105 T.C. No. 21
UNITED STATES TAX COURT
KRISTINE A. CLUCK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18590-91. Filed October 30, 1995.
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 - 2 - than $355,000 (one-fourth the amount E had agreed G was worth as of the date of M's death). 1. 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. 2. Held, further, additions to tax under secs. 6651, 6653, and 6661, I.R.C., are sustained.
Kevin P. Kennedy and Elwood Cluck, for petitioner.
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 Sec. Sec. Sec. Sec. Year Deficiency 6651 6653(a)(1)(A) 6653(a)(1)(B) 6661 1 1987 $7,013 $1,380 $620 $1,753 1988 35,574 13,398 2,856 -- 8,894 1 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.
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
1 Respondent disallowed a medical expense deduction of $1,366 and a miscellaneous deduction of $250 for tax year 1987. In her (continued...) - 3 - 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 section 6651 addition to tax, because she failed to
timely file her 1987 and 1988 Federal income tax returns.2 We
hold that she is liable. (3) Whether petitioner is liable for
the addition to tax for negligence under section 6653 for the
years at issue. We hold that she is liable. (4) Whether
petitioner is liable for the substantial understatement penalty
under section 6661 for the years at issue. We hold that she is
liable.
FINDINGS OF FACT
1 (...continued) 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, 92 T.C. 661, 683 (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987). 2 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. - 4 - Some of the facts have been stipulated or deemed stipulated
under Rule 91(f)(3).3 The stipulated facts and the accompanying
exhibits are incorporated into our findings by this reference.
Petitioner, Kristine A. Cluck, resided in San Antonio, Texas, on
the date the petition was filed.
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
3 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. 4 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, 44 T.C. 420, 430 (1965). - 5 - 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 - 6 - 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 $1,054,500.5
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
5 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. - 7 - 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
6 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. - 8 - 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."7 The agreement provided, among other things, that 100
percent of the value of the Grapevine property would be included
in Martha Cluck's gross estate. In addition, the parties agreed
that the fair market value of Martha Cluck's 100-percent interest
in the Grapevine property on the date of her death was
$1,420,000. Separate decisions were entered in the Estate case
as to each of the brothers based on the aforementioned agreement.
This Court entered a decision in Elwood's case on August 29,
1989.
7 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, 96 T.C. 18, 43-44 (1991), affd. on other grounds 979 F.2d 162 (9th Cir. 1992). - 9 - 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, alleging that petitioner had
8 Petitioner claimed a net operating loss deduction of $195,459 for 1987, and respondent allowed a net operating loss deduction of $29,330. 9 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, 92 T.C. 661, 683 (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987). - 10 - received unreported income in that amount. Petitioner conceded
this adjustment.10
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
10 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. - 11 - 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.11
The $355,000 amount is one-fourth of $1,420,000, the stipulated
value in the Estate case. In the alternative, respondent argues
11 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). - 12 - 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 - 13 - 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
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 - 14 - unavailable." Bartel v. Commissioner, 54 T.C. 25, 32 (1970);
McMillan v. United Sates, 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 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 - 15 - 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, 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. - 16 - 1974); Griffith v. United States, 27 AFTR 71-436, 71-1 USTC par.
9280 (N.D. Tex. 1971); McMillan v. United Sates, 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 - 17 - 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 Sates, 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
12 Unlike the situation in Ford v. United States, 149 Ct. Cl. 558, 276 F.2d 17 (1960), petitioner was an adult and married to Elwood in 1989 when he signed the agreement. - 18 - 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 - 19 - particular case.13 In this case, we believe there is a
sufficiently close relationship between the parties, since
petitioner and her husband have closely aligned legal and
economic interests.
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. Sec.
6013(d)(3). By filing a joint income tax return, petitioner and
Elwood entered into a joint economic arrangement, whereby they
shared the benefits and burdens associated with filing a joint
return. In addition to their economic relationship, petitioner
and Elwood were also in the legal relationship of marriage in
1989, when the stipulation was entered. Here we have two
individuals who have elected to be treated as a single taxpaying
13 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, 83 T.C. 640, 659 (1984), affd. in part and revd. in part as to other issues 800 F.2d 215 (8th Cir. 1986), affd. 485 U.S. 212 (1988) (duty of consistency does not require the presence of all the technical elements of estoppel); Unvert v. Commissioner, 72 T.C. 807, 814 (1979) (to same effect), affd. 656 F.2d 483 (9th Cir. 1981). - 20 - unit. Petitioner elected to be taxed not on her individual
earnings and deductions (a treatment she could have chosen) but
on the income and deductions of both spouses. Her tax liability
is therefore directly affected by her husband's stipulation in
the Estate case, agreeing to the value of the Grapevine property.
Petitioner's husband (not she) was the one who allegedly incurred
the loss. If the loss is unavailable to him as a carryforward,
then it stands to reason that she is no more entitled to the loss
than he is. Under these circumstances, we hold that petitioner
is bound by the representations contained in that agreement.
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 - 21 - Bartel v. Commissioner, 54 T.C. 25, 32 (1970). We find that
Elwood had unreported capital gain of $264,425 ($619,425 amount
realized over $355,000 basis). The effect of this ruling is that
the portion of petitioner's 1987 and 1988 NOL's attributable to
the 1984 loss carryforwards will be eliminated.
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, 292 U.S. 435 (1934). A taxpayer is required to
substantiate claimed deductions by maintaining the records needed
to establish her entitlement to such deductions. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs.
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, 274 U.S. 295, 300-301 (1927);
Southeastern Bldg. Corp. v. Commissioner, 3 T.C. 381, 384 (1944),
affd. 148 F.2d 879 (5th Cir. 1945). To substantiate entitlement - 22 - to a depreciation deduction, the taxpayer must show that the
property was used in a trade or business (or other profit-
oriented activity). In addition, the taxpayer must establish the
property's depreciable basis, by showing the cost of the
property, its useful life, and the previously allowable
depreciation. E.g., Delsanter v. Commissioner, 28 T.C. 845, 863
(1957), affd. in part and remanded in part 267 F.2d 39 (6th Cir.
1959).
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. - 23 - 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
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 - 24 - 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. - 25 - 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, 85 T.C. 934, 947 (1985) (quoting Marcello v.
Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. in part
and remanding in part 43 T.C. 168 (1964)). The Commissioner's
determination that the taxpayer's underpayment was due to
negligence is presumed correct, and the taxpayer has the burden
of proving that the determination is erroneous. Rule 142(a);
Bixby v. Commissioner, 58 T.C. 757 (1972). Thus, petitioner must
show that she acted reasonably and prudently and exercised due
care in reporting her taxes. Neely v. Commissioner, supra.
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 - 26 - 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, 92
T.C. 501 (1989); Woods v. Commissioner, 91 T.C. 88 (1988). An
understatement is substantial if it exceeds the greater of $5,000
or 10 percent of the amount required to be shown on the return.
Sec. 6661(b)(1). The understatement is reduced, however, to the
extent it is: (1) Based on substantial authority, or (2)
adequately disclosed in the return or in a statement attached to
the return. Sec. 6661(b)(2)(B).
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.