TAX COURT OPINION

Case: Perry Dean Knowles
Docket Number: 8555-08
Judge: Paris
Opinion Type: memo
Filed: 01/27/2011
Pages: 14

T.C. Memo. 2011-23 UNITED STATES TAX COURT PERRY DEAN KNOWLES, Petitioner E. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8555-08. Filed January 27, 2011. Perry Dean Knowles, pro se. Duy P. Tran, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION PARIS, Judge: On January 14, 2008, respondent issued to petitioner a notice of deficiency which determined a Federal income tax deficiency of $1,502 for petitioner's 2005 tax year. Petitioner filed a timely petition with- this Court. The issues for decision are: (1) Whether petitioner is entitled to a SERVED JAN 2 7 2011 - 2 - capital loss carryover pursua t to section 1212 (b) ; i (2) whether petitioner is permitted to in rease his adjusted basis in either the Mexico Fund, Inc. (MXF), or the Mexico Equity and Income Fund, I c. (MXE) , pursuant to section 852 (b) (3) (D) (iii) ; and (3) whether petitioner made an ov rpayment of tax attributable to a ! I i mathemat ical miscalculation. FINDINGS OF FACT Soine of the facts have bèen stipulated, and the stipulation of facts and the exhibits attached 2thereto Åre incorporated herein y this reference. Petitioner and his wife filed, a joint 2005 Federal income tax reture (2005, return), but petitioner's wife is not a party to this c).se. At the time the petition was filed, etitioner resided in Granbury, Texas. Thè record contains tax eturns for 2001, 2002, 2003, 2004, and 2005.3 In 2001 petitione reported no capital gain or loss. Ur less otherwise indicat ed, section references are to the Interna] Revenue Code (Code) Rule re: erences are to the Ta c Court Rules of Practice and Procedu e . n effect for the year at issue,, and 2Pe itioner does not contest respondent' s determination that he must paid by America Movil and $16 of from the eale or exchange of Agere Systems shares. include an additional $194 of:qualified dividend income long-term capital gain income - 3Re pondent and petition r were unable to produce the IRS' polic is to destroy returns after 7 petit ior er ' s returns f or year bef ore 20 01. Respondent' s counsel indicat d that years, returns were destroyed accord ngly. Petitioner was unable to - supply respondent with copies of his returns for tax years 1991- . nd respondent's counsel confirmed that petitioner's (continued. . ) - 3 - Petitioner reported long-term capital gains of $26,984, $15,265, and $171 for tax years 2002, 2003, and 2004, respectively.4 Petitioner contends that he sustained net capital losses of about $12,000 and $9,000 in at least 2 years before 2001. Accordingly, he maintains that he is entitled to capital loss carryovers of $9,000 and $6,000 from those 2 respective years." However, - petitioner asserts that he was unaware of the capital loss carryover rule and thus did not carry these amounts forward. Upon discovering the rule in 2007, he filed an amended 2005 return. Respondent, however, did not accept the amended return. On January 3, 1996, petitioner purchased shares of'MXF and MXE, each of which is a regulated investment company (RIC). Petitioner paid $7,580 for 500 shares of MXF and $4,955 for 500 shares of MXE. Petitioner owned these shares from -1996 to 2005, and he received dividends and capital gain distributions from both MXF and MXE during that time. The record contains various 3(...con.tinued) 2000 as they were destroyed in a fire. 4Long-term capital gains are profits from a transaction in which a taxpayer sells a capital asset, as,defined by sec. 1221, for more than the taxpayer's basis in that property and has held that property for more than 1 year. sPetitioner contends that he deducted a $3,000 loss from the $12,000 loss and the $9,000 loss in the years he realized those losses. 'RICs, commonly known as mutual issue shares to raise capital that is later invested in common stocks, corporate bonds, short-term money market funds, funds, and other securities. 4 - brokerage statements, Forms 1p99-DIV, Dividends -and Distributions, and tax return ; however, 'these documents do not account forethe entire period petitioner owned MXF and MXE shares.7 Accordirig to the "income activity"; section .of petitioner' e January 1997 brokerage statem nt, he received a dividend of $90 and a c pital gain distributi n of $245 from :MXE on January 13, 1997. he following day he räceived a dividend of $220 from MXE. Then, o January 31, 1997, petitioner. received a $20 dividend from MX . In .another section of th~e monthly statement, the entire 575 received from MXF and MXE in the, form of dividends and capÈtal gain distribution was classified as "dividends from mutual unds" . - Petitioner re eived the capital gain distribution in the orm of a cash payment Pet itioner, received capi al- gain .distributions of $2974 95, $25, $1 2.98, and $289.45 fro MXF ons January 30, 1998, January 31, 200 , January 15, 2004, a d January 14, 2005, respectively. In addit ion, petitioner recei ed capital gain distributions of $1, 780 and $465 from MXE on nuary 9 and 19, 1999, respectively. Each amcunt reflected on the vailable brokerage statements shows a corre ponding cash increase The two amounts from 2004 and 2005 are reflected on Forms 1Ó99-DIV. Mobeover, there is neither Fo instance, brokerage statements are available for portions of 1997, 1998, 1999, and 2001; but are not available the othdr relevant years. - 5 - evidence that petitioner received a deferred capital gain - distribution from either MXF or MXE, nor any indication that petitioner received a Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. Petitioner included $1,333 on line 13, "Capital gain distributions", of his 2002 Schedule D, Capital Gains and Losses. However, he reported no capital gain distributions on his 2001, 2003, 2004, and 2005 returns. In addition, it does not appear that capital gain distributions from MXF and MXE were reported on any other-line of the 2001, 2003, 2004, and 2005 returns. On:January 3, 2005, petitioner sold 500 shares of MXF and 500 shares of MXE for net proceeds of $10,804 and $8,499, respectively. Petitioner did not report.those proceeds on the 2005 return. However, he did report $26,440 of wages from his wife's employment, $243 of taxable interest, and $579 of unemployment compensation for total ordinary income of $27,262. In addition, he reported $15,065 of qualified dividends and $86,073 of long-term capital gains for a total of $101,138 subject to preferential rates. An adjusted gross income of $128,400 was then reduced by a $4,000 tuition and fees deduction, a $10,000 standard deduction, and four exemptions of $3,200 each, reflecting taxable income of $101,600. Petitioner then manually calculated and reported tax of $18,044 on a handwritten return for tax year 2005. The 2005 eturn was timely filed in April 2006. I. Burden of Proof PINION In general, - the Commissi ner' s' determinations in the notice of defi iency are presumed co rect, and taxpayers bear the burden of disproving, those determina ions. See Rule 142(a) (1.); Welch,v. Helveririq, 290 U.S. 111-,- 115 (1933) . Tax deductions. are a*matter of legislative grace; thus ta payers have the. burden of proving that thdy . are entitled to each claimed deduction. See- Rule 142(a) ( ); New Colonial Ice C6. v. Helvering 292 U.S. 435; 440 (1934) . The burden on factua issues that affect a taxpayer's liabilit y for tax may shift t the Commissioner if "a taxpayer introduces credible evidence with respect to * * * such issue." See sec. 7491(a) (1) . -However .this provision does not apply if the tax ayer has failed to co ply with the substantiation require ents. See sec. 7491:( ) (2) (A) . Pursuant to section 6001 and the regulations thereunder, taxpaye s are required to kee sufficient srecords to establish the amounts of deductions cla med on .any Federal tax return. -See sec . 1. 001-1 (a) , Income -Tax egs . Petitioner has not provided credible evidence that. he is ntitled to a capital loss carryover. This Courts is not required to acceptapetitioner's , uncorro orated testimony that he sustained net capital losses in - 7 - previous years. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Accordingly, the burden with respect to the capital loss carryover issue remains with petitioner. With respect to petitioner's adjusted bases in MXF and MXE, because this Court's decision is not affected by the placement of the burden of proof, it is unnecessary for this Court to determine whether petitioner has met the requirements of section 7491(a). II. Capital Loss Carryover As he is a married individual filing a joint return, petitioner's losses from sales of capital assets are allowed only ·to the extent of the gains from such sales or exchanges, plus the lower of $3,000 or the excess of such losses over such gains. Sec. 1211(b). Excess net capital losses beyond the $3,000 threshold 'are treated as either short-term or long-term capital losses in then succeeding taxable year, depending on the character of the capital loss that- created the carryover. See sec. 1212(b) (1). To determine the "excess" referred to in section 1212(b) (1),, the amount allowed under section 1211(b) (1) or (2) is used in the calculation rather than the amount of the deduction actually claimed in a given tax year. See sec. 1212(b) (2). Therefore, a taxpayer's capital loss carryover is reduced to the I extent a deduction is allowed regardless of whether the taxpayer benefits from the deduction or chooses not to claim the - 8 - deducti n. See "sec. 1212(b) ( ); Cleveland v. Commissioner, T.C. Memo. 1 83-299 (holding that åt is not relevant whether the taxpayei claimed any amount of the caþital loss carryover in intervening years) ; see also Rev. Rul. 76-177-," 1976-1 C.B. 224 (ruling that a taxpayer must ake into account the allowed deductión for purposes of det rmining the capital loss * carryover) . Petiitioner asserts that he is entitled to capital loss carryov rs oŽ $9, 000 and $6, O O from years before 2001. Even if these a ounts were otherwise adequately substantiated, the carryovers would have been exhausted before 2005, the sole .year before t his Court . SincespetE.tioner reported no capital gain or loss -in 2001, he would have b en allowed a $3, 000 deduction under section 1211(b) on his, joint eturn, assuming he had a sufficient carryover from tax year 2000 . The excess beyond $3, 000 twould then carry over to 2002 where he would exhaust the entire carryover since he reported- a $26, 984 capital gain. Therefore, even if petitioner had a $15, 000 capital loss, carryover from ta year 20 0, it would no longer exist after tax year 2002 whether he clain ed the allowable capital loss' carryover de'ductions or not . Irt addition, a capital .oss carryover was not created in taX yea 2003 Or 2004 SinCet a net ga n was repOrted in bOth years. - 9 - Respondent was unable to produce returns for years before 2001. Petitioner contends that it is respondent's burden to produce these records; however, as discussed above, petitioner has not complied with the substantiation requirements of section 6001. Therefore, the burden does not shift to respondent. Petitioner has failed to meet his burden of proving that he generated a capital loss carryover in any prev'ious year,. and even if this Court accepted petitioner's recollection, the alleged carryover would be insufficient to affect the tax year at issue. Therefore, this Court finds that petitioner is not entitled to a capital loss carryover deduction for tax year 2005. III. Capital 'Gain Calculation for Sale of MXF anda MXE Shares Income from whatever source derivednis includable in-gross income unless excluded by statute. Sec. 61(a)a. Gains derived from deálings in property are specifically included in gross income'. Sec. 61(a) (3). Pursuant to section 1001, taxpayers generally must recognize gain when the amount realized from the disposition of their property exceeds the adjusted basis in the property. The gain is calculated by subtracting the adjusted basis from the amount realized. See sec. 1001(a). Petitioner concedes that he must recognitze gain from the sale of both his MXF and MXE shares. His only disagreement with respondent on this issue is whether he is permitted to increase his bases for taxes previously paid on capital gain distributions from MXF and 10 - MXE. A cordingly this Court must determine whether a .basis adjustment is proper. Generally, the adj,usted asis equals the initial cost uñless an adju tment is otherwise pr vided for in the Code. Secs. 1011(a) 1012. An RIC can ch ose either to distribute its capital gains in 'the form of apital gain as dividends or not to distrib te its capital gain a dividends and make a designation; instead See sec . 852 (b) (-3 ) ( ) If an RIC chooses to pay a capital gain dividend, its shareho]dersamust,include the dividend in their long-term capital gain in ome. Sec. 852(b) (3) (B) . Similarly, if an RIC chooses to make a capital gain designati n, its shareholders must include the amodnt in their2 long--term capital gain income. Sec. 852 (b) (3) (D) (i) . A capita-l gAin designation, however, creates e other t x consequences as wel . For instance, shareholders must increase their adjusted basis when as capital gain designation is made. Sec 852(b) (3) (D) (i) , iii) . A tax is imposed .on an RIC if it h s capital gains in ex ess of its capitalsgain dividends paid deduction. | »Sec . 852 (b) {3) (A) . RIC shareholders are deemed - to have paid their pro rata s ares of .this tax and are allowed to take a credit or refund for the same amount. Sec. 852 (b) (3) (D) (ii) . In additio , a shareholder's, basis in RIC shares is increased by the ex ess of the undistributed capital I" ! 1 - 11 - gains allocable to the shares over the tax deemed paidt by the shareholder. Sec. 852(b) (3) (D) (iii). In each of the years 2002 through 2004 petitioner received capital gain distributions in the form of cash payments relating to his shares in MXF and MXE. There is no evidence that either company,..by Form 2439 or otherwise¡ ever designated with respect to his shares any undistributed capital- gain.. Nor is there evidence that any such gain was included in,his gross income . Accordingly, he is not entitled to a basis ädjustment under section 852(b) (3) (D) (iii). Petitioner purchased MXF shares for (7,580 and sold them for $10,804 over a year later. Therefore, petitioner must - recognize $3,224 of -long-term capital gain under section 1001 upons the shares' disposition. Petitioner purchased MXE shares for $4,955 and sold them for $8,499~ over a year later., * Consequently, petitioner must recognize $3,544 of long-term , capital gain under section 1001eupon the shares' disposition. IV. Tax Court Jurisdiction The Tax Court has jurisdiction in a deficiency case to determine that "a taxpayer has made an overpayment of income tax. for the same taxable year at issue. See sec. 6512(b) (1). A. credit or refund is not allowed unless this Court finds as part of its decision that one of the provisions of section 6512(b) (3) is met. Section 6512(b) (3) (B), the applicable law, directs this 12 - Court to the lookback periods set forth in section 6511(b) (2) See alsè Commissioner v. Lund , 516 U.È. 235, 242 (1996) The notice f deficiency pet'itior er received is dated January 14, 2008, w 11 before the expiråtion of the 3-year lookback period providec in section 6511(a) since the 2005 return was timely fileåì i April 2006. All of etitiorier's spayments for tax year 2005 we e paid or deemed paic within 3 years of the mailing of the not ce of deficiency Th refore, this Court has jurisdiction to award petitioner a credit br refund if it finds that an overpayment occurred. V. * Tax Liability Calculation and Overpayment The Jobs and Growth' Tax Relief Reconciliation Act of 2003 (2003 Tax Act), Pub. L. 3108-2/,-,secs. 301 and 302, -117 Stat. 758, 760, recuced capital gains ra es and taxed certain :individual dividend income at the newly- owered capital gains trates. Before the rel vant provisions of th 2003 Tax Act took effect/s the maximum capital gains rat-e wa 20 percent. The 2003 Tax- Act reduced the rates to 5 and 15 percent, respectively. Id. sec. 301 (a) , 117- Stat . 758 . These tax rate reductions apply to tax years erding on or -after May 6, 2003. Id. sec. 301(d), 117 Stàt 760. "Th capital gain rate reduction and qualifie'd dividend preferer tial treatment apply to tax year 2005. - 13 - Before the relevant provisions of the 2003 Tax Act took effect, dividends received by individuals were included in gross income and taxed at ordinary income rates. Under the new provision, qualified dividends will be taxed at 5 and 15 percent tax rates.- Id. secs. 301 and 302. This preferential treatment for qualified dividends applies to tax years beginning after December 31, 2002. Id. secs. 302(f), 117 Stat. 764. Section 1(h) sets forth the manner in which the ordinary income rates and capital gains rates are applied. Petitioner must increase his capital gain income by $3,224, $3,544, and $16 for the sales or exchanges of MXF, MXE, and Agere Systems shares, respectively. Accordingly, petitioner's capital gain income is $92,857 rather than $86,073 as originally reported. Petitioner must also increase his qualified dividend income by $194 for the unreported portion of the dividend he received from America Movil. This results in total qualified dividend income of $15,259 rather than $15,065 as originally reported. Under section 1(h) (11) qualified dividends are taxed as capital gains. Therefore, petitioner's "net capital gain", as used in section 1(h), equals $108,116. These corrections, however, do not affect petitioner's ordinary income of $27,262 reduced by deductions and exemptions of $26,800 for a net of $462. - 14 - The capital gain and qual.ified dividend income in tax year 2005 should-be subject to preferential rates. It appears thats the pre erential rates of 5 and 15 percent were- not applied to the "qualified income reported on the. 2005 return. || Thus, thi^s Court finds that petitioner wbuld be entitled to any overpayment once the preferential rates a e applied incident to Rule 2155 computat ions . This Court has considered all arguments the parties have made, a d to the extent not discussed herein, this Court findse that they are, meritless, moot, or irrelevant . To reflect the foregoing i Decision will be entered under Rule 155 . I! I