KRISTINE A. CLUCK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18590-91
UNITED STATES TAX COURT
Filed October 30, 1995
105 T.C. No. 21
P is married to E. E is not a petitioner in this case. E‘s mother, M, died in 1983, leaving E and his brothers a tract of land (G). G was sold in 1984. P and E have filed joint Federal income tax returns since 1986. P and E claimed net operating loss (NOL) deductions on their 1987 and 1988 returns, consisting of unused NOL‘s carried forward from E‘s 1983, 1984, and 1985 returns and from P and E‘s 1986 joint return. In 1989, after a dispute with R regarding the value of G for purposes of M‘s estate‘s Federal estate tax liability, E and his brothers, who each had owned a one-fourth interest in G, entered into an agreement with R. Pursuant to the agreement, G was valued at $1,420,000. R disallowed the 1984 portion of the 1987 and 1988 NOL‘s on the ground that E had unreported income from the sale of G in 1984, sufficient to eliminate the 1984 loss. P argued that E did not have unreported income in 1984 because E‘s basis in G was $625,000, which exceeded his amount realized ($619,425). R argued that P was estopped by the duty of consistency from arguing that E‘s basis was greater than $355,000 (one-fourth the amount E had agreed G was worth as of the date of M‘s death).
- Held: P and E are in a sufficiently close legal and economic relationship so that P is estopped by E‘s representation, under the duty of consistency. Held, further, P cannot increase her 1987 and 1988 NOL for previously unclaimed depreciation and amortization deductions, because she has failed to substantiate her entitlement to such deductions.
- Held, further, additions to tax under
secs. 6651 ,6653 , and6661 , I.R.C., are sustained.
Steven B. Bass, for respondent.
PARR, Judge: Respondent determined deficiencies in and additions to petitioner‘s Federal income tax for taxable years 1987 and 1988 as follows:
| Additions to Tax | |||||
|---|---|---|---|---|---|
| Year | Deficiency | Sec. 6651 | Sec. 6653(a)(1)(A) | Sec. 6653(a)(1)(B) | Sec. 6661 |
| 1987 | $7,013 | $1,380 | $620 | 1 | $1,753 |
| 1988 | 35,574 | 13,398 | 2,856 | -- | 8,894 |
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,1 the issues for decision are: (1) Whether petitioner is entitled to net operating loss (NOL) deductions in the amounts claimed. This turns on whether petitioner may claim that her husband had a higher basis in property he inherited from his mother than that stipulated by him as beneficiary/transferee in a prior estate case in which an agreed decision was entered in this Court. Estate of Cluck v. Commissioner, Docket No. 10381-88 (August 29, 1989). We hold she may not. (2) Whether petitioner is liable for the
FINDINGS OF FACT
Some of the facts have been stipulated or deemed stipulated under
Petitioner is still married to Elwood, who was 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.4
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 Federal income tax returns 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
| 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
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“.6 Thereafter, Elwood and each of his brothers timely filed petitions for redetermination with this Court.
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
OPINION
Issue 1. The NOL‘s for 1987 and 1988
Respondent disallowed $166,129 of petitioner‘s claimed 1987 NOL deduction,8 and the entire NOL claimed for 1988. More specifically, respondent adjusted the 1983, 1984, 1985, and 1986 losses that made up the 1987 and 1988 NOL‘s. Respondent eliminated the 1983 and 1985 NOL‘s on the ground that petitioner did not elect to carry such losses forward. Petitioner has conceded this adjustment.9 Respondent also disallowed the carryforward of the 1984 loss, on the ground that such loss was eliminated by the unreported gain arising from the sale of the Grapevine property, as discussed below. Finally, respondent reduced the 1986 loss by $10,842,
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, 56 T.C. 1083, 1089 (1971), affd. 482 F.2d 150 (3d Cir. 1973); State Farming Co. v. Commissioner, 40 T.C. 774, 783 (1963). Accordingly, in determining whether petitioner‘s 1987 and 1988 NOL‘s are allowable, respondent may recompute the income or loss reported in the tax years which generated the carryforwards claimed by petitioner in 1987 and 1988.
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.
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.11 The $355,000 amount is one-fourth of $1,420,000, the stipulated value in the Estate case. In the alternative, respondent argues that Elwood‘s basis in the Grapevine property was $263,625, which is one-fourth of the value which the appraisal attached to the Estate‘s Federal estate tax return placed on the Grapevine property as of the date of Martha Cluck‘s death. Petitioner argues that the duty of consistency is inapplicable in this case and that, under all the facts and circumstances of this case, she has established that the Grapevine property had a fair market value of $2,500,000 on the date of Martha Cluck‘s death, and therefore Elwood had a basis of $625,000 when he sold his interest in the Grapevine property.
The “duty of consistency“, sometimes referred to as quasi-estoppel, applies in this Court. E.g., LeFever v. Commissioner, 103 T.C. 525, 541 (1994); Unvert v. Commissioner, 72 T.C. 807 (1979), affd. 656 F.2d 483 (9th Cir. 1981); Mayfair Minerals, Inc. v. Commissioner, 56 T.C. 82 (1971), affd. 456 F.2d 622 (5th Cir. 1972). The duty of consistency is based on the theory that the taxpayer owes the Commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer‘s own prior error or omission. LeFever v. Commissioner, supra. The duty of consistency doctrine prevents a taxpayer from taking one position one year and a contrary position in a later year after the limitations period has run for the first year. Id. at 541-542. A taxpayer gaining governmental benefits on the basis of a representation or an asserted position is thereafter estopped from taking a contrary position in an effort to avoid taxes. Id. at 542.
There are a number of justifications for the duty of consistency, the most obvious being that taxpayers should not be
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, 54 T.C. 25, 32 (1970); McMillan v. United States, 14 AFTR 2d 5704, 64-2 USTC par. 9720, at 93,839 (S.D. W. Va. 1964); see Johnson, “The Taxpayer‘s Duty of Consistency“, 46 Tax Law Rev. 537, 538, 544-549 (1991).
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
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, 103 T.C. 525 (1994).
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, 495 F.2d 211 (8th Cir. 1974); Griffith v. United States, 27 AFTR 71-436, 71-1 USTC par. 9280 (N.D. Tex. 1971); McMillan v. United States, supra; accord Hess v. United States, 210 Ct. Cl. 483, 537 F.2d 457 (1976). But cf. Ford v. United States, 149 Ct. Cl. 558, 276 F.2d 17 (1960). In Beltzer, Griffith, and McMillan, the taxpayer beneficiary had been a coexecutor or administratrix of the estate. In Hess, the taxpayer was a testamentary trust whose trustees had been coadministrators of the estate. By contrast, in Ford, where the beneficiaries had not been estate fiduciaries, the quasi-estoppel doctrine was rejected by the court. This Court has not previously addressed this precise issue.
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 22.12
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
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.13 In this case, we believe there is a sufficiently close relationship between the
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, 66 T.C. 1084, 1100 (1976), affd. 592 F.2d 1259 (5th Cir. 1979). However, in accepting the benefit of filing jointly, the spouses also assume joint and several liability for the payment of any tax due.
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.
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.
We are not required to accept the unsubstantiated testimony of petitioner‘s husband, and we decline to do so. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The summary schedules provided by petitioner do not demonstrate her entitlement to the claimed deductions. Petitioner neither called the accountant who allegedly prepared the schedules to testify, nor offered any documentation underlying the schedules. This dual failure gives rise to the presumption that the evidence, if produced, would be unfavorable. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
Therefore, we hold that petitioner is not entitled to use the claimed depreciation and amortization deductions in the computation of her 1987 and 1988 NOL.
Issue 2. Addition to Tax--Failure To Timely File
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
Issue 3. Addition to Tax--Negligence
In her notice of deficiency, respondent determined that petitioner was liable for additions to tax for negligence under
For 1987,
Negligence under
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
An understatement is the difference between the amount required to be shown on the return and the amount actually shown on the return.
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
To reflect the foregoing opinion and the concessions of the parties,
Decision will be entered under Rule 155.