                         T.C. Memo. 2011-23



                       UNITED STATES TAX COURT



                PERRY DEAN KNOWLES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8555-08.                  Filed January 27, 2011.



     Perry Dean Knowles, pro se.

     Duy P. Tran, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:    On January 14, 2008, respondent issued to

petitioner a notice of deficiency which determined a Federal

income tax deficiency of $1,502 for petitioner’s 2005 tax year.

Petitioner filed a timely petition with this Court.    The issues

for decision are:    (1) Whether petitioner is entitled to a
                                - 2 -

capital loss carryover pursuant to section 1212(b);1 (2) whether

petitioner is permitted to increase his adjusted basis in either

the Mexico Fund, Inc. (MXF), or the Mexico Equity and Income

Fund, Inc. (MXE), pursuant to section 852(b)(3)(D)(iii); and (3)

whether petitioner made an overpayment of tax attributable to a

mathematical miscalculation.2

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulation

of facts and the exhibits attached thereto are incorporated

herein by this reference.   Petitioner and his wife filed a joint

2005 Federal income tax return (2005 return), but petitioner’s

wife is not a party to this case.3      At the time the petition was

filed, petitioner resided in Granbury, Texas.




     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code (Code) in effect for the year at issue, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      Petitioner does not contest respondent’s determination that
he must include an additional $194 of qualified dividend income
paid by America Movil and $16 of long-term capital gain income
from the sale or exchange of Agere Systems shares.
     3
      A notice of deficiency was issued to both petitioner and
his wife on Jan. 14, 2008. The last day to petition this Court
was Apr. 14, 2008. His wife did not petition the Court. Nor
does the record indicate that she intended to petition the Court.
This Court does not have jurisdiction over her tax matter.
                               - 3 -

     The record contains tax returns for 2001, 2002, 2003, 2004,

and 2005.4   In 2001 petitioner reported no capital gain or loss.

Petitioner reported long-term capital gains of $26,984, $15,265,

and $171 for tax years 2002, 2003, and 2004, respectively.5

Petitioner contends that he sustained net capital losses of about

$12,000 and $9,000 in at least 2 years before 2001.   Accordingly,

he maintains that he is entitled to capital loss carryovers of

$9,000 and $6,000 from those 2 respective years.6   However,

petitioner asserts that he was unaware of the capital loss

carryover rule and thus did not carry these amounts forward.

Upon discovering the rule in 2007, he filed an amended 2005

return.   Respondent, however, did not accept the amended return.

     On January 3, 1996, petitioner purchased shares of MXF and

MXE, each of which is a regulated investment company (RIC).7


     4
      Respondent and petitioner were unable to produce
petitioner’s returns for years before 2001. Respondent’s counsel
indicated that the IRS’ policy is to destroy returns after 7
years, and respondent’s counsel confirmed that petitioner’s
returns were destroyed accordingly. Petitioner was unable to
supply respondent with copies of his returns for tax years 1991-
2000 as they were destroyed in a fire.
     5
      Long-term capital gains are profits from a transaction in
which a taxpayer sells a capital asset, as defined by sec. 1221,
for more than the taxpayer’s basis in that property and has held
that property for more than 1 year.
     6
      Petitioner contends that he deducted a $3,000 loss from the
$12,000 loss and the $9,000 loss in the years he realized those
losses.
     7
      RICs, commonly known as mutual funds, issue shares to raise
                                                   (continued...)
                                 - 4 -

Petitioner paid $7,580 for 500 shares of MXF and $4,955 for 500

shares of MXE.    Petitioner owned these shares from 1996 to 2005,

and he received dividends and capital gain distributions from

both MXF and MXE during that time.       The record contains various

brokerage statements, Forms 1099-DIV, Dividends and

Distributions, and tax returns; however, these documents do not

account for the entire period petitioner owned MXF and MXE

shares.8

     According to the “income activity” section of petitioner’s

January 1997 brokerage statement, he received a dividend of $90

and a capital gain distribution of $245 from MXE on January 13,

1997.    The following day he received a dividend of $220 from MXE.

Then, on January 31, 1997, petitioner received a $20 dividend

from MXF.    In another section of the monthly statement, the

entire $575 received from MXF and MXE in the form of dividends

and capital gain distributions was classified as “dividends from

mutual funds”.    Petitioner received the capital gain distribution

in the form of a cash payment.

     Petitioner received capital gain distributions of $297.95,

$25, $152.98, and $289.45 from MXF on January 30, 1998, January


     7
      (...continued)
capital that is later invested in common stocks, corporate bonds,
short-term money market funds, and other securities.
     8
      For instance, brokerage statements are available for
portions of 1997, 1998, 1999, and 2001, but are not available for
the other relevant years.
                                 - 5 -

31, 2001, January 15, 2004, and January 14, 2005, respectively.

In addition, petitioner received capital gain distributions of

$1,780 and $465 from MXE on January 9 and 19, 1999, respectively.

Each amount reflected on the available brokerage statements shows

a corresponding cash increase.    The two amounts from 2004 and

2005 are reflected on Forms 1099-DIV.    Moreover, there is neither

evidence that petitioner received a deferred capital gain

distribution from either MXF or MXE, nor any indication that

petitioner received a Form 2439, Notice to Shareholder of

Undistributed Long-Term Capital Gains.

     Petitioner included $1,333 on line 13, “Capital gain

distributions”, of his 2002 Schedule D, Capital Gains and Losses.

However, he reported no capital gain distributions on his 2001,

2003, 2004, and 2005 returns.    In addition, it does not appear

that capital gain distributions from MXF and MXE were reported on

any other line of the 2001, 2003, 2004, and 2005 returns.

     On January 3, 2005, petitioner sold 500 shares of MXF and

500 shares of MXE for net proceeds of $10,804 and $8,499,

respectively.    Petitioner did not report those proceeds on the

2005 return.    However, he did report $26,440 of wages from his

wife’s employment, $243 of taxable interest, and $579 of

unemployment compensation for total ordinary income of $27,262.

In addition, he reported $15,065 of qualified dividends and

$86,073 of long-term capital gains for a total of $101,138
                                 - 6 -

subject to preferential rates.     An adjusted gross income of

$128,400 was then reduced by a $4,000 tuition and fees deduction,

a $10,000 standard deduction, and four exemptions of $3,200 each,

reflecting taxable income of $101,600.      Petitioner then manually

calculated and reported tax of $18,044 on a handwritten return

for tax year 2005.     The 2005 return was timely filed in April

2006.

                                OPINION

I.   Burden of Proof

     In general, the Commissioner’s determinations in the notice

of deficiency are presumed correct, and taxpayers bear the burden

of disproving those determinations.       See Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Tax deductions are a matter

of legislative grace; thus taxpayers have the burden of proving

that they are entitled to each claimed deduction.      See Rule

142(a)(1); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   The burden on factual issues that affect a taxpayer’s

liability for tax may shift to the Commissioner if “a taxpayer

introduces credible evidence with respect to * * * such issue.”

See sec. 7491(a)(1).     However, this provision does not apply if

the taxpayer has failed to comply with the substantiation

requirements.   See sec. 7491(a)(2)(A).

     Pursuant to section 6001 and the regulations thereunder,

taxpayers are required to keep sufficient records to establish
                                - 7 -

the amounts of deductions claimed on any Federal tax return.      See

sec. 1.6001-1(a), Income Tax Regs.      Petitioner has not provided

credible evidence that he is entitled to a capital loss

carryover.    This Court is not required to accept petitioner’s

uncorroborated testimony that he sustained net capital losses in

previous years.    See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).    Accordingly, the burden with respect to the capital loss

carryover issue remains with petitioner.

      With respect to petitioner’s adjusted bases in MXF and MXE,

because this Court’s decision is not affected by the placement of

the burden of proof, it is unnecessary for this Court to

determine whether petitioner has met the requirements of section

7491(a).

II.   Capital Loss Carryover

      As he is a married individual filing a joint return,

petitioner’s losses from sales of capital assets are allowed only

to the extent of the gains from such sales or exchanges, plus the

lower of $3,000 or the excess of such losses over such gains.

Sec. 1211(b).    Excess net capital losses beyond the $3,000

threshold are treated as either short-term or long-term capital

losses in the succeeding taxable year, depending on the character

of the capital loss that created the carryover.     See sec.

1212(b)(1).   To determine the “excess” referred to in section

1212(b)(1), the amount allowed under section 1211(b)(1) or (2) is
                                - 8 -

used in the calculation rather than the amount of the deduction

actually claimed in a given tax year.   See sec. 1212(b)(2).

Therefore, a taxpayer’s capital loss carryover is reduced to the

extent a deduction is allowed regardless of whether the taxpayer

benefits from the deduction or chooses not to claim the

deduction.    See sec. 1212(b)(1); Cleveland v. Commissioner, T.C.

Memo. 1983-299 (holding that it is not relevant whether the

taxpayer claimed any amount of the capital loss carryover in

intervening years); see also Rev. Rul. 76-177, 1976-1 C.B. 224

(ruling that a taxpayer must take into account the allowed

deduction for purposes of determining the capital loss

carryover).

     Petitioner asserts that he is entitled to capital loss

carryovers of $9,000 and $6,000 from years before 2001.   Even if

these amounts were otherwise adequately substantiated, the

carryovers would have been exhausted before 2005, the sole year

before this Court.   Since petitioner reported no capital gain or

loss in 2001, he would have been allowed a $3,000 deduction under

section 1211(b) on his joint return, assuming he had a sufficient

carryover from tax year 2000.   The excess beyond $3,000 would

then carry over to 2002 where he would exhaust the entire

carryover since he reported a $26,984 capital gain.   Therefore,

even if petitioner had a $15,000 capital loss carryover from tax

year 2000, it would no longer exist after tax year 2002 whether
                                 - 9 -

he claimed the allowable capital loss carryover deductions or

not.    In addition, a capital loss carryover was not created in

tax year 2003 or 2004 since a net gain was reported in both

years.

       Respondent was unable to produce returns for years before

2001.    Petitioner contends that it is respondent’s burden to

produce these records; however, as discussed above, petitioner

has not complied with the substantiation requirements of section

6001.    Therefore, the burden does not shift to respondent.

Petitioner has failed to meet his burden of proving that he

generated a capital loss carryover in any previous year, and even

if this Court accepted petitioner’s recollection, the alleged

carryover would be insufficient to affect the tax year at issue.

Therefore, this Court finds that petitioner is not entitled to a

capital loss carryover deduction for tax year 2005.

III. Capital Gain Calculation for Sale of MXF and MXE Shares

       Income from whatever source derived is includable in gross

income unless excluded by statute.       Sec. 61(a).   Gains derived

from dealings in property are specifically included in gross

income.    Sec. 61(a)(3).   Pursuant to section 1001, taxpayers

generally must recognize gain when the amount realized from the

disposition of their property exceeds the adjusted basis in the

property.    The gain is calculated by subtracting the adjusted

basis from the amount realized.     See sec. 1001(a).     Petitioner
                               - 10 -

concedes that he must recognize gain from the sale of both his

MXF and MXE shares.    His only disagreement with respondent on

this issue is whether he is permitted to increase his bases for

taxes previously paid on capital gain distributions from MXF and

MXE.    Accordingly, this Court must determine whether a basis

adjustment is proper.

       Generally, the adjusted basis equals the initial cost unless

an adjustment is otherwise provided for in the Code.     Secs.

1011(a), 1012.    An RIC can choose either to distribute its

capital gains in the form of capital gain as dividends or not to

distribute its capital gain as dividends and make a designation

instead.    See sec. 852(b)(3)(C).

       If an RIC chooses to pay a capital gain dividend, its

shareholders must include the dividend in their long-term capital

gain income.    Sec. 852(b)(3)(B).   Similarly, if an RIC chooses to

make a capital gain designation, its shareholders must include

the amount in their long-term capital gain income.     Sec.

852(b)(3)(D)(i).    A capital gain designation, however, creates

other tax consequences as well.      For instance, shareholders must

increase their adjusted basis when a capital gain designation is

made.    Sec. 852(b)(3)(D)(i), (iii).   A tax is imposed on an RIC

if it has capital gains in excess of its capital gain dividends

paid deduction.    Sec. 852(b)(3)(A).   RIC shareholders are deemed

to have paid their pro rata shares of this tax and are allowed to
                                - 11 -

take a credit or refund for the same amount.      Sec.

852(b)(3)(D)(ii).   In addition, a shareholder’s basis in RIC

shares is increased by the excess of the undistributed capital

gains allocable to the shares over the tax deemed paid by the

shareholder.   Sec. 852(b)(3)(D)(iii).

      In each of the years 2002 through 2004 petitioner received

capital gain distributions in the form of cash payments relating

to his shares in MXF and MXE.    There is no evidence that either

company, by Form 2439 or otherwise, ever designated with respect

to his shares any undistributed capital gain.      Nor is there

evidence that any such gain was included in his gross income.

Accordingly, he is not entitled to a basis adjustment under

section 852(b)(3)(D)(iii).

        Petitioner purchased MXF shares for $7,580 and sold them

for $10,804 over a year later.    Therefore, petitioner must

recognize $3,224 of long-term capital gain under section 1001

upon the shares’ disposition.    Petitioner purchased MXE shares

for $4,955 and sold them for $8,499 over a year later.

Consequently, petitioner must recognize $3,544 of long-term

capital gain under section 1001 upon the shares’ disposition.

IV.   Tax Court Jurisdiction

      The Tax Court has jurisdiction in a deficiency case to

determine that a taxpayer has made an overpayment of income tax

for the same taxable year at issue.      See sec. 6512(b)(1).   A
                                - 12 -

credit or refund is not allowed unless this Court finds as part

of its decision that one of the provisions of section 6512(b)(3)

is met.   Section 6512(b)(3)(B), the applicable law, directs this

Court to the lookback periods set forth in section 6511(b)(2).

See also Commissioner v. Lundy, 516 U.S. 235, 242 (1996).    The

notice of deficiency petitioner received is dated January 14,

2008, well before the expiration of the 3-year lookback period

provided in section 6511(a) since the 2005 return was timely

filed in April 2006.     All of petitioner’s payments for tax year

2005 were paid or deemed paid within 3 years of the mailing of

the notice of deficiency.    Therefore, this Court has jurisdiction

to award petitioner a credit or refund if it finds that an

overpayment occurred.

V.   Tax Liability Calculation and Overpayment

     The Jobs and Growth Tax Relief Reconciliation Act of 2003

(2003 Tax Act), Pub. L. 108-27, secs. 301 and 302, 117 Stat. 758,

760, reduced capital gains rates and taxed certain individual

dividend income at the newly-lowered capital gains rates.    Before

the relevant provisions of the 2003 Tax Act took effect, the

maximum capital gains rate was 20 percent.     The 2003 Tax Act

reduced the rates to 5 and 15 percent, respectively.     Id. sec.

301(a), 117 Stat. 758.    These tax rate reductions apply to tax
                                - 13 -

years ending on or after May 6, 2003.       Id. sec. 301(d), 117 Stat.

760.9

        Before the relevant provisions of the 2003 Tax Act took

effect, dividends received by individuals were included in gross

income and taxed at ordinary income rates.       Under the new

provision, qualified dividends will be taxed at 5 and 15 percent

tax rates.     Id. secs. 301 and 302.    This preferential treatment

for qualified dividends applies to tax years beginning after

December 31, 2002.     Id. secs. 302(f), 117 Stat. 764.    Section

1(h) sets forth the manner in which the ordinary income rates and

capital gains rates are applied.

        Petitioner must increase his capital gain income by $3,224,

$3,544, and $16 for the sales or exchanges of MXF, MXE, and Agere

Systems shares, respectively.     Accordingly, petitioner’s capital

gain income is $92,857 rather than $86,073 as originally

reported.     Petitioner must also increase his qualified dividend

income by $194 for the unreported portion of the dividend he

received from America Movil.     This results in total qualified

dividend income of $15,259 rather than $15,065 as originally

reported.     Under section 1(h)(11) qualified dividends are taxed

as capital gains.     Therefore, petitioner’s “net capital gain”, as

used in section 1(h), equals $108,116.      These corrections,



        9
      The capital gain rate reduction and qualified dividend
preferential treatment apply to tax year 2005.
                             - 14 -

however, do not affect petitioner’s ordinary income of $27,262

reduced by deductions and exemptions of $26,800 for a net of

$462.

     The capital gain and qualified dividend income in tax year

2005 should be subject to preferential rates.   It appears that

the preferential rates of 5 and 15 percent were not applied to

the qualified income reported on the 2005 return.    Thus, this

Court finds that petitioner would be entitled to any overpayment

once the preferential rates are applied incident to Rule 155

computations.

     This Court has considered all arguments the parties have

made, and to the extent not discussed herein, this Court finds

that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
