Neilson v. Comm'r of Internal Revenue, Docket No. 4014-88.

CourtUnited States Tax Court
Citation94 T.C. 1,58 USLW 2448,94 T.C. No. 1
Docket NumberDocket No. 4014-88.
PartiesROBERT B. NEILSON and DOROTHY F. NEILSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Decision Date02 January 1990

OPINION TEXT STARTS HERE

P filed a voluntary liquidating bankruptcy. R, after the discharge but before the closing of the bankruptcy proceeding, mailed a notice of deficiency to P. Following the close of the bankruptcy proceeding, P filed a timely petition with this Court. R had been notified that this was a ‘no assets‘ bankruptcy and had not filed a proof of claim. Neither the merits of the tax liability or the discharge were litigated in the bankruptcy proceeding.

Under similar facts, we held in Graham v. Commissioner, 75 T.C. 389 (1980), that a notice of deficiency relating to prebankruptcy years is valid if it is mailed after the termination of the bankruptcy proceeding, and the Tax Court will have jurisdiction if a timely petition is filed with respect to such notice. The case was decided pursuant to former sec. 6871, I.R.C. 1954, and pursuant to the Bankruptcy Code in effect prior to 1978.

Changes to the law made by the 1978 Bankruptcy Code and by the Bankruptcy Tax Act of 1980 modify the holding of Graham and allow the Tax Court to assume jurisdiction once the automatic stay is lifted even though this may occur before the termination of the bankruptcy proceeding and even though the notice of deficiency may have been mailed prior to the lifting of the automatic stay.

HELD, under the circumstances of this case, the Tax Court has jurisdiction to redetermine Federal income tax deficiencies with respect to prebankruptcy tax years.

Held further, the Tax Court has no jurisdiction to determine whether P's taxes were discharged in the bankruptcy proceeding.

HELD, FURTHER, allowable home office expenses are redetermined.

Robert B. Neilson and Dorothy F. Neilson, pro se.

Kathryn K. Vetter, for the respondent.

GERBER, JUDGE:

Respondent determined deficiencies in petitioners' Federal income taxes for taxable years 1983 and 1984 in the amounts of $918.00 and $992.98, respectively. Petitioners moved, at the time of trial, to dismiss for lack of jurisdiction on the ground that any deficiency in or liability for 1983 and 1984 income taxes was or should have been discharged in their bankruptcy proceedings. At trial, the parties offered evidence concerning both the jurisdictional motion and the underlying income tax issue involving claimed deductions for ‘office in home‘ under section 280A. 1 The jurisdictional motion was taken under advisement and is addressed as the first issue in this opinion.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioners Robert B. and Dorothy F. Neilson are husband and wife and resided in Carmichael, California, at the time the petition in this case was filed. Petitioners filed timely joint 1983 and 1984 Federal income tax returns. In connection with respondent's examination of their 1983 and 1984 returns, petitioners executed a Consent to Extend Time to Assess Tax (Form 872) to extend the period of assessment for the 1983 income tax until December 31, 1987. Petitioners executed the consent in December 1986.

PETITIONERS' BANKRUPTCY PROCEEDINGS

During mid-June 1987, each petitioner voluntarily initiated a liquidating bankruptcy proceeding under chapter 7 of the Bankruptcy Act, 11 U.S.C. The voluntary petitions were filed on behalf of each taxpayer in the United States Bankruptcy Court for the Eastern District of California. Schedules filed by petitioners in conjunction with their petitions listed, as a ‘disputed liability,‘ $8,400 in taxes owed to the ‘I.R.S.‘ There is no indication that the 1983 and 1984 deficiencies determined by respondent in this case were part of the $8,400 listed in the bankruptcy proceeding. Respondent did not file a proof of claim in either bankruptcy proceeding and neither petitioners nor respondent filed an application in the bankruptcy proceeding to determine the dischargeability of petitioners' 1983 and 1984 tax liability.

On October 20, 1987, discharge orders were entered in the Neilsons' respective bankruptcy proceedings which provided in pertinent part as follows:

1. THE ABOVE-NAMED DEBTOR(S) IS RELEASED FROM ALL DISCHARGEABLE DEBTS.

2. ANY JUDGMENT HERETOFORE OR HEREAFTER OBTAINED IN ANY COURT OTHER THAN THIS COURT IS NULL AND VOID AS A DETERMINATION OF THE PERSONAL LIABILITY OF THE DEBTOR(S) WITH RESPECT TO ANY OF THE FOLLOWING:

(A) DEBTS DISCHARGEABLE UNDER 11 U.S.C. SEC. 523;

(B) UNLESS HERETOFORE OR HEREAFTER DETERMINED BY ORDER OF THIS COURT TO BE NONDISCHARGEABLE, DEBTS ALLEGED TO BE EXCEPTED FROM DISCHARGE UNDER CLAUSES (2), (4), and (6) OF 11 U.S.C. SEC. 523(A);

(C) DEBTS DETERMINED BY THIS COURT TO BE DISCHARGED UNDER 11 U.S.C. SEC. 523(D).

3. ALL CREDITORS WHOSE DEBTS ARE DISCHARGED BY THIS ORDER AND ALL CREDITORS WHOSE JUDGMENTS ARE DECLARED NULL AND VOID BY PARAGRAPH 2 ABOVE ARE ENJOINED FROM INSTITUTING OR CONTINUING ANY ACTION OR EMPLOYING ANY PROCESS TO COLLECT SUCH DEBTS AS PERSONAL LIABILITIES OF THE ABOVE-NAMED DEBTOR(S).

Respondent was notified of the discharge in Dorothy Neilson's bankruptcy proceeding on or about October 23, 1987. Notice of the discharge in Mr. Neilson's bankruptcy was not sent to respondent apparently due to an incomplete address.

On December 9, 1987, respondent mailed a joint statutory notice of deficiency to petitioners for their 1983 and 1984 taxable years. The deficiencies resulted from respondent's partial disallowance of certain home office deductions claimed on petitioners' joint Federal income tax returns.

On December 10, 1987, the bankruptcy trustee reported that no assets could be recovered from either of petitioner-bankrupts' estates and on January 28, 1988 an order was approved reflecting no distribution and closing the bankrupts' estates. The petition to this Court was filed on March 1, 1988. There is no indication that respondent filed a proof of claim or that petitioners made an attempt to litigate the merits or dischargeability of the tax deficiencies in the bankruptcy proceeding.

RESPONDENT'S DEFICIENCY DETERMINATION

During 1983 and 1984 petitioners operated a licensed day-care center in their home. Petitioners purchased their 3,000-square-foot home in 1981 for $119,624, of which $75,285 was allocable to the house. Eighty-nine percent of the 3,000 square feet of space was utilized for day-care purposes. The following schedules reflect the amount of deductions claimed by petitioners and allowed by respondent for the 1983 and 1984 taxable years:

+-------------------------------------------------------+
                ¦Type of        ¦Claimed  ¦Allowed  ¦Claimed  ¦Allowed  ¦
                +---------------+---------+---------+---------+---------¦
                ¦deduction      ¦in 1983  ¦in 1983  ¦in 1984  ¦in 1984  ¦
                +---------------+---------+---------+---------+---------¦
                ¦               ¦         ¦         ¦         ¦         ¦
                +---------------+---------+---------+---------+---------¦
                ¦Depreciation2  ¦$5,057.00¦$1,994.00¦$5,057.00¦$1,994.00¦
                +---------------+---------+---------+---------+---------¦
                ¦Lawn Care      ¦532.00   ¦         ¦608.00   ¦         ¦
                +---------------+---------+---------+---------+---------¦
                ¦Utilities      ¦753.94   ¦792.00   ¦1,348.37 ¦602.37   ¦
                +---------------+---------+---------+---------+---------¦
                ¦Repairs        ¦960.00   ¦442.90   ¦         ¦         ¦
                +---------------+---------+---------+---------+---------¦
                ¦Insurance      ¦425.00   ¦190.00   ¦697.59   ¦311.59   ¦
                +---------------+---------+---------+---------+---------¦
                ¦Real estate tax¦1,369.44 ¦611.44   ¦1,464.29 ¦654.29   ¦
                +---------------+---------+---------+---------+---------¦
                ¦Interest-Mtg.  ¦5,455.17 ¦3,171.17 ¦7,035.85 ¦3,921.86 ¦
                +-------------------------------------------------------+
                

Respondent determined that petitioners' use of their residence for day-care services was 75 hours per week. Respondent's estimate was based upon a log kept by petitioners that reflects the times and days that children were in petitioners' care.

In addition to the time children were actually present in petitioners' residence, petitioners spent about 2 hours each morning organizing the facility and preparing luncheon meals for the children. Petitioners also spent about one hour each evening after the children departed cleaning and reorganizing the day-care facility. Respondent did not consider the preparation and clean-up time in estimating 75 hours per week. Petitioners, on occasion, also provided day care on weekends. Respondent's formula did not consider the weekend use of petitioners' residence. Petitioners utilized their residence for day-care business purposes for an average of 90 hours per week or 54 percent (90 divided by 168) of the time.

Petitioners claimed and respondent disallowed $532 and $608 for lawn care in 1983 and 1984, respectively. During 1983 and 1984 petitioners used the lawn areas around their residence for day-care business purposes. During 1983 and 1984 petitioners paid $532 and $608, respectively, for lawn care expenses, 54 percent of which is deductible in each taxable year.

OPINION

Petitioners contend that their 1983 and 1984 income tax liabilities were discharged by the discharge orders issued in their respective bankruptcy proceedings and that this Court lacks jurisdiction to redetermine the deficiencies. Respondent counters that these taxes are not dischargeable under the Bankruptcy Code. The parties have incorrectly couched the jurisdictional issue in a manner where jurisdiction would be dependent upon our authority to determine whether the taxes in issue were dischargeable or discharged in the bankruptcies. In so couching the issue, the parties have overlooked the possibility that we may have jurisdiction over the merits of the 1983 and 1984 tax deficiencies without having the jurisdiction to determine the dischargeability...

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