TAX COURT OPINION

Case: Ernest Giddens Sloan
Docket Number: 22471-17S
Judge: Goeke
Opinion Type: bench
Filed: 12/10/2018
Pages: 7

BD UNITED STATES TAX COURT WASHINGTON, DC 20217 ERNEST GIDDENS SLOAN, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 22471-17S. ) ) ) ) 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Nashville, Tennessee containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. December 10, 2018 SERVED Dec 11 2018 Bench Opinion by Judge Joseph Robert Goeke November 29, 2018 3 ERNEST GIDDENS SLOAN v. Commissioner of Internal Revenue Docket No. 22471-17S 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. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code, in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court. All the section references in this opinion are to the Internal Revenue Code as it effects the case before us. This opinion is rendered pursuant to section 7459(b) and Rule 152 of the Tax Court Rules of Practice and Procedure. The Court has jurisdiction over this case based upon our authority to review petitions filed after Respondent has issued notices of deficiency. The respondent issued a notice of deficiency for the year 2014 to the petitioner, and the petitioner timely filed a petition. At the time the petition was filed, the petitioner was a resident of Tennessee. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1973)406-2250 operationseescribersmet wwwescribestnet On the income tax return Mr. Sloan, the 4 petitioner, filed for 2014, he reported Schedule C activity for an entity called Kigoriak Oil & Gas Investments. The Schedule C reflects $2,305 in gross income, $346 for depletion expense, $310 for legal and professional expense, and $21,346 for other expense, resulting in a loss of $19,697. Respondent's notice of deficiency disallows the loss and asserts a penalty under section 6662(a). The issue in this case is substantiation; that is, whether Mr. Sloan has provided sufficiently credible evidence of the Schedule C expense he's claimed related to the oil and gas activity. Mr. Sloan has the burden of proof, but the expenses in question are not subject to the heightened requirements of section 274. Based upon the documents that the parties have stipulated and Mr. Sloan's testimony, we find that he has established that he invested in oil and gas properties offered by Brad Ford. The record establishes that Mr. Ford was convicted of securities fraud in 2002, and that Mr. Sloan's entity was a party listed in the retribution order associated with the federal criminal procedures brought against Mr. Ford. Mr. Sloan has offered other documents reflecting a $24,000 investment in the O'Connor 1A project. This 1 2 3 4 6 7 8 9 10 11 13 14 15 16 17 18 19 20 21 22 23 24 25 cribets 73) 406-2250| opera tions besa Amsnet i emwesenbersmet documentation is incomplete and, based upon the 5 documentation alone, we would not find that Mr. Sloan has supported his investment of $24,000. But reading the documentation in conjunction with his testimony and the other evidence about Mr. Ford's securities offerings, which are stipulated in the record, we find that Mr. Sloan's investment in the O'Connor 1A project is credible and that expenses were incurred with respect to that project. The key points of Mr. Sloan's testimony is that he invested $24,000 in the subject property in 1999. He KMe a also j±tst::i:f:sesi- that he did not receive a return on this investment other than some small retribution payments made after Mr. Ford's conviction, which were included together with other investments he made with Mr. Ford, aN wN in the restitution order from the Federal District Court after Mr. Ford's conviction. We find Mr. Sloan's testimony that, in 2013, he learned that the Texas Railroad Commission was going to have the well in question regarding his $24,000 investment capped to be credible. He testified that this well was in fact capped in 2014 and that he received $2,305 for salvaged equipment at the time the well was capped and closed. This represents the amount he reported as income associated with the Schedule C expenses in question. 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 73)406-2250] operatkmsøescribersaet j wwmescribersaet We note that the Schedule C does not perfectly 6 mirror Mr. Sloan's testimony because the Schedule C reflects specific expenses and not a lump sum amount of $24,000. Mr. Sloan has not provided any specific documentation or testimony that would support the $346 of depletion expense, or $310 for legal and professional expenses, and we find that these expenses are not allowable. However, we find that the $21,346 for other expense is substantiated based upon Mr. Sloan's testimony and the documentation in the record. This results in a net loss which would be the difference between $21,346 and S2,305, which would equal $19,041. Regarding the appropriate year of this loss, some discussion is merited because, by Mr. Sloan's testimony, the original investment was 15 years before he claimed the Schedule C expense. The discussion in the Court of Claims case Henley v. United States, 396 F.2d 956, 961-962, is especially appropriate to the circumstances of this case. The Court in Henley found that no deduction was allowed because, although the mineral interest of the taxpayer became worthless in a particular year, the tract itself still had other value. In discussing the legal analysis, the Court explained, the question of whether an item of property became worthless during a particular tax year is a factual 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 issue, as to which the burden of proof is borne by the taxpayer who claims an income tax deduction on that basis. 7 Henley and other case law make it clear that the reasonable prospect of a return on the well would require the deferral of the claim of expense. We find that applying that case law to the present case, together with established case law in this court, including Finston v. Ccmmissioner, T.C. Memo. 1956-2002, we would find that the plugging of the well was in fact an event which would make clear that no further income possibility was reasonable from the well in question. Up until the actual decision to plug the well, we think it was reasonable for Mr. Sloan to defer claiming the expense. Giving our holdings on the facts of this case, we think that the addition to tax is inapplicable to the extent there is a minor deficiency generated by the discrepancy between Mr. Sloan's testimony and the amounts claimed on the Schedule C. The small amounts in question make the addition to tax inappropriate. A Rule 155 computation will be necessary to account for the difference between Mr. Sloan's claimed expense and the two small items we've disallowed based upon the prior discussion. This concludes the Court's oral findings of fact and opinion in this case. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973) 406-2250| operatiorseescribersaet I www.esoibersaet 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 (Whereupon, at 11:15 a.m., the above-entitled 8 matter was concluded.) 973)4(cid:16)0601250apostianseemribennetj wwmeserbersaat