United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 15, 2013 Decided April 5, 2013

No. 12-1284

MARC S. BARNES AND ANNE M. BARNES,

APPELLANTS

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

APPELLEE

On Appeal from the Decision 

of the United States Tax Court

Mario Vincent Dispenza Jr. argued the cause for 

appellants. On the briefs was Gerald W. Kelly Jr.

John A. Nolet, Attorney, U.S. Department of Justice, 

argued the cause for appellee. With him on the brief was 

Richard Farber, Attorney.

Before: GARLAND, Chief Judge, ROGERS and TATEL, 

Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: This case concerns Marc and Anne 

Barnes’s joint income-tax return for fiscal year 2003. That 

year was a busy one for the Barneses, who at the time owned 
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or were involved with several different restaurant, nightclub, 

and event-promotion businesses. Relevant here, they held a 

partial ownership stake in an S corporation called “Whitney 

Restaurants,” and they also ran an unincorporated eventpromotion sole proprietorship.

The Barneses’ 2003 tax return reported the income and 

withholdings for each of these businesses. The Internal 

Revenue Service disagreed with the Barneses’ assessment of 

their tax liability in two primary respects. The first concerns a 

deduction the Barneses claimed for their $279,289 pro rata 

share of Whitney’s 2003 losses. Taxpayers can deduct Scorporation losses only when they have sufficient “basis”—

here, the amount of capital the taxpayer has contributed to the 

corporation minus the taxpayer’s share of the corporation’s 

previous losses—to absorb them. See 26 U.S.C. § 1366(d)(1). 

Because the IRS determined that the Barneses’ remaining 

basis in Whitney was just $153,282.93, they were entitled to 

take a deduction for that amount only. Accordingly, the IRS

disallowed the deduction claimed for the remainder 

($123,006) of the Barneses’ share of Whitney’s losses.

The second point of contention between the Barneses and 

the IRS relates to the gross income of the Barneses’ eventpromotion sole proprietorship. Although the Barneses initially 

reported its income as $168,997, they subsequently alleged

that they had overstated that amount by $30,000 because of a 

bookkeeping error. The IRS rejected this claim, declining to 

reduce the sole proprietorship’s income as the Barneses had

requested.

When all was said and done, the IRS determined that the 

Barneses’ 2003 income taxes were deficient by $54,486.

Finding that this deficiency constituted a “substantial 

understatement” of their income tax liability, see id.
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§ 6662(d), the Service imposed a $10,897.20 accuracy-related 

penalty.

The Barneses challenged the IRS’s deficiency finding, as 

well as the penalty, in the United States Tax Court. Reviewing 

the case on a fully stipulated record, the Tax Court upheld the 

Commissioner’s determinations.

Appealing to this Court, see id. § 7482(a)(1) (“The 

United States Courts of Appeals . . . shall have exclusive 

jurisdiction to review the decisions of the Tax Court . . . in the 

same manner and to the same extent as decisions of the 

district courts . . . .”), the Barneses argue that the Tax Court 

misunderstood relevant law when it affirmed the IRS’s 

calculation of their remaining basis in Whitney. They also 

challenge the factual basis for the Tax Court’s decisions 

affirming the Service’s rejection of their over-reporting claim 

and upholding its imposition of the penalty.

We review the Tax Court’s legal conclusions de novo and 

its factual findings for clear error. See Jombo v. 

Commissioner of Internal Revenue, 398 F.3d 661, 663 (D.C. 

Cir. 2005). We would owe deference to the IRS’s 

interpretation of the Internal Revenue Code under Chevron 

U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), “if the Service 

had reached the interpretation[s] asserted here in a notice-andcomment rulemaking, a formal agency adjudication, or in 

some other procedure meeting the prerequisites for Chevron 

deference.” Landmark Legal Foundation v. IRS, 267 F.3d 

1132, 1135–36 (D.C. Cir. 2001) (citing United States v. Mead 

Corp., 533 U.S. 218, 229–34 (2001)). But because the IRS 

makes no claim to have done anything of the sort in 

evaluating the Barneses’ return, we give its interpretations

“no more than the weight derived from their ‘power to 

persuade.’ ” Id. at 1136 (quoting Mead, 533 U.S. at 228, in 
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turn quoting Skidmore v. Swift & Co., 323 U.S. 124, 140 

(1944)).

The first of the Barneses’ three challenges—their claim 

that IRS and the Tax Court calculated their basis in Whitney 

in reliance on an erroneous interpretation of the Internal 

Revenue Code—turns on a single question: Is a taxpayer’s 

basis in an S corporation reduced by the amount of any 

suspended losses in the first year the basis is adequate to 

absorb those losses, regardless of whether the taxpayer claims 

a tax deduction for those losses in that year? The Barneses, 

who in 1997 failed to claim a deduction for a suspended loss 

even though they had adequate basis to absorb it, say “no: no 

deduction claimed, no basis reduction.”

Unfortunately for the Barneses, the IRS and the Tax 

Court correctly concluded that the Internal Revenue Code 

says otherwise. Section 1367, which specifies the effects of 

various losses on a shareholder’s basis, states that basis “shall 

be decreased for any period,” 26 U.S.C. § 1367(a)(2)(B) 

(cross-referencing id. § 1366(a)(1)(A)), by “the shareholder’s 

pro rata share of the corporation’s . . . items of . . . loss.” Id.

§ 1366(a)(1)(A). Section 1366 provides that any Scorporation losses a shareholder lacks sufficient basis to 

absorb “shall be treated as incurred by the corporation in the 

succeeding taxable year.” Id. § 1366(d)(2)(A) (crossreferencing id. § 1366(d)(1)). Taken together, these two 

provisions are clear: A shareholder’s basis is decreased “for 

any period” by the amount of that shareholder’s pro rata share 

of the corporation’s losses, and a shareholder incurs 

previously unabsorbed losses in the first year the shareholder 

has adequate basis to do so. 

Nothing in any of these provisions suggests that a 

shareholder’s basis is not reduced if the shareholder fails to 
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take a deduction for the corporation’s losses. Indeed, the fact 

that the Code explicitly provides that a shareholder’s basis is 

increased by corporate income “only to the extent such 

amount is included in the shareholder’s gross income on his 

return,” id. § 1367(b)(1), but provides no similar exception for

corporate losses, militates against the Barneses’ preferred 

reading. See Russello v. United States, 464 U.S. 16, 23 (1983) 

(“[W]here Congress includes particular language in one 

section of a statute but omits it in another section of the same 

Act, it is generally presumed that Congress acts intentionally 

and purposely in the disparate inclusion or exclusion.” 

(internal quotation marks omitted)). This difference makes 

sense. Although Congress had every reason to prevent 

taxpayers from reaping a double benefit by failing to report 

income while still being credited with an increased basis, it 

had no reason to permit them to indefinitely delay the 

realization of losses.

True, this means that the Barneses paid more in taxes 

than they owed. But so it goes. They could have avoided this 

problem by claiming a deduction for the loss in 1997 or by

amending their 1997 return during the applicable limitations 

period thereafter. Because they failed to do either, neither a 

contorted reading of the applicable statutes nor the so-called 

tax benefit rule—which the Barneses invoke but which is 

simply inapplicable here, see Hillsboro National Bank v. 

Commissioner of Internal Revenue, 460 U.S. 370, 377–86 

(1983)—can turn back the clock. 

The Barneses’ next claim relates to their alleged $30,000 

over-reporting of the sole proprietorship’s income. In support 

of their claim, they provided evidence showing that only 

$30,000 of a certain $60,000 check was paid to the sole 

proprietorship. As the Tax Court emphasized, however, they 

provided no evidence that they actually reported the excess 
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$30,000 as part of the sole proprietorship’s income in the first 

place. Given this, the Tax Court made no clear error when it 

upheld the IRS’s determination not to reduce the sole 

proprietorship’s income. On this issue, the Barneses also 

argue that the IRS acted inconsistently by rejecting their claim 

of over-reported income while accepting their claim of overreported expenses. But because they failed to make this 

argument before the Tax Court, see Oral Arg. Rec. 12:33–

13:30 (conceding this point), we consider it forfeited. See 

Marymount Hospital, Inc. v. Shalala, 19 F.3d 658, 663 (D.C. 

Cir. 1994) (“[A]bsent ‘exceptional circumstances’ . . . ‘it is 

not our practice to entertain issues first raised on appeal.’ ”

(quoting Roosevelt v. E.I. Du Pont de Nemours & Co., 958 

F.2d 416, 419 & n.5 (D.C. Cir. 1992)); see also Valdez v. 

Commissioner of Internal Revenue, 110 F.3d 72 (9th Cir. 

1997) (applying this rule to appeals from Tax Court

decisions). 

Finally, given our resolution of the two previous issues, 

there is no dispute that the Barneses’ 2003 tax return 

understated their taxes by an amount that qualifies as 

“substantial.” See 26 U.S.C. § 6662(d)(1)(A). The Barneses 

nonetheless argue that the IRS and the Tax Court should have 

excused their understatement on “substantial authority” or 

“reasonable cause and good faith” grounds. See id.

§§ 6662(d)(2)(B)(i), 6664(c)(1). But taxpayers bear the 

burden of proof on this question, see Higbee v. Commissioner

of Internal Revenue, 116 T.C. 438, 447 (2001), and the Tax 

Court committed no error when it determined that the 

Barneses failed to submit the evidence necessary to carry that 

burden.

For the foregoing reasons, we affirm.

So ordered.