DocketNumber: No. 9989-99; No. 9990-99; No. 9991-99
Citation Numbers: 2001 T.C. Memo. 196, 82 T.C.M. 336, 2001 Tax Ct. Memo LEXIS 227
Judges: "Marvel, L. Paige"
Filed Date: 7/27/2001
Status: Non-Precedential
Modified Date: 4/18/2021
*227 Decisions will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, JUDGE: In separate notices of deficiency, respondent determined the following income tax deficiencies, penalties, and additions to tax with respect to petitioners' Federal income taxes:
Year Deficiency penalty addition to*228 tax
____ __________ _________ ________________
1991 $ 1,796
1992 12,291
1994 10,533 $ 2,107 $ 371
GREGORY A. COX (GREGORY) & LINDA M. COX (LINDA),
DOCKET NO. 9990-99
Year Deficiency penalty
____ __________ _________
1992 $ 8,205
1994 1,190 $ 178
ROBERT A. BURKE (ROBERT) & DEBORAH A. BURKE (DEBORAH),
DOCKET NO. 9991-99
Year Deficiency penalty
____ __________ _________
After the parties' concessions, *230 (1) Whether Christopher, Gregory, and Deborah, shareholders in Cox Tomato, Inc. (Cox Tomato), an S corporation, had sufficient bases in their Cox Tomato stock and in any indebtedness owed by Cox Tomato to them (hereinafter referred to, in the aggregate, as basis in Cox Tomato) to deduct their respective shares of the ordinary losses generated by Cox Tomato during the years at issue;
(2) whether Deborah may reduce the gross income she derived from her use of a corporate automobile to reflect that she used the automobile, in part, for business and that she reimbursed Cox Tomato for some of her personal use; and
(3) whether Christopher and Brenda and Gregory and Linda are liable for the accuracy-related penalty imposed by
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts into these findings by this reference.
On the date the petitions were filed, Christopher and Brenda resided in Edmond, Oklahoma; Gregory and Linda resided in Oklahoma City, Oklahoma; and Robert and*231 Deborah resided in Ardmore, Oklahoma. Christopher, Gregory, and Deborah (collectively referred to as petitioner shareholders) are siblings.
For all relevant periods, Cox Tomato was an S corporation that bought and sold fresh produce primarily from California and Florida. In 1987, petitioner shareholders inherited their shares of stock in Cox Tomato from their father. For all relevant periods, petitioner shareholders were the sole shareholders of Cox Tomato and used the cash method of accounting and the calendar year for tax reporting.
During the years at issue, Christopher and Gregory each owned 34.32 percent and Deborah owned 31.36 percent of Cox Tomato's stock. Without regard to any of the disputed transactions discussed infra, their bases in their shares of Cox Tomato stock were:
Christopher Gregory Deborah
___________ _______ _______
12/31/87 $ 33,250 *232 15,465 15,465 15,210
12/31/91 (26,575) (26,575) (21,788)
12/31/92 9,045 9,045 11,890
12/31/93 (911) (911) 2,791
In 1994, Cox Tomato had an operating loss of $ 375,896. Petitioner shareholders reported their pro rata shares of Cox Tomato's 1994 operating loss on their respective Schedules E, Supplemental Income and Loss, to their respective Forms 1040, United States Individual Income Tax Return, for 1994. Because each petitioner shareholder was unable to utilize fully his or her pro rata share of Cox Tomato's 1994 loss, each petitioner shareholder*233 filed a Form 1045, Application for Tentative Refund, which reported a net operating loss (NOL) for 1994 and carried that NOL back to prior taxable years. Christopher carried his NOL back to 1991 and 1992, Gregory carried his NOL back to 1992 only, and Deborah carried her NOL back to 1991, 1992, and 1993.
In 1995, Cox Tomato had an operating loss of $ 193,825. Deborah reported $ 12,000 of that loss on the Schedule E to her 1995 Form 1040.
On April 7, 1989, Christopher and Brenda purchased improved real estate located at 222 East Sheridan in Oklahoma City, Oklahoma, and gave a mortgage on the property (first mortgage) to the seller. Christopher subsequently leased the property to Cox Tomato for use as a corporate office and warehouse (the warehouse).
With respect to the warehouse, Christopher reported rents received, mortgage and other interest paid, and expenses for repairs paid, on his Schedules E to his 1991, 1992, and 1994 Forms 1040. Neither Gregory nor Deborah received any income or paid any expenses with respect to the warehouse in any of the years in issue.
*235 The terms of the installment note required 60 monthly payments. Christopher treated loan 91850 as his personal debt and made at least some payments on it. Neither Gregory nor Deborah made any payments on loan 91850 in any of the years in issue, either to the Oklahoma Bank or to Christopher in reimbursement for his payments.
On January 27, 1995, petitioner shareholders and Cox Tomato as co-makers borrowed $ 70,000 from the Oklahoma Bank (loan 92107) for Cox Tomato's operating capital. Petitioner shareholders and Cox Tomato executed an installment note for $ 70,000 in favor of the Oklahoma Bank. Christopher and Brenda also gave the Oklahoma Bank a mortgage on their personal residence as security for the loan.
Christopher treated loan 92107 as his personal obligation and made at least some payments on it during 1995. Neither Gregory nor Deborah made any payments on the loan, either to the Oklahoma Bank or to Christopher in reimbursement for his payments, during 1995.
Cox Tomato distributed to Deborah $ 1,500 each month from January to May 1994, and from January to December 1995. In the intervening months*236 of June 1994 to December 1994, Cox Tomato distributed to Deborah only $ 1,420 each month, retaining the $ 80 difference as Deborah's payment for her personal use of a 1994 Ford Explorer (automobile) provided to her by Cox Tomato from March 1994 through December 1995. The automobile's annual lease value was $ 7,750 in 1994 and 1995. *237 Respondent determined that Christopher and Gregory had no bases in Cox Tomato. Respondent determined that Deborah had a basis of $ 2,791 in Cox Tomato, allowed Deborah to recognize a flowthrough loss in 1994 to the extent of that basis, and disallowed the $ 12,000 loss she claimed in 1995 because respondent determined that she had no remaining basis. Respondent disallowed each of petitioner shareholders' NOL carrybacks for all the years in issue. Respondent further determined that Deborah must include the prorated annual lease value of the corporate automobile she drove in 1994 and 1995 in her income for those years.
Lastly, respondent determined that Christopher, Gregory, and their spouses are each liable for an accuracy-related penalty for 1994 under
OPINION
The primary issue for consideration is whether petitioner shareholders had sufficient bases in their Cox Tomato stock and in any indebtedness owed by Cox Tomato*238 to them to deduct their distributive shares of Cox Tomato's losses for the years at issue.
Respondent determined that the amount of Cox Tomato's losses petitioner shareholders could deduct was limited by their adjusted bases in Cox Tomato at the end of 1993. Petitioner shareholders contend that certain transactions in which they participated increased their bases in Cox Tomato under
A shareholder of an S corporation may deduct his pro rata share of any loss sustained by the corporation.
When an S corporation*240 shareholder is only indirectly liable for a corporate debt, that shareholder has not transferred any cash or property to the S corporation or created corporate indebtedness owed to him until and to the extent the shareholder actually pays the debt.
With these principles in mind, we examine the transactions that petitioner shareholders contend entitle them to an increase in their S corporation bases.
A. 91850 Loan for $ 220,000
1. *241 BASIS APPORTIONMENT AMONG PETITIONER SHAREHOLDERS
Petitioner shareholders first contend that loan 91850 should increase each of their bases because they each made an economic outlay in that the loan was secured with jointly owned property. Respondent contends that neither Gregory nor Deborah made an economic outlay with regard to loan 91850.
Petitioner shareholders' argument depends upon a faulty premise. Petitioner shareholders contend that although Christopher and Brenda purchased the warehouse and titled it in their names, Christopher and Brenda actually held the warehouse as nominees for the three siblings. Because the warehouse was used as security for the loan, petitioner shareholders argue that, as the legal and/or equitable owners of the warehouse, they are entitled to increase their respective bases in Cox Tomato by the amount of the loan.
Whether petitioner shareholders jointly owned the warehouse is not controlling here. A shareholder who uses individually owned property to secure corporate debt has not necessarily made an economic outlay requiring an increase in his adjusted basis under
No form of indirect borrowing, be it guaranty, surety,
accommodation, comaking or otherwise, gives rise to indebtedness
from the corporation to the shareholders until and unless the
shareholders pay part or all of the obligation. Prior to that
crucial act, 'liability' may exist, but not debt to the
shareholders.
Neither Gregory nor Deborah made any payments to the Oklahoma Bank, Christopher, or Cox Tomato regarding loan 91850.
*243 2. CHRISTOPHER'S INCREASE IN BASIS
Christopher contends, in the alternative, that loan 91850 should increase only his basis in Cox Tomato because only he owned the warehouse and made payments on the loan. Apparently assuming that loan 91850 was really a personal loan to Christopher and not to Cox Tomato, respondent concedes that Christopher is entitled to increase his basis in Cox Tomato to the extent that Christopher proves how much of the loan proceeds was paid over to Cox Tomato. Respondent contends, however, that Christopher failed to introduce "sufficient credible evidence to establish the amount contributed to Cox Tomato and the amount used to pay off * * * [Christopher and Brenda's] first mortgage on * * * [the warehouse]."
Christopher has the burden of proving how much money he transferred to Cox Tomato out of the proceeds of loan 91850. Rule 142(a). Citing a lack of documentation in the record, respondent asserts that Christopher has not met his burden.
While it is true that the record in this case is lacking in documentation that would have made our analysis of this issue easier and more satisfying, Christopher nevertheless has convinced us that he transferred approximately*244 $ 148,000 of the loan proceeds to Cox Tomato in 1993. Christopher testified to that effect and also offered an explanation regarding why documentation of what transpired in 1993 is not available. *245 an economic outlay simply by signing the loan documents. Respondent contends that the loan was not made until 1995; therefore, the issue of whether the loan requires an adjustment to the bases of Christopher and Gregory in 1994 is not before us. Respondent further contends that Deborah did not make an economic outlay with respect to loan 92107.
Loan 92107 was not made until 1995. Since the loan did not exist in 1994, it cannot have any bearing on the calculation of Christopher's or Gregory's basis in Cox Tomato during 1994. *246 the loan, Deborah did not make any payments to the Oklahoma Bank on loan 92107, nor did she transfer any cash or property to Cox Tomato in connection with loan 92107. We hold, therefore, that Deborah has failed to prove that she made any economic outlay with respect to loan 92107 and, absent such proof, she is not entitled to increase her basis in Cox Tomato by reason of the loan.
Respondent determined that the prorated annual lease value of the corporate automobile furnished to Deborah during 1994 and 1995 constituted additional gross income to Deborah in each of those years. Deborah concedes that the automobile's prorated annual lease value constituted income to the extent that she used the automobile for personal reasons and did not pay for such personal use. Deborah contends, however, that the automobile's prorated annual lease value did not constitute income to the extent the automobile was used for business purposes and to the extent she compensated Cox Tomato for her personal use of the automobile. Deborah, however, has cited no provision of the Internal Revenue Code in support of her argument.
If Deborah's argument is that she is entitled to exclude a portion of the annual lease value of the automobile from her gross income, as we interpret it to be, her argument would appear to be grounded in
Although the applicable regulations provide considerable guidance to employees who, like Deborah, seek to exclude a portion of the value of a company-supplied automobile from their income as a working condition fringe and are required to substantiate their business use of the automobile, e.g.,
Deborah also argues that the amounts retained by Cox Tomato from the monthly distributions she received from June through December 1994 to compensate Cox Tomato for her personal use of the corporate automobile should be excluded from her gross income. We reject this argument because it fails to recognize that respondent's adjustment increasing Deborah's income by the amount of distributions she received for 1994 includes only the distributions Deborah actually received; i.e., the distributions net of the amounts retained by Cox Tomato for Deborah's personal use of the automobile. In effect, Deborah has received the benefit of an exclusion because the amount Cox Tomato withheld from her distribution to compensate the company for her personal use of the automobile was not included in her income. Deborah is not entitled to exclude*251 from income money she is not otherwise required to include in income in the first place.
On this record, therefore, we hold that Deborah has failed to substantiate her business use of the corporate automobile she drove during 1994 and 1995 as required by
Respondent determined that, for 1994, Christopher and Brenda and Gregory and Linda (petitioners Cox) were liable for an accuracy-related penalty under
We have concluded that Christopher may increase his basis in Cox Tomato by $ 148,000 to reflect the money he transferred to Cox Tomato from loan 91850. *254 Because petitioners Cox failed to prove that the proposed deficiencies were not attributable to negligence or disregard of rules or regulations, and because they did not assert any other basis for obtaining relief from the
B. ACCURACY-RELATED PENALTY FOR SUBSTANTIAL UNDERSTATEMENT
OF TAX
Respondent determined that Deborah and her spouse (petitioners Burke) were liable for an accuracy-related penalty under
Respondent determined that the understatement to which the penalty applied was attributable to three items: (1) Deborah's failure to report as income $ 18,000 of distributions received from Cox Tomato; (2) Deborah's failure to report as income the annual lease value ($ 7,750) of the corporate automobile; and (3) Deborah's reported flowthrough loss from Cox Tomato of $ 12,000.
Petitioners Burke do not contend, nor have they proven, that they had substantial authority for*256 the tax treatment of the items in question or that they adequately disclosed all relevant facts as to the tax treatment of those items. They also do not contend, nor have they proven, that they had a reasonable basis for their tax treatment of the items, or that they qualify for relief under
We hold that Christopher is entitled to increase his adjusted basis in Cox Tomato by $ 148,000, the amount he transferred to Cox Tomato in 1993. We also hold that, as to all other adjustments addressed in this opinion, respondent's determinations must be sustained.
We have carefully considered all remaining arguments made by the parties for contrary holdings and, to the extent not discussed, find them to be irrelevant or without merit.
To reflect the foregoing,
Decisions will be entered under Rule 155.
1. Cases of the following petitioners are consolidated herewith: Gregory A. Cox and Linda M. Cox, docket No. 9990-99; and Robert A. Burke and Deborah A. Burke, docket No. 9991-99.↩
2. All 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. Monetary amounts are rounded to the nearest dollar.↩
1. The record also reflects that respondent issued to Deborah a
separate notice of deficiency disallowing a net operating loss
carryback claimed for 1991. Although the parties have treated 1991 as
one of the years in dispute, we do not examine respondent's
determinations made in Deborah's 1991 notice of deficiency because
Deborah did not file a petition with this Court regarding that
notice. Sec. 6213(a).↩
3. Respondent and Christopher agree that, in 1994, Christopher had gain of $ 1,554 from the sale of stock, rather than $ 11,305 as was set forth in the notice of deficiency. Christopher also conceded that he received ordinary dividend income of $ 391 in 1994.
Christopher did not present evidence regarding respondent's determination that he had unreported capital gain distributions of $ 490 from Merrill Lynch in 1994, or that he was liable for the addition to tax under section 6651(a)(1) for failure to timely file his 1994 return, and Christopher did not dispute these adjustments on brief. These adjustments are deemed conceded in accordance with Rule 149(b).
Christopher, Gregory, and Deborah did not present evidence regarding respondent's determination that they had unreported distributions from Cox Tomato in 1994 of $ 9,784, $ 6,124, and $ 4,204, respectively, and they did not dispute these adjustments on brief. These adjustments are deemed conceded in accordance with Rule 149(b).
Deborah conceded that she received from Cox Tomato cash distributions of $ 17,440 in 1994 and $ 18,000 in 1995 and that those amounts increase her taxable income for the respective taxable years. Deborah also conceded that her share of Cox Tomato's loss for 1994 was $ 117,881, rather than $ 139,301 as she originally reported.↩
4. The only other issues raised in the notices of deficiency are computational.↩
1. The parties stipulated each petitioner shareholder's basis.
The stipulation with respect to Gregory's basis, however, appears to
contain a typographical error. The corrected calculation indicates
that Gregory actually had a basis on Dec. 31, 1987, of $ 33,250
instead of $ 32,250, the stipulated number.↩
5. Because no deficiency has been asserted for the 1993 taxable year, we may not determine an overpayment or underpayment of tax for that taxable year. Sec. 6214(b);
6. Deborah has conceded that the distributions received during 1994 and 1995 are includable in her income as determined by respondent.↩
7. Losses in excess of basis may be carried forward to any subsequent year in which a shareholder has basis in the S corporation's stock or debt.
8. Deborah argued in connection with the 91850 loan that she contributed or loaned $ 75,000 to Christopher for improvements to the warehouse and that her transfer of funds shows she was a co-owner of the warehouse. As discussed supra, however, ownership is not controlling here. Moreover, Deborah has not argued or proven that she is entitled to adjust her basis for this amount in any event. She offered no documentation of her $ 75,000 transfer of funds, nor did she prove that the funds went to Cox Tomato. We are not required to accept a taxpayer's self-serving testimony as evidence, particularly in the absence of corroborating evidence.
9. Christopher testified that he tried to find his records for 1993 and 1994 but was not able to do so. He also tried to get records from UMB Bank (formerly the Oklahoma Bank), but the bank did not retain records for more than 5 years.↩
10. Christopher asserts that he is entitled to increase his basis in Cox Tomato to reflect the $ 70,000 loan (the 92107 loan) and an additional $ 66,000 loan that he obtained in 1995. We decline to decide whether these loans increase Christopher's basis, since Christopher has not filed a petition with respect to any year after 1994.↩
11. Christopher may still have an underpayment because of his concessions regarding other adjustments.↩
john-alford-theo-v-anderson-robert-g-brown-norman-cross-jr-jg , 800 F.2d 987 ( 1986 )
Lone Manor Farms, Inc. v. Commissioner , 61 T.C. 436 ( 1974 )
Homer Z. Goatcher, and Margaret E. Goatcher, Husband and ... , 944 F.2d 747 ( 1991 )
estate-of-daniel-leavitt-deceased-charles-d-fox-iii-estate-of-evelyn , 875 F.2d 420 ( 1989 )
Prashker v. Commissioner , 59 T.C. 172 ( 1972 )