The opinion
T.C. Summary Opinion 2009-77
UNITED STATES TAX COURT
GARY W. AND REGINA G. STEELE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1344-06S. Filed May 14, 2009.
Gary W. and Regina G. Steele, pro sese.
John M. Tkacik, Jr., for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
Respondent determined a deficiency of $4,095 in petitioners’
2002 Federal income tax. The issues we must decide are:
(1) Whether petitioners are entitled to certain deductions
and credits for 2002, including:
(a) A deduction for alleged contributions to
separate individual retirement accounts (IRAs);
(b) a deduction for student loan interest paid;
(c) a credit for the payment of qualified
educational expenses; and
(d) a deduction for claimed itemized deductions;
(2) whether petitioners have correctly reported all their
income, specifically whether they included:
(a) A State income tax refund; and
(b) distributions from petitioners’ separate IRA
accounts;
(3) whether petitioners are liable for the section 72(t) 10-
percent additional tax for early distributions from their IRAs;
(4) whether petitioners are entitled to deductions for
certain expenses made on behalf of and transactions entered into
with the Estate of Janice M. Steele (the estate), including:
(a) A payment made to prevent foreclosure on real
property held by the estate;
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(b) expenses paid to maintain and to allegedly
convert the real property into rental real property;
(c) a capital loss deduction on the sale of the
real property held by the estate;
(d) a theft loss and related legal fees paid to
investigate and settle disputes concerning the estate;
and
(e) a deduction for a nonbusiness bad debt for an
alleged loan made to the estate; and
(5) whether petitioners are entitled to a dependency
exemption deduction for petitioner Regina G. Steele’s minor
sister.
Background
There are no written or oral stipulations by the parties.
The exhibits received into evidence are incorporated by this
reference. When the petition was filed, petitioners resided in
Ohio.
Petitioners are husband and wife. Petitioners timely filed
their 2002 Form 1040, U.S. Individual Income Tax Return (tax
return), on which they reported wages of $42,148, taxable
interest of $654, a capital loss of $3,000, and aggregate IRA
distributions of $4,081.2 On Schedule A, Itemized Deductions,
2
Petitioners reported only $2,081 of the IRA distributions
as taxable.
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petitioners claimed expenses of $15,2423 for medical and/or
dental expenses, $4,287 for taxes paid, $7,632 for qualified
residence interest paid, and $7,900 for charitable
contributions.4 Petitioners’ claimed itemized deductions totaled
$32,407. For 2002 petitioners also claimed a $4,000 deduction
for IRA contributions and a $2,500 deduction for student loan
interest paid.
On November 10, 2005, respondent issued to petitioners a
notice of deficiency (notice). In the notice respondent
disallowed most of petitioners’ claimed deductions for lack of
substantiation and further adjusted petitioners’ income for
erroneously reported IRA distributions and an unreported State
income tax refund. Respondent’s adjustments are as follows:
2002 Tax Year
Income Tax Examination Changes
Adjustments to Per Per
Income Return Exam Adjustment
IRA deduction $4,000 -- $4,000
IRA distributions 2,081 $4,081 2,000
State refunds,
credits, or offsets -- 386 386
3
After application of the 7.5-percent floor, in accordance
with sec. 213, petitioners claimed a $12,588 itemized deduction
for medical and/or dental expenses.
4
On brief respondent concedes that in 2002 petitioners
paid $2,991 for deductible medical expenses, $4,533 for taxes,
and $8,838.57 for qualified residence interest. Respondent
further concedes that petitioners made charitable contributions
of $1,265.
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Student loan interest
deduction 2,500 -- 2,500
Capital gain or loss (3,000) -- 3,000
Itemized deductions 32,407 12,683 19,724
Total adjustments
to income -- -- 31,610
Taxable income per
return -- -- (3,024)
Corrected taxable
income -- -- 28,586
Tax (joint filing
status) -- -- 3,686
Plus other taxes (tax
on qualified plans) -- -- 409
Total corrected tax
liability -- -- 4,095
After filing the tax return, petitioners submitted two Forms
1040X, Amended U.S. Individual Income Tax Return (amended
returns), dated June 1, 2004, and December 5, 2005, respectively.
Respondent received the amended returns but did not accept or
process them. On the first amended return petitioners claimed a
rental loss of $54,303 on Schedule E, Supplemental Income and
Loss, reduced their taxable IRA distribution from $2,081 to $81,
claimed income of $5,000 for fiduciary fees, eliminated the
$4,000 deduction for IRA contributions, and reduced their claim
for a student loan interest deduction from $2,500 to $450. On
the second amended return petitioners included a State income tax
refund of $386, eliminated the capital loss, eliminated the
student loan interest deduction, reduced the Schedule E rental
loss from $54,303 (as reported on the first amended return) to
$35,928, and claimed an additional dependency exemption deduction
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for petitioner Regina G. Steele’s (Mrs. Steele’s) minor sister
(RMW).5
The Schedule E rental losses reported on petitioners’
amended returns relate to real property located on Warrendale
Road in South Euclid, Ohio (Warrendale property). The Warrendale
property was owned by Janice M. Steele, the mother of petitioner
Gary W. Steele (Mr. Steele). Janice M. Steele died on April 11,
2001. After her death the Warrendale property was listed in the
name of “The Estate of Janice M. Steele”. The Inventory and
Appraisal Form filed on August 27, 2001, with the probate court
of Cuyahoga County, Ohio, listed the value of the Warrendale
property at $95,000. On January 31, 2002, the estate sold the
Warrendale property for $90,000. Mr. Steele was both a
beneficiary and the executor of the estate.
Discussion
Generally, the Commissioner’s determinations are presumed
correct and the taxpayer bears the burden of proving that the
determinations are in error. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Deductions are a matter of legislative
grace, and the taxpayer bears the burden of proving entitlement
to the deductions claimed. Rule 142(a); INDOPCO, Inc. v.
5
The Court refers to minor children by their initials. See
Rule 27(a)(3).
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Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).
Section 6001 requires taxpayers to maintain records,
statements, and returns and to comply with such rules and
regulations as the Secretary prescribes. Individual taxpayers
are to keep permanent books and records sufficient to verify
income, deductions, or other matters required to be shown on any
information or tax return. Sec. 1.6001-1(a), Income Tax Regs.
In accordance with section 7491(a) the burden of proof may
be shifted to the Commissioner where a taxpayer has introduced
credible evidence regarding factual issues relevant to
ascertaining his tax liability. Rule 142(a)(2). In order for a
taxpayer to shift the burden of proof to the Commissioner he must
produce credible evidence evincing that he has: (1) Complied
with the substantiation requirements of the Code; (2) maintained
all records required by the Code; and (3) cooperated with
reasonable requests by the Secretary for witnesses, information,
documents, meetings, and interviews. Sec. 7491(a)(2).
Petitioners have not asserted nor do we find that they have met
these requirements; thus, the burden of proof remains with
petitioners.
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I. Certain Deductions Claimed on the Tax Return
A. IRA Contribution Deduction
Section 219(a) provides: “In the case of an individual,
there shall be allowed as a deduction an amount equal to the
qualified retirement contributions of the individual for the
taxable year.” For 2002 the maximum deduction allowed is the
lesser of $3,000 or an amount equal to the compensation
includable in the individual’s gross income for the taxable year.
Sec. 219(b). The deduction may be further limited if an
individual or the individual’s spouse is an active participant in
a retirement plan maintained by his employer. Sec. 219(g).
On the tax return petitioners claimed a $4,000 IRA
contribution deduction. In the notice respondent determined that
petitioners were not entitled to an IRA contribution deduction.
On both of the amended returns petitioners eliminated the
claim for an IRA contribution deduction. Furthermore,
petitioners have neither offered any documentary or testimonial
evidence to substantiate any portion of the alleged IRA
contributions nor established whether they were active
participants in an employer-provided retirement plan. See sec.
219(g).
Because they failed to produce evidence to establish their
eligibility for an IRA contribution deduction, we hold that
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petitioners are not entitled to deduct any amounts contributed to
IRAs for tax year 2002.
B. Student Loan Interest Deduction
Section 221(a) provides: “In the case of an individual,
there shall be allowed as a deduction for the taxable year an
amount equal to the interest paid by the taxpayer during the
taxable year on any qualified education loan.” For 2002 the
maximum allowable deduction for interest paid on a qualified
education loan was $2,500. Sec. 221(b)(1). The allowable
deduction is further limited by the taxpayer’s modified adjusted
gross income. Sec. 221(b)(2).
On the tax return petitioners claimed a $2,500 student loan
interest deduction. In the notice respondent determined that
petitioners were not eligible for that deduction. On the first
amended return petitioners reduced their student loan interest
deduction claim to $450. On the second amended return, however,
petitioners eliminated their claim for a student loan interest
deduction.
At trial petitioners again asserted that they had paid
student loan interest and were entitled to a corresponding
deduction. Petitioners stated that they had consolidated their
student loan in 2001 and had “$13,000 worth of accrued interest.”
In an attempt to substantiate their claim, petitioners provided a
statement dated June 11, 2008, from Sallie Mae. The Sallie Mae
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statement was addressed to Mrs. Steele, but the payment history
shows only the last five payments made, all of which were made in
2008, and does not show what portion of the payments was
attributable to the payment of student loan interest.
In any event, other than vague self-serving testimony
petitioners have failed to proffer any evidence establishing that
they actually paid student loan interest during 2002.
Accordingly, we hold that petitioners are not entitled to a
student loan interest deduction in 2002.
C. Education Credits
Section 25A(a) provides: “In the case of an individual,
there shall be allowed as a credit against the tax imposed by
this chapter for the taxable year the amount equal to the sum of
–-(1) the Hope Scholarship Credit, plus (2) the Lifetime Learning
Credit.”
Petitioners first claimed a credit for qualified education
expenses paid in 2002 at trial when they asserted: “we qualify
for the Hope Credit and Lifetime Credit.” To substantiate their
eligibility, petitioners submitted a copy of a receipt showing
that they paid $277.80 to Cuyahoga Community College in 2002.
At trial and on brief respondent has acknowledged and
conceded that petitioners substantiated $277.80 of qualified
education expenses for 2002. On brief respondent states: “The
amount allowable as a credit, if any, is a computational
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adjustment based on petitioners’ modified adjusted gross income.”
See sec. 25A(b), (c), and (d). Accordingly, we find that
petitioners have substantiated that they paid $277.80 of
qualified education expenses in 2002 and, therefore, are entitled
to a corresponding educational credit subject to the limitation
provided in section 25A(d).
D. Itemized Deductions
On Schedule A of the tax return petitioners claimed $32,407
of itemized deductions, which included $12,588 of medical and/or
dental expenses, $984 of real property taxes, $2,553 of State and
local income taxes, $750 of personal property taxes, $7,632 of
qualified residence interest, and $7,900 of charitable
contributions. Petitioners’ first amended return increased their
claimed itemized deductions to $37,206. Petitioners’ second
amended return reduced their claimed itemized deductions to
$29,187. In the notice respondent reduced petitioners’ itemized
deductions to $12,683.
Not only have petitioners failed to explain the reasons for
the changes made from their initial tax return, but they have
also failed to produce any evidence establishing entitlement to
any of the claimed itemized deductions. On brief, however,
respondent concedes that petitioners are entitled to itemized
deductions as follows: $2,991 for medical and/or dental
expenses; $4,533 for taxes paid; $8,838 for qualified residence
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interest paid; and $1,265 for charitable contributions.
Accordingly, we hold that petitioners are entitled to itemized
deductions in the amounts respondent conceded.
II. Unreported and Underreported Income
Gross income includes all income from whatever source
derived, including accessions to wealth, clearly realized, and
over which the taxpayers have complete dominion. Sec. 61(a);
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
A. State Income Tax Refund
In the notice respondent determined that petitioners had
unreported income because of their failure to report a $386 State
income tax refund. At trial Mrs. Steele stated: “right after
we’d mailed our [Federal income] tax return * * * we got a
statement in the mail saying that we had a tax refund of $386
from the State.” Inexplicably, however, petitioners did not
include the State income tax refund on the first amended return.
They did, however, finally report it on the second amended
return. We interpret petitioners’ statements, actions, and
failure to contend otherwise as conceding that their $386 State
income tax refund is includable in gross income and so find.
B. IRA Distributions
A distribution from an IRA is includable in gross income in
the manner provided in section 72 unless rolled over within 60
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days after the distribution is received into another IRA or an
eligible retirement plan. See secs. 72, 408(d)(1), (3).
Both petitioners received Forms 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., for 2002. Mr. and Mrs. Steele
received IRA distributions of $2,035 and $2,046, respectively.
On the tax return petitioners reported $4,081 of IRA
distributions but claimed only $2,081 as taxable. On the amended
returns petitioners reported $4,081 of IRA distributions but
claimed only $81 as taxable. In the notice respondent determined
that petitioners had failed to adequately establish that any
portion of the $4,081 of IRA distributions was rolled over and,
therefore, the entire amount is includable in petitioners’ gross
income.
The documentary evidence consisted of a letter prepared for
respondent wherein petitioners alleged that they rolled over Mrs.
Steele’s IRA distribution into “a qualified savings account plan”
at Dollar Bank and that Mr. Steele’s IRA distribution was used to
pay for medical premiums, and a photocopy of a check payable to
Dollar Bank for the benefit of Mrs. Steele. At trial Mrs. Steele
testified that they did not believe the IRA distributions were
taxable because, as she stated: “We used the funds to pay for
medical expenses.” On brief petitioners continue to assert that
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they rolled over Mrs. Steele’s IRA distribution and Mr. Steele’s
IRA distribution was used to “cover documented medical expenses.”
While a determination of whether the funds from the IRA
distributions were used to pay eligible medical expenses is
relevant for determining whether the section 72(t) 10-percent
additional tax applies, it has no bearing on whether the
distributions are includable in petitioners’ gross income. See
sec. 72.
Petitioners have failed to adequately establish that any
portion of the IRA distributions was rolled over into either an
IRA or some other eligible retirement plan. See sec. 408(d)(3).
Although petitioners provided a copy of Mrs. Steele’s
distribution check, which indicated that the funds were payable
to Dollar Bank for her benefit, other than their self-serving
testimony petitioners have offered nothing to substantiate that
the account the money was allegedly deposited into at Dollar Bank
was either an IRA or an eligible retirement plan account.
Accordingly, we hold that in accordance with section 72(a)
petitioners’ IRA distributions of $4,081 are includable in their
gross income for 2002.
III. 10-Percent Additional Tax on Premature Distributions
Section 72(t)(1) provides:
(1) Imposition of additional tax.–-If any taxpayer
receives any amount from a qualified retirement plan
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(as defined in section 4974(c)),[6] the taxpayer’s tax
under this chapter for the taxable year in which such
amount is received shall be increased by an amount
equal to 10 percent of the portion of such amount which
is includible in gross income.
Exceptions to this rule are found in section 72(t)(2).
Applicable to petitioners’ contention that they used a portion of
their IRA distributions to pay for medical expenses is section
72(t)(2)(B), which provides:
(B) Medical expenses.--Distributions made to the
employee * * * to the extent such distributions do not
exceed the amount allowable as a deduction under
section 213[7] to the employee for amounts paid during
the taxable year for medical care (determined without
regard to whether the employee itemizes deductions for
such taxable year).
In the notice respondent determined that petitioners were
not eligible for an exception to the section 72(t) 10-percent
additional tax and adjusted petitioners’ tax liability to include
an additional $409.8 At trial Mrs. Steele testified that the
funds from both IRA distributions were used to pay medical
6
Sec. 4974(c) defines the term “qualified retirement plan”
to include, inter alia, an IRA. See sec. 4974(c)(4).
7
Sec. 213 allows as a deduction the expenses paid during
the taxable year, not compensated for by insurance or otherwise,
for medical care of the taxpayer, his spouse, or a dependent, to
the extent that such expenses exceed 7.5 percent of adjusted
gross income.
8
The record is not clear as to how respondent determined
that 10 percent of the $4,081 distributed from petitioners’ IRAs
is $409.
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expenses and therefore petitioners are not liable for the 10-
percent additional tax. See sec. 72(t)(2)(B).
While petitioners have failed to substantiate any medical
expenses paid, on brief respondent concedes that petitioners are
entitled to a $2,991 deduction for medical expenses paid in 2002.
Respondent’s concession leads us to the conclusion that this
amount represents the portion of paid medical expenses that
exceeds 7.5 percent of petitioners’ adjusted gross income. See
sec. 213. Thus, we conclude that the portion of petitioners’ IRA
distributions that does not exceed the deduction allowed under
section 213 is excepted from the 10-percent additional tax under
section 72(t). See sec. 72(t)(2)(B).
IV. Expenses Paid on Behalf of the Estate
A. $5,150 Payment To Prevent Foreclosure on the Warrendale
Property
Petitioners assert they are entitled to a $5,150 deduction
in 2002 for funds allegedly paid to Aurora Loan Service in 2001
to prevent foreclosure of the Warrendale property. Petitioners
raised this issue for the first time at trial; neither
petitioners’ tax return, the amended returns, nor the notice
addresses this alleged payment. At trial petitioners asserted
that the $5,150 payment should qualify either as a real property
taxes paid deduction or a qualified residence interest deduction.
The scant documentary evidence petitioners proffered does
not establish that they actually paid $5,150 to prevent
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foreclosure on the Warrendale property. The only evidence they
provided consisted of a letter dated September 17, 2001,
addressed to “Mr. & Mrs. Gary Steele” at what purports to be the
Warrendale property address, confirming “that the amount to
REINSTATE the loan through September 30, 2001 is $5,739.53”, and
a photocopy of the customer’s copy of a $5,150 cashier’s check,
dated September 8, 2001, payable to Aurora Loan Service. Both
the letter and the photocopy of the cashier’s check refer to the
same loan number, but neither document establishes that this loan
number pertains to the Warrendale property. Furthermore, even
assuming that this loan number pertains to the Warrendale
property, petitioners have not established that the $5,150
cashier’s check was drawn on their personal account (as opposed
to the estate’s account) or that Aurora Loan Service received the
funds. In fact, the partial accounting of the fiduciary’s
account filed with the probate court of Cuyahoga County, Ohio,
shows the estate, rather than petitioners, paid mortgage payments
of $7,674.53 on September 18, 2001.
Even if petitioners had established that they actually paid
$5,150 to prevent foreclosure on the Warrendale property,
petitioners have not established their eligibility for either a
real property taxes paid deduction or a qualified residence
interest paid deduction in 2002 for the alleged payment.
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Section 164(a)(1) generally allows a deduction for the
payment of real property taxes for the taxable year within which
paid. It is well established that, in general, taxes paid on
real property may be deducted as such only by the person on whom
the tax obligation is imposed. Cramer v. Commissioner, 55 T.C.
1125, 1130 (1971); sec. 1.164-1(a), Income Tax Regs. Petitioners
have not established that it was their obligation, as opposed to
the decedent’s or the estate’s, to pay any real property taxes to
prevent foreclosure on the Warrendale property. Moreover,
petitioners have not substantiated what portion, if any, of the
alleged $5,150 payment was for real property taxes.
Section 163 allows as a deduction all interest paid within
the taxable year on indebtedness. Section 163(h)(1), however,
provides: “In the case of a taxpayer other than a corporation,
no deduction shall be allowed under this chapter for personal
interest paid * * * during the taxable year.” For this purpose,
personal interest does not include “any qualified residence
interest”. Sec. 163(h)(2)(D). Section 1.163-1(b), Income Tax
Regs., provides: “Interest paid by the taxpayer on a mortgage
upon real estate of which he is the legal or equitable owner,
* * * may be deducted as interest on his indebtedness.” However,
we need not determine whether petitioners were either legal or
equitable owners of the Warrendale property because they have
likewise failed to substantiate what portion, if any, of the
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alleged $5,150 payment was attributable to the payment of
qualified residence interest.
Furthermore, section 461(a) provides that deductions “shall
be taken for the taxable year which is the proper taxable year
under the method of accounting used in computing taxable income.”
Since petitioners are cash method calendar year taxpayers, they
may not claim as a deduction on the tax return an expense they
allegedly paid in 2001. See id.; sec. 1.461-1(a), Income Tax
Regs.
Accordingly, we hold that petitioners are not entitled to a
deduction for the alleged $5,150 payment made to prevent
foreclosure on the Warrendale property.
B. Expenses Paid for the Maintenance and Conversion of the
Warrendale Property
On the amended returns petitioners claimed entitlement to
deductions for various Schedule E expenses related to the
maintenance and conversion of the Warrendale property into rental
property. On the first amended return petitioners claimed
Schedule E expenses totaling $54,303, including $10,033 for
depreciation or depletion expenses. On the second amended return
petitioners reduced their Schedule E expenses to $35,928, in part
by eliminating depreciation or depletion expenses. At trial and
on brief petitioners argued that as beneficiaries of the estate
they were entitled to a deduction for maintenance and conversion
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costs because the estate, which would have been eligible to claim
it, did not.
Petitioners, however, have failed to adequately substantiate
that either they or the estate paid the expenses reported on
Schedule E. Petitioners have not submitted any receipts or other
documentary evidence that establishes that they paid the expenses
listed on the respective Schedules E. Petitioners’ failure to
substantiate their claimed Schedule E expenses necessarily leads
to our conclusion that they are not entitled to deduct any of the
claimed Schedule E expenses in 2002. Therefore it is unnecessary
to consider whether petitioners could qualify for any deduction
of the claimed expenses under section 642(h).
C. Capital Loss Deduction
On their initial 2002 Schedule D, Capital Gains and Losses,
petitioners reported both a $1,500 short-term capital loss
carryover and a $1,500 long-term capital loss carryover. In the
notice respondent disallowed the entire capital loss deduction
for lack of substantiation. On the Schedule D attached to the
first amended return petitioners reported a short-term capital
loss carryover of $15,000 and a long-term capital loss carryover
of $15,000 but limited the deductible loss to $3,000 in
accordance with section 1211(b). On the Schedule D attached to
the second amended return petitioners reported zero short-term
capital losses and left blank the line for long-term capital
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gains and losses. At trial and on brief, however, petitioners
asserted entitlement to a capital loss deduction for the sale of
the Warrendale property despite the fact that the property was
sold by the estate. Petitioners assert that as beneficiaries of
the estate they are entitled to deduct a capital loss on capital
assets sold by the estate.
On January 31, 2002, the estate sold the Warrendale property
for $90,000.9 Petitioners, however, have failed to establish the
estate’s basis in the Warrendale property.
Section 1014(a)(1) provides: “the basis of property in the
hands of a person[10] acquiring the property from a decedent or to
whom the property passed from a decedent shall * * * be–-(1) the
fair market value of the property at the date of the decedent’s
death”. In an attempt to establish the basis of the Warrendale
property petitioners offered a letter written by an attorney,
which states in part:
My check of the pertinent records indicates that the
valuation of the property will be in the neighborhood
of $100,000. To complete my appraisal of this
property, you need to forward the original Inventory
9
Petitioners contend that the sale of the Warrendale
property resulted in a long-term capital loss of $20,000 ($75,000
price minus the alleged $95,000 fair market value on Apr. 11,
2001). However, the U.S. Department of Housing and Urban
Development Settlement Statement shows that the estate sold the
property for $90,000, not $75,000.
10
Sec. 7701(a)(1) provides: “The term ‘person’ shall be
construed to mean and include an * * * estate”.
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and Appraisal Form to my attention for me to affix my
appraisal evaluation of the property.
The attached inventory and appraisal form shows the value of the
Warrendale property as $95,000, but the accompanying appraiser’s
certificate is unsigned; and there is no indication as to whether
$95,000 is the alleged fair market value on April 11, 2001, or
some other date.11 Because petitioners have failed to establish
the fair market value of the Warrendale property on the date of
the decedent’s death, we are unable to determine whether a
capital loss occurred upon the sale of the Warrendale property.
We note again that even if we were to assume the date of
death fair market value of the Warrendale property was $95,000,
petitioners have not established that any resulting loss was
theirs as opposed to the estate’s. Petitioners may not deduct on
the tax return losses or expenses incurred by the estate.
Accordingly, we hold that petitioners are not entitled to a
capital loss deduction in 2002 from the sale of the Warrendale
property by the estate.
D. Theft Loss Deduction and Related Legal Fees
Petitioners did not claim deductions for a theft loss and
the related legal fees on either the tax return or the amended
returns. Petitioners first claimed these deductions at trial.
11
The Inventory and Appraisal Form filed with the probate
court of Cuyahoga County, Ohio, is stamped “filed” on Aug. 27,
2001. The other random dates that appear on the form are Apr. 19
and 25, 2001, and Sept. 19, 2001.
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On brief petitioners continue to assert that they are entitled to
both a theft loss deduction and a deduction for the payment of
legal fees incurred in their attempt to recover the allegedly
stolen funds. On brief respondent asserts that “there is no
evidence in the record as to the amount of the funds withdrawn or
that a theft occurred.”
The limitation on deductions for losses under section 165
generally allows an individual a deduction for a loss arising
from theft. See sec. 165(c)(3). A loss that arises from theft
is treated as sustained during the taxable year in which the
taxpayer discovers such loss. See sec. 165(e). For this
purpose, theft is generally defined as larceny, embezzlement, or
robbery. Sec. 1.165-8(d), Income Tax Regs.
For tax purposes, whether a theft loss has occurred depends
upon the law of the jurisdiction wherein the particular loss
occurred. Monteleone v. Commissioner, 34 T.C. 688, 692 (1960).
The statutory definition of theft in Ohio is as follows:
(A) No person, with purpose to deprive the owner of
property or services, shall knowingly obtain or exert
control over either the property or services in any of
the following ways:
(1) Without the consent of the owner or person
authorized to give consent;
(2) Beyond the scope of the express or implied
consent of the owner or person authorized to give
consent;
(3) By deception;
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(4) By threat;
(5) By intimidation.
(B)(1) Whoever violates this section is guilty of
theft. [Ohio Rev. Code Ann. sec. 2913.02 (Lexis Nexis
2006).]
Two days before her death, Mr. Steele’s mother signed and
executed a form adding both her minor son (DS) and DS’s
grandmother, Ms. Gillum, to her accounts maintained at Key Bank.
After her death the joint bank accounts were allegedly liquidated
by Ms. Gillum and DS. Petitioners contend that Ms. Gillum and DS
did not have the proper authority to withdraw the funds from the
bank accounts. Mr. Steele filed complaints with both Key Bank
and the Beachwood police department alleging that Ms. Gillum
either deceived his mother into signing or forged her signature
on the forms that added both Ms. Gillum and DS to the joint bank
accounts.
Other than their allegation, petitioners have failed to
produce any evidence establishing that Mr. Steele’s mother was
deceived, threatened, or intimidated into executing the form
which added DS and Ms. Gillum to the joint bank accounts. See
id. Thus, we hold that petitioners have not met their burden of
proving that they are entitled to a theft loss deduction.
Additionally, petitioners contend that they are entitled to
a deduction for legal fees paid in an attempt to recover the
allegedly stolen funds. Petitioners hired an attorney to assist
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in recovering the allegedly stolen funds. While no charges for
theft were ever filed, petitioners’ efforts resulted in a
settlement agreement between DS and Mr. Steele as administrator
of the estate.
The record indicates that the estate, rather than
petitioners, paid the attorney $6,560. Although a photocopy of
the $6,560 check, payable to the attorney, was entered into
evidence, there is no indication as to whether it was drawn on
petitioners’ bank account. The Final and Distributive Account
Form filed with the Cuyahoga County, Ohio, probate court,
indicates that the estate paid the attorney $6,560 for legal
services. Petitioners have failed to substantiate that they
actually paid legal fees to recover the allegedly stolen funds
during 2002.
Again, petitioners are claiming entitlement to a deduction
for an expense paid by the estate, to which they have not
established entitlement as beneficiaries. Accordingly, we hold
that petitioners are not entitled to a deduction for legal fees
paid to recover the alleged theft loss.
E. Nonbusiness Bad Debt Deduction
Petitioners did not claim a nonbusiness bad debt deduction
on either the tax return or the amended returns. Petitioners
first claimed a nonbusiness bad debt deduction at trial. On
brief petitioners continue to assert that they are entitled to a
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nonbusiness bad debt deduction because they were not able to
recover any of the money lent to the estate before its
insolvency. On brief respondent contends that petitioners have
not established that the alleged funds were ever transferred to
the estate or that a loan actually existed between petitioners
and the estate.
Section 166(a) generally allows a deduction for any debt
which becomes worthless within the taxable year. Section 166(d)
provides:
SEC. 166(d). Nonbusiness Debts.--
(1) General rule.-– In the case of a taxpayer
other than a corporation--
(A) subsection (a) shall not apply to
any nonbusiness debt; and
(B) where any nonbusiness debt becomes
worthless within the taxable year, the loss
resulting therefrom shall be considered a
loss from the sale or exchange, during the
taxable year, of a capital asset held for not
more than 1 year.
Petitioners allege that they wrote a $13,914.22 check to the
estate as a loan to be repaid by December 31, 2002. Petitioners
assert that the $13,914.22 check constituted a loan between
petitioners and the estate, that the debt became worthless in
March 2002, and that they are entitled to a nonbusiness bad debt
deduction. Respondent contends that the debt did not become
worthless in March 2002 because petitioners’ bank statement shows
the $13,914.22 was not withdrawn from petitioners’ bank account
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until April 25, 2002, and the record is devoid of any evidence
that the $13,914.22 check was ever deposited into an account
owned by or transferred to the estate.
Petitioners provided a photocopy of a $13,914.22 check
payable to the order of the “Estate of Janice Steele”. However,
there is no further evidence in the record to indicate that the
estate received these funds. The final and distributive account
form filed with the probate court of Cuyahoga County neither
lists petitioners as creditors of the estate nor indicates that
the $13,914.22 was received by the estate.
Even assuming that a bona fide loan existed between
petitioners and the estate, petitioners have failed to establish
that the debt became worthless in 2002. The estate was not
closed until April 4, 2003, and any assets that remained in the
estate would have been available to pay the debt until the
estate’s termination.
Thus we hold that petitioners have failed to establish
entitlement to a nonbusiness bad debt deduction.
V. Dependency Exemption Deduction
For the purpose of computing taxable income, section 151(a)
allows an individual to claim an exemption deduction for a
dependent. A dependent is defined as follows:
SEC. 152. DEPENDENT DEFINED.
(a) General Definition.-–For purposes of this
subtitle, the term “dependent” means any of the
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following individuals over half of whose support, for
the calendar year in which the taxable year of the
taxpayer begins, was received from the taxpayer (or is
treated under subsection (c) or (e) as received from
the taxpayer):
* * * * * * *
(3) A brother, sister, stepbrother, or
stepsister of the taxpayer,
In determining whether an individual received over one-half
of his or her support from the taxpayer, “the amount of support
received from the taxpayer as compared to the entire amount of
support which the individual received from all sources, including
support which the individual himself supplied” must be
considered. Sec. 1.152-1(a)(2)(i), Income Tax Regs. Petitioners
bear the burden of demonstrating the total amount of the child’s
support furnished from all sources for the year at issue. See
Blanco v. Commissioner, 56 T.C. 512, 514 (1971). If the total
support is not shown and cannot be reasonably inferred from the
competent evidence available, then it is not possible to conclude
that petitioners furnished more than one-half of RMW’s support.
See id. at 514-515.
Petitioners did not claim RMW as a dependent on the tax
return or on the first amended return. Only on the second
amended return did petitioners claim RMW as a dependent.
Although petitioners allege they provided over one-half of
RMW’s support in 2002, they have failed to prove the total
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support furnished to RMW from all sources in 2002. The only
evidence petitioners proffered was a summary of expenses
estimating their dependent care expenses at $9,483 and a
statement allegedly made by RMW that she received her financial
support from Mrs. Steele in 2002. Petitioners testified that RMW
also resided with Mrs. Steele’s brother in 2002. According to
their summary of expenses, petitioners claimed to have provided
support for RMW for approximately 10 months during 2002.
However, petitioners have not provided any substantiating
documents, such as receipts, canceled checks, copies of mortgage
or rent payments, or copies of utility bills, of either their
alleged expenses or the total expenses paid for RMW’s support in
2002.
Without adequate substantiation of both RMW’s total support
in 2002 and the portion of that support furnished by petitioners,
we cannot conclude from the record that petitioners provided more
than one-half of RMW’s support. See Manukainiu v. Commissioner,
T.C. Memo. 1998-90. Accordingly, we find that petitioners are
not entitled to a dependency exemption deduction for RMW in 2002.
To reflect the foregoing,
Decision will be entered
under Rule 155.