MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT, Judge: Respondent determined deficiencies in income tax and an addition to tax under section 6651(a) 1 (late filing) against petitioners as follows:
| | Addition to |
| Taxable Year | Deficiency | Tax |
| 1972 | $ 3,793.50 | $189.68 |
| 1973 | 10,945.64 | 0 |
| 1974 | 22,314.72 | 0 |
The parties have settled all but one of the issues raised in the pleadings. The issue remaining for decision is whether petitioners' corporation had the status of an electing small business corporation ("subchapter S") for 1972 through 1974--in particular, whether the corporation timely elected that status.
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.
When the petition herein was filed, petitioners Clifford L. Hogan (hereinafter sometimes referred to as "Clifford") and Nancy C. Hogan (hereinafter sometimes referred to as "Nancy"), husband and wife, were legal residents of Bridgewater, New Jersey.
During the years before the Court, Clifford was a self-employed real estate appraiser. On their joint individual income tax returns for these years, petitioners reported net profit from Clifford's real estate appraising occupation as shown in table 1.
Table 1
| Income Tax Return | Net Profit from |
| for Year | Real Estate Appraising |
| 1972 | $56,869.00 |
| 1973 | 53,185.00 |
| 1974 | 83,141.85 |
On September 10, 1971, petitioners incorporated Slainte, Inc. (hereinafter sometimes referred to as "Slainte"), as a New Jersey corporation. During the years before the Court, petitioners were equal shareholders--and the only shareholders--in Slainte. Slainte was engaged in the business of renting and selling boats in Stuart, Florida.
The legal work to incorporate Slainte was done as a favor to petitioners by Walter Davis (hereinafter sometimes referred to as "Davis"), an attorney who was a relative of petitioners. Davis did not file an election for Slainte to be taxed as an electing small business corporation under subchapter S (secs. 1371 through 1379) of chapter 1 of the Internal Revenue Code of 1954 (hereinafter sometimes referred to as a "subchapter S corporation"), nor did he witness the filing of such an election. He informed petitioners that some form of election of subchapter S status was necessary, but he had only a very general and sketchy knowledge of the technical requirements for the election.
Nancy was Clifford's secretary in his real estate appraising business during the years in issue. She performed most of her secretarial work at home. Some time after Slainte was incorporated, Nancy typed the following letter on stationery that had the letterhead of Clifford's real estate appraising business.
CLIFFORD L. HOGAN REAL ESTATE APPRAISER 390 GEORGE ST. SUITE 702 NEW BRUNSWICK, N.J. 08901
September 15, 1971
District Director Internal Revenue Service Newark, New Jersey
Dear Sir;
On September 10, incorporation papers for "Slainte Incorporated" were filed with the New Jersey Secretary of State.
It is my understanding that "Slainte Inc." qualifies as a "Sub Chapter S" corporation, as my wife and I are the only share holders. It is my further understanding that to be taxed as a "Sub Chapter S" corporation notification is all that is required.
Please be advised, at this time, that we are desious [sic] of a "Sub Chapter S" status.
Thank you for your co-operation in this matter.
Sincerely yours,
CLIFFORD L. HOGAN
President "Slainte Incorporated"
cc/ Mr. Walter Davis
Nancy did not sign the letter. Clifford signed the letter as Slainte's president.
Neither Clifford nor Nancy recalls actually mailing the letter. Petitioners had a practice in 1971 of placing outgoing mail on top of a grandfather clock in their home. Whichever of petitioners went out first the following morning would mail whatever mail was on top of the grandfather clock. Petitioners adopted this practice to keep the mail out of the reach of their children because mail was "relatively safe" on top of the grandfather clock.
Slainte did not obtain an employer's identification number until June 1973. Respondent's agent began an audit of Slainte as a consequence of an audit of petitioners' individual income tax returns, the audit beginning in August 1974.
On February 3, 1975, a Form 2553 (Election by Small Business Corporation), with appropriate shareholder consents, was filed with respondent's Brookhaven Service Center, and made effective January 1, 1975. That form stated that Slainte first had shareholders September 10, 1971, that Slainte first had assets September 10, 1971, that Slainte began doing business September 10, 1972, and that Nancy and Clifford acquired their stock on April 26, 1972.
On January 19, 1976, a Form 2553 was filed which stated that Slainte first had shareholders September 10, 1971, that Slainte first had assets April 26, 1972, that Slainte began doing business April 26, 1972, and that Nancy and Clifford acquired their first shares of stock on September 10, 1971. The 1976 filing was made because of the addition of two shareholders as of January 10, 1976.
Respondent's records for the entire country, including the Brookhaven Service Center, 2 do not reveal the filing of an election by Slainte before February 3, 1975, to be treated as a subchapter S corporation, nor the filing of consents by the shareholders of Slainte to such an election before February 3, 1975.
Petitioners deducted Slainte's losses on their joint income tax returns for the years before the Court in the amounts shown in table 2, claiming that Slainte was a subchapter S corporation.
Table 2
| Income Tax Return |
| for Year | Slainte Loss |
| 1972 | $ 7,718.00 |
| 1973 | 26,768.00 |
| 1974 | 46,527.26 |
Respondent disallowed these deductions
OPINION
If Slainte were a subchapter S corporation for the years before the Court, then petitioners would be permitted to deduct Slainte's losses on their individual income tax returns. 3 Respondent argues that Slainte was not a subchapter S corporation for the years 1972 through 1974, for two reasons. First, respondent alleges that no properly filed timely election by Slainte to be treated as a subchapter S corporation was made for these years. Second, respondent alleges that no consents by Slainte's shareholders to such an election were filed for these years.
Petitioners maintain that the letter dated September 15, 1971, constituted an election by Slainte to be treated as a subchapter S corporation from 1972 on. Petitioners also allege that the letter indicates the shareholders' consent to the election.
We agree with respondent that Slainte did not timely elect subchapter S status for the years before the Court.
In order for a corporation to be a subchapter S corporation it must elect to have the subchapter apply to it and this election must be consented to by all the shareholders. (Sec. 1372(a). 4) In general, such an election is prospective only. The statute specifically requires compliance with regulations of the Treasury Department in the manner of making the election. (Sec. 1372(c)(1). 5)
Petitioners have the burden of proving that they filed a valid election for the years before the Court. Welch v. Helvering,290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Petitioners have failed to prove that the 1971 letter was filed. Petitioners have testified to a course of conduct that normally would have led to the letter being mailed. However, respondent points out that a search of Internal Revenue Service Center records across the country failed to turn up any evidence that an election by Slainte to be treated as a subchapter S corporation was filed before February 3, 1975. We think that the results of respondent's record search is significant; it puts an even greater burden on petitioners to prove that an election was filed. Compare Brutsche v. Commissioner,585 F.2d 436 (CA10 1978), affg. and revg. 65 T.C. 1034 (1976) with Mitchell Offset Plate Service, Inc. v. Commissioner,53 T.C. 235 (1969).
Petitioners have not presented us with any evidence of actual mailing. Apparently, nothing was done that would fix in the mind of anyone a recollection of mailing the letter. Nothing was done to secure tangible evidence (such as a receipt from the United States Postal Service) of mailing.
We note that petitioners appear to have been capable of running a successful business operation during the years before the Court. The net profit from Clifford's real estate appraising business averaged almost $65,000 per year during these years. Petitioners evidently recognized that, under normal circumstances, the income and losses of a corporation are separate from that of its shareholders and that some action had to be taken in order to bring into play the "integration" rules of subchapter S. We are not told why petitioners failed to follow through and take the steps that would avoid a later controversy, or at least strengthen their hand in the event of controversy.
The burden of proof is on petitioners. They have come forward with evidence. The record also contains evidence adverse to petitioners. Considering the record as a whole, we conclude that petitioners have failed to bear their burden of persuasion that the 1971 letter was timely mailed.
Petitioners rely on Mitchell Offset,supra, to demonstrate that this Court has "accepted testimony and held that the presumption of delivery was not rebutted by such failure [i.e., respondent's failure to find any record of receipt of the election] and thus held the elections valid." 6
In Mitchell Offset, we held that the shareholders had proved that the Form 2553 had been filed. The accountant testified that he prepared the form and the consents, had them signed, placed them in a properly addressed, stamped envelope, and mailed them before May 10, 1959 (the corporation therein had been incorporated on April 13, 1959). The attorney testified that he maintained a calendar system to assure that each required step in electing under section 1372 was performed on time. The attorney also conferred on this matter by telephone with the accountant. Respondent in Mitchell Offset, made a very poor effort to locate the form by searching its files. The testimony and circumstances in Mitchell Offset are not present in the instant case, and thus we do not consider it dispositive.
Since the 1975 election could not be retroactive (sec. 1372(c)(1), set forth at note 5, supra) and no other election is claimed to have been made for the years before the Court, we conclude that no valid subchapter S election was made for Slainte for the years before the Court.
On the only contested issue, we hold for respondent.
To reflect concessions made by both parties,
Decision will be entered under Rule 155.