Woodall v. C.I.R., 91-4572

• Decision Date: 12 June 1992
• Docket Number: No. 91-4572,91-4572
• Citation: 964 F.2d 361
• Parties: -5126, 92-2 USTC P 50,363 Phyllis A. WOODALL and Jeannie S. Coutta, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 361

964 F.2d 361

70 A.F.T.R.2d 92-5126, 92-2 USTC P 50,363

Phyllis A. WOODALL and Jeannie S. Coutta, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 91-4572.

United States Court of Appeals, Fifth Circuit.

June 12, 1992.

John Leeper, Leeper & Leeper, El Paso, Tex., for Jeannie S. Coutta and Phyllis A. Woodall.

Randolph L. Hutter, Atty., Gary R. Allen, Chief, Jonathan S. Cohen, Appellate Section, Tax Div., Dept. of Justice, Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Washington, D.C., for C.I.R.

Appeal from a Decision of the United States Tax Court.

Before WILLIAMS and HIGGINBOTHAM, Circuit Judges, and McNAMARA, ^* District Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Phyllis Woodall and Jeannie Coutta appeal a Tax Court judgment finding additional taxes due in their 1982, 1983, and 1984 tax years. The dispute arises out of fire losses to two partnership assets presenting issues of valuation and accounting for income. We affirm.

I.

Woodall and Coutta were equal partners in El Paso Cosmopolitan, a partnership operating two nightclubs, the Naked Harem Show Bar and the El Paso Cosmopolitan Topless Show Bar. On April 5, 1982, the Cosmopolitan suffered extensive fire damage. Woodall estimated the value of the partnership assets destroyed at $90,000. The partnership pursued an insurance claim, but the insurer was insolvent and the partnership had no reasonable prospect of recovery by the end of 1982. The partnership claimed a deduction of $78,441 for the fire loss at the Cosmopolitan on its 1982 return. However, the schedule L balance sheet attached to the return, prepared by taxpayers' accountant, stated that the adjusted basis of all depreciable partnership assets at the beginning of 1982 was only $8,541.

On April 21, 1982, the Naked Harem sustained extensive fire damage. The partnership filed an insurance claim of $122,500, but received only $50,000 from the receivership estate of the insurance company. During 1983, the partnership spent $25,272 repairing fire damage at the Naked Harem and purchased replacement assets totalling $13,093. In August 1983, the partnership purchased the land, building and improvements at 6345 Alameda for $245,000. The partnership reported the $50,000 insurance recovery as taxable income on its 1983 tax return.

Upon audit of the taxpayers' and the partnership's returns for 1982-1984, the IRS increased the partnership's taxable income for each year, with excess income attributed equally to each partner. The revenue agent used the bank deposits plus cash expenditures method to reconstruct the gross receipts of the partnership and the taxpayers. The revenue agent also disallowed $69,991 of the partnership's claimed fire loss.

The IRS gave deficiency notices and Woodall and Coutta filed petitions to the Tax Court.

II.

Internal Revenue Code § 165(a) allows a deduction for a loss sustained during the taxable year not compensated for by insurance or otherwise. The amount of available deductible loss is limited to the adjusted basis of the property at the time of the loss. 26 U.S.C. § 165(b). The Tax Court determined that the adjusted basis of the assets lost in the Cosmopolitan fire was $8,541 and disallowed the partnership's deduction of losses above that amount. The Tax Court valuation rested on the adjusted basis on the balance sheet statement submitted by the partnership with its 1982 return.

The taxpayers argue first that the Tax Court could not rely upon the balance sheet statement alone to prove that the adjusted basis of the property was only $8,541, relying upon Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.1991). In Portillo, the IRS issued a deficiency notice solely on the basis of an inconsistency between the taxpayer's return and the figures on another party's 1099 form. We held that it was arbitrary and capricious to find a deficiency without investigating or corroborating the figures in the 1099 form provided by a third party. 932 F.2d at 1134. This case does not raise the concern of Portillo, however, because the IRS here relied upon the taxpayer's statement, not another's statement.

Second, the taxpayers argue that they have disproved the accuracy of the $8,541 figure because that figure would require that deductions had been taken in prior years in excess of those legally allowed under 26 U.S.C. § 1011. A taxpayer challenging the IRS's disallowance of a deduction bears the burden of proof. Laney v. Commissioner, 674 F.2d 342, 349 (5th Cir.1982). The taxpayers presented evidence at trial that the original cost basis in the property was $93,569 and that the legally allowable depreciation in prior years was $16,421. They argue that this evidence meets their burden of proving the adjusted basis of their loss.

In Laney v. Commissioner, 674 F.2d 342 (5th Cir.1982), we held that where the IRS relied on facts in a schedule filled out and signed by the taxpayer, the taxpayer could not meet its burden of proof without financial records or other documentary evidence to refute or contradict the reliability of the schedule. The taxpayer's testimony that the facts in the schedule were untrue was insufficient to rebut the tax return. Id.

The evidence here tending to contradict the schedule was weaker than in Laney. Here, there was only Woodall's claim that the property was worth more than $8,541. She did not state unequivocally that the deductions had not been claimed in prior years. She did not provide a credible explanation for the allegedly inaccurate information on the schedule nor did she present her tax returns for previous years to support her contention. The taxpayers did not prove that the Tax Court's findings were clearly erroneous.

Taxpayers suggest that even if they did take excessive deductions in prior years, the proper result is to allow them the 1982 loss deduction and force the IRS to reopen their returns for those prior years. The amount of deductible loss is limited to the greater of the amount allowed as deductions or allowable as deductions. 26 U.S.C. § 1016. An amount has been "allowed" in a prior year if the Commissioner has not challenged it. Kilgroe v. United States, 664 F.2d 1168, 1170 (10th Cir.1981). Thus, the Code contemplates allowed depreciations greater than those allowable by law. The IRS need not reopen the taxpayer's past returns but may use the lower adjusted basis resulting from excess depreciation in calculating the 1982 allowable loss.

III.

The taxpayers assert that the $50,000 insurance recovery from the Naked Harem fire was non-taxable...