T.C. Memo. 1997-361

UNITED STATES TAX COURT

WILLIAM T. HOUGH AND NORMA HOUGH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12228-95. Filed August 6, 1997.

William T. Hough, pro se. 

Susan G. Lewis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined deficiencies in

petitioners' joint Federal income taxes and accuracy-related

penalties as follows:
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Accuracy-Related Penalty

Year Deficiency Sec. 6662(a) 

1990 $7,849 $1,570 

1991 9,613 1,923 

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure. References to petitioner are to William T. Hough.

The only issue for decision is whether for purposes of

calculating petitioners' self-employment tax liabilities for 1990

and 1991 certain deposits and claimed partnership losses may be

deducted on Schedule C of petitioners' joint Federal income tax

returns. 

FINDINGS OF FACT

Many of the facts have been stipulated and are so found. At

the time the petition was filed, petitioners resided in Basking

Ridge, New Jersey. 

During the 1970's and part of the 1980's, petitioner

practiced law through his professional law corporation (PC), and

petitioner established through his PC a money purchase pension

plan. 

In 1975, petitioner received a favorable determination

letter from respondent regarding the money purchase pension plan. 

Respondent's determination letter qualified the plan so that for
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Federal income tax purposes contributions made to the plan would

be deductible from the PC's gross income. Respondent's

determination letter, however, indicated that with respect to the

pension plan, due to anticipated legislation, the determination

letter was only effective until the end of 1975. 

During 1990 and 1991, petitioner no longer practiced law

through his PC, rather petitioner practiced law as a sole

proprietor.

In each of the years 1990 and 1991, petitioner deposited

$30,000 into an account maintained in his name apparently at a

stock brokerage company allegedly as a contribution to the above

money purchase pension plan. 

On their 1990 and 1991 joint Federal income tax returns,

petitioners claimed Schedule C deductions with respect to each of

the above $30,000 deposits into the stock brokerage account.

These deposits were reflected on petitioners’ joint income tax

returns as deductible contributions to a qualified pension and

profit sharing plan.

In amended joint Federal income tax returns for 1990 and

1991 and to reflect the percentage-of-gross-income limitation

applicable to deductible pension plan contributions, petitioners

reduced the amount of the claimed Schedule C deductions with

respect to the above deposits into the stock brokerage account to

$11,898 for 1990 and $22,339 for 1991. 
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On their 1990 and 1991 joint Federal income tax returns,

petitioners also claimed loss carry-forward deductions in the

respective amounts of $137,047 and $86,367 relating to an

investment in a limited partnership. The claimed $137,047 loss

carry-forward deduction for 1990 was reflected on line 18 of

petitioners’ 1990 joint Federal income tax return as a

partnership loss. It was not reflected as a Schedule C business

expense deduction.

The claimed $86,367 loss carry-forward deduction for 1991

relating to the investment in the limited partnership, however,

was reflected on Schedule C of petitioners’ 1991 joint Federal

income tax return as a business expense deduction.

By claiming the alleged pension plan contributions for 1990

and 1991 and the claimed partnership loss for 1991 as deductions

on Schedule C of petitioners' joint Federal income tax returns,

petitioners' reported self-employment income was reduced, and no

self-employment tax liability was reported as due on petitioners’

1990 and 1991 joint Federal income tax returns. 

OPINION 

Generally, taxpayers are required to pay employment taxes on

net earnings from self-employment. Sec. 1401(a). Net earnings

from self-employment are defined in section 1402(a) as gross

income derived by self-employed individuals from any trade or

business less certain enumerated expenses. Contributions to
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qualified or unqualified pension plans are not included among the

enumerated expenses that may be deducted from net earnings from

self-employment. 

Also, section 1402(a)(13) specifically excludes from the

calculation of net earnings from self-employment a limited

partner's distributive share of income or loss from a

partnership. 

Petitioners' theory for claiming Schedule C deductions with

respect to the deposits into petitioner’s stock brokerage account

is not entirely clear. Petitioners apparently argue that in 1990

and 1991 petitioner’s $30,000 deposits into petitioner's stock

brokerage account (subject to the percentage limitations

reflected in petitioners’ amended joint income tax returns)

represented deductible Schedule C payments to petitioner’s PC. 

Petitioners' theory for claiming a Schedule C deduction on their

1991 joint Federal income tax return with respect to the claimed

partnership loss is incomprehensible.

Respondent, among other things, argues that petitioner's

deposits in 1990 and 1991 into the stock brokerage account and

the claimed partnership loss for 1991 should be reflected, if

anywhere, not as deductions on Schedule C but respectively on

lines 17 and 18 of petitioners’ joint Federal income tax returns

(Forms 1040) where they would not reduce petitioners' selfemployment income.
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We agree with respondent as to both items. In 1990 and

1991, petitioner practiced law as a sole proprietor. Earnings

from petitioner’s law practice therefore constituted earnings

from self-employment, and any contributions into petitioner’s

pension plan would not be deductible on Schedule C of

petitioners' joint Federal income tax returns. No authority

exists for claiming the partnership loss for 1991 on Schedule C

of petitioners’ 1991 joint Federal income tax return. 

Negligence includes the failure to make a reasonable attempt

to comply with provisions of the Code and regulations or the

failure to exercise ordinary and reasonable care in preparation

and filing of a Federal income tax return. Sec. 6662(c). 

Negligence has been defined as the failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances. Emmons v. Commissioner, 92 T.C. 342, 349 (1989),

affd. 898 F.2d 50 (5th Cir. 1990); Neely v. Commissioner, 85 T.C.

934, 947 (1985). 

Petitioners have offered no credible evidence that there was

a reasonable cause for erroneously claiming the deductions in

issue. Sec. 6664(c)(1). Petitioners are liable for the

negligence penalties.

To reflect the foregoing,

Decision will be entered

for respondent.
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