Cluck v. Comm'r of Internal Revenue

• Decision Date: 30 October 1995
• Docket Number: No. 18590-91.,18590-91.
• Parties: Kristine A. CLUCK, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

105 T.C. 324
105 T.C. No. 21

Kristine A. CLUCK, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18590-91.

United States Tax Court.

Oct. 30, 1995.

[105 T.C. 325]

Kevin P. Kennedy and Elwood Cluck, San Antonio, TX, for petitioner.

Steven B. Bass, Austin, TX, for respondent.

[105 T.C. 324]

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).

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.

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 ¦
                +----------------+----------+-------+-------------+-------------+------¦
                ¦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 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

[105 T.C. 326]

liable for the substantial understatement penalty under section 6661 for the years at issue. We hold that she is liable.

FINDINGS OF FACT

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 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 ¦
                +---------------+
                

[105 T.C. 327]

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 carry-forwards, 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

[105 T.C. 328]

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 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...