DocketNumber: Docket No. 15177-10
Citation Numbers: 2012 T.C. Memo. 320, 104 T.C.M. 581, 2012 Tax Ct. Memo LEXIS 321
Judges: MORRISON
Filed Date: 11/19/2012
Status: Non-Precedential
Modified Date: 11/20/2020
Decision will be entered under
MORRISON,
The issues for decision 2*322 are:
(1) whether Karl Weatherly failed to accurately include certain items of income for 2003;
(2) whether Karl Weatherly is entitled to a 2003 deduction for $79,997 of expenses related to royalty income;
*322 (3) whether Karl Weatherly *323 is entitled to certain itemized deductions for 2003;
(4) whether the Weatherlys failed to include certain items of income for 2004;
(5) whether the Weatherlys are entitled to a 2004 deduction for $61,193 of expenses related to royalty income;
(6) whether the Weatherlys are entitled to a net-operating-loss carryforward as a deduction for 2004.
(7) whether Karl Weatherly is liable for the failure-to-file addition to tax for 2003; and
(8) whether the Weatherlys are liable for a penalty under
The parties filed both a stipulation of facts and a supplemental stipulation of facts. We adopt the stipulated facts.
Petitioners Karl Gregg Weatherly and Jinny H. S. Weatherly were married and lived in Idaho at all relevant times. Karl Weatherly is a professional photographer specializing in sports photography. He received payments from companies who used his photos, and these payments were reported by the payors *323 on Forms 1099-MISC, Miscellaneous Income. Jinny Weatherly earned wage income as a dental assistant in 2003.
On April 15, 2004, Jinny Weatherly filed a Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, for tax year 2003. In that tax return she *324 filed as a single taxpayer, and she elected the standard deduction. The only income she reported was $13,971.90 of wages earned as a dental assistant.
Also on April 15, 2004, Karl Weatherly had a document entitled "Notice of Affidavit Statement in Rebuttal to
On or around February 18, 2005, Karl Weatherly hand-delivered his own late 2003 Form 1040 to the IRS office in Boise, Idaho. Attached to the Form 1040 were six Forms 1099-MISC. Three of the Forms 1099-MISC had been issued to him by payors. The other three forms he prepared himself; he marked these forms as "corrected" and indicated "$0.00" as the amount received. The forms the payors issued reported $98,485 of royalties from Getty Imagery, $21,765.50 of royalties from Corbis Corp., and $1,276.72 of royalties from Index Stock Images.
*324 On his Form 1040 for 2003 Karl Weatherly reported income of $3,294.01 of ordinary dividends. This amount was also listed on a Form 1099-DIV, Dividends and Distributions, an original *325 of which Karl Weatherly attached to the Form 1040. He reported no other income and claimed the standard deduction.
Also on or around February 18, 2005, Karl Weatherly submitted a timely Form 1040 for 2004 for himself, along with eight Forms 1099-MISC for 2004. Four of the Forms 1099-MISC were originals from payors. Weatherly prepared the other four Forms 1099-MISC himself; he marked these forms "corrected" and entered the amounts as "$0.00". The forms the payors issued reported $114,368.97 of royalties from Getty Imagery, $18,994.11 of royalties from Corbis Corp., $431 of royalties from Index Stock Images, and nonemployee compensation of $3,007.07 from Mountain Stock Photography & Film. On the 2004 Form 1040 submitted in February 2005 Karl Weatherly claimed married filing separate status, reported no income, and claimed no deductions.
On May 15, 2007, the IRS Appeals Office issued a notice of determination sustaining levy and lien actions against Karl Weatherly to collect
*325 On June 14, 2007, Karl Weatherly filed a petition in the Tax Court in which he challenged the May 15, 2007 notice of determination under
On June 21, 2007, after discussions with an IRS agent, the Weatherlys filed Forms 1040 for 2003 and 2004. Both returns claimed joint filing status. The returns were prepared by an accountant.
On the 2003 Form 1040 submitted on June 21, 2007, the Weatherlys reported the following items of income and expense: • royalty income before expenses of $121,526.62 (i.e. the sum of $98,485, $21,765.50, and $1,276.12), which is the sum of the royalty amounts reported on three Forms 1099-MISC; • Jinny Weatherly's wages of $13,972; and • ordinary dividend income of $3,294. • capital losses of $3,000; • expenses related to royalty income of $79,977, which included $13,778 in legal expenses; and • total itemized deductions of $385,694, which included a theft loss deduction of $369,318.
*326 On the 2004 Form 1040 submitted on June 21, 2007, the Weatherlys reported that their only income item was: • royalty income before expenses of $133,794 (i.e. the sum of $114,368.97, *327 $18,994.11, and $431, the royalty amounts reported on three Forms 1099-MISC). • capital losses of $3,000; • a business loss of $246 (the difference between $3,007 in business income and $3,253 in business expenses); • expenses related to royalty income of $61,192, which included $9,008 in legal expenses; • a net-operating-loss carryforward of $326,879 from 2003; and • total itemized deductions of $19,093, which included a medical expense deduction of $4,769.
The various submissions the Weatherlys made to the IRS for the 2003 and 2004 tax years and the dates of the submissions are summarized below.
*3272003 | Apr. 15, 2004 | Apr. 15, 2004 | Feb. 18, 2005 | June 21, 2007 |
2004 | — | — | Feb. 18, 2005 | June 21, 2007 |
On August 22, 2008, the Tax Court entered the following decision in docket No. 13619-07L: Pursuant to the agreement of the parties in this case, it is ORDERED AND DECIDED: That the determinations set forth in the Notice of Determination Concerning Collection Action(s) under [signed] DIANE L. KROUPA Judge. Entered: Aug 22, 2008 [page 2] It is hereby stipulated that the Court may enter the foregoing decision in this case. It is further stipulated that respondent will abate the penalties assessed against petitioner for the years 1998 through 2004, under DONALD L. KORB Chief Counsel Internal Revenue Service [signed] KARL GREGG By: [signed] WEATHERLY WESLEY F. MCNAMARA
On April 6, 2010, the IRS sent Karl Weatherly a notice of deficiency for tax year 2003 and sent the Weatherlys a notice of deficiency for tax year 2004.
The notice of deficiency for tax year 2003 determined that Karl Weatherly—not both Weatherlys—received income of $3,294 from ordinary dividends and $55,327 from net royalties. This net-royalties figure was computed by subtracting allowable royalty expenses of $66,199 from gross-royalty income of $121,526. The claimed $13,778 deduction for legal expenses was disallowed. *329 Income was then reduced by $1,500 for capital losses, $4,750 for the standard deduction, and $3,050 for the personal exemption. The resulting taxable income was $49,321, which yielded a tax liability of $9,141 at the married-filing-separate rate. The deficiency was also $9,141 because the June 21, 2007 Form 1040 reported zero tax liability and no tax was paid. A $2,285.25 addition to tax, 25% of the amount owed, was applied under
*329 The notice of deficiency for tax year 2004 determined that the Weatherlys received income of $3,007 from gross receipts from nonemployee compensation and $81,609 from net royalties. This net-royalties figure was computed by subtracting allowable royalty expenses of $52,184 from gross royalty income of $133,793. The claimed $9,008 deduction for legal expenses was disallowed. Taxable income was then reduced by $3,253 for allowable business expenses reported on Schedule C, Profit or Loss From Business, $3,000 in capital losses, $18,418 in allowable itemized deductions, and $6,200 for the personal exemption. The claimed medical-expense deduction of $4,769 was disallowed because it did not exceed the required threshold *330 of 7.5% of adjusted gross income. The claimed net-operating-loss carryforward from 2003 was disallowed. The resulting taxable income was $53,745, which yielded a tax liability of $7,344 at the joint filing rate. The deficiency was also $7,344 because the June 21, 2007 Form 1040 reported zero tax liability and no tax was paid.
The Weatherlys timely petitioned this Court for redetermination of the deficiencies and the addition to tax.
The taxpayer bears the burden of proving by a preponderance of the evidence that the IRS's determinations in the notice of deficiency are incorrect.
He contends that the documents he submitted on April 15, 2004 and February 18, 2005 constitute valid returns and that therefore these documents must be presumed correct. The April 15, 2004 "Notice of Affidavit" denied that he had any tax liability. The February 18, 2005 Form 1040 reported that Karl Weatherly's only income *332 was dividend income of $3,294.01. Even if these documents were somehow considered to be valid returns, their validity has no bearing on his tax liability for 2003. A valid tax return is not presumed to be correct.
We find that Karl Weatherly received the payments in question. And, although the payments constitute income subject to tax, the IRS has conceded on brief that under community-property principles only half of the payments are includable in Karl Weatherly's gross income. We hold that Karl Weatherly's gross income properly includes only half of the royalty and dividend income he received in 2003.
On the Form 1040 for 2003 they submitted on June 21, 2007, the Weatherlys claimed a deduction for $79,997 of expenses related to royalty income. This deduction included $13,778 of legal expenses. Taxpayers who claim the standard deduction may deduct ordinary and necessary business expenses.
In the notice of deficiency for 2003, which was issued to Karl Weatherly but not Jinny Weatherly, the IRS conceded that Karl Weatherly was entitled to a $66,199 deduction for expenses related to royalty income for 2003. However, because the royalty income is community income, Karl Weatherly may deduct only half of the allowable royalty expenses.
On their June 21, 2007 Form 1040 for 2003, the Weatherlys claimed itemized deductions of $385,694, which included a theft loss deduction of $369,318. The IRS contends that Karl Weatherly can claim only the standard deduction for 2003 and is therefore barred from benefiting from any itemized deductions for that year. We need not reach the merits of the IRS's contention because in his brief Karl Weatherly does not challenge the IRS's *334 contention that he is limited to the standard deduction.
As was true with respect to 2003, Karl Weatherly conceded at trial that he had received the amounts indicated on the 2004 Forms 1099-MISC he received from various payors. These forms are in the record, and the indicated amounts are: $114,368.97 of royalties from Getty Imagery, $18,994.11 of royalties from Corbis Corp., and $431 of royalties from Index Stock Images. He also conceded that he had received nonemployee compensation of $3,007.07 from Mountain Stock Photography & Film. These amounts are reflected in the notice of deficiency for 2004. We find that the Weatherlys received these payments and that they are includable in gross income.
*334 The Weatherlys contend that Karl Weatherly's Form 1040, submitted on February 18, 2005, constituted a valid return, and therefore the Form 1040 must be presumed correct. The February 18, 2005 Form 1040 reported that Karl Weatherly earned no income. Even if the Form 1040 is considered a valid return, its validity has no bearing on the Weatherlys' *335 tax liability for 2004. A valid tax return is not presumed to be correct.
On the Form 1040 for 2004 they submitted on June 21, 2007, the Weatherlys claimed a $61,192 deduction for expenses related to royalty income. This deduction included $9,008 of legal expenses. Legal expenses can qualify as ordinary and necessary business expenses if they are paid or incurred in carrying on a taxpayer's trade or business.
In the notice of deficiency for 2004 the IRS conceded that the Weatherlys are entitled to a $52,184 deduction for expenses related to royalty income for *335 2004. We hold that the Weatherlys are entitled to a $52,184 deduction for expenses related to royalty income for 2004.
The Weatherlys' Form 1040 for 2003 claimed a theft-loss deduction of $369,318. The Form 1040 for 2004 *336 claimed a net-operating-loss carryforward of $326,879 from 2003. The net-operating-loss carryforward, as computed on the Form 1040 for 2004, would not exist without the theft-loss deduction. As we explained above in part 3, Karl Weatherly is not entitled to a theft-loss deduction for 2003 because the Weatherlys' brief failed to challenge the IRS's contention that he is limited to the standard deduction for that year. Furthermore, the Weatherlys' brief does not contend that they are entitled to a theft-loss deduction for 2003 or a net-operating-loss carryforward to 2004 resulting from the theft-loss deduction. We hold that the Weatherlys are not entitled to a net-operating-loss carryforward for 2004.
On April 15, 2004, Karl Weatherly submitted the Notice of Affidavit. On February 18, 2005, Karl Weatherly submitted a Form 1040. And on June 21, 2007, the Weatherlys filed a Form 1040 claiming joint-filing status. Of these three submissions, only the Notice of Affidavit was submitted to the IRS in time to prevent the imposition of the full addition to tax. The February 18, 2005 Form 1040 was submitted more than five months after the due date for the 2003 tax return. The Notice of Affidavit could qualify as a valid tax return, thereby relieving Karl Weatherly of liability for the addition to tax, only if it meets all four requirements of the test set forth in
*338 Next, Karl Weatherly argues that the proceeding in docket No. 13619-07L established that he filed a valid return for 2003. In that proceeding the parties (i.e. Karl Weatherly and the IRS) stipulated that he did not file frivolous returns for 2003 and other years. At most the stipulation means that *340 the Form 1040 was not a frivolous return. Nothing suggests that it was the Notice of Affidavit that was the object of the IRS's attempt to impose the frivolous-return penalty. The Notice of Affidavit does not even purport to be a return, which is a necessary condition for it to be a frivolous return.
The IRS satisfied its burden of production under
The Weatherlys' arguments that they are entitled to deductions for legal expenses (for 2003 and 2004), a theft-loss deduction (for 2003), and a net-operating-loss-carryforward deduction (for 2004) were advanced by Karl Weatherly's testimony. We did not reach the question whether his testimony was sufficient to secure the deductions because the Weatherlys abandoned their claims on brief. Nonetheless, their initial claims were not frivolous. We do not want to discourage taxpayers from litigating colorable claims. Moreover, we note that while the arguments Karl Weatherly made in his Notice of Affidavit were *341 frivolous, the Weatherlys *343 did not pursue any of those arguments in their briefs or testimony to this Court. Thus, we decline to impose a penalty.
However, we emphasize to the Weatherlys that they should expect to be penalized if they make frivolous and groundless arguments in the future.
In reaching our holdings, we have considered all arguments made, and to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect in the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. As described below, the date on the notice of deficiency (April 6, 2010) is (1) more than three years after the date (April 15, 2004) that Karl Weatherly submitted a document he called "Notice of Affidavit Statement in Rebuttal to
3. The notice of determination is not in the record, but it is attached to the petition Karl Weatherly filed in docket No. 13619-07L.
4. Weatherly argues that if not a "return", his Notice of Affidavit is a "statement" that suffices for purposes of the requirement that he file a return. In the absence of a prescribed form, a statement made by a taxpayer disclosing his gross income and the deductions therefrom may be accepted as a tentative return, and, if filed within the prescribed time, the statement so made will relieve the taxpayer from liability for the addition to tax imposed for the delinquent filing of the return, provided that without unnecessary delay such a tentative return is supplemented by a return made on the proper form.↩
Robert D. Beard v. Commissioner of Internal Revenue , 793 F.2d 139 ( 1986 )
Norman E. Coleman v. Commissioner of Internal Revenue, Gary ... , 791 F.2d 68 ( 1986 )
Bronstein v. Comm'r , 138 T.C. 382 ( 2012 )
John E. Hansen Imelda M. Hansen v. Commissioner of Internal ... , 820 F.2d 1464 ( 1987 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Commissioner v. Schleier , 115 S. Ct. 2159 ( 1995 )
Swain v. Comm'r , 118 T.C. 358 ( 2002 )
Johnson v. Commissioner , 72 T.C. 340 ( 1979 )
Levenson & Klein, Inc. v. Commissioner , 67 T.C. 694 ( 1977 )