TAX COURT OPINION

Case: Walter G. Adams & LaMarie B. Leverette-Adams
Docket Number: 30816-14
Judge: Nega
Opinion Type: bench
Filed: 11/27/2017
Pages: 12

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 WALTER G. ADAMS & LAMARIE B. LEVERETTE-ADAMS, Petitioners, v. ) ) ) ) ) Docket No. 30816-14. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the 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 the pages of the transcript of the proceedings in the above case before Judge Joseph W. Nega at Chicago, Illinois, on October 19, 2017, 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, decision will be entered under Rule 155. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. November 27, 2017 SERVED Nov 28 2017 1 2 Bench Opinion by Judge Joseph Nega October 19th, 2017 3 Walter G. Adams and LaMarie B. Leverette-Adams v. 3 4 5 6 7 8 9 10 11 Comm ssioner Docket No. 30816-14 THE COURT: The Court has decided to render the following as oral A findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. In this Bench Opinion, unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the year at 12 issue, and all Rule references are to the Tax Court Rules 13 of Practice and Procedure. This Bench Opinion is rendered 14 15 16 to section 7459(b) and Rule 152, and this opinion pursuant shJ sherte not be treated as precedent for any other case. Q-d Petitioners, Walter G. Adams (Mr. Adams) and 17 LaMarie B. Leverette-Adams (Ms. Adams), appeared pro se. 18 Stanislaw Balazia appeared on behalf of respondent. 19 Respondent determined deficiencies in the 20 Federal income tax of petitioners for their tax years 21 2010, 2011, and 2012 and imposed accuracy-related 22 penalties under section 6662 as follows: 23 24 25 Penalty under Me Year 2010 Deficiency sec. 6662(a) $4,127 $825.40 BEllll!!E 1973)406-2250|operations@escribers.net|www.esaibers.net 1 2 3 4 5 6 7 8 9 10 11 2011 2012 $6,060 $1,212.00 $15,036 $3,007.20 After concessions, the remaining issues for 4 decision are: (1) whether petitioners are entitled to a deduction claimed on their Schedule A, Itemized Deductions (Schedule A for a "CASUALTY AND THEFT LOSS" of $76,000 for tax year 20121 and (2) whether petitioners are liable A for the accuracy-related penalty under section 6662(a) for their tax year 2012. FINDINGS OF FACT This case was tried on October 18, 201 Sin A 12 Chicago, Illinois. Petitioners resided in Illinois at the 13 14 time they filed the petition. At some time prior to 2007, petitioners 15 purchased several vacant lots in Chicago, Illinois. 16 Petitioners purchased thyse lots with intention to build o 17 homes on each of th se lots and then sell the developed 18 properties. 19 In 2007, petitioners began construction on a 20 single-family residence on one of the vacant lots, 21 22 23 24 25 located at 352 East 77th Street, Chicago, Illinois (petitioners' home). Petitioners intended that home to be 1 At trial, petitioners now maintain that the casúalty and theft loss8they claimed on their Schedule A oÈ©$76,000 for {heir $ax year 2012 is actually a bad business debt deduction under.section 166. BEIEI (973)406-2250|operations@escribersnet|wwwescribers.ner 5 1 2 3 4 5 6 7 8 9 their primary residence for one year, and also to serve as a model home for other homes petitioners intended to develop and sell on the petitioners' other vacant lots2 In order to finance the construction of petitioners' home, on or around July 20tM 2007, Mr. Adams borrowed $236,000 from Taylor, Bean, and Whitaker Mortgage Corporation (TBW). That loan was secured by a mortgage a4r petitioners' home. (We shall refer to the loan secured by the mortgage on petitioners' home that petitioners had 10 obtained with respect to the construction of the home as 11 petitioners' mortgage loan.) Thereafter, TBW paid 12 $151,000 from an escrow account to petitioners' home 13 builder. 14 At a time during 2008, petitioners' home builder 15 went out of business and filed for bankruptcy. In 2009 16 TBW also filed for bankruptcy with the U.S. Bankruptcy 17 Court for the Middle District of Florida (Bankruptcy 18 Court) 19 20 21 22 2 During 2010, 2011, and 2012, petitioners owned multiple rental housing units in Chicago, Illinois. 3 Petitioners maintain that at bankruptcy, TBW had $85,000 of completion of petitioners' home. maintain that these funds were never provided to them the time TBW filed for funds in escrow for the etitioners further( 23 Petitioners, however, failed to provide any documentation to respondent reflecting the alleged escrow balance. 24 Petitioners, nonetheless, believe that they are creditors 25 and that TBW was a debtor to them for the aforementioned $85,000. Despite this belief, petitioners did not file a claim in TBW's bankruptcy (continued...) (973)406-2250|operations@escribersnet|www.escribersnet 6 On January 8, 2010, Selene Finance (Selene) acquired petitioners' mortgage loan. In February 2011, the Bankruptcy Court approved the sale of that loan. At the time Selene acquired petitioners' mortgage loan, petitioners' account showed: (1) that it was past due for the July 1, 200 payment and all subsequent payments that were due thereafter/ and (2) an unpaid principal balance of $151,570. In 2010, Mr. Adams sought legal assistance in filing a lawsuit to release the first mortgage that encumbered petitioners' home. Thereafter, Mr. Adams filed a lawsuit against Royal Bank of Canada, a.k.a. Florida 1 2 3 4 5 6 7 8 9 10 11 12 13 Choice Bank/ and Selene as agent for TBW in the State of 14 Illinois, Circuit Court of Cook County. This suit was 15 dismissed for lack of prosecution in 2012. 16 17 18 19 In 2013, petitioners timely filed their joint Form 1040, U.S. Individual Income Tax Return (return for their tax year 2012 (2012 return). Petitioners attached A to that return Schedule A. In that Schedule A, 20 petitioners claimed, inter alia, a deduction for "CASUALTY 21 22 AND THEFT LOSS" of $76,000 for tax year 2012. On October 10, 2014, respondent issued to 23 petitioners a notice of deficiency (notice) for 44mr tax 24 3(continued) proceeding. Petitioners did not elaborate on 25 why they only claimed $76,000 of the $85,000 as a loss, but given our holding, this discrepancy is not material. 973)406-2250|operationsgescribers.net|www,escribers.net 7 1 2 3 4 5 6 7 8 9 years 2010, 2011, and 2012. In that notice, respondent disallowed, inter alia, petitioners' claimed Schedule A deduction for a "CASUALTY AND THEFT LOSS" of $76,000 for their tax year 2012. In the notice, respondent also determined petitioners were liable for an accuracy-related penalty under section 6662(a). At some point after 2012, petitioners renewed their litigation against the lenders. In January 2016, petitioners secured a legal settlement that discharged the 10 amount remaining on petitioners' mortgage loan, cleared 11 12 13 their title to the property, awarded them $25,000 cash, and other consideration. At the time of trial in this case, petitioners 14 had not completed construction of petitioners' home. 15 16 17 I. Burden of Proof OPINION The Commissioner's determinations in a notice 18 are generally presumed correct, and the taxpayer 19 ordinarily bears the burden of proving thËse 20 determinations erroneous. Rule 142(a); Welch v. Helvering 21 22 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace; the taxpayer bears the burden of 23 proving entitlement to deductions allowed by the Code and 24 of substantiating expenses underlying his claimed 25 deductions by keeping and producing records sufficient to (973)406-2250|operations@escribers.netjwww.escribersmet enable the Commissioner to determine the correct tax liability. Sec. 6001, INDOPC v. Commissioner, 503 U.S 79, 84 (1992); New Colonial Ice Company v. Commissioner, 292 U.S. 435, 440 (193p ; sec. 1.6001-1(a and e), Income 8 Tax Regs. II. Section 166: Bad Debt Section 166 authorizes a taxpayer to deduct any debt that becomes worthless within the taxable year. Section 166 distinguishes between business and nonbusiness 1 2 3 4 5 6 7 8 9 10 bad debts. Nonbusiness bad debts are treated as losses 11 resulting from the sale or exchange of a short-term 12 13 14 capital asset. Secs. 166(d) (1), 1211(b), 1212(b). A nonbusiness debt is a debt other than "(A) a debt created or acquired (as the case may be) in connection with a 15 trade or business of the taxpayer; or (B) a debt the loss 16 17 from the worthlessness of which is incurred in the taxpayer's trade or business." Sec. 166(d) (2). "To 18 qualify for a deduction for a worthless debtJPa taxpayer 19 must show that he and his alleged debtor intended to 20 create a debtor-creditor relationship, that a genuine debt 21 in fact existed, and the debt became worthless within the 22 tax year." Andrew v. Commissioner, 54 T.C. 23ß, 244-245 23 24 25 (1970); see also sec. 1.166-l(c), Income Tax Regs. In order to claim a bad debt deduction, the taxpayer must be a creditor on the loan for which the deduction is claimed. BEBIE (973)406-2250|operationsøescribers.netj www.escribers.net 1 2 3 4 5 6 7 8 9 See, e.g., erson v. Commissioner, 5 T.C. 482, 499 (1945) ("A taxpayer is not entitled to deduct from gross income any part of a worthless debt to someone other than the taxpayer."), aff'd, 156 F.2d 591 (2d Cir. 1946); see also sec. A 166-l(a), Income Tax Regs. ("Section 166 provides that *** a deduction shall be allowed in respect of bad debts owed to the taxpayer.") Respondent contends (1) petitioners are not entitled to the deduction because petitioners have not 10 established there 4e- a bona fide debt, A (2) the debt has 11 12 13 14 not been demonstrated to be worthless in 2012, and (3) even if petitioners met the other requirements they have failed to substantiate the $76,000 amount claimed. Petitioners have failed to establish the 15 existence of a bona fide debt. In 2007, petitioners 16 borrowed $236,000 from TBW (i.e., petitioners' mortgage 17 loan). Petitioners, however, contend that only $151,000 18 of that $236,000 was ever transferred to petitioners' home 19 builder, and the remaining $85,000 remained in an escrow Á 20 account controlled by TBW. Therefore, petitioners contend A 21 22 they are creditors for purposes of the $85 000. A The record is devoid of any evidence that supports such a 23 conclusion. In fact, the record supports the opposite, 24 that petitioners s+e debtors, not creditors. Therefore, 25 petitioners could not create a debtor-creditor 73)406-2250|operations@escribers.net|www.escribers.net relationship with TBW as TBW was not their debtor, but 10 their creditor. Accordingly, as petitioners were not creditors with respect to the $85,000, we find that petitioners have not established they are entitled to a bad debt deduction under section 166(a), and respondent's determination is sustained.4 III. Section 6662(a) Accuracy-Related Penalty Section 6662(a) and (b) (1) and (2) imposes a 1 2 3 4 5 6 7 8 9 10 penalty equal to 20% of any portion of an underpayment 11 12 13 that is attributable to negligence or disregard of the rules or regulationgpor any substantial understatement of tax. Section 6662(d)(1) (A) defines a substantial A 14 understatement as an understatement that exceeds the 15 greater of 10% of the tax required to be shown on the 16 return for the taxable year or $5,000. Section 17 18 19 6662(d) (2) (A) defines "understatement" as the excess of the amount of tax required to be shown on the return for the taxable year over the amount of tax imposed which is 20 shown on the return, reduced by any rebate. 21 22 23 24 25 The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment 4 Because we have found there is no bona fide debt, we need not address respondent's remaining contentions. (973)406-2250|operations@escribers.net|www.escribers.net 11 if it is shown that there was reasonable cause for, and the taxpayer acted in good faith with respect t such portion. Sec. 6664(c)(1). The detèrmination of whether the taxpayer acted with reasonable cause and in good faith depends on all the pertinent facts and circumstances, including the taxpayer's efforts to assess the taxpayer's proper tax liability, the knowledge and experience of the taxpayer, and the reliance on the advice of a professional, such as an accountant. Sec. 1.6664-4(b) (1), Income Tax Regs. Respondent bears the burden of production with respect to an accuracy-related penalty under section 6662(a) that respondent determined in the notice. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438 at 446-447 (2001). To satisfy respondent's burden of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 production, respondent must come forward with "sufficient 17 evidence indicating that it is appropriate to impose" the 18 penalty. See Higbee v. Commissioner, 116 T.C. at 446. 19 Although respondent bears the burden of production with 20 respect to the accuracy-related penalty under section 21 22 23 24 25 6662(a), respondent "need not introduce evidence regarding reasonable cause *** or similar provisiong)*** [T]he taxpayer bears the burden of proof with respect to those issues." Id. On the record before us, we find that respondent has carried respondent's burden of production 1973)406-2250|operationseescribers.net j vmw.escribers.net 12 .1 under section 7491(c) with respect to the accuracy-related 2 3 4 5 6 7 8 9 10 11 penalty under section 6662(a). We understand petitioners to contend that no penalty should be imposed against them because their initial return position with respect to their claimed Schedule A deduction at issue was taken with reasonable cause and good faith. On the record before us, we find that petitioners have carried their burden of establishing that there was reasonable cause for, and that they.acted in good faith with respect to the underpayment of the tax 12 year 2012. On that record, we find petitioners have 13 14 carried their burden of establishing they are not liable for their tax year 2012 for the accuracy-related penalty 15 because of a substantial understatement of tax under 16 section 6662(b) (2).5 17 18 IV. Conclusion Accordingly, a decision will be entered under 19 Rule 155. This concludes the Court's oral findings of 20 21 22 23 24 25 fact and opinion in this case. In reaching our holdings In the notice, respondent determined that the the (1) negligence or disregard of rules or 5 underpayment of tax was attributed to one or more of following: regulations; (3) substantial valuation misstatement (4) respondent only presented evidence with respect petitioners' substantial understatement of (overstatement); transaction lacking economic substance". At trial, to the income tax. (2) substantial understatement of income tax; (973)406-2250|operationsgescribers.netivmwascribers.net herein, we have considered all arguments made by the parties, and to the extent not mentioned above, find those arguments moot, irrelevant, or without merit. 13 (Whereupon, at 5:19 p.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 2 4 25 (973)406-2250|operations@escribers.net jwww.escribers.net