                        T.C. Memo. 2009-35



                      UNITED STATES TAX COURT



         PATRICK T. AND LEANNE S. FUREY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13459-06.              Filed February 12, 2009.



     Patrick T. and Leanne S. Furey, pro sese.

     David L. Zoss, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined $14,310, $7,089, and

$31,872 deficiencies in petitioners’ respective Federal income

taxes for 2002, 2003, and 2004.

     The two primary issues for decision are whether petitioners

have substantiated claimed partnership income, losses, and

expenses and whether securities trading losses that petitioners
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reported on their Federal income tax returns as capital losses

may now be treated as ordinary losses.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code applicable to the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.


                        FINDINGS OF FACT

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

Many of the circumstances in this case are vague and unclear.

     At the time the petition was filed, petitioners resided in

Minnesota.

     On their 2002, 2003, and 2004 joint Federal income tax

returns petitioners reported taxable income and taxes paid and

claimed tax overpayments, as follows:


                                             Year
                           2002            2003          2004

     Taxable income        -0-             -0-         $95,732
     Taxes due             -0-             -0-          21,470
     Taxes paid          $18,226         $18,067        53,028
     Overpayment          18,226          18,067        31,558


     Upon receipt respondent processed petitioners’ Federal

income tax returns and refunded to petitioners the claimed tax

overpayments.

     During respondent’s audit of petitioners’ 2002, 2003, and

2004 Federal income tax returns, Patrick T. Furey (petitioner),
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informally provided respondent’s revenue agent what appeared to

be partially amended 2002, 2003, and 2004 joint Federal income

tax returns (amended tax returns).      The amended tax returns were

not signed by petitioners, were undated, and were not filed with

respondent.

     Petitioners’ filed tax returns and the amended tax returns

were prepared by a retired accountant (preparer) whose title was

shown on petitioners’ tax returns as “C.P.A.” despite the fact

that his C.P.A. license had expired.

     On petitioners’ filed tax return for each year, petitioner’s

occupation is reported as “corporate executive”.       On the amended

tax returns petitioner’s occupation is shown as “trader in

securities”.


Harmony Malting

     On their 2002 and 2003 filed joint Federal income tax

returns petitioners reported income, capital gains, losses, and

expenses relating to petitioner’s alleged interest in a

partnership by the name of Harmony Malting (HM), as follows:


                                                    Year
                  Harmony                 2002                2003

     Interest income                       ---                 $922
     Ordinary dividends                    ---                5,859
     Net long-term capital gain          $30,201               ---
     Net sec. 1231 gain                   35,896               ---
     Sec. 179 expense                       (163)              (754)
     Nonpassive ordinary loss           (173,260)          (158,303)
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      Petitioner claims that an individual by the name of Robert

Saterdalen was his partner in HM.       Petitioner claims that in 2003

Mr. Saterdalen disappeared and HM went out of business.

Petitioner explains that if Mr. Saterdalen is not someday found

he (petitioner) might be liable for the debts of HM approximating

$510,000.   Although it is not completely clear, petitioner’s

claimed losses relating to HM apparently are based on this

alleged speculative liability.

      Petitioner’s tax return preparer claims that he prepared for

HM 2002 and 2003 informational Forms 1065, U.S. Return of

Partnership Income, showing that petitioner had an interest in

HM.   The preparer, however, acknowledges that these Forms 1065

were never filed with respondent, and the preparer explained at

trial that if respondent wanted the Forms 1065 filed, respondent

should have asked him to do so.

      Copies of the alleged Forms 1065 that the preparer submitted

to respondent during respondent’s audit show identification

numbers for HM that were either nonexistent numbers or that were

assigned to other taxpayers, and respondent has no record of the

existence of HM.   HM did not file with respondent Federal income

tax returns for the years in issue.

      On audit, for lack of substantiation respondent removed from

the computation of petitioners’ taxable income for 2002 and 2003
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the above reported income, section 179 expense, and nonpassive

ordinary loss items relating to HM.


Becker Sunset Farms

     On their 2002, 2003, and 2004 filed joint Federal income tax

returns, petitioners reported income, section 179 expenses, and

nonpassive ordinary losses relating to petitioner’s alleged

partnership or corporate interest in an entity named Becker

Sunset Farms (BSF), as follows:


         BSF Item Claimed                        Year
          by Petitioner             2002         2003       2004

Interest income                      ---        $2,512       ---
Nonpassive ordinary income        $15,363       18,512       ---
Sec. 179 expense                    (982)       (1,052)      ---
Nonpassive ordinary loss             ---          ---     ($56,311)


     A company by the name of BSF that operated a game farm was

licensed to do business in Minnesota in the 1990s, but that

company was dissolved in 1999.    No credible evidence in the

record substantiates that BSF existed in any form during 2002,

2003, and 2004 and that petitioner had any ownership interest

therein.

     Neither the State of Minnesota nor respondent has any record

during 2002, 2003, and 2004 of the existence of BSF, and BSF did

not file with respondent Federal income tax returns for those

years.
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     On audit, for lack of substantiation respondent removed from

the computation of petitioners’ taxable income for 2002, 2003,

and 2004 the above reported income, section 179 expense, and

nonpassive ordinary loss items relating to BSF.


Securities Trading Activity

     Over the years petitioner invested frequently in the stock

market for his own account (securities trading activity).

     On each of petitioners’ 2002, 2003, and 2004 filed Federal

income tax returns, petitioner’s securities trading activity was

treated as an investment, nonbusiness activity.     Petitioners did

not claim any deductions that on the tax returns were identified

as related to petitioner’s securities trading activity, and

petitioners attached to each of their tax returns a Schedule D,

Capital Gains and Losses, relating to petitioner’s securities

trading activity and reported thereon capital gains and losses,

as follows:


                    Capital Gains and Losses
                  2002          2003         2004

               ($214,608)     $23,780     $28,345


     Petitioner did not conduct securities trades for others.

Petitioner never made a timely and proper election under section

475(f) to use the mark-to-market method of accounting with regard

to his securities trading activity.
                                  -7-

     However, attached to petitioners’ 2002, 2003, and 2004

amended joint Federal income tax returns were Schedules C, Profit

or Loss from Business, on which petitioner reported different

total amounts for his securities trading gains and losses and on

which petitioner changed the character thereof from capital to

ordinary, as follows:


                       Ordinary Gains and Losses
                     2002         2003           2004

               ($102,385)       ($1,430)      $27,609


     In connection with the trial, petitioners continue to assert

the business nature of petitioner’s securities trading activity

and for 2002 petitioners again revise the total ordinary losses

claimed relating thereto (namely for 2002 $121,201).

     On audit, respondent treated petitioner’s securities trading

activity as a nonbusiness investment activity and petitioner’s

gains and losses as capital gains and losses.     Also relating

thereto, respondent determined that for 2002 petitioner failed to

report $30,901 of short-term capital gains and that petitioner

was entitled to annual capital losses for 2002, 2003, and 2004 of

$3,000, to short-term capital loss carryovers (from 2002 to 2003-

-$246,804, from 2003 to 2004--$220,024, and from 2004 to 2005--

$186,865), and to a long-term capital loss carryforward from 2004

to 2005 of $7,000.
                                 -8-

     At trial petitioners claimed yet different amounts for the

ordinary net losses petitioner allegedly realized in his

securities trading activity for each year in issue.   Petitioners

also now claim cost of goods sold deductions relating to

petitioner’s securities trading activity.

     In the notice of deficiency respondent made a number of

other adjustments to petitioners’ 2002, 2003, and 2004 Federal

income tax returns.   Petitioners have offered evidence regarding

only the HM and BSF losses and the securities trading activity

set forth above.

     Before trial, petitioners did not answer respondent’s

interrogatories, and petitioners did not file a pretrial

memorandum.

     At trial, petitioners did not testify, and petitioners

called as their only witness their preparer.


                               OPINION

     Generally, respondent’s determinations are presumed correct,

and petitioners bear the burden of proving that the adjustments

set forth in respondent’s notice of deficiency were erroneous.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

Petitioners make no claim nor showing that under section 7491(a)

any shift in the burden of proof should occur.

     As has been said repeatedly, deductions are a matter of

legislative grace.    INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
                                  -9-

84 (1992).   Taxpayers are expected to maintain books and records

and to substantiate claimed deductions with credible source

documentation such as invoices and receipts and books and

records.

     In order to deduct partnership losses, a partner must

establish his basis in the partnership.   Sec. 704(d).   Further,

an individual partner may deduct partnership losses only to the

extent he is at risk, sec. 465, and passive partnership losses

are deductible only to the extent of passive partnership income,

sec. 469.

     Under section 1221, the term “capital assets” includes all

assets other than assets expressly excluded.   Dealers in

securities who sell to customers may recognize ordinary income or

ordinary loss on their securities trading activity.   Dealers’

securities are considered to be inventory held for sale to

customers.   Sec. 1221(a)(1).   Apart from dealers, however, only

traders in securities whose trading activity rises to the level

of a trade or business and who make a valid election under

section 475(f) are entitled to treat gains and losses from the

sale of securities as ordinary.    See generally United States v.

Diamond, 788 F.2d 1025, 1028-1030 (4th Cir. 1986); Vines v.

Commissioner, 126 T.C. 279, 288 (2006).

     As is apparent, the testimonial and documentary evidence in

this case is incomplete and lacking in credibility.   Petitioners’
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evidence relating to HM and to BSF--their existence, their

business activity, their income and expenses, their books and

records, the partners therein--is highly suspect and completely

inadequate.

     Petitioners offer implausible explanations and evidence

relating to the losses and expenses in question.   For example,

petitioner states that he has HM documents in his possession at

home but that he could not produce them at trial because he

simply left them at home.   Petitioner’s explanation does not

begin to explain why petitioner, if he actually had such

documents, never produced them to respondent’s revenue agent or

to respondent’s trial counsel before the trial.

     Petitioner has not adequately established, for the years in

issue, the existence of HM and BSF as partnerships or otherwise

and what losses, if any, petitioner is entitled to relating to HM

and BSF.

     We sustain each of respondent’s adjustments relating to HM

and BSF.

     With regard to his securities trading activity, petitioner

contends that during 2002, 2003, and 2004 his securities trading

activity was so frequent and extensive that it qualifies as a

trade or business and that the ordinary losses shown on the

Schedules C attached to the unsigned partial amended tax returns

should be allowed.
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     Respondent contends that petitioner’s claimed securities

trading ordinary losses should be disallowed because petitioner’s

securities trading activity did not rise to the level of a trade

or business, because the losses are not substantiated, and

because petitioner did not make a section 475(f) election with

regard thereto.

     For all of respondent’s reasons, we sustain respondent’s

adjustments relating to petitioner’s securities trading activity.

Petitioner has not established that his activity was anything

other than a nonbusiness investment activity with respect to

which petitioner realized only capital gains and losses.

     Respondent’s other adjustments are sustained for lack of

proof.   See Rule 149(b).   Petitioners’ failure to call

corroborating witnesses and failure to produce at trial

documentation that is purportedly in their possession is

particularly troubling, and we assume that such evidence, if

produced, would not be favorable to petitioners.    See Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947).

     Further, we deny any claims for refund made by petitioners

other than those allowed by respondent.
                          -12-

For the reasons stated,


                                      Decision will be

                                 entered under Rule 155.
