TAX COURT OPINION

Case: Richard A. Ferne & Valeria Ferne
Docket Number: 17360-18S
Judge: Thornton
Opinion Type: bench
Filed: 12/03/2019
Pages: 12

JRB UNITED STATES TAX COURT WASHINGTON, DC 20217 RICHARD A. FERNE & VALERIA FERNE, Petitioners, v. ) ) ) ) Docket No. 17360-18S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED: That the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Michael B. Thornton at Louisville, Kentucky, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Michael B. Thornton Judge Dated: Washington, D.C. December 3, 2019 SERVED Dec 03 2019 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 IN THE UNITED STATES TAX COURT In the Matter of: RICHARD A. FERNE & VALERIA FERNE, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 17360-18S ) ) ) ) ) ) ) ) Gene Snyder Cthse. 601 W. Broadway Street Room 440, 4th Floor Louisville, Kentucky 40202 - Custom House November 13, 2019 The above-entitled matter came on for bench opinion, pursuant to notice at 9:10 a.m. BEFORE: HONORABLE MICHAEL B. THORNTON Judge APPEARANCES: For the Petitioners: No Appearance For the Respondent: No Appearance c n ( 3e P R O C E E D I N G S 2 (9:10 a.m.) THE CLERK: Recalling from the calendar docket number 17360-18S, Richard A. Ferne & Valeria Ferne. (Whereupon, a bench opinion was rendered.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Michael B. Thornton November 13, 2019 Richard A. Ferne & Valeria Ferne v. Commissioner Docket No. 17360-18S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. Except as otherwise provided by Rule 152(c) of the Tax Court Rules of Practice and Procedure, the oral 10 findings of fact and opinion shall not be relied upon as 11 Precedent in any other case. 12 This proceeding for the redetermination of a 13 deficiency is a Small Tax Case conducted pursuant to the 14 Provisions of section 7463 of the Internal Revenue Code of 15 1986, as amended, and Rules 170 through 175 of the Tax 16 Court Rules of Practice and Procedure. Pursuant to 17 18 19 section 7463(b), the decision to be entered in this case is not reviewable by any other court. This bench opinion is made pursuant to the 20 authority granted by section 7459(b) and Rule 152. 21 Hereinafter in this bench opinion, section references are 22 to the Internal Revenue Code in effect for the taxable 23 year at issue. All Rule references are to the Tax Court 24 Rules of Practice and Procedure. All monetary amounts are 25 rounded to the nearest dollar. e < r ners This case was tried on November 12, 2019, in 4 Louisville, Kentucky. Petitioners appeared pro sese. Mr. 1 2 3 Phillip A. Lipscomb appeared on behalf of respondent. 4 5 6 7 FINDINGS OF FACT Petitioner husband, Mr. Richard A. Ferne, has lived and worked in various countries throughout his life. From 1958 to 2013 he lived for stretches in Ireland, 8 Malta, Malaysia, Hong Kong, Singapore, and Scotland, as 9 10 11 well as (from 1998 to 2005) the United States. From 1985 to 2013 his employment required extensive international travel. In 2013 Mr. Ferne retired because of various 12 health conditions. He has since lived in the United 13 States. 14 Beginning in the late 1960s Mr. Ferne began 15 purchasing collectible and personal items, including 16 Postage stamps, model whiskey trucks, bird figurines, 17 18 photographs, and photo slides (hereinafter, "collectibles"). He did not keep books or records 19 indicating when he purchased each item, the price paid for 20 each item, the country in which he was located when he 21 made each purchase, or the currency used to purchase the item. 22 23 Upon retiring and moving from Hong Kong to the 24 United States in 2013, Mr. Ferne had to sort and sell 25 many of his collectibles in the process of downsizing and a ners to pay personal living expenses. To this end, beginning 5 in July of 2014 he began selling a number of the collectibles on eBay. His sales activities continued beyond 2014, and during 2015 Mr. Ferne sold at least 2,100 collectibles on eBay, receiving in exchange gross proceeds of $41,691. With respect to these sales, Mr. Ferne used PayPal to process 867 payment transactions. To facilitate his sales activities during 2015 Mr. Ferne paid fees to eBay in the amount of $4,570 and paid fees to PayPal in 1 2 3 4 5 6 7 8 9 10 the amount of $1,760. Additionally, during 2015 Mr. Ferne 11 Paid $5,966 in shipping costs in connection with his sales 12 activities. 13 14 15 On their 2015 joint Form 1040, U.S. Individual Income Tax Return, petitioners reported $45,153 of gross income, comprising $30,298 of wages, $66 of ordinary 16 dividends, and $14,789 of pensions and annuities. 17 Petitioners did not report any of the $41,691 gross 18 proceeds they received in connection with their sales 19 activities. 20 21 22 By notice of deficiency respondent determined that petitioners had a $11,696 deficiency for their 2015 tax year based on the inclusion of the gross proceeds of 23 their sales activities as reported to respondent on Form 24 1099-K, Payment Card and Third Party Network Transactions. 25 The notice also determined that petitioners were liable for a $2,339 accuracy-related penalty under section 6662(a). While residing in Kentucky, petitioners timely 6 Petitioned this Court. OPINION The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer generally bears the burden of proving those determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioners have not 1 2 3 4 5 6 7 8 9 10 established their compliance with the substantiation and 11 12 13 14 15 recordkeeping requirements of the Internal Revenue Code so as to shift the burden of proof to respondent as to any issue. See sec. 7491(a)(2) (A) and (B). Gross income includes gains derived from dealings in property, including gains from the sale of 16 personal or collectible items. See sec. 61(a)(3). Gains 17 from the sale or other disposition of property are 18 generally the excess of the amount realized over the 19 adjusted basis of the property. Sec. 1001(a). Sections 20 1011 and 1012 provide that the basis of property sold is 21 generally its cost to the taxpayer, adjusted to the extent 22 Provided by section 1016. 23 The adjusted bases of the collectibles 24 petitioners sold during 2015 are determined by reference 25 to their cost to petitioners. See secs. 1011(a), 1012. anes 7 Unfortunately, petitioners did not keep sufficient records to establish their cost basis in any of the items sold. see sec. 1.6001-1(a), 1ncome Tax aegs. Petitioners suggest that because Mr. Ferne was living abroad in various years when he acquired some of the collectibles, Petitioners should not be subject to the United States recordkeeping requirements. Petitioners have cited no legal authority for this proposition, and we are aware of none. The parties have stipulated that petitioners' aggregate basis in the items sold during 2015 is at least $12,507. In an attempt to establish greater cost basis than $12,507, petitioners introduced into evidence statements from eBay identifying items sold during 2015 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 and statements from PayPal showing the gross amounts 16 received from hundreds of payment transactions. 17 Petitioners also introduced portions of various bank 18 statements from 2004 to 2015 which they say show that Mr. 19 Feme spent substantial sums of money during those years 20 Purchasing collectibles. As petitioners acknowledge, 21 however, this evidence cannot be directly linked to any 22 particular items listed in the eBay or PayPal statements. 23 In fact, the evidence does not establish that all the 24 items sold in 2015 were even purchased from 2004 to 2015. 25 Moreover, as petitioners acknowledge, some collectibles have been sold in years since 2015, and some of the collectibles have not been sold at all. 8 As best we understand it, petitioners would have us infer that Mr. Ferne paid more for the collectibles than he realized from those sales. A taxpayer must prove he or she is entitled to additional basis in collectible items through competent evidence, however, not mere inference and speculation. Schoch v. Commissioner, T.C. Memo. 1991-547 (citing Wood Corp. of Del. v. Commissioner 22 B.T.A. 1182 (1931), aff'd, 63 F.2d 1023 (6th Cir. 1933)). The evidence offered is inadequate to show that 1 2 3 4 5 6 7 8 9 10 11 12 Petitioners paid more for the collectibles sold in 2015 13 14 15 than the $12,507 that respondent has agreed to allow as aggregate basis in these collectibles. If a taxpayer with inadequate records proves 16 that he incurred certain expenses but cannot substantiate 17 the exact amount, the Court in appropriate circumstances 18 may estimate the allowable amount. See Cohan v. 19 Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The 20 Court has applied these principles to estimate a 21 taxpayer's basis in property and cost of goods sold. See 22 Huzella v. Commissioner, T.C. Memo. 2017-210, at *7. In 23 order for the Court to estimate basis, however, the 24 taxpayer must provide some reasonable evidentiary 25 foundation for the estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). 9 In making an estimate under the Cohan rule, the Court "bear[s] heavily * * * upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner, 39 F.2d at 544. As previously explained, Petitioners have not produced a reasonable evidentiary foundation from which the Court can determine that they had greater aggregate cost basis in the items sold in 2015 than the $12,507 as agreed to by the parties in their stipulation. Consequently, we hold that petitioners are 1 2 3 4 5 6 7 8 9 10 entitled to aggregate cost basis of $12,507 in determining 11 their taxable gain from the sales of the items in 12 question. 13 The parties have stipulated that petitioners are 14 entitled to itemized deductions (subject to the 15 limitations contained in section 67) for fees paid to eBay 16 in the amount of $4,570, fees paid to PayPal in the amount 17 of $1,760, and $5,966 of shipping costs. The parties have 18 also stipulated that petitioners are liable for an 19 accuracy-related penalty for negligence and disregard of 20 rules and regulations to the extent there is an 21 underpayment in income tax for the 2015 tax year. The 22 amount of such penalty will be determined in the Rule 155 23 computations. 24 The Court has considered all of petitioners' 25 arguments and statements. To the extent not discussed herein, 10 the Court concludes that they are moot, meritless, or irrelevant. Consistent with the foregoing, and to take into account the parties' stipulations, a decision will be entered under Rule 155. This concludes the Court's findings of fact and opinion in this case. (Whereupon, at 9:30 a.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cuners CERTIFICATE OF TRANSCRIBER AND PROOFREADER 11 CASE NAME: Richard A. Ferne & Valeria Ferne v. Commissioner DOCKET NO.: 17360-18S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 11 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Gary Baldwin on November 13, 2019 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its session in Louisville, KY, in accordance with 11 the applicable provisions of the current verbatim 12 13 14 15 18 19 20 21 22 23 24 25 reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 Transcriber 11/19/19 Date Traci Fine, CDLT-169 Proofreader 11/20/19 Date ones