Lockett v. Comm'r

T.C. Memo. 2008-5
UNITED STATES TAX COURT
CURTIS G. LOCKETT AND EDNA L. LOCKETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10374-05. Filed January 14, 2008.
Curtis G. Lockett and Edna Lockett, pro sese.
William J. Gregg, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: Respondent determined deficiencies in
petitioners’ Federal income tax of $3,049, $32,675, and $2,581
for taxable years 2001, 2002, and 2003, respectively. The issue
for decision is whether respondent correctly determined the
amounts of petitioners’ deductions for these years. Unless
otherwise indicated, all Rule references are to the Tax Court
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Rules of Practice and Procedure, and all section references are
to the Internal Revenue Code in effect for the years in issue.
Background
When they petitioned the Court, petitioners resided in
Florida.
Petitioners filed joint Federal income tax returns for the
years at issue. In the notice of deficiency, respondent
disallowed the following amounts of deductions that petitioners
claimed on their returns:1
2001 2002 2003
Itemized deductions $480,776 $12,419 $26,015
Business expenses 61,632 1,065,543 64,931
Theft/destruction of 36,000 1,500,000 --
property losses
Moving expenses -– 41,952 --
Petitioners timely petitioned this Court. At the time of
trial, the parties had entered into no stipulations, contrary to
Rule 91(a) and the Court’s standing pretrial order. Petitioners
also failed to comply with the Court’s order, dated May 8, 2006,
granting respondent’s motions to compel production of documents
and to compel responses to interrogatories. The case was
1
In the notice of deficiency, respondent also determined
that petitioners had unreported dividend income of $113 and $248
for 2001 and 2003, respectively, and unreported interest income
of $16 for 2002. Respondent also determined that petitioners
owed $30 additional tax for the early distribution of retirement
income pursuant to sec. 72(t). Petitioners have not assigned
error to these determinations either in their pleadings or at
trial. Consequently, we sustain respondent’s determinations as
to these items.
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submitted on the basis of a sparse record consisting of
petitioner husband’s testimony and limited documentary evidence.
Discussion
A. In General
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
to prove that the determinations are in error. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).2 Deductions are a
matter of legislative grace, and a taxpayer must prove
entitlement to claimed deductions. Rule 142(a)(1); INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). The taxpayer must keep
sufficient records to substantiate any deductions claimed. Sec.
6001. In the event that a taxpayer establishes a deductible
expense but is unable to substantiate the precise amount, the
Court may approximate the deductible amount, but only if the
taxpayer presents sufficient evidence to establish a rational
basis for making the estimate. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930).
B. Casualty and Theft Losses
Petitioners challenge respondent’s disallowance of various
deductions they have claimed for casualty and theft losses.
2
Petitioners have not alleged and the record does not
support a conclusion that the burden of proof is shifted to
respondent pursuant to sec. 7491(a).
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Section 165(a) allows as a deduction “any loss sustained during
the taxable year and not compensated for by insurance or
otherwise.” For individuals, the deduction is available only
for: (1) Losses incurred in a trade or business; (2) losses
incurred in transactions entered into for profit; or (3) losses
of property not connected with a trade or business or with a
transaction entered into for profit, if such losses arise from
“fire, storm, shipwreck, or other casualty, or from theft.” Sec.
165(c).
The amount of a casualty or theft loss is generally limited
to the lesser of the property’s reduction in fair market value or
the property’s adjusted tax basis. Secs. 1.165-7(b)(1) and
1.165-8(c), Income Tax Regs. Petitioners bear the burden of
proving both the occurrence of a casualty or theft within the
meaning of section 165 and the amount of the loss. See Rule
142(a); Elliott v. Commissioner, 40 T.C. 304, 311 (1963).
A casualty loss deduction under section 165(a) is allowed
only for the taxable year in which the loss was sustained. Sec.
1.165-7(a)(1), Income Tax Regs. If the taxpayer has a reasonable
prospect for recovering the loss (for example, through insurance
or a lawsuit), no portion of the loss is treated as being
sustained until it can be ascertained with reasonable certainty
that the taxpayer will not receive reimbursement. Sec. 1.165-
1(d)(2), Income Tax Regs. A taxpayer has a reasonable prospect
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for recovery if there is a bona fide claim for recoupment and a
substantial possibility that the claim will be decided in the
taxpayer’s favor. Ramsay Scarlett & Co. v. Commissioner, 61 T.C.
795, 811 (1974), affd. 521 F.2d 786 (4th Cir. 1975).
1. Claimed Destruction of Home and Illegal Foreclosure
Petitioners assign error to respondent’s disallowance of
$467,900 of casualty and theft losses that were included among
the $480,776 total itemized deductions that petitioners claimed
on their 2001 Federal income tax return.3 Petitioners contend
that the disputed $467,900 of casualty and theft losses arose, in
undifferentiated fashion, from the burning of their house in 1994
and from an illegal foreclosure action in 2001, apparently with
respect to the property where the destroyed house formerly stood.
Petitioners contend that although their house was destroyed in
1994, they claimed the casualty loss in 2001 because it was then
that litigation against an insurance company to recover the value
of the home proved unsuccessful.
The record is far from clear about the circumstances of the
alleged destruction of petitioners’ house and the litigation to
3
Petitioners have not otherwise assigned error to
respondent’s disallowance of the itemized deductions that they
claimed for 2001, 2002, and 2003, other than the $467,900 of
casualty and theft losses claimed on their 2001 Federal income
tax return. We deem petitioners to have conceded respondent’s
determinations with respect to all of their itemized deductions
other than the $467,900 item. In any event, petitioners have
failed to substantiate any of these itemized deductions.
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recover the value of the house. Even if we were to assume,
however, for purposes of argument, that 2001 was the proper year
for petitioners to claim a deduction for the alleged destruction
of their house in 1994, petitioners have failed to prove the fair
market value of the house or to produce evidence that would allow
us to reasonably estimate its value.4 Furthermore, petitioners
have failed to prove their adjusted basis in the house, thereby
4
Petitioners’ explanations as to their lack of supporting
documentation are unconvincing and unsatisfactory. At trial, in
response to an inquiry as to whether he had evidence as to the
amount of unreimbursed loss, petitioner husband stated
incongruously: “Yes, sir. I don’t have that. I don’t know if I
have it or not.” Petitioner husband testified that at least some
of the relevant documents were in a trailer that “was stolen by
two people who worked for the government.” Petitioner husband
initially testified that petitioners “didn’t have the money to
get the trailer back.” Subsequently, petitioner husband
testified, inconsistently: “even after we got the trailer, we
didn’t have, we couldn’t move it. We had no way to move the
trailer from off the person’s property to where we could go
through it.” Petitioner husband also testified that although
petitioners had additional records in a “storage facility” with
“files all the way to the door”, they were unable to open the
door of the storage facility to go through the files.
Petitioner husband attempted to establish the value of the
house by testifying that certain bids, ranging from $200,000 to
$245,000, were received to replace the house. The only
documentary evidence offered in support of this testimony,
however, was a brief prepared by petitioners in connection with
an Alabama State court proceeding in 2002. Petitioners otherwise
submitted no documentary evidence to show that such bids were
ever received or that any appraisal was ever made. Petitioner
husband’s self-serving statements in this proceeding and
petitioners’ statements in briefs purportedly filed in other
court proceedings are insufficient to establish the property’s
reduction in fair market value. See Ganas v. Commissioner, T.C.
Memo. 1990-143, affd. without published opinion 943 F.2d 1317
(11th Cir. 1991); Marcus v. Commissioner, T.C. Memo. 1988-3.
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precluding the allowance of any casualty loss deduction with
respect to their house. See Zmuda v. Commissioner, 79 T.C. 714,
727-728 (1982), affd. 731 F.2d 1417 (9th Cir. 1984); Millsap v.
Commissioner, 46 T.C. 751, 760 (1966), affd. 387 F.2d 420 (8th
Cir. 1968).5
Petitioners contend that additional losses of an
indeterminate amount arose from an illegal foreclosure action in
2001, which they characterize as a theft. This Court has
previously questioned whether an illegal foreclosure action is a
theft for purposes of section 165(c). See Johnson v.
Commissioner, T.C. Memo. 2001-97. We need not decide this issue,
however, because petitioners have failed to show that the alleged
foreclosure action was illegal and have also failed to
substantiate the amount of the alleged losses. Accordingly, we
sustain respondent’s determination.
2. Claimed Loss of Computer Equipment
On their 2001 Federal income tax return, petitioners claimed
negative $36,000 as “Other gains or (losses).” On their 2002
Federal income tax return, petitioners claimed negative $1.5
million as “Other income.” Petitioners claim that these amounts
represent losses arising from the theft and destruction of a
5
Petitioner husband testified, without reference to any
supporting evidence, that petitioners paid $115,000 for the
property. Petitioners otherwise have offered no evidence to
establish the adjusted basis of their house.
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computer system and possibly other personal property. Respondent
disallowed these claimed losses for lack of substantiation.6
At trial, petitioner husband produced photographs showing
personal computer equipment and other items of personal property
piled into the back of a pickup truck and lying along a roadside.
Petitioner husband contends that “the government came in with no
legal basis and just took everything and put it out on the side
of the road” because he had refused to turn over research that
the Government wanted. Petitioner husband’s contention, as best
we understand it, is that his personal computer was worth $1.5
million because of the value of technology that he had created
and installed on the computer.
Petitioners have failed to prove that a theft occurred.
Moreover, petitioners have neither established the fair market
value of the property alleged to have been stolen nor provided
sufficient evidence to allow the Court to estimate any of the
property’s value.7 See sec. 1.165-8(c), Income Tax Regs.
6
In the notice of deficiency, in showing his income tax
examination changes, respondent listed the disallowance of these
losses under “Adjustments to Income” as “Other Income”. The
accompanying explanation noted that these adjustments were in
disallowance of petitioners’ claimed losses of these amounts. In
their petition, petitioners attempt to recharacterize
respondent’s disallowance of these claimed losses as erroneous
determinations of unreported income and assign error on that
basis. Petitioners’ contentions are without merit.
7
Petitioners allege that a third party was prepared to pay
$1.5 million for this equipment, presumably before its alleged
(continued...)
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Furthermore, petitioners have not established their adjusted
basis in the property that they allege was stolen. See id. We
sustain respondent’s disallowance of petitioners’ claimed $36,000
theft loss for 2001 and their claimed $1.5 million theft loss for
2002.
C. Moving Expenses
On their 2002 Federal income tax return, petitioners claimed
a $41,952 deduction for moving expenses. Petitioners argue that
they are entitled to the deduction because in 2002 they moved
from Mobile, Alabama, to Florida.
Generally, a taxpayer may deduct moving expenses paid or
incurred during a year in connection with beginning qualifying
work at a new location. Sec. 217(a). Petitioners have failed to
substantiate the claimed moving expenses or to show that the
requirements of section 217(a) have been met.
D. Business Expenses
Respondent disallowed petitioners’ claimed business expenses
for all 3 years: $61,632 in 2001; $1,065,543 in 2002; and
$64,931 in 2003. At trial, petitioner husband contended that $1
million of the claimed business losses in 2002 was due to “bad
7
(...continued)
destruction. Petitioners have not, however, identified this
third party and have produced no other evidence of such an offer.
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debts” but provided no supporting evidence. Petitioners have
failed to substantiate these claimed business expense deductions.
E. Conclusion
Petitioners have failed to meet their burden to prove that
respondent’s determinations were in error.
In the light of the foregoing,
An appropriate order and
decision will be entered.