TAX COURT OPINION

Case: Lazar Simov Kovachevich
Docket Number: 4480-06S
Judge: Dean
Opinion Type: summary
Filed: 10/24/2007
Pages: 13

T .C . Summary Opinion 2007-179 UNITED STATES TAX COURT LAZAR SIMOV KOVACHEVICH , Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket Nos . 4480-06S, 4481-06S . Filed October 24,', 2007 . Lazar Simov Kovachevich, pro se . Patricia A . Rieggar , for respondent . DEAN, Special Trial Judge : These consolidated case s heard pursuant to the provisions of section 7463 of the I Revenue Code in effect at the time the petitions were fil o Pursuant to section 7463(b), the decisions to be entered Ore not reviewable by any other court, and this opinion shall not be treated as precedent for any other case . Unless otherwis e 001 2 4 r - 2 - indicated, subsequent section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . Respondent determined deficiencies of $4,123 and $13,379 in petitioner's 2002 and 2003 Federal income taxes, respectively . With respect to petitioner's 2002 taxable year, the issues for decision are whether petitioner is entitled to the following : (1) $6,000 in dependency exemption deductions ; (2) a $3,800 deduction for alimony ; and (3) a $6,905 casualty and theft loss deduction . With respect to petitioner's 2003 taxable year, the issues for decision are whether petitioner is : (1) Entitled to claim a $71,200 loss ; and (2) liable for a $2,675 .80 accuracy- related penalty under section 6662(a) . ' Background Some of the facts have been stipulated and are so found . The stipulation of facts and the exhibits received into evidence are incorporated herein by reference . At the time the petitions were filed, petitioner resided in Flushing, New York . Petitioner timely filed his 2002 and 2003 Federal income tax returns . On his 2002 tax return, petitioner claimed personal exemption deductions for his two sons who were ages 23 and 25 and full-time students attending European schools . Petitioner als o 1 Respondent conceded that petitioner was entitled to a $1,900 moving expense deduction for 2002 and that he did not receive $2,887 as nonemployee compensation in 2003 . - 3 - claimed a $3,800 alimony deduction , for which he listed hill sons' Social Security numbers in the area titled "Recipient's SSW- Lastly, petitioner claimed a $ 6,905 casualty and theft los , for which he attached a Form 4684 , Casualties and Thefts , to s 2003 tax return . Petitioner ' s Form 4684 listed the values of rious personal and business properties that he alleges were damaged or stolen from his storage shed . Petitioner stored the item from 1998-2002 . On his 2003 return, petitioner claimed a $71,200 cas lty and theft loss, for which he had handwritten " Pro Se in C rt Proceedings ." Similarly, on his Schedule C, Profit or Lo From Business , he claimed the $71,200 as a "legal and professi ~al services " expense, for which he had handwritten " Pro Se ( hurt) . ( Three ) months for extraordinary writ to be filed in S . C~~. U .S . shall appear in 2004 tax return." i i Discussion The Commissioner ' s determinations in a notice of def ' ciency are presumed correct, and the taxpayer has the burden to t rove that the determinations are in error . Rule 142 ( a) ; Welchlly . Helvering , 290 U .S . 111 , 115 (1933) . But the burden of p oof on factual issues that affect a taxpayer ' s tax liability may be shifted to the Commissioner where the "taxpayer introducer credible evidence with respect to * * * such issue ." Sec, 7491 ( a)(1) . The burden will shift only if the taxpayer has - 6 - of a spouse under a divorce or separation instrument ; ( 2) the instrument does not designate the payment as a payment that is not includable in the recipient ' s gross income and not allowable as a deduction to the payor ; (3) the payee and payor are not members of the same household at the time of payment ; and (4) there is no liability to make any payments after the payee's death . Secs . 71(b), 215(b) . Because petitioner offered no evidence to show that the payments were made under a divorce or separation instrument, the payments do not constitute alimony, and he is not entitled to the deduction . See Prince v . Commissioner , 66 T .C . 1058, 1067 (1976 ) ; Herring v . Commissioner , 66 T .C . 308, 311 ( 1976) ; Clark v . Commissioner , 40 T .C . 57, 58 ( 1963 ) . Given the disposition of this issue on this element, we need not discuss the other elements . Accordingly , respondent's determination is sustained . III . Casualty Los s Section 165 ( a) allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise . With respect to individuals, deductions for losses are limited to losses : (1) Incurred in a trade or business ; (2) incurred in a transaction for profit ; or (3) of property not connected with a trade or business or a transaction entered into for profit, if the losses arise from fire, storm, shipwreck, or other casualty , or from theft . Sec . 165 ( c) . In order for the - 7 - loss to be deductible, the loss must be evidenced by clos e and completed transactions , fixed by an identifiable event, ano actually sustained during the taxable period year . See sec 1 .165-1( b), Income Tax Regs . Case law has defined the t o "casualty" to include an event that is "due to some suddeny unexpected, or unusual cause" similar in nature to a fire,!, storm , or shipwreck . Matheson v . Commissioner , 54 F .2d 537, 539 ( 12d Cir . 1931), affg . 18 B .T .A . 674 (1930) ; see Rosenberg v . Commissioner , 198 F .2d 46, 49 (8th Cir . 1952), revg . 16 T . 1360 (1951) . Petitioner testified that his $6,905 casualty and th~ft loss deduction was for damages sustained to his personal a4d business properties from raccoons, birds, vandals, and thives . On his Form 4684, petitioner represented that the storage hed was "built of wood material with a 1 foot high opening all along the wall" below the roof and that he had insisted that the owner close the opening of the wall, but the owner never did . Petitioner testified that some of the damage was due to vandals in either 2000 or 2001 . With respect to the vandalism, th4 damages were not sustained in the 2002 taxable year ; there ore , they are not deductible . Generally, a loss arising from theft is treated as sustained "during the taxable year in which the taxpayer discovers suc h loss ." See sec . 165(e) ; secs . 1 .165-1(d)(3), 1 .165-8(a)(2)1, - 8 - Income Tax Regs . The amount of the deductible loss is limited to the lower of : (1) The fair market value of the property immediately before the theft reduced by its fair market value immediately after the theft ( i .e ., zero ) ; or (2) its adjusted basis, and if the property was used in a trade or business or for the production of income and the fair market value of the property immediately before the theft is less than its adjusted basis, then its adjusted basis is treated as the amount of the loss . See secs . 1 .165-7(b)(1), 1 .165-8(c), Income Tax Regs . And with respect to property that is neither used in a trade or business nor for the production of income, the amount of the loss is limited to that portion of the loss that is in excess of $100 . See sec . 1 .165-8(c), Income Tax Regs . Petitioner must establish, inter alia, both the existence of a theft and the amount of the claimed theft loss . See Elliott v . Commissioner , 40 T .C . 304, f311 (1963) . In his Form 4684, petitioner failed to identify specifically the items of property that he alleges were stolen . Petitioner also failed to establish the year that he discovered the theft . He merely stated, in his Form 4684, that "Probably somethings were stolen" when his storage shed was vandalized in 2001, and at trial, he merely testified that "Somebody took" the 5,500 square feet of marble he had stored . Finally, petitioner failed to prove the amount of his loss by establishing the lower of the - 9 - properties' adjusted bases (i .e, by receipts) or their fa i market values immediately before the loss . Therefore, pet-tione r is not entitled to a deduction for a theft loss . Generally, damages resulting from animals and insects are not deductible because they occur not from a sudden event but rather gradually over time, unless it can be shown that th I destruction was occasioned by a sudden invasion that occurred in a relatively short time (i .e ., 1-3 months or 1 year) . Cf . Rosenberg v . Commissioner , supra at 50 ; Fay v . Helvering , 20 F .2d 253 (2d Cir . 1941), affg . 42 B .T .A . 206 (1940) ; Unite d States v . Rogers , 120 F .2d 244, 246 (9th Cir . 1941) . The destruction of petitioner's properties that was caused by animals' entering the wall's opening is not a type of "~udden, unexpected, or unusual cause" within the definition of a casualty . Without evidence to the contrary, the Court surise s that petitioner 's damages were not occasioned by a sudde n invasion of raccoons and birds within a short period of ti e but rather occurred gradually over time (i .e ., from 1998-2002) Additionally, the damages resulting from the inadequacy of the structure are neither unexpected nor unusual . Therefore, they are not deductible, and accordingly, respondent's determin$tio n is sustained . - 10 - B . 2003 Taxable Year 1 . $71,200 Los s In general , a taxpayer's "loss of time" or "value of his time" is not deductible as a casualty loss or otherwise . Cf . Pfalzgraf v . Commissioner , 67 T .C . 784 (1977) (stating that in using a valuation method to compute a loss for purposes of section 165 , the value of a person ' s "loss of time" cannot be included in the computation ) ; Wilhelm v . Commissioner , T .C . Memo . 1991-513 ( disallowing a taxpayer ' s "time spent" handling an estate from his net operating loss computation) ; O'Connor v . Commissioner , T .C . Memo . 1981-151 (disallowing a taxpayer's deduction for the uncompensated " value of his time" as a classroom expense and a job-related expense) . The disallowance of a claimed deduction arising from the taxpayer's loss of time or the value thereof results from the fact that he has not included any amount in gross income, . and therefore , he has no tax cost basis in the item that he can deduct . See Hutcheson v . Commissioner , 17 T .C . 14, 19 ( 1951) . Petitioner testified that his itemized deductions represented , in part, a $71 , 200 casualty or damages for his time fighting crime and criminals and defending himself and his business pro se in the courts against the Government . Petitioner concluded that since attorneys are paid "when [ they] practice in the court ," he too should be similarly compensated or rewarded - 11 - for his pro se appearances . Petitioner is claiming a dedu tion for his loss of time or the value thereof , and he is not entitle d to it . Accordingly, respondent ' s determination is sustai n d . II . Accuracy-Related Penalty Initially, the Commissioner has the burden of production with respect to any penalty, addition to tax, or additional amount . Sec . 7491(c) . The Commissioner satisfies this burden of production by coming forward with sufficient evidence that'! indicates that it is appropriate to impose the penalty . See Higbee v . Commissioner , 116 T .C . 438, 446 (2001) . Once th Commissioner satisfies this burden of production, the taxp~ye r must persuade the Court that the Commissioner's determination is in error by supplying sufficient evidence of reasonable cause , substantial authority, or a similar provision . Id . In pertinent part, section 6662 ( a) imposes an accuracy-related penalty equal to 20 percent of the underpa ymen t that is attributable to : (1) Negligence or disregard of t~e rules or regulations ; or (2) a substantial understatement f income tax . Section 6662(c) defines the term "negligence"Ito include "any failure to make a reasonable attempt to comply wit h the provisions of this title", and the term "disregard " include "any careless, reckless, or intentional disregard ."' I n interpreting section 6662, this Court has defined the ter m "negligence" as a "'lack of due care or the failure to do What a - 12 - reasonable and ordinarily prudent person would do under the circumstances '" . Freytag v . Commissioner , 89 T .C . 849, 887 (1987 ) ( quoting Marcello v . Commissioner , 380 F .2d 499, 506 (5th Cir . 1967 ), affg . on this issue 43 T .C . 168 (1964) and T .C . Memo . 1964-299 ), and citing Zmuda v . Commissioner , 731 F .2d 1417, 1422 (9th Cir . 1984 ), affg . 79 T .C . 714 (1982)) . If a "taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction , credit or exclusion on a return which would seem to a reasonable and prudent person to be 'too good to be true' under the circumstances ", then there is a strong indication of negligence . Sec . 1 .6662 - 3(b)(1)(ii ), Income Tax Regs . Section 6664 ( c)(1) is an exception to the section 6662(a) penalty : no penalty is imposed with respect to any portion of an underpayment if it is shown that there was reasonable cause therefore and the taxpayer acted in good faith . Section 1 .6664-4 (b)(1), Income Tax Regs ., incorporates a facts and circumstances test to determine whether the taxpayer acted with reasonable cause and in good faith . The most important factor is the extent of the taxpayer ' s effort to assess his proper tax liability . Id . "Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of * * * the experience, knowledge and education of the taxpayer ." Id . - 13 - The Court concludes that respondent has met his burde of production and that petitioner failed to persuade us that h e determination was in error . The Court finds that petitio n r wa s negligent because he failed to make a reasonable attempt t ascertain the correctness of his deduction since he merely testified , without more , that he thought he should be compensate d for his pro se works in the courts : " somebody has to pay t is . It is damage . It is a casualty ." Because petitioner fail to make a reasonable attempt to ascertain the correctness of his deduction , he cannot establish a reasonable cause and good fait h defense . Accordingly, respondent's determination is sustained . To reflect the foregoing, Decision will be entereG fo r respondent in docket No . 4480-06S, and decision will be entered- under Rule 155 in docket No . 4481-QOS . TED STATES TAX COURT WASHINGTON, D.C. 20217-0002 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE, $300 III 704 2890 000 9342 6736 CERTIFIED MAIL SITED STATES TAX COURT WASHINGTON, D.C. 20217-0002 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE , $300 Lazar Simov KovacbeGic h p" A O INSUFFICIENT ADD FSS q ATTEMPTED NOT K OW N _ U O T Ht H 0 SU C H NUMBER ; NOT DELIVERABLE !~. ADDRESSED UNABLE TO FORS RD ;TREE T First Class