                        T.C. Memo. 2009-57



                      UNITED STATES TAX COURT



                 ROBERT J. KENNEDY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14021-04.              Filed March 16, 2009.



     James J. Gatziolis, for petitioner.

     Jeffrey S. Luechtefeld, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency in

petitioner’s 1998 Federal income tax and additions to tax as

follows:


                                   Additions to Tax
                           Sec.            Sec.        Sec.
     Deficiency         6651(a)(1)      6651(a)(2)    6654(a)
     $3,516,772          $791,273        $826,441     $8,325
                                 - 2 -
     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1998, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     After concessions of some issues, the primary issue for

decision is whether for 1998 petitioner has substantiated various

carry forward losses from 1994, 1995, and 1997.



                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time the petition was filed, petitioner resided in

Florida.

     From 1989 through 1993 petitioner owned and managed several

retail music stores in Hawaii.

     In 1990 petitioner purchased a home on Oahu.    In connection

with the Oahu home purchase petitioner obtained a mortgage loan

from a bank.   The record does not adequately establish the

purchase price of the home, the amount and terms of the mortgage

loan, or petitioner’s intended use of the Oahu home.

     After purchasing the Oahu home and without moving into the

home, petitioner hired a contractor to remodel the home.    Before

the home remodeling was completed, petitioner’s retail music

stores went out of business, and in 1994 petitioner stopped

making payments on the mortgage loan.    In 1995 the bank
                               - 3 -
foreclosed on the Oahu home and discharged petitioner’s mortgage

loan obligation.

     From 1994 through 1998 petitioner traded securities on his

own account, and petitioner was involved in other business

activities in Illinois.

     On his 1994 individual Federal income tax return petitioner

reported zero taxable income and claimed a $131,748 long-term

capital loss from worthless securities.   None of the claimed

capital loss was used to offset 1994 capital gain income, and

petitioner reported the claimed capital loss as available for

carry forward to 1995.

     On his 1995 individual Federal income tax return petitioner

reported zero taxable income and the above $131,748 capital loss

carryforward from 1994.   None of the claimed $131,748 long-term

capital loss carryforward was used to offset 1995 capital gain

income, and petitioner reported the claimed capital loss from

1994 as available for carry forward to 1996.

     Also on his 1995 tax return petitioner claimed a $1,088,448

net operating loss (NOL) deduction.    The claimed $1,088,448 NOL

related to the following items:
                                 - 4 -
                Item                             Amount
     Oahu home
       Passive activity loss                    ($403,123)
       Long-term capital loss                    (441,444)
     Illinois business property
       Passive activity loss                     (273,151)
     Miscellaneous deductions                     (31,449)
     Miscellaneous interest income                 60,719
       Total claimed 1995 NOL                 ($1,088,448)


     The claimed $1,088,448 1995 NOL was reported on petitioner’s

1995 individual Federal income tax return as carried back to 1993

and as carried forward to 1996 in the amounts reflected below:


             Claimed 1995 NOL
          Carried back/forward to             Amount
                   1993                      ($273,910)
                   1996                       (814,538)
                     Total                 ($1,088,448)


     On his 1996 individual Federal income tax return petitioner

reported zero taxable income and zero losses, and petitioner

reported the unused claimed $131,748 1994 long-term capital loss

carryforward and the unused claimed $814,538 1995 NOL

carryforward.   On his 1996 tax return, petitioner used none of

the claimed loss carryforwards, and petitioner reported the

losses as available for carry forward to 1997.

     On his 1997 individual Federal income tax return petitioner

reported zero taxable income, and petitioner reported the unused

claimed 1994 long-term capital loss carryforward and the unused

claimed 1995 NOL carryforward.    Also on his 1997 tax return

petitioner claimed a $32,347 short-term capital loss for 1997
                                 - 5 -
relating to the sale of securities, and an $18,075 NOL for 1997,1

and petitioner reported that he used none of the claimed loss

carryforwards and none of the claimed 1997 losses.   Petitioner

reported the following carryforwards to 1998:


                                             Carryforward
                      Claimed                   to 1998
         1994   Long-term capital loss        ($131,748)
         1995   NOL                            (814,538)
         1997   Short-term capital loss         (32,347)
         1997   NOL                             (18,075)


     Although petitioner received substantial income in 1998 from

various activities, he did not timely file a 1998 Federal income

tax return.

     On audit for 1998 using information obtained from third

parties respondent determined that petitioner received $8,939,449

in income from wages, interest, dividends, capital gains, and

pensions.   Respondent did not take into account any of the loss

carryforwards that had been reflected on petitioner’s 1997

individual Federal income tax return as available for carry

forward to 1998.

     On May 3, 2004, respondent mailed to petitioner a notice of

deficiency in which respondent charged petitioner with the above

$8,939,449 in income and determined a $3,516,772 deficiency in

petitioner’s 1998 Federal income tax.


     1
        The record does not establish the alleged source of the
claimed $18,075 1997 NOL.
                               - 6 -
     On August 2, 2004, petitioner filed his petition herein.

     On March 3, 2006, petitioner filed with respondent a

document purporting to be his 1998 individual Federal income tax

return on which petitioner reported $70,452 in income and on

which petitioner claimed carryforwards of the claimed $131,748

1994 long-term capital loss, the claimed $814,538 1995 NOL, the

claimed $32,347 1997 short-term capital loss, the claimed $18,075

1997 NOL, miscellaneous itemized deductions, and taxable income

and tax due, as follows:


        Petitioner’s 1998 Tax Return              Income (Losses)
Income
  Taxable interest                                         $70
  Ordinary dividends                                     9,270
  Net capital gain                                      46,112
  Pensions                                              15,000
Deductions
  1994 Long-term capital loss carryforward           (131,748)
  1995 NOL carryforward                              (814,538)
  1997 Short-term capital loss carryforward           (32,347)
  1997 NOL carryforward                               (18,075)
  Miscellaneous itemized deductions                   (75,595)
   Taxable income                                        -0-
   Tax due                                               -0-


     During pretrial respondent’s representatives reviewed

petitioner’s late-filed 1998 individual Federal income tax

return, petitioner’s 1994 through 1997 individual Federal income

tax returns, and the claimed 1994, 1995, and 1997 losses

petitioner reported as carried forward to 1998.

     The parties agreed to some of the above income and losses

claimed.   For lack of substantiation, respondent disallowed two
                               - 7 -
components of the claimed $1,088,448 1995 NOL, thereby reducing

the allowable NOL carryforward from 1995 to 1998 to zero.   The

schedule below reflects the portion of petitioner’s claimed

$1,088,448 1995 NOL that respondent allowed and the portion

respondent disallowed:


                                           Claimed 1995 NOL
             Description                 Allowed      Disallowed
     Oahu home
       Passive activity loss               -0-       ($403,123)
       Long-term capital loss              -0-        (444,144)
     Illinois business property
       Passive activity loss           ($273,151)        -0-
     Miscellaneous deductions            (31,449)        -0-
     Miscellaneous interest income        60,719         -0-
       1995 NOL carryforward           ($243,881)    ($847,267)


     On the basis of the above reduction of the claimed 1995 NOL

to $243,881, respondent determined that the allowable $243,881

portion of petitioner’s claimed 1995 NOL was carried back to 1993

and exhausted, leaving no 1995 NOL to carry forward to 1996,

1997, and 1998.   Also, for lack of substantiation respondent

disallowed the claimed $18,075 1997 NOL carryforward to 1998.     As

a result, respondent determined that for 1998 petitioner was not

entitled to the claimed $814,538 1995 and the claimed $18,075

1997 NOL carryforwards reported on petitioner’s late filed 1998

tax return.

     In addition respondent determined that petitioner had not

substantiated and was not entitled to the claimed long- and

short-term capital loss carryforwards from 1997 to 1998 and to
                               - 8 -
some of petitioner’s claimed miscellaneous itemized deductions

for 1998.

     After some concessions by respondent, still in dispute are

two components of the claimed $1,088,448 1995 NOL (the $403,123

passive activity loss and the $441,444 long-term capital loss

relating to the Oahu home), the claimed $131,748 1994 long-term

and the claimed $32,347 1997 short-term capital loss

carryforwards, the claimed $18,075 1997 NOL carryforward, two

claimed miscellaneous itemized deductions for 1998 ($9,842 in

real estate taxes and $5,380 in unreimbursed employee expenses),

and the section 6651(a)(1) addition to tax.


                              OPINION

     Generally, determinations made by respondent in a notice of

deficiency are presumed correct, and a taxpayer bears the burden

of proving otherwise.2   See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933); Feldman v. Commissioner, 20 F.3d 1128, 1132

(11th Cir. 1994), affg. T.C. Memo. 1993-17.

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of substantiating the amount and purpose of a

claimed deduction.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); Keith v. Commissioner, 115 T.C. 605, 621 (2000);

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. 540 F.2d

     2
        Petitioner makes no claim that he qualifies for a shift
in the burden of proof under sec. 7491(a).
                               - 9 -
821 (5th Cir. 1976).   A filed Federal income tax return does not

establish a taxpayer’s entitlement to the amounts reported

thereon.   Lawinger v. Commissioner, 103 T.C. 428, 438 (1994);

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.

Commissioner, 62 T.C. 834, 837 (1974).

     Where appropriate, the Court may estimate the amount of a

taxpayer’s losses and allow deductions therefor.   Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).


$1,088,448 Claimed 1995 NOL

     We first analyze the two components of the claimed

$1,088,448 1995 NOL which remain in dispute–-the $403,123 passive

activity loss and the $441,444 long-term capital loss relating to

the Oahu home.   In an attempt to substantiate these losses

petitioner submitted a February 5, 1992, credit application he

prepared in connection with refinancing a mortgage loan on his

Illinois business property.   On the credit application petitioner

listed the bank from which he apparently obtained the mortgage

loan on the Oahu home, the alleged monthly mortgage payment due

on the mortgage loan for the Oahu home, and an estimated value of

the Oahu home.

     Petitioner argues that the information reported on his

Federal income tax returns for 1995 through 1998 together with

information on the February 5, 1992, credit application relating
                                - 10 -
to the Illinois business property substantiate that in 1995 he

realized the claimed $403,123 passive activity loss and the

claimed $441,444 long-term capital loss relating to the Oahu

home.    Petitioner also argues that we should estimate the amount

of his allowable losses from the amounts reported on his Federal

income tax returns and on the credit application.

     Petitioner’s Federal income tax returns alone do not

adequately substantiate that in 1995 petitioner realized a

$403,123 passive activity loss and a $441,444 long-term capital

loss relating to the 1995 bank foreclosure on the Oahu home.    See

Lawinger v. Commissioner, supra at 438.     The February 5, 1992,

credit application does not contain adequate and credible

financial information relating to the 1995 bank foreclosure on

the Oahu home and does not establish that in 1995 petitioner

realized either a $403,123 passive activity loss or a $441,444

long-term capital loss relating thereto.    Further, petitioner’s

Federal income tax returns for 1995 through 1998 and his credit

application do not provide sufficient information for us to

estimate petitioner’s claimed losses.    See Vanicek v.

Commissioner, supra at 742-743.

        Petitioner has not come close to properly substantiating the

claimed $403,123 passive activity loss and the $441,444 long-term

capital loss relating to the Oahu home, and petitioner is not
                              - 11 -
allowed the claimed 1995 carry forward losses to 1998 relating

thereto.


Remaining Disputed Items

     With regard to the claimed $131,748 1994 long-term and the

claimed $32,347 1997 short-term capital loss carryforwards, the

claimed $18,075 1997 NOL carryforward, the $9,842 in real estate

taxes, and the $5,380 in unreimbursed employee expenses,

petitioner again argues that his Federal income tax returns

substantiate and establish his entitlement thereto.

     Again, petitioner’s Federal income tax returns do not

provide adequate substantiation of these items.   See Lawinger v.

Commissioner, supra at 438.   Because petitioner has not submitted

credible documentation and other evidence to substantiate his

claimed long- and short-term capital losses and NOL carryforwards

and miscellaneous itemized deductions, we sustain respondent’s

disallowance thereof.

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

taxpayer’s failure to timely file a Federal income tax return

unless the taxpayer proves that such failure is due to reasonable

cause and not willful neglect.   See United States v. Boyle, 469

U.S. 241, 245 (1985).   By virtue of our finding that petitioner’s

return for 1998 was filed late, respondent has carried his burden

of production under section 7491(c) as to this addition to tax.

Petitioner has provided no explanation and has submitted no
                             - 12 -
evidence to suggest that his failure to timely file his 1998

Federal income tax return was due to reasonable cause.

Respondent’s imposition of the section 6651(a)(1) addition to tax

is sustained.3

     To reflect the foregoing,


                                 Decision will be entered for

                         respondent as to the deficiency and sec.

                         6651(a)(1) addition to tax and for

                         petitioner as to the secs. 6651(a)(2)

                         and 6654(a) additions to tax.




     3
        Respondent concedes the additions to tax under secs.
6651(a)(2) and 6654(a).
