Wayno v. Commissioner
| Decision Date | 28 January 1992 |
| Docket Number | Docket No. 12989-90. |
| Citation | 63 T.C.M. 1935 |
| Parties | Rita Ann Wayno v. Commissioner. |
| Court | U.S. Tax Court |
This case was assigned pursuant to the provisions of section 7443A(b) and Rules 180, 181, and 182.1
Respondent determined a deficiency in petitioner's 1986 Federal income taxes of $6,515, and additions to tax for negligence under section 6653(a)(1)(A) of $326, and under section 6653(a)(1)(B) in an amount equal to 50 percent of the interest due on $4,915.
On April 15, 1987, Jerome W. Wayno (hereinafter Mr. Wayno) and Rita Ann Wayno (hereinafter petitioner) filed their 1986 joint Federal income tax return. They attached thereto a Schedule C on which they reported no gross income, but on which they deducted expenses totaling $21,530.
Mr. Wayno died on December 17, 1987, after the 1986 return was filed. On March 19, 1990, petitioner mailed a Form 1040X for 1986 (hereinafter second return) to the Internal Revenue Service Center on which (among other things) she reduced the Schedule C deductions to $3,566. However, on the second return petitioner deducted some expenses on Schedule A which previously had been deducted on Schedule C.
In addition, petitioner claimed "casualty" losses totaling $1,917,766 on the second return. That total was comprised of the following losses:
Theft of equipment .................. $ 2,500
Vandalism of equipment .............. 6,600
Embezzlement of funds ............... 59,709
Sale of equipment ................... 95,308
Losses for Outdoor Bowl ............. 10,000
Sale of real property ............... 206,000
Foreclosure costs ................... 7,000
Wages ............................... 480,000
Deferred Compensation ............... 320,000
Worthlessness of
Florida I.Q. stockholdings ........ 240,000
Loans to Florida I.Q. ............... 490,649
___________
Total ............................... 1$1,917,766
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1 At trial, petitioner incorrectly stated that the "casualty"
losses totaled $1,913,296
Respondent issued a notice of deficiency to petitioner on March 29, 1990. The notice of deficiency did not take into account any of the changes included on the second return. In filing her petition, however, petitioner referred to the second return and, in his answer, respondent disputed those allegations on the grounds that some of the losses were not actually sustained and that none of the losses were sustained in 1986. Because the petition specifically referred to the losses claimed on the second return, and because the issues raised thereby were tried without objection from respondent, we consider them herein. See Rule 41(b). Accordingly, after concessions by both parties, the issues for our decision are: (1) Whether petitioner may deduct losses of $1,917,766, (2) whether petitioner may deduct expenditures she made to maintain certain litigation, (3) whether petitioner is entitled to an investment tax credit, and (4) whether petitioner is liable for additions to tax for negligence.
Some of the facts have been stipulated and are so found. The Stipulation of Facts, Supplemental Stipulation of Facts, and attached exhibits are incorporated herein by this reference. Petitioner resided in Bonsall, California, at the time she filed her petition.
Between 1968 and 1975, petitioner and her husband owned and operated Florida I. Q. Computer Corp. (hereinafter Florida I. Q.). Florida I.Q. was a Florida corporation in the business of installing, maintaining, and operating music and amusement machines. In 1974 it contracted with the Army and Air Force Exchange Service (hereinafter AAFES) to place and maintain its machines at MacDill Air Force Base, Tampa, Florida; Moody Air Force Base, Valdosta, Georgia; and Fort Jackson, Columbia, South Carolina.
In 1975, AAFES terminated the Fort Jackson contract on the grounds that Florida I.Q. was delinquent in its payment of fees and charges for which the corporation was contractually responsible. Thereafter, petitioner and her husband entered into a multitude of appeals and law suits stretching over a period of more than 10 years, only some of which are briefly described below.
Florida I.Q. appealed to the Armed Service Board of Contract Appeals (hereinafter ASBCA) alleging that the Fort Jackson contract had been wrongfully terminated. In March 1977, ASBCA found that the termination was proper and denied recovery. On October 2, 1978, Florida I.Q. appealed ASBCA's decision in the United States Court of Claims. The Court of Claims upheld ASBCA's decision, finding that the termination was proper, supported by substantial evidence and correct as a matter of law. See Florida I.O. Computer Corp. v. United States, 228 Ct. Cl. 748 (1981).
In 1981, Florida I.Q. was involuntarily dissolved for failure to pay its filing fees to the State of Florida. The delinquent filing fees were subsequently paid and Florida I.Q.'s corporate charter was reinstated. However, Florida I.Q. was involuntarily dissolved for the second time in 1984, again because its filing fees had not been paid.
In 1982, petitioner and her husband filed a complaint for damages with the United States District Court for the Central District of California, alleging conspiracy to injure and destroy business, antitrust, restraint of competition, breach of contract, negligence, misrepresentation, conversion, and defamation of character. On March 22, 1983, the District Court dismissed the case because petitioner and her husband lacked standing to bring such action.
In 1983, petitioner and her husband appealed the District Court's dismissal to the United States Court of Appeals for the Ninth Circuit, which, inter alia, remanded the case to permit petitioner and her husband to amend their complaint. Subsequently, on November 8, 1984, the District Court again dismissed the case, this time for the failure of Florida I.Q. to comply with the court's rules.
In 1984, petitioner, her husband, and Florida I.Q. filed an amended complaint for breach of contract with the United States Claims Court. This case was dismissed on May 10, 1985, for failure to comply with the court's rule 8(a). Petitioner and her husband subsequently filed an appeal with the United States Court of Appeals for the Federal Circuit, which affirmed on November 13, 1985. See Wayno v. United States, 785 F.2d 323 (Fed. Cir. 1985).
During 1985 and 1986, petitioner prepared a petition for a writ of certiorari to the United States Supreme Court. She first attempted to file her petition on October 14, 1986. Afterward, she revised the petition as required by the Supreme Court to conform to its rules. That revised petition was filed on December 5, 1988. The Supreme Court denied certiorari in 1989. See Wayno v. United States, 489 U.S. 1086 (1989).
Prior to 1986, petitioner also filed a lawsuit in the United States District Court for the Middle District of Florida against Bob Steele Chevrolet, Inc. (Steele Chevrolet). The suit sought damages resulting from an accident involving petitioner's automobile (driven by her son) and another automobile initially owned by Steele Chevrolet. In July 1986, the case went to trial. After a decision was entered against petitioner, she appealed it to the United States Court of Appeals for the Eleventh Circuit. On May 22, 1987, the Eleventh Circuit affirmed. See Wayno v. Bob Steele Chevrolet, Inc., 819 F.2d 1148 (11th Cir. 1987). Petitioner subsequently petitioned the Supreme Court for certiorari, but it was denied on October 13, 1987. See Wayno v. Bob Steele Chevrolet, Inc., 484 U.S. 899 (1987).
During 1986, petitioner incurred various expenses in maintaining the aforementioned law suits. The parties have stipulated that, in 1986, petitioner expended $1,824 with respect to her claim against AAFES, and $3,407 with respect to her claim against Steele Chevrolet.
Opinion2The first issue which we must address is whether petitioner may deduct various losses (which she denominated "casualty losses") totalling $1,917,766. In general, section 165(a) allows a deduction for losses "sustained during the taxable year and not compensated for by insurance or otherwise." An individual may only deduct losses that are (1) incurred in a trade or business, (2) incurred in any transaction entered into for profit, (3) of property lost because of fire, storm, shipwreck, or other casualty, or (4) from theft. Sec. 165(c). To be deductible, a loss must be evidenced by a closed and completed transaction, fixed by an identifiable event, and sustained in the year claimed. Sec. 1.165-1(b), Income Tax Regs. Because deductions are a matter of legislative grace the taxpayer must prove she is entitled to the loss claimed. Rule 142(a); Deputy v. du Pont [40-1 USTC ¶ 9161], 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering [4 USTC ¶ 1292], 292 U.S. 435, 440 (1934).
A loss must be "actually sustained" to be deductible. Sec. 1.165-1(a), Income Tax Regs. Further, only a bona fide loss is deductible, and the principle of substance over form governs in determining whether a loss is bona fide. Sec. 1.165-1(b), Income Tax Regs.
Further, a loss may only be deducted by the taxpayer who sustained it. Where there is a question as to whether a loss is properly deductible by a corporation or its shareholders, the corporation is treated as being separate and distinct from its shareholders. Moline Properties, Inc. v. Commissioner [43-1 USTC ¶ 9464], 319 U.S. 436 (1943). Therefore, a loss incurred by a corporation in connection with its trade or business is deductible by the corporation, not its shareholders. Evans v. Commissioner [77-2 USTC ¶ 9596], 557 F.2d 1095, 1099-1100 (5th...
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