                    T.C. Summary Opinion 2011-118



                       UNITED STATES TAX COURT



     B. DWIGHT OLMSTEAD AND LISA B. OLMSTEAD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17289-10S.              Filed October 4, 2011.



     B. Dwight Olmstead and Lisa B. Olmstead, pro sese.

     Britton G. Wilson and Elizabeth H. Downs, for respondent.



     LARO, Judge:    This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code (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
applicable version of the Code, and Rule references are to the
Tax Court Rules of Practice and Procedure. Some dollar amounts
are rounded.
                                 -2-

this opinion shall not be treated as precedent for any other

case.

     Petitioners petitioned the Court to redetermine respondent’s

determination of a $15,904 deficiency in their 2007 Federal

income tax and a $3,108 accuracy-related penalty under section

6662(a).    After concessions,2 we decide:    (1) Whether petitioners

failed to report petitioner B. Dwight Olmstead’s (Mr. Olmstead)

pro rata share of income from Olmstead Funeral Home, Inc. (OFHI),

an S corporation in which he was a majority shareholder.      We hold

they did; (2) whether petitioners failed to report $5,592 of

nonemployee compensation paid to petitioner Lisa B. Olmstead (Ms.

Olmstead).    We hold they did not; (3) whether petitioners are

subject to self-employment tax of $836 and are entitled to a

self-employment tax deduction of $418.       We hold they are; and (4)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a) due to negligence or disregard of rules or

regulations, or for a substantial understatement of tax.      We hold

they are.

     2
      Petitioners concede on brief that they received $779 in
retirement income from Aurora National Life Assurance Co.
(Aurora). We also consider petitioners to have conceded that
they received but failed to report $26 of interest income from
Olmstead, Inc. (OI), by virtue of the fact that they did not
address this issue in the petition, at trial, or on brief. See
Rule 34(b)(4); Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4
(2001).
                                -3-

                             Background

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

The stipulated facts and the exhibits submitted therewith are

incorporated herein by this reference.     Petitioners are husband

and wife who resided in Arkansas when the petition was filed.

I.   OFHI

     Mr. Olmstead was a 15-percent shareholder of OFHI until 2004

when he purchased additional shares from his father.     In 2007 Mr.

Olmstead owned 54.7 percent of OFHI.      The remaining 44.3 percent

of that company was owned by Mr. Olmstead’s mother and two

brothers (collectively, minority shareholders).

     After Mr. Olmstead acquired a controlling interest in OFHI,

he fell into bitter disputes with the minority shareholders and

his father over OFHI’s management.    These disputes led to the

commencement of several lawsuits in the Circuit Court of Cleburne

County, Arkansas (State court), for alleged fraud and

misrepresentation on the part of Mr. Olmstead, his father, and

the minority shareholders.   One such lawsuit resulted in OFHI’s

being placed into receivership in March 2007.     In connection with

that lawsuit, the State court initially appointed Lane Keeter

(Mr. Keeter), a former accountant of OFHI, as the receiver.     The

State court subsequently appointed Jack Raymond (Mr. Raymond) as

OFHI’s receiver.   Mr. Raymond hired Mr. Keeter as OFHI’s

accountant in or around October 2007.
                                   -4-

      OFHI filed with respondent a 2007 Form 1120S, U.S. Income

Tax Return for an S Corporation (2007 corporate return).3     The

2007 corporate return reported ordinary business income of

$114,743, interest income of $13,156, net long-term capital gain

of $2,250, and $892,979 of deductions.   Attached to the 2007

corporate return was a Schedule K-1, Shareholder’s Share of

Income, Deductions, Credits, etc., which reported Mr. Olmstead’s

share of current year income, deductions, credits, and other

items as follows:

               Item1                          Amount

      Ordinary business income                $62,763
      Interest income                           7,196
      Net long-term capital gain                1,231
      Net sec. 1231 loss                          329
      Sec. 179 deduction                          497
      Other deductions                            107
      1
      The Schedule K-1 also reported alternative minimum tax
items and items affecting Mr. Olmstead’s basis.

Petitioners did not report any of the foregoing items on their

2007 joint Federal income tax return (2007 return).

II.   Tanner

      During 2007 Ms. Olmstead performed services for Tanner Cos.,

LLC (Tanner), as a salesperson, and she was paid a commission

based on a percentage of the total sales she generated for

Tanner.   In 2007 Tanner issued to Ms. Olmstead Form 1099-MISC,



      3
      The copy of the 2007 corporate return included in the
record is not dated.
                                  -5-

Miscellaneous Income, which reported that Tanner paid Ms.

Olmstead $5,592 of nonemployee compensation.

III. 2007 Return

      On the 2007 return petitioners reported wages of $154,570, a

business loss of $61,045, and total income of $93,525.    They also

reported itemized deductions of $76,355, self-employment tax of

zero, total tax due of $1,058, Federal income tax withheld of

$24,016, and a $22,958 overpayment of tax.   Attached to the 2007

return were three Forms W-2, Wage and Tax Statement.    The first

Form W-2 was issued to Mr. Olmstead by OFHI and reported, among

other things, wages of $130,187.    The second Form W-2 was issued

to Mr. Olmstead by Cleburne County and reported, among other

things, wages of $5,000.   The third Form W-2 was issued to Ms.

Olmstead by Herber Springs School District and reported, among

other things, wages of $13,790.    Also attached to the 2007 return

were two Schedules C, Profit or Loss From Business.    The first

Schedule C for Olmstead Investments, Inc., reported zero gross

receipts or sales, zero expenses, and a net loss of $13,002.    The

second Schedule C for OFHI reported zero gross receipts or sales,

total expenses of $48,043, and a net loss of $48,043.

IV.   Notice of Deficiency, Petition, and Trial

      By notice of deficiency dated June 21, 2010 (notice),

respondent determined that petitioners had failed to report the

following income from OFHI:   $62,763 of ordinary business income,
                                 -6-

$7,196 of interest income, and $1,231 of net long-term capital

gain.   Respondent also determined that petitioners had failed to

report $5,592 of nonemployee compensation from Tanner, $26 of

interest income from OI, and $779 of retirement income from

Aurora.   Finally, respondent determined computational adjustments

to the 2007 return.    Petitioners petitioned the Court in response

to the notice, and a trial was held in which Mr. Olmstead was the

only witness to testify.

                             Discussion

I.   Burden of Proof

     As a general rule, the Commissioner’s determinations in a

notice of deficiency are presumed correct, and taxpayers must

prove error in those determinations to prevail.    Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1993).     Section 7491(a)

provides an exception to the general presumption of correctness

in that the burden of proof as to factual issues may shift to the

Commissioner in limited circumstances.    For the burden of proof

to shift to the Commissioner, section 7491 requires taxpayers to

prove that they have maintained adequate records, satisfied

certain substantiation requirements, and cooperated fully with

the Commissioner.   See sec. 7491(a)(2)(A) and (B).    Petitioners

have not alleged that section 7491(a) applies, nor have they

established their compliance with the recordkeeping requirements
                                -7-

of section 7491(a)(2)(A) and (B).      Accordingly, petitioners bear

the burden of proof.

II.   Distributable Income From OFHI

      On the basis of the Schedule K-1, respondent determined that

petitioners failed to report Mr. Olmstead’s pro rata share of

income from OFHI.   Petitioners counter that Mr. Keeter

fraudulently issued the Schedule K-1 and that any distributions

from OFHI were loan repayments to Mr. Olmstead to reimburse him

for certain business expenses which he paid for OFHI.      We agree

with respondent.4

      An S corporation such as OFHI generally does not incur an

entity-level tax.   See sec. 1363(a).    Rather, items of income,

loss, deduction, and credit attributable to the corporation flow

through to its shareholders and must be reported by each

shareholder pro rata on his or her individual income tax return.

Sec. 1366(a); see also sec. 1.1366-4(a), Income Tax Regs.     The

2007 corporate return reported $114,743 of ordinary business

income, $13,156 of interest income, and $2,250 of net long-term

capital gain.   We find the Schedule K-1 to accurately reflect Mr.

Olmstead’s 54.7-percent share of income from OFHI, including

$62,763 of ordinary business income, $7,196 of interest income,

and $1,231 of net long-term capital gain.



      4
      Notwithstanding secs. 6037(c) and 6213(b)(1), we have
jurisdiction to redetermine the entire deficiency, including the
adjustments arising from petitioners’ inconsistent reporting.
See Winter v. Commissioner, 135 T.C. 238, 242 (2010).
                                -8-

     Petitioners’ arguments that they are not required to report

Mr. Olmstead’s distributable share of income from OFHI are not

persuasive.   First, petitioners contend that Mr. Olmstead’s

distributable share of income from OFHI should be reduced because

he lent $131,000 to OFHI.   We disagree.   Whether an advance made

by a shareholder to a corporation qualifies as a bona fide loan

that creates a debtor-creditor relationship is a question of fact

to be decided in the light of the surrounding facts and

circumstances.   See J.S. Biritz Constr. Co. v. Commissioner, 387

F.2d 451, 453 (8th Cir. 1967), revg. T.C. Memo. 1966-227.

Essential to the creation of a debtor-creditor relationship are a

good-faith intent on the part of the debtor to make repayment and

on the part of the creditor to enforce repayment.   See Fisher v.

Commissioner, 54 T.C. 905, 909-910 (1970).    Other factors we have

considered as indicative of a debtor-creditor relationship

include:   (1) A written loan agreement; (2) provisions for

security, interest, and a fixed repayment schedule; and (3)

records of the parties that reflect the transaction as a loan.

See Calloway v. Commissioner, 135 T.C. 26, 37 (2010); McFadden v.

Commissioner, T.C. Memo. 2002-166; see also United States v.

Basin Elec. Power Coop., 248 F.3d 781, 804 (8th Cir. 2001).

     Petitioners did not produce a note evidencing OHFI’s

indebtedness to Mr. Olmstead, a repayment schedule, proof of

adequately stated interest, proof of repayment, or any other
                                 -9-

evidence that establishes that Mr. Olsmtead and OFHI were in a

debtor-creditor relationship.5   We are especially unpersuaded

that Mr. Olmstead lent $131,000 to OFHI because of his

inconsistent statements at trial.      For example, Mr. Olmstead

stated in his opening statement that he lent more than $115,000

to OFHI, but during cross-examination he claimed that the loan

was about $100,000.   Yet on brief, petitioners assert that Mr.

Olmstead lent OFHI more than $131,000.      We decline to accept such

self-serving and inconsistent statements without corroborating

evidence.   See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

We thus conclude that petitioners have failed to carry their

burden of proving that Mr. Olmstead lent $131,000 to OFHI.

     Petitioners next assert that Mr. Keeter inaccurately and

fraudulently prepared the 2007 corporate return.      Specifically,

petitioners contend that Mr. Keeter, Mr. Raymond, OFHI’s

attorney, and the minority shareholders conspired to defraud Mr.

Olmstead of his interest in OFHI.      Petitioners further claim that

Mr. Keeter failed to deduct business expenses on the 2007

corporate return which Mr. Olmstead had paid on behalf of OFHI

and that such expenses, if deducted, would reduce Mr. Olmstead’s

distributable share of income from OFHI.


     5
      Mr. Olmstead offered into evidence a summary of the loans
purportedly made to OFHI. We declined to receive that summary
into evidence because Mr. Olmstead did not produce the underlying
documents on which that summary was based. See Fed. R. Evid.
1006.
                                   -10-

       Petitioners seek to carry their burden primarily by relying

on Mr. Olmstead’s testimony and documents which he prepared

describing the alleged conspiracy.        They did not corroborate

their allegations of fraud by calling witnesses such as Mr.

Keeter, Mr. Raymond, OFHI’s attorney, or any of the minority

shareholders, though it was their right to do so.6       Nor did they

offer any documents filed with or received from the State court.

We give little weight to self-serving testimony of interested

parties, especially where there is no corroborating evidence to

support these claims.       See Day v. Commissioner, 975 F.2d 534, 538

(8th Cir. 1992), affg. in part and revg. in part T.C. Memo. 1991-

140.       Accordingly, we find that petitioners failed to carry their

burden of proving that the Schedule K-1 was fraudulently issued.

       We also decline to accept petitioners’ assertion that OFHI’s

accountant failed to report business deductions of more than

$131,000 on the 2007 corporate return.        Petitioners did not

adduce any evidence establishing that the payments Mr. Olmstead

allegedly made for OFHI were ordinary and necessary business

expenses of OFHI.       See sec. 162.   They did not establish that


       6
      Petitioners submitted into evidence an email exchange
between Mr. Olmstead’s attorney and Mr. Raymond regarding a loan
secured by OFHI’s property. We are not persuaded by petitioners’
contention that this email exchange evinced the intent of Mr.
Keeter or Mr. Raymond to defraud Mr. Olmstead of his interest in
OFHI. We find that the email exchange, if anything, reflects
that Mr. Raymond was forthcoming with unfavorable information
concerning the minority shareholders and was willing to cooperate
with Mr. Olmstead to ascertain the financial situation of OFHI.
                               -11-

such expenses were not already included in OFHI’s reporting of

$892,979 of deductions on the 2007 corporate return.   Nor do we

accept petitioners’ contention that they should be permitted to

report OFHI’s business expense deductions on the 2007 return.      It

is well established that a corporation and its shareholders are

separate entities for Federal tax purposes.   See Moline Props.,

Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943); Crook v.

Commissioner, 80 T.C. 27, 33 (1983) (including S corporations

under the Moline doctrine), affd. without published opinion 747

F.2d 1463 (5th Cir. 1984).   It is equally well settled that a

shareholder who pays a corporation’s expenses is not entitled to

deduct the expenses on his or her personal income tax return

because such expenditures are regarded as loans or capital

contributions.   See Deputy v. du Pont, 308 U.S. 488, 494-495

(1940); Betson v. Commissioner, 802 F.2d 365, 368 (9th Cir.

1986), affg. in part and revg. in part T.C. Memo. 1984-264.      We

therefore conclude that petitioners may not deduct OFHI’s alleged

business expenses on the 2007 return.7

     As petitioners have failed to establish any nontaxable

source of Mr. Olmstead’s distributable share of OFHI income, we



     7
      Respondent did not assert and we do not decide whether
petitioners are precluded from deducting losses of $13,002 and
$48,043 from their activities with Olmstead Investments, Inc.,
and OFHI, respectively. See, e.g., Betson v. Commissioner, 802
F.2d 365, 368 (9th Cir. 1986), affg in part and revg. in part
T.C. Memo. 1984-264; Leuthold v. Commissioner, T.C. Memo. 1987-
610.
                                -12-

must sustain respondent’s determination.    We thus hold that

petitioners failed to report ordinary business income of $62,763,

interest income of $7,196, and net long-term capital gain of

$1,231.   We also hold that petitioners are entitled to a net

section 1231 loss of $329, a section 179 deduction of $497, and

other deductions of $107, as reported on the Schedule K-1.

III. Nonemployee Compensation

     Respondent also determined that petitioners failed to report

on the 2007 return $5,592 of nonemployee compensation that Tanner

paid to Ms. Olmstead.   Petitioners concede on brief that Ms.

Olmstead received $5,592 of nonemployee compensation from Tanner

but contend that they reported the amount as wages on the 2007

return.   We agree with petitioners.   The Forms W-2 attached to

the 2007 return show that petitioners received wage income of

$148,977, but petitioners reported that they received wages of

$154,570.   We observe that petitioners overreported their wages

by $5,593, which correlates with the amount of nonemployee

compensation Tanner paid Ms. Olmstead.8    We credit petitioners’

claim that they reported the nonemployee compensation as wages on

the 2007 return and hold that they need not report such income as

taxable twice.




     8
      We attribute the $1 difference to rounding.
                                 -13-

IV.   Self-Employment Tax

      Respondent determined that the $5,592 of nonemployee

compensation Ms. Olmstead received from Tanner is subject to

self-employment tax.   We agree.    Section 1401 imposes a tax on an

individual’s self-employment income.     See sec. 1401(a) and (b).

Self-employment income includes any gross income derived by an

individual from carrying on a trade or business, less the

allowable deductions attributable to such trade or business.      See

sec. 1402(a) and (b); see also sec. 1.1402(a)-1, Income Tax Regs.

Petitioners do not dispute that the sales activities Ms. Olmstead

carried on for Tanner were part of her trade or business, and

they did not claim or prove any deductions attributable to Ms.

Olmstead’s sales activities.     We therefore conclude that the

$5,592 of nonemployee income Tanner paid Ms. Olmstead was self-

employment income.   Accordingly, we hold that petitioners are

liable for self-employment tax of $836 on $5,592 of nonemployee

compensation, see sec. 1401(a) and (b), and that they are

entitled to a deduction of $418 which is equal to one-half of the

self-employment tax paid, see sec. 164(f).

V.    Accuracy-Related Penalty

      Respondent determined that petitioners are liable for a 20-

percent accuracy-related penalty under section 6662(a) and (b)(1)

and (2) for a substantial understatement of income tax, or

alternatively, because of negligence or disregard of rules or
                                 -14-

regulations.   Under section 7491(c), respondent bears the burden

of producing evidence that it is appropriate to impose an

accuracy-related penalty.    See Higbee v. Commissioner, 116 T.C.

438, 446 (2001).   An understatement of income tax is considered

substantial if the understatement exceeds the greater of 10

percent of the tax required to be shown on the return, or $5,000.

See sec. 6662(d)(1)(A).     As petitioners’ understatement of income

tax is more than 10 percent of the tax required and $5,000, we

find that respondent has satisfied his burden of production.

     Since respondent has met his burden of production, the

burden of persuasion shifts to petitioners to prove that an

accuracy-related penalty does not apply because they:      (1) Had

reasonable cause; and (2) acted in good faith.      See sec.

6664(c)(1); Higbee v. Commissioner, supra at 446.      Whether a

taxpayer acted with reasonable cause and in good faith with

regard to an underpayment related to an item reflected on the

return of a passthrough entity is determined “on the basis of all

pertinent facts and circumstances, including the taxpayer’s own

actions, as well as the actions of the pass-through entity”.

Sec. 1.6664-4(e), Income Tax Regs.      In general, the most

important factor to be considered when determining the existence

of reasonable cause and good faith is the extent to which the

taxpayer endeavored to assess his or her proper tax liability.

Sec. 1.6664-4(b)(1), Income Tax Regs.
                                -15-

       Petitioners have not specifically addressed in their

petition, at trial, or on brief whether they acted with

reasonable cause.    We understand from Mr. Olmstead’s testimony

that petitioners believe they acted with reasonable cause because

Mr. Olmstead allegedly did not receive the Schedule K-1.      Mere

nonreceipt of a Schedule K-1 does not necessarily constitute

reasonable cause sufficient to excuse a taxpayer from reporting

his or her distributable income from an S corporation where a

taxpayer does not pursue other means to assess his or her proper

tax liability.    See Van Ryswyk v. Commissioner, T.C. Memo. 2009-

189; Deas v. Commissioner, T.C. Memo. 2000-204.

       Petitioners do not assert that they inquired from OFHI as to

whether Mr. Olmstead would be issued a Schedule K-1 or that they

requested an extension of time to file the 2007 return until they

received the Schedule K-1.    Instead, Mr. Olmstead assumed on the

basis of his mistaken belief that there was no distributable

income from OFHI in 2007 that he would not receive a Schedule

K-1.    Although Mr. Olmstead testified that petitioners requested

access to OFHI’s financial records, we are not persuaded that

such requests, assuming they occurred, were sufficient to

constitute reasonable cause.    Petitioners offered no

corroborating evidence such as letters requesting access to

OFHI’s records.    We infer from this lack of evidence that there

was none or that it would be unfavorable to petitioners’ claim.
                                 -16-

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).         We also

observe that Mr. Olmstead, as OFHI’s majority shareholder, could

have accessed OFHI’s financial records but did not.         See Ark.

Code. Ann. sec. 4-26-715(b) (2001) (giving shareholders the right

to examine the books and records of a corporation they own upon

written demand).

     On balance, we are unable to conclude that petitioners

attempted to assess their proper tax liability.       Accordingly, we

hold that petitioners are liable for the accuracy-related penalty

under section 6662(a) on that portion of the deficiency

attributable to:   (1) Mr. Olmstead’s pro rata share of income

from OFHI; (2) self-employment tax on the nonemployee

compensation from Tanner; (3) $26 of interest income from OI; and

(4) $779 of retirement income from Aurora.

     We have considered all arguments made by the parties, and to

the extent not discussed above, we conclude that those arguments

are irrelevant, moot, or without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        under Rule 155.
