TAX COURT OPINION

Case: Terra Michelle & Alejandro Mercado
Docket Number: 7868-10
Judge: Kroupa
Opinion Type: bench
Filed: 05/17/2011
Pages: 7

UNITED STATES TAX COURT WASHINGTON, DC 20217 TERRA MICHELLE & ALEJANDRO MERCADO, Petitioners, KVC v. Docket No. 7868-10 COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of transcript of April 28, 2011, containing her oral rendered in this case. the above case before Judge Diane L. Kroupa on findings of fact and opinion the pages of the In accordance with the oral findings of decision will be entered for respondent for petitioners as to the accuracy-related penalty. fact and opinion, for the deficiency and Dated: Washington, D.C. May 17, 2011 (Signed) Diane L. Kroupa Judge SERVED May 18 2011 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 28, 2011 Mercado v. Commissioner Docket No. 7868-10 THE COURT: The Court has decided to render oral findings of facts 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 for 2007, the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners appeared pro se, and oline Wang appeared on behalf of Respondent. FINDINGS OF FACT Certain facts have been stipulated. The stipulation of facts and the supplemental stipulation of facts, with accompanying exhibits, are incorporated by this reference. The facts are so found. Petitioners resided in Omaha, Nebraska at the time they filed the petition. Petitioners have been married since 2005 and have two young children. Petitioner wife worked for Hy Vee Stores, Petitioner husband worked as a food cook or chef and they reported approximately $61,000 of wages in 2007. They 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 also claimed that someone, possibly a family member, stole a tennis bracelet and a Rolex watch from their single-family residence sometime after August 2007. Petitioners filed a police report reflecting that the two items were stolen. The police report indicated there was no break-in, yet the items were stolen. No suspects were reflected in the police report. Petitioners did not make an insurance claim for the stolen bracelet or the Rolex. They did not have a rider on their homeowner's policy to insure any personal property items. They understood that a personal property loss under their homeowner's policy was limited to $1,500 per item and there was a $1,000 deductible. Petitioners were able to establish that they paid $2,000 for the stolen tennis bracelet. Petitioners failed to provide, however, any amount they paid for the Rolex. Instead, they explained that the Rolex was a gift from Petitioner husband's father, who lived in Guadalajara, Mexico and earned money making labels or impresses for Tequila bottles. Petitioner husband moved to Omaha in September 1988. He is one of the youngest in the family of five sisters and five brothers. One of his sisters who visited him from Mexico brought him the Rolex from their father before the father died. It is unclear when the "gift" Heritage Reporting Corporation (202) 628-4888 1 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 occurred. The Court understood that Petitioners had it for two or three years before it was stolen. Petitioners assured the Court that the Rolex was real, not a fake, yet they failed to insure the Rolex. They failed to do so even though they learned it may have been worth more than $16,000. Petitioners never had the watch appraised and never safeguarded the watch in safekeeping. It was only after the watch was stolen that Petitioners obtained an appraisal of a Rolex similar to the one they said was stolen. The appraiser never saw the watch that was stolen. Petitioners claimed a $16,268 theft loss on the return when they consulted with a tax preparer who explained taxpayers may claim a theft loss when their property is stolen. Respondent examined Petitioners' claimed theft loss. Petitioners were able to substantiate and Respondent allowed their basis in the tennis bracelet. Respondent determined, however, that none of the claimed amount was deductible because it failed to exceed the 10 percent limitation plus the $100 limitation under section 165 for theft losses. Respondent issued Petitioners a deficiency no C determining a $2,438 deficiency in Federal income tax and that Petitioners were liable for a $487.60 accuracy-related penalty under section 6662. Petitioners timely filed the petition. // 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 OPINION 6 This is primarily a substantiation case involving whether Petitioners kept accurate records to deduct a theft loss in 2007. We begin with two fundamental principles of tax litigation. First, the Commissioner's determinations are generally presumed correct, and taxpayers bear the burden of proving that those determinations are erroneous. Rule 142(a). This principle is not affected by section 7491(a) because Petitioners 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 taxpayers must show that they are 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 taxpayers failed to present other probative evidence. Beam v. Commissioner, T.C. Memo. 1990-304. 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 We now consider whether Petitioners have substantiated the value of the watch they claim was stolen at or near the time the tennis bracelet was stolen. This Court has consistently held that a loss cannot be computed where the taxpayer failed to prove basis. Millsap v. Commissioner, 46 T.C. 751, 760 (1966). Stated otherwise, taxpayers must establish their basis in property before they may claim a deduction for that property if it is stolen. Richardson-v. Commissioner, T.C. Memo. 1998-236; Fisher v. Commissioner, T.C. Memo. 1986-141. Without such proof, taxpayers could claim a theft loss for property they never owned. Draper v. Commissioner, 15 T.C. 135 (1950). This would be absurd. We do not question that Petitioner husband may have received a watch from~his father. Petitioners have failed to establish, however, that it was a real Rolex. Petitioner husband testified that his father only bought real gold and that he would not have bought a fake Rolex. His testimony does not make it so. We are not required to accept a taxpayer's self-serving testimony as gospel. Tokarski v-; Commissioner, 87 T.C. 74, 77 (1986). The Court is well aware that there are thousands of counterfeit Rolexes. We would have been more persuaded if petitioners had handled the watch as if it was a real Rolex. They did not. They did not have it insured. They 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 did not have it appraised. They did not keep it in safekeeping. Instead they kept it in the wife's jewelry 1 8 box, unlocked,-for-their four-year-old daughter to play with and apparently for a relative to take in plain view. We find that Petitioners are not entitled to deduct any theft loss under section 165 because they failed to prove their adjusted basis in the watch. We next address whether Petitioners are liable for the accuracy-related penalty under section 6662 for failing to keep records to prepare an accurate return. We ruled against Petitioners on the theft loss. We find, however, that Petitioners made a reasonable attempt to comply with the tax laws. They consulted a tax preparer who explained the general rules for a theft loss deduction. They, therefore, are not liable for the accuracy-related penalty for 2007. To reflect the foregoing, decision will be entered for Respondent for the deficiency but for Petitioners as to the accuracy-related penalty. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 12:09 p.m., the bench opinion in the above-entitled matter was concluded.) // // Heritage Reporting Corporation (202) 628-4888