                          T.C. Memo. 2003-244



                        UNITED STATES TAX COURT



              ALLAN & JUDY N. GREEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7158-02.                Filed August 14, 2003.



     Chester A. Swart, for petitioners.

     Vicken Abajian and Guy Glaser, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioners petitioned the Court to

redetermine deficiencies of $31,962 and $6,647 in their 1998 and

1999 Federal income taxes, respectively.    Following concessions,

we decide whether petitioners may deduct for those years net

operating losses (NOLs) which purportedly arose in earlier years.

We hold they may not.    Unless otherwise stated, section
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references are to the applicable versions of the Internal Revenue

Code.   Rule references are to the Tax Court Rules of Practice and

Procedure.   Dollar amounts are rounded to the nearest dollar.

                         FINDINGS OF FACT

     Some facts were stipulated.    The stipulated facts and the

accompanying exhibits are incorporated herein by this reference.

We find the stipulated facts accordingly.      Petitioners are

husband and wife, and they resided in Long Beach, California,

when their petition was filed.

     In May 1980, petitioners and a third individual formed an S

corporation named Gilliflower’s Shoppe, Ltd. (GF I).      During

August 1981, GF I opened a 1,500-square-foot retail store in

Sunnyside, New York.   In October 1981, the carpeting, inventory,

and leasehold improvements in that store were damaged by fire.

On February 14, 1982, a second fire destroyed a wall in the store

and the rest of the store’s inventory.      Petitioners received no

reimbursement as to the fires, and the store operated at a loss

in 1981 and 1982.   The building in which the store was located

later burned to the ground in April 1983.      Petitioners received

no reimbursement as to this fire, and the store closed

permanently.   The record does not establish the income or loss of

GF I for any of its taxable years.       Nor does the record establish

the amount of the income or loss of GF I that passed through to

petitioners.
                                 - 3 -

     During 1982, petitioners formed a second S corporation named

Gilliflower’s Shoppe Steinway Street, Ltd. (GF II).    In October

1982, GF II opened a 3,500-square-foot retail store in Astoria,

New York.    This store operated at a loss in 1982 and closed in

July 1984.    GF II later opened two other stores.   The record does

not establish the income or loss of GF II for any of its taxable

years.   Nor does the record establish the amount of the income or

loss of GF II that passed through to petitioners.

     On June 23, 1983, petitioners filed a chapter 11 petition in

the name of GF II in the United States Bankruptcy Court for the

Eastern District of New York.1    On the same date, they filed in

the same court a chapter 11 petition in their own names.    On

April 5, 1984, they filed in that court a chapter 11 petition in

the name of GF I.2   All three proceedings were converted to

chapter 7 proceedings on November 16, 1984, and each of these

proceedings was closed in or about 1987.

     Petitioners reported on their 1988 through 1997 Federal

income tax returns the following negative amounts of adjusted

gross income:




     1
       At the time of this filing, petitioners each owned 50
percent of the stock of GF II. Also at that time, GF II reported
in its filings that its assets and liabilities on June 20, 1983,
totaled $722,850 and $448,640, respectively.
     2
       At the time of this filing, petitioners were the sole
shareholders of GF I.
                               - 4 -

                                     Negative Amounts of
                Taxable Year        Adjusted Gross Income

                   1988                   $662,246
                   1989                    601,726
                   1990                    545,994
                   1991                    518,707
                   1992                    468,723
                   1993                    443,339
                   1994                    497,225
                   1995                    617,510
                   1996                    682,840
                   1997                    738,081

Included in these amounts were wages of $117,412, $137,272,

$140,435, $130,440, $154,509, $122,322, $110,766, $125,600,

$138,291, and $84,233, respectively.    The record does not

establish the amounts that petitioners reported as their taxable

income for any of the years 1988 through 1997.    Nor does the

record establish petitioners’ income (either adjusted gross or

taxable) for years before 1988.

     For the subject years, petitioners filed with the

Commissioner Federal income tax returns using the filing status

of “Married filing joint return”.    They claimed on those

respective returns deductions for NOL carryovers of $832,503 and

$719,564.   Neither the 1998 nor the 1999 return details the

composition of the NOL carryovers, e.g., the amounts of the

purported NOLs included within the reported NOL carryovers or the

years in which those NOLs purportedly arose.    Petitioners

ascertained their NOL carryover from each year after 1980 by

deducting in full any NOL carryover to that year and treating the
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loss as shown on the taxable income line of their Federal income

tax return for that year as the NOL carryover to the next year.3

Without taking into account the claimed NOL carryovers to 1998

and 1999, petitioners reported total income for 1998 and 1999 of

$207,102 and $120,479, respectively.

     The Commissioner determined in the notice of deficiency that

petitioners were not entitled to deduct any part of the NOL

deductions claimed for 1998 and 1999.   The notice of deficiency

provides as to these determinations:

     Your loss flow-through from your S corporation is
     limited to your basis.

     For tax years beginning before August 5, 1997 the
     period to which you can carry a Net Operating Loss
     (NOL) back is 3 tax years. The period to which you can
     carry an NOL forward is 15 tax years.

     We disallowed your net operating loss deduction because
     the carry-over period expired.

                             OPINION

     Petitioners made no attempt at trial or on brief to

establish the composition of the NOL carryovers at issue.

Instead, petitioners point to the notice of deficiency and argue



     3
       For example, petitioners ascertained their NOL carryover
from 1998 to 1999 in the following manner. First, they claimed a
deduction on their 1998 Federal income tax return as “Other
income” a “Prior Year Carry-Over” of ($832,503), and they
reported their adjusted gross income for that year as ($625,401).
Second, they subtracted from the reported figure $88,763 for
itemized deductions and $5,400 for personal exemptions to arrive
at “taxable income” for 1998 (and the NOL carryover to 1999) of
($719,564).
                                - 6 -

that the Commissioner did not in the notice of deficiency dispute

that they had NOL carryovers to 1998 and 1999 in the amounts so

claimed.    Petitioners conclude from their reading of the notice

of deficiency that they may deduct the NOLs in the amounts

claimed on the subject returns if they establish:     (1) Their

basis in the S corporations and (2) that the carryover period for

the NOLS has not expired.    When this case was tried on May 9,

2003, respondent’s counsel in his opening statement stated

specifically that the substantiation of the existence, amounts,

and years of petitioners’ NOLs was in issue.     Respondent also

stated similarly in his trial memorandum served upon petitioners’

counsel on April 17, 2003.

     Section 172 allows a taxpayer to deduct an NOL for a taxable

year.    The amount of the NOL deduction equals the sum of the NOL

carryovers plus NOL carrybacks to that year.     Sec. 172(a).

Absent an election to the contrary, an NOL for any taxable year

must first be carried back 3 years and then carried over 15

years.    Sec. 172(b)(1)(A), (2), and (3).4   A taxpayer claiming an

NOL deduction for a taxable year must file with his return for

that year a concise statement setting forth the amount of the NOL

deduction claimed and all material and pertinent facts, including


     4
       In 1997, sec. 172(b)(1)(A) was amended to generally
require a 2-year carryback and a 20-year carryover for NOLs
incurred in taxable years beginning after Aug. 5, 1997. Neither
party asserts that this amendment is applicable here, and we
conclude it is not.
                                - 7 -

a detailed schedule showing the computation of the NOL deduction.

Sec. 1.172-1(c), Income Tax Regs.

     Section 172(c) defines the term “net operating loss” as “the

excess of the deductions allowed by this chapter over the gross

income.   Such excess shall be computed with the modifications

specified in subsection (d).”   In the case of individuals such as

petitioners, the list of modifications in subsection (d) includes

that “No net operating loss deduction shall be allowed”, that “No

deduction shall be allowed under section 151 (relating to

personal exemptions)”, and that “the deductions allowable by this

chapter which are not attributable to a taxpayer’s trade or

business shall be allowed only to the extent of the amount of the

gross income not derived from such trade or business”.     Sec.

172(d)(1), (3), and (4).

     Petitioners’ counsel acknowledged at trial that petitioners

bear the burden of proof in this case.     Petitioners, as taxpayers

attempting to deduct NOLs, bear the burden of establishing both

the existence of the NOLs and the amount of any NOL that may be

carried over to the subject years.      Rule 142(a)(1); United States

v. Olympic Radio & Television, Inc., 349 U.S. 232, 235 (1955);

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

Commissioner, 25 T.C. 1100, 1104 (1956), revd. and remanded on

other grounds 259 F.2d 300 (5th Cir. 1958).     Such a deduction is

a matter of legislative grace; it is not a matter of right.
                                - 8 -

United States v. Olympic Radio & Television, Inc., supra at 235;

Deputy v. Du Pont, 308 U.S. 488, 493 (1940).     Whereas petitioners

argue that the composition of the NOLs is not in issue, we

conclude to the contrary.   Respondent indicated both in his trial

memorandum and in his opening statement at trial that

petitioners’ substantiation of the existence, amounts, and years

of the NOLs underlying the disputed NOL carryovers was in issue.

Moreover, petitioners alleged in their petition as to each

subject year that “Petitioners did have a [sic] N.O.L. deduction

as set forth on the income tax return for the taxable year, or

some greater amount”.    (Emphasis added.)   The fact that

petitioners included in their pleading the phrase “some greater

amount” indicates that they contemplated specifically that the

Court would redetermine the amount of the NOL deduction for each

year.    We also note that petitioners claim to have incurred NOLs

in numerous years, two of which are 1981 and 1982, and that we

understand petitioners at the least to have acknowledged that

part of the disputed NOL carryovers is attributable to 1981 and

1982 NOLs.5   In that 1981 and 1982 are both more than 15 years



     5
       Ms. Green testified vaguely that the NOL carryovers
consisted of losses from 1981, 1982, 1983, 1984, and 1986, and
that these losses were attributable to “operating losses, the
cost of selling goods, the leasehold improvements, [and] the
investments.” Petitioners acknowledged on brief that they
continued to carry over to the subject years NOLs that arose in
1982. Petitioners’ counsel stated at trial that “this case is
regarding a net operating loss that started out in 1982".
                               - 9 -

before 1998, the first year in issue, and that respondent

determined in the notice of deficiency that the 15-year carryover

period had expired, we cannot fathom how petitioners could

otherwise establish their entitlement to deduct any part of the

subject NOL carryovers were they not to substantiate the

composition of those carryovers.

     Petitioners have made no attempt to substantiate their

claimed deductions of NOL carryovers,6 and the record does not

establish that any portion of an NOL that petitioners incurred

before 1998 was applied properly to 1998 or 1999.   Petitioners

must prove not only that they had an NOL in a year before 1998,

but that a portion of an NOL was properly deductible in 1998

and/or 1999.   See Jones v. Commissioner, supra; see also sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs. (taxpayers must

keep sufficient records to establish the amount of any item

reported on their Federal income tax returns).   Although

petitioners have consistently attempted to manifest on their tax

returns for at least 1988 through 1999 that they were carrying

over NOLs to those returns, these representations are not enough

for petitioners to meet their burden.7   Wilkinson v.


     6
       Petitioners, for example, have failed to introduce any
evidence establishing the years in which they purportedly
incurred NOLs or the amount of those purported NOLs.
     7
       In fact, petitioners calculated incorrectly the amounts of
those represented NOL carryovers; e.g., petitioners included in
                                                   (continued...)
                              - 10 -

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

supra at 1104.   Petitioners’ burden requires at a minimum that

they establish that:   (1) They had an NOL in at least one

specified taxable year before 1998, (2) they elected to forgo a

carryback of that NOL, see sec. 172(b)(3),8 or, if they made no

such election, the NOL could not be fully applied against income

in the 3 taxable years immediately preceding the taxable year of

the NOL, (3) the NOL (as adjusted by the amounts applied in

carryback years) could not be applied against income in the

taxable years immediately and chronologically following the

taxable year of the NOL, and (4) that 1998 is no more than 15

taxable years after the taxable year of the NOL that they seek to

apply in 1998, and 1999 is no more than 15 taxable years after

the taxable year of the NOL that they seek to apply in 1999.     As

we explained in Lassiter v. Commissioner, T.C. Memo. 2002-25:

          Under a plain reading of section 172(b)(1)(A)(i),
     a taxpayer * * * must first apply an NOL loss to his
     third taxable year preceding the loss, then apply any
     remaining portion of that loss to his second taxable
     year preceding the loss, and then apply any portion of
     the loss that still remains to his taxable year
     immediately preceding the loss. If the NOL is not


     7
      (...continued)
those calculations a deduction for personal exemptions.   See sec.
172(d)(3).
     8
       Sec. 172(b)(3) allows a taxpayer to elect to relinquish
the carryback period. Such an election must be made, in a
prescribed manner, by the due date (including extensions) for
filing the taxpayer’s return for the NOL year in which the
election is to be in effect. Id.
                              - 11 -

     fully absorbed in those 3 carryback years, or if the
     taxpayer elects under section 172(b)(3) to waive the
     carryback of the NOL, section 172(b)(1)(A)(ii) mandates
     that the unabsorbed NOL be carried forward to, and
     applied in, the first taxable year postdating the loss.
     Section 172(b)(1)(A)(ii) further mandates that this
     carryover procedure follow for each of the next 14
     years until the NOL is applied in full. With the
     exception of section 172(b)(3), and certain other
     specialized rules set forth in section 172(b), none of
     which are applicable here, the statute does not provide
     explicitly any rule that would allow a taxpayer to
     decline to apply an NOL in the year which is next in
     line under the statutory scheme.

     The record does not establish any of these requirements.

Accordingly, we sustain respondent’s determination as to this

issue in full.9   In so doing, we note again that 1981 and 1982

are outside of the applicable 15-year period and that petitioners

have chosen to structure the record so as not to allow us to

attribute any specific portion of the NOL carryovers to years

other than 1981 and 1982.   We also note that any NOL that

petitioner incurred in 1983 could not be carried over to 1999.




     9
       We also are unpersuaded that petitioners had basis in the
S corporations to support a deduction of any losses passed
through to them from those corporations. Whereas Ms. Green
testified at trial that petitioners’ basis in the S corporations
totals $1,150,000, we find that testimony incredible and
unsupported by the record. We decline to rely upon it. We note,
however, that even if petitioners had basis in those S
corporations, the record does not establish the amount of any
loss that the S corporations may have incurred, let alone the
amount of any loss that passed through to petitioners.
                             - 12 -



     All arguments made by the parties and not discussed herein

have been rejected as meritless.   To reflect concessions,


                                              Decision will be

                                         entered under Rule 155.
