Lead Opinion
Respondent determined deficiencies in and additions to petitioner’s Federal income tax for taxable years 1987 and 1988 as follows:
Additions to tax
Deficiency Sec. 6651 Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6661 £
1987 $7,013 $1,380 $620
35,574 13,398 2,856 8,894 00 00 <Ji
Although petitioner filed joint returns with her husband, Elwood Cluck (Elwood), Elwood is not a party herein because his liability was determined and discharged in the U.S. Bankruptcy Court for the Western District of Texas. Cluck v. United States, 165 Bankr. 1005 (W.D. Tex. 1993). After concessions,
FINDINGS OF FACT
Some of the facts have been stipulated or deemed stipulated under Rule 91(f)(3).
Petitioner is still married to Elwood, who is an attorney representing her in this case. Although Elwood is not a petitioner, we have found a number of facts related to him, as such facts are germane to the issues presented.
Petitioner and Elwood were married on July 24, 1984. For the taxable years 1984 and 1985, Elwood filed his Federal income tax returns as married filing separate. The record does not establish whether petitioner filed a Federal income tax return for either 1984 or 1985. Beginning in 1986 and continuing through the years at issue, petitioner and Elwood filed joint Federal income tax returns. Petitioner and Elwood also filed amended Federal income tax returns, Forms 1040X, for the taxable years 1987 and 1988.
Petitioner and Elwood claimed an nol deduction of $195,459 on their 1987 joint Federal income tax return. The 1987 deduction consisted of unused NOL’s carried forward from Elwood’s 1983, 1984, and 1985 Federal income tax returns and from petitioner’s and Elwood’s 1986 joint Federal income tax return. Petitioner and Elwood reported the calculation of their 1987 NOL deduction on a schedule attached to their 1987 return as follows:
1983 . $10,083
1984 . 120,199
1985 . 25,005
1986 . 40,172
Total. 195,459
Petitioner and Elwood claimed an NOL deduction of $109,340 on their 1988 joint Federal income tax return. The 1988 NOL deduction consisted of the same losses that make up the 1987 NOL, reduced by $86,119, which was the amount of income offset by the use of the 1987 NOL. Thus, petitioner and Elwood reported the calculation of their 1988 NOL deduction on a schedule attached to their 1988 return as follows:
1983 . $10,083
1984 . 120,199
1985 . 25,005
1986 . 40,172
Less 1987 income . (86,119)
Total. 109,340
The 1983, 1984, 1985, and 1986 NOL carryforwards, discussed above, were incurred in various businesses operated by Elwood.
In 1984, Elwood entered into a transaction which affects his reported 1984 loss, and therefore the NOL’s reported by petitioner and Elwood for the years at issue.
Specifically, in 1984, Elwood sold a one-fourth interest in a 149.67-acre tract of land located in Grapevine, Texas (Grapevine property). Elwood had inherited this property from his mother, Martha Cluck, who died July 29, 1983. Elwood’s three brothers owned the remaining three-fourths interest in the Grapevine property, which they too had inherited from their mother in 1983.
Elwood prepared the Federal estate tax return for the Estate of Martha Cluck (estate), and he signed it as the estate’s personal representative. The return included a one-half interest in the Grapevine property in the decedent’s gross estate, valued at $527,250. An appraisal, attached to the return, valued a 100-percent interest in the Grapevine property at $1,054,500.
On March 29, 1984, Elwood and his brothers entered into a contract for the sale of the Grapevine property to Joe L. Wright. Pursuant to a closing statement dated April 26, 1984, the Cluck brothers transferred the Grapevine property to Joe L. Wright for a net sale price of $2,477,700. Each brother’s share of the net sale proceeds was one-fourth of $2,477,700, or $619,425. Elwood did not report the sale of the Grapevine property on his 1984 Federal income tax return, on the theory that his basis in the one-fourth interest sold was equal to or exceeded the proceeds he received from the sale.
On March 10, 1988, respondent issued a notice of deficiency to the “Estate of Martha K. Cluck, Elwood Cluck, Executor” (estate case). In the notice, respondent determined that, on the date of her death, Martha Cluck owned the entire 149.67 acres located in Grapevine, Texas, rather than a one-half interest as reported in the estate’s tax return. Respondent further determined that the date of death fair market value of the decedent’s interest was $2,548,242, rather than $527,250 as reported on the estate’s tax return. Respondent issued similar notices to each of Elwood’s three brothers, apparently naming each as “Executor”.
In his petition, Elwood alleged that respondent erred in determining that Martha Cluck owned the entire 149.67 acres of land located in Grapevine, Texas. He asserted that she owned only a one-half interest in the property on the date of her death, and that the fair market value was $527,250. Alternatively, Elwood alleged that, in the event the Court determined that Martha Cluck owned the entire legal interest in the Grapevine property at the date of her death, the fair market value thereof did not exceed $1,054,500.
On November 25, 1988, we consolidated the cases of Elwood and his brothers, and the consolidated case was set for trial. On February 27, 1989, Elwood and his brothers entered into an agreement with respondent, styled “Stipulation of Settled Issues.”
OPINION
Issue 1. The NOL’s for 1987 and 1988
Respondent disallowed $166,129 of petitioner’s claimed 1987 NOL deduction,
After conceding respondent’s adjustments to the 1983, 1985, and 1986 NOL carryforwards, petitioner asserts that the portion of the 1987 and 1988 NOL’s arising from the 1984 NOL carryforward is allowable. Furthermore, petitioner asserts that she had additional, unclaimed deductions during the period 1984 to 1988 which contribute to the NOL available in 1987 and 1988.
As a preliminary point, we note the well-settled rule that the Commissioner may recompute a taxpayer’s taxable income or loss for a year in which the statute of limitations would otherwise bar assessment in order to redetermine the amount of the NOL deduction claimed in an open year. ABKCO Indus., Inc. v. Commissioner,
A. 1984 Gain From Sale of Grapevine Property
Respondent argues that Elwood had sufficient unreported gain arising from the sale of the Grapevine property in 1984 to eliminate Elwood’s claimed loss for that year. Accordingly, petitioner would not be entitled to claim the 1984 NOL carryforward as part of her 1987 and 1988 NOL deductions. Petitioner argues that Elwood did not have unreported gain on the 1984 sale of the Grapevine property, so the loss reported in 1984, which was carried forward to 1987 and 1988, was allowable.
Gross income includes gains derived from dealings in property. Sec. 61(a)(3). Gain derived from the disposition of property is the excess of the amount realized over the property’s adjusted basis. Sec. 1001(a). The basis of property acquired from a decedent is generally the fair market value of the property as of the date of the decedent’s death. Sec. 1014(a). This basis rule parallels the general rule of the estate tax for determining the value of property which is included in a decedent’s gross estate under section 2031. Sec. 1.1014-1(a), Income Tax Regs.
The parties agree that Elwood realized $619,425 on the sale of the Grapevine property, but disagree on Elwood’s basis. Respondent argues that Elwood was bound by a duty of consistency to use a basis of $355,000 when he sold the Grapevine property.
The “duty of consistency”, sometimes referred to as quasi-estoppel, applies in this Court. E.g., LeFever v. Commissioner,
There are a number of justifications for the duty of consistency, the most obvious being that taxpayers should not be able to maintain inconsistent positions to obtain an unfair advantage. As stated by the Court of Appeals for the Fifth Circuit:
In adjusting values the Commissioner in effect represents the interests of all other taxpayers who must bear what the particular taxpayer unjustly escapes. It is no more right to allow a party to blow hot and cold as suits his interests in tax matters than in other relationships. Whether it be called estoppel, or a duty of consistency, or the fixing of a fact by agreement, the fact fixed for one year ought to remain fixed in all its consequences, unless a more just general settlement is proposed and can be effected. * * * [Alamo Natl. Bank v. Commissioner,95 F.2d 622 , 623 (5th Cir. 1938), affg.36 B.T.A. 402 (1937).]
Aside from eliminating the unfair advantage obtained by a taxpayer who maintains inconsistent positions, the duty of consistency also contributes to our self-reporting system of taxation. As this Court has noted, to allow taxpayers “to disavow their prior representations * * * would invite similar intentional deceit on the part of other taxpayers seeking to gain a tax benefit.” LeFever v. Commissioner, supra at 544. Furthermore, this Court has noted that the duty of consistency buttresses the values of finality and repose inherent in statutes of limitation, and it possesses the administrative virtue of eliminating the fact-finding problems associated with reviewing old transactions, “when the evidence may be stale and unavailable.” Bartel v. Commissioner,
This Court has found that the duty of consistency applies when:
“(1) the taxpayer has made a representation or reported an item for tax purposes in one year,
(2) the Commissioner has acquiesced in or relied on that act for that year, and
(3) the taxpayer desires to change the representation, previously made, in a later year after the statute of limitations on assessments bars adjustments for the initial year.”
[LeFever v. Commissioner, supra at 543 (quoting Beltzer v. United States,495 F.2d 211 , 212 (8th Cir. 1974)).]
Respondent argues that the foregoing triune standard has been satisfied. Specifically, respondent argues Elwood made a representation in the stipulation of settled issues that the value of the Grapevine property for purposes of computing the estate’s Federal estate tax liability was $1,420,000. Respondent argues that, due to the relationship between Elwood and petitioner, petitioner was bound by this representation. Respondent relied on this representation, allowing such value to be used in computing the estates’s Federal estate tax liability. Finally, respondent argues that petitioner is now maintaining a position inconsistent with the prior representation, after the decision in the estate case has become final, barring subsequent adjustments to the estate. Accordingly, respondent argues that petitioner is estopped from arguing that Elwood’s basis in the Grapevine property was higher than one-fourth of the agreed value of the Grapevine property in the stipulation of settled issues.
Petitioner argues that the duty of consistency does not apply in this case, since she was not a party to the stipulation.
In analyzing whether the duty of consistency applies, we note that respondent’s initial premise is that the duty of consistency would estop Elwood from arguing that his basis in the Grapevine property was greater than one-fourth of the amount agreed to in the stipulation of settled issues. We agree with respondent’s threshold premise, as it comports with our decision in LeFever v. Commissioner,
However, even assuming the application of the duty of consistency against Elwood, petitioner points out that Elwood is not the taxpayer in this case. Petitioner asserts that she was not a party to and did not enter into the stipulation of settled issues, and therefore the first prong of the duty of consistency test is not satisfied. Respondent argues that, due to the relationship between Elwood and petitioner, petitioner was bound by Elwood’s representation.
Several courts have held that the duty of consistency doctrine prevents a beneficiary of an estate from repudiating an estate tax value where the beneficiary had been a fiduciary of the estate. Beltzer v. United States,
In Ford v. United States, supra, the decedent was a citizen of the United States and a resident of Brazil. At the time of his death, the decedent owned stock in a Brazilian corporation. Under Brazilian law, the stock passed from the decedent to his two minor children. The executor of the decedent’s estate used the value established by Brazilian appraisers, after converting the amount into dollars, for Federal estate tax purposes. The Commissioner contested the method of computing the rate of exchange but not the actual value of the stock. The executor acquiesced on this issue, although other issues were litigated. Subsequently, after the children reached majority, they sold their stock and claimed a basis substantially in excess of that used for estate tax purposes. The U.S. Court of Claims held that the duty of consistency did not estop the taxpayers from asserting that the stock had a value in excess of that used for estate tax purposes. The court refused to bind the beneficiaries to the estate’s valuation of the stock because the taxpayers were minors and had no knowledge of what was being written in their father’s estate tax return in the United States. Id. at 22.
A number of courts have distinguished Ford, finding that a taxpayer can, under appropriate circumstances, be estopped by a representation made by or on behalf of a related taxpayer. E.g., Hess v. United States, supra; Beltzer v. United States, supra; McMillan v. United States, supra. In Hess v. United States, supra at 464, the court distinguished its own decision in Ford, finding that the representation of an estate bound a testamentary trust created by the estate. In reaching this decision, the court found that, although the trust and the estate were separate legal entities, it was “fair and in accord with the spirit of law, to require the trust to act in a manner consistent with the estate”, because the two entities were “very closely related.” Id.
In Beltzer v. United States, supra at 212-213, the U.S. Court of Appeals for the Eighth Circuit held that a beneficiary was bound by an estate’s representation, distinguishing the Ford case. In Beltzer, the taxpayer was a coexecutor of his father’s estate. The taxpayer inherited stock which had been reported in the estate tax return as having a fair market value of $59,713 on the date of his father’s death, September 22, 1959. The time for adjustments and assessments against the estate expired on December 23, 1963. On May 6, 1966, the taxpayer sold the shares for $140,000. For purposes of determining his gain on the sale of the stock, the taxpayer asserted that the stock actually had a fair market value of $118,020 on the date of his father’s death, despite the fact that he had signed the estate tax return at the lesser figure and had received the benefit of the lower estate tax. The taxpayer argued that he should not be bound by the estate’s representation of value, because he relied on his coexecutor to handle the estate tax return. Rejecting the taxpayer’s nonparticipation argument, the Court of Appeals held that the taxpayer was bound by the lower stock value reported by the estate under the duty of consistency. Id. at 212.
The teaching from Hess, Beltzer, and the other cases which have found that a taxpayer may be estopped by a prior representation made by or on behalf of another taxpayer is that there must be a sufficiently close relationship between the party making the prior representation and the party to be estopped. Hess v. United States, supra at 464; Beltzer v. United States, supra at 212. Whether there is sufficient identity between the parties will be dependent upon the facts and circumstances of the particular case.
Petitioner and Elwood filed a joint Federal income tax return for each of the tax years in issue and continued to do so for 1989, the year in which the stipulation of settled issues was executed by Elwood. We have previously noted that filing a joint Federal income tax return generally results in tax savings to the husband and wife. Benjamin v. Commissioner,
The remaining two elements of the duty of consistency standard are met. Respondent was bound to follow the stipulation of settled issues, creating the necessary reliance by respondent. The third prong is met because petitioner is maintaining a position in this case which is inconsistent with the stipulation of settled issues, to respondent’s detriment. Since all three elements of the duty of consistency are satisfied, we hold that petitioner is bound to use $355,000 as Elwood’s basis in the Grapevine property for purposes of determining the amount of gain he realized on the sale of such property.
We decline petitioner’s invitation to redetermine the fair market value of the Grapevine property as of the date of Martha Cluck’s death in 1983. We will not disturb the agreement between respondent and Elwood, and we will not reexamine the stale evidence regarding the 1983 value of the Grapevine property. See Bartel v. Commissioner,
B. Additional Depreciation Deductions
Petitioner asserts that she is entitled to increase her claimed 1987 and 1988 nol’s to reflect certain depreciation and amortization deductions that were not claimed during the tax years 1984 to 1988. Respondent contends that petitioner has not substantiated her entitlement to such deductions.
Deductions are strictly a matter of legislative grace, and petitioner bears the burden of proving she is entitled to any deductions claimed. Rule 142(a); New Colonial Ice Co. v. Helvering,
Section 167 provides, in part, for a depreciation deduction with respect to property used in a trade or business. Depreciation allows the taxpayer to recover the cost of the property used in a trade or business or for the production of income. United States v. Ludey,
To substantiate her entitlement to the additional amortization and depreciation deductions, petitioner presented testimony of her husband, Elwood, and a number of summary schedules. According to petitioner, the summary schedules, which were purportedly prepared by petitioner’s accountant, substantiate her entitlement to the claimed deductions. Although petitioner indicated that the original documentation supporting the schedules (canceled checks and receipts) was in the courtroom, she did not offer it as evidence. In regard to this documentation, the revenue agent that audited petitioner’s returns for the years at issue testified that he had, in the company of petitioner’s accountant, attempted to reconcile the summary schedules with the alleged original documentation. According to the agent, the original information could not be reconciled with the summary schedules. Furthermore, it appeared to the agent that a number of the claimed depreciation deductions arose from assets that belonged to another person or entity.
We are not required to accept the unsubstantiated testimony of petitioner’s husband, and we decline to do so. Tokarski v. Commissioner,
Issue 2. Addition to Tax — Failure To Timely File
Section 6651(a)(1) provides for an addition to tax for failure to file a Federal income tax return by its due date determined with regard to any extension of time for filing, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. Calendar year individual taxpayers must file their Federal income tax return by April 15 following the close of the calendar year. Sec. 6072(a). The taxpayer bears the burden of proof on this issue. Rule 142(a).
To demonstrate that petitioner did not timely file her 1987 and 1988 returns, respondent introduced a Form 4340, Certificate of Assessments and Payments, for both 1987 and 1988, indicating that petitioner filed her 1987 and 1988 tax returns on January 16 and September 7, 1990, respectively. Petitioner does not contend, at trial or on brief, that she timely filed her 1987 or 1988 Federal income tax return. Furthermore, she has not attempted to prove reasonable cause for her failure to file timely. Thus, we hold that petitioner is liable for the additions to tax under section 6651(a)(1).
Issue 3. Addition to Tax — Negligence
In her notice of deficiency, respondent determined that petitioner was liable for additions to tax for negligence under section 6653(a)(1)(A) and (B) for 1987 and section 6653(a)(1) for 1988. Petitioner asserts that her actions were not negligent and, therefore, she is not liable for such additions.
For 1987, section 6653(a)(1)(A) provides that if any part of the underpayment is due to negligence or disregard of rules or regulations, there shall be added to the tax an amount equal to 5 percent of the underpayment. Also for 1987, section 6653(a)(1)(B) imposes an addition to tax equal to 50 percent of the interest payable under section 6601 with respect to the portion of the underpayment attributable to negligence. For 1988, section 6653(a)(1) provides that if any part of the underpayment is due to negligence or disregard of rules or regulations, there shall be added to the tax an amount equal to 5 percent of the underpayment.
Negligence under section 6653(a) is defined as a “lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.” Neely v. Commissioner,
Here, petitioner has failed to present any evidence that she was not negligent in claiming the 1987 and 1988 NOL’s. Accordingly, she has failed to meet her burden of proof; therefore, we affirm respondent’s determination on this issue.
Issue 4. Addition to Tax — Substantial Understatement
Respondent determined that petitioner was liable for additions to tax pursuant to section 6661 for tax years 1987 and 1988.
Section 6661 provides that if there is a substantial understatement of income tax, there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement. Sec. 6661(a). The taxpayer bears the burden of proving that the Commissioner’s determination as to the addition to tax under section 6661(a) is erroneous. Rule 142(a).
An understatement is the difference between the amount required to be shown on the return and the amount actually shown on the return. Sec. 6661(b)(2); Tweeddale v. Commissioner,
Petitioner made no arguments and presented no evidence regarding the substantial understatement additions to tax. Therefore, petitioner has failed to carry her burden of proof as to those items. Accordingly, if the recomputed deficiency under Rule 155 attributable to those items satisfies the statutory percentage or amount, petitioner will be liable for such additions to tax.
To reflect the foregoing opinion and the concessions of the parties,
Decision will be entered under Rule 155.
Notes
50 percent of the interest that is computed on the portion of the underpayment which is attributable to negligence or intentional disregard of rules and regulations.
Respondent disallowed a medical expense deduction of $1,366 and a miscellaneous deduction of $250 for tax year 1987. In her petition, petitioner asserted that these deductions were allowable; however, petitioner did not address these issues at trial or on brief. Accordingly, we find that petitioner has conceded these issues. Rule 151(e)(4) and (5); Petzoldt v. Commissioner,
All section references are to the Internal Revenue Code in effect for the taxable years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All dollar amounts are rounded to the nearest dollar.
By order dated Dec. 13, 1993, we granted respondent’s motion to compel stipulation and directed petitioner to file a response to respondent’s proposed stipulation of facts and to show cause why the facts and evidence recited in such proposed stipulation should not be accepted as established for purposes of this case. Petitioner’s response to our show cause order was evasive and not fairly directed at the proposed stipulation or any portion thereof. Accordingly, on Jan. 12, 1994, we ordered that respondent’s proposed stipulation of facts be deemed stipulated for purposes of this case.
When a husband and wife file joint Federal income tax returns, sec. 6013(d)(3) imposes joint and several liability upon each spouse. The law of joint and several liability permits the Internal Revenue Service (IRS) to assess one spouse for the tax deficiency of the couple and to issue a deficiency notice to the other spouse when it is unable to satisfy the claim. However, the IRS is allowed to collect this single tax obligation only once. Dolan v. Commissioner,
According to Elwood’s testimony, the reason only one-half the value of the Grapevine property was included in the decedent’s gross estate was that Elwood and his brothers believed that they had inherited a one-half interest in the property in 1964, which is the year their father died.
Actually, Martha K. Cluck died intestate, and her four sons were thus beneficiaries, and thus potentially liable as transferees for any unpaid Federal estate tax owed by her estate.
Petitioner argues that evidence of the agreement between the Cluck brothers and respondent is inadmissable under Rule 91(e), because it was a stipulation which was used in another case. Although styled as a stipulation, the settlement is an agreement between the parties which was deemed stipulated for purposes of this case. See supra note 3. Furthermore, the agreement is relevant and not barred by any evidentiary rule. We therefore find that the agreement is admissible in this case. AMERCO & Subs. v. Commissioner,
Petitioner claimed a net operating loss deduction of $195,459 for 1987, and respondent allowed a net operating loss deduction of $29,330.
Petitioner made no arguments regarding her failure to elect to forgo the carrybacks in both 1983 and 1985, and her returns for those years do not contain such an election. Since petitioner failed to make such an election, as required by sec. 172(b)(3), the 1983 and 1985 losses must first be carried back to 1980 and 1982, respectively. It appears that Elwood had sufficient income in 1980 and 1982 to absorb the 1983 and 1985 carrybacks, and petitioner has not argued otherwise. Therefore, we find that the portion of petitioner’s 1987 and 1988 net operating losses arising from the 1983 and 1985 loss carryforwards is not allowable. Rule 151(e)(4) and (5); Petzoldt v. Commissioner,
The amount of unreported income conceded by petitioner exceeds $10,842. However, since respondent has not argued for an increase in the deficiency, we treat petitioner’s concession as being limited to $10,842.
Respondent has conceded that she has the burden of proof on this issue, because the duty of consistency is an affirmative defense. Rule 142(a).
Unlike the situation in Ford v. United States,
We believe the flexibility inherent in such an approach comports with the spirit of our duty of consistency jurisprudence. See Arkansas Best Corp. v. Commissioner,