Sam H. Patton v. Commissioner

116 T.C. No. 17UNITED STATES TAX COURT
SAM H. PATTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16428-99. Filed April 13, 2001.
For 1995, P elected, under sec. 179, I.R.C., to
expense a depreciable asset. R examined P’s 1995
Federal income tax return and reclassified as
depreciable three assets that P had originally
classified as “materials and supplies”. Following R’s
reclassification, P sought R’s consent to expense the
three reclassified assets under sec. 179, I.R.C. P was
unable to revoke (modify or change) his election
without R’s consent. R refused to give P consent to
revoke (modify) his original election.
Held: R’s refusal to consent, considering the
facts in this case, was not an abuse of discretion.
Hugh T. Echols, Sr., for petitioner.
Gordon P. Sanz, for respondent.
- 2 -
OPINION1
GERBER, Judge: Respondent determined a deficiency in
petitioner’s 1995 Federal income tax of $26,526, a penalty
pursuant to section 6662(a)2 of $5,305, and a late-filing
addition to tax pursuant to section 6651(a)(1) of $5,305. After
concessions,3 the issue remaining for our consideration is
whether respondent abused his discretion in refusing to grant
consent to petitioner to revoke (modify or change) his 1995
election to expense depreciable business assets under section
179.
Background
Sam H. Patton (petitioner) resided in Houston, Texas, on
October 22, 1999, the date his petition was filed. Petitioner
was self-employed as a welder during the 1995 calendar year.
Petitioner timely filed his 1995 Federal income tax return (1995
return) and reported a business loss in the amount of $36,271 and
1
This case was submitted fully stipulated under Rule 122 of
this Court’s Rules of Practice and Procedure.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable periods under
consideration, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
3
Petitioner concedes that he is liable for the accuracy-
related penalty pursuant to sec. 6662(a) for the 1995 taxable
year. Respondent concedes that petitioner is not liable for an
addition to tax pursuant to sec. 6651(a)(1) for the 1995 taxable
year. Several other agreements and concessions made by the
parties in the stipulation of facts are accepted and should be
reflected in the final disposition of this case.
- 3 -
a total loss of $38,829. As part of the 1995 return, petitioner
elected to expense a plasma torch under section 179 in the amount
of $4,100. At the time petitioner filed his 1995 return, he was
unable to deduct the $4,100 section 179 expense because of the
reported business loss.
In connection with the examination of petitioner’s 1995
return, respondent reconstructed petitioner’s income by means of
a bank deposit analysis. The analysis resulted in respondent’s
determination that petitioner failed to report $135,638 of gross
receipts from the welding business on Schedule C. Petitioner
reduced income by classifying as “materials and supplies” the
following items: (1) Miller 450 amp reach; (2) extended reach
feeder; and (3) Webb turning roller. Respondent determined that
these were capital assets that should have been depreciated as
tangible business property as follows:
Elected Date placed Cost recovery
Item cost into service period
(1) Miller 450 amp reach $7,500 Feb. 1995 5 years
(2) Extended reach feeder 3,200 Aug. 1995 7 years
(3) Webb turning roller 2,700 Apr. 1995 5 years
As a result of respondent’s determinations, petitioner’s
welding business would have a profit in excess of $17,500 instead
of a loss. Petitioner sought respondent’s consent to revoke,
amend, or modify his section 179 election so as to expense the
three assets respondent determined were depreciable. Respondent
denied petitioner’s request to modify his original section 179
- 4 -
election to include the three assets that were recharacterized as
depreciable.
Discussion
Petitioner made a section 179 election, in conjunction with
his original 1995 return, to expense the cost of a depreciable
business asset. The expense could not be utilized in the 1995
year because the asset was used in a business activity that
reported a loss for the 1995 year. See sec. 179(b)(3)(A). After
examination, respondent reclassified three assets as depreciable
business assets and made other adjustments, which collectively
resulted in 1995 taxable income for petitioner’s business. For
the 1995 tax year, petitioner had classified the three assets as
“materials” or “supplies” and reduced income by their cost. In
response to respondent’s determination, petitioner sought
respondent’s consent to modify his original section 179 election
by adding the three reclassified depreciable business assets.
With respondent’s consent, petitioner would be able to offset the
profit determined by respondent. Respondent declined
petitioner’s request for consent to revoke or modify the original
election. Petitioner contends that it was respondent’s
reclassification of the assets that triggered the availability or
possibility of treating them as section 179 expenses and that he
should be entitled to add those assets to his election.
- 5 -
Section 179(a) generally allows a taxpayer to elect to treat
the cost of section 179 property as a current expense in the year
the property is placed in service, within certain dollar
limitations.4 See sec. 179(b). The election must specify the
items of section 179 property to which the election applies and
the portion of the cost of each item which is to be taken into
account under section 179(a). See sec. 179(c)(1)(A); sec. 1.179-
5(a)(1) and (2), Income Tax Regs. Moreover, a section 179
election must be made on the taxpayer’s first income tax return
(whether or not the return is timely) or on an amended return
filed within the time prescribed by law (including extensions)
for filing the original return for such year. See Genck v.
Commissioner, T.C. Memo. 1998-105; sec. 179(c)(1)(B); sec 1.179-
5(a), Income Tax Regs. An election made under section 179 and
any specifications contained in such election may not be revoked
(modified or changed) without the Secretary’s consent. See sec.
179(c)(2); King v. Commissioner, T.C. Memo. 1990-548.
Petitioner argues that respondent’s refusal to consent to
petitioner’s request to revoke or modify his election so as to
include the recharacterized assets is contrary to the spirit of
4
The parties agree that the assets would have qualified as
sec. 179 property if petitioner had made an election with respect
to them on his original 1995 return. The parties also agree that
petitioner had sufficient income from the welding business to
have deducted $17,500, the maximum amount allowable under sec.
179 for the 1995 tax year.
- 6 -
section 179. Petitioner also argues that his failure to amend
his return and make the election with respect to the three assets
was due to circumstances beyond his control; i.e., petitioner was
not aware that the three assets would qualify under section 179
until respondent had reclassified them as depreciable business
assets. Petitioner contends that respondent’s denial is, in
these circumstances, inequitable. Respondent argues that
petitioner is bound by his original section 179 expense election
and limited to $4,100 as shown on petitioner’s original 1995
Federal income tax return. We agree with respondent.
Petitioner perceives that his dilemma was caused by
respondent’s actions and by timing. Petitioner points out that
it was respondent’s determination, after the period within which
petitioner could make a timely election, that necessitated
petitioner’s request for consent to revoke. Petitioner, in
arguing that it is inequitable for respondent to deny the request
for revocation (addition of the three assets), in essence,
questions whether respondent’s refusal was an abuse of
discretion. This is the first instance where we have considered
whether respondent’s refusal to grant a consent to revoke an
election under section 179 was an abuse of discretion.
Section 179(c)(2) provides that “Any election made under
this section, and any specification contained in any such
election, may not be revoked except with the consent of the
- 7 -
Secretary.” The abuse of discretion question in the section 179
setting is similar to the questions that arise under section
446(e), which also requires a taxpayer to obtain the Secretary’s
consent before changing a method of accounting. Under both
sections a formal request is to be made for consent to
revoke/change an election/method of accounting. See sec. 1.179-
5(b), Income Tax Regs.
Respondent is required to follow the statute and abide by
regulations reasonably based on the statute, and failure to do so
will amount to an abuse of discretion. Cf. Lansons, Inc. v.
Commissioner, 622 F.2d 774, 776 (5th Cir. 1980), affg. 69 T.C.
773 (1978); Buzzetta Constr. Corp. v. Commissioner, 92 T.C. 641,
647 (1989). In reviewing the Commissioner’s discretionary
administrative acts we are not empowered to substitute our
judgment for that of the Commissioner. “The exercise of
discretionary power will not be disturbed unless the Commissioner
has abused his discretion, i.e., his determination is
unreasonable, arbitrary, or capricious.” Buzzetta Constr. Corp.
v. Commissioner, supra at 648. The question of abuse of
discretion is factual, and the burden of showing abuse is greater
than a mere preponderance of evidence. See Estate of Gardner v.
Commissioner, 82 T.C. 989, 1000 (1984); Oakton Distribs., Inc. v.
Commissioner, 73 T.C. 182, 188 (1979).
- 8 -
Petitioner contends that respondent was unreasonable in not
giving consent because, as petitioner further contends,
respondent was the catalyst for petitioner’s need to modify
(revoke) his section 179 election. Petitioner’s
characterization, however, ignores significant factual
predicates. First, petitioner, in reporting for his 1995 tax
years, classified the three assets as materials and supplies so
as to reduce income by the assets’ cost in the year of
acquisition. For the 1995 year, petitioner reported a loss in
the business activity in which the assets were used.
Accordingly, petitioner could not, under section 179, expense
rather than depreciate those assets. See sec. 179(b)(3). That
appears to be the reason why petitioner attempted to classify and
report depreciable assets as “materials” or “supplies” and to
reduce income by the entire cost of the asset. Petitioner does
not argue that respondent’s classification of the three assets as
depreciable property was incorrect or in error. Instead,
petitioner wants to “capitalize” on his initial misclassification
by reducing taxable income caused by the unreported receipts
discovered by respondent. In this setting, we do not see
respondent as precipitating petitioner’s request for consent to
revoke. Instead it was petitioner’s mischaracterization that
precipitated the need for change.
- 9 -
Finally, neither the statute nor the regulations permit
petitioner to revoke (modify) his original election without the
Secretary’s consent. In that regard, petitioner does not argue
and has not shown that the Secretary’s regulations are
unreasonable or that they do not comport with congressional
intent. Section 1.179-5(b), Income Tax Regs., provides that the
Commissioner’s consent to revoke an election “will be granted
only in extraordinary circumstances.” Legally and factually,
petitioner accepts that his attempt to change the election is
untimely. We are cognizant of the fact that petitioner’s
circumstances are of his own making. His need to revoke (modify)
his section 179 election only arose after respondent uncovered
petitioner’s failure to report all of his income and his
misclassification of the very assets for which section 179
treatment is sought. Accordingly, we hold that respondent did
not abuse his discretion in refusing to consent to petitioner’s
request to revoke (modify) the 1995 election under section 179.
To reflect the foregoing and due to concessions by the
parties,
Decision will be entered
under Rule 155.