T.C. Memo. 2010-74

UNITED STATES TAX COURT

PHILIP A. LEHMAN AND SARA A. MERRICK, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16845-07. Filed April 14, 2010.

Robert A. Wise, for petitioners.

Richard J. Hassebrock and Gary R. Shuler, for respondent.

MEMORANDUM OPINION

HALPERN, Judge: Respondent has determined deficiencies in,

and penalties with respect to, petitioners’ Federal income tax

liabilities as follows:
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Penalties

Year Deficiency Sec. 6662(a) Sec. 6663(a)

1998 $74,320 $14,864 --

1999 89,478 17,896 --

2000 71,614 6,539 $29,190

2001 63,800 852 44,656

2002 29,586 861 18,962

Unless otherwise stated, section references are to the

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

references are to the Tax Court Rules of Practice and Procedure.

Some facts have been stipulated and are so found. The

stipulation of facts, with accompanying exhibits, is incorporated

herein by this reference. We need find few facts in addition to

those stipulated and therefore shall not separately set forth our

findings of fact. We shall make additional findings of fact as

we proceed.

Petitioners bear the burden of proof with respect to the

issues remaining for decision. See Rule 142(a). Petitioners

have not raised the issue of section 7491(a), which shifts the

burden of proof to the Commissioner in certain situations. We

conclude that section 7491(a) does not apply here because

petitioners have not produced any evidence that they have

satisfied the preconditions for its application. 

Background

The parties have filed, and we accept, a stipulation of

settled issues that disposes of all but two issues in this case. 

Those two issues relate to respondent’s adjustments disallowing
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net operating loss (NOL) deductions that petitioners claimed for

the years in issue. Respondent made those adjustments in part on

the ground that petitioners had failed to establish that

petitioner husband (Mr. Lehman) sustained NOLs in 1994 and 1995

or that, if he did, any of those losses carried over and were

available as NOL deductions for any year in issue. Respondent

further argues that, even if we find that any of those losses

carried over and were available as NOL deductions for any year in

issue, the passive activity loss rules of section 469 preclude

petitioners from claiming those deductions. Because we sustain

respondent’s adjustments disallowing the NOL deductions on the

ground that petitioners have failed to show that they are

entitled to NOL deductions for any year in issue, we need not

consider section 469.

Discussion

Section 172 provides for an NOL deduction. As they apply to

this case, the rules of section 172 can be stated summarily. An

NOL is the excess of the deductions allowed over the gross

income. Sec. 172(c). An NOL for any taxable year may be carried

back to each of the 3 taxable years preceding the taxable year of

the loss and carried over to each of the 15 taxable years

following the taxable year of the loss. Sec. 172(b). A taxpayer

may elect to waive the 3-year carryback period. Sec. 172(b)(3).
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On his 1994 and 1995 Federal income tax returns, Mr. Lehman

reported NOLs of $60,312 and $57,040, respectively. Petitioners

concede that Mr. Lehman made no effective elections to waive the

carryback period for those losses. Therefore, to prevail,

petitioners must prove (1) that Mr. Lehman incurred those losses

and (2) that those losses were not absorbed during the period

beginning with 1991 (the earliest carryback year) and ending with

1997 (the last year before the first year here in issue). To

carry that burden, petitioners must introduce convincing evidence

not only of Mr. Lehman’s NOLs for 1994 and 1995 but also of his

taxable income for the other years (the carry years) in the

period beginning with 1991 and ending with 1997. See, e.g.,

Leitgen v. Commissioner, T.C. Memo. 1981-525, affd. without

published opinion 691 F.2d 504 (8th Cir. 1982).

In the petition, petitioners aver nothing with respect to

either the losses Mr. Lehman reported for 1994 and 1995 or his

taxable income for the carry years. See Rule 34(b)(5) (requiring

in a deficiency case statements of the facts on which the

taxpayer bases his assignments of error (except with respect to

assignments of error for which the Commissioner bears the burden

of proof)). On brief, petitioners make 36 proposed findings of

fact, only 2 of which (remotely) address the 1994 and 1995 losses

or Mr. Lehman’s taxable income for the carry years. See Rule

151(e)(3) (briefs shall contain proposed findings of fact). 
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Those two proposed findings concern “Byers Inn”, a tavernrestaurant that petitioners claim Mr. Lehman operated at a loss. 

Those two proposed findings are: (1) “Byers Inn never turned a

profit”, and (2) “Byers Inn incurred expenses that exceeded its

income.” On brief, petitioners allege that Mr. Lehman operated

Byers Inn at a loss from 1993 through 1999 and that a flood in

2003 destroyed the records of that operation. Petitioners argue

that, under the so-called Cohan rule, the net operating loss

deductions at issue should be allowed “despite the lack of

substantiating documentation.” 

Under the Cohan rule, if a taxpayer establishes that an

expense is deductible but is unable to substantiate the precise

amount, the Court may estimate the amount, bearing heavily

against the taxpayer whose inexactitude is of his own making. 

See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). 

To apply the Cohan rule, however, the Court must have some

information to estimate the proper deduction. See Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Petitioners have

proposed no facts that, were we to so find, would allow us to

make a reasonable estimate of Mr. Lehman’s l994 and 1995 losses

from Byers Inn. Tax returns alone do not establish that a

taxpayer suffered a loss. E.g., Wilkinson v. Commissioner, 71

T.C. 633, 639 (1979). Even were we to accept Mr. Lehman’s vague

testimony that Byers Inn never turned a profit, we would still
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lack sufficient information to make a reasonable estimate of his

1994 and 1995 losses. Petitioners have failed to carry their

burden of proving an NOL for either 1994 or 1995. Moreover, Mr.

Lehman’s tax returns for the carry years are insufficient to

prove that any 1994 and 1995 NOLs (assuming such) were not

completely absorbed during the carry years. See, e.g., Stutsman

v. Commissioner, T.C. Memo. 1961-109. Indeed, petitioners fail

even to propose findings of fact with respect to 1991 and 1992,

the first 2 carry years. 

We shall sustain respondent’s adjustments denying NOL

deductions for the years in issue because petitioners fail to

prove facts showing that they are entitled to those deductions. 

Decision will be entered

pursuant to Rule 155.