                  T.C. Summary Opinion 2010-110



                      UNITED STATES TAX COURT



               STEPHEN PERRY BREAM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 30349-08S.             Filed August 3, 2010.




     Stephen Perry Bream, pro se.

     Kimberly L. Clark, for respondent.



     HAINES, Judge:   This case was heard pursuant to the

provision of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section 7463(b), the

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


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code as amended and in effect for the year in
issue. Rule references are to the Tax Court Rules of Practice
and Procedure. Amounts are rounded to the nearest dollar.
                                -2-

this opinion shall not be treated as precedent for any other

case.

     Respondent determined a deficiency in petitioner’s Federal

income tax for 2005 of $26,163, an addition to tax under section

6651(a)(1) of $6,541, and a penalty under section 6662(a) of

$5,233. After concessions, the remaining issues for decision are:

(1) Whether petitioner is entitled to a passthrough loss from a

Schedule K-1, Shareholder’s Share of Income, Deductions, Credits,

etc., for taxable year 2005; (2) whether petitioner is liable for

the section 6651(a)(1) addition to tax for failure to timely file

an income tax return for 2005; and (3) whether petitioner is

liable for the accuracy-related penalty under section 6662(a).

                            Background

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.    At the time he filed his

petition, petitioner resided in Oregon.

Notice of Deficiency and Procedural Background

     Petitioner failed to file timely income tax returns for

2003, 2004, and 2005.   Respondent requested an income tax return

for 2005 from petitioner and subsequently prepared a substitute

return for the year pursuant to section 6020(b).   In response to

respondent’s request, petitioner submitted a 2005 return on

September 24, 2007.   Upon examination of petitioner’s return,
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respondent determined that petitioner failed to include pension

and annuity income of $119,048 and interest income of $933, and

issued the notice of deficiency to petitioner on September 15,

2008.   On December 17, 2008, petitioner filed a petition claiming

that he is entitled to a passthrough loss of $19,764 from an S

corporation with which he was involved and that the addition to

tax and the penalty under sections 6651(a)(1) and 6662(a),

respectively, should be reduced or abated.

Personal Background

     Petitioner’s mother passed away in 2004, and he was a

beneficiary of her estate.   During 2005 the assets from the

estate generated pension and annuity income of $119,048 and

interest income of $933, neither of which petitioner included in

income.   Petitioner conceded that that income is taxable.

     Petitioner was a shareholder in Titaua Teraifea, Inc., a

Hawaiian corporation, d.b.a. Tahitian Goddess (Tahitian Goddess),

that was primarily a manufacturer of gourmet foods.   Tahitian

Goddess was incorporated in 1991 and ceased functioning in 2007.

Tahitian Goddess made a subchapter S election for 2005.

Petitioner testified that although he was not an officer or

manager of Tahitian Goddess, he had paid more than $130,000

trying to keep its business operational.   In his petition,

petitioner claimed he is entitled to a passthrough loss of
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$19,764 from Tahitian Goddess for 2005 which forms the basis for

the dispute.

     In response to respondent’s request for documentation, on

January 6, 2010, petitioner submitted to respondent an undated

letter from his tax preparer, a printout from the Internal

Revenue Service Master File showing a reported Schedule K-1 loss

of $19,764 from Tahitian Goddess for 2005 attributed to

petitioner, purported balance sheets for Tahitian Goddess for the

years 2004 through 2006, and a copy of Tahitian Goddess’ 2006

Form 1120S, U.S. Income Tax Return for an S Corporation, without

statements or schedules.   Petitioner likewise included various

financial software printouts of transactions by accounts.

Respondent’s examiner was unable to determine how or whether

petitioner’s financial software printouts and other documents

were associated with the figures shown on the Form 1120S or to

determine whether petitioner had any basis in the purported S

corporation against which a loss might be allowable.

                              Discussion

I.   Burden of Proof

     Petitioner bears the burden of proving that respondent’s

determination is incorrect.    See Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933).   Deductions are strictly a matter of

legislative grace, and taxpayers must satisfy the specific

requirements for any deduction claimed.    See INDOPCO, Inc. v.
                                 -5-

Commissioner, 503 U.S. 79, 84 (1992); 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

by maintaining the records needed to establish such entitlement.

See sec. 6001; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd.

540 F.2d 821 (5th Cir. 1976).    A taxpayer’s self-serving

declaration is generally not a sufficient substitute for records.

Weiss v. Commissioner, T.C. Memo. 1999-17.

       In certain circumstances, if the taxpayer introduces

credible evidence with respect to a factual issue relevant to

ascertaining the taxpayer’s proper tax liability, section

7491(a)(1) places the burden of proof on the Commissioner.    Rule

142(a)(2).    For the burden to be placed on the Commissioner, the

taxpayer, inter alia, must have complied with the substantiation

requirements of the Internal Revenue Code and “cooperated with

reasonable requests by the Secretary for witnesses, information,

documents, meetings, and interviews”.    Sec. 7491(a)(2)(A) and

(B).    Petitioner neither presented credible evidence at trial nor

provided respondent with useful documents necessary to

substantiate petitioner’s basis in the S corporation.    Moreover,

petitioner was required to treat the passthrough loss from

Tahitian Goddess in a manner consistent with the treatment of the

loss on the corporate return or to file with the Secretary a

statement identifying any inconsistency.    See sec. 6037(c); Jones
                                -6-

v. Commissioner, T.C. Memo. 2010-112.   Accordingly, section

7491(a) is inapplicable, and the burden remains on petitioner to

prove that respondent’s determination of the income tax

deficiency is incorrect.

II.   Substantiation of Basis in S Corporation

      An S corporation is a small business corporation that has an

election in effect for the taxable year to be treated as a

passthrough entity pursuant to section 1362(a).   Sec. 1361(a)(1).

Section 1366(a)(1) provides that a shareholder shall take into

account his pro rata share of the S corporation’s items of

income, loss, deduction, or credit for the S corporation’s

taxable year ending with or in the shareholder’s taxable year.

Stated otherwise, section 1366 establishes a regime under which

items of an S corporation are generally passed through to

shareholders, rather than being subject to tax at the corporate

level.   Section 1366(d)(1), however, limits the aggregate amount

of such passthrough losses and deductions that a shareholder may

claim to the sum of:   (1) His adjusted basis in the stock of the

S corporation, and (2) his adjusted basis in any indebtedness of

the S corporation to the shareholder.

      A taxpayer must establish the basis of his stock for

purposes of determining the amount of gain or loss he must

recognize.   “Proof of basis is a specific fact which the taxpayer

has the burden of proving.”   O’Neill v. Commissioner, 271 F.2d
                                -7-

44, 50 (9th Cir. 1959), affg. T.C. Memo. 1957-193.   Respondent

requested evidence of petitioner’s basis in the stock of Tahitian

Goddess.   However, petitioner failed to provide any credible

evidence substantiating his basis in the stock of Tahitian

Goddess from the organization of the corporation to the year at

issue against which such a loss could be allowed.    Thus, we deny

the $19,764 passthrough loss claimed on the petition and sustain

respondent’s deficiency determination of $26,163 for 2005.

III. Addition to Tax and Penalty

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

     Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(1) for failure to timely

file an income tax return for 2005.   Respondent bears the burden

of production with respect to petitioner’s liability for the

addition to tax.   See sec. 7491(c); Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001).   To meet his burden of production with

respect to section 6651, respondent must come forward with

sufficient evidence indicating that it is appropriate to impose

the addition to tax.   Higbee v. Commissioner, supra at 446.    The

parties stipulated that petitioner’s Federal income tax return

for 2005 was not timely filed; thus respondent has carried the

burden of production with respect to the addition to tax under

section 6651(a)(1).
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      Section 6651(a)(1) imposes an addition to tax for failure

to file a return on the date prescribed (determined with regard

to any extension of time for filing), unless petitioner can

establish that such failure was due to reasonable cause and not

due to willful neglect.   A showing of reasonable cause requires

petitioner to demonstrate he exercised ordinary business care and

prudence and nevertheless was unable to file the return by the

due date.   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

     In order to avoid an addition to tax under section 6651(a),

the taxpayer must carry the burden of establishing reasonable

cause.    Sec. 6664; Higbee v. Commissioner, supra at 446.

Petitioner claims that because of his mother’s death in September

2004 and a major financial setback in connection with Tahitian

Goddess during 2005, he was unable to timely file his 2005

return.   Petitioner further claims that he failed to timely file

a return because he believed the pension and annuity income and

the interest income he received during 2005 from his mother’s

estate were not taxable and that his remaining income was

sufficiently below the taxable threshold.

     We are not unsympathetic to petitioner’s position, yet he

failed to offer a legitimate explanation as to how or why his

mother’s death or his financial setback prevented him from timely

filing a return for 2005.   Moreover, petitioner likewise failed

to file tax returns for 2003 and 2004, before either his mother’s
                                 -9-

death or the financial setback, in addition to the year at issue.

Finally, his mistake as to the taxability of the income he

received for 2005 does not constitute reasonable cause under

section 6651(a)(1).   Joyce v. Commissioner, 25 T.C. 13, 15

(1955).   Accordingly, we conclude that petitioner is liable for

an addition to tax under section 6651(a)(1) in the amount

respondent determined.

     B.    Section 6662(a) Penalty

     Section 6662(a) and (b)(2) imposes a 20-percent accuracy-

related penalty upon any underpayment of tax resulting from a

substantial understatement of income tax.   An understatement is

substantial if it exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000.   Sec.

6662(d)(1)(A).   The Commissioner bears the burden of production

with respect to penalties.   Sec. 7491(c); Higbee v. Commissioner,

supra at 446-447.

     Petitioner reported no tax liability on his untimely income

tax return, and respondent calculated that petitioner understated

his tax liability by $26,163.   The amount of the understatement

was substantial because it exceeded the greater of:    (1) 10

percent of the tax required to be shown on the return for the

taxable year, or (2) $5,000.    Consequently, respondent has met

the burden of production, and petitioner, having failed to show

reasonable cause, substantial authority, or other basis for
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reducing the underpayment, is liable for the section 6662 penalty

for 2005 in the amount respondent determined.      See sec. 6664(c).

     The Court, in reaching its holding, has considered all

arguments made, and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        for respondent.
