Fisher v. Commissioner

MEMORANDUM OPINION

PANUTHOS, Special Trial Judge: The proceedings in this case were conducted pursuant to section 7456(d)(3) of the Code (redesignated as section 7443A(b)(3) by section 1556 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rules 180, 181, and 182. ¹

Respondent determined deficiencies in petitioners' Federal income taxes for the years 1981 and 1982 in the amounts of $4,398.80 and $2,754.80, *86 respectively. Respondent also determined an addition to tax for each year under section 6653(a)(1) in the amounts of $219.94 and $137.74, respectively, and an addition to tax under section 6653(a)(2) in an amount of 50 percent of the interest due on the deficiencies.

Respondent determined the following adjustments to deductions claimed by petitioners on their 1981 and 1982 Federal income tax returns:

*87 After concessions by the parties, the issues for decision are:

(1) whether the Bankruptcy Code ³ bars respondent from assessing the 1981 tax against Jerri L. Fisher;

(2) whether Jerri L. Fisher qualifies as an innocent spouse under section 6013(e);

(3) whether petitioners are entitled to a loss carryover of $12,500 in 1981;

(4) whether petitioners are entitled to Schedule C deductions claimed in 1981 and 1982;

(5) whether petitioners are entitled to itemized deductions claimed in 1981 and 1982;

(6) whether unemployment compensation received by Ronald Fisher in 1982 should be excluded from income in 1982; and,

(7) whether petitioners are liable for the additions to tax under section 6653(a) for the years in issue.

At the time of filing the petition, petitioners resided at Woodbridge, Virginia.

Petitioners refused to stipulate to any of the facts in this case. ⁴ Therefore, the record is confusing. In addition, at trial petitioners' testimony was vague and ambiguous. The Court advised petitioners that the burden of proof was on them to establish that respondent's determination was erroneous. Despite*88 this admonishment, petitioners failed in many respects to present clear or reliable evidence on many of the issues. We will discuss the facts as they relate to each issue separately.

(1) Bankruptcy. Jerri L. Fisher filed for bankruptcy on February 22, 1982. A discharge*89 of debtor was issued on June 15, 1982 by the United States Bankruptcy Court for the Eastern District of Virginia. Petitioners do not argue that the decree discharged Jerri Fisher from liability for 1981 taxes. Rather, they argue that section 507(a)(7)(A)(ii) of the Bankruptcy Code⁵ bars respondent from assessing the 1981 deficiency against Jerri Fisher, because that section acts as a statute of limitations which bars assessment of tax unless it is assessed within the time period provided by that statute. This argument is without merit.

First, section 507 of the Bankruptcy Code*90 is not a statute of limitations. Rather, it merely sets forth the priority of claims against a debtor's estate. Section 6501(a) of the Internal Revenue Code provides that the period of limitation on assessment of tax is three years after the date the return is filed. The notice of deficiency in this case was mailed on February 15, 1985, which date is less than three years after April 15, 1982, the due date of the 1981 return.

Second, section 507(a)(7)(A)(ii) of the Bankruptcy Code on its face relates to an assessment pending before the filing of a bankruptcy petition. Here, the bankruptcy petition was filed before the 1981 return was even due. Therefore, the assessment would not likely have been pending at the time the bankruptcy petition was filed. ⁶ Thus, we find for respondent on this issue.

(2) *91 Innocent Spouse. Petitioners were married in July 1981 and filed a joint return for that year. Because petitioners were married for only five months in 1981, they claim that Jerri Fisher should not be held liable for the 1981 deficiency, and in addition, they argue that she qualifies as an innocent spouse under section 6013(e). Section 6013(d)(3) provides that the liability with respect to a joint return is joint and several. This is so whenever a joint return is filed, regardless of how many months during the year the taxpayers were married. ⁷ Thus, unless Jerri Fisher qualifies under section 6013(e) as an innocent spouse, she will be liable for any deficiency in tax for 1981 as well as 1982. In order to qualify as an innocent spouse, she must prove that (1) on the 1981 joint return there is a substantial ⁸ understatement of tax attributable to grossly erroneous items ⁹ of Ronald Fisher; (2) she did not know and had no reason to know of the substantial understatement upon signing the return; (3) taking into account all of the facts and circumstances, it is inequitable to hold her liable for the deficiency attributed to such understatement; and, (4) that the liability for*92 tax exceeds a specified percentage of her own income in the year ending before the notice of deficiency was mailed. ¹⁰

*93 The burden of proving the elements of the innocent spouse exception is on Jerri Fisher. Adams v. Commissioner,60 T.C. 300, 303 (1973). We conclude that she has failed to prove that she qualifies as an innocent spouse. Jerri Fisher failed to establish either that she had no adjusted gross income in 1984, the year prior to the year in which the notice of deficiency was issued, or that she had adjusted gross income in 1984, but that the understatement of tax (attributable to an unfounded claim for deduction, credit, or basis) exceeded the applicable percentage of adjusted gross income provided under section 6013(e)(4)(A) or (B). Even assuming she could have met the percentage requirement, she failed to present relevant evidence or probative testimony to prove the other requirements of section 6013(e). Therefore, we hold that Jerri Fisher does not qualify as an innocent spouse within the meaning of section 6013(e).

(3) and (4) Schedule C Expenses. Respondent determined the following adjustments to Schedule C expenses claimed by petitioners on their 1981 and 1982 income tax returns:

*94 These deductions stem from Ronald Fisher's (hereinafter Fisher) claimed activity as a publisher and author. His publishing activities consisted of a partnership formed to solicit manuscripts from budding authors in the hopes of publishing them. He testified that the firm began winding down its activities in 1980 and was still doing so in 1981.

Fisher's activities as an author consisted of his publication through Banner Books of an adaptation of his Master's thesis entitled, "The Concept of Judicial Activism." It appears from his testimony that most, if not all, of the activities associated with publishing this book took place prior to 1981.

Included in the Schedule C expenses for 1981 is a $12,500 loss carryover from prior years. This carryover stems from a loss claimed by petitioners relating to the bankruptcy of Banner Books. Petitioners' claim that the loss is for anticipated lost profits from books which were never published. This loss was the subject of this Court's decision in Fisher v. Commissioner,T.C. Memo. 1986-141. We held in that case that Fisher, as a cash basis taxpayer, was not entitled to claim loss for anticipated unreported profits from*95 unpublished books. Rather, Fisher was only entitled to claim a loss for his investment in books which he paid Banner Books to publish, but which were never published. Since Fisher deducted the amount of this investment in 1979, the year of the Banner Books bankruptcy, he was not entitled to claim any additional loss. For the reasons stated therein, we hold that petitioners are not entitled to deduct the $12,500 loss carryover claimed in 1981.

With regard to the remaining Schedule C deductions, Fisher's testimony was of a general nature and he did not convince us that petitioners are entitled to deduct the expenses claimed in 1981 and 1982. It is well-settled that petitioners have the burden of proving that respondent's determination is erroneous. Welch v. Helvering,290 U.S. 111 (1933); Rule 142(a). Petitioners have failed to sustain their burden. While petitioners presented some personal checks to substantiate the expenses, they appear to relate to non-deductible personal items. For example, checks made payable to grocery stores, laundries, cash and apartment management companies appear to be for non-deductible personal expenses. Respondent is thus sustained*96 on these two issues.

(5) Itemized Deductions. Petitioners claimed miscellaneous deductions in the amount of $7,097 for 1981 of which respondent initially allowed $4,223 and at trial conceded an additional $2,370. Petitioners also claimed miscellaneous itemized deductions in the amount of $12,867 for 1982 of which respondent allowed $8,473. Petitioners failed to substantiate the disallowed amounts. Thus, petitioners have failed to prove that respondent's determination is erroneous. Welch v. Helvering,supra.

(6) Unemployment Compensation. During 1982, Fisher received unemployment compensation from the State of Virginia in the amount of $3,588. This amount was included by petitioners in gross income on their 1982 tax return. Fisher subsequently won job reinstatement and received full back pay for the period he was unemployed. Under Virginia law, he is now required to repay the amount of unemployment compensation received. Petitioners argue that the amount of unemployment compensation should be removed from gross income for 1982, as it will now have to be repaid. At the time of submission of this case, the issue of repayment had not yet been resolved*97 with the State of Virginia, and Fisher had not repaid the amount received.

If a taxpayer receives earnings under a claim of right and without restrictions, the earnings are taxable in the year received, Corliss v. Bowers,281 U.S. 376, 378 (1930), even though the taxpayer may still be adjudged liable to restore its equivalent. North America Oil Consolidated v. Burnet,286 U.S. 417, 424 (1932). When, in a later year, a taxpayer is required to restore an amount received by him and included in income in a prior year, the taxpayer may deduct the repayment from income in the year repayment is made, or, if the repayment exceeds $3,000, reduce his tax liability in the year of repayment by the amount of tax for the earlier year, which was attributable to inclusion in income of the repaid amount. Section 1341(a); section 1.1341-1, Income Tax Regs.

Thus petitioners are not entitled to exclude from their 1982 gross income the amount of unemployment compensation.

(7) Additions to Tax. Since respondent determined the additions to tax under section 6653(a) in his notice of deficiency, such determination is presumed to be correct and the burden is on*98 petitioners to show that the determination is erroneous. Bixby v. Commissioner,58 T.C. 757, 791 (1972). We are satisfied based upon the entire record, including the substantial understatement of tax liability and petitioners' failure to maintian adequate books and records, that petitioners are liable for the additions to tax under section 6653(a).

Decision will be entered under Rule 155.