Opinion
26230-15
09-21-2022
NEIL L. WHITESELL & TRACY L. WHITESELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Richard T. Morrison, Judge.
Background
Neil Whitesell was the 100% owner of Whitesell International Corporation ("WIC"), an S corporation. We refer to him as "Whitesell." We refer to him and his wife collectively as "the Whitesells."
See also Part II, n.2.
For tax year 2008, WIC filed a Form 1120S, U.S. Income Tax Return for an S Corporation. Part of the Form 1120S was a Schedule K for Whitesell. The Schedule K reported $360 in cash charitable contributions subject to the 50% adjusted-gross-income ("AGI") limitation. The Schedule K-1 that WIC issued to Whitesell reported the $360 in contributions as "CODE A - CASH CONTRIBUTIONS". The instructions for the Form 1120S state that "code A" is for "cash contributions subject to the 50% AGI limitation." IRS Instructions for Form 1120S at 25 (2008).
For tax year 2009, WIC filed a Form 1120S. Part of the Form 1120S was a Schedule K for Whitesell. The Schedule K did not report any charitable contributions.
For tax year 2010, WIC filed a Form 1120S. Part of the Form 1120S was a Schedule K for Whitesell. The Schedule K did not report any charitable contributions.
II. Tax Returns for 2011
For tax year 2011, WIC filed a Form 1120S. On Line 19 for "other deductions", WIC claimed $9,066,763 of deductions. An itemized list of these deductions, which list was included with WIC's Form 1120S, did not contain an item for a domestic-production-activities deduction. Therefore, the $9,066,763 of "other deductions" did not include a domestic-production-activities deduction.
Included with the Form 1120S for 2011 was a "Domestic Production Activities Statement." The statement reported that qualified production activity income was $15,368,638. The statement also reported that "Employer's W-2 wages" was $2,628,666. Finally, the statement reported that the "Total" was $17,997,304, which is the sum of $15,368,638 and $2,628,666.
Part of WIC's Form 1120S for 2011 was a Schedule K for Whitesell. The Schedule K left blank line 12.a for charitable contributions. The Schedule K reported $17,997,304 for "[o]ther deductions" on line 12.d. This amount equaled the total amount on the domestic production activities statement.
WIC sent the IRS a 2011 Schedule K-1 for Whitesell. On the line for "[o]ther deductions," WIC reported a "Q" amount of $15,368,638 and an "R" amount of $2,628,666. According to the instructions for Form 1120S, "code Q" is used in the following circumstance: "If the corporation is eligible and chooses to figure qualified production activities income (QPAI) at the corporate level, use code Q to report the shareholder's pro rata share of the corporation's QPAI." IRS Instructions for Form 1120S, at 26 (2011). The instructions state that "code R" is used in the following circumstance: "If the corporation is eligible and chooses to report QPAI with code Q, use code R to report the shareholder's pro rata share of employer's Form W-2 wages properly allocable to domestic production gross receipts." IRS Instructions for Form 1120S, at 26 (2011). By contrast to Code Q, Code P is to be used "[i]f the corporation is not eligible or chooses not to figure qualified production activities income (QPAI) at the corporate level . . . ." IRS Instructions for Form 1120S, at 26 (2011).Furthermore, an S corporation using Code P was to attach a statement to its Form 1120S with certain information to enable its shareholders to figure the qualified-domestic-production-activities deduction. Id.
For 2008, WIC reported domestic production activities information using Code P. For 2009 and 2010, WIC reported using Code Q.
On their Form 1040 for 2011, the Whitesells reported that they had AGI of -$69,394.
The Whitesells' Form 1040 for 2011 included a Schedule A. For deductions for taxes, the Schedule A claimed $220,432. The Schedule A contained blanks for the following three lines under "Gifts to Charity": (1) "[g]ifts by cash or check", (2) "[o]ther than by check or check", and (3) "[c]arryover from prior year." The Schedule A reported $70 for miscellaneous itemized deductions before application of the 2% floor. The Schedule A computed that the 2% floor for miscellaneous itemized deductions was zero. Therefore, the Schedule A reported that the Whitesells were entitled to $70 of miscellaneous itemized deductions after accounting for the 2% floor. The Schedule A reported $299 for "[o]ther [m]iscellaneous [d]eductions." The total itemized deductions reported on the Schedule A was $220,801.
The Whitesells' Form 1040 for 2011 did not report any amount for the domestic-production-activities deduction. Nor did the Form 1040 include a Form 8903, "Domestic Production Activities Deduction".
The Whitesells' Form 1040 for 2011 reported they had no taxable income.
III. Tax Returns for 2012
WIC's Form 1120S for 2012 is not in the record.
The Whitesells' Form 1040 for 2012 included a Schedule A. For deductions for taxes, the Schedule A claimed $729,813. The Schedule A reported the following amounts on the three lines under "Gifts to Charity": (1) $10,250 for "[g]ifts by cash or check", (2) $9,996,880 for "[o]ther than by check or check", and (3) $5,248 for "[c]arryover from prior year." The Schedule A reported a total charitable-contribution deduction of $10,012,378, the sum of these three amounts. The Schedule A reported $117 of miscellaneous itemized deductions before application of the 2% floor. The schedule computed that the 2% floor for miscellaneous itemized deductions was $666,459. Therefore, the Schedule A reported that the Whitesells were entitled to $0 for miscellaneous itemized deductions after application of the 2% floor. The Schedule A reported $641 of "[o]ther [m]iscellaneous [d]eductions". The total itemized deductions reported on the Schedule A was $10,742,832.
Miscellaneous itemized deductions for the year are allowed only to the extent they exceed 2% of AGI. § 67(a).
The Whitesell's Form 1040 for 2012 reported--on line 35--a domestic-production-activities deduction of $3,295,675. The computation of this deduction was made on a Form 8903 that was part of the Whitesell's Form 1040. On this Form 8903, the Whitesells reported that (1) qualified production activities income from estates, trusts, and certain partnerships and S corporations was $37,572,261, (2) qualified production activities income was also $37,572,261, (3) adjusted gross income, figured without the deduction, was $36,618,607, (4) the lesser of amounts (2) and (3) was $36,618,607, (5) 9% of that was $3,295,675, (6) Form W-2 wages from estates, trusts, and certain partnerships and S corporations was $9,866,440, (6) the 50% Form W-2 wage limitation was $4,933,220, and (7) the domestic-production-activities deduction was $3,295,675. The qualified-production-activities income was apparently calculated at the corporate level.
The Whitesells did not include a Schedule K-1 for WIC with their Form 1040 2012.
IV. Notice of deficiency
In 2015, the IRS mailed the Whitesells a notice of deficiency determining a deficiency of $2,862,054 for 2011, a deficiency of $81,893 for 2012, and a section 6651(a)(1) addition to tax of $696,206.50 for 2011. The notice of deficiency reflected the following adjustments to income:
References to Rules are to the Tax Court Rules of Practice and Procedure. References to sections are to the Internal Revenue Code of 1986, as amended and in effect for the relevant tax years.
| Adjustments to income | 2011 | 2012 |
| 1a. Sch E-NLW Holdings, LLC | $1,011,784 | $1,367,927 |
| 1b. NOLD carryforward from 2010 | -1,914,166 | |
| 1c.Sch. E-Whitesell International Corporation | 10,557,567 | -51,329 |
| 1d.Sch. E-Whitesell Corporation | -98,096 | -59,628 |
| 1e. Itemized deductions | 70 | -134,494 |
| 1f. IRA distributions | 1,564 | |
| 1g. Interest income | 20,413 | |
| 1h. NOLD carryforward from 2011 | 210,858 | |
| 1i. Domestic production activities deduction | -85,828 | |
| 1k. Qualified dividends | 290 |
The notice of deficiency gave the following explanation of item 1.b (the net operating loss carryforward): "It is determined that your [sic] are entitled to a net operating loss carryforward from tax year ended December 31, 2010 as a deduction in the tax year ended December 31, 2011. Therefore, your taxable income is decreased in the amount of $1,194,166.00 for the taxable year ended December 31, 2011."
The reference to "$1,194,166.00" was apparently meant to be "$1,914,166.00".
The notice of deficiency gave the following explanation of item 1.e (itemized deductions) for 2011: "Due to the increase in Adjusted Gross Income for the taxable year ended December 31, 2011 your deduction for Miscellaneous Itemized deductions has been decreased in the amount of $70. Accordingly, your taxable income for the tax year ended December 31, 2011 has been increased in the amount of $70.00."
A worksheet of the calculation of itemized deductions for 2011 gave further detail about the $70 adjustment in itemized deductions. On that page, line 12 for miscellaneous itemized deductions, before application of the 2% floor, shows that $70 was reported on the return and that exam allowed $70 of such deductions for an adjustment of $0. Line 14 stated that 2% of AGI was $0 on the return and $189,754 as determined by exam. Line 14 for excess miscellaneous itemized deductions showed $70 was reported on the return but $0 allowed by exam, for an adjustment of $70. This adjustment is a result of the application of the 2% floor. The itemized deduction worksheet for 2011 reflected that the notice of deficiency had adjusted AGI from $0 as reported to $9,487,695. Nonetheless, the worksheet showed that charitable-contribution deductions were $0. Thus, the worksheet showed the IRS's determination that the Whitesells were entitled to no charitable-contribution deductions for 2011 even though they had positive AGI. This means that the reasons for disallowing charitable-contribution deductions for 2011 were other than any AGI limitation.
A worksheet explaining the calculation of itemized deductions for 2012 stated that taxes of $729,813 had been reported as deductions on the return, but that "PER EXAM" these deductions were reduced by $286,786.
The worksheet explaining the calculation of itemized deductions for 2012 stated that charitable contributions of $10,012,378 had been reported on the return, that these deductions were increased "PER EXAM" to $10,443,658, an increase of $421,280. The total adjustment to itemized deductions was $286,785 minus $421,280, totaling -$134,494. The itemized deductions worksheet showed the notice of deficiency determined AGI was $34,727,000 rather than the $33,322,932 reported, an increase of $1,404,250. Thus, the $421,280 increase in the notice of deficiency for the charitable-contribution deduction was 30% of the determined increase in AGI.
Line item 1.e (itemized deductions) was further explained as follows: "Contributions are limited if they exceed a certain percentage of your adjusted gross income (AGI). Since your AGI was changed, we adjusted your deductible contributions accordingly." This explanation did not say which tax year it was directed to. The 2011 and 2012 calculations of itemized deductions show only a change to the 2012 charitable contribution deduction.
Line item 1.i (domestic-production-activities deduction) was explained as follows: "Changes made to your Gross Income affect the deductible portion of your Domestic Production Activities Deduction. Therefore, your taxable income for the tax year ended December 31, 2010 is increased in the amount of $48,457.00 as shown in the attached schedule of allowable domestic production activities deductions." It is unclear why an adjustment regarding the tax year 2010 was reflected in the notice of deficiency. The notice of deficiency determined deficiencies for 2011 and 2012, but not 2010. The reference to 2010 does not appear to be a mistaken reference to 2012. For 2012, the amount of the adjustment stated in line 1.i is $85,828, which is equal to $3,381,503 minus $3,295,675. The 2012 adjustment is not $48,457. Although this portion of the explanation of line item 1.i stated that the $48,457 adjustment is "shown in the attached schedule of allowable domestic production activities deductions", the only schedule in the notice of deficiency describing domestic-production-activities deductions related to tax year 2012. The schedule stated that (1) qualified production activities income was $37,572,261, (2) adjusted gross income, figured without the deduction, was $38,108,702 (compared to $36,618,607 reported on the return), (3) the lesser amount of (1) and (2) was $37,572,261, (4) 9% of that was $3,381,503, (5) Form W-2 wages was $9,866,440, (6) the 50% Form W-2 wage limitation was $4,933,220, and (7) the domestic-production-activities deduction was $3,381,503.
V. Litigation
On October 15, 2015, the Whitesells filed their petition.
On December 14, 2015, the Whitesells filed an amended petition. Exhibit II to the amended petition stated specific contentions with respect to alleged errors in the notice of deficiency. Regarding adjustment 1.i. in the notice of deficiency (the domestic-production-activities deduction), the amended petition stated that the "Taxpayer Positions" was "Disputed". The amended petition further stated that its "Comment on Error by IRS Position" was "Deduction is not disputed but merely a recalculation of flowthrough affects [sic] of disputed items". The amended petition did not expressly say which tax year these statements addressed. Regarding adjustment 1.e in the notice of deficiency (charitable-contribution deductions), the amended petition stated that the "Taxpayer" was "Whitesell Corporation", that the "Subject of Error" was "2008 or possibly 2011?", that the "Taxpayer Positions" was "Not Disputed-legal expense-union exp", and that the "Comment on Error by IRS Position" was "Statute Closed; IRS advised not to file in 2011 if under current audit".
On February 5, 2016, the IRS filed an answer to the amended petition. Addressing Exhibit II, the answer to amended petition stated: "Admits that petitioners[] disagree with determinations made by respondent in the notice of deficiency, denies the remainder for lack of knowledge".
On October 18, 2016, the parties filed their first stipulation of facts.
On November 14, 2016, Whitesell informed the Court that he agreed with all the adjustments in the notice of deficiency except for a net operating loss carryforward.
On August 11, 2017, and June 7, 2018, the IRS filed amendments to its answer. The amendments asserted three positions: (1) the Whitesells had claimed an overstated non-cash charitable contribution deduction on their 2012 income tax return, (2) the Whitesells are liable for section 6662 penalties for the 2011 and 2012 tax years, and (3) the Whitesells are liable for a 40% section 6662(h) penalty as a result of their alleged overvaluation of their claimed non-cash charitable contribution deduction on their 2012 income tax return.
On January 29, 2020, the parties filed a joint stipulation of settled issues. The stipulation stated that "Respondent and Petitioners agree that the following adjustments as set forth in the notice of deficiency have been conceded by petitioners:"
| Adjustments to incomes | 2011 | 2012 |
| 1a. Sch E-NLW Holdings, LLC | $1,011,784 | $1,367,927 |
| 1b. NOLD carryforward from 2010 | -1,914,166 | |
| 1c. Sch. E-Whitesell International Corporation | 10,557,567 | -51,329 |
| 1d. Sch. E-Whitesell Corporation | -98,096 | -59,628 |
| 1e. Itemized deductions | 70 | -134,494 |
| 1f. IRA distributions | 1,564 | |
| 1g. Interest income | 20,413 | |
| 1h. NOLD carryforward from 2011 | 210,858 | |
| 1i. Domestic production activities deduction | -85,828 | |
| 1j. Qualified dividends | 290 |
The January 29, 2020 stipulation provided: "Respondent concedes that the $10,557.567.00 income adjustment shall be reduced by $10,000.00, resulting in an income adjustment of $10,547,567.00".
The January 29, 2020 stipulation observed that the IRS has asserted that the Whitesells overstated the amount of non-cash charitable contributions on their 2012 income tax return, that the Whitesells are liable for section 6662 penalties for the 2011 and 2012 years, and that they are liable for the 40% penalty under section 6662(h) as a result of the overstatement of the non-cash charitable contribution. The stipulation concluded by stating: "The parties agree that these stipulations shall be incorporated into deficiency computations upon the resolution by agreement or this Court's decision, of the remaining issues describe above."
On February 1, 2021, the trial began. Each party presented an opening statement. On February 8, 2021, the Court stated that the case was submitted, i.e., that the record was closed.
On February 9, 2021, the Court began to hear closing arguments from the parties. The IRS began first. During the IRS's closing argument, the Court declared a recess. After the recess, the parties reported that they had reached a settlement under which the value of the subject property was $4.5 million and the IRS conceded the section 6651(a)(1) addition to tax and the section 6662 penalties. The parties stated that the settlement resolved all remaining issues in the case. The Court ordered the parties to file a stipulation of settlement by the close of business the next day.
On February 10, 2021, the IRS filed a status report explaining that the parties were unable to agree to a stipulation of settlement. The IRS attached an unexecuted stipulation of settled issues representing the IRS understanding of the settlement. On the same day, the Whitesells filed a status report explaining that the parties were unable to agree to a stipulation of settlement. The Whitesells attached an unexecuted stipulation of settlement representing their understanding of the settlement.
The unexecuted stipulations of settlement attached to each side's February 10, 2021 status reports are identical except that the Whitesells' document had a requirement, not found in the IRS document, that the IRS would provide the Whitesells with the IRS's proposed Rule 155 computations within 60 days.
On February 19, 2021, the Court ordered the parties to file status reports reflecting the then-present status of the case.
On February 24, 2021, the parties filed a joint status report stating that on February 9, 2021, the parties had represented to the Court that a settlement of all remaining issues in the case was reached by the parties, that on February 22, 2021, the IRS had transmitted computations and decision documents to the Whitesells for their review, that the Whitesells expected to review these documents in about 30 days, and that the parties expected to file decision documents on or before April 12, 2021.
On April 2, 2021, the IRS filed a motion for entry of decision. In the motion the IRS asked the Court to enter a decision that there is a deficiency of $2,858,554 for 2011, a deficiency of $2,152,780 for 2012, that the Whitesells are not liable for the section 6662(a) penalty for 2011 and 2012, and that the Whitesells are not liable for the section 6651(a)(1) addition to tax for 2012. Under the IRS's computations, the charitable-contribution deduction for 2012 was computed as follows: a subtotal of $15,498 of contributions made in 2012, plus $4.5 million in contributions made in 2012 related to the subject property, for total contributions made in 2012 of $4,515,498. Under the computations, no charitable-contribution deductions were carried over from any prior tax year. Under the computations, the $4,515,498 deduction was not subject to any of the section 170 limitations. The computations also assumed that there was an $85,828 adjustment to the domestic-production-activities deduction for 2012. The deduction, as adjusted, was $3,381,503. The computations assumed there was no domestic-production-activities deduction for 2011.
On April 23, 2021, the Whitesells filed a motion for entry of decision. The motion sought a decision of a $2,558,170 deficiency for 2011 and a $2,155,085 deficiency for 2012. The sought-after decision would provide that the Whitesells are not liable for the section 6662 penalties for either year or for the section 6651(a)(1) addition to tax for 2012.
The Whitesells observed that in McMullen v. Commissioner, T.C. Memo. 2015-219, *3, the Court addressed a situation in which a settlement resolved all issues in the case. In McMullen, the Court held that in evaluating the IRS's motion for entry of decision, the Court's role is similar to addressing unagreed tax computations in a Rule 155 context. McMullen v. Commissioner, 2015-219 *3 at n.3. The Whitesells observed that in a Rule 155 proceeding, the issues considered are limited to mathematical adjustments. The Whitesells claim that they are entitled to a $852,993 domestic-production-activities deduction for 2011 because of (1) various income adjustments made to the 2011 Form 1040 and (2) the assumed correctness of amounts reflected on the "stipulated" Schedule K-1 issued by WIC to Whitesell for 2011. In addition, the Whitesells seek to reverse the $5,248 charitable contribution that they had reported to have been carried forward from the 2011 to the 2012 tax year. Alternatively, the Whitesells contend that if the Court determines that the two issues are new issues, they seek leave to amend their amended petition to plead the items. The Whitesells contend that this is appropriate under Pinson v. Commissioner, T.C. Memo. 2002-393, *5-*6, where the Court weighted the potential for prejudice against the importance of the issue to be pled and allowed petitioner to plead a new issue after trial. Id. at *4. Evaluating the evidence presented at trial, the Pinson Court concluded that the petitioner prevailed on the new issue. Id. at *5-*6. The Whitesells' motion does not seek continued trial to present new evidence. Rather, the motion, as the Whitesells have explained, considers tax returns already in the record to be evidence.
Discussion
The disputed computations involve in part the deduction for charitable contributions. Section 170(a) allows a deduction for any charitable contribution that was paid within the taxable year. Under section 170(b)(1)(A), charitable contributions to certain types of organizations are allowed only to the extent that the aggregate of such contributions does not exceed 50% of the taxpayer's "contribution base" for the taxable year. These types of organizations are referred to as "50% limit" organizations. Publication 526, at 13 (2011). Section 170(b)(1)(G) defines the "contribution base" as adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172). Besides the 50% limit of section 170(b)(1)(A), there are four other types of limitations on charitable-contribution deductions. These limits are described in Publication 526 as the "30% limit", see section 170(b)(1)(B)(i), the "special 30% limit for capital gain property", see section 170(b)(1)(C)(i), the "20% limit", see section 170(b)(1)(D)(i)(I), and the "special 50% limit for qualified conservation contributions", see section 170(b)(1)(E)(i). All of these limits are formulas that incorporate the amount of adjusted gross income. The limits are interrelated in various ways. If a limit is exceeded, the excess amount is not deductible in the tax year, and rules in the Code determine how to carry forward to the next tax year (or tax years) the amounts exceeding the limits. The carryover of the excess is related to the net operating loss carryover in certain situations. § 170(d)(1)(A). IRS Publication 526 contains a two-page worksheet, Worksheet 2, for computing the various limitations and carryovers. No such Worksheet 2 is in the record for any of the Whitesells' tax years.
The other aspect of the disputed computations involves the deduction under section 199(a). Section 199(a) allows a deduction equal to 9% of the lesser of (1) the qualified production activities income of the taxpayer or (2) taxable income without regard to the deduction. Section 199(c)(1) defines qualified production activities income as (1) the taxpayer's domestic production gross receipts, (2) minus cost of goods sold allocable to such receipts (3) minus other expenses, losses, or deductions (except for the section 199(a) deduction) which are properly allocable to such receipts. Section 199(c)(4) defines domestic production gross receipts to include gross receipts derived from the sale of tangible personal property manufactured in the U.S. See also § 199(c)(5). Section 199(b) provides that the amount of the deduction under section 199(a) cannot exceed 50% of the Form W-2 wages of the taxpayer. Section 199(b)(2)(B) provides that the Form W-2 wages of the taxpayer do not include any amount which is not properly allocable to domestic production gross receipts. Section 199(d)(1)(A)(i) provides that in the case of an S corporation, section 199 is applied at the shareholder level. Section 199(d)(1)(A)(ii) provides that each shareholder of an S corporation shall take into account the shareholder's allocable share of (1) the taxpayer's domestic production gross receipts and (2) the sum of (a) the cost of goods sold that is allocable to such gross receipts and (b) other expense, losses, or deductions (other than the section 199(a) deduction), which are properly allocable to such receipts. Section 199(d)(1)(A)(iii) provides that each shareholder is treated as having Form W-2 wages in an amount equal to the shareholder's allocable share of the Form W-2 wages of the S corporation.
The parties in this case dispute the computation of the deficiencies resulting from their resolution of the issues in the case. In a case in which the disputed issues are ruled on by the Court, the procedure for determining the amounts of the redetermined deficiencies is set forth in Rule 155. Under Rule 155, the parties are to submit to the Court the amount of the redetermined deficiency reflecting the Court's rulings on the disputed issues. When the issues in the case have been resolved by the parties, the parties are expected to submit to the Court the amount of the redetermined deficiency reflecting the parties' resolution of the disputed issues. McMullen, at *4 ("Where a stipulation of settlement resolves all issues in the case, as the parties' stipulation did here, the parties are expected to agree on the tax computation resulting from the settlement and embody that computation in a decision document for entry by the Court.").
In resolving a dispute between the parties as to the computation of the deficiencies, the starting point is the computations in the notice of deficiency. The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988), aff'd, 875 F.2d 377 (2nd Cir. 1989); JP Morgan Chase & Co. v. Commissioner, 530 F.3d 634, 638 (7th Cir. 2008). The next step is to adjust these computations for (1) rulings by the Court, (2) settlements by the parties, and (3) computational adjustments. The Home Group, Inc., 91 T.C. at 269; Wells v. Commissioner, 779 Fed.Appx. 552 (10th Cir. 2019); Molasky v. Commissioner, 897 F.2d 334, 338 (8th Cir. 1990); JP Morgan Chase & Co. v. Commissioner, 530 F.3d 634, 638 (7th Cir. 2008). As we explained in The Home Group, Inc., 91 T.C. at 269:
The starting point for the computation is the statutory notice of deficiency from which the parties compute the redetermined deficiency based upon matters agreed by the parties or ruled upon by the Court . . . . The Court's redetermination and the parties' agreed items usually affect items of income and deductions which raise or lower taxable
income. It is also normal and usual for certain purely mathematical adjustments to be triggered by the change of taxable income, adjusted gross income, etc. Some examples of the automatic mathematical changes are the percentage limit on contributions, medical deductions, or investment tax credits.
The first disputed computation is with respect to the $5,248 charitable contribution the Whitesells reported as a carryover deduction for 2012. On their 2011 return, the Whitesells did not report any charitable-contribution deduction. On their 2012 return, the Whitesells reported that they had $10,012,378 of charitable-contribution deductions, comprising the following three amounts: (1) $10,250 for gifts to charity by cash or check, (2) $9,996,880 for gifts to charity other than by cash or check, and (3) $5,248 for carryover from the prior year. The notice of deficiency allowed no charitable-contribution deductions for 2011 even though the notice of deficiency computed AGI as a positive number. For 2012, the notice of deficiency increased the $10,012,378 reported as charitable-contribution deductions for 2012 to $10,443,658. The increase was exactly 30% of the increase in AGI determined by the notice of deficiency. The IRS then amended its answer to take the position that the $9,996,880 reported for 2012 for noncash, noncheck gifts to charity was too high. On January 29, 2020, the Whitesells conceded the correctness of the notice of deficiency's adjustments to itemized deductions. Other concessions made by the Whitesells on that day resulted in an increase in AGI for 2011 from the $0 reported by the Whitesells to $9,487,000. On February 9, 2021, the parties agreed that for 2012, $4.5 million was the amount of the deduction for non-cash charitable deductions for 2012 instead of the $9,996,880 reported.
The concessions were made in a stipulation of settled issues that recognized that the IRS challenged the amount of charitable contribution other than by cash or by check for 2012. Thus, the concession that the notice of deficiency was correct in determining the itemized deductions for 2012 should be adjusted by $134,494 seemingly recognized that this $134,494 adjustment, which does not take into account the IRS's challenge to the amount of charitable contribution other than by cash or by check, would itself need to be adjusted to account for the eventual resolution of the challenge.
The Whitesells now claim that the $5,248 deduction should be moved back to tax year 2011 because the AGI for 2011 was increased as part of the January 29, 2020 stipulation of settled issues. To determine the correct recomputation, the starting point is the notice of deficiency. The Home Group, Inc., 91 T.C. at 269. The notice of deficiency determined that there should be no charitable-contribution deduction for 2011 despite an increase in AGI. The notice of deficiency also determined that the $5,248 the Whitesells reported as part of their charitable contributions for 2012 should be allowed for 2012. The notice of deficiency permitted the $5,248, but not as a carryover deduction. A carryover deduction is allowed only when there is an AGI limitation in the prior year. But the notice of deficiency determined to increase AGI for 2011 to $9,487,000.
So, the notice of deficiency determined that the $5,248 amount reported by the Whitesells as a carryover from 2011 to 2012 was (1) not allowable as a deduction for 2011 but (2) was allowable for a deduction for 2012. The settlement of this case did not address this deduction. Therefore, the notice of deficiency's treatment of the $5,248 amount must be sustained.
The second disputed computation is the amount of the domestic-production-activities deduction for 2011. For 2011, the Whitesells reported no domestic-production-activities deduction. They reported no taxable income for 2011. Had they no taxable income, this would have precluded them from taking a domestic-production-activities deduction. § 199(a). The notice of deficiency determined that the Whitesells had taxable income for 2011 but still determined they had no domestic-production-activities deduction. Therefore, the notice of deficiency determined that the Whitesells were not entitled to a domestic-production-activities deduction for reasons other than their taxable income for 2011. To allow them such a deduction for 2011 would not be a computational adjustment because the notice of deficiency did not rely on the Whitesells' lack of taxable income for the year to disallow the deduction. Granting the deduction would therefore be inappropriate at this stage in the proceedings. The notice of deficiency's determination that no domestic-production-activities deduction was allowable for 2011 is sustained.
The Whitesells contend that the two adjustments they urge can be determined from information in certain tax returns and are therefore not computational adjustments. WIC's Forms 1120S for 2011 reported that its qualified production activity income was $15,363,638 and that its Form W-2 wages was $2,628,666. These pieces of information also appeared on the Form K-1 WIC prepared for Whitesell. Furthermore, the Whitesells' Forms 1040 for 2012 reported that $5,248 was a carryover charitable-contribution deduction from 2011. But these tax returns are really just statements of the position of the taxpayer. See Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Paulson v. Commissioner, T.C. Memo 1991-508. The notice of deficiency determined that the relevant positions taken on the returns were incorrect. And the parties never agreed that these return positions were correct as part of the settlement of the case. Therefore, the amounts reported on the returns referred to by the Whitesells do not serve as the basis for computational adjustments.
Our conclusion that the two disputed adjustments are other than computational adjustments resulting from the settlement is sufficient to resolve the disputes in favor of the IRS. Neither party urges that the Court reopen the record and hold a continued trial. This course of action not being requested by any party, we need not, and do not, consider it. Likewise, neither party urges the Court to set aside the February 9, 2021 agreement. Therefore, we need not, and do not, consider whether that would be appropriate.
Conclusion
Given the foregoing, it is
ORDERED that respondent's motion for entry of decision, filed April 2, 2021, is granted and petitioners' motion for entry of decision, filed April 23, 2021, is denied. It is further
ORDERED and DECIDED that there are deficiencies of income tax due from petitioner, for the taxable years 2011 and 2012, in the amounts of $2,858,554, and $2,152,780, respectively; and that there is no addition to tax due from petitioners for the taxable year 2012, under the provisions of I.R.C. section 6651(a)(1); and that there are no penalties due from petitioners, for the taxable years 2011 and 2012, under the provisions of I.R.C. section 6662(a).