TAX COURT OPINION

Case: Glenda S. Beardsley & Gary L. Beardsley
Docket Number: 13849-12
Judge: Goeke
Opinion Type: bench
Filed: 05/19/2014
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 GLENDA S. BEARDSLEY & GARY L. BEARDSLEY, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. 13849-12. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transniit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Miami, Florida, on May 1, 2014 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. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. May 19, 2014 SERVED MAY 2 0 2014 Capital Reporting Company 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 Bench Opinion by Judge Joseph Robert Goeke May 1, 2014 Glenda S. Beardsley & Gary L. Beardsley Commissioner Docket No. 13849-12 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 opinion is rendered pursuant to the authority provided by Rule 152 of the Tax Court Rules of Practice and Procedure and Internal Revenue Code section 7459(b). Hereinafter, section references are to the Internal Revenue Code unless otherwise stated, and Rule references are to the Tax Court Rules of Practice and Procedure. The present case is before the Court based upon our jurisdiction to review deficiency determinations made by the respondent, after the issuance of notices of deficiency and a timely petition by the taxpayers. The taxpayers were residents of Florida at the time they filed their petition in this case, which they filed after receiving notice of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 deficiency which determined deficiencies for 2008 and 2009. The deficiency in tax for 2008 was $83. For 2009 there was a deficiency in tax of $70,270, and an addition to tax under section 6662 in the amount of $14,054. This case involves rather factually complex real estate activities engaged in by the petitioners and the parties have worked very hard to settle the issues in the case. All the issues have been resolved including respondent's concession of the addition to tax, with the except on of respondent's disallowance of a carry-forward net operating loss which the petitioners carried forward into the year 2008, which also affects their tax liability in 2009. Respondent maintains t at the petitioners have not properly substantiated this net operating loss and that determination was the focus of the trial of the case and the parties stipulation of facts and presentation of evidence. The carry- forward into £LOO8, which the petitioners claimed from the years 2005, 2006, and 2007, was $477,100. The evidence at trial regarding the carry- forward and the years 2005 through 2007 was testimony and documents submitted by the petitioners which established certain expenses incurred in 2005 and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingC mpany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 2006, relative to their real estate activities. The documents submitted by the petitioners established that they incurred $129,059 in real estate taxes in 2005 and $136,958 in real estate taxes in 2006. There were no documents submitted regarding 2007. Based upon the testimony and other information in the record, we will describe petitioners' real estate activities which involved bidding for and paying to the county tax collectors of Lee County and Collier County, Florida, delinquent real estate taxes in order that the petitioners could assume ownership of property after the expiration of a certain period of time. And in lieu of ownership would receive interest from the original owners of the property if the original owners attempted to pay the real estate taxes after the periods they were due. Petitioners had been engaged in this 19 activity for many years and were knowledgeable about 20 21 22 23 24 25 the real estate markets in Lee and Collier counties and had incurred significant reall estate tax expenses in acquiring properties, which over the course of time would have been somewhat offiset by their sales of the properties they had acquired in this fashion. The difficulties in the present case are 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 that the petitioners did not retain their records for the years 2005, 2006 and 2007. We note however that respondent did not provide any assistance to the petitioners in obtaining petitioners' income tax returns for those prior years, and we believe that testimony of Mrs. Beardsley is credible in stating that she attempted to obtain those returns £er the Internal Revenue Service to help substantiate the net operating losses, but was unsuccessful in doing so in preparation for trial. We are faced with the question of whether to allow any portion of the net operating losses given the lack of complete information concerning those losses in the years prior to the years at issue before the Court. There is authority for the Court to make appropriate approximate determinations if there is a factual basis for those determinations in the context of net operating losses. The basic authority for 20 making approximate estimations of expenses items for 21 22 23 24 25 taxpayers is Cohen v. Commissioner, 39 F.2d 540, 543- 544 (2d Cir. 1930). It is well established that in making such approximations courts must have s me basis before providing any relief because of lack of complete 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting C6mpany 1 2 3 4 5 substantiation. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). The application of these principles to the net operating losses is established by precedent and is discussed in various opinions including W.B. 6 Acquisitions, Inc. & Subsidiaries v. Commissioner, 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 T.C. Memo. 2011-36, Lehman v. Commissioner, T.C. Memo. 2010-74, and Flora v. Commissioner, T.C. Memo. 1965-64. The Court's analysis in W.B. Acquisitions, Inc. is helpful. We quote from that opinion as follows: "Petitioners bear the burden of establishing both the existence and amount of NOL carry-backs and carry-forwards. See Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621 (2000), Lee v. Commissioner, T.C. Memo. 2006-70. Taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the Commissioner to determine the correct tax liability. Sec. 6001, Shay v. Commissioner, 112 T.C. 183, 186 (1990). If a factual basis exists to do so, the court may in some contexd approximate when an 6 allowable expense bearing heavily against the taxpayer who failed to maintain adequate records." 101 CCH TCM, page 1169. Given the circumstances of the present 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 case, we have tried to apply the precedent to the factual record before us. The evidence submitted by petitioners established that for the years 2005 and 2006 they spent $266,017 for real estate taxes in the real estate business. Respondent correctly points out that petitioners also must establish what their income was for those years, and given the lack of information regarding the income we have attempted to determine if under the precedent discussed previously, there's any basis to estimate income in the years 2005, 2006 and 2007. We've referenced the petitioners' income tax return which was stipulated into the record for the year 2008. That return demonstrates that petitioners had gross income from the sale of real estate, as reported on Schedule C, in the amount of $91,581. Using this figure, rounding the figure up to $92,000, and determining that petitioners would have had real estate expenses bas d upon their 20 activities and the testimony in excess of the real 21 22 23 24 25 estate taxes, which we estimate to be roughly $30,000, we determine that petitioners would have had income before the real estate taxes in '05 and '06 in the amount of $62,000 for each year, which would have offset the real estate taxes in d termining whether 866.488.DEPO www.CapitalReportingCo pany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 there was a net operating loss. This leaves us with the quandary as to what was the situation in 2007. Petitioners have failed to produce any evidence what the income or expense was in 2007. We would estimate based upon their returns for 2008, 2009 and the testimony that the petitioners would have had incomd from the real estate activity in 2007, especially bearing in mind the prior precedent that in appl ing the Cohen Rule, we must interpret the facts against the petitioner. In doing so, we would determine that the petitioners had income from the real estate activities in 2007 which would have been offset by the losses in 2005 and 2006 in the amount of $90,000. This is based upon petitioners' description of their sales 16 activity, the real estate market in 2007, which 17 18 19 20 21 22 23 24 25 , and the other expenses they would have incurred. Netting these figures, this would provide that the income which should offset the expenses petitioners demonstrated for 2005 and 2006, would total $214,000. This would allow petitioners to retain a net operating loss going into 2008 in the amount of $52,000. This is the amount of the net operating loss we determine based upon the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company application of the Cohen Rule j,,a the p-r-wr precedent. This analysis would require a computation under Rule 155. And this computation would also have to take into account the parties' stipulation of settlement 10 as it affects all the income and expense/ items in 6 2008 and 2009. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:24 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 25 866.488.DEPO www.CapitalReportingCompany.com