T.C. Memo. 2003-259

UNITED STATES TAX COURT

STEPHEN P. ARNOLD, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12911-01. Filed September 4, 2003.

Stephen P. Arnold, pro se.

Martha J. Weber, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioner petitioned the Court to redetermine

respondent’s determination of a $47,036 deficiency in his 1998

Federal income tax and additions thereto of $10,279, $2,970, and

$2,067 under sections 6651(a)(1) and (2) and 6654(a),
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1 Unless otherwise indicated, section references are to the

applicable versions of the Internal Revenue Code, Rule references

are to the Tax Court Rules of Practice and Procedure, and dollar

amounts are rounded to the nearest dollar.

respectively.1 Following concessions and respondent’s assertion

in the answer that petitioner is liable for an additional amount

as to the addition to tax under section 6651(a)(1), we are left

to decide:

1. Whether petitioner may use the filing status of “Married

filing joint return”. We hold that he may not.

2. Whether petitioner realized losses on certain stock

transactions. We hold that he did not.

3. Whether petitioner may deduct a loss of $86,889 from an

S corporation named Only Kids, Inc. (Only Kids). We hold that he

may not.

4. Whether petitioner may deduct certain itemized expenses

in amounts greater than allowed by respondent. We hold that he

may not.

5. Whether petitioner is liable for the additions to tax

under sections 6651(a)(1) and 6654(a) included in the notice of

deficiency and for the increase in the addition to tax under

section 6651(a)(1) asserted by respondent in answer. We hold

that petitioner is liable only for the amounts included in the

notice of deficiency.
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FINDINGS OF FACT

Some facts were stipulated. The stipulated facts and the

accompanying exhibits are incorporated herein by this reference. 

We find the stipulated facts accordingly. Petitioner was married

throughout the subject year and resided in Memphis, Tennessee,

when his petition was filed. He has not filed a Federal income

tax return for 1995 through 2000.

Petitioner is the president, chief executive officer, and

sole shareholder of Only Kids. Only Kids was incorporated on

November 4, 1988, and it filed a 1998 Form 1120S, U.S. Income Tax

Return for an S Corporation, reporting a loss of $86,889. That

return also reported that Only Kids had been an S corporation

since the year of its incorporation and that as of the end of its

1998 taxable year, December 31, 1998, its balance sheet included

capital stock, additional paid-in-capital, and a retained deficit

in the amounts of $425,000, $2,049,649, and $2,053,361,

respectively. That balance sheet did not list any loans to Only

Kids from petitioner.

Only Kids paid wages of $99,692 to petitioner during 1998. 

Petitioner also received during 1998 other items of gross income. 

First, he received interest and dividends of $99 and $463,

respectively. Second, he received $39,056 from Donaldson Lufkin

& Arnold (DLA) and $16,349 from U.S. Clearing (USC) for sales of

stock. The proceeds from DLA were for sales in the respective
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2 As to the stock proceeds, respondent gave petitioner

credit for the bases mentioned above and treated the gains and

losses as short-term capital gains and losses.

amounts of $3,237, $10,255, $3,354, $2,512, $3,193, $9,775, and

$6,730. The proceeds from USC were for sales in the respective

amounts of $6,487 and $9,862. As to the sales of $3,237,

$10,255, $3,193, and $9,775, petitioner’s basis in the underlying

stock was $4,371, $8,738, $3,775, and $10,493, respectively, and

his gain or loss on the sales was ($1,134), $1,517, ($582), and

$718, respectively. The record does not establish petitioner’s

basis as to the stock underlying any of the other sales. Nor

does the record establish petitioner’s holding period as to any

of the sales.

In the notice of deficiency, respondent determined

petitioner’s gross income on the basis of income reported to

respondent by petitioner’s payors. That income included the

amounts of wages, interest, dividends, and stock proceeds stated

above.2 Respondent also determined in the notice of deficiency

that petitioner’s filing status was “Married filing separate

return”.

OPINION

1. Burden of Proof

Taxpayers generally must prove the Commissioner’s

determinations wrong in order to prevail. Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933). As one exception to this
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rule, section 7491(a) places upon the Commissioner the burden of

proof with respect to any factual issue if the taxpayer

maintained adequate records, satisfied applicable substantiation

requirements, cooperated with the Commissioner, and introduced

during the court proceeding credible evidence on the factual

issue. The legislative history of section 7491(a) clarifies that

taxpayers must prove that they have satisfied the adequate

records, substantiation, and cooperation requirements before that

section places the burden of proof upon the Commissioner. H.

Conf. Rept. 105-599, at 240 (1998), 1998-3 C.B. 747, 994 (“The

taxpayer has the burden of proving that it meets each of these

conditions, because they are necessary prerequisites to

establishing that the burden of proof is on the Secretary.”); see

also Prince v. Commissioner, T.C. Memo. 2003-247. The text of

the statute requires that the taxpayer satisfy the remaining

(credible evidence) requirement as a condition of placing the

burden of proof upon the Commissioner.

We do not find that petitioner maintained adequate records,

satisfied applicable substantiation requirements, or cooperated

with respondent. Accordingly, we hold that section 7491(a) does

not apply here to place the burden of proof upon respondent.

2. Filing Status

Section 1(a) allows married individuals to elect to compute

their Federal income tax liability on the basis of a joint
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return. We conclude that petitioner is not entitled to compute

his 1998 Federal income tax liability as such in that he has

never filed a 1998 tax return. See Thompson v. Commissioner,

78 T.C. 558, 561 (1982). Although petitioner gave respondent’s

counsel a copy of his purported joint return for 1998, that

“return” was not a joint return in that it was signed by neither

him nor his wife. Weber v. Commissioner, T.C. Memo. 1995-125;

Gudenschwager v. Commissioner, T.C. Memo. 1989-6. We sustain

respondent’s determination that petitioner’s filing status for

1998 is "Married filing separate return".

3. Stock Sales

A taxpayer such as petitioner must recognize gain or loss on

each sale of stock in an amount equal to the difference between

the amount realized and his basis. Secs. 1001, 1012. Gain or

loss on the sale of stock held for more than one year is

considered long-term. Sec. 1222(3) and (4). Gain or loss on all

other sales of stock is considered short-term. Sec. 1222(1) and

(2). Taxpayers who fail to prove a basis in a sold asset are

considered to have a zero basis in that asset. Garret v.

Commissioner, T.C. Memo. 1997-231; see also Reeve v.

Commissioner, a Memorandum Opinion of this Court dated March 27,

1947.

Petitioner argues that he is entitled to recognize losses on

sales of stock not mentioned above. We disagree. The record
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does not establish that petitioner had any other such sales of

stock during the relevant year. In that petitioner has not

disproved respondent’s determination that his stock proceeds are

taxable in full, with the exception of our findings above as to

basis, that those proceeds were the only sales proceeds received

by petitioner during the subject year, and that petitioner’s

gains and losses from his stock sales were short-term capital

gains and losses, we sustain respondent’s determination as to

this issue.

4. Loss From Only Kids

The pro rata share of an S corporation’s loss passes through

to its shareholders. Sec. 1366(a)(1). A shareholder may deduct

such a loss to the extent that it does not exceed the

shareholder’s adjusted basis in (1) the shareholder’s stock in

the corporation plus (2) any debt owed by the corporation to the

shareholder. Sec. 1366(d)(1). A taxpayer such as petitioner

must establish that he has acquired basis in the referenced stock

and debt and, to the extent that he does, that his basis in those

items was not reduced to zero because of losses claimed in years

predating the subject year. Hogan v. Commissioner, T.C. Memo.

1999-365. Taxpayers who fail to prove that they have any basis

in an S corporation are considered to have a zero basis in that

corporation. Thomson v. Commissioner, T.C. Memo. 1983-279, affd.

without published opinion 731 F.2d 899 (11th Cir. 1984).
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3 We are mindful that petitioner, as the only shareholder of

Only Kids, obviously had to have at least once invested in the

corporation and that Only Kids’ 1998 Form 1120S reported that

Only Kids’ balance sheet as of December 31, 1998, listed capital

stock and additional paid-in-capital of $425,000 and $2,049,649,

respectively. In that the record contains no credible evidence

(continued...)

Petitioner argues that he is entitled to deduct an $86,889

loss from Only Kids and that the 1998 Form 1120S, a single bank

statement, and his testimony establish his basis in Only Kids. 

We disagree with petitioner when he asserts that he has

established that he has a basis in Only Kids. The Form 1120S

does not contain sufficient information for us to establish that

he has any basis in Only Kids. Fehlhaber v. Commissioner,

94 T.C. 863, 869 (1990), affd. 954 F.2d 653 (11th Cir. 1992). 

Nor does the bank statement, which simply lists Only Kids’

deposits and other credits for April 1998, establish that

petitioner had any such basis. Although petitioner observes

correctly that the statement reports that funds of $105,000 were

wired into Only Kids’ bank account during April 1988, the

statement does not indicate the source of those wire transfers. 

In that petitioner testified vaguely and incoherently that the

deposits were from his personal account, and that the record does

not otherwise support that testimony, we decline to find the

subject matter of that testimony as a fact. We conclude that

petitioner’s adjusted basis in Only Kids was zero for 1998 and,

hence, that he was not entitled to deduct the referenced loss.3
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3(...continued)

to persuade us that the amounts listed on the balance sheet are

correct, we decline to find those amounts as facts. We also note

that petitioner has never filed a tax return for 1995 through

2000 and that the record does not establish his taxable income

for any of the nondocketed years. Petitioner, therefore, has

failed to establish that any basis that he may have acquired in

Only Kids’ stock and debt before the subject year was not reduced

to zero because of losses claimed in those earlier years.

5. Itemized Expenses

Petitioner argues that he is entitled to deduct certain

itemized expenses (i.e., medical expenses, real estate taxes, and

home mortgage interest) in amounts greater than allowed by

respondent. In addition to his general burden of proof discussed

above, petitioner must prove his entitlement to any deduction,

e.g., by maintaining sufficient records to substantiate his

claimed deductions. New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934); Lychuk v. Commissioner, 116 T.C. 374, 384

(2001); see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs. 

Petitioner has failed to carry his burden of proof. The record

does not establish that petitioner is entitled to deduct any

itemized expense in an amount greater than allowed by respondent. 

Lobe v. Commissioner, T.C. Memo. 2001-204, and cases cited

therein.

6. Additions to Tax

a. Section 6651(a)(1)

Section 6651(a)(1) imposes an addition to tax for failing to

file a return on or before the specified filing date unless it is
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shown that this failure is due to reasonable cause and not due to

willful neglect. Reasonable cause may exist if a taxpayer

exercised ordinary business care and prudence and was nonetheless

unable to file the return within the date prescribed by law. 

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect

means a “conscious, intentional failure or reckless

indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).

Respondent bears the burden of production with respect to

this addition to tax. Sec. 7491(c). In order to meet this

burden of production, respondent must produce sufficient evidence

establishing that it is appropriate to impose this addition to

tax. Once respondent has done so, the burden of proof is upon

petitioner, Higbee v. Commissioner, 116 T.C. 438, 449 (2001),

except for the increased portion of the addition to tax asserted

by respondent in the answer. Respondent bears the burden of

proof as to that portion of the addition to tax. Rule 142(a)(1). 

Petitioner’s burden of proof requires that he prove that his

failure to file a timely 1998 tax return was due to reasonable

cause and was not due to willful neglect. Sec. 6651(a)(1);

United States v. Boyle, supra at 245. Respondent’s burden of

proof requires that he prove the contrary; i.e., that

petitioner’s failure to file timely was not due to reasonable

cause or was due to willful neglect. Sec. 6651(a)(1); United

States v. Boyle, supra at 245; Bruner Woolen Co. v. Commissioner,
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6 B.T.A. 881, 882 (1927); see also Banks v. Commissioner, T.C.

Memo. 2001-48; Collins v. Commissioner, T.C. Memo. 1994-409;

Taylor v. Commissioner, T.C. Memo. 1989-201; McCanless v.

Commissioner, T.C. Memo. 1987-573. 

Respondent has satisfied his burden of production in that

the record establishes that petitioner has never filed a 1998 tax

return. Petitioner must establish reasonable cause in order to

prevail as to the portion of the addition to tax for which he

bears the burden of proof. Petitioner has failed to present any

persuasive evidence establishing that his failure to file that

return timely was due to reasonable cause and was not due to

willful neglect. Respondent, in turn, also has failed to

introduce any evidence establishing to the contrary; i.e., that

petitioner’s failure to file timely was not due to reasonable

cause or was due to willful neglect. We sustain respondent’s

determination as to the addition to tax under section 6651(a)(1)

included in the notice of deficiency but hold for petitioner as

to the portion of that addition to tax asserted in the answer.

b. Section 6654

Section 6654 imposes an addition to tax on an underpayment

of estimated tax. This addition to tax is mandatory unless the

taxpayer establishes that one of the exceptions listed in section

6654(e) applies. Recklitis v. Commissioner, 91 T.C. 874, 913

(1988).
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The record establishes that petitioner failed to pay the

required amount of estimated tax for 1998. We conclude that

respondent has met his burden of production as to this issue. 

Given that the record does not establish that any of the

referenced exceptions applies, we conclude that petitioner has

failed to meet his burden of proof and sustain respondent's

determination as to this issue. See Motley v. Commissioner, T.C.

Memo. 2001-257.

 ___________________________________

All arguments made by the parties and not discussed herein

have been rejected as meritless.

Decision will be

entered under Rule 155.