                        T.C. Memo. 2003-270



                      UNITED STATES TAX COURT



    MAINTENANCE, PAINTING & CONSTRUCTION, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4904-02.              Filed September 17, 2003.



     Martin A. Grusin and James W. Surprise, for petitioner.1

     Rebecca Dance Harris, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court on

February 26, 2002, to redetermine a $74,543 deficiency in its

Federal income tax for its fiscal year ended May 31, 1997 (1997

taxable year), and a $18,583 addition thereto under section


     1
       Counsel for petitioner entered their appearances on
Apr. 28, 2003.
                                - 2 -

6651(a)(1).2   The deficiency and addition to tax were reflected

in a notice of deficiency issued to petitioner on November 30,

2001, and result from respondent’s disallowance of petitioner’s

deduction of a $234,265 net operating loss (NOL) carryover from

its 1996 taxable year.   Petitioner concedes that it is not

entitled to the NOL deduction and alleges in an amendment to

petition filed with the Court on June 13, 2003, that it

“abandoned certain depreciable assets in the tax year 1997, and

is entitled to a deductible loss for the amount of the basis in

said assets for that year.”    The amendment does not list the

amount of the claimed loss but references an amended return

prepared by petitioner on August 28, 2002, claiming an

abandonment loss of $246,382.    Petitioner asserts in its opening

brief that its abandonment loss is actually $169,439.

     We decide first whether petitioner may deduct an abandonment

loss for the subject year.    We hold it may not.   We decide second

whether petitioner is liable for the addition to tax determined

by respondent under section 6651(a)(1).     We hold it is.

                         FINDINGS OF FACT

     Some facts were stipulated.   The stipulated facts and the

accompanying exhibits are incorporated herein by this reference.



     2
       Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, Rule references
are to the Tax Court Rules of Practice and Procedure, and dollar
amounts are rounded to the nearest dollar.
                               - 3 -

We find the stipulated facts accordingly.   Petitioner is a C

corporation with a fiscal year ending on May 31.   It specializes

in the repair and painting of buildings in the State of

Tennessee.   Its mailing address was in Brighton, Tennessee, when

its petition was filed.

     In 1992, petitioner was awarded a contract (contract) to

repair and paint 1,500 service stations in California, Arizona,

Nevada, Oregon, Washington, and Alaska.   Petitioner began working

on the contract in 1992 and purchased in and around California

most of the trucks, automobiles, and other equipment

(collectively, equipment) necessary to complete its work under

the contract.   The equipment was generally used property

purchased at auction.

     In 1994, petitioner began storing on a lot (lot) in

California some of the equipment that had become inoperable.     The

record does not indicate that petitioner documented the assets

which it placed on the lot.   On May 31, 1995, petitioner sold

some of the equipment located on the lot for $30,000.   Petitioner

reported on its Federal income tax return for its 1995 taxable

year that it had paid $360,728 for the equipment sold in that

transaction, and it claimed a $199,408 loss with respect to the

sale.   Petitioner reported on the return that the assets sold in

the transaction were “VARIOUS ASSETS–-CA” and did not otherwise

identify those assets.
                                - 4 -

     Pursuant to the contract, petitioner worked on approximately

300 service stations per year and completed its work in the fall

of 1997.    Shortly thereafter, petitioner’s president, Carlton

Laxton (Laxton), went to California and shipped to Tennessee at

least some of the equipment remaining on the lot.    The record

does not indicate that petitioner documented the assets which it

shipped to Tennessee.    Petitioner later sold some or all of the

assets which it shipped from California to Tennessee.

     On July 12, 2001, petitioner filed with the Commissioner its

Federal income tax return for its 1997 taxable year (1997

return).    The 1997 return was prepared by Dan R. Tacker (Tacker),

a certified public accountant (C.P.A.), and was signed by Laxton

in his capacity as petitioner’s president.    As of the time of

trial, Tacker had been a C.P.A. for almost 20 years, and he had

worked for petitioner as its outside accountant for approximately

the same amount of years performing audits, tax work, and other

services.    Tacker stopped working for petitioner as its

accountant effective with its operation after May 31, 1997.

     Petitioner reported on its 1997 return that its taxable

income before NOL deduction was $234,265 and that its NOL

deduction was the same.    Petitioner had incurred a $621,456 NOL

in its 1996 taxable year and applied $206,955, $106,115, and

$308,386 of that loss to its 1993, 1994, and 1995 taxable years.

Petitioner mistakenly reported on its 1997 return that the NOL in
                                - 5 -

its 1996 taxable year equaled $659,827, that it had applied that

NOL only to its 1993 and 1994 taxable years, and that the NOL was

available in part for carryover to 1997 and later years.

     On August 28, 2002, Tacker prepared for petitioner an

amended Federal income tax return for its 1997 taxable year.      The

amended return conceded that petitioner did not have a $234,265

NOL to apply to that year and claimed, instead, that petitioner

was entitled to deduct a $246,382 abandonment loss.    As stated on

the amended return:    “THE COMPANY SCRAPPED VARIOUS EQUIPMENT USED

IN THE CALIFORNIA OPERATION AS OBSOLETE BASED UPON HIGH MILEAGE

AND EXCESSIVE USE.    THE BASIS OF THE EQUIPMENT (VEHICLES) WAS

$246,382 BASED UPON COST MINUS DEPRECIATION.”

     During this proceeding, Tacker prepared workpapers that were

admitted into evidence by stipulation as part of Exhibit 5-J.

These workpapers in relevant part list under the category “Assets

Abandoned/OBSOLETE” 79 assets the “Unrecovered Cost” (adjusted

basis) of which totals $246,382 as of May 31, 1995, and May 31,

1997.3   Exhibit 5-J also contains a computerized list of

approximately 318 depreciable assets owned by petitioner as of

May 31, 1995, and used by it in connection with the contract.

Of the 79 assets listed on the workpapers, 75 are also shown on



     3
       According to Tacker, the assets appearing on this
workpaper were useless to petitioner after May 31, 1995. Thus,
he did not compute any depreciation for these assets after that
date.
                                - 6 -

the computerized lists with a handwritten checkmark placed next

to them.    (The other four assets, for which the worksheet reports

the total unrecovered cost as $28,214, appear on the computerized

list without a checkmark.)    The checkmarks were made by Laxton

who reviewed the computerized lists during this proceeding and

checked off the assets which petitioner initially asserted were

abandoned.    The amounts shown next to the checkmarks and the

amounts shown for the just mentioned four assets correspond in

total to petitioner’s claim that the “unrecovered cost” of the 79

assets totals $246,382 (with rounding).

       The Court also admitted into evidence petitioner’s Exhibit

8-P.    This exhibit is petitioner’s summary of the identity and

“unrecovered cost” of the:    (1) 60 assets which petitioner now

claims were abandoned in 1997 and (2) 17 assets which petitioner

now claims were included in the assets sold in 1995 for $30,000.

Exhibit 8-P lists that the unrecovered costs of the assets

included in these categories were $169,439 and $61,835,

respectively.    The difference between the $246,382 shown on

Exhibit 5-J and the $231,274 listed on Exhibit 8-P (i.e.,

$169,439 + $61,835) is attributable to two assets appearing on

the former exhibit but not on the latter.
                               - 7 -

                              OPINION

1.   Burden of Proof

      Taxpayers generally must prove respondent’s determination of

an income tax deficiency wrong in order to prevail.   Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).     As one

exception to this rule, section 7491(a) places upon the

Commissioner the burden of proof with respect to any factual

issue relevant to a taxpayer’s liability for tax if the taxpayer

maintained adequate records, satisfied applicable substantiation

requirements, cooperated with respondent, and introduced during

the court proceeding credible evidence on the factual issue.    A

taxpayer such as petitioner must prove that it has satisfied the

recordkeeping, substantiation, and cooperation requirements

before section 7491(a) places the burden of proof upon the

Commissioner.   Prince v. Commissioner, T.C. Memo. 2003-247.

      We do not find that petitioner maintained adequate records,

satisfied applicable substantiation requirements, or cooperated

with respondent.   Accordingly, we hold that section 7491(a) does

not apply here to place the burden of proof upon respondent.

2.   Abandonment Loss

      Section 165(a) provides a deduction for any loss sustained

during the taxable year which is not compensated for by insurance

or otherwise.   A loss from the abandonment of an asset is within

this section if:   (1) The owner of the asset intended to abandon
                               - 8 -

the asset, and (2) the owner in fact abandoned the asset through

an affirmative act.   United States v. S.S. White Dental

Manufacturing Co., 274 U.S. 398 (1927); A.J. Indus., Inc. v.

United States, 503 F.2d 660, 670 (9th Cir. 1974); CRST, Inc. v.

Commissioner, 92 T.C. 1249, 1257 (1989), affd. 909 F.2d 1146 (8th

Cir. 1990); see also United Dairy Farmers, Inc. v. United States,

267 F.3d 510, 522 (6th Cir. 2001).     The amount of the loss on an

abandonment of depreciable property equals the property’s

adjusted basis at the time of abandonment.    Secs. 1.165-2(c),

1.167(a)-8(c)(4), Income Tax Regs.

     Petitioner’s burden of proof requires that it establish:

(1) It intended to abandon specific assets during its 1997

taxable year, (2) it in fact during that year abandoned those

assets through an affirmative act, and (3) its adjusted bases in

the assets.   See Burnett v. Houston, 283 U.S. 223, 227 (1931);

Stivers v. Commissioner, 360 F.2d 35, 40-41 (6th Cir. 1966).

Petitioner has not proven any of these elements.    Although Laxton

testified that he intended on behalf of petitioner to abandon any

equipment placed on the lot which was not taken back to

Tennessee, we are hard pressed to determine on the basis of the

record at hand that any specific asset actually was abandoned.

Although petitioner may in fact have left on the lot one or more

pieces of the equipment, we are unable to find (and have serious

doubt) that petitioner actually knew what pieces of the equipment
                               - 9 -

were or were not left there.   The record contains no

contemporaneous documentation as to the equipment which was

placed on the lot, or the equipment on the lot that was

eventually shipped to Tennessee.   Petitioner relies predominantly

on the workpapers prepared by Tacker to establish the equipment

which it claims was abandoned, as well as on the conclusory

testimony of Tacker and Laxton to the effect that those

workpapers are accurate.   The probative value of these workpapers

is minimal, as is the referenced testimony.   In addition to the

fact that the workpapers were prepared during this proceeding,

Tacker testified that his knowledge as to the specific assets

which he showed thereon as abandoned was derived entirely from

Laxton.   Laxton, in turn, offered no clear explanation as to why

he believed these workpapers were accurate, although he was

specifically asked to do so upon cross-examination.

     We also question the accuracy of Exhibit 8-P when we examine

the specific assets shown thereon which petitioner claims were

useless after May 31, 1995, and abandoned in 1997.    For example,

as to those assets, the exhibit lists that petitioner purchased a

1987 truck during its 1995 taxable year at a cost of $22,588.

This truck cost substantially more than the numerous other trucks

used by petitioner on the contract, and petitioner generally used

each of those other trucks for more than 1 year.   We are hard

pressed on the record at hand to conclude that the 1987 truck was
                              - 10 -

of no use to petitioner after May 31, 1995, and was abandoned by

it in 1997.   In fact, by petitioner’s count, almost all of its

vehicles were not used by it after that date and were abandoned

in 1997.   Given that petitioner makes no claim that it abandoned

any vehicle purchased after May 31, 1995, that the record does

not persuade us that petitioner in fact purchased any vehicles

after that date, and that approximately 40 percent of

petitioner’s work on the contract remained to be performed after

May 31, 1997, we decline to accept petitioner’s implication that

it finished its work on the contract with virtually no vehicles.

We sustain respondent’s determination as to the deficiency.4

3.   Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for failing to

file a return on or before the due date unless it is shown that

this failure is due to reasonable cause and not due to willful

neglect.   Reasonable cause may exist if a taxpayer exercised

ordinary business care and prudence and was nonetheless unable to

file the return within the date prescribed by law.   Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.   Willful neglect means a


      4
       In so doing, we also note that Laxton testified that he
ascertained in the fall of 1997 the equipment that would be left
in California. This being so, petitioner’s claimed loss on the
abandonment of that equipment was not deductible by it for the
subject year. CRST, Inc. v. Commissioner, 92 T.C. 1249 (1989)
(taxpayer that alleged an intent to abandon asset in a year was
precluded from deducting an abandonment loss for that year
because it did not show that it actually abandoned the asset in
that year), affd. 909 F.2d 1146 (8th Cir. 1990).
                              - 11 -

“conscious, intentional failure or reckless indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985).

      Respondent bears the burden of production with respect to

this addition to tax.   Sec. 7491(c).   In order to meet this

burden, respondent must produce sufficient evidence that it is

appropriate to impose this addition to tax.    Once respondent has

done so, the burden of proof as to reasonable cause or other

mitigating factors is upon petitioner.    Higbee v. Commissioner,

116 T.C. 438, 446-447, 449 (2001).

      Respondent has satisfied his burden of production with

respect to the addition to tax in that the record establishes

that petitioner filed his 1997 tax return after its due date.

Petitioner must establish reasonable cause in order to prevail.

Id.   Petitioner filed the subject tax return approximately 4

years after its due date, and petitioner has not presented any

evidence establishing that the failure to file that return timely

was due to reasonable cause and not due to willful neglect.     We

sustain respondent’s determination as to the addition to tax.



      All arguments made by the parties and not discussed herein

have been rejected as without merit.


                                               Decision will be

                                          entered for respondent.
