                        T.C. Memo. 1996-464



                      UNITED STATES TAX COURT



          JOYCE E. AND JEROME G. BEERY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26995-93.                 Filed October 16, 1996.



     Joyce E. Beery and Jerome G. Beery, pro sese.

     Thomas F. Eagan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioners' joint Federal income taxes for 1989, 1990, and 1991,

and accuracy-related penalties for 1989 and 1990, as follows:
                                  - 2 -

                                       Accuracy-Related Penalty
       Year          Deficiency              Sec. 6662(a)

       1989           $28,242                   $5,648
       1990            24,401                    4,880
       1991             4,624                     ---


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

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

Procedure.

     After settlement of some issues, the primary issue for

decision is whether a net operating loss from 1975 (1975-NOL) can

be carried forward to 1989, 1990, and 1991.


                         FINDINGS OF FACT

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

the time the petition was filed, petitioner Joyce E. Beery

resided in Los Alamos, New Mexico, and petitioner Jerome G. Beery

(petitioner) resided in Placitis, New Mexico.

     During 1975, petitioner owned and managed in Colby, Kansas,

two businesses as sole proprietorships -- a farm and a grain

distributorship.   Also during 1975, petitioner owned and managed

in Colby, Kansas, a branch of Mayer-Gelbort-Leslie, Inc., a

commodities trading firm based in Chicago, and petitioner made

investments in commodities.

     In his combined businesses, in 1975, petitioner incurred

total net operating losses of $1,517,999 (1975-NOL).
                               - 3 -

     On January 16, 1976, petitioner filed a chapter 11 petition

in the U.S. Bankruptcy Court for the District of Kansas

(Bankruptcy Court) to obtain protection from his creditors and to

reorganize his business and personal debts, including debts

relating to his farm, his grain distributorship, and his

commodity investments.

     On April 20, 1976, in the above proceeding and over

petitioner's objection, the Bankruptcy Court converted

petitioner's chapter 11 proceeding into a chapter 7 proceeding,

adjudicating petitioner a bankrupt and subjecting petitioner's

assets to liquidation.   Petitioner appealed that decision to the

U.S. District Court for the District of Kansas (District Court),

in which appeal petitioner claimed that he qualified for "farmer"

status under 11 U.S.C. secs. 1(17) and 22(b) (1970), which

provisions exempt farmers from chapter 7 bankruptcy proceedings.

In order to qualify for "farmer" status, under the above

provisions as applicable to bankruptcy petitions filed in 1976,

an individual must have been personally engaged in farming as his

or her principal source of income.     11 U.S.C. sec. 1(17).1

     On October 5, 1977, after an evidentiary hearing, the

District Court, by written order, concluded that petitioner did

not qualify for "farmer" status under 11 U.S.C. sec. 1(17) on the

1
     Petitioner’s bankruptcy proceedings were governed by the
Bankruptcy Act of 1898, ch. 541, 30 Stat. 544, as amended. The
Bankruptcy Act of 1978 did not become effective until Oct. 1,
1979. Pub. L. 95-598, sec. 402(a), 92 Stat. 2549, 2682.
                                - 4 -

grounds that petitioner's income was not derived primarily from

farming.   In its written order, with regard to petitioner's

claimed 1975-NOL, the District Court expressly stated that, if

all creditors' claims were considered valid, petitioner's

farming, grain, and other business activities incurred the 1975-

NOL of $1,517,999.

     Petitioner appealed the decision of the District Court, and

on May 14, 1982, the U.S. Court of Appeals for the Tenth Circuit

affirmed the District Court's decision to deny petitioner's claim

that he was exempt as a farmer from the chapter 7 bankruptcy

proceeding.    In re Beery, 680 F.2d 705, 717 (10th Cir. 1982).

     Prior to July 16, 1986, respondent determined and assessed a

deficiency of $1,178,012 in petitioners' 1975 joint Federal

income tax, plus interest and penalties.    On July 16, 1986,

however, respondent, pursuant to a Request For Adjustment (Form

3870) that had been filed by petitioners, redetermined

petitioners' 1975 joint Federal income tax and abated the

assessment from $1,178,012 to zero, eliminating the interest and

penalties.    The record herein does not explain respondent's

action in abating the $1,178,012 tax deficiency assessed against

petitioners for 1975, although respondent's action apparently

relates to the 1975-NOL that was established in the course of

petitioner’s chapter 7 bankruptcy proceeding.

     On October 5, 1987, petitioner filed in the Bankruptcy Court

a motion to stay all bankruptcy proceedings and to enjoin any
                              - 5 -

settlements between the bankruptcy trustee and respondent with

regard to the bankruptcy estate's Federal income tax liability.

In the motion, petitioner contended that, on the Federal income

tax returns the trustee had filed on behalf of petitioner's

bankruptcy estate, the trustee improperly reflected and claimed

carryforward deductions of petitioners' 1975-NOL.

     On July 6, 1988, the Bankruptcy Court denied petitioner's

motion to stay all bankruptcy proceedings and issued an order in

which it held that the specific amount of the 1975-NOL (namely,

$1,517,999) had been properly determined through settlement

negotiations between the trustee and respondent, that the 1975-

NOL should be treated as property of petitioner's bankruptcy

estate, not of petitioner personally, and that the trustee was

entitled to carry forward the 1975-NOL on the bankruptcy estate's

Federal income tax returns until the bankruptcy estate exhausted

the amount of the 1975-NOL or abandoned it (upon termination of

the bankruptcy proceeding), or upon expiration of the 5-year

period applicable to carry forward of the 1975-NOL.

     On June 7, 1990, the District Court affirmed the Bankruptcy

Court's decision regarding the bankruptcy estate's entitlement to

the 1975-NOL, applying Segal v. Rochelle, 382 U.S. 375 (1966).

In re Beery, 116 Bankr. 808 (D. Kan. 1990).   In Segal v.

Rochelle, supra, the Supreme Court held that a tax refund claim

based upon a net operating loss carryback should be treated as

property of the bankruptcy estate and not of the bankrupt.
                               - 6 -

     Petitioner's bankruptcy estate was closed on December 2,

1993.

     For each of the years 1976 through 1993, the trustee

apparently filed Federal income tax returns on behalf of

petitioner's bankruptcy estate.   The trustee apparently claimed

on those returns for 1976 through 1980 carryforward deductions

relating to the $1,517,999 1975-NOL.   The record in this case,

however, does not reflect any of those returns and does not

reflect the deductions or amounts thereof carried forward and

claimed on the Federal income tax returns filed by the trustee on

behalf of petitioner's bankruptcy estate.

     For 1975 and 1977, the record does not indicate what

individual Federal income tax returns were filed by petitioners.

For 1976, petitioners apparently did not file an individual

Federal income tax return.   For 1978 through 1981, petitioners

filed joint Federal income tax returns on which they did not

claim any portion of the $1,517,999 1975-NOL as a carryforward

deduction.

     In 1982, however, petitioners filed amended joint Federal

income tax returns for 1978 through 1981 on each of which they

did claim the 1975-NOL as a carryforward deduction.   For 1982

through 1991, petitioners filed timely joint Federal income tax

returns on each of which they also claimed the 1975-NOL as a

carryforward deduction.
                                 - 7 -

     The schedule below reflects the amount of the carryforward

deductions relating to the $1,517,999 1975-NOL that petitioners

claimed on their original and amended joint Federal income tax

returns for 1976 through 1991.    As indicated in the schedule,

petitioners did not attempt to carry back the 1975-NOL to any of

the 3 years prior to 1975.



                  Amount of Claimed 1975-NOL Carryforward
                      Petitioners'        Petitioners'
     Year           Original Returns    Amended Returns

     1972                 ---                   ---
     1973                 ---                   ---
     1974                 ---                   ---
     1975                 ---                   ---
     1976                 ---                   ---
     1977                 ---                   ---
     1978                 ---                $35,008
     1979                 ---                 33,203
     1980                 ---                 45,891
     1981                 ---                 18,623
     1982             $ 47,307                  ---
     1983               73,590                  ---
     1984               92,116                  ---
     1985              102,592                  ---
     1986              110,043                  ---
     1987               88,967                  ---
     1988              104,638                  ---
     1989              104,700                  ---
     1990               98,604                  ---
     1991               30,848                  ---


     On their 1989 joint Federal income tax return, petitioners

claimed $7,414 in car and truck expenses associated with

petitioner's farm and grain distributorship.

     Respondent apparently allowed petitioners' carryforward

deductions as claimed on petitioners' amended returns for 1978
                               - 8 -

through 1981, and respondent never audited petitioners' joint

Federal income tax returns for 1982 through 1988, even though the

carryforward deductions claimed on the amended 1978 through 1981

and 1982 through 1988 income tax returns were based on the same

$1,517,999 1975-NOL that was the basis for the NOL carryforward

deductions that were apparently claimed by the bankruptcy trustee

on Federal income tax returns filed on behalf of petitioner's

bankruptcy estate for 1976 through 1980.

     In 1993, respondent audited only petitioners' 1989, 1990,

and 1991 joint Federal income tax returns, and on September 30,

1993, respondent issued a notice of deficiency disallowing the

carryforward deductions of $104,700, $98,604, and $30,848,

respectively, claimed on those three returns with regard to the

1975-NOL.   Respondent's disallowance of the claimed 1975-NOL

carryforward deductions was based on the argument that, under

section 172 as applicable to 1975, the period for carrying

forward the 1975-NOL expired on December 31, 1980.    Respondent

also disallowed the $7,414 in car and truck expenses claimed on

petitioners’ 1989 joint Federal income tax return and determined

the accuracy-related penalties.


                              OPINION

     Deductions are a matter of legislative grace with respect to

which taxpayers generally bear the burden of proof.    Rule 142(a);
                                 - 9 -

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934);

Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Under pre-1980 law, neither bankruptcy law nor the Internal

Revenue Code clearly established the ownership of tax attributes

of a bankruptcy estate.     Mueller v. Commissioner, 60 T.C. 36, 44

n.6 (1973), affd. in part, revd. in part, and remanded 496 F.2d

899 (5th Cir. 1974); 1A Collier on Bankruptcy, par. 9.02(3)(a),

at 9-6 (15th ed. 1996).   As indicated above, the Supreme Court in

Segal v. Rochelle, supra, applying the provisions of the

Bankruptcy Act of 1898, ch. 541, 30 Stat. 544, as amended, held

that a claim for refund based on an NOL carryback was to be

treated as property of the bankruptcy estate and not of the

individual taxpayer.   The Supreme Court in Segal expressly

reserved the issue of whether the same rule applied to NOL

carryforwards.

     In Davis v. Commissioner, 69 T.C. 814 (1978), this Court,

applying the Bankruptcy Act of 1898, held that, unlike refund

claims based on NOL carrybacks, NOL carryforwards arising from

prebankruptcy businesses belonged not to the bankruptcy estate

but to the individual taxpayer.    See also Matter of Luster, 981

F.2d 277 (7th Cir. 1992).

     As part of the Bankruptcy Tax Act of 1980, Pub. L. 96-589,

94 Stat. 3389, Congress clarified this area of the law and

enacted section 1398, which directly addresses the tax

implications of bankruptcy.    Section 1398 expressly provides that
                              - 10 -

the bankruptcy estate of a debtor who is an individual succeeds

to his NOL carryforwards and that upon termination of the

bankruptcy estate the individual taxpayer succeeds to any tax

attributes of the bankruptcy estate.   Sec. 1398(g)(1), (i)

(1994).   Section 1398, however, is not applicable to bankruptcy

proceedings, such as petitioner’s, that were commenced prior to

March 25, 1981.   Pub. L. 96-589, sec. 7(b), 94 Stat. 3412.

     As alluded to above, however, in 1990, the District Court,

with jurisdiction over petitioner's bankruptcy proceeding, held

specifically that petitioner's 1975-NOL was to be treated as

property of the bankruptcy estate and not of petitioner.

     Petitioners argue that under Segal v. Rochelle, 382 U.S. 375

(1966), they, not petitioner's bankruptcy estate, should be

regarded as owners of petitioners' 1975-NOL and that petitioner's

bankruptcy estate was never entitled to claim the 1975-NOL.

Respondent argues that the District Court's holding that the

1975-NOL should be treated as property of the bankruptcy estate,

and not of petitioner, should collaterally estop petitioners on

this issue.

     Petitioners’ and respondent's arguments, however, as to

ownership of the 1975-NOL need not be decided.   Based on the

analysis set forth below and regardless of any question as to

ownership of the 1975-NOL, petitioners' attempt in this case to

carry forward and apply the 1975-NOL to offset their taxable
                              - 11 -

income for years far beyond 1980 (namely, to 1989, 1990, and

1991) is not allowable.

     Net operating losses and the carryback and carryforward

thereof are to be determined pursuant to the law applicable to

the year in which the losses occurred, without regard to the law

applicable to other years to which losses are carried back or

forward.   Reo Motors, Inc. v. Commissioner, 338 U.S. 442, 446

(1950); sec. 1.172-1(e)(1) and (2), Income Tax Regs.   Section

172, as applicable to 1975, provides a maximum net operating loss

carryback period of 3 years immediately preceding the year of the

loss and a maximum net operating loss carryforward period of 5

years immediately following the loss.

     Generally, net operating losses are first carried back and

then carried forward until the losses are fully absorbed or until

the carryforward period expires.   Sec. 172(b); sec. 1.172-1,

Income Tax Regs.   Neither section 172 nor any other provision of

the Internal Revenue Code or the bankruptcy law in effect for

19752 provides for any tolling, during bankruptcy proceedings, of

the period for which NOL deductions may be carried forward.

     Section 806(a) of the Tax Reform Act of 1976, Pub. L. 94-

455, 90 Stat. 1598, extended the carryforward period under

2
     The Bankruptcy Act of 1898, as amended by the Chandler Act
of June 22, 1938, ch. 575, sec. 314, 52 Stat. 840, 907, provides
for a stay once a bankruptcy petition has been filed only of the
"commencement or continuation of any proceeding to enforce any
lien upon the property of a debtor" for cause shown or of any
other judicial proceeding.
                              - 12 -

section 172 to 7 years for net operating losses incurred in any

taxable year ending after December 31, 1975.   Section 207(a)(1)

of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat.

225, further extended the carryforward period under section 172

to 15 years for net operating losses incurred in any taxable year

also ending after December 31, 1975.   Pub. L. 97-34, sec.

209(c)(1)(A), 95 Stat. 226.

     Section 102(d)(2) of the Technical Corrections Act of 1982,

Pub. L. 97-448, 96 Stat. 2370, clarified that the 15-year

carryforward period of section 207(a)(1) of the Economic Recovery

Tax Act of 1981 did not apply to any amount which, under the law

in effect on the day before enactment of the Act, could not be

carried to a taxable year ending in 1981.   The 1976 and 1981

amendments to section 172, therefore, did not extend the 5-year

carryforward period for petitioners’ 1975-NOL.

     In 1978, Congress enacted the Bankruptcy Act of 1978, which

expressly provided in certain circumstances for suspension,

during bankruptcy proceedings, of periods of limitation

applicable to use by a bankrupt taxpayer of tax attributes not

utilized by a bankruptcy estate.   11 U.S.C. sec. 346(i)(2)

(1994).3   That statute provided that the suspension provisions of

3
     11 U.S.C. sec. 346(i)(1) and (2) provides as follows:

          (i)(1) In a case under chapter 7, 12, or 11 of this
     title concerning an individual, the estate shall succeed to
     the debtor's tax attributes, including--
                                                   (continued...)
                               - 13 -

11 U.S.C. sec. 346(i)(2) applied notwithstanding State and local

tax laws, but subject to the Internal Revenue Code.   11 U.S.C.

sec. 346(a).4

     These statutory provisions do not apply to the instant case

because petitioner's bankruptcy petition was filed prior to

October 1, 1979, the effective date of the Bankruptcy Act of

1978.   They have been interpreted to establish that for

bankruptcy petitions to which the Bankruptcy Act of 1978 is

applicable, periods of limitation under the Internal Revenue Code

are not subject to the specific suspension provisions of 11

U.S.C. sec. 346(i).    Firsdon v. United States, __ F.3d __ (6th




3
 (...continued)
          (A) any   investment credit carryover;
          (B) any   recovery exclusion;
          (C) any   loss carryover;
          (D) any   foreign tax credit carryover;
          (E) any   capital loss carryover; and
          (F) any   claim of right.

          (2) After such case is closed or dismissed, the debtor
     shall succeed to any tax attribute to which the estate
     succeeded under paragraph (1) of this subsection but that
     was not utilized by the estate. The debtor may utilize such
     tax attributes as though any applicable time limitations on
     such utilization by the debtor were suspended during the
     time during which the case was pending.
4
     11 U.S.C. sec. 346(a) provides as follows:

          (a) Except to the extent otherwise provided in
     this section, subsections (b), (c), (d), (e), (g), (h),
     (i), and (j) of this section apply notwithstanding any
     State or local law imposing a tax, but subject to the
     Internal Revenue Code of 1986.
                             - 14 -

Cir., Sept. 12, 1996); In re Page, 163 Bankr. 196, 197-198

(Bankr. D. Kan. 1994).

     As explained in the recent opinion of the Court of Appeals

for the Sixth Circuit --


          The * * * [taxpayers] argue that the statutory
     period was in fact tolled during the pendency of their
     bankruptcy proceeding, under section 346(i)(2) of the
     Bankruptcy Code, 11 U.S.C. sec. 346(i)(2). [11 U.S.C.]
     Section 346(i)(2), like I.R.C. section 1398(i),
     provides that at the close of a bankruptcy proceeding,
     debtors shall succeed to any unused tax attributes
     (including NOLs) to which the estate originally
     succeeded at the inception of the proceeding. Unlike
     I.R.C. section 1398(i), though, 11 U.S.C. sec.
     346(i)(2) goes on to state: "The debtor may utilize
     such tax attributes as though any applicable time
     limitations on such utilization by the debtor were
     suspended during the time during which the case was
     pending." On its face, this language appears to
     support the * * * [taxpayers’] contention that I.R.C.
     section 6511(a) should have been tolled. The sweep of
     this sentence is significantly circumscribed, however,
     by [11 U.S.C.] sec. 346(a), which states:

               Except to the extent otherwise provided
          in this section, subsections (b), (c), (d),
          (e), (g), (h), (i), and (j) of this section
          apply notwithstanding any State or local law
          imposing a tax, but subject to the Internal
          Revenue Code of 1986.

     11 U.S.C. sec. 346(a). In this context, "subject to
     the Internal Revenue Code" essentially means that the
     named Bankruptcy Code subsections, including the
     tolling provision in subsection (i), have no effect on
     the Federal tax laws. Such is the holding in In re
     Page, 163 B.R. 196, 197-98 (Bankr. D. Kan. 1994), where
     the court found [11 U.S.C.] sec. 346(a) "not extremely
     well-drafted" but clear enough to make subsection (i)
     applicable "only to State and local laws." [Firsdon v.
     United States, __ F.3d __ (6th Cir., Sept. 12, 1996)].
                              - 15 -

     We hold that the period applicable to the carrying forward

of petitioners' 1975-NOL expired on December 31, 1980, and was

not affected or suspended by petitioner's bankruptcy proceeding.

     Petitioners argue that respondent should be equitably

estopped from asserting the bar of the 5-year period, as

applicable to 1975, on the carryforward of petitioner's 1975-NOL.

Petitioners' estoppel argument is based on alleged

misrepresentations made to petitioners by respondent's

representatives regarding whether the 15-year carryforward period

available under section 172, as amended in 1981, applied to

petitioner's 1975-NOL and on respondent’s failure to disallow

petitioners' claimed carryforward deductions relating to the

1975-NOL as claimed on petitioners' joint Federal income tax

returns for 11 years (namely, for 1978 through 1988).

     Equitable estoppel against the Government is considered an

extraordinary remedy and is applied with the "utmost caution and

restraint".   The Board of County Commrs. v. Isaac, 18 F.3d 1492,

1499 (10th Cir. 1994); Estate of Emerson v. Commissioner, 67 T.C.

612, 617 (1977).

     Generally, equitable estoppel is unavailable against the

Government without a showing of at least the following elements

by the claimant:   (1) The Government made false representations

with regard to material facts; (2) the claimant was ignorant of

the true facts; (3) the claimant reasonably relied on the

Government's misrepresentations; and (4) the claimant relied on
                               - 16 -

the misrepresentations to his detriment.    Rapp v. United States

Dept. of Treasury, Office of Thrift Supervision, 52 F.3d 1510,

1516 (10th Cir. 1995); The Board of County Commrs. v. Isaac,

supra; Estate of Emerson v. Commissioner, supra    at 617-618;

Underwood v. Commissioner, 63 T.C. 468, 477-478 (1975), affd. 535

F.2d 309 (5th Cir. 1976).    The detrimental-reliance test includes

the requirement that the party asserting estoppel, as a result of

the misrepresentation, must have been deprived of something to

which it was entitled.    Heckler v. Community Health Servs., Inc.,

467 U.S. 51, 61 (1984); Kennedy v. United States, 965 F.2d 413,

418 (7th Cir. 1992).

     Respondent, among other things, argues that because

petitioners, for the years before us, were not entitled to the

1975-NOL, petitioners were not deprived of something to which

they were entitled.    We agree.

     Because the 5-year period for the carryforward of

petitioner's 1975-NOL expired on December 31, 1980, petitioners,

under the law as applicable to 1975, were not entitled to carry

forward the 1975-NOL to 1989, 1990, and 1991, and petitioners

were not deprived of any NOL carryforward to which they were

entitled.

     With regard to the $7,414 claimed car and truck expenses and

to the accuracy-related penalties under section 6662(a) for

substantial understatements of income tax for 1989 and 1990,

petitioners have failed to make any separate arguments, and we
                              - 17 -

hold that petitioners have failed in their burden of proof.     Rule

142(a).   We sustain respondent's disallowance of the car and

truck expenses, and we sustain respondent’s imposition of the

accuracy-related penalties under section 6662(a).

     Respondent filed a motion for partial summary judgment prior

to trial.   Because the issues raised therein have been decided in

this opinion, respondent's motion for partial summary judgment

will be denied as moot.


                                    Respondent’s motion for

                               partial summary judgment will be

                               denied as moot, and decision will

                               be entered under Rule 155.
