T.C. Memo. 1996-217

UNITED STATES TAX COURT

DAN S. AND NANCY J. MITCHELL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19785-94. Filed May 6, 1996.

Dan S. Mitchell and Nancy J. Mitchell, pro se.

Bruce W. Wilpon, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies of $1,435

and $8,883 in petitioners’ Federal income taxes for 1990 and

1991, respectively. Respondent also determined accuracy-related

penalties of $287 and $1,777 under section 6662(a) for those

years. Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure. After concessions, the issues remaining for decision

are whether petitioners are entitled to deduct losses from

farming claimed on amended returns for the years in issue;

whether mortgage interest and property taxes paid by petitioners

are properly deducted on Schedule A or on Schedule F of their

returns; whether petitioners are entitled to deduct a net

operating loss carryforward from 1989; whether petitioners are

entitled to depreciation expense and legal expense deductions on

Schedule C; whether petitioners can change from the cash to the

accrual method of accounting on their Schedules C and F where

respondent’s permission was neither sought nor secured; and

whether petitioners are liable for the penalties for negligence.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. 

Petitioners resided in Boerne, Texas, at the time that they filed

their petition.

Petitioner Dan S. Mitchell (Mr. Mitchell) is a certified

public accountant who operates a sole proprietorship known as

Mitchell & Associates. Petitioner Nancy J. Mitchell

(Mrs. Mitchell) is a secretary with an accounting firm.

On November 24, 1986, petitioners purchased a 113.205-acre

rural property in Kendall County, Texas (the real property),

which includes a residence. Since its purchase, petitioners have
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maintained the residence as their homestead. Petitioners

financed the purchase of the real property with a bank loan in

the amount of $299,000. On their 1990 and 1991 Forms 1040, U.S.

Individual Income Tax Returns, petitioners claimed Schedule A

mortgage interest deductions of $32,450 and $34,636,

respectively, for interest paid on the real property loan. The

correct amounts of interest paid on the real property loan were

$5,000 for 1990 and $28,067 for 1991. On their 1990 and 1991

Forms 1040, petitioners claimed Schedule A real property tax

deductions of $2,500 and $2,056, respectively, for taxes paid on

the real property. The correct amounts of real property taxes

paid were $2,377 for 1990 and $232 for 1991.

During 1990, Mr. Mitchell had a business loan with Groos

Bank. On Schedule C to their Form 1040 for 1990, petitioners

claimed interest expense of $9,600 in relation to the Groos Bank

loan. The correct amount of interest expense for 1990 on this

loan was $1,399.

On June 1, 1990, petitioners filed a voluntary chapter 11

petition in bankruptcy. No tax returns were ever filed for the

bankruptcy estate. In a Second Amended Disclosure Statement

filed in the bankruptcy proceeding February 1, 1991, petitioners

represented that the filing of the bankruptcy petition was

required by the scheduled foreclosure sale on their real

property. They also asserted the following:
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Mr. Mitchell was raised on a farm in Dallas

County, Texas, close to Lancaster, Texas, where his

family grew wheat, cotton, corn and alfalfa, which is a

hay crop similar to Coastal Bermuda, and raised dairy

and beef cattle. The Mitchells live on 113.205 acres

of land in Boerne, Texas, which they purchased in 1986

to begin farming operations. Although Mr. Mitchell had

not been an active farmer for 35 years, he believes he

has and can make a profit at farming operations. 

Mr. Mitchell planted Coastal Bermuda in 1990 on 97

acres and expects to generate from this crop cash flow

of $17,640.00 a month during April to September and a

profit of $52,380.00 a year, although a profit was not

made in 1990. A market exists for Coastal Bermuda for

horses and cattle in the hill country area which has

been enhanced by the race tracks now in operation in

Frederickburg, twenty-two miles from the Mitchells’

home and in Bandera, fifteen miles from the Mitchells. 

The Mitchells plan to plant oats or wheat over the

Coastal Bermuda in winter and graze the cattle on the

oats rather than buying feed, thus saving $10,000.00 a

year in fee [sic] bills. The Mitchells are attempting

to obtain a FMHA loan to purchase 100 head of cattle

and operating expenses for hay/Coastal Bermuda

production, including drilling a well and installing an

irrigation system for the Coastal Bermuda acreage. 

Mr. Mitchell expects to make a yearly profit of

$16,400.00 from the cattle. If the [sic] the loan is

not obtained, Mr. Mitchell believes he will still be

able to meet the expenses, buy the cattle and make the

projected profit.

As of the date of the statement, however, no farming operation

had commenced. On schedules filed in the bankruptcy proceeding,

petitioners stated that they owned no farm animals, farm

supplies, or farm equipment. Operating statements filed with the

bankruptcy court showed no cash receipts or cash disbursements

for any farming activity. The bankruptcy proceeding was closed

by final decree filed July 13, 1992.
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 Petitioners’ Forms 1040 for 1989, 1990, and 1991 were

prepared using the cash basis method of accounting. Prior to

December 1993, an examination of petitioners’ returns was

commenced by the Internal Revenue Service. In December 1993,

petitioners filed a Form 1040X, Amended U.S. Individual Income

Tax Return, for 1990. In September 1994, petitioners filed a

Form 1040X for 1989 and a second Form 1040X for 1990. The

statutory notice of deficiency for 1990 and 1991 was sent to

petitioners on September 29, 1994. In December 1994, petitioners

filed a third Form 1040X for 1990 and a Form 1040X for 1991. On

each of the amended Forms 1040X, petitioners claimed farm losses

on Schedule F and recharacterized the interest and tax expenses

claimed on Schedule A as farm loss expenses, claimed the standard

deduction instead of itemized deductions on Schedule A, and

purportedly changed from cash to accrual accounting for farm

operations allegedly begun in 1989. They claimed depreciation of

unidentified farm equipment in the amount of $3,000 on the

amended returns for 1990 and 1991. They then claimed a net

operating loss carried forward from 1989 to 1990 and 1991.

During the course of the bankruptcy proceeding, petitioners

returned to the vendors certain office equipment that had been

possessed by Mitchell & Associates pursuant to lease/purchase

agreements. Rent and lease expense deductions for office

equipment of Mitchell & Associates were claimed on Schedules C

for 1990 and 1991 in the amounts of $7,800 and $5,600,
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respectively. On the amended returns, petitioners claimed

depreciation for the equipment that was returned to the

lessor/vendors.

OPINION

Petitioners contend that they are entitled to additional

deductions and losses not claimed on their returns as originally

filed. They assert that, after conceding that amounts of

unreported income determined in the statutory notice were

erroneous, respondent sought ways to deny them deductions that

they erroneously did not claim on their original returns, in

order to sustain some deficiency in tax for each year. According

to respondent, the amounts now in dispute approximate $1,150 for

1990 and $200 for 1991.

Petitioners’ accusations against respondent’s agents have no

persuasive effect in this case. See Greenberg’s Express, Inc. v.

Commissioner, 62 T.C. 324 (1974). The only remaining issues are

whether petitioners are entitled to the additional deductions

that they now claim and whether they are liable for the penalties

for negligence. They have the burden of proof on these factual

issues. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); Rockwell v. Commissioner, 512 F.2d 882 (9th Cir.

1975), affg. T.C. Memo. 1972-133. Unless petitioners

substantiate their deductions, we do not reach legal issues

raised by respondent, to wit, whether any farm losses would

belong to the bankruptcy estate and not be deductible on
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petitioners’ personal tax returns and whether petitioners could

change their method of accounting without permission.

Mr. Mitchell testified at trial. Mrs. Mitchell failed to

appear, and no witnesses corroborated Mr. Mitchell’s assertions

concerning his alleged farm activity. Although a few receipts

were produced, the purpose of the expenditures is not apparent

from the face of the receipts and was not specifically or

adequately explained by Mr. Mitchell. His testimony consisted

almost exclusively of attacking respondent’s agents and arguing

that he was engaged in farm activity. Mr. Mitchell stated that

“we feel that the fact that we live there, that we care for the

farm every day is substantiation enough.” His uncorroborated

testimony was vague and conclusory and, particularly in view of

the belatedness of the claims, is not persuasive.

Petitioners have not proven that they have any depreciable

basis in any equipment. Respondent suspects that petitioners are

now claiming depreciation deductions on the same equipment for

which lease payments were previously deducted. The only

references in the record pertaining to business equipment relate

to lease/purchase agreements, and respondent’s suspicion that

petitioners have already deducted the lease payments on the same

equipment is not, as petitioners’ contend, “a ludicrous

statement”. Although Mr. Mitchell denies that the equipment

depreciated is the same as that for which deductions were already

taken, he has not presented any evidence substantiating either
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the purchase of the equipment on which depreciation is claimed or

the lease of different equipment.

Respondent concedes that petitioners paid $3,000 to their

bankruptcy attorney but contends that the amount is a personal

expense because the purpose of the proceeding was to prevent

foreclosure on petitioners’ homestead. Petitioners have given us

no basis for concluding that the bankruptcy attorney’s fee was an

ordinary and necessary business expense or for allocating the fee

between personal services and business services. See United

States v. Collins, 26 F.3d 116 (11th Cir. 1994); Dowd v.

Commissioner, 68 T.C. 294, 303-304 (1977).

With respect to the penalties for negligence, the parties

stipulated that the interest deducted on petitioners’ returns for

the years in issue exceeded substantially the amounts that they

were entitled to deduct. Although Mr. Mitchell asserted that he

relied on Forms 1098 received from banks, his testimony is

uncorroborated and not persuasive. As a certified public

accountant, he should have maintained accurate records of his

interest payments and deducted only the amounts actually paid. 

Petitioners have failed to prove that the recomputed

underpayments are not due to negligence, and recomputed penalties

under section 6662(a) will be sustained.

To take account of the concessions by the parties,

Decision will be entered

under Rule 155.