Deutsch v. Comm'r
| Decision Date | 15 November 2012 |
| Docket Number | Docket No. 4865-10,T.C. Memo. 2012-319 |
| Parties | FRED DEUTSCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Ira B. Stechel and John T. Morin, for petitioner.
Shawna A. Early, for respondent.
GOEKE, Judge: Respondent determined a $367,019 deficiency and a $73,404 accuracy-related penalty under section 6662(a)1 for petitioner's taxableyear 2004. Part of the determined deficiency stems from respondent's disallowance of several deductions petitioner claimed on his 2004 Schedule C, Profit or Loss From Business. Petitioner adduced no evidence or relevant testimony concerning the deductions at trial and later conceded the attendant determinations in his posttrial brief.2 There remain two issues for decision:
(1) whether petitioner is entitled to a $2,776,050 net operating loss (NOL) deduction for the taxable year at issue. We hold that he was not so entitled; and,
(2) whether respondent appropriately determined a $73,404 section 6662(a) penalty against petitioner. We hold that his determination was appropriate.
At the time of petition to this Court, petitioner's mailing address was in New York.
Beginning in the mid-1970s petitioner became engaged in real estate development and management, primarily in the New York metropolitan area. Petitioner participated in real estate activities through various corporations andlimited partnerships.3 In the late 1980s petitioner's business purportedly expanded to include real estate lending. Petitioner states that several alleged loans, extended in his individual capacity or through his wholly owned company, Fred Deutsch Co., became unrecoverable at various nonspecified periods in the 1990s, permitting him bad debt deductions pursuant to section 166. For his taxable year 2004 petitioner alleges that he was entitled to an NOL deduction for bad debts arising from the following purportedly unrecoverable loans:
+----------------------------------------------------+
¦Debtor ¦Aggregate amount ¦
+---------------------------------+------------------¦
¦270 Lafayette Associates, LP ¦$1,142,527 ¦
+---------------------------------+------------------¦
¦285 Lafayette Associates, LP ¦2,500,000 ¦
+---------------------------------+------------------¦
¦Broadway Mercer Reality, Inc. ¦450,000 ¦
+---------------------------------+------------------¦
¦630 West 11th Street Corp. ¦423,114 ¦
+---------------------------------+------------------¦
¦Stephen Corelli * ¦182,500 ¦
+---------------------------------+------------------¦
¦104 East 98th Street Owners Corp.¦1,031,426 ¦
+---------------------------------+------------------¦
¦Ashburton Five Guys ¦630,407 ¦
+---------------------------------+------------------¦
¦Lafayette Funding Corp. ¦3,150,000 ¦
+---------------------------------+------------------¦
¦Avram Lebor ** ¦1,000,000 ¦
+----------------------------------------------------+
* Petitioner submits that Mr. Corelli used the loan proceeds to acquire an interest in 630 West 11th Street Corp. ** Mr. Lebor allegedly used the loan proceeds to acquire an interest in a New Jersey real estate "project".
Petitioner purports to have held interests in all the aforementioned entities with the exception of Lafayette Funding Corp., which he states was owned by Mr. Lebor, a childhood friend and business partner.4
Petitioner also guaranteed loans, extended by Westinghouse Credit Corp. (Westinghouse) and Continental Realty, Inc. (Continental), to 270 Lafayette Associates, LP (270 Lafayette),5 of $4,040,000 and $4,545,000. The loans were secured by second and third mortgages on a property held by 270 Lafayette. Following a foreclosure instituted by the holder of the first mortgage, 270 Lafayette defaulted on the second and third mortgages. Thereafter, Westinghouse and Continental commenced an action on the second mortgage against petitioner,resulting in a judgment of $5,087,127.27. An action was also commenced against 270 Lafayette and petitioner on the third mortgage.
On March 4, 1993, petitioner entered into a settlement agreement with Continental and Westinghouse.6 As part of the settlement agreement, both Continental and Westinghouse agreed, subject to various conditions, to "refrain from the active prosecution of any and all enforcement actions which may have been instituted by them and to refrain from instituting, filing, or pursuing any further enforcement actions" against petitioner and 270 Lafayette and to release petitioner from "any and all personal liability" arising from the second and third mortgage.
Petitioner filed individual tax returns for taxable years 1990 through 1994 reflecting negative adjusted gross income of $82,812, $2,407,061, $1,141,924, $1,146,424, and $5,823,021, respectively. Petitioner did not file a return for taxable year 1995 or 1996. He did, however, file a tax return for taxable year 1997 in October 1998.7 Petitioner filed individual tax returns for taxable years 1998through 2003 reflecting negative adjusted gross income of $7,250,750, $6,634,311, $5,485,549, $4,279,281, $3,494,834, and $2,557,305, respectively.
At some point following 1998, respondent's Special Agent Anthony Carcione was assigned to investigate petitioner's taxable years 1995, 1996, and 1997. Revenue Agent Anthony Campetella served as a cooperating agent in the matter. Petitioner was represented by criminal attorney Benjamin Brafman and tax attorney Richard Champion throughout the criminal investigation. As part of his inquiry, Special Agent Carcione reviewed bank records and corporate documents provided by petitioner's attorneys for the purpose of determining petitioner's earned income derived from interests he held in various companies.
During the course of the investigation Mr. Champion informed Revenue Agent Campetella that any potential NOLs would have been offset by forgiveness of indebtedness income from petitioner's prior property foreclosures.
In May 2002 the U.S. Attorney's Office for the Southern District of New York filed a "felony information" in the U.S. District Court for the Southern District of New York charging petitioner with violation of section 7206(1) for willfully subscribing a false tax return for taxable year 1997. On August 1, 2002, petitioner pleaded guilty to the offense. As part of the criminalproceedings, petitioner also agreed to his income tax liabilities for taxable years 1995, 1996, and 1997.
On January 14, 2003, Mr. Champion executed on petitioner's behalf a Form 4549, Income Tax Examination Changes, consenting to the assessment and collection of tax, penalties, and interest computed to February 8, 2003, for 1995 and 1996 in the following amounts:
+---------------------------------------+
¦Year ¦Tax ¦Penalty ¦Interest ¦
+------+--------+-----------+-----------¦
¦1995 ¦$182,167¦$136,625.25¦$229,530.82¦
+------+--------+-----------+-----------¦
¦1996 ¦114,958 ¦86,218.50 ¦115,781.70 ¦
+---------------------------------------+
Following the conclusion of the criminal investigation, Special Agent Carcione stated that he personally returned petitioner's documents to Mr. Brafman or Mr. Champion at some point in 2002 or 2003.
On August 17, 2004, petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for his taxable year 1997, claiming an NOL carryforward of $8,209,814. Respondent treated the submitted return as a claim for refund. Revenue Agent Campetella was thereafter assigned to review petitioner's claim.
As part of his examination of the 1997 NOL claim, Revenue Agent Campetella requested documentation of the final dispositions of foreclosedproperty and copies of the documents evidencing the purported loans which resulted in the claimed losses. Revenue Agent Campetella also met with petitioner's accountant, Jim Ashe, in his office on three separate occasions to review six boxes of petitioner's records. During his investigation Revenue Agent Campetella made copies of relevant documents; however, he did not take possession of the original documents at any point. At the conclusion of his review, Revenue Agent Campetella determined that petitioner had failed to substantiate his NOL claim. Petitioner never formally contested Revenue Agent Campetella's determination in a civil refund suit. See generally secs. 6532, 7422.
OPINIONTaxpayers are required to maintain adequate records substantiating claimed loss deductions and generally bear the burden of proving that they are entitled to claimed losses. Sec. 6001; Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).8
Taxpayers attempting to deduct NOLs bear, in particular, the burden of establishing both the existence of the NOLs and the amount of any NOL that may be carried over to the subject years. Rule 142(a)(1); United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235 (1955); Keith v. Commissioner, 115 T.C. 605, 621 (2000); Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), rev'd and remanded on other grounds, 259 F.2d 300 (5th Cir. 1958). Such deductions are a matter of legislative grace, not a matter of right. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Olympic Radio & Television, 349 U.S. at 235; Deputy v. Du Pont, 308 U.S. 488, 493 (1940).
Notwithstanding the general rule, if the taxpayer produces credible evidence9 with respect to any factual issue relevant to ascertaining his Federal income tax liability, the burden of proof shifts from the taxpayer to the Commissioner as to that factual issue. Sec. 7491(a)(1). The shifting of the burden of proof, however, is conditioned upon the taxpayer first demonstrating that he met the requirements of section 7491(a)(2), including: (1) substantiating any itemas required by the Code, (2) maintaining all records required by...
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