DocketNumber： No. 19813-03
Citation Numbers： 89 T.C.M. 1518, 2005 Tax Ct. Memo LEXIS 159, 2005 T.C. Memo. 160
Judges： "Chiechi, Carolyn P."
Filed Date： 6/29/2005
Status： Non-Precedential
Modified Date： 4/18/2021
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following deficiency in, and additions to, petitioner's Federal income tax (tax):
| Additions to Tax | ||||
| Year | Deficiency | Sec. 6651(a)(1)Sec. 6651(a)(2) | Sec. 6654(a) | |
| 2000 | $103,811 | $21,728 .92 | $12,071 .62 | $5,150.77 |
The issues remaining for decision are:
(1) Is petitioner entitled to deduct for 2000 a theft loss under
(2) Is petitioner liable for 2000 for the addition to tax under
(3) Is petitioner liable for 2000 for the addition to tax under
FINDINGS OF FACT
Most of the facts have been stipulated by the parties and are so found.
At the time petitioner filed the petition in this case, he resided in Annapolis, Maryland.
On May 24, 2000, petitioner and June Davis (Ms. Davis), his wife, executed a contract (custom house contract) with Mona Builders & Developers, Inc., (Mona Builders). That contract provided in pertinent part:
ARTICLE ONE -- THE WORK MONA BUILDERS & DEVELOPERS, INC. [Mona Builders] shall perform all work required by the Contract Documents for the complete construction of the home described in the plans attached hereto and to be built on Lot #30 Perder Lane, South River Colony, Anne Arundel County, Maryland. The lot is not part of this contract. * * * * * * * ARTICLE FOUR -- CONTRACT SUM The Owner [petitioner and Ms. Davis] shall pay to MONA BUILDERS & DEVELOPERS, INC. for the performance of the work, subject to additions and deductions by change order as provided in the General Conditions, in current*161 funds, the sum of $ 935,000.00 (Nine Hundred Thirty Five Thousand Dollars). ARTICLE FIVE -- PAYMENT The Contract sum will be paid as follows: 1. Upon ratification of Contract. $ 15,000.00 2. Upon installation of foundation, 1st 159,240.00 floor joists and decking installed. 3. Upon installation of exterior walls, 184,000.00 roof sheathed and interior partitions framed. 4. Upon rough-ins of plumbing, mechani- 230,000.00 cal and electric, roof shingles in stalled and installation of windows and doors. 5. Upon drywall being finished, exterior 230,000.00 walls completed, and house trimmed out. 6. Upon plumbing, electrical, mechanical 116,760.00 ixtures installed; kitchen cabinets installed; flooring installed; paint ing completed and approval by Anne Arundel County inspector. TOTAL $ *162 935,000.00 MONA BUILDERS & DEVELOPERS, INC. will adhere to the lending institution's draw schedule; MONA BUILDERS & DEVELOPERS, INC. will be a named party on each draw check. The above is our standard draw schedule. We would prefer 8 to 10 draw payments due to the amount of the contract. ARTICLE SIX -- CHANGE ORDERS 1) Every custom home has a few change orders. As the project evolves, you will probably want to make some changes. That's one of the great opportunities you have by custom building. The Project Manager is available to discuss any changes you consider. On average, change orders amount to 49% of the Proposal Price. We suggest you plan accordingly. * * * * * * * 6) Please note, a fee of 15% for overhead and profit will be added to the actual and/or estimated cost for all change orders. The fee is waived for change orders that result in a credit. [Handwritten addition.] Upon substantial completion of the Contract, all amounts due to Owner as a credit shall be *163 increased by 10% for reimbursement to Owner of overhead and profit previously included in the contract sum. * * * * * * * ARTICLE ELEVEN -- MONA BUILDERS & DEVELOPERS, INC. 11.1 MONA BUILDERS & DEVELOPERS, INC. shall supervise and direct the Work, using best skill and attention. MONA BUILDERS & DEVELOPERS, INC., shall be solely responsible for all construction means, methods, techniques, sequences and procedures for coordinating all portions of the Work under the Contract. * * * * * * * 11.3 MONA BUILDERS & DEVELOPERS, INC. shall at all times enforce strict discipline and good order among employees, and shall not employ on the Work any unfit person or anyone not skilled in the task assigned to him. * * * * * * * ARTICLE SEVENTEEN -- PAYMENTS 17.1 Payments shall be made as provided in Article five of this agreement. 17.2 Payments may be withheld on account of (1) defective*164 Work not remedied, (2) claims filed, (3) failure of MONA BUILDERS & DEVELOPERS, INC. to make payments properly to Subcontractors for labor, materials, or equipment or (4) damage to another contractor. 17.3 The making of final payment shall constitute a waiver of all claims by the Owner except these arising from (1) unsettled liens, (2) faulty or defective Work discovered after Substantial Completion, (3) failure of the Work to comply with the requirements of the Contract Documents and code or (4) terms of any special guarantees required by the Contract Documents. The acceptance of final payment shall constitute a waiver of all claims by MONA BUILDERS & DEVELOPERS, INC. except these previously made in writing and still unsettled. * * * * * * * ARTICLE NINETEEN -- MONA BUILDERS & DEVELOPERS, INC. LIABILITY INSURANCE MONA BUILDERS & DEVELOPERS, INC. shall purchase and maintain such insurance as will protect from claims under workman's compensation acts and other employee benefit*165 acts, from claims for damages because of bodily injury, including death, and from claims for damages to property which may arise out of or result from MONA BUILDERS & DEVELOPERS, INC. operations under this Contract. * * * * * * * ARTICLE TWENTY TWO -- CHANGES IN THE CONTRACT 22.1 The Purchaser [petitioner and Ms. Davis] without invalidating the Contract may order Changes in the Work consisting of additions, deletions, or modifications, the Contract Sum and the Contract Time being adjusted accordingly. All such Changes in the Work shall be authorized by written Change Order signed by the Purchaser and Builder. 22.2 The Contract Sum and Contract Time may be changed only by Change Order. 22.3 The cost or credit to the Purchaser from a Change in the Work shall be determined by mutual agreement. ARTICLE TWENTY THREE -- CORRECTION OF WORK % MONA BUILDERS & DEVELOPERS, INC. shall correct any Work that fails to conform to the requirements of the Contract Documents *166 where such failure to conform appears during the progress of the Work, and shall remedy any defects due to faulty materials, equipment or workmanship which appear within a period of one year from the Date of Substantial Completion of the Contract or within such longer period of time as may be prescribed by law or by the terms of any applicable special guarantee required by the Contract Documents. The provisions of the Article Twenty Three apply to Work done by Subcontractors as well as to Work done by direct employees of MONA BUILDERS & DEVELOPERS, INC. * * * * * * * ARTICLE TWENTY FIVE -- TERMINATION BY THE PURCHASER If MONA BUILDERS & DEVELOPERS, INC. defaults or neglects to carry out the Work in accordance with the Contract Documents or fails to perform any major provisions of the Contract, the Purchaser may, after seven days written notice to MONA BUILDERS & DEVELOPERS, INC., and without prejudice to any other remedy he may have, make good such deficiencies and may deduct the cost thereof*167 from the payment then or thereafter due MONA BUILDERS & DEVELOPERS, INC. or, at his option, may terminate the Contract.
At a time not disclosed by the record after petitioner and Ms. Davis executed the custom house contract, Mona Builders began construction of the house (custom house) described in that contract. Mona Builders obtained certain insurance policies from State Auto Property & Casualty Insurance Company (State Auto) in order to maintain the insurance required by the custom house contract.
The workmanship in constructing the custom house was generally poor. In addition, during construction of the custom house Mona Builders (1) used in certain structural components of that house materials that were inferior to those required by the custom house contract and (2) failed to install certain other required structural components. (We shall refer to the inferior and missing structural components as the structural defects of the custom house.) As a result of the structural defects of the custom house, the custom house was structurally unsound.
On or about August 29, 2001, petitioner and Ms. Davis moved into the custom house. Thereafter, at the request of petitioner and*168 Ms. Davis, Mona Builders continued to perform services in connection with finishing and repairing the custom house. On or about September 25, 2001, Mona Builders stopped work on the custom house.
Sometime after petitioner and Ms. Davis moved into the custom house, petitioner discovered the structural defects of the custom house.
In October 2001, Mona Builders commenced litigation in the Circuit Court for Anne Arundel County, Maryland (Maryland Circuit Court) against petitioner and Ms. Davis with respect to the custom house (custom house litigation) in which it sought payment from them of $ 23,065. In December 2001, petitioner and Ms. Davis filed a counterclaim (custom house litigation counterclaim) in the custom house litigation in which petitioner and Ms. Davis alleged, inter alia, that Mona Builders violated the
On June 7, 2002, petitioner sent a letter (June 7, 2002 letter) by certified mail, return receipt requested, to State Auto. That letter stated in pertinent part:
We are involved in litigation with Mona Builders and Developers, Inc. (Mona), the company that built our house. A*169 copy of our Amended Counter-Complaint is attached. As part of that litigation, we recently discovered serious structural problems with our house. We have been told by our experts that Mona failed to build our house in compliance with the architectural drawings that were part of our agreement with them. At present we do not know the full extent of the problems, nor do we have cost estimates for necessary remedial action. * * * We understand that Mona purchased from the State Auto Insurance Companies a commercial general liability policy, and an excess liability umbrella policy, to cover the construction of our house. The number of those policies is PBP1005193. We do not know whether Mona has notified the State Auto Ins. Companies of the pending litigation and our claims against Mona.
(We shall refer to petitioner's claim to any of the proceeds from the insurance policies that State Auto issued to Mona Builders in connection with the construction of the custom house as petitioner's insurance claim.)
On November 8, 2002, petitioner and Ms. Davis sent a letter (November 8, 2002 letter) *170 to the Maryland Attorney General with respect to Mona Builders and the custom house. That letter stated in pertinent part:
On May 24, 2000, we entered into a Contract with Mona Builders and Developers, Inc. (Mona), for the construction of a custom home on a lot we had previously purchased. The initial Contract price was $ 935,000. With change orders and upgrades, we paid more than $ 1,000,000 for the construction of our residence. We are currently in the midst of a civil suit against Mona. However, in spite of the disclosure requirements of the Custom expended in formal discovery efforts, Mona has yet to disclose the names and addresses of many of the suppliers and subcontractors who worked on our home. * * * * * * * * * * We have been in our house for a little over one year, and are continuing to discover that Mona deviated very significantly and very seriously from the architectural plans we provided, and which were incorporated into our*171 Contract. The house we paid Mona to build was not the house they constructed. Mona's misrepresentations, acts of malfeasance, and deliberate acts of fraud in building our home were, and continue to be, egregious. In summary, Mona deliberately and deceptively, without our knowledge or approval, failed to comply with the plans and specifications agreed to under our Contract. As a result of Mona's deliberate failure to adhere to our construction plans, our house is structurally unsound and unsafe. * * * * * * * * * * Mona's acts of fraud go beyond the substitutions and omissions in the physical construction of our home. Information obtained through our discovery efforts suggest [sic] that Mona may have fraudulently altered a subcontractor's invoice, and may have fraudulently overcharged us for materials and supplies. * * *
On February 3, 2003, State Auto commenced litigation in the Maryland Circuit Court against petitioner and Mona Builders (insurance litigation) in which it sought a declaratory judgment that petitioner's*172 insurance claim was not covered by the insurance policies that State Auto had issued to Mona Builders. At a time not disclosed by the record after February 3, 2003, petitioner and Ms. Davis filed a second amended counterclaim *173 Petitioner did not file a tax return (return) for taxable year 2000. Nor did he file a return for any of the taxable years 1995, 1996, 1997, 1998, and 1999. Between July 25, 2001 and Aug 8, 2001, Garrett Mona, Patrick Mona and Nick Mona intentionally misrepresented their intent to complete work on our [petitioner's and Ms. Davis'] house and repair defective work that existed at that time. As a result of their intentional misrepresentations, we paid an additional $ 120,543.00 to them. We discovered and confirmed the*174 extent of the structural defects between July & Oct 2002. On April 22, 2003, petitioner received a copy of a letter from the Department of Inspection and Permits, Anne Arundel County, in which it voided the certificate of occupancy that it had issued with respect to the custom house. On May 1, 2003, petitioner and Mona Builders entered into a settlement agreement (May 1, 2003 settlement agreement) with respect to the custom house litigation. As part of that settlement agreement, Mona Builders agreed to purchase the custom house from petitioner and Ms. Davis for $ 1,500,000. On May 29, 2003, pursuant to the May 1, 2003 settlement agreement, petitioner and Ms. Davis transferred the custom house to Mona Builders in exchange for $ 1,500,000. On August 20, 2003, respondent issued to petitioner a notice of deficiency (notice) with respect to petitioner's taxable year 2000. In that notice, respondent determined, inter alia, that petitioner is liable for the taxable year at issue for the respective additions to tax under On October 26, 2004, respondent received Form 1040, U.S. Individual Income Tax Return, with respect to petitioner's taxable year*175 2000 (petitioner's Form 1040 for 2000), which respondent did not process as a return. In that form, petitioner, inter alia, claimed a $ 256,975 deduction under On November 1, 2004, a jury awarded petitioner and Ms. Davis $ 524,727 in compensatory damages (insurance litigation verdict) with respect to the insurance litigation counterclaim. The jury found, inter alia, that the property damages that petitioner and Ms. Davis sustained were not fully satisfied by the $ 1,500,000 paid to them pursuant to the May 1, 2003 settlement agreement. As of the time of the trial in this case, the Maryland Circuit Court was considering in the insurance litigation numerous posttrial motions and had not reduced the insurance litigation verdict to final judgment. OPINION We first address As we understand petitioner's position under *177 Respondent counters that petitioner has not introduced credible evidence concerning the factual issues presented under 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. Petitioner relies on his testimony with respect to the factual issues presented under We turn next to whether petitioner is entitled to deduct under A reasonable prospect of recovery exists when the taxpayer has*180 a bona fide claim for recoupment and there is a substantial possibility that such claim will be decided favorably for the taxpayer. Petitioner bears the burden of proving that the alleged custom house theft loss occurred and that the requirements of It is petitioner's position that he is entitled to a deduction under It is respondent's position that petitioner is not entitled to a deduction under In the instant case, the parties agree that the law of Maryland determines whether the actions of Mona Builders with respect to the custom house constituted theft. However, they disagree over whether such actions constituted theft under such law. We need not resolve that disagreement. That is because, assuming arguendo that we were to find that the actions of Mona Builders with respect to the custom house constituted theft under applicable Maryland law, on the instant record, we nonetheless would, and do below, reject petitioner's position that he is entitled to a deduction under With respect to when petitioner discovered the alleged custom house theft loss, petitioner claims that, because of the ongoing nature of Mona Builders' actions that resulted in the alleged custom house theft loss, he became aware of different aspects of that loss at different times. According to petitioner, for purposes of *184 Assuming arguendo that petitioner had carried his burden of establishing that it is appropriate for purposes of In October 2004, by the brick subcontractor was $ 310 per 1,000. * * *
If in the year of the discovery of the loss there exists a claim
for reimbursement with respect to which there is a reasonable
prospect of recovery, then there is no closed and completed
transaction fixed by identifiable events and thus no deductible
loss. * * *
* * * * * * *
* * * Despite asking for them, we received no invoices
certifying the price of the bricks, and the only way we were
ultimately able to obtain those invoices was through the
litigation that we started with Mona Builders over the problems
with the house.
When we received those invoices, they showed that the bricks
were in fact charged that $ 310 per 1,000. [Emphasis added.]
As we understand the foregoing testimony of petitioner, he claims that he became aware of the invoices detailing the price that Mona Builders had paid for the bricks used in the custom house as a result of the discovery that he conducted in connection with the custom house litigation counterclaim. *187 Although the record does not disclose when discovery in the custom house litigation counterclaim began, such discovery could not have begun before*186 petitioner filed that counterclaim in December 2001. On the record before us, we find that petitioner has failed to carry his burden of establishing that he became aware of the alleged brick theft and the alleged humidifier theft in October 2000 or at any time in that year. *188 Assuming arguendo that petitioner had carried his burden of establishing that he discovered the alleged custom house theft loss in 2000, we turn to whether petitioner established the amount of the alleged custom house theft loss which he claims he is entitled to deduct under With respect to the fair market value of the custom house before the alleged custom house theft, petitioner introduced an appraisal report prepared by Robert H. Campbell & Associates, LLC, that was dated October 28, 2002 (October 28, 2002 appraisal report) and that was prepared and provided to petitioner in connection with*189 the custom house litigation counterclaim. That appraisal report did not purport to establish the fair market value of the custom house before the time in October 2000 when petitioner alleges he discovered certain aspects of the alleged custom house theft. Instead, the October 28, 2002 appraisal report purported to determine the diminished value of the custom house as of October 1, 2002. With respect to the adjusted basis of Ms. Davis and petitioner in the custom house, in the November 8, 2002 letter that Ms. Davis and petitioner sent to the Maryland Attorney General, they stated that they paid more than $ 1 million for the custom house. Petitioner failed to introduce any evidence that corroborated that statement. Nor did petitioner introduce any evidence that otherwise established the adjusted basis of Ms. Davis and himself in the custom house (or in any property that was part of the custom house and that was allegedly stolen, including the bricks and humidifiers that were the subject of the alleged brick theft and the alleged humidifier theft). On the record before us, we find that petitioner has failed to carry his burden of establishing the fair market value of the custom house*190 before the time in October 2000 when petitioner alleges he discovered certain aspects of the alleged custom house theft and the adjusted basis of Ms. Davis and petitioner in the custom house (or in any property that was part of the custom house). On that record, we further find that petitioner has failed to carry his burden of establishing the amount of the loss which he claims he is entitled to deduct under Assuming arguendo that petitioner had carried his burden of showing (1) that he discovered the alleged custom house theft loss in 2000 and (2) the amount of the loss which he claims he is entitled to deduct under At trial, petitioner testified that as a result of the discovery that he conducted in connection with the custom house litigation counterclaim*191 he became aware that Mona Builders had only $ 75,000 in assets and was thinly capitalized (Mona Builders' alleged financial condition). Based on that testimony, petitioner argues that Mona Builders was always thinly capitalized and that therefore petitioner never had a reasonable prospect of recovery from Mona Builders of the alleged custom house theft loss. We found petitioner's testimony with respect to Mona Builders' alleged financial condition to be questionable, conclusory, vague, and general. That testimony also appeared to be inconsistent with Mona Builders' ability on May 29, 2003, to purchase the custom house from petitioner and Ms. Davis for $ 1,500,000. Even if we were to accept petitioner's testimony about Mona Builders' alleged financial condition, the argument that petitioner advances based on such testimony assumes that Mona Builders' alleged financial condition requires the conclusion that petitioner did not have a reasonable prospect of recovery of the alleged custom house theft loss. That Mona Builders may have had only $ 75,000 in assets and/or been thinly capitalized does not require the conclusion that petitioner did not have a reasonable prospect of recovery*192 of the alleged custom house theft loss. Assuming arguendo that we were to accept petitioner's testimony regarding Mona Builders' alleged financial condition, on the record before us, we find that petitioner did not carry his burden of establishing that at the end of 2000 he did not have a reasonable prospect of recovery of the alleged custom house theft loss (or any portion thereof, including the alleged brick theft and the alleged humidifier theft) by, for example, withholding future payments to Mona Builders under article seventeen of the custom house contract, requiring Mona Builders to correct its work under article twenty- three of that contract, or terminating the custom house contract under article twenty-five and suing Mona Builders for breach of contract. On that record, we further find that petitioner did not carry his burden of establishing that at the end of 2000 he did not have a reasonable prospect of recovery of the alleged custom house theft loss (or any portion thereof). Based upon our examination of the entire record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled to a deduction under We turn next to whether petitioner is liable for the addition to tax under Respondent must carry the burden of production with respect to the addition to tax under We have found that petitioner did not file a return for taxable year 2000. *194 *195 respondent's burden of production under Petitioner introduced no evidence and advances no argument that his failure to file a return for 2000 was due to reasonable cause, and not willful neglect. Based upon our examination of the entire record before us, we find that petitioner has failed to carry his burden of showing that his failure to file a return for taxable year 2000 was due to reasonable cause, and not willful neglect. Based upon that examination, we further find that petitioner has failed to carry his burden of demonstrating error in respondent's determination that he is liable for taxable year 2000 for the addition to tax under We turn finally to whether petitioner is liable for the addition to tax under Respondent has the burden of production with respect to the addition to tax under In the event that the calculation relating to We have considered all of the contentions and arguments of petitioner that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot. To reflect the foregoing and the concessions of the parties, Decision will be entered under
1. All section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The record does not disclose any information about any counterclaim that petitioner and Ms. Davis filed in the insurance litigation before they filed the second amended counterclaim.↩
3. Ms. Davis did not file a return for any of the taxable years 1995, 1996, 1998, 1999, and 2000.↩
4. Petitioner also contends that he introduced credible evidence concerning the factual issue presented under
5. At trial, on direct examination petitioner testified that the alleged brick theft occurred in October 2004. According to petitioner, that was when he had a conversation with Mona Builders concerning the price that Mona Builders had charged Ms. Davis and petitioner for bricks used in the custom house. However, the record establishes that the custom house litigation counterclaim was settled in May 2003.↩
7. Our understanding is consistent with the November 8, 2002 letter that petitioner and Ms. Davis sent to the Maryland Attorney General. That letter stated in pertinent part:
We are currently in the midst of a civil suit against Mona [custom house litigation counterclaim]. However, in spite of the disclosure requirements of the Custom Home Protection Act (CHPA), and tens of thousands of dollars expended in formal discovery efforts, Mona has yet to disclose the names and addresses of many of the suppliers and subcontractors who worked on our home. * * * * * * * * * * * * * Information obtained through our discovery efforts suggest [sic] that Mona may have fraudulently altered a subcontractor's invoice, and may have fraudulently overcharged us for materials and supplies. * * *↩
8. In October 2001, Mona Builders commenced the custom house litigation in which petitioner filed the custom house litigation counterclaim.↩
9. Petitioner declared under oath (petitioner's declaration) in the April 11, 2003 application filed with the District Court of Maryland for Anne Arundel County that "Between July 25, 2001 and Aug 8, 2001, Garrett Mona, Patrick Mona and Nick Mona intentionally misrepresented their intent to * * * repair defective work that existed at that time" in the custom house. That declaration indicates to us that petitioner became aware of certain unspecified defective work in the custom house sometime prior to his moving into that house around Aug. 29, 2001. We infer from petitioner's declaration in the April 11, 2003 application that petitioner became aware of certain defective work in the custom house sometime in the summer of 2001. That inference is consistent with other statements that petitioner made (1) in the April 11, 2003 application, (2) in the November 8, 2002 letter to the Maryland Attorney General, and (3) in the insurance litigation counterclaim. Petitioner's declaration in the April 11, 2003 application does not evidence that petitioner became aware of any defective work in the custom house in 2000.↩
10. We have also found (1) that petitioner did not file a return for any of the taxable years 1995, 1996, 1997, 1998, and 1999 and (2) that Ms. Davis did not file a return for any of the taxable years 1995, 1996, 1998, 1999, and 2000. Respondent introduced respective Forms 3050, Certification of Lack of Record (Forms 3050), for petitioner's taxable years 1995 through 2000 and Ms. Davis's taxable years 1995, 1996, 1998, 1999, and 2000. Absent a showing of some irregularity in such Forms 3050, which petitioner has not made, we may rely on such forms. See, e.g.,
11. It is noteworthy that petitioner, an attorney, was aware of the importance of using certified mail in connection with mailing important documents. Indeed, petitioner sent the June 7, 2002 letter notifying State Auto of petitioner's insurance claim by certified mail, return receipt requested.↩
12. For purposes of
13. Petitioner does not take the position that one or more of the exceptions in