t c memo united_states tax_court richard a gerstenberger petitioner v commissioner of internal revenue respondent docket no filed date richard a gerstenberger pro_se stephen p baker for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined a deficiency in and an accuracy-related_penalty under sec_6662 on peti- tioner’s federal_income_tax tax for in the amounts of ‘all section references are to the internal_revenue_code code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure - dollar_figure and dollar_figure respectively ’ the issues for decision are should the determinations for increasing peti- tioner’s income and disallowing certain claimed deductions that respondent has not conceded be sustained we hold that they should except to the extent provided herein is petitioner entitled for to a theft_loss under sec_165 we hold that he is not is petitioner liable for for the accuracy-related_penalty under sec_6662 we hold that he is findings_of_fact some of the facts have been stipulated and are so found petitioner resided in alaska and had a mailing address in montana at the time the petition was filed although the notice_of_deficiency issued to petitioner for notice shows that respondent determined a deficiency in and an accuracy-related_penalty under sec_6662 on peti- tioner’s tax of dollar_figure and dollar_figure respectively computational schedules that are attached to the notice show a deficiency of dollar_figure and an accuracy-related_penalty of dollar_figure because respondent has admitted in the answer that the deficiency in and accuracy-related_penalty on petitioner’s tax determined in the notice are dollar_figure and dollar_figure respectively we shall disregard for purposes of this case the erroneous numbers shown in the computational schedules that are attached to the notice ‘there are other issues relating to certain determinations in the notice that are computational in that their resolution flows automatically from our resolution of other determinations in the notice that we address herein unless otherwise indicated our findings_of_fact and opin- ion pertain to the year at issue petitioner maintained a joint checking account account no with jan weber ms weber at first hawaiian bank from which ms weber paid certain of petitioner’s bills from at least date through around date petitioner also maintained a joint savings account account no with ms weber at first hawaiian bank petitioner who was a member of the international union of operating engineers local and local worked for wilder construction company wilder in alaska and for goodfellow bros inc goodfellow in hawaii petitioner received dollar_figure of wage income from wilder from which wilder withheld dollar_figure of alaska state_income_tax petitioner received dollar_figure of wage income from goodfellow from which goodfellow withheld dollar_figure of hawaii state_income_tax in addition to his wage income peti- tioner had dollar_figure of taxable interest_income petitioner who held a dive-master rating from the profes-- sional association of dive instructors padi wanted to become qualified to receive a dive-instructor rating from padi a person who held a dive-master rating was qualified to assist a dive instructor in teaching an individual how to dive in no event could a dive master certify an individual as qualified to dive only a person who held a dive-instructor rating from padi was gualified to certify an individual as qualified to dive in order to become qualified as a padi dive instructor - - petitioner was required inter alia to work a certain amount of time as a dive master assisting a dive instructor in teaching individuals how to dive which he did while living in hawaii petitioner spent dollar_figure on various expenditures relating to his diving activity sometime in date petitioner received a dive-instructor rating from padi in addition to the expenditures with respect to his diving activity that petitioner made while living in hawaii petitioner made the expenditures listed below when he was in hawaii alaska montana idaho washington and or perhaps other states and or in canada nature of expenditure amount of expenditure long distance calls dollar_figure gasoline dollar_figure clothes dollar_figure airfare dollar_figure parts dollar_figure union dues dollar_figure tools dollar_figure parts for recreational vehicle dollar_figure truck repair and maintenance dollar_figure ‘this category does not include amounts spent for gasoline by petitioner in hawaii that is because petitioner does not claim as deductions any gasoline expenditures that he made while he was living in hawaii on date in response to a letter written by petitioner to the police department in fairbanks alaska in which he alleged that certain of his tools with a value of dollar_figure were stolen from him sometime in purported theft police officer coffey officer coffey a member of that police department was assigned to investigate that purported theft officer coffey prepared a report with respect to the purported theft police report largely on the basis of informa-- tion provided by petitioner and or ms weber the police report included certain attachments that petitioner and or ms weber prepared which described the items that were allegedly stolen from petitioner as a result of the purported theft and assigned a monetary value to each of those items in the course of investigating the purported theft officer coffey con- tacted two other individuals in addition to petitioner and ms weber with respect to the statements that officer coffey took from those two individuals officer coffey stated in the police report ofc coffey contacted a business_associate of petitioner welch who stated that the tools were loaded up onto a truck and moved to montana by petitioner’s girlfriend as far as he knew welch stated that he didn’t know who took the tools or he didn’t have anything to do with it ofc coffey called and contacted melchert who stated that he was only briefly aware of the theft and was not sure what ofc coffey wanted melchert could only say that petitioner had a lot of tools and melchert stated that he thinks that dollar_figure is a bit inflated officer coffey recommended in the police report that the case be closed due to the time laps sic and no leads to follow up on form_1040 u s individual_income_tax_return form_1040 for return was filed with respondent in petitioner’s name and signed in petitioner’s name the return showed -- - petitioner’s occupation as mechanic and michael j brady of the michael j brady accty corp as the paid preparer of that return the return reported the following items and amounts of income or loss on page on the lines indicated line on page item_of_income or loss of return amount wages salaries tips etc dollar_figure taxable interest_income 8a business income or loss big_number unemployment_compensation big_number net_operating_loss nol carry- big_number over to the return reported on page on line sec_22 and sec_31 respec- tively total income and adjusted_gross_income of dollar_figure the return included schedule a itemized_deductions schedule a lines through of which were entitled job expenses and most other miscellaneous deductions job-expense section the return claimed on line of schedule a entitled unreimbursed employee_expenses dollar_figure for union and professional dues and dollar_figure from form form_2106 employee business_expenses form attached to the return listed the following claimed expenses on the lines indicated line on amount of form_2106 nature of claimed expense claimed expense vehicle expense - parking fees tolls and trans-- - portation travel expense while away from dollar_figure home overnight business_expenses not included on line sec_1 through meals and entertainment_expenses big_number ‘according to a separate statement attached to the return the dollar_figure listed in form_2106 consisted of dollar_figure for supplies and dollar_figure for uniforms although form_2106 claimed dollar_figure for meals and entertain- ment as required by form_2106 only percent of those expenses ie dollar_figure was claimed on line of schedule a as part of unreimbursed employee_expenses the return claimed on line of schedule a dollar_figure for tax preparation fees and did not claim any amount on line of that schedule entitled other expenses as required by the job-expense section of the return and sec_67 2-percent adjustment the total expenditures claimed in that section ie dollar_figure were reduced by an amount equal to percent of the dollar_figure of adjusted_gross_income reported in the return ie by dollar_figure the return claimed the balance ie dollar_figure on line of schedule a as a deduction the return also included schedule c profit or loss from business schedule c which claimed that petitioner was the proprietor of a business that provided truck repair services schedule c reported gross_income of dollar_figure and claimed total expenses before expenses for business use of home of dollar_figure - - claimed schedule c expenses anda net_loss of dollar_figure in the notice respondent determined that petitioner re- ceived dollar_figure as a refund of state_income_tax that he had de- ducted in a prior year and increased petitioner’s income by that amount in addition respondent disallowed in the notice the following claimed in the return the entire amount dollar_figure of the nol carryforward claimed as a deduction on page line of that return the entire amount dollar_figure of the deduction claimed for alleged schedule c expenses and dollar_figure of the total expenses dollar_figure claimed before the percent adjustment in the job-expense section of schedule a respondent also determined in the notice that petitioner is liable for the accuracy-related_penalty under sec_6662 opinion petitioner has the burden of showing error in respondent's determinations in the notice and his entitlement to any new_matter that he claimed at trial see rule a 290_us_111 petitioner attempted to satisfy his burden_of_proof in this case through his own testimony and certain documentary_evidence based on our observation of petitioner at trial including his demeanor we did not find petitioner to be credible in addi- although we provided petitioner an opportunity to file a brief in this case petitioner declined to do so --- - tion we found petitioner's testimony to be evasive uncorrobo- rated vague and or conclusory in certain material respects under these circumstances we are not required to and we shall not rely on petitioner's testimony to sustain his burden_of_proof in this case see 877_f2d_624 7th cir affg tcmemo_1987_295 440_f2d_688 9th cir affg per curiam tcmemo_1969_159 87_tc_74 as for the documentary_evidence on which petitioner relies that evidence establishes that petitioner paid certain amounts for various expenditures however except as discussed below that documentary_evidence does not show that any of those paid amounts is deductible we address initially petitioner’s contention at trial that he did not file the return the only evidence proffered by petitioner to support that contention is his own self-serving testimony on which we are unwilling to rely sec_6064 provides that the fact that an individual’s name is signed to a return shall be prima facie evidence for all purposes that the return was actually signed by him we have found that the return was signed in petitioner’s name on the record before us we find that petitioner has failed to overcome the -- - statutory presumption that he signed the return we turn next to petitioner’s contention that respondent erred in determining to include in petitioner’s income a state_income_tax refund of dollar_figure that he had deducted in a prior year the record contains no evidence to support that contention other than petitioner’s self-serving testimony on which we are unwill- ing to rely on the record before us we find that petitioner has failed to satisfy his burden to show error in respondent’s determination to include in his income a dollar_figure state tax_refund accordingly we sustain that determination we turn now to petitioner’s contentions that respondent erred in determining to disallow a the deduction claimed for an alleged nol carryforward nol deduction b the deductions claimed for alleged schedule c expenses and c dollar_figure of the total expenses dollar_figure claimed before the 2-percent adjust-- ment in the job-expense section of schedule a deductions are strictly a matter of legislative grace and petitioner bears the burden of proving that he is entitled to any deductions claimed ‘in any event petitioner conceded at trial that he received dollar_figure and dollar_figure of wage income from wilder and goodfellow respectively and that he earned dollar_figure of taxable interest_income all of which income was reported in the return with respect to the dollar_figure that was reported in the return as unemployment_compensation at trial petitioner did not concede or deny that he received such compensation he testified that he did not know anything about such compensation including whether or not he received it on the instant record we find that petitioner has failed to show that he did not receive the unemployment_compensation reported in the return see 503_us_79 with respect to petitioner’s contention that respondent erred in disallowing the nol deduction sec_172 allows a deduction for an nol for the taxable_year in an amount equal to the nol carried back to the taxable_year and the nol carried forward to the taxable_year see sec_172 an nol is defined as the excess of deductions over gross_income for a particular taxable_year with certain modifications see sec_172 and d petitioner as the claimant of an nol deduction must prove his right thereto see 349_us_232 it is petitioner’s position that he had an nol for that he is entitled to carry forward to the year at issue according to petitioner the nol that he claims for was produced by an alleged loss from the purported theft which he did not discover until sometime during claimed theft_loss respondent argues that petitioner has failed to substantiate the claimed theft_loss and conseguently has failed to prove his entitlement to the nol deduction sec_165 allows a taxpayer to deduct any loss from theft in the year during which the taxpayer discovers such loss see sec_165 e petitioner bears the burden of proving that a theft has occurred and that the requirements of sec_165 have been met see rule a allen v commissioner 16t c -- in order to carry his burden petitioner must establish both the existence of a theft within the meaning of sec_165 and the amount of the loss see 40_tc_304 in order to satisfy his burden to substantiate the claimed theft_loss petitioner relies on his self-serving testi- mony on which we are unwilling to rely and on a police report that was prepared by officer coffey who was assigned to investi- gate the purported theft officer coffey prepared that report largely on the basis of information provided by petitioner and or ms weber attachments to the police report that were prepared by petitioner and or ms weber listed the items that were purportedly stolen from petitioner and assigned a monetary value to each of those items officer coffey recommended that the case be closed due to the time laps sic and no leads to follow up on we find that the police report and the attach- ments thereto constitute for the most part nothing more than a mere recitation of the factual allegations of petitioner and or ms weber who was not a witness at the trial in this case with respect to the purported theft we are unwilling to rely on the police report and the attachments thereto as establishing either that the purported theft occurred or that petitioner had any loss for under sec_165 from that purported theft let alone a loss therefrom in the amount claimed by petitioner based on our examination of the entire record before us we find that petitioner has failed to establish his entitlement to the claimed theft_loss or to any other loss for that resulted in an nol for that year which he is entitled to carry forward to the year at issue ’ accordingly we sustain respon- dent’s determination to disallow the claimed nol deduction with respect to petitioner’s contention that respondent erred in determining to disallow the claimed schedule c-expense deductions as pertinent here sec_162 allows a deduction for ordinary and necessary expenses paid during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibil- ity under sec_162 is a question of fact see 320_us_467 in general an expense is ‘assuming arguendo that petitioner had proved that he had an nol for we nonetheless find that petitioner failed to satisfy his burden to show that he was entitled to an nol deduc- tion for the year at issue in general a taxpayer who sustains an nol must first carry such loss back years and if unab- sorbed then forward years see sec_172 a the taxpayer may elect to relinquish the entire carryback period and simply carry the loss forward for years see sec_172 any such election must be made by the due_date including exten- sions of time for filing the taxpayer's return for the taxable_year of the nol see sec_172 on the record before us assuming arguendo that petitioner had established that he had an nol for we find that petitioner has failed to show that he timely made the election described in sec_172 and if he did not that the claimed loss was not absorbed for the years prior to ordinary if it is considered normal usual or customary in the context of the particular business out of which it arose see 308_us_488 ordinarily an expense is necessary if it is appropriate and helpful to the operation of the taxpayer's trade_or_business see 383_us_687 83_tc_356 affd 777_f2d_662 11th cir on the record before us we find that petitioner has failed to establish that he incurred and paid all of the claimed schedule c expenses that he was engaged in any trade_or_business other than that of being an employee of wilder and of goodfellow and that any of the claimed schedule c expenses are ordinary and necessary to any trade_or_business in which petitioner claims to have engaged with respect to the depreciation claimed in schedule c on the record before us we find that petitioner has failed to prove that any of the properties with respect to which such deprecia- tion was claimed was used in a trade_or_business of petitioner or held by him for the production_of_income see sec_167 based on our examination of the entire record before us we find that petitioner has failed to show that he is entitled to ‘assuming arguendo that petitioner had established that properties on which depreciation was claimed in schedule c were used in a trade_or_business or held_for_the_production_of_income we find on the instant record that petitioner has failed to prove his respective bases in any such properties see sec_167 -- - deduct the claimed schedule c expenses on that record we sustain respondent’s determination to disallow the schedule c deductions claimed in the return we shall now consider whether petitioner is entitled to deduct any of the claimed schedule c expenses as itemized deduc-- tions subject_to the 2-percent adjustment required by sec_67 if a taxpayer’s trade_or_business is that of being an employee the ordinary and necessary expenses of being an em-- ployee will be treated as itemized_deductions see sec_62 subject_to the limitation of sec_67 sec_1 e the 2-percent adjustment see 72_f3d_938 lst cir affg alexander v commissioner tcmemo_1995_51 respondent concedes that of the total schedule c expenses claimed by petitioner expenses aggregating dollar_figure qualify as employee business_expenses that constitute miscellaneous_itemized_deductions subject_to the 2-percent adjustment based on our examination of the entire record before us we find that peti- tioner has failed to prove that any additional_amount of the claimed schedule c expenses qualifies as such an itemized deduc-- tion with respect to petitioner’s contention that respondent erred in determining to disallow certain of the expenditures that he claimed in the job-expense section of schedule a respondent concedes that petitioner is entitled to dollar_figure of those disallowed -- - expenditures as union dues based on our examination of the entire record before us we find that petitioner is entitled to an additional dollar_figure of those disallowed expenditures as union dues except for the union dues which respondent conceded and the additional union dues which we found petitioner paid total- ing dollar_figure we find on the instant record that petitioner has failed to establish that he is entitled to any additional expen- ditures that were claimed in the job-expense section of schedule a and that respondent determined to disallow accordingly except to that extent we sustain that determination we next address the new_matter raised by petitioner at trial that he is entitled to a deduction for a theft_loss because ms weber embezzled certain of his funds in support of that deduc-- tion petitioner testified that approximately week prior to the trial in this case he discovered that ms weber had embezzled an undisclosed amount of money from him during the year at issue purported embezzlement we are unwilling to rely on that testimony on the record before us we find that petitioner has failed to establish that ms weber embezzled any money from him during the year at issue ’ see elliott v commissioner t c assuming arguendo that petitioner had established that ms weber embezzled a certain amount of money from him during on the record before us we find that he has failed to establish that he is entitled to a theft-loss deduction under sec_165 for with respect to that embezzlement that is because a theft_loss is treated as sustained in the year during which the tax- continued - pincite based on our examination of the entire record before us we find that petitioner has failed to establish that he is entitled to a theft-loss deduction under sec_165 we turn finally to respondent’s determination that peti- tioner is liable for the accuracy-related_penalty under sec_6662 sec_6662 imposes an accuracy-related_penalty equal to percent of the underpayment_of_tax resulting from inter alia negligence or disregard of rules or regulations see sec_6662 or a substantial_understatement_of_income_tax see sec_6662 for purposes of sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the code and the term disregard includes any careless reckless or intentional disregard see sec_6662 negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances see 963_f2d_907 6th cir affg tcmemo_1991_179 91_tc_686 affd 893_f2d_656 4th cir an under- statement is equal to the excess of the amount of tax required to be shown in the tax_return over the amount of tax shown in the tax_return see sec_6662 a and is substantial in the continued payer discovers the loss and petitioner claims that he discov- ered the purported embezzlement in the year see sec_165 e - - case of an individual if it exceeds the greater of percent of the tax required to be shown or dollar_figure see sec_6662 a the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith see sec c the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances see sec_1_6664-4 b income_tax regs although petitioner asserted at trial that he should not be held liable for the accuracy-related_penalty under sec_6662 he presented no evidence regarding that penalty on the record before us we find that petitioner has failed to show that he is not liable for the accuracy-related_penalty under sec_6662 a we have considered all of the contentions and arguments of petitioner that he advanced at trial which are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing and the concessions of respondent decision will be entered under rule


internal_revenue_service number release date index numbers ------------------------------------------------ -------------------------------------------------------- ----------------------- ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number -------------------- refer reply to cc psi b3 plr-105547-16 date august x -------------------------------------------------- ------------------------------------- legend n -------- m ---- state -------------- date -------------------- date -------------------------- date ------------------ date ------------------- year ------- dear ---------------------- this letter responds to a letter dated date submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code code facts plr-105547-16 the information submitted states that x was incorporated under the laws of state on date on date x filed an amendment to its certificate of incorporation specifically amending the fourth article restated fourth article to authorize n shares of class a common_stock all without nominal or par_value and n shares of preferred_stock par_value of dollar_figurem per share and immediately converted the class of class b common_stock to preferred_stock the restated fourth article provided that the preferred_stock would receive priority distributions over the class a common_stock x elected be classified as an s_corporation effective date in year x became aware that the preferred_stock created by the restated fourth article created a second class of stock that caused x’s s_corporation_election to be ineffective on date x amended the restated fourth article second restated fourth article to provide for n shares of class a common_stock without par_value and n shares of class b common_stock without par_value and immediately converted the class of preferred_stock to class b common_stock under the second restated fourth article the class a common_stock and the class b common_stock confer identical rights to distribution and liquidation proceeds the only differences between the classes relate to voting rights and notice of shareholder meetings x represents that it was not aware that the provisions of the restated fourth article would render its future s_corporation_election ineffective x and its shareholders agree to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation x represents that during all periods since date x has made distributions to each shareholder pro_rata and has filed all returns consistent with x’s status as an s_corporation x requests a ruling that the ineffectiveness of x’s s_corporation_election due to the existence of the preferred_stock was inadvertent within the meaning of sec_1362 and that it will be treated as an s_corporation from date and thereafter law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock plr-105547-16 sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 further provides that the termination shall be effective on and after the date of cessation sec_1_1361-1 of the income_tax regulations provides in part that a corporation is generally treated as having only one class of stock if all the outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides in part that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to the distribution and liquidation proceeds collectively the governing provisions sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 the secretary determines that the circumstances resulting in the ineffectiveness were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to this period then notwithstanding the circumstances resulting in the ineffectiveness the corporation will be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election was ineffective on date as a result of x having more than one class of stock we further conclude that such ineffectiveness was inadvertent within the meaning of sec_1362 x has taken corrective action so that it meets the requirements of a small_business_corporation under sec_1361 therefore we determine that pursuant to the provisions of sec_1362 x will be treated as an s_corporation effective date and thereafter provided that x’s s_corporation_election was otherwise valid and has not otherwise terminated under sec_1362 plr-105547-16 except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited for precedent pursuant to a power_of_attorney on file we are sending a copy of this letter to x’s authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the rulings requested it is subject_to verification on examination sincerely holly porter chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes