Coburn v. Comm'r

MICHAEL A. COBURN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Coburn v. Comm'r

Docket No. 15293-11

United States Tax Court

T.C. Memo 2014-113; 2014 Tax Ct. Memo LEXIS 114; 107 T.C.M. 1551;

June 10, 2014, Filed

---

Decision will be entered under Rule 155.

">*114 Howard Scott Fisher, for petitioner.

Whitney N. Moore, James C. Hughes, and Catherine G. Chang, for respondent.

BUCH, Judge.

---

BUCH

MEMORANDUM FINDINGS OF FACT AND OPINION

BUCH, Judge: Respondent issued a notice of deficiency determining the following deficiencies, additions to tax, and penalties with respect to Michael Coburn's Federal income tax for years 2002 and 2003:^*114

Year	Deficiency	Addition to tax sec. 6651(a)(1)	Penalty sec. 6662(a)
2002	$74,362	$18,486	$14,872
2003	205,657	51,335	41,131

After concessions by both parties, the issues remaining for consideration are whether Mr. Coburn is entitled to a net operating loss carryforward for the 2003 tax year and whether he is liable for the additions to tax and penalties. Mr. Coburn failed to prove that he is entitled to the net operating loss carryforward. Mr. Coburn is also liable for the additions to tax and penalties.

FINDINGS OF FACT

Mr. Coburn is a medical doctor specializing in physical medicine and">*115 rehabilitation. In 1985 he moved to California and started his own private practice focusing on workers' compensation work injuries. Around 1999 and 2000 Mr. Coburn changed his area of practice and began concentrating on pain management and electrodiagnositic studies. This practice was named Netwave Neurodiagnostics and Pain Management (Netwave). As Netwave evolved, Mr. Coburn hired more employees, and he entered into agreements with area doctors to see patients at their offices. Because of these extra costs, Netwave operated at a loss and Mr. Coburn used his personal savings to pay Netwave's expenses. Mr. Coburn did not personally keep any of the financial records for the business and instead relied on staff members to handle the accounting matters. Mr. Coburn did not employ a bookkeeper or an accountant for the business during the years in issue.

Mr. Coburn fell behind on filing his tax returns. Mr. Coburn started working with an enrolled agent at an accounting firm to file his past due returns. The enrolled agent completed Mr. Coburn's returns by comparing statements made during discussions with Mr. Coburn about his finances to the information provided. Mr. Coburn filed Forms 1040,">*116 U.S. Individual Income Tax Return, for 2002 and 2003 in 2008. Attached to each return was a Schedule C, Profit or Loss From Business, identifying his principal business as occupational medical diagnostics for Netwave.

Respondent examined Mr. Coburn's 2002 and 2003 returns. As part of the examination the revenue agent requested substantiation for all of Mr. Coburn's claimed deductions. Mr. Coburn and the enrolled agent spoke with the revenue agent on a few occasions. At the conclusion of the audit, the revenue agent told the enrolled agent that she was disallowing many of the deductions that Mr. Coburn claimed on his 2002 and 2003 returns, including the net operating loss carryforward he claimed on his 2003 return.

Respondent issued a notice of deficiency on March 30, 2011, reflecting adjustments to the Schedule C deductions and making other computational adjustments for the 2002 and 2003 taxable years. In addition respondent determined additions to tax under section 6651(a)(1) as a result of the untimely filing of Mr. Coburn's 2002 and 2003 returns and an accuracy-related penalty under section 6662(a) for each year in issue.

Mr. Coburn, residing in California, timely petitioned the Court. This case was calendared for">*117 trial during the Court's trial session in Los Angeles, California. At the time of trial, the parties entered into a stipulation of settled issues. Respondent conceded portions of the disallowed Schedule C deductions, and Mr. Coburn conceded that he was not entitled to any additional Schedule C deductions beyond those respondent allowed. Accordingly, the only issues remaining are whether Mr. Coburn is entitled to the net operating loss carryforward claimed on his 2003 return, whether Mr. Coburn is liable for additions to tax under section 6651(a)(1), and whether Mr. Coburn is liable for accuracy-related penalties under section 6662(a).

OPINIONI. Burden of Proof

The Commissioner's determinations in the notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving otherwise.2014 Tax Ct. Memo LEXIS 114">*118 claimed deductions, the Commissioner's determination to deny them is not arbitrary or unreasonable.*118 ascertaining the taxpayer's liability, the burden may shift to the Commissioner under section 7491(a). Credible evidence is "'evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted'".2014 Tax Ct. Memo LEXIS 114">*119 the losses. Accordingly, the burden does not shift to respondent because Mr. Coburn has not complied with the requirements of section 7491(a)(2).

II. Net Operating Loss Carryforward

Income tax deductions are a matter of legislative grace, and the burden of proving entitlement to any claimed deduction rests on the taxpayer.Section 172(a) allows for a net operating loss (NOL) deduction. An NOL is the excess of the allowable deductions over gross income, subject to specified modifications.*120 completely absorbed, it may be carried forward up to 20 years.section 172(b)(3), a taxpayer may elect to waive the carryback period and carry the entire loss forward. However, the election must be made by the due date (including extensions) of the return">*120 for the year in which the NOL arose and for which the election is to be in effect.*121 Mr. Coburn did not provide any evidence other than his and his enrolled agent's vague testimony to substantiate the NOL from 2001. We find that he failed to establish that the portion of the NOL that he claimed for 2003 arose in 2001.

As part of the stipulation of settled issues, respondent conceded that Mr. Coburn is entitled to portions of the disallowed deductions for 2002. Mr. Coburn conceded that he is not entitled to any additional">*121 amounts of the disallowed deductions beyond respondent's concessions. After the parties' concessions, Mr. Coburn no longer has a loss on his 2002 Schedule C. Therefore, he will not have an NOL available from 2002 to carry forward to his 2003 return.

Accordingly, respondent's determinations regarding the NOL carryforward are sustained.

III. Section 6651(a)(1) Addition to Tax

Section 6651(a)(1) imposes an addition to tax for failing to timely file a Federal income tax return, unless it is shown that the failure was due to reasonable cause and not due to willful neglect. Respondent bears the burden of production with respect to any penalty or addition to tax.section 6651(a)(1) for each of the 2002 and 2003 taxable years. Mr. Coburn stipulated that he filed his 2002 and 2003 returns in 2008. He did not provide evidence of any defenses.

Accordingly, we find that respondent has met his burden of production and Mr. Coburn was not able to prove any defenses. As a result, the additions to tax under section 6651(a)(1) are sustained.

IV. Section 6662(a) Accuracy-Related Penalty

Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty on "any portion of an underpayment of tax required">*122 to be shown on a return" if the underpayment is due to, among other reasons, negligence, disregard of rules or regulations, or any substantial understatement of income tax. As with the section 6651(a) additions, respondent bears the burden of production as to the penalty.*123 The penalty will not apply to any portion of the underpayment for which a taxpayer establishes that he or she had reasonable cause and acted in good faith.*124 In accordance with this opinion, Mr. Coburn's exact underpayment for each">*123 year depends on the Rule 155 computations. If these computations establish a substantial understatement of income tax for any year, respondent has met his burden with respect to that year.section 6662(a) for 2002 and 2003.

V. Conclusion

On the basis of the evidence before us, we find that Mr. Coburn is not entitled to the NOL carryforward for 2003. Further, respondent met his burden of production with respect to the additions to tax and the penalties, and Mr. Coburn failed to meet">*124 his burden to show that the penalties should not apply.

To reflect the foregoing and the concessions of the parties,

Decision will be entered under Rule 155.

---

Footnotes

• 1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the relevant years, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.↩

• 2. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115, 54 S. Ct. 8">54 S. Ct. 8, 78 L. Ed. 212">78 L. Ed. 212, 1933-2 C.B. 112↩ (1933).

• 3. Dunne v. Comm'r, T.C. Memo 2008-63; Hutchinson v. Commissioner, T.C. Memo. 1980-551↩.

• 4. Keogh v. Commissioner, 713 F.2d 496">713 F.2d 496, 713 F.2d 496">501 (9th Cir. 1983), aff'g Davies v. Commissioner, T.C. Memo. 1981-438↩.

• 5. Roberts v. Commissioner, 62 T.C. 834">62 T.C. 834, 62 T.C. 834">835-837 (1974); Taylor v. Comm'r,T.C. Memo 2006-67↩.

• 6. Higbee v. Comm'r, 116 T.C. 438">116 T.C. 438, 116 T.C. 438">442 (2001) (quoting H. R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3 C.B. 947↩, 994-995).

• 7. Sec. 7491(a)(2)↩.

• 8. INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79, 503 U.S. 79">84, 112 S. Ct. 1039">112 S. Ct. 1039, 117 L. Ed. 2d 226">117 L. Ed. 2d 226 (1992); see alsoRule 142(a)↩.

• 9. Sec. 6001↩.

• 10. Cohan v. Comm'r, 39 F.2d 540">39 F.2d 540, 39 F.2d 540">543-544↩ (2d Cir. 1930).

• 11. Vanicek v. Commissioner, 85 T.C. 731">85 T.C. 731, 85 T.C. 731">742-743↩ (1985).

• 12. Sec. 172(c) and (d)↩.

• 13. Sec. 172(b)(1)(A), (H); sec. 1.172-4(b)(1), Income Tax Regs.↩

• 14. Sec. 172(b)(3)↩.

• 15. Keith v. Commissioner, 115 T.C. 605">115 T.C. 605, 115 T.C. 605">621↩ (2000).

• 16. Wilkinson v. Commissioner, 71 T.C. 633">71 T.C. 633, 71 T.C. 633">639↩ (1979).

• 17. Sec. 6214(b)↩.

• 18. Seesec. 7491(c)↩.

• 19. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 447↩.

• 20. Sec. 7491(c)↩.

• 21. Sec. 6664(c)(1)↩.

• 22. Sec. 6662(c)↩.

• 23. Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 380 F.2d 499">506 (5th Cir. 1967), aff'g in part, remanding in part43 T.C. 168">43 T.C. 168 (1964), andT.C. Memo. 1964-299↩).

• 24. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 449; sec. 1.6662-3(b)(1), Income Tax Regs.↩

• 25. Sec. 6662(d)(1)(A)↩.

• 26. See Olagunju v. Comm'r, T.C. Memo 2012-119; Jarman v. Comm'r, T.C. Memo 2010-285↩.

• 27. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43">115 T.C. 43, 115 T.C. 43">98 (2000), aff'd, 229 F.3d 221">229 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs.↩