                     T.C. Summary Opinion 2010-63



                        UNITED STATES TAX COURT



    MATTHEW HARRIS AND DEBORAH M. MACE-HARRIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 17418-08S.             Filed May 19, 2010.



        Matthew Harris and Deborah M. Mace-Harris, pro sese.

        Robert V. Boeshaar, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.     Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     For 2004 respondent determined a deficiency of $15,551 in

petitioners’ Federal income tax and an addition to tax of

$3,887.75 pursuant to section 6651(a)(1).    The issues for

decision1 are whether petitioners:    (1) Are entitled to a

deduction of $46,100 for losses sustained in a joint venture; and

(2) are subject to the addition to tax pursuant to section

6651(a)(1).

                           Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    When petitioners filed

their petition, they resided in the State of Washington.

     Petitioners filed their 2004 Form 1040, U.S. Individual

Income Tax Return, on or about October 17, 2006.    They

subsequently amended their 2004 return on or about May 11, 2007.

On their amended return petitioners claimed on Schedule C, Profit

or Loss From Business, $46,100 of cost of goods sold (CGS),

reflecting losses sustained from a joint venture agreement.


     1
      Respondent conceded that Matthew Harris (petitioner) is
entitled to a deduction for commission fees paid to his daughter.
Petitioner conceded that he is not entitled to a deduction for
claimed commission fees paid to Deborah Mace-Harris.
     Petitioner’s self-employment tax adjustment is a
computational adjustment and will be resolved consistent with the
Court’s decision.
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     Petitioner entered into a joint venture agreement

(agreement) dated January 19, 2004, with Jebuni Import2 (Jebuni)

to develop and execute a purchase contract with Fred Meyer, a

regional multidepartmental store, for manufactured goods.

Petitioner agreed to provide funds for the upfront costs of

manufacturing the goods, and Jebuni agreed to purchase the

material and hire the artisans.   The agreement specified that

when Jebuni obtained payment from Fred Meyer, Jebuni would repay

petitioner for his original investment, and petitioner would also

receive a 30-percent share of the proceeds.

     On October 8, 2004, Fred Meyer executed a purchase order

with Jebuni for the manufactured goods.   The purchase order

specified that the goods were to be shipped on February 20, 2005.

     Petitioner provided funding for the venture and Jebuni

manufactured the goods consistent with their agreement.   Jebuni

delivered the goods to Fred Meyer and was paid for the delivery.

But Jebuni never repaid petitioner his advance funding or paid

over his share of the proceeds.

     Respondent issued to petitioners a notice of deficiency

disallowing petitioners’ claimed CGS for 2004 and $4,357 of

petitioners’ claimed deduction for commissions and fees of

$4,607.



     2
      Jebuni was involved in ch. 13 bankruptcy proceedings
throughout 2004.
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                            Discussion

I.   Burden of Proof

      Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.3    Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).

      Although petitioner characterized the claimed loss as CGS

and respondent did not correct this characterization,4

petitioner’s funding for the agreement did not constitute CGS.5




      3
      Petitioner has not claimed or shown that he meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to his liability for
tax.
      4
      Respondent’s counsel continually referred to CGS as “a
Schedule C deduction”. As we explained in Lawson v.
Commissioner, T.C. Memo. 1994-286, CGS is taken into account in
computing gross income and is not an item of deduction. See also
Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).
     5
      Sec. 263A provides the rule for inclusion in inventory
costs of certain expenses. The direct cost of: (1) Property
produced by the taxpayer; or (2) property acquired by the
taxpayer for resale, which is inventory in the hands of the
taxpayer, shall be included in inventory costs. Sec. 263A(a)(1),
(b). Petitioner did not produce or acquire property for resale
during 2004. Jebuni manufactured the goods and sold them to Fred
Meyer. Petitioner simply provided funds for the upfront costs
for the manufacture of the goods pursuant to the joint venture
agreement, and Jebuni was the party responsible for manufacturing
and selling the goods.
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      Petitioner’s investment, rather, resulted in a loss and if

properly substantiated may be deductible pursuant to section 165.

See sec. 165(a), (c).

II.   Loss Deduction

      Deductions are strictly a matter of legislative grace, and

taxpayers must satisfy the specific requirements for any

deduction claimed.     See INDOPCO, Inc. v. Commissioner, supra at

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

Taxpayers bear the burden of substantiating the amount and

purpose of any claimed deduction.    See Hradesky v. Commissioner,

65 T.C. 87 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

      Section 165(a) allows a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.   With respect to individuals, deductions for losses

are limited, as is relevant here, to losses incurred in any

transaction entered into for profit.     Sec. 165(c).   In order for

the loss to be deductible, the loss must be evidenced by a closed

and completed transaction, fixed by an identifiable event, and

actually sustained during the taxable year.     Sec. 1.165-1(b),

Income Tax Regs.   A loss shall be allowed as a deduction under

section 165(a) only for the taxable year in which the loss is

sustained.   Sec. 1.165-1(d)(1), Income Tax Regs.

      Petitioner presented records and testified that he provided

Jebuni with the funds necessary to manufacture the goods pursuant
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to their agreement.   The Court is satisfied that petitioner has

substantiated that he paid Jebuni $10,1006 in 2004 pursuant to

their agreement.   Accordingly, if petitioner sustained a loss

attributable to the joint venture agreement in 2004, he will be

entitled to deduct the amount of the loss.

     Petitioner claimed on his 2004 amended return, filed in

2007, a loss related to the agreement with Jebuni and argued that

he sustained the loss in 2004 because Jebuni was in bankruptcy

during 2004.

     Petitioner’s agreement with Jebuni specified that the

agreement “shall continue until the Venture is completed”7 and

that “After the collection of all proceeds from the Venture are

completed” petitioner would receive repayment of the advance

funding.    Under the Fred Meyer purchase order the shipment date

for the goods was not until February 20, 2005; thus, the purchase

order was not complete until Jebuni shipped the goods on February

20, 2005.   Jebuni was not obligated to pay petitioner until there



     6
      Petitioner testified that he sent six wire transfers to
Jebuni in 2004. He provided copies of two wire transfer receipts
totaling $10,100, with Jebuni as the beneficiary. Petitioner
authorized the four remaining wire transfers via telephone and
consequently did not obtain wire transfer receipts for those
transfers. Instead, petitioner obtained a signed letter from his
bank confirming that in 2004 he authorized four wire transfers
via telephone in favor of Jebuni. But the letter did not
indicate the amounts of the remaining four wire transfers.
     7
      The Venture, according to the agreement, refers to the sale
of manufactured goods to Fred Meyer.
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was a closed and completed transaction pursuant to their

agreement upon delivery of the goods.     See   Gorman v.

Commissioner, T.C. Memo. 1990-136; Casey v. Commissioner, T.C.

Memo. 1988-170, affd. without published opinion 876 F.2d 899

(11th Cir. 1989); Carpenter v. Commissioner, T.C. Memo. 1981-551.

Petitioner could be certain of nonpayment and realize a loss only

after Jebuni satisfied the Fred Meyer purchase order, received

payment from Fred Meyer, and then refused to pay petitioner.       The

certainty of nonpayment did not occur in 2004; therefore,

petitioner did not sustain a loss in 2004.      Accordingly,

respondent’s determination is sustained.

III.    Section 6651(a)(1) Addition to Tax

       Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax.       Higbee v.

Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164.      In order to meet the burden

of production under section 7491(c), the Commissioner need only

make a prima facie case that imposition of the penalty or the

addition to tax is appropriate.    Higbee v. Commissioner, supra.

       Once the Commissioner meets his burden of production

regarding the addition to tax, the burden of proof remains on the

taxpayer, who must prove that the failure to file was:      (1) Due

to reasonable cause; and (2) not due to willful neglect.       Sec.
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6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);

Higbee v. Commissioner, supra at 446-447.

     A failure to file a timely Federal income tax return is due

to reasonable cause if the taxpayer exercised ordinary business

care and prudence and nevertheless was unable to file the return

within the prescribed time.   Barkley v. Commissioner, T.C. Memo.

2004-287; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.   Willful

neglect means a conscious, intentional failure or reckless

indifference.   United States v. Boyle, supra at 245.

     Petitioner’s 2004 Federal income tax return was due on April

15, 2005, and was not filed until on or about October 1, 2006.

Therefore, respondent has met his burden of production.

     Petitioner testified that when his father passed away in

2004, petitioner traveled to Philadelphia on several occasions to

assist his mother, who had difficulty dealing with the tragedy.

Although the Court commends petitioner in assisting his mother

during this difficult time, petitioners presented no additional

evidence as to why they could not, 1 year following the passing

of petitioner’s father, timely file their return.   In addition,

they did not file their return for a full year and a half after

the due date of the return and failed to present additional

reasonable cause for their failure to timely file their return as

required by section 6651(a)(1).   Accordingly, respondent’s
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determination of an addition to tax under section 6651(a)(1) is

sustained.

     To reflect the foregoing,


                                         Decision will be entered

                                  under Rule 155.
