UNITED STATES TAX COURT

T.C. Memo. 2012-51

UNITED STATES TAX COURT

JOSEPH DECRESCENZO, Petitioner ±.

.

COMMISSIONER OF INTERNAL REVENUE, Îlespondent

Docket No. 5630-09.

Joseph DeCrescenzo, prp se.

Filed February 27, 2012.

.

Mimi M. Wong, for respondent.

MEMORANDUM OPINION

MARVEL, Judge: Respondent determined a deficiency of $196,227 in

petitioner's 2006 Federal income tax and additions to tax under sections

SERVED FEB 27 200

-26651(a)(1) and (2)1 and 6654(a) of $44,151, $17,660, and $9,286, respectively.

After concessions,2 the issue for decision is whether petitioner may offset his net

earnings from self-employment with a net operating loss (NOL) carryforward that

originated in earlier taxal>1e years.

1Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect för thé year in issue, and äll Rule references are to the Tax

Court Rules of Practice and Procedure. Monetary amounts haá been rounded to

the nearest dollar.

2The parties stipulated the following: (1) petitioner's filing status is married

filing separately; (2) for purpöses of the individual retirement account (IRA)

deduction only, petitione 's filing status is single; and (3) petitioner is allowed one

personal exemption deduötion for 2006. The parties also stipulated that petitioner

must include the followinig amounts in gross income for 2006: (1) interest of $25;

(2) taxable annuity distriljutions of $21,807; (3) nonemployee compensation of

$137,660; and (4) ordinafy dividends of $5.

The parties also stipulated that petitioner is allowed the following

deductions: (1) itemized }deductions of $5,916; (2) a business expense deduction

of $80,475; (3) a partnership loss deduction of $2,036; (4) an IRA deduction of

$5,Ó00; and (5) a self-employed health insurance dëduction of $7,896. Petitioner

also is allowed a $30 credit for Federal telephone excise tax paid and a $3,000 net

short-term cajpital loss.

Petitioner concedes that if we find in favor of respondent on the remaining

issue, he is liable for the additions to tax únder secs. 6651(a)(1) and (2) and

6654(a).

-3Background

The parties submitted this case fully stipulated pursuant to Rule 122. The

stipulation of facts is incorporated herein by this reference. Petitioner resided in

New York when he filed his petition.

Petitioner is an accountant. In 2006 petitioner received nonemployee

compensation of $137,660lfrom his accounting business.

Petitióner failed to timely file a Form 1040, U.S. Individual Income Tax

Return, for 2006. Respondent prepared a substitute for return l 541ursuant

to section

6020(b) and determined a deficiency. On December 5, 2008, respondent mailed to

petitioner a notice of deficiency for 2006. -On.the Schedule SE, Self-Employment

Tax, respondent determined that petitioner received $131,660 in self-employment

income and that he owed self-employment tax of $15,207.

Petitioner timely filed a petition for redetermination of the deficiency. The

parties stipulated that petitioner has an NOL: carryforward from prior years. While

the parties agree that petitioner may reduce his total.income by $51,065,ithe

3In the notice of deficiency, respondent determined that petitioner received

self-employment income of $131,660. However, the parties stipulated that

petitioner received self-employment income of $137,660. Neither party offered an

explanation for the $6,000 difference between the amount in the notice of

deficiency and the stipulated amount.

amount of the NOL carryforward, the parties disagree as to whether petitioner also

may use the NOL carryforward to offset his self-employment income.

Discussion

I.

.

Preliminary Matter

Petitioner contends that this Court lacks jurisdiction to consider whether he

may offset his net earniné,s from self-employment with an NOL carryforward on

the ground that respondent did not raise the NOL carryforward issue in the notice

of deficiency. Petitioner raised the same jurisdictional argument before trial in his

motion to dismiss for lack ofjurisdiction, which we denied.

Petitioner also app ars to argue that,we cannot hear the issue of whether

petitioner may offset net earnings from self-employment with an NOL

carryforward because the issue was untimely raised. Generally, "[w]e have

refused to consider an untimely raised issue when the opposing party is unfairly

surprised and prejudiced because his defense against the issue requires the

presentation of evidence different from the evidence relevant to the identified

issues in the case." Rolfs!v. Commissioner, 135 T.C. 471, 484 (2010).

The parties filed a tipulation of settled issues on January 11, 2010,

stipulating to the amount of the NOL carryforward and agreeing that thé issue of

whether the NOL carryforward offsets petitioner's net earnings from self-

-.5 employment remained in dispute. On October 22, 2010, the parties jointly moved

to submit this case under Rule 122. It is apparent from the record that the parties

jointly agreed to pi.esent.the issue of how to calculate petitioner's net selfemployment income to the Court. Furthermore, because the parties stipulated the

existence and ämount of the NOL, this issue does not require the presentation of

new evidence. We shall consider the issde liiacéo dance with the parties'

stipulation.

II.

Burden of Proof

Petitioner contends that respondent bears the burden of proof on the issue of

whether he may offset net earnings from self-employment with an NOL

carryforward because respondent failed to raise the issue in the notice of

r,

deficiency. Alternatively, petitioner contends that respondent bears the burden of

proof because section 7491(a) applies.

Generally, the Commissioner's determinations are presumed correct; and the

taxpayer bears the burden of proving that they are incorrect. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

29i) U.S. 111, 115 (1933). Ho vever, the Commissioner bears the b'urden of proof

with respect to "any new matter, increases in deficièncy, and affirmative défenses,

pleaded in the answer". R'ule 142(a)(1). In Wayne Bolt & Nut Co. v.

-6Commissioner, 93. T.C. 500, 507 (1989), we stated: "A new theory that is

presented to sustain a deficiency is treated as a new matter when it either alters the

original deficiency or requires the presentation of different evidence. * * * A new

theory which merely;clarifies or develops the original determination is not a new

matter in respect of.which respondent bears the burden of proof." See also Shea v.

Commissioner, 112 T.C. 183, 191-197 (-1999). The Commissioner does not bear

the burden of disproving deductions that a taxpayer belatedly claims. See

Rappaport v. Commissioder, T.C. Memo. 2006-87.

Section 7491(a) provides that if a taxpayer produces credible evidence with

respect to any factual issue relevant to ascertaining the tax liability of the taxpayer,

the burden of proof shifts to the Secretary4 if the taxpayer has complied with

substantiation requirements, maintainedrall required records; and cooperated with

reasonable requests by the Secretary for witnesses, information, documents, .

meetings, and interviews.

4The term "Secretary" means "the Secretary of the,Treasury or his delegate",

sec. 7701(a)(11)(B), and the term "or his delegate" means "any officer, employee,

or agency of the Treasury Department duly authorized by the Secretary of the

Treasury directly, or indi ectly by one or more redelegations of authority, to

perform the function mentioned or described in the context", sec.

7701(a)(12)(A)(i).

-7Petitioner did not claim the NOL carryforward until after respondent issued

the notice of deficiency. After petitioner raised the issue of his entitlement to the

NOL carryforward, respondent conceded that petitioner is entitled to the NOL

carryforward deduction for 2006. Thereafter, in the course of trying to settle the

case and calculate the deficiency, a dispute arose regarding the use of the NOL

carryforward in calculating petitioner's self-employment tax. The only remaining

issue is whether petitioner may use his NOL carryforward to offset net earnings

from self-employment. Because the relevant facts are stipulated and only a legal

issue remains, we need not decide whether the burden of proof shifts to

respondent. See Estate of Morgens v. Commissioner, 133 T.C. 402, 409 (2009);

see also Waamiq-Ali v. Commissioner, T.C. Memo. 2010-86; Rozzano v.

Commissioner, T.C. Memo. 2007-177.

III.

Calculation of Self-Employment Income

A taxpayer's self-employment income is subject to self-employment tax.

Sec. 1401(a) and (b). Self-employment tax is assessed and collected as part of the

income tax, must be included in computing any income tax deficiency or

overpayment for the applicable tax period, and must be taken into account for

estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Income Tax Regs.

Self-employment income is generally defined as "the net earnings from self-

employment derived by an individual". Sec. 1402(b). Section 1402(a) defines

"net earnings from self-employment" in pertinent part as follows:

SEC. 1402. DEF

ITIONS.

(a) Net Earnings From Self-Employment.--The term "net

earnings from self-employment" means the gross income derived by

an individual from any trade or business carried on by such

individual, less the deductions allowed by this subtitle which are

attributable to such trade or business, plus his distributive share

(whether or not dis ributed) of income or loss described in section

702(a)(8) from anyltrade or business carried on by a partnership of

which he is a member; except that in computing such gross income

and deductions and such distributive share of partnership ordinary

income or loss-

*

*

*

*

*

*

*

(4) the deduction for net operating losses provided in

section 172 shall not be allowed;

(5) if(A) any of the income derived from a trade or

business (other than a trade or business carried on by a

partnership) is community income under community

property laws applicable to such income, the gross

income and deductions attributable to such trade or

business shall be treated as the gross income and

deductions ofthe spouse carrying on such trade or

,

business * * *; and

(B) any portion of a partner's distributive share of

the ordinary income or loss from a trade or business

carried on by a partnership is community income or loss

under the community property laws applicable to such

-9share, all of such distributive share shall. be included in

computing the net earnings from self-employment of

such partner * * *

See also sec. 1.1402(a)-1, Income Tax Regs. For purposes of determining selfemployment income, section 1.1402(a)-7, Income Tax Regs., states that "[t]he

deduction provided by section 172, relating to net operating losses sustained in

years other than the taxable year, is excluded."5

We repeatedly have held that section 1402(a)(4) prohibits a taxpayer6 from

offsetting net earnings from self-employment with an NOL carryforward or

carryback. Ding v. Commissioner, T.C. Memo. 1997-435, aff'd, 200 F.3d 587

(9th Cir. 1999); Laney v. Commissioner, T.C. Memo. 1997-403, aff'd without

published opinion, 168 F.3d 482 (4th Cir. 1999); Moonev v. Commissioner, T.C.

5Sec. 172(a) provides that "[t]here shall be allowed as a deduction for the

taxable year an amount equal to the aggregate of (1) the net operating loss

carryovers to such year, plus (2) the net operating loss carrybacks to such year.

For purposes of this subtitle, the term 'net operating loss deduction' means the

deduction allowed by this subsection."

6ÊetitiOner contends that para. (4) of sec. 1402(a) does not apply to

individuals but instead applies only to partnerships. He contends that, because

para. (5) of sec. 1402(a) begins with the word "if," para. (4) of sec. 1402(a) is

applicable only if the taxpayer meets the requirements of either subpar. (A) or (B)

of sec. 1402(a)(5). Paragraphs (1)-(17) of sec. 1402(a) set forth specific rules for

computing net earnings from self-employment. Each numbered paragraph

contains a separate rule. Paragraph (4) of sec. 1402(a) operates independently of

para. (5) of sec. 1402(a), and the application of para. (4) of sec. 1402(a) is not

dependent on the taxpayer's satisfaction of subpar. (A) or (B) of sec. 1402(a)(5).

- 10 Memo. 1993-204, aff'd without published opinion, 111 F.3d 138 (9th Cir. 1997);

see also Thomson v. United States, 83 A.F.T.R.2d (RIA)99-2210, 99-1 U.S. Tax

Cas. (CCH) para. 50,488 (Fed. Cl. 1999) (holding that the taxpayer did not make

an overpayment of self-e nployment tax in prior years because the taxpayer could

not offset net earnings from self-employment with an NOL carryback).7 As in the

cited cases, section 1402(a)(4) prohibits petitioner from using his NOL

carryforward of $51,065 to reduce his net earnings from self-employment in this

case.

Because we concl

e that petitioner may not offset his net earnings from

self-employment with his NOL carryforward, we hold that he is liable for the

additions to tax under sections 6651(a)(1) and (2) and 6654(a). See supra note 2.8

7Of the cited cases, petitioner attempts to distinguish only Mooney v.

Commissioner, T.C. Memo. 1993-204, aff'd without published opinion, 111 F.3d

138 (9th Cir. 1997). In Mooney, we held that the taxpayers could not offset 1988

net earnings from self-employment with a 1988 net rental loss reported on a

Schedule E, Supplemental Income and Loss, because the taxpayers were not in a

real estate trade or business. We also held that the taxpayers could not offset 1988

net earnings from self-employment with NOLs that the taxpayers sustained in

1984 and 1985. Id. Petitioner incorrectly assumes that the rental loss in Mooney

derived from participatio in a partnership.

8Despite his concessions regarding the additions to tax, on brief petitioner

contends that the stipulation is not binding because he agreed to the stipulation

under duress. Rule 91(e) provides that "[t]he Court will not permit a party to a

stipulation to qualify, cha ige, or contradict a stipulation in whole or in part, except

(continued...)

- 11 We have considered all the other arguments made by the parties, and to the extent

not discussed above, we find those arguments to be irrelevant, moot, or without

merit.

To reflect the foregoing,

Decision will be entered under

Rule 155.

8(...continued)

that it may do so where justice requires." While petitioner argues that he was

unable to appear at trial because of an acute anxiety disorder, he introduced no

evidence that he was suffering from the acute anxiety disorder at the time he

executed the stipulation. See King v. Commissioner, 121 T.C. 245, 252-253

(2003). Petitioner is bound by the stipulation of settled issues.