DocketNumber: Docket No. 7780-14S
Citation Numbers: 2016 T.C. Summary Opinion 26, 2016 Tax Ct. Summary LEXIS 27
Judges: ARMEN
Filed Date: 6/20/2016
Status: Non-Precedential
Modified Date: 4/17/2021
Decision will be entered under Rule 155.
ARMEN,
Respondent determined the following deficiencies in petitioner's Federal income tax and accuracy-related penalties under section 6662(a):
2009 | $10,984 | $2,197 |
2010 | 1,677 | 335 |
2011 | 8,671 | 1,734 |
2012 | 2,367 | 473 |
In an Amendment To Answer respondent asserted increased deficiencies and accuracy-related penalties for 2009, 2010, and 2011, which respondent subsequently conceded in full, together with the entire deficiency and penalty for 2012.
After additional concessions,2 and without regard to purely computational matters involving*28 certain credits, the issues for decision are as follows:
(1) whether petitioner underreported his income for 2009, 2010, and 2011. We hold that he did to the extent provided herein;
(2) whether petitioner received income in the form of cancellation of indebtedness in 2009. We hold that he did;
(3) whether petitioner is entitled to deduct a section 1231 loss for 2009 in an amount greater than respondent determined. We hold that he is to the extent provided herein; and
(4) whether petitioner is liable for accuracy-related penalties for 2009, 2010, and 2011. We hold that he is not.
Some of the facts have been stipulated, and they are so found. The Court incorporates by reference the parties' stipulation of facts and accompanying exhibits.
*29 Petitioner resided in the State of Florida at the time that the petition was timely filed with the Court.
For quite some time, and in particular during the years in issue, petitioner made his living by steam cleaning and pressure washing exhaust fans, cooking hoods, and other restaurant equipment so as to eliminate grease and thereby prevent the occurrence of kitchen fires. Petitioner numbered some 250 restaurants among his clients, which included "mom & pop" and other independent restaurants as well as chain restaurants. Petitioner would typically visit each restaurant once every three to five months to steam clean and pressure wash its grease-covered equipment, with each visit lasting anywhere between 2.5 and 4 hours depending on the size of the restaurant, its volume of business, and its relative level of cleanliness. Payment for services rendered was by check, delivered either immediately upon completion of the job (typically for "mom & pop" and other smaller independent restaurants) or within a fixed number of days after presentation of an invoice (typically for larger independent and chain restaurants). Petitioner conducted his business through*30 his solely owned S corporation, Mat-Lex, Inc.
During relevant periods petitioner maintained a $25,000 equity line of credit with Grow Financial Federal Credit Union (Grow Financial). Petitioner occasionally drew on this line of credit, particularly in 2009, to provide operating capital for his business and for other financial needs.
During the years in issue petitioner maintained a number of bank accounts with Bank of America and Grow Financial. Respondent performed a bank deposits analysis because of the inadequacy or unavailability of petitioner's books and records and determined in the notice of deficiency that petitioner had unreported income in the following amounts for 2009 through 2011:
Total deposits | $70,309 | $52,903 | $101,792 |
Less: nontaxable & | |||
transfer deposits | (40,366) | (31,234) | (34,670) |
Less: total reported income | |||
Unreported income |
At trial respondent (R) conceded substantial portions of the unreported income that he had determined in the notice of deficiency (NoD), thus:
Unreported income per NoD | $18,939 | $5,762 | $32,563 |
Less: conceded by R at trial | |||
Balance in issue per R |
At trial petitioner*31 (P) conceded a portion of the foregoing "Balance in issue per R" for each year, thus putting in issue the following amounts:
Balance in issue per R | $8,347 | $2,453 | $3,563 |
Conceded by P at trial | |||
Amount remaining in issue |
In 2006, when the Florida real estate market was booming, petitioner purchased a two-bedroom condominium in New Port Richie, Florida, for $203,509, which he financed through Countrywide Financial Corp. (Countrywide). In addition, petitioner purchased certain fixtures, appliances, and various upgrades for the condominium, which he also financed through Countrywide. Petitioner held the condominium for the production of rents.
In 2009, after the Florida real estate market had imploded, petitioner found it financially necessary to dispose of the New Port Richie condominium (including all fixtures, appliances, and upgrades) for $100,000. At the time of sale petitioner's adjusted basis in the condominium was $188,555 and his adjusted basis in the fixtures, appliances, and upgrades was some $19,000. In conjunction with the sale, Bank of America (which had acquired Countrywide in the interim) also canceled debt*32 of $117,528 owed by petitioner.
Around the time of the sale of the condominium it was suggested to petitioner that he consider filing for bankruptcy. Petitioner declined to consider that possibility because he wanted to "just get rid of the property" with its negative cashflow "without destroying my credit".
In the notice of deficiency respondent made two adjustments to petitioner's income for 2009 that were related to the condominium. First, respondent determined that petitioner had received income of $117,528 from the cancellation of indebtedness to Bank of America. Second, respondent determined that petitioner was entitled to deduct a section 1231 loss (described in the notice of deficiency as a loss on Form 4797, Sales of Business Property) of $88,555, which respondent computed as the difference between $100,000 and $188,555. Notably, on his 2009 tax return petitioner had neither reported any income from cancellation of indebtedness nor claimed any loss deduction from the sale of the condominium.
Finally, in the notice of deficiency respondent determined that petitioner was liable for the accuracy-related penalty for each of the years in issue on the basis*33 of (1) negligence or disregard of rules or regulations or (2) a substantial understatement of income tax.
In general, the Commissioner's determination in a notice of deficiency is presumed to be correct, and the taxpayer bears the burden to show otherwise.3 Rule 142(a);
In the present case respondent reconstructed petitioner's income because of the inadequacy or unavailability*34 of petitioner's books and records.
The Commissioner is not required to show a likely source of income when using the bank deposits method, but the Commissioner is obliged to take into account any nontaxable item or deductible expense that is known to him or her.
Petitioner does not challenge respondent's bank deposits analysis other than to contend that it understates the amounts of nontaxable deposits. But in this regard petitioner offered limited proof at trial.4 However, we do accept petitioner's*35 testimony, which we found credible, that he maintained a line of credit with Grow Financial that he occasionally drew on to provide operating capital for his business and for other financial needs, particularly in 2009. In this regard we conclude that a portion, but not all, of the deposits remaining in issue for 2009 is attributable to advances from this line of credit.
Mindful as we are of the recordkeeping requirements of section 6001 and the regulations promulgated thereunder that require taxpayers to maintain records sufficient to permit verification of income,
In sum, taking into account the foregoing cases, and applying Rule 142(a),
Money received pursuant to a loan is not includible in gross income at the time of the loan because there is an obligation to repay it.
In general, cancellation of indebtedness produces income in an amount equal to the difference between the amount due on the obligation and the amount paid for the discharge.
There are, however, exceptions to the foregoing rule. One exception, known as the insolvency exception, was originally judicially created but has now been codified.
Petitioner alleged in the petition that he was insolvent at the time that Bank of America canceled his indebtedness. At trial petitioner pointed to the depressed state of the Florida real estate market in 2009; however, he did not introduce sufficient evidence to permit a finding of personal insolvency.
Section 1231 provides a rule that has long offered the best of all possible worlds to a taxpayer, i.e., "capital gains treatment for certain transactions that would otherwise be ordinary income, and * * * ordinary loss treatment for certain transactions that would otherwise constitute capital losses."
Insofar as losses are concerned and as pertinent herein, a section 1231(a)(3) loss is a loss from the sale or exchange of property used in a trade or business. The rental of one parcel*38 of improved real estate may constitute a trade or business such that the sale of the parcel implicates section 1231.
In the present case respondent determined that petitioner was entitled to deduct a section 1231 loss of $88,555 for 2009 from the sale of the condominium. However, respondent understated the amount of the allowable loss by $19,000, i.e., by the amount of petitioner's adjusted basis in the fixtures, appliances, and upgrades to the condominium. At trial petitioner introduced no persuasive evidence that the loss should be any greater than $107,555 (i.e., $88,555 + $19,000). Accordingly, the Court holds that petitioner is entitled to deduct a section 1231 loss of $107,555 for 2009.
As relevant herein, section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of the amount of any underpayment attributable to either (1) negligence or disregard of rules or regulations or (2) a substantial understatement of income tax.
With respect to a taxpayer's liability for the penalty, section 7491(c) places on the Commissioner the burden of production, thereby requiring*39 the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty.
Section 6664 provides an exception to the imposition of the accuracy-related penalty if the taxpayer establishes that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the underpayment. Sec. 6664(c)(1);
In order to facilitate resolution of the penalty issue we will proceed as if respondent had satisfied his burden of production. That said, it is clear from the record that petitioner is neither "educated school-wise" nor at all experienced in tax matters.*40 It is equally clear from the record that petitioner relied reasonably and in good faith on his accountant and commercial return preparer (whose competency was worthy of petitioner's reliance,
In order to give effect to the Court's disposition of the disputed issues, as well as the parties' concessions,
1. Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the closest dollar.↩
2. Respondent concedes in full petitioner's liability for self-employment tax for 2009, 2010, and 2011. Given that concession, petitioner is deemed to concede the deduction under sec. 164(f)(1) for one-half of his self-employment tax. Further, petitioner concedes that he failed to report interest income of $48, $27, and $63 for 2009, 2010, and 2011, respectively. Finally, certain other concessions by the parties will be discussed
3. For the presumption to apply in a case involving the receipt of unreported income, the deficiency determination must be supported by an evidentiary foundation linking the taxpayer to an income-producing activity.
4.
Nelson M. Blohm and Joann M. Blohm v. Commissioner of ... , 994 F.2d 1542 ( 1993 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Bruce K. Price, as Administrator of the Estate of A. M. ... , 335 F.2d 671 ( 1964 )
Michael Friedman v. Commissioner of Internal Revenue , 216 F.3d 537 ( 2000 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
neonatology-associates-pa-v-commissioner-of-internal-revenue-tax-court , 299 F.3d 221 ( 2002 )
Stephen Babin Betty Boehm Babin v. Commissioner of Internal ... , 23 F.3d 1032 ( 1994 )
Estate of Mary Mason, Deceased, Herbert L. Harris, ... , 566 F.2d 2 ( 1977 )
United States v. Kirby Lumber Co , 52 S. Ct. 4 ( 1931 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )
Commissioner v. Tufts , 103 S. Ct. 1826 ( 1983 )
Tokarski v. Commissioner , 87 T.C. 74 ( 1986 )