                  T.C. Summary Opinion 2004-32



                     UNITED STATES TAX COURT



             HAROLD AND DOREEN SILK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16009-02S.             Filed March 18, 2004.


     Shawn A. Silk, for petitioners.

     Frank N. Panza, for respondent.



     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.


     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                                  - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes, additions to tax, and accuracy-related penalties as

follows:
                                     Sec.           Sec.
     Year       Deficiency        6651(a)(1)       6662(a)

     1996        $12,707            $920.25       $2,541.40
     1997            742             234.00          148.40
     1999          5,222              ---          1,044.40

     After concessions by the parties, the issue for decision by

the Court is whether petitioners properly elected, under section

172(b)(3), to waive the carryback of a net operating loss (NOL)

from 1995.

Background

     Some of the facts have been stipulated, and they are so

found.   At the time that the petition was filed, petitioners

resided in San Francisco, California.

     During 1995, because of a downturn in the economy,

petitioners incurred significant financial losses with respect to

their real estate activities.     Properties used by petitioners in

their real estate activities were subject to possible

foreclosure.   Petitioners were also being sued by their financial

institution.

     Using tax software, Harold Silk (hereinafter referred to as

petitioner) prepared what, at best, may be described as a 10-page

“draft income tax return” for the 1995 taxable year (the so-

called draft return).      Petitioner allegedly mailed the so-called
                                - 3 -

draft return, together with a letter dated April 4, 1996, to

respondent.

     Petitioners no longer have a copy of the so-called draft

return.    However, at trial, petitioners introduced a copy of the

April 4, 1996 letter that allegedly accompanied the so-called

draft return.

     Petitioner’s April 4, 1996 letter stated, in part as

follows:

          Our tax return for the tax year 1995 is being
     filed using TurboTax software and the return is printed
     using the program. The enclosed return is submitted,
     although there appears to be a flaw in the program that
     prevents us from representing operating losses for 1995
     and working these losses into the calculations for
     correctly determining our tax obligations. * * * But we
     know we have sustained significant operating losses
     during 1995 and are now attempting to accurately
     ascertain their value and declare our intention to
     carry forward those losses into future tax years. When
     our data collection is complete, an amended return will
     be filed to correctly adjust our return(s).

     Respondent did not receive either the so-called draft return

or the April 4, 1996 letter.

     On or about April 3, 1996, petitioners filed an application

for an extension of time to file their 1995 return.   The

application was consistent with petitioners’ actions taken in

prior taxable years.   Respondent received petitioners’

application for extension.

     At trial, petitioners introduced a “Receipt for Certified

Mail” (the postal receipt), indicating postage paid of 32 cents
                                - 4 -

and bearing a U.S. Postal Service stamp dated April 3, 1996.

     On March 27, 1997, petitioners jointly filed a Form 1040,

U.S. Individual Income Tax Return, for the 1995 taxable year (the

1995 return).    The 1995 return did not purport to be an amended

tax return.    On an attached Form 8582, Passive Activity Loss

Limitations, petitioners reported a total passive activity loss

of $159,683.    On line 17 of the 1995 return, petitioners claimed

a rental real estate loss in the amount of $25,000.    Petitioners

did not submit with the 1995 return an election to forgo the

carryback period with respect to an NOL, and nothing on the 1995

return itself suggested that petitioners intended to make such an

election.

     Petitioners jointly filed a Form 1040 for the 1996 taxable

year (the 1996 return) on April 13, 2001.    On line 21 of the 1996

return, petitioners claimed a loss in the amount of $59,032.     A

statement attached to the 1996 return indicated that such loss

was an NOL “from a prior year”.

     In the notice of deficiency, respondent disallowed the

$59,032 NOL carryover claimed by petitioners on their 1996

return.   Respondent determined that petitioners had not elected

under section 172(b)(3) to waive the carryback of the 1995 NOL.

Petitioners contend that the April 4, 1996 letter allegedly

mailed to respondent with the so-called draft return was a valid
                                - 5 -

election to waive the carryback period.2

Discussion

     In general, the determinations of the Commissioner in a

notice of deficiency are presumed correct, and the burden is on

the taxpayer to show that the determinations are incorrect.      Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).3

     Section 172(a) permits taxpayers to carry NOL deductions

from one taxable year to another.    In general, taxpayers who

sustain NOLs must first carry such losses back 3 years, and, if

unabsorbed in the earlier years, then the losses may be carried

forward for as long as 15 years.4   Sec. 172(b)(1)(A) and (2).

However, taxpayers may elect to waive or relinquish the 3-year

carryback period and only carry forward their NOLs.    Sec.

172(b)(3).   To make this election, the statute expressly requires

taxpayers to file an election relinquishing the carryback period

by the return due date, including any extensions of time, for the


     2
        Petitioners concede that if no valid sec. 172(b)(3)
election was made, then their gross income for the 3 taxable
years prior to 1995 would absorb the entire amount of the 1995
NOL.
     3
        Sec. 7491(a) does not serve to place the burden of proof
on respondent because petitioners failed to introduce credible
evidence of an election to waive the carryback of the 1995 NOL.
See Higbee v. Commissioner, 116 T.C. 438 (2001).
     4
        For purposes of   this case involving a 1995 net operating
loss and a 1996 taxable   year, we consider sec. 172(b)(1)(A) prior
to its amendment by the   Taxpayer Relief Act of 1997, Pub. L. 105-
34, sec. 1082(a)(1) and   (2), 111 Stat. 950.
                               - 6 -

taxable year in which the NOL was incurred.      Id.; see sec.

301.9100-12T(b), Temporary Proced. & Admin. Regs., 57 Fed. Reg.

43896 (Sept. 23, 1992).   Once made, the election is irrevocable.

Id.   The statute directs the Secretary to prescribe the manner in

which taxpayers shall make the election.   Id.

      The Secretary promulgated the following regulation

concerning a taxpayer’s election to waive NOL carrybacks:

      [The election] shall be made by a statement attached to
      the return (or amended return) for the taxable year.
      The statement required when making an election pursuant
      to this section shall indicate the section under which
      the election is being made and shall set forth
      information to identify the election, the period for
      which it applies, and the taxpayer’s basis or
      entitlement for making the election. [Sec. 301.9100-
      12T(d), Temporary Proced. & Admin. Regs., 57 Fed. Reg.
      43896 (Sept. 23, 1992) (redesignating sec. 7.0,
      Temporary Income Tax Regs., 42 Fed. Reg. 1470 (Jan. 7,
      1977)).]

      The Court analyzed these statutory and regulatory

requirements under section 172 in Young v. Commissioner, 83 T.C.

831 (1984), affd. 783 F.2d 1201 (5th Cir. 1986).      In Young, the

Court held that to be in substantial compliance with the election

requirements, “as an absolute minimum, the taxpayer must exhibit

in some manner, within the time prescribed by the statute, his

unequivocal agreement to accept both the benefits and burdens of

the tax treatment afforded by that section.”     Id. at 839.

      Petitioners contend that the postal receipt is evidence that

the so-called draft return and the April 4, 1996 letter were

mailed to respondent and, thus, the election requirements under
                                - 7 -

section 172(b)(3) were satisfied.   We are not persuaded that the

postal receipt demonstrates that the so-called draft return and

the April 4, 1996 letter were mailed to, and received by,

respondent.    First, the postal receipt bears a date earlier than

the date of the April 4, 1996 letter.     Second, the postal receipt

indicates postage paid of 32 cents.     The postal rate in effect

for 1996 was 32 cents for the first ounce and 23 cents for each

additional ounce.   Thus, the postal receipt does not reflect the

proper amount of postage necessary to mail the 10-page so-called

draft return and the April 4, 1996 letter.     Third, petitioner

admitted that such letter may have been mailed to respondent with

the so-called draft return, with the 1995 extension application,

or independently of either document.     Finally, respondent did not

receive either the so-called draft return or the April 4, 1996

letter.   Therefore, we cannot accept petitioners’ claim that the

postal receipt demonstrates that the so-called draft return and

the April 4, 1996 letter were ever mailed to, or received by,

respondent.5

     On March 27, 1997, petitioners filed the 1995 return.

However, petitioners did not attach any statement to the 1995



     5
        We note that the postal receipt does support the fact
that petitioners mailed to respondent their 1995 extension
application on Apr. 3, 1996. Even if we were to assume arguendo
that the letter was attached to the extension application, this
would still be insufficient to satisfy the statutory and
regulatory requirements under sec. 172(b)(3).
                                 - 8 -

return that indicated their intention to make an election under

section 172(b)(3) to waive the NOL carryback period.       Likewise,

nothing on the 1995 return itself suggested that petitioners

intended to make such an election.

     Accordingly, we hold that petitioners did not satisfy the

requirements under section 172(b)(3) for making a valid election

to waive the NOL carryback period.       We therefore sustain

respondent’s disallowance of the NOL carryover claimed by

petitioners on their 1996 return.

     Reviewed and adopted as the report of the Small Tax

Division.

     To reflect the foregoing,



                                                  Decision will be

                                             entered under Rule 155.
