Calcutt v. Comm'r of Internal Revenue, Docket Nos. 29849-83

• Citation: 84 T.C. No. 47,84 T.C. 716
• Decision Date: 15 April 1985
• Docket Number: 29850-83.,Docket Nos. 29849-83
• Parties: JAMES K. CALCUTT and JUNE B. CALCUTT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWILLIAM HERSHFELD and PAMELA HERSHFELD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

84 T.C. 716

84 T.C. No. 47

JAMES K. CALCUTT and JUNE B. CALCUTT, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, RespondentWILLIAM HERSHFELD and PAMELA HERSHFELD, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 29849-83

29850-83.

United States Tax Court

Filed April 15, 1985

29850-83. During trial, petitioners attempted to establish their entitlement to losses from a subchapter S corporation and depreciation allowable to the corporation. They did not file a post-trial brief in support of their contentions, notwithstanding Rule 151, Tax Court Rules of Practice and Procedure, an order setting dates for seriatim briefs, and an order to show cause why the case should not be dismissed for their failure to do so. HELD, issues are determined against petitioners because the failed to satisfy their burden of proof. Stringer v. Commissioner, 84 T.C. _____ (Apr. 15, 1985), distinguished. JOHN F. DEAN, for the respondent.

James K. Calcutt and William Hershfeld, pro se.

COHEN, JUDGE:

In docket No. 19849-83, respondent determined deficiencies in Federal income taxes of petitioners Calcutt in the amounts of $1,846 for 1980 and $7,430 for 1981. Respondent also determined an addition to tax in the amount of $371.50 under section 6653(a) ¹ and that the full amount of that additional tax was subject to an increment of 50 percent of the interest due on the underpayment of $7,430 for that year.

In docket No. 39850-83, respondent determined deficiencies in the Federal income taxes of petitioners Hershfeld in the amounts of $716 for 1979, $1,975 for 1980, and $2,159 for 1981.

After concessions by each party, the issues for decision are (1) whether the basis of the respective petitioners in a subchapter S corporation may be increased to reflect a bank loan made directly to the corporation and (2) the correct amount of depreciation on certain corporate assets.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulations are incorporated herein by this reference.

All of the petitioners were residents of Maryland at the time their petitions herein were filed.

During the years in issue, petitioners were the shareholders of Uptown-Levy, Inc., a corporation that duly elected to be taxed under subchapter S of the Internal Revenue Code. Uptown-Levy, Inc., operated a delicatessen providing food service and liquor sales.

The delicatessen was operated on property located at 5402 and 5402-1/2 Park Heights Avenue, Baltimore, Maryland. The property was acquired in December 1977, and the acquisition was financed by a mortgage from Fairfax Savings and Loan Association, Inc. In relation to the financing and in addition to the mortgage on the corporate real estate, Fairfax Savings and Loan Association, Inc., demanded a lien on the personal residences of petitioners.

In the statutory notices of deficiency, among other adjustments no longer in issue, respondent disallowed losses of Uptown-Levy, Inc., as deductions to petitioners to the extent that petitioners had not substantiated that they had a basis in their respective shares of the corporation. Respondent also adjusted the amount of depreciation claimed by the corporation by reallocating among corporate assets the total cost of those assets and thereby reducing the cost basis of depreciable assets. Respondent's determination was based, in part, on an appraisal report dated October 25, 1977, that had been delivered to respondent's agents by petitioners' counsel during the course of the audit of petitioners' tax returns for the years in issue. The appraisal had been prepared in connection with the financing of the real estate acquisition by the corporation. The dispute as to the amount allocated to depreciable assets was narrowed, at the time of trial, to a dispute over the value of the corporation's liquor license.

The petitions herein were filed on behalf of petitioners by an attorney duly admitted to practice before the Tax Court. By Notice Setting Case for Trial served July 13, 1984, these cases were set for trial in Baltimore, Maryland, on October 1, 1984. On September 4, 1984, counsel for petitioners filed Motions to Withdraw Appearance, citing ethical reasons why he was required to withdraw from these cases. The motions were granted. On the day of trial, Edward S. Margolis was present on behalf of petitioner William Hershfeld. At that time, however, Mr. Margolis was authorized to practice law but not admitted to practice before the United States Tax Court. He was therefore recognized specially on his representation that he would proceed to secure admission to the Tax Court, which he did. He did not, however, ever file a written entry of appearance in accordance with Rule 24(a)(3).

At the conclusion of trial, the Court ordered seriatim briefs, with petitioners' opening brief due December 3, 1984. No brief was ever received from petitioners. After a series of inquiries from the Court, Mr. Margolis advised the Court by letter that petitioners did not intend to file a brief. Because Mr. Margolis had not entered his appearance on behalf of all of petitioners, the Court ordered petitioners to show cause on March 27, 1985, why these cases should not be dismissed under Rule 123(b) for failure of petitioners properly to prosecute or to comply with the rules of the Court. Petitioners did not appear at the said hearing and did not file any written response to the Court's order.

OPINION

In this proceeding, petitioners have the burden of proving that respondent's determinations are incorrect and that petitioners are entitled to the deductions that they claim. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a).

During trial, petitioners presented evidence that they had given their personal residences as collateral for the loan to the corporation in order to enable the corporation to acquire the property from which it operated the delicatessen business. Petitioner James K. Calcutt also testified that, in his opinion, the liquor license had a value of $7,000 and that the value of $30,000, used in the appraisal done on behalf of the lender at the time of the loan and subsequently used in respondent's determination, was grossly overstated.

Respondent presented the testimony of the agent whose calculations formed the basis of the notice of deficiency. That agent testified that he received the appraisal report from petitioners' prior counsel during the course of his examination.

The respective parties each presented schedules during trial that showed how depreciation would be calculated in accordance with his contention or assumption as to the value of the liquor license. Neither party, however, presented independent evidence of the value of the license.

Petitioners did not file a trial memorandum, but, during trial, petitioner James K. Calcutt explained his contention that petitioners were entitled to include in the basis of their stock in the subchapter S corporation their proportionate shares of the loan made to the corporation. This contention was predicated solely on the argument that section 465, which is applicable to subchapter S corporations, includes in amounts considered ‘at risk‘ amounts borrowed for which the taxpayer has pledged his interest in property unrelated to the activity to which the ‘at risk‘ rules are being applied. See section 465(b)(2)(B). The Court advised petitioners, however, that the at risk ...