                         T.C. Memo. 2001-123



                       UNITED STATES TAX COURT



         MARTIN H. TONN AND LORRAINE A. TONN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11076-99.                         Filed May 24, 2001.


     Martin H. Tonn and Lorraine A. Tonn, pro sese.

     Eric W. Johnson, for respondent.



                         MEMORANDUM OPINION


     RUWE, Judge:   This matter is before the Court on

respondent’s motion for partial summary judgment filed pursuant

to Rule 121.1   The issues presented are:     (1) Whether the amounts



     1
      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.
                                  - 2 -

and characterizations of gross income determined in the notices

of deficiency are correct; and (2) whether petitioners incurred a

loss in 1987 which they may use to offset their gross income for

1995, 1996, and 1997.

Background

       Respondent determined deficiencies in petitioners’ Federal

income taxes and additions to tax as follows:

Mr. Tonn

                                         Additions to tax
       Year      Deficiency       Sec. 6651(a)(1)     Sec. 6654
       1995         $592             $148.00            $32.10
       1996        1,165              291.25              62.02
       1997        1,279              319.75              68.45

Mrs. Tonn

                                         Additions to tax
       Year      Deficiency       Sec. 6651(a)(1)     Sec. 6654
       1996       $18,801            $4,700.25        $1,000.68
       1997        15,539             3,884.75            831.34

In the notices of deficiency, respondent determined the following

amounts and characterizations of petitioners’ gross income:

Mr. Tonn

Year      Interest Income     Self-Employment Income    Rental Income
1995          $153                    $4,187                 --
1996           246                     7,169                 --
1997           360                     2,820               $9,000

Mrs. Tonn

                 Year                 Self-Employment Income
                 1996                       $57,429
                 1997                        49,614
                              - 3 -

     On March 26, 2001, respondent filed a request for

admissions, containing 22 admissions, setting forth the same

amounts and characterizations of gross income determined in the

notices of deficiency sent to petitioners.   Petitioners filed the

following answer to respondent’s request for admissions:

     In response to your request for admission dated March
     20, 2001 we wish to state: We had a major change of
     office personnel in June 2000. Much of the information
     you have requested has been either lost or misplaced.
     We will have to assume that the items #1-22 are correct
     as listed in your request.

     In their amended petition, petitioners contend that on March

27, 1987, respondent’s agents conducted a seizure at Interstate

Energy Enterprises, Inc.’s (IEEI) manufacturing facility which

was “wrongful, illegal and unconstitutional” and caused the loss

of petitioners’ property and business.    Petitioners’ position in

their amended petition is that the damages caused by the seizure

activities should be taken into consideration when calculating

their personal income taxes for the years since 1987.2   The

amount of the loss that petitioners claim they are entitled to is

based on the value of Mr. Tonn’s labor.

     Over a period of years prior to 1981, Mr. Tonn developed an




     2
      On July 26, 2000, this Court entered an order dismissing
for lack of jurisdiction all years subsequent to 1987 with the
exception of petitioners’ taxable years 1996 and 1997 and Mr.
Tonn’s taxable year 1995.
                                - 4 -

“on-farm energy plant”.3   In 1981, Mr. Tonn sold the on-farm

energy plant to Laurington Corp. (Laurington), his wholly owned

corporation.   Under the terms of the sale, payments were to be

made in installments.   Between 1981 and 1983, Laurington sold the

on-farm energy plant to three partnerships.    Payments were also

to be made in installments.    The three partnerships were:   (1)

Laurington Energy Properties; (2) Independent Energy Systems I;

and (3) Independent Energy Systems II (collectively, the

Alternative Energy entities).    Before 1987, the Alternative

Energy entities entered into a royalty agreement with IEEI,

whereby IEEI agreed to manufacture and sell on-farm energy plants

and pay the Alternative Energy entities royalties on the sales.

IEEI owned or leased property in Kiel, Wisconsin, where it

planned to manufacture on-farm energy equipment.

     Sometime before March 27, 1987, respondent filed liens

against the property of IEEI.    On March 27, 1987, respondent’s

agents entered the property of the IEEI plant in Kiel, Wisconsin,

and posted a notice of seizure.    On the same day, respondent’s

agents went to Citizens State Bank in Kiel, Wisconsin, and agreed

to discharge the liens against the IEEI property in exchange for

the payment of $22,500.    Citizens State Bank was a creditor of

IEEI and also had liens against the IEEI property.    The payment



     3
      The “on-farm energy plant” was an ethanol-based power
system for farms.
                               - 5 -

of $22,500 from Citizens State Bank to respondent was credited

against IEEI’s outstanding tax liabilities.

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    See Northern Ind. Pub.

Serv. Co. v. Commissioner, 101 T.C. 294, 295 (1993); Shiosaki v.

Commissioner, 61 T.C. 861, 862 (1974).    Rule 121(a) provides that

either party may move for a summary judgment upon all or any part

of the legal issues in controversy.    Full or partial summary

judgment is appropriate where there is no genuine issue as to any

material fact and a decision may be rendered as a matter of law.

See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).    Respondent, as

the moving party, bears the burden of proving that no genuine

issue exists as to any material fact and that he is entitled to

judgment as a matter of law.   See Bond v. Commissioner, 100 T.C.

32, 36 (1993); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

     Once a motion for summary judgment is made and supported,

the nonmoving party must do more than merely allege or deny facts

in its pleadings; it must “set forth specific facts showing that

there is a genuine issue for trial.    If the adverse party does

not so respond, then a decision, if appropriate, may be entered

against such party.”   Rule 121(d); accord Celotex Corp. v.

Catrett, 477 U.S. 317, 322 n.3 (1986); Sundstrand Corp. v.
                                 - 6 -

Commissioner, supra at 520.    In deciding whether to grant summary

judgment, the factual materials and the inferences drawn from

them must be considered in the light most favorable to the

nonmoving party.   See Bond v. Commissioner, supra at 36; Naftel

v. Commissioner, supra at 529.

     Petitioners do not dispute the authenticity of any of the

exhibits attached to respondent’s motion for partial summary

judgment, nor have they claimed that they did not make the

representations contained therein.       However, petitioners argue

that some of the factual allegations made by respondent are in

dispute.    After reviewing the materials filed by both parties, we

find that there is no genuine issue as to any of the material

facts that we have set forth in the background section of this

opinion.    A significant undisputed factual allegation is that the

amount of the loss that petitioners claim they are entitled to is

based on the value of Mr. Tonn’s labor.       “Only disputes over

facts that might affect the outcome of the suit under the

governing law will properly preclude the entry of summary

judgment.   Factual disputes that are irrelevant or unnecessary

will not be counted.”    Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986).

     The first issue is whether the amounts and characterizations

of gross income determined in the notices of deficiency are

correct.    Respondent filed a request for admissions setting forth
                              - 7 -

the same amounts and characterizations of gross income determined

in the notices of deficiency sent to petitioners.    In their

answer, petitioners claim that they do not have the necessary

records to verify the request for admissions and state that they

assume the requested admissions are accurate.    We deem

petitioners’ response a concession as to the amounts and

characterizations of gross income determined in the notices of

deficiency for the years in issue.    See Rule 90(c).

     The remaining issue for purposes of respondent’s motion is

whether petitioners incurred a loss in 1987 which they may use to

offset their gross income for the years in issue.    Petitioners

argue that they may offset their gross income with a carryforward

loss that they claim was caused by respondent’s illegal and

unconstitutional seizure activities against assets of IEEI, the

Alternative Energy entities, and Mr. Tonn in March of 1987.4


     4
      Petitioners present lengthy arguments in support of their
contention that respondent’s agents engaged in illegal and
unconstitutional collection activities. We generally do not
address such arguments. See, e.g., Kerr v. Commissioner, 5
B.T.A. 1073, 1095 (1927). We note that petitioners have pursued
their claims that respondent’s agents engaged in illegal and
unconstitutional collection activities in District Court, but
those claims have been unsuccessful. See, e.g., Tonn v. United
States, 210 F.3d 379 (8th Cir. 2000); Tonn v. United States, 78
AFTR 2d 96-5631 (D. Minn. 1996), affd. without published opinion
108 F.3d 1382 (8th Cir. 1997); Tonn v. United States, 847 F.
Supp. 711 (D. Minn. 1993), affd. sub nom. Tonn v. Forsberg, 27
F.3d 1356 (8th Cir. 1994). Petitioners also contend that they
did not receive notice of the alleged seizure in March of 1987,
and, thus, the property seized must be returned. This argument
does not bear on the issue of whether petitioners are entitled to
                                                   (continued...)
                                - 8 -

     Respondent alleges that petitioners are claiming a loss of

$920,000, which is the value placed by petitioners on the labor

contributed by Mr. Tonn over the years prior to 1987 for

developing the on-farm energy systems.   In response to this

specific allegation, petitioners state that “the value was not

placed by Petitioners.   The value was determined by Russell

Associates Appraisal of Alternative Energy equipment”.5    In an

exhibit attached to respondent’s motion, Mr. Tonn states that he

“suffered a loss of approximately $920,000” as a result of the

March 1987 collection activities.   Respondent also presented a

document obtained through informal discovery in which respondent

posed the following question:   “Please state the total amount of

loss you suffered from the March 27, 1987 seizure”.   Petitioners

responded that a “Loss of alternative energy equipment and

appraisal was left with Eric Johnson District Council at 1-5-01



     4
      (...continued)
offset their gross income for the years in issue with a claimed
loss; thus, we find it unnecessary to address it.
     5
      Respondent posed the following question to petitioners
during informal discovery:

          3) Please provide a calculation of your basis in
     the on-farm energy plant, i.e., your costs and efforts
     involved in creating the on-farm energy plant, prior to
     the sale to Laurington Corporation and any
     substantiating documentation.

In response, petitioners stated that “Russell Associates
Appraisal was left with Eric Johnson of the IRS District
Council’s Office during the January 5, 2001 meeting.”
                                 - 9 -

meeting. $920,000.00 Alternative Energy Property only.”     The

response further states that “Loss of IEEI property not part of

this claim.”    The appraisal by Russell Associates was performed

to estimate the value of the prototype farm energy system

equipment and technology which was sold to the Alternative Energy

entities.6    The appraisal values Mr. Tonn’s labor for the years

1969 through 1983 at $920,250.

     Petitioners admit that they were not the taxpayers in the

alleged seizure activities in March of 1987 and that they are not

seeking damages for any property owned by IEEI.7    Petitioners

argue that the value of Mr. Tonn’s labor was in the hard assets

of the equipment of the Alternative Energy entities.

Additionally, petitioners claim that the alleged seizure

activities “wrongfully confiscated Tonn’s labor contribution in

inventory and equipment” and these activities “destroyed Tonn’s

hope for future income from the sales of the seized property and

equipment.”    Petitioners do not dispute respondent’s factual

allegations that (1) petitioners are claiming a loss of $920,000,


     6
      The appraisal valued the equipment components at $175,500
and the research and development investment at $1,258,926. After
adjusting for other factors, the appraisal concluded that the
value of the prototype equipment was $1,200,000. The appraisal
contains a table valuing the labor put into the equipment and
then allocating that labor to different components of the
equipment.
     7
      Thus, petitioners could not have incurred a loss with
respect to any property owned by IEEI. See, e.g., Rink v.
Commissioner, 51 T.C. 746, 752-753 (1969).
                              - 10 -

and (2) the $920,000 is properly characterized as the value of

Mr. Tonn’s labor, as determined by the appraisal performed by

Russell Associates.

     In viewing the factual materials and the inferences drawn

from them in the light most favorable to petitioners, we find

that their pleadings raise claims for a deduction or loss under

sections 162, 165, and 166.   It appears that petitioners are

arguing that they are entitled to a loss for either (1) the value

of Mr. Tonn’s labor which petitioners will not recover because of

the alleged collection activities of respondent, or (2) the

amount of the payments that Laurington failed to make to

petitioners under the installment sale for the on-farm energy

equipment.8   In either situation, petitioners are not entitled to

a deduction or loss as a matter of law.

     The value of labor performed by a taxpayer does not

constitute an amount “paid or incurred”, and, for that reason, a

cash basis taxpayer is not entitled to deduct the value of his or

her own labor as a business expense under section 162(a).

Maniscalco v. Commissioner, 632 F.2d 6, 7-8 (6th Cir. 1980),


     8
      An exhibit signed by Mr. Tonn that sets forth a summary of
his claim is attached to respondent’s motion for partial summary
judgment. In the document, Mr. Tonn claims that as a result of
the seizure activities in March 1987, Laurington was unable to
make installment payments to Mr. Tonn. Mr. Tonn further states
that the $920,000 loss flowed from the March 1987 seizure
activities and included “receivables from the Laurington
Corporation relating to the energy equipment research, inventory,
equipment, manufactured goods, and vehicles.”
                              - 11 -

affg. T.C. Memo. 1978-274; Grant v. Commissioner, 84 T.C. 809,

820 (1985), affd. without published opinion 800 F.2d 260 (4th

Cir. 1986); Rink v. Commissioner, 51 T.C. 746, 753 (1969).     Thus,

a taxpayer is not entitled to a deduction for the imputed value

of services which he has not been required to report as income.

See Maniscalco v. Commissioner, supra at 7-8; Grant v.

Commissioner, supra at 820; Rink v. Commissioner, supra at 753.

Petitioners make no allegation that they reported the $920,000 of

claimed losses on any of their Federal income tax returns, and

they represented that they were cash basis taxpayers for the

years in issue.9

     Section 165 provides, in general, for the deductibility of

losses sustained by the taxpayer.   Section 166 provides, in

general, for the deductibility of debt which becomes worthless

during the taxable year.   Under both provisions, the amount of

the deduction is determined by reference to the adjusted basis

provided in section 1011 for determining the loss from the sale

or other disposition of the property.   See secs. 165(b) and

166(b).   The deduction of a bad debt or a loss from gross income


     9
      In an exhibit attached to respondent’s motion for partial
summary judgment, respondent asked petitioners whether they
reported the sale of the on-farm energy plant to Laurington Corp.
on any of their Federal income tax returns. Petitioners replied
that “I don’t believe it was because we were on a cash basis and
no cash was received.” Petitioners have not disputed any of the
exhibits attached to respondent’s motion and have referenced the
exhibits in their arguments opposing respondent’s motion for
partial summary judgment.
                               - 12 -

is limited to situations where the taxpayer has a basis in the

item he is claiming a deduction or a loss on.   See Oates v.

Commissioner, 316 F.2d 56, 57-58 (8th Cir. 1963), affg. T.C.

Memo. 1962-77; Perry v. Commissioner, 92 T.C. 470, 477-478

(1989), affd. without published opinion 912 F.2d 1466 (5th Cir.

1990); Swenson v. Commissioner, 43 T.C. 897, 898 (1965); Towers

v. Commissioner, 24 T.C. 199, 239 (1955), affd. 247 F.2d 233 (2d

Cir. 1957); O’Meara v. Commissioner, 8 T.C. 622, 632-633 (1947).

It is well established that a cash basis taxpayer is not entitled

to a deduction under section 165 for the loss of potential,

unreported income.    See Hort v. Commissioner, 313 U.S. 28, 33

(1941); Escofil v. Commissioner, 464 F.2d 358, 359 (3d Cir.

1972), affg. T.C. Memo. 1971-131; Hutcheson v. Commissioner, 17

T.C. 14, 19 (1951).   Additionally, a cash basis taxpayer is not

entitled to a deduction under section 166 for an income item when

the item has never been reported in income.   See Gertz v.

Commissioner, 64 T.C. 598, 600 (1975); Seymour v. Commissioner,

14 T.C. 1111, 1117 (1950); Garrison v. Commissioner, T.C. Memo.

1994-200, affd. without published opinion 67 F.3d 299 (6th Cir.

1995).   “A short form for stating the rule might thus be that the

process of establishing a basis for an income item consists, in

effect, of reporting it in the taxpayer’s gross income for tax

purposes.”   O’Meara v. Commissioner, supra at 633.

     Petitioners do not dispute respondent’s specific allegation
                               - 13 -

that the amount of the deduction or loss they are claiming is

based on the value of Mr. Tonn’s labor.   Courts have consistently

and uniformly held that a taxpayer has no basis in his labor.

See Carter v. Commissioner, 784 F.2d 1006, 1009 (9th Cir. 1986);

Funk v. Commissioner, 687 F.2d 264, 265 (8th Cir. 1982), affg.

per curiam T.C. Memo. 1981-506; Abrams v. Commissioner, 82 T.C.

403, 407 (1984); Rowlee v. Commissioner, 80 T.C. 1111, 1119-1122

(1983).

     Petitioners are claiming a loss of $920,000.   Petitioners do

not dispute that this amount was determined in the appraisal by

Russell Associates, in which the amount is attributed to the

value of Mr. Tonn’s labor.   Petitioners have not alleged that

they reported in their gross income the amount due from

Laurington under the installment sale of the on-farm energy

equipment or any amount attributable to Mr. Tonn’s labor

contribution to the on-farm energy equipment.   Petitioners have

represented that they were cash method taxpayers for the years in

issue.    Accordingly, the undisputed facts establish, as a matter

of law, that petitioners are not entitled to a deduction or a

loss for the years in issue.


                                     An appropriate order will be

                                issued granting respondent’s motion

                                for partial summary judgment.
