TAX COURT OPINION

Case: Percy Irving
Docket Number: 7775-11
Judge: Kroupa
Opinion Type: bench
Filed: 04/25/2012
Pages: 6

UNITED STATES TAX COURT WASHINGTON, DC 20217 PERCY IRVING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) O R D E R Docket No. 7775-11 Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit the to petitioner and to respondent a copy of transcript of Diane L. Kroupa at San Francisco, California, on April 3, 2012, containing her oral the proceedings in the above case before Judge the pages of findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. April 25, 2012 SliRVED APR 26 2012 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 Bench Opinion by Judge Diane L. Kroupa April 3, 2012 Percy Irving v. Commissioner Docket No. 7775-11 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. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. All section references are to the Internal Revenue Code in effect for 2007 and all rule references are to the Tax Court Rules of Practice & Procedure. Petitioner appeared pro se, and Tim Froehle appeared for Respondent. FINDINGS OF FACT Certain facts have been stipulated. The stipulation of facts the parties filed with accompanying exhibits is incorporated by this reference and the facts are so found. Petitioner resided in California at the time he filed the petition. Petitioner was formerly an electrician, and began purchasing commercial real estate. In 2003 Petitioner owned two pieces of commercial real estate, one of which was owned one half by Petitioner and one half by a married couple. Heritage Reporting Corporation (202) 628-4888 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 4 Petitioner owned the other property by himself, which property shall be referred to as the Tennessee property. Petitioner claimed a net operating loss, NOL, in excess of $200,000 for 2003 that he has carried forward to 2007, the year at issue.. Petitioner's return for 2007 was audited and Respondent disallowed any amount of the NOL, as Petitioner was unable to provide any documentation to substantiate any NOL in 2003. Respondent issued a deficiency notice to Petitioner for 2007, determining a $2,429 deficiency in federal income tax against Petitioner. During trial, Petitioner provided no records or documentation to substantiate any expenses he paid or incurred for any year he owned the Tennessee property, or any other interest in real estate. Petitioner timely filed a petition asking the Court to allow him to claim an NOL carryforward from 2003 to 2007. OPINION This is primarily a substantiation case where we must determine whether Petitioner is entitled to the claimed NOL carryforward from 2003 to 2007. We begin with two fundamental principles of tax litigation. First, the Commissioner's determinations are generally presumed correct and the taxpayer bears the burden of proving that those Heritage Reporting Corporation (202) 628-4888 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 5 determinations are erroneous. Rule 142(a). This principle is not affected by section 7491(a), because Petitioner failed to comply with the substantiation requirements and failed to maintain adequate records. See sec. 7491(a) (2) (A) and (B). See also Higbee v. Commissioner, 116 T.C. 438 (2001). Second, deductions are a matter of legislative grace and the taxpayer must show that he or she is entitled to any deduction claimed. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Substantiation means that a taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. The Court need not accept a taxpayer's self- serving testimony when the taxpayer fails to present other probative evidence. Beam v. Commissioner, T.C. Memo. 1990- 304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)). Although the Cohan rule allows the Court in certain situations to approximate the amount of allowable deductions, no such circumstances exist here. Cohan v. Heritage Reporting Corporation (202) 628-4888 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 6 Commissioner, 39 F.2d 540, 543-544 (2nd Cir. 1930). We must have some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. Commissioner, 245 F.2d 559, 560 (5th Cir. 1957). In addition, certain expenses such as auto and travel expenses Petitioner claimed in 2003 may not be estimated because of the strict substantiation requirements mandated by section 274(d). See sec. 280F(d) (4) (A); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2nd Cir. 1969). For such expenses, only documentary substantiation will suffice. We now apply these rules to the facts here. First and foremdst, we cannot determine if any loss was sustained in 2003 without any records or documentation. We also fail to see how the loss claimed in 2003 was computed. There appears to be a computational mistake that would decrease the amount of any alleged loss for that year. There is no explanation how the reported $23,176 loss on the Tennessee property somehow increased to a loss of $127,176. In addition, a taxpayer must establish not only the amount of the loss and the year in which the loss was sustained, but must also establish that the loss has not been previously claimed on returns for other years. Sec. 172. Heritage Reporting Corporation (202) 628-4888 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 7 Petitioner asks us to allow him an NOL carryforward from 2003 to 2007 when he has no receipts to substantiate the amount of the NOL. This we cannot do. Petitioner bore the burden of proving the fact and amount of the loss. See Rule 142(a); Ocean Sands Holding Corp. v. Commissioner, T.C. Memo. 1980-423, affd. without published opinion 701 F.2d 163 (4th Cir. 1983). Petitioner failed to present any evidence to substantiate the claimed loss or carryover. Accordingly, we sustain Respondent's determination in the deficiency notice regarding the NOL. Petitioner also failed to challenge in the petition any other issue determined in the deficiency notice. Accordingly, Petitioner has conceded these issues. See Swain v. Commissioner, 118 T.C. 358 (2002). All other issues are computational based upon our determination regarding the NOL. To reflect the foregoing, decision will be entered for Respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:54 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // Heritage Reporting Corporation (202) 628-4888