ears . Befo re 2 st art in g P owe r Rea lt y

in 19 93 , Mr. Po wer wo rk edfor Fred eri ckSch m id t an d Ch el se a Mo or e, res pe ct iv el y , whi ch are re al est at e fi rm s i n C in ci nn at i, Oh io
.- 5 -

[* 5] Po wer Rea lt y ’s Form s 1 12 0S Po wer Rea lt y

fil edFo rm s 1 12 0S , U.S. Inco m e Tax Return fo r anSCo rp or at io n, fo r th e ta xabl e y ears 19 93 -2 01 1, wh ic h wer e p rep aredby eith er Att orne y C. Ch ris to ph er Mu th or C .P.A. Andrew J . Buc he r. Whe n M r. Mu th 3 pr ep aredreturns , Mr. Po wer wo ul d t y pi cal ly pro vi de hi m

with o ne or t wo s he et s o f pape r with h an dwr it te n i nc om e an d e xp en se cat eg or ie s an d c orres po nd in g
am ou nt s. Mr . Powe r wou ldpro vi de un de rlyin g d oc um en ta ti on to Mr. Mu th

“ [o ]ccasi on al ly, bu t n otve ry freque nt ly.” T he reco rddo es no t es tabl is h wh ethe r Mr. Po wer fo ll owe d asi m il ar p ro to co l fo r ta x re tu rn s tha t M r. Bu ch er p rep ared
. The fol lo win g t ab le is a su m m ary of pe rti ne ntit em s re po rte d o n P owe r Rea lt y ’s Fo rm s 1 12 0S forth e ta xabl e y ears 19 93 -2 00 6: Date O rdinary Income Prope rty Filed Ye ar Income or L oss Items Distributions

--- 1993 ($56,552) - 0- -0-

--- 1994 (38,376) - 0- -0- 5/19/00 1995 (191,044) -0- - 0- 6/30/00 1996 (70,325) -0- - 0- 8/18/00 1997 (19,670) -0- - 0- 9/27/00 1998 (23,783) -0- - 0- 5/19/00 1999 (18,056) -0- - 0- 1/4/02 2000 (21,760) -0- - 0-
Mr. Mu th pre pa redPo wer Rea lt y ’s Form s 1 12 0S forth e ta xabl e y ears 3 19 93 -2 00 6 a nd20 10 -1 1 a ndam en de d F orm s 1 12 0S for th e ta xabl e y ears 20 08 -0 9. Mr. Bu ch er p rep aredPo wer Rea lt y ’s Form s 1 12 0S forth e ta xabl e y ears 20 07 -0 9 an d a m en de d F orm

11 20 S fo r th e ta xabl e y ear 2 00 7.- 6 -

[* 6] 3/26/03 2001 (9,840) -0- - 0- 10/6/03 2002 (99,813) -0- - 0- 9/20/04 2003 218,409 -0- -0- 9/19/05 2004 19,210 -0- -0- 10/16/06 2005 193,849 -0- $150,000 9/17/07 2006 487,266 $21,673 200,000 On i ts Fo rm

11 20 S fo r th e ta xabl e y ear 2 00 7 (i .e., th e fi rs t t ax ab le y ear i n i ss ue ), Po wer Rea lt y

rep orte d o n i ts NOL work sh eetNOL carry ov ers as f ol lo ws: Year NOL 19 99 $3 3,5 35 20 00 13 8,6 85 20 01 12 8,6 23 20 02 21 7,2 45 Total 51 8,0 88 Po wer Rea lt y

co m pe ns at edMr. Po wer thr ou gh di st rib ut io ns rathe r th an wag es or s al ary. Howev er, Po wer Rea lt y di d n otrep ort an y

di st rib ut io ns to Mr. Po wer o n i ts Fo rm s 1 12 0S forth e ta xabl e y ears 20 07 -1 1. Mr . Powe r us edfun ds fro m Po wer Rea lty

to pa y pe rs on al li vi ng ex pe ns es of p et it io ne rs foreachof t he ta xabl e y ears 20 07 -1 1. Furth erm or e, du rin g t he tax ab le y ears 20 07 -1 1 P owe r Rea lty cla im edde du ct io ns on it s Fo rm s 1 12 0S forcert ai n p ers on al li vi ng ex pe ns es of Mr. Po wer. In19 86 Mr. Po wer p ur ch as eda th ree- be dr oo m , th ree- ba th ro om ran ch on NorthCli pp en ge r Driv e in Cin ci nn at i, Oh io (Cl ip pe ng er re si de nc e), fo r $2 56 ,00 0. On J ul y 30 , 20 07 , Mr. Po wer wir ed$1 ,11 5,0 26 fro m two cert ifi cat es of d ep os it- 7 -

[* 7] (CDs ) atU.S. Ban k t o Nat io na l Ci ty Bankforth e p ur ch as e o f rea l p ro pe rty at Tud or Hil l Es ta te s i n In di anHil l, Oh io (In di anHil l p ro pe rty). Mr. Powe r reque st edth atth e b al an ce o f th e CDs ($3 9,7 25 .75 ) be tra ns ferr edto Po wer Rea lty ’s ban k a cco un t. Pet it io ne rs pu rch as edth e In di anHil l p ro pe rty us in g t he
m on ey wire d fr om

U.S. Ban k a nd$1 00 ,00 0 fr om Po wer Rea lt y . In 2 00 8 pe ti ti on ers m ov edou t o f th e Cl ip pe ng er res id en ce. Pet it io ne rs ren te d t he Cl ip pe ng er re si de nc e fo r 20 10 an d t he fir stsev enm on th s o f 20 11 be fo re s el li ng it in 20 12
. Pet it io ne rs ’ Tax Returns Mr. Po wer fi le d F orm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r th e ta xabl e y ears 19 94 -2 00 3 c la im in g s in gl e st atus . Peti ti on ers were m arri edon Feb ru ary 14 , 20 04 , andMr. Po wer cl ai m edm arri edfil in g s ep arat el y st atus on hi s Fo rm s 1 04 0 fo r th e ta xabl e y ears 20 04 -0 9. Pe ti ti on ers joi nt ly file d the ir 2 01 0 a nd 20 11 Fo rm s 1 04 0. Eithe r Mr. M ut h o r Mr. Bu ch er p rep aredMr. Po wer’s ta x re turn s fo r th e ta xabl e y ears 19 93 -2 00 9 a ndpe ti ti on ers ’ ta x re tu rn s fo r th e ta xabl e y ears 20 10
- 11
. After

th e in co rp or at io n o f Po wer Rea lt y in19 93 , Mr. Mu th advi se d M r. 4
Mr. Mu th pre pa red(1) Mr. Po wer’s Fo rm s 1 04 0 fo r th e ta xabl e y ears 19 94
- 4 20 00 an d 2 00 2- 06 ; (2 ) Mr. Po wer’s Fo rm s 1 04 0X, Am en de d U.S. In di vi du al (co nt in ue d...)- 8 -

[* 8] Po wer tha t al l i nc om e an d e xp en se s fr om Po wer Rea lt y

ha d t o b e rep orte d o n Fo rm s 1 12 0S an d t ha t the res ul ti ng ne t i nc om e o r lo ss wou ld“ flo w th ro ug h” to Mr. Po wer’s in di vi du al tax return. Des pi te th is advi ce, an d fo r rea so ns un cl ear fro m th e rec or d, M r. Po wer s pl itth e in co m e an d e xp en se s o f Po wer Rea lt y be twee n S ch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , att ach edto Fo rm s 1 04 0 a nd Fo rm s 1 12 0S . The fo ll owi ng tab le is a su m m ary of th e ad jus te d g ro ss in co m e an d Sch edul e C i nc om e/ lo ss onMr. Po wer’s Fo rm s 1 04 0 fo r th e ta xabl e y ears 19 93
- 20 09 : Date A djusted Schedule C Filed Ye ar Gross Income Income/L oss 10/17/94 1993 ($21,405) $83,786 10/18/95 1994 40,170 76,831 1 7/26/00 1995 28,507 (114,822) 10/31/03 1996 (136,862) (108,994) 12/31/03 1997 (298,881) (115,791) 12/31/03 1998 (439,929) (110,865) 1/21/04 1999 (547,830) (116,863) 2/8/04 2000 (685,360) (117,931) 1/28/04 2001 (724,882) ( 118,783) 2 4/27/04 2002 (1,059,417) (117,432) 9/30/04 2003 (978,336) (137,328) 9/28/05 2004 (1,023,334) 4,859 10/18/06 2005 (863,030) (19,335) (...co nt inue d) 4 In co m e Tax Return, fo r th e ta xabl e y ears 20 01 an d 2 00 8; an d (3 ) pe ti ti on ers ’ Fo rm s 1 04 0 fo r th e ta xabl e y ears 20 10 -1 1. Mr . Buc he r pr ep ared(1) Mr. Po wer’s Fo rm s 1 04 0 fo r th e ta xabl e y ears 20 07 -0 9 a nd(2) Mr. Po wer’s Fo rm 10 40 X for th e ta xabl e y ear 2 00 7. Itis un cl ear f ro m th e rec or d wh o p rep aredMr. Po wer’s Fo rm 10 40 forth e ta xabl e y ear 2 00 1.- 9 -

[* 9] 9/17/07 2006 (429,738) (3,796) 5/9/11 2007 (358,913) (993) 5/9/11 2008 (433,183) (30,935) 5/9/11 2009 (361,673) (26,913)

The pa rties have stipulated the above -re fer ence d dates a nd 1 amounts. Howeve r, thereappea r to be inconsistenc ies betwe en cer tain stipulated amounts and the amounts re ported on the corr espondingtax returns. We have c orre cted these discrepa ncies to comport with the underly ing e x hibits. On May 8, 2006, responde nt rec eived f rom Mr. Power 2 a F orm 1040X for

the taxable year

2001, which wa s signe d by Mr. Muth as the tax return pre pare r. Res po nd en t re cei ve d fr om Po wer Rea lt y

anam en de d F orm

11 20 S fo r th e ta xabl e y ear 2 00 7 o n J un e 1 , 20 12 , andam en de d F orm s 1 12 0S forth e ta xabl e y ears 20 08 an d 2 00 9 o n Au gu st16 , 20 12 . Becau se res po nd en t re cei ve d t he
am en de d F orm s 1 12 0S du rin g t he ex am in at io n p ro ces s, h e d idno t p ro ces s t he m . On t he am en de d F orm s 1 12 0S forth e ta xabl e y ears 20 07 -0 9 M r. Po wer rem ov ed th e p rev io us ly clai m edde du ct io ns forpe rs on al ex pe ns es . Res po nd en t re cei ve d fr om Mr. Po wer Fo rm s 1 04 0X fo r th e ta xabl e y ears 20 07 an d 2 00 8 o n J un e 1 an d Au gu st16 , 20 12 , res pe ct iv el y . On the am en de d 5 returns for20 07 an d 2 00 8 M r. Po wer rem ov edall it em s p rev io us ly repo rte d o n Sch edul es C. Howev er, b ecau se res po nd en t re cei ve d t he 20 07 an d 2 00 8 a m en de d

Mr. Bu ch er s ig ne d t he 20 07 am en de d re tu rnas t he tax return p rep arer , and 5 Mr. Mu th si gn edth e 2 00 8 a m en de d re turn .- 10 -

[* 10 ] returns du rin g the ex am in at io n o f Mr. Po wer’s an d p et it io ne rs ’ returns , res po nd en t d idno t p ro ces s ei th er Fo rm 10 40 X. On J un e 1 6, 2 01 4, re sp on de ntis su edpe ti ti on ers two sep arat e n ot ic es of de fic ie nc y . The fi rs t was is su edto Mr. Po wer i nd iv idua ll y forth e ta xabl e y ear 20 07 , andth e se co ndwas i ss ue d t o p et it io ne rs joi nt ly for the tax ab le y ears 20 10
an d 2 01 1. Pe ti ti on ers ti m el y fil eda pe ti ti on di sp ut in g re sp on de nt ’s det erm in at io ns in th e n ot ic es of d efi ci en cy . OPINION The Co m m is si on er’s d et erm in at io ns inth e n ot ic e o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d t he tax pa y er b ears th e b ur de n o f pr ov in g tha t tho se de te rm in at io ns are i n e rro r. See Ru le 14 2( a); W el ch v. Hel ve rin g, 2 90 U.S. 11 1, 11 5 (1 93 3) . The t ax pa y er i s re qu ire d t o m ai nt ai n re co rd s s uf fic ie ntto en ab le th e Co m m is si on er t o d et erm in e h is or h er co rrec t t ax li ab il it y . See s ec. 6 00 1; sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Pu rs ua ntto sec ti on 74 91 (a)( 1) , th e b ur de n o f pr oo f with re sp ectto rel ev an t fa ctua l i ss ue s m ay sh iftto th e Co m

m is si on er. Sp eci fic al ly, se ct io n 7 49 1( a)(1 ) pr ov id es : “ If, in an y co urt p ro ceed in g, a t axpa y er in tro du ces cred ib le ev id en ce wi th res pe ctto an y factua l i ss ue rel ev an t t o
as cert ai ni ng th e li ab il it y

of t he tax pa y er fo r an y

tax im po se d b y subt it le A or B, th e Sec ret ary sh al l h av e th e b ur de n o f pr oo f wit h re sp ectto su ch is su e.” Sec ti on- 11 -

[* 11 ] 74 91 (a)( 2) furth er p ro vi de s t ha t the bu rd enof p ro of sh ift s t o t he Co m m is si on er o nl y

when th e ta xp ay er h as : (1 ) “ co m pl ie d wi th th e requi rem en ts
un de r th is ti tl e to subs ta nt ia te an y it em ” an d (2 ) “ m ai nt ai ne d a ll reco rd s re qu ire d
un de r th is ti tl e an d h as co op erat edwith re as on ab le reque st s b y th e Sec ret ary fo r witne ss es , in fo rm at io n, d oc um en ts , m eet in gs , andin te rv ie ws” . “ Cred ib le ev id en ce is th e qua li ty of ev id en ce wh ic h, af te r cri ti cal an al y si s, the co urt wo ul d fi nd
su ffi ci en t upo n wh ic h t o b as e a d eci si on on th e is su e if no co nt rary evi de nc e were
subm it te d” . Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 42 (20 01 ) (quo ti ng H.R. Co nf . Rep t. No . 10 5- 59 9, at24 0- 24 1 (1 99 8) , 19 98 -3 C.B. 7 47 , 99 4- 99 5)
. Pet it io ne rs di d n otret ai n re co rd s t o c om pl y with the Co de ’s subs ta nt ia ti on requi rem en ts or p ro vi de cred ib le ev id en ce. The refo re we h ol d t ha t s ect io n 7 49 1( a) do es no t ap pl y

to sh iftth e b ur de n o f pr oo f to res po nd en t. 1. NetOper at in g Lo ss The fir stis su e fo r de ci si on is whet he r Mr. Po wer i nc urredNOLs in th e ta xabl e y ears 19 99 -2 00 2 t ha t g av e ri se to a $5 18 ,08 8 NOL carry ov er, wh ic h was
subs eque nt ly avai labl e to off se t h is gro ss in co m e b eg in ni ng inth e ta xabl e y ear 20 07 . In the no ti ce o f de fic ie nc y is su edto Mr. Po wer i nd iv idua ll y , res po nd en t di sa ll owe d i n i ts en ti rety

Mr. Po wer’s cl ai m ed$5 18 ,08 8 NOL carry ov er d educ ti on to th e ta xabl e y ear 2 00 7.- 12 -

[* 12 ] Sect io n 1 72 all ows a ta xp ay er t o d educ t anNOL for a t ax ab le y ear. Th e
am ou ntof t he de du ct io n e qu al s t he ag gr eg at e o f th e NOL carryback s an d
carry ov ers to th e ta xabl e y ear. Se c. 17 2( a). Sec ti on 17 2( c) d efi ne s an NOL as th e
ex ces s o f de du ct io ns ov er g ro ss in co m e, co m pu te d wi th cert ai n m od ifi cat io ns sp eci fie d i n s ect io n 1 72 (d ). Abs en t an ele ct io n u nd er s ect io n 1 72 (b )(3 ), anNOL 6 fo r an y tax ab le y ear m

us t fi rs t b e carrie d b ack2 years andth encarr ie d o ve r 20 y ears . Sec. 1 72 (b )(1 )(A), (2 ), (3 ).

7
Sec. 1 72 (b )(3 ) pr ov id es : 6 (3 ) Elec ti on to waiv e carry ba ck .--Any

tax pa y er en ti tl edto a carry ba ckpe rio d und er p arag rap h (1 ) m ay ele ctto rel in qu is h t he en ti re ca rry

ba ckpe rio d wi th res pe ctto a ne t o pe rat in g l os s fo r an y ta xabl e y ear. Su ch ele ct io n s ha ll be m ad e insu ch m an ne r as m ay be pr es cri be d b y

th e Sec ret ary, an d s ha ll be m ad e b y th e due da te (in cl ud in g e xt en si on s o f ti m e) fo r fi li ng th e ta xp ay er’s return fo r th e ta xabl e y ear o f th e n etop erat in g l os s fo r whi ch th e el ect io n i s t o b e in effe ct . Suc h e le ct io n, o nc e m ad e fo r an y tax ab le y ear, s ha ll be irr ev oc ab le forsu ch tax ab le y ear. Altho ug h i t i s i nc on se qu en ti al to ou r de ci si on , th e rec or d d oe s n otin di cat e th at Mr. Po wer m ad e su chanele ct io n. In19 97 sec . 17 2( b) (1 )(A) was am en de d t o g en eral ly requ ire a 2- y ear 7 carry ba ckan d a20 -y ear c arryov er fo r NOLs i nc urredintax ab le y ears be gi nn in g aft er Au gu st5, 1 99 7. Se e Tax pay er Re li ef Actof 1 99 7, Pub. L. No. 1 05 -3 4, s ec. 10 82 , 11 1 S ta t. at95 0. Be fo re thi s amendm en t s ec. 1 72 (b )(1 )(A) g en eral ly requi reda 3- y ear c arrybackan d a15 -y ear c arryov er. NOLs an d t he carry ba ckan d carry ov er the reo f are de te rm in edpu rs ua ntto th e la w app li cab le to th e y ear i n whi chth e lo ss es oc cu rredwitho utreg ardto ot he r y ears to whi ch lo ss es are ca rri ed (co nt in ue d...)- 13 -

[* 13 ] Pet it io ne rs be ar the burd enof e st ab li sh in g b ot h t he ex is te nc e o f NOLs an d th e am ou nt s o f th e lo ss es th atm ay be carri edov er t o t he tax ab le y ears 20 07 -1 1. See Rul e 1 42 (a); Keit h v . Comm is si on er, 1 15 T.C. 60 5, 6 21 (20 00 ). An NOL de du ct io n i s a m at te r of

leg is la ti ve gra ce; itis no t a r ig ht . Uni te d S ta te s v . Olym pi c Rad io & Tele vi si on , Inc ., 34 9 U.S. 2 32 , 23 5 (1 95 5)
. Pet it io ne rs ’ arg um en t, as we un de rs ta ndit , is th atMr. Po wer an d P owe r Rea lty in cu rredNOLs to ta li ng $5 18 ,08 8 i n t he tax ab le y ears 19 99 -2 00 2, wh ic h
were av ai labl e to off

se t M r. Po wer’s in co m e b eg in ni ng with t he tax ab le y ear 2 00 7. Pet it io ne rs ackno wled ge th e “ ab se nc e o f su ffi ci en t re co rd s” to subs ta nt ia te th ei r cl ai m edNOL carry ov er t o the tax ab le y ears 20 07 -1 1; ho wev er, p et it io ne rs co nt en d th atth ey “ha ve reco ns tru ct eda reas on ab le lo ss carry ov er s cen ari o i n asi tu at io n whe re the actua l b oo ks an d re co rd s * * * [are ] no t av ai labl e to ful ly sub st an ti at e th e cl ai m edne t o pe rat in g l os se s”
. Pet it io ne rs m

us t p ro ve no t o nl y

th atMr. Po wer i nc urredNOLs in19 99
- 20 02 bu t al so th atth e NOLs were no t ab so rb eddurin g t he pe rio d b eg in ni ng with 19 97 (th e ear li es t ca rry

ba ck y ear) an d e nd in g wi th 20 06 (th e la sty ear b efo re the (...co nt inue d) 7 ba ckor f orward . Sec. 1 .17 2- 1( e)(1 ) an d (2 ), In co m e Tax Reg s. Be cau se pe ti ti on ers arg ue th atth e NOL carryove rs at i ss ue were g en erat edfro m 19 99
- 20 02 , we wil l ap pl y

sec . 17 2( b) (1 )(A) as am en de d i n 1 99 7.- 14 -

[* 14 ] fir sttax ab le y ear i n i ss ue ). To m eetth is bu rd enpe ti ti on ers m us t i nt ro du ce
co nv in ci ng ev id en ce tha t M r. Po wer i nc urredNOLs in th e ta xabl e y ears 19 99
- 20 02 an d a ls o p ro ve Mr. Po wer’s ta xabl e in co m e fo r th e p eri odbe gi nn in g wi th 19 97 an d e nd in g wi th 20 06 . See, e.g ., Leit ge n v . Comm is si on er, T.C. Mem o. 19 81 -5 25 , aff’d wit ho utpubl is he d o pi ni on , 69 1 F .2d50 4 (8 th Cir . 19 82 ). Pet it io ne rs in tro du cedas e vi de nc e: (1) co pi es of F orm s 1 04 0 fo r th e ta xabl e y ears 19 94 -2 00 0 a nd20 02 -1 1; (2) co pi es of F orm s 1 04 0X fo r th e ta xabl e y ears 20 01 , 20 07 , and20 08 ; (3 ) co pi es of P owe r Rea lt y ’s Form s 1 12 0S forth e ta xabl e y ears 19 93 -2 01 1; an d (4 ) co pi es of P owe r Rea lty ’s am en de d F orm s 1 12 0S forth e ta xabl e y ears 20 07 -0 9. Fro m th es e ta x re tu rn s p et it io ne rs arg ue th atth e Co urt ca n ap pl y th e Co ha n ru le to est im at e th e NOL carryove rs to th e ta xabl e y ears 20 07 -1 1. Und er the Co ha n ru le , if a t ax pa y er es tabl is he s t ha t an ex pe ns e is de du ct ib le bu t i s u nabl e to subs ta nt ia te th e p reci se am ou nt , th e Co urt m ay est im at e th e
am ou nt , bea rin g h eav il y

ag ai ns t the tax pa y er wh os e in ex act itud e is of h is or h er
own m ak in g. Se e Co ha n v . Comm is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ). Howev er, t o app ly the Co ha n ru le th e Co urt m us t h av e so m e in fo rm at io n t o
es ti m at e th e p ro pe r de du ct io n. Se e Van ic ekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . Peti ti on ers ha ve pro vi de d n o t es ti m on y or o th er ev id en ce s uf

fic ie ntto
en ab le us to m ak e a rea so nabl e es ti m at e o f th e p ur po rte d NOLs . Peti ti on ers di d- 15 -

[* 15 ] no t i nt ro du ce b oo ks , reco rd s, b il ls , or re cei pt s t o e st ab li sh th e in co m e an d
ex pe ns es of P owe r Rea lt y for19 99 -2 00 2 o r an y

ot he r ta xabl e y ear. To
subs ta nt ia te th e cl ai m edNOLs pe ti ti on ers rel y ex cl us iv el y

on co pi es of t ax returns , anditis well set tl edth attax returns alo ne do no t es tabl is h t ha t a t ax pa y er
su ffer eda lo ss . See Leh m anv. Co m m is si on er, T.C. Mem o. 2 01 0- 74 , 20 10 Tax C t. Mem o LEXIS 7 6, at*5
. The reco rdbe fo re u s d oe s n otest ab li sh th atMr. Po wer i nc urredNOLs fo r 19 99 -2 00 2 o r an y

ot he r ta xabl e y ears pre ced in g t he tax ab le y ear 2 00 7. Fu rth erm or e, co pi es of t ax returns are i ns uf fic ie ntby the m se lv es to pro ve th atth e pu rp orte d NOLs were n otco m pl et el y ab so rb edbe fo re the tax ab le y ears inis su e. See i d., 2 01 0 Tax Ct. M em o LEXIS 7 6, at*5 -* 6 (c it in g S tu ts m anv. Co m m is si on er, T.C. Mem o. 1 96 1- 10 9) ; s ee al so Hoo pe ng arn er v . Comm is si on er, T.C. Mem o. 2 00 3- 34 3, 2 00 3 Tax Ct. M em o LEXIS 3 44 , at * 13 . W it ho ut ad di ti on al ev id en ce (e .g., b oo ks , reco rd s, b il ls , andrece ip ts ) th is is no t a c as e in whi chth e ap pl ic at io n o f th e Co ha n ru le wou ldbe ap pr op ria te . Accor di ng ly, we
su st ai n re sp on de nt ’s di sa ll owa nc e o f Mr. Po wer’s cl ai m edNOL carry ov er- 16 -

[* 16 ] de du ct io ns be cau se pe ti ti on ers fai le d t o p ro ve fact s s ho win g t ha t the y are
en ti tl edto th os e d educ ti on s. 8 2. Mr . Powe r’s Sto ckBas is in Po wer Rea lt y The sec on d i ss ue forde ci si on is whet he r Mr. Po wer rec ei ve d d is tri bu ti on s fro m Po wer Rea lty

in ex ces s o f hi s ad

jus te d s to ckba si s i n t he S co rp or at io n. In th e n ot ic es of d efi ci en cy

res po nd en t d et erm in ed , in te r al ia , th atPo wer Rea lt y
m ad e d is tri bu ti on s t o M r. Po wer o f $3 59 ,86 0 fo r 20 07 ; $ 60 ,17 3 fo r 20 08 ; $2 21 ,82 9 fo r 20 10 ; an d $ 18 9,4 47 for20 11 . Res po nd en t al so de te rm in edth atMr. Po wer h ada zero st oc k b as is in Po wer Rea lt y as o f Ja nu ary 1, 2 00 7. Pe ti ti on ers 9
co nt en d t ha t the re was no di st rib ut io n fr om Po wer Rea lt y

inex ces s o f Mr. Po wer’s ad jus te d s to ck

ba si s i n t he S co rp or at io n. Sp eci fic al ly, pe ti ti on ers co nt en d t ha t Mr. Po wer h ada ba si s i n P owe r Rea lt y of $ 51 0,2 16 in20 07 an d t ha t n o

As a re su ltof r es po nd en t’s ad jus tm en ts inth e n ot ic e o f de fic ie nc y for th e 8 ta xabl e y ear 2 00 9, a $ 9,8 85 NOL was ge ne rat edan d c arri edov er i nt o t he tax ab le y ear 2 01 0. Res po nd en t co m

pu te d M r. Po wer’s st oc k b as is inPo wer Rea lt y as o f 9 Ja nu ary 1, 2 00 7, as fol lo ws: (1) ord in ary in co m e o f $3 38 ,40 8; pl us (2) ord in ary di vi de nd s o f $3 3,0 79 ; equa ls (3) a st oc k b as is of $ 37 1,4 87 be fo re d is tri bu ti on s; m in us (4) di st rib ut io ns of $ 35 9,8 60 ; equa ls (5) st oc k b as is of $ 11 ,62 7 b efo re n on de du ct ib le ex pe ns es an d d ep le ti on ; m in us (6) no nd educ ti bl e ex pe ns es of $ 11 ,41 8; equa ls (7) st oc k b as is of $ 20 9 b efo re al lo wab le lo ss es an d d educ ti on s; m inus (8) se c. 17 9 d educ ti on of $ 8,0 06 an d c ha rit ab le co ntrib ut io n d educ ti on of $ 11 ,68 6; equa ls (9) a st oc k b as is of z ero .- 17 -

[* 17 ] di st rib ut io ns in ex ces s o f th atba si s wer e m ad e to Mr. Po wer fro m Po wer Rea lty foran y of t he tax ab le y ears 20 07 -1 1. Sect io n 1 36 6( a)(1 ) pr ov id es th atanS co rp or at io n s ha reh ol de r de te rm in es hi s o r he r ta x l iabi li ty by

tak in g i nt o a cco un t h is or h er p ro rat a sh are o f th e S
co rp or at io n’s i nc om e, lo ss es , deduc ti on s, o r cre di ts forth e S co rp or at io n’s t ax ab le y ear e nd in g wi th or i n t he sh areh ol de r’s ta xabl e y ear. Th e sh areh ol de r m ay no t ta ke in to acco un t, h owe ve r, S co rp or at io n l os se s an d d educ ti on s fo r an y tax ab le y ear i n e xc es s o f th e sh areh ol de r’s ad jus te d b as is inth e S co rp or at io n’s s to ckan d de bt . Sec. 1 36 6( d) (1 ). Gene ral ly, se ct io n 1 36 8( b) pro vi de s t ha t d is tri bu ti on s fr om
anS co rp or at io n wi th no accu m ul at edearn in gs an d p ro fit s ar e n otin cl ud edinth e gr os s i nc om e o f th e sh areh ol de r to th e ex te ntth atth ey do no t ex ceedth e ad

jus te d ba si s o f th e sh areh ol de r’s st oc k, an d a ny exce ss of a dju st edba si s i s t reat edas g ai n fro m th e sa le or e xc ha ng e o f pr op erty . Sect io n 1 36 7 p ro vi de s t ha t b as is inS
co rp or at io n s to ckis in crea se d b y in co m e p as se d thr ou gh to th e sh areh ol de r un de r
se ct io n 1 36 6( a)(1 ) an d d ecre as edby, in te r al ia , di st rib ut io ns no t i nc lu dabl e in th e sh areh ol de r’s in co m e p ur su an t t o s ect io n 1 36 8. A sh areh ol de r m ay

in crea se hi s o r he r ba si s i n a n S co rp or at io n i f he or s he
m ak es aneco no m ic ou tl ay to or f orth e b en efi t o f th e S co rp or at io n. Go at ch er v . Uni te d S ta te s, 9 44 F.2d74 7, 7 51 (10 th Cir . 19 91 ); Es ta te of Lea vi ttv.- 18 -

[* 18 ] Co m

m is si on er, 8 75 F.2d42 0, 4 22 (4t h C ir. 1 98 9) , aff’g 9 0 T.C. 2 06 (19 88 ). An ec on om ic ou tl ay

forth is purp os e is anactua l co nt rib ut io n o f cas h o r pr op erty by the sh areh ol de r to th e S co rp or at io n o r a tran sa ct io n t ha t l eav es th e S
co rp or at io n i nd eb te d t o t he sh areh ol de r. Sec. 1 36 6( d) (1 ). A tax pa y er m us t
es tabl is h t ha t h e h as acqui redba si s i n t he refe ren cedst oc k a nd , to th e ex te ntth at he do es , th athi s b as is was n otreduc edto zero be cau se of l os se s cl ai m ediny ears pr ed at in g t he subjec t year. Arno ldv. Co m m is si on er, T.C. Mem o. 2 00 3- 25 9, 2 00 3 Tax Ct. M em o LEXIS 2 58 , at * 8; Hog anv. Co m m is si on er, T.C. Mem o. 1 99 9- 36 5, 19 99 Tax C t. Me m o LEXIS 4 20 , at * 7. A ta xp ay er wh o fa il s t o p ro ve th athe or sh e h as an y

ba si s i n a n S co rp or at io n i s co ns id eredto ha ve a zero ba si s i n t ha t
co rp or at io n. Th om so n v . Comm is si on er, T.C. Mem o. 1 98 3- 27 9, af f’d wit ho ut publ is he d o pi ni on , 73 1 F .2d88 9 (1 1t h C ir. 1 98 4) . Thu s, p et it io ne rs be ar the bu rd enof p ro vi ng th atMr. Po wer h adsu ffi ci en t b as is inPo wer Rea lt y . Mr. Po wer d idno t m ai nt ai n aba si s s ch edul e fo r hi s Po wer Rea lt y st oc k. To
es tabl is h M r. Po wer’s b as is in hi s Po wer Rea lt y st oc k, p et it io ne rs off

eredPo wer Rea lty ’s Form s 1 12 0S for th e ta xabl e y ears 19 93 -2 01 1 a nda reco ns tru ct edst oc k ba si s ch artatt ach edas a n app en di x t o t he ir p os tt ria l b rie f. To b eg in with, the Fo rm s 1 12 0S do no t i nc lu de su ffi ci en t i nf orm at io n fo r us to est ab li sh Mr. Po wer’s ba si s i n P owe r Rea lty . See Feh lh ab er v . Comm is si on er, 9 4 T.C. 8 63 , 86 9 (1 99 0) ,- 19 -

[* 19 ] aff’d, 9 54 F.2d65 3 (1 1t h C ir. 1 99 2) . It i s al so un cl ear h ow p et it io ne rs cal cu la te d M r. Po wer’s st oc k b as is inPo wer Rea lty us in g F orm s 1 12 0S gi ve n t ha t Po wer Rea lt y ’s in co m e an d e xp en se s wer e im pr op erl y di vi de d b etweenMr. Po wer’s Sch edul es C an d P owe r Rea lt y ’s Form s 1 12 0S . Furt he r, pe ti ti on ers st ip ul at e th atMr. Po wer was co m pe ns at edby Power Re al ty thro ug h d is tri bu ti on s (n otwage s o r sa la ry ) an d tha t p et it io ne rs us edPo wer Rea lty ’s che ck in g a cco un t t o pa y subs tant ia l p ers on al ex pe ns es du rin g t he tax ab le y ears 20 07 -1 1. Onth e b as is of th e rec or d b efo re u s, p et it io ne rs ha ve no t es tabl is he d t ha t M r. Po wer h adba si s in Po wer Rea lt y

st oc k o r th athe di d n otrece iv e d is tri bu ti on s fr om Po wer Rea lt y

as
res po nd en t d et erm in edin th e n ot ic es of d efi ci en cy . Accor di ng ly, we co nc lu de th atMr. Po wer’s ad

jus te d s to ckba si s i n P owe r Rea lt y was z ero an d t ha t h e
rece iv eddi st rib ut io ns fro m Po wer Rea lt y

as r es po nd en t d et erm in edinth e n ot ic es of de fic ie nc y . 3. Mi sc el la ne ou s Is su es Inth e n ot ic es of d efi ci en cy res po nd en t m ad e v ari ou s ad jus tm en ts to in co m e
an d e xp en se s af

fect in g M r. Po wer’s an d p et it io ne rs ’ ta xabl e in co m e fo r th e ta xabl e y ears 20 07 -1 1. Attri al on Sep te m be r 23 , 20 15 , th e p art ie s fi le d wi th th e Co urt a st ip ul at io n o f se tt le d i ss ue s i n wh ic h p et it io ne rs ag reedto m os t o f res po nd en t’s ad jus tm en ts in th e n ot ic es of d efi ci en cy . Howev er, certa in is su es rem ai ne d- 20 -

[* 20 ] un res ol ve d a fte r th e fi li ng of t he st ip ul at io n o f se tt le d i ss ue s, i nc lu di ng : (1 ) ad jus tm en ts to de du ct io ns cla im edon Sch edul es A, Item iz edDedu ct io ns , for th e ta xabl e y ears 20 07 -1 1 a nd(2) ad jus tm en ts to pe rs on al ex em pt io ns forth e ta xabl e y ears 20 07 , 20 09 , and20 10 . Peti ti on ers pro vi de d n o e vi de nc e o r arg um en t
co nc ern in g t he se rem ai ni ng is su es . Con se qu en tl y , pet it io ne rs are d eem edto ha ve
co nc ed edth es e is su es pu rs ua ntto Ru le 34 (b )(4 ). To th e ex te ntth atth es e 1 0 ad jus tm en ts are d ep en de ntup on ou r de ci si on s ab ov e--a ndth us are co m pu ta ti on al
-- th ey are t o b e res ol ve d i n t he pa rti es ’ Ru le 15 5 c om pu ta ti on s. 4. Accu racy-Rel at edPen al ti es Insep arat e n ot ic es of d efi ci en cy , res po nd en t d et erm in edth atMr. Po wer (fo r th e ta xabl e y ear 2 00 7) an d p et it io ne rs (fo r th e ta xabl e y ears 20 10 an d 2 01 1) are li ab le foraccu racy-rela te d p en al ti es purs ua ntto sec ti on66 62 (a) a nd(b) (1 ) an d (2 ) fo r ne gl ig en ce o r subs ta nt ia l u nd ers ta te m en ts of i nc om e ta x. Re sp on de ntbe ars th e bu rd enof p ro du ct io n wi thres pe ctto th es e p en al ti es . See s ec. 7 49 1( c). To m eet

Inth e n ot ic e o f de fic ie nc y res po nd en t i nd ic at es th atpe ti ti on ers ’ ta xabl e 1 0 in co m e o n t he ir f

il ed20 10 return i s “ 0.0 0” an d a dju st s t hi s n um be r up wardby “ 11 1,5 93 .00 ”, res ul ti ng in a rev is edtax ab le in co m e o f “ 11 1,5 93 .00 ”. It app ears th atth e ta xabl e in co m e rep orte d o n p et it io ne rs ’ fil edFo rm 10 40 for th e ta xabl e y ear 2 01 0 i s -$ 27 0,6 33 an d, thu s, the $1 11 ,59 3 upwa rdad jus tm en t s ho ul d b e m ad e fro m th is am ou nt . Howev er, p et it io ne rs m ad e n o a rg um en t co nc ern in g t hi s ap pa ren t d is crep an cy . To th e ex te ntth atth is is infactanerro r, itsh ou ldbe res ol ve d b y

th e p art ie s i n t he ir Rul e 1 55 co m pu ta ti on s.- 21 -

[* 21 ] th is bu rd en , res po nd en t m us t p ro du ce ev id en ce es tabl is hi ng th atitis ap pr op ria te to im

po se th e p en al ti es . Once r es po nd en t h as do ne so , th e b ur de n o f pr oo f is on pe ti ti on ers to sh ow t ha t the pe na lt ie s d o n otap pl y . See Hig be e v . Co m m is si on er, 1 16 T.C. at 4 49
. Neg li ge nc e in cl ud es any

fai lu re t o m ak e a rea so nabl e atte m ptto co m pl y with t he pro vi si on s o f th e in te rn al rev enue laws an d t he fai lu re t o e xe rci se du e
care or the fai lu re t o d o wh ata reas on ab le an d p ru de ntpe rs on wou lddo un de r th e ci rcu m st an ces . Sec. 6 66 2( c); see als o Nee ly v. Comm is si on er, 8 5 T.C. 9 34 , 94 7 (1 98 5) ; s ec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Neg li ge nc e al so in cl ud es an y fai lu re b y th e ta xp ay er t o k eep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te it em s pr op erl y . Sec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Mr . Powe r in di vi du al ly, an d pe ti ti on ers joi nt ly, ex hi bi te d alac k o f du e car e in fai li ng to accu rat el y rep ort in co m e an d p ro pe rly subs tant ia te ex pe ns es forth e ta xabl e y ears 20 07 -1 1. Th e
reco rdest ab li sh es th atpe ti ti on ers us edfun ds fro m Po wer Rea lty

forpe rs on al
ex pe ns es an d d idno t re ta inreco rd s p ert in en t t o t he tax ab le y ears 20 07 -1 1. Fu rth erm or e, Mr. Po wer d idno t s up pl y hi s t ax return p rep arer(Mr. M uth) with ad equa te in fo rm at io n o r un de rlyin g d oc um en ta ti on to pre pa re p ers on al or
co rp or at e ta x re tu rn s an d i ne xp li cab ly ign or edMr. Mu th ’s adv ic e to rep ort al l- 22 -

[* 22 ] act iv it y

of P owe r Rea lt y

on Fo rm s 1 12 0S . Res po nd en t h as m ethi s b ur de n of pro du ct io n wi th res pe ctto th e se ct io n 6 66 2( a) p en al ti es forne gl ig en ce. The accu racy-rela te d p en al ty doe s n otap pl y with re sp ectto an y

po rti on of th e u nd erp aym en t fo r whi ch itis sh own th atth e ta xp ay er h adreas on ab le cau se an d act edin go odfai th . Sec. 6 66 4( c)(1 ). Pet it io ne rs arg ue th atth ey rel ie d i n g oo d fai th ontax return p rep arer s t o p rep are a ccu rat e in co m e ta x re tu rn s. Ho wev er, the
reco rdin di cat es th atpe ti ti on ers pro vi de d M r. Mu th with i ns uf fic ie ntin fo rm at io n to pre pa re the ir p ers on al an d c or po rat e ta x re tu rn s an d i gn or edcert ai n o f Mr. Mu th ’s adv ic e. Acco rd in gl y , we ho ldth atMr. Po wer (fo r 20 07 ) an d p et it io ne rs (fo r 20 10 an d 2 01 1) are l iabl e fo r th e se ct io n 6 66 2( a) p en al ti es forne gl ig en ce. Inreac hi ng ou r de ci si on , we hav e co ns id eredall arg um en ts m ad e b y th e pa rti es , andto th e ex te ntno t m en ti on edor a dd res se d, the y are i rrel ev an t o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.