Opinion
13943-18
10-04-2021
Anthony Aulisio, Jr., Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Alina I. Marshall, Judge
On October 17, 2016, petitioner timely filed a Form 1040, U.S. Individual Income Tax Return, for taxable year 2015. On September 11, 2017, the Internal Revenue Service's (IRS) automated underreporter unit mailed petitioner a CP2000 notice, proposing adjustments to petitioner's taxable income based on third-party reporting. On October 25, 2017, petitioner signed and submitted a Form 1040X, Amended U.S. Individual Income Tax Return, for taxable year 2015 (petitioner's amended tax return). The IRS received the amended tax return, but did not process it.
On April 9, 2018, the IRS issued a notice of deficiency to petitioner for taxable year 2015, proposing a tax deficiency and a substantial tax understatement penalty. On July 16, 2018, petitioner timely filed a petition with the Court. On August 27, 2018, respondent filed an answer with the Court. On October 25, 2019, respondent filed a motion for leave to file first amendment to answer, seeking to increase the deficiency based on petitioner's amended tax return, and lodged the first amendment to answer. The Court granted respondent's motion to file an amendment to answer and later denied petitioner's motion for reconsideration.
On March 19, 2021, petitioner filed a motion for partial summary judgment (petitioner's motion), and on March 22, 2021 respondent filed a motion for partial summary judgment (respondent's motion). On April 26, 2021, each party filed a response to the opposing motion.
I. Summary Judgment
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. v. Commissioner, 116 T.C. 73, 74 (2001). The Court may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b). Furthermore, the Court will construe the facts and draw all inferences in the light most favorable to the nonmoving party to decide whether summary judgment is appropriate. Bond v. Commissioner, 100 T.C. 32, 36 (1993). The nonmoving party may not rest upon the mere allegations or denials of his or her pleading, but must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d).
All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated, and all section references are to the Internal Revenue Code in effect at all relevant times.
II. Petitioner's Unreported Income
A. Petitioner's Motion
Petitioner moves for summary judgment with respect to whether he received unreported income in excess of the amount shown on the notice of deficiency. He contends that: (1) the Court should have denied respondent's motion for leave to file first amendment to answer because respondent did not follow correct exam procedures in failing to process the amended tax return that petitioner submitted for taxable year 2015; (2) the burden of proof is on respondent with respect to establishing that petitioner had $165, 700 of unreported income; and (3) respondent has not substantiated that petitioner had $165, 700 of unreported income. Given the contents of petitioner's amended tax return, the Court cannot reach the requested holding as a matter of law.
B. Respondent's Motion
Respondent cross moves for summary judgment with respect to whether petitioner received $165, 700 in unreported income. He contends that: (1) petitioner admitted the unreported income on petitioner's amended tax return for taxable year 2015; (2) petitioner has not substantiated his contentions with respect to interest income; and (3) the record is now closed because the parties agreed that all evidence for the issue would be exchanged by February 22, 2021.
In support of respondent's motion, respondent refers to petitioner's amended tax return that was submitted. On petitioner's amended tax return, petitioner reported $123, 180 in gross receipts from an accounting business, $1, 250 in gross receipts from an equipment leasing business, $18, 778 in Social Security benefits, and $22, 492 in taxable interest. Respondent argues that, while tax returns do not establish the truth of the facts stated in them, a taxpayer's statements in his or her returns are admissions that may be overcome only through cogent evidence. Drawing inferences in the light most favorable to petitioner, the we do not hold for respondent as a matter of law.
C. Analysis & Conclusion
The Court will not entertain arguments with respect to its order dated November 4, 2019, granting respondent's motion for leave to file an amendment to answer. The Court has already denied petitioner's motion for reconsideration of the order, holding that petitioner's arguments went to the underlying merits of the case and not to any procedural deficiencies. Under section 6214(a), the Court has jurisdiction to redetermine the correct amount of petitioner's deficiency, even if the amount so redetermined is greater than the amount in the notice of deficiency.
Respondent's motion and petitioner's motion do not present the Court with undisputed material facts from which a decision may be rendered as a matter of law. See Rule 121(b). Petitioner's amended tax return does not establish the truth of the facts stated therein, Buchsbaum v. Commissioner, T.C. Memo. 2002-138, 2002 WL 1150779, at *4, but his statements in his return are admissions that may be overcome only through cogent evidence, Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 322 (2013); Buchsbaum v. Commissioner, T.C. Memo. 2002-138, at *4. Petitioner will be given the opportunity to present such evidence at trial. While the parties agreed to exchange evidence for the issue to the greatest extent possible by February 22, 2021, the record is not closed. The parties' respective motions for partial summary judgment on the issue are denied.
III. Petitioner's Deduction for Money Judgment
A. Petitioner's Motion
Petitioner moves for summary judgment with respect to whether he is entitled to deduct as a business expense a money judgment from his lawsuit in the Superior Court of California for the County of Orange (California superior court). He contends that: (1) the expense is deductible because it was an ordinary and necessary expense paid or incurred during taxable year 2015 in carrying on an equipment leasing business; (2) he was an accrual method taxpayer with respect to the equipment leasing business in 2015; and (3) he properly claimed the deduction in 2015 pursuant to section 461(f), because real property in which he held a beneficial interest was subject to levy by the judgment holder. Drawing inferences in a light most favorable to respondent, we cannot conclude as a matter of law that petitioner is entitled to deduct the amount of the money judgment in taxable year 2015.
B. Respondent's Motion
Respondent cross moves for summary judgment with respect to whether petitioner is entitled to deduct $72, 500 (resulting from a money judgment that petitioner lost in the California superior court) as a business expense. He contends that: (1) the expense is not deductible under section 162 because it was not an ordinary and necessary expense paid or incurred during taxable year 2015 in carrying on any trade or business; (2) the expense is not deductible under section 183 because the expense relates to an activity not engaged in for profit; (3) even if petitioner was an accrual method taxpayer with respect to an equipment leasing business in 2015, the expense is not deductible in 2015 because petitioner actively contested the money judgment through 2017 and did not pay the money judgment pursuant to section 461(f); (4) by the time that petitioner signed petitioner's amended tax return for taxable year 2015 on October 23, 2017, the Court of Appeal of California had already overturned the money judgment; and (5) petitioner did not include the deduction as income in 2016, as would have been required under the tax benefit rule.
See Bancroft v. Aulisio, No. G052329, 2017 LEXIS 3983 (Cal.Ct.App. Mar. 27, 2017).
See sec. 111.
The Court must consider many facts and factors in evaluating respondent's five arguments on this point. These facts and factors are not adequately addressed by the parties for purposes of summary judgment.
C. Analysis & Conclusion
The parties disagree about whether petitioner paid the money judgment in taxable year 2015 for purposes of section 461(f). One of the requirements of section 461(f) is that "the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability". Sec. 461(f)(2). Importantly, "[a] transfer of any indebtedness of the taxpayer or of any promise by the taxpayer to provide services or property in the future" does not qualify as a transfer. Sec. 1.461-2(c)(1)(iii)(D), Income Tax Regs. In the context of real property, the Court has held that key factors in determining whether the property was transferred include: (1) whether the taxpayer executed and delivered a deed and (2) whether physical control of the real property was transferred. See Davies v. Commissioner, 101 T.C. 282, 290 (1993) (finding that petitioner properly executed and delivered to the escrow agent a special warranty deed sufficient to transfer control of the real property for purposes of section 461(f)); Continental Nut Co. v. Commissioner, 62 T.C. 771 (1974) (purported sale of the property did not affect payment of a contested liability because the taxpayer had unrestricted use of the land and had not yet transferred the deed). While petitioner has submitted a writ of levy for the real property, neither party has submitted evidence showing whether petitioner transferred control of the real property. The parties also do not adequately address respondent's arguments with sufficient facts or legal analysis to permit us to decide this issue as a matter of law. The parties' respective motions for partial summary judgment on the issue are denied.
IV. Petitioner's Net Operating Loss Carry-Forward
A. Petitioner's Motion
Petitioner moves for summary judgment with respect to whether he is entitled to deduct a net operating loss carry-forward related to his equipment leasing business in taxable year 2015. He contends that he incurred the losses in 2001 and 2013 in operating his equipment leasing activity. Outside of his declaration and some previously filed tax returns, he is unable to further substantiate the net operating losses because tracking of the net operating losses was under the direction of his administrative assistant who is deceased. Petitioner argues that he is entitled to the deduction under the Cohan rule, as a matter of law. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
B. Respondent's Motion
Respondent cross moves for summary judgment with respect to whether petitioner is entitled to deduct a net operating loss carry-forward of $437, 141 related to his equipment leasing activities. He contends that: (1) petitioner has the burden of proof in substantiating the deduction; (2) petitioner has not substantiated the deduction; and (3) the record is now closed.
C. Analysis & Conclusion
In general, the taxpayer bears the burden of establishing both the existence of the net operating losses and the amounts of the losses that may be carried forward. See Power v. Commissioner, T.C. Memo. 2016-157, at *13-*14. To substantiate both, the taxpayer is required to maintain records sufficient to enable the Commissioner to determine the correct tax liability. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Under the Cohan rule, if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount, the Court may estimate the amount, bearing heavily against the taxpayer whose inexactitude is of his or her own making. See Cohan v. Commissioner, 39 F.2d at 543-544. However, to apply the Cohan rule the Court must have some information to estimate the proper deduction. See Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). It is well settled that self-serving declarations are not sufficient to substitute for records, see Rushing v. Commissioner, T.C. Memo. 2018-23, at *8, and that tax returns alone do not establish that a taxpayer suffered a loss, see Lehman v. Commissioner, T.C. Memo. 2010-74, at *5.
Petitioner has not shown either the existence of the net operating losses or the amounts of the losses that may be carried forward to taxable year 2015. Interpreting facts in the light most favorable to petitioner, however, respondent has not shown that he is entitled to judgment as a matter of law. The parties' respective motions for partial summary judgment on the issue are denied.
V. Petitioner's Deductions for Mortgage Interest and Property Taxes Paid
A. Petitioner's Motion
Petitioner moves for summary judgment with respect to whether he is entitled to deduct mortgage interest expense and property taxes paid for his personal residence. He contends that: (1) he is the beneficial owner of the personal residence through a trust; and (2) he paid the mortgage interest and property taxes.
B. Respondent's Motion
Respondent cross moves for summary judgment, contending that: (1) petitioner has not substantiated whether a mortgage existed in taxable year 2015; (2) petitioner has not substantiated that he paid (in part or in full) the mortgage interest; and (3) the record is now closed.
C. Analysis & Conclusion
Respondent's motion and petitioner's motion do not present the Court with undisputed material facts from which a decision may be rendered as a matter of law. See Rule 121(b). Petitioner does not offer sufficient evidence to show that he should prevail as a matter of law, particularly when facts are viewed in a light favorable to respondent. Petitioner does, however, offer evidence sufficient to defeat respondent's motion on this issue.
Upon due consideration of the parties' arguments, and for the reasons stated above, it is
ORDERED that petitioner's motion for partial summary judgment, filed March 19, 2021, is denied. It is further
ORDERED that respondent's motion for partial summary judgment, filed March 22, 2021, is denied. It is further
ORDERED that, on or before October 22, 2021, the parties shall file a joint status report reflecting the status of the case and reporting the parties' views on setting a date and time certain for a remote trial at the Court's remote trial session, during the week of December 6, 2021, February 14, 2022, or March 14, 2022.