                                T.C. Memo. 2018-78



                         UNITED STATES TAX COURT



           JAMES N. GAUNT AND LILLIAN GAUNT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17513-15L.                          Filed June 6, 2018.



      Wayne J. King, for petitioners.

      Scott A. Hovey and Jacob Russin, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: The posture of this collection due process (CDP) case is

somewhat unusual. Petitioners have conceded that the Internal Revenue Service

(IRS or respondent) did not abuse its discretion in sustaining a notice of intent to

levy relating to their 2008, 2009, and 2010 tax years. Instead, they dispute only

the liabilities underlying the levy notice, which resulted from a notice of defici-
                                         -2-

[*2] ency issued to them in 2014. Respondent has conceded that petitioners never

received that notice of deficiency and that they properly challenged their

underlying liabilities at their CDP hearing and in their petition. See sec.

6330(c)(2)(B); Rule 331(b)(4); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin.

Regs.1 We therefore consider petitioners’ underlying liabilities on the merits.

      After concessions (described below) the issues for decision are whether pe-

titioners may deduct: (1) certain expenses reported on Schedule C, Profit or Loss

From Business, of their 2008 return; (2) a theft loss reported on their return for

2010; and (3) net operating losses (NOLs) reported on their returns for 2009 and

2010. We will generally sustain respondent’s determinations.

                               FINDINGS OF FACT

      The parties filed two stipulations of fact with attached exhibits that are in-

corporated by this reference. Petitioners resided in California when they timely

petitioned this Court.

      During the years in issue James Gaunt (petitioner) was the sole proprietor of

All American Pool and Spa (AAPS). AAPS built in-ground pools (and to a lesser

extent, spas). Most of its clients were homeowners in Los Angeles. Petitioner’s

      1
       All statutory references are to the Internal Revenue Code (Code) in effect
during the years in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] role at AAPS was that of a general contractor: He would negotiate a fee for a

project, then hire and supervise subcontractors to perform whatever tasks were re-

quired. These subcontractors included excavators, steelworkers, electricians, ce-

ment masons, tilers, and landscapers. In most instances AAPS paid the subcon-

tractors by check.

      Petitioner’s son, David, owned a plumbing company called David Gaunt

Pool Services (DGPS). DGPS designed plumbing systems for pools and often

worked on the same projects as AAPS. DGPS was not a subcontractor to AAPS

and negotiated its fee directly with customers. But this arrangement was compli-

cated by the fact that David lacked a general contractor’s license. Petitioner, who

had the required license, sometimes agreed to accept payments on his son’s behalf.

He deposited each payment into an AAPS bank account and then remitted it, either

in cash or by check, to David. He remitted at least $20,745 to David or DGPS dur-

ing 2008.

      Demand for AAPS’ services declined sharply in 2009 as the financial crisis

took its toll. In an effort to supplement his income, petitioner began a venture in

which he sold sandwiches from a trailer. Petitioner drove the trailer to several

events, including a renaissance fair and the San Diego Street Fair, each of which

required vendors to pay an admission fee of at least $1,000. Petitioner never sold
                                          -4-

[*4] enough sandwiches to recoup the admission fees--not to mention the cost of

fuel, licenses, and sandwich supplies--and abandoned this activity after eight

months.

      During the years in issue petitioners owned real property in Fontana, Cali-

fornia. The Fontana property consisted of a house and a 2,700-square-foot de-

tached garage. Petitioners used the garage to store infrequently used possessions,

including obsolete pool-building supplies, personal effects, and two antique cars.

      Petitioners did not regularly visit the Fontana property but were, on account

of the neighborhood in which it was located, reluctant to leave it unattended.

They accordingly turned to Tony Heathcoat,2 one of petitioner’s business associ-

ates, who agreed to reside at and oversee the Fontana house in lieu of paying rent.3

In early 2010 Mr. Heathcoat moved to Nevada for medical treatment. Petitioners

were not aware of his departure, and a group of itinerants moved into the Fontana

house. It promptly fell into disrepair.



      2
        The surname of this individual is unclear from the record. Petitioner testi-
fied that he regularly purchased PVC pipe from a business associate named Tony
Heathcliff. However, various checks in the record were issued to Tony Heathcoat
for PVC pipe. A police report and insurance claim refer to Tony Heathcoat as the
caretaker of the Fontana property.
      3
      Respondent has not alleged that Mr. Heathcoat’s services constituted rental
income to petitioners.
                                         -5-

[*5] In March 2010 David drove past the Fontana property and noticed that the

garage door was ajar. He entered the garage and discovered that many of peti-

tioners’ items, including the antique cars, were missing. David reported the inci-

dent to petitioners and to the Fontana Police Department (FPD). Petitioner subse-

quently submitted to the FPD a 37-page list of items that he believed had been

stolen. In total he reported as missing approximately 1,000 items, including vend-

ing machines, stoves, radio-controlled toy cars, and tools that he had inherited

from his father. The FPD conducted several interviews and prepared a detailed re-

port of its findings. As of the time of trial, however, it had not determined who

was responsible for the theft and had recovered only a few of the missing items.

      Petitioners maintained homeowners’ insurance on the Fontana property.

They purchased their policy--which carried a liability limit of $310,226--from the

Allstate Indemnity Co. (Allstate). After learning of the theft, petitioner filed a

claim for reimbursement with Allstate and estimated that the stolen property had a

fair market value of $749,477.

      Petitioners pursued their insurance claim throughout 2010 and for several

years thereafter. Allstate ultimately denied their claim in 2016, finding that peti-

tioners had subjected their property to an “increase in hazard” by entrusting it to a

caretaker; that petitioners should have converted their policy from homeowners’
                                        -6-

[*6] insurance to landlord’s insurance; and that, in any event, landlord’s insurance

would not have covered petitioners’ personal items stored in the garage.

      Petitioners jointly filed Forms 1040, U.S. Individual Income Tax Return, for

the years in issue. Petitioners’ 2008 and 2009 returns were untimely; their 2010

return was timely filed. Each return attached a Schedule C relating to AAPS.4

      The IRS selected petitioners’ 2008, 2009, and 2010 tax returns for exami-

nation and issued petitioners a notice of deficiency. The notice of deficiency:

(1) determined that petitioners had understated AAPS’ gross receipts for 2008,

2009, and 2010; (2) disallowed various expense deductions relating to AAPS;

(3) disallowed an NOL and theft loss deduction claimed on their 2010 return;

(4) partially disallowed a home mortgage interest deduction claimed for 2008;

(5) increased petitioners’ home mortgage interest deduction for 2009; (6) deter-

mined that petitioners had failed to report retirement distributions for 2008 and

2009; (7) determined additional tax for early retirement withdrawals in 2008 and

2009; (8) determined that petitioners had failed to report interest income for 2008;

(9) determined a section 6662 accuracy-related penalty for each year; and (10) de-

termined section 6651(a)(1) late-filing additions to tax for 2008 and 2009.


      4
        It is not clear whether petitioners reported any income or expenses attribut-
able to the food trailer on their 2009 return.
                                         -7-

[*7] Petitioners did not receive the notice of deficiency and did not file a petition

with this Court. Respondent thereupon assessed the deficiencies, penalties, and

additions to tax shown on the notice of deficiency and issued petitioners a levy no-

tice. They timely requested a CDP hearing; at the hearing they challenged only

the liabilities underlying the levy notice. The settlement officer assigned to their

case sustained the proposed levy and issued petitioners a notice of determination.

They timely petitioned the Court.

      Before trial petitioners submitted to respondent what they called a “pro for-

ma” return for each year in issue. (These returns, which the IRS did not process,

were essentially amended returns, and we will refer to them as such.) On Sched-

ules C relating to AAPS, the amended returns reported the following:

            Item                         2008         2009        2010
            Gross receipts             $330,062     $47,934    $137,356
            Returns and allowances        -0-          -0-         -0-
            Cost of goods sold            -0-        55,811        -0-
            Total expenses              296,480     153,337      104,188
             Profit (loss)                33,582 (161,214)        33,168
                                         -8-

[*8] The AAPS expenses reported on the amended Schedule C for 2008 were:

                            Expense            Amount

                    Advertising                $11,417
                    Car and truck               10,369
                    Contract labor             127,297
                    Depreciation/sec. 179       10,270
                    Insurance                    9,420
                    Interest                     4,205
                    Legal/professional
                     services                      500
                    Office expense               4,023
                    Rent/lease                   1,725
                    Supplies                    83,811
                    Travel                       4,542
                    Utilities                    3,055
                    Other expenses              25,846
                     Total                     296,480

Petitioners’ amended return for 2009 claimed an NOL deduction of $113,393.

Their amended return for 2010 claimed an NOL deduction of $18,128 and re-

ported a $727,404 theft loss.

      In a stipulation of settled issues, the parties agreed that petitioners were lia-

ble for late-filing additions to tax for 2008 and 2009; that petitioners were not lia-

ble for any accuracy-related penalties; and that petitioners’ amended returns--

which conceded many of the adjustments listed in the notice of deficiency--were

generally accurate. They reserved the following issues for trial: (1) whether peti-

tioners had understated AAPS’ gross receipts for 2009; (2) whether the sum of
                                         -9-

[*9] AAPS’ cost of goods sold (COGS) and expenses for 2008, 2009, and 2010

exceeded $233,127, $143,638, and $70,610, respectively;5 (3) whether petitioners

were entitled to a theft loss deduction for 2010; and (4) whether petitioners were

entitled to an NOL deduction for 2009 or 2010.

      At the close of trial the Court ordered one round of seriatim briefs. In their

answering brief petitioners conceded that for 2009 they had understated AAPS’

gross receipts in the amount alleged by respondent. Petitioners further conceded

that the sum of their Schedule C expenses and COGS for 2009 and 2010 did not

exceed $143,638 and $70,610, respectively, viz., the “floor” amounts allowed in

the stipulation of settled issues. Thus, the only Schedule C expenses remaining in

dispute are those reported for 2008.

                                       OPINION

I.    Standard of Review and Burden of Proof

      Section 6330(d)(1) does not prescribe the standard of review that this Court

should apply in reviewing an IRS administrative determination in a CDP case.

But our case law tells us what standard to adopt. Where the validity of the under-

      5
        The parties stipulated that “petitioners * * * [were] entitled to total Sched-
ule C cost of goods sold and expenses” in the stated amounts but that the total
amount of those items “remain[ed] in dispute.” In effect, the stipulation estab-
lished a floor for these items but reserved for trial whether petitioners could sub-
stantiate larger amounts.
                                           - 10 -

[*10] lying liability is not at issue, the Court reviews the IRS’ determinations for

abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000).

Where (as here) the underlying liability is properly at issue, we review the IRS’

determinations de novo. Ibid.

      A taxpayer may dispute his underlying liability in a CDP case only if he did

not receive a notice of deficiency or otherwise have an opportunity to contest that

liability. Sec. 6330(c)(2)(B). The taxpayer must raise his underlying liability dur-

ing his CDP hearing by challenging and presenting evidence relating to the under-

lying liability. See sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs. The

taxpayer must also contest his underlying liability in his petition. Rule 331(b)(4).

The parties agree that petitioners did not receive the notice of deficiency for the

years in issue and that they properly challenged their underlying liabilities during

their CDP hearing and in their petition. We will review those liabilities de novo.

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, and taxpayers bear the burden of proving them erroneous. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioners do not contend--and

could not plausibly contend--that the burden of proof shifts to respondent under

section 7491(a) as to any issue of fact.
                                        - 11 -

[*11] II.    Schedule C Expenses

      Section 162(a) allows a taxpayer to deduct “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or busi-

ness.” A necessary expense is one that is “appropriate and helpful” to the taxpay-

er’s business; an ordinary expense is one that is common or frequent in the type of

business in which the taxpayer is engaged. Deputy v. du Pont, 308 U.S. 488, 495

(1940); Welch v. Helvering, 290 U.S. at 113. Personal, living, and family expens-

es are generally not deductible. Sec. 262.

      Deductions are a matter of legislative grace. Taxpayers must prove their

entitlement to deductions allowed by the Code and substantiate the amounts of any

deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); sec. 1.6001-1(a), Income Tax Regs. They also must produce records

sufficient to enable the IRS to determine their correct liabilities. Sec. 6001; sec.

1.6001-1(a), Income Tax Regs. The failure to keep and present such records

weighs heavily against a taxpayer’s attempted proof. Rogers v. Commissioner,

T.C. Memo. 2014-141, 108 T.C.M. (CCH) 39, 43.

      If a taxpayer with inadequate business records proves that he paid certain

expenses but cannot substantiate the exact amount, the Court may in appropriate

cases estimate the amount allowable. Cohan v. Commissioner, 39 F.2d 540, 543-
                                       - 12 -

[*12] 544 (2d Cir. 1930); Key Carpets, Inc. v. Commissioner, T.C. Memo. 2016-

30, 111 T.C.M. (CCH) 1126, 1128. But the Court is not required to guess at a

number; rather, “we must have some basis upon which an estimate may be made.”

Polyak v. Commissioner, 94 T.C. 337, 346 (1990); Vanicek v. Commissioner, 85

T.C. 731, 743 (1985). In making an estimate under the Cohan rule, the Court

“bear[s] heavily * * * upon the taxpayer whose inexactitude is of his own mak-

ing.” Cohan, 39 F.2d at 544.

      Section 274(d) imposes strict substantiation requirements for deductions

claimed for (among other things) “listed property.” Listed property includes “any

passenger automobile.” Sec. 280F(d)(4)(A)(i). No such deduction is allowed un-

less the taxpayer substantiates, by adequate records or by sufficient evidence cor-

roborating his statements, the amount, time, place, and business purpose of each

expenditure. Sec. 274(d); sec. 1.274-5T(a), (b), and (c), Temporary Income Tax

Regs., 50 Fed. Reg. 46014-46017 (Nov. 6, 1985). A court may not apply the

Cohan rule to approximate expenses covered by section 274(d). Sanford v. Com-

missioner, 50 T.C. 823, 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.

1969).
                                       - 13 -

[*13] A.     Advertising Expenses

      Petitioners reported on their 2008 amended Schedule C advertising expens-

es of $11,417. At trial they explained that these expenses were for several phone

numbers used by AAPS, for AAPS’ website, and for purchasing online advertise-

ments. They identified on AAPS’ bank account statements debits relating to these

items. Respondent in his post-trial brief conceded that petitioners had substantiat-

ed $5,798 of advertising expenses. After carefully parsing the bank account state-

ments, we conclude that petitioners have not substantiated advertising expenses

beyond those conceded by respondent. Petitioners are therefore entitled to an ad-

vertising expense deduction of $5,798 for 2008.

      B.     Car and Truck Expenses

      Petitioners reported on their 2008 amended Schedule C car and truck ex-

penses of $10,270. Petitioners did not discuss these expenses at trial or on brief.

The only clue as to their origin is a statement included with petitioners’ amended

return, which cites expenses for fuel and repairs for two vehicles used by AAPS.

Petitioners produced no mileage logs, receipts, or other substantiation for these ex-

penses and did not demonstrate that the vehicles listed on their return were ex-

cepted from the heightened substantiation requirements of section 274. See secs.
                                        - 14 -

[*14] 274(d)(4), 280F(d)(5)(B). Accordingly, they are not entitled to any

deduction for car and truck expenses.

      C.     Contract Labor Expenses

      Petitioners reported on their 2008 amended Schedule C contract labor ex-

penses of $127,297. Petitioners submitted evidence to substantiate payments of

$80,845 by check.6 These checks included a $4,400 check issued on December

19, 2007, and $20,745 of checks issued to David or DGPS. Respondent contends

that the checks referenced in the previous sentence do not give rise to a deduction,

and we agree. Because the $4,400 check was issued in 2007, it cannot generate a

deduction for 2008. See sec. 162(a); Cain-White & Co. v. Commissioner, T.C.

Memo. 1978-438, 37 T.C.M. (CCH) 1829, 1830. And because DGPS was not a

subcontractor to AAPS, checks issued to it (or to David on its behalf) were not

“ordinary and necessary” expenses of AAPS’ business and hence were not deduct-

ible. We therefore find that petitioners are entitled to a deduction for contract la-

bor of only $55,700 ($80,845 ! [$4,400 + $20,745]).




      6
        Petitioners assert that they paid another $46,452 of contract labor expenses
by cash and credit card. But they produced no credit card statements, invoices, or
other documents corroborating this assertion. That assertion in any event is con-
tradicted by petitioner’s testimony at trial, when he estimated that he paid 99% of
AAPS’ contract labor expenses by check during the years in issue.
                                        - 15 -

[*15] D.        Depreciation/Section 179 Expenses

       Petitioners reported on their 2008 amended Schedule C depreciation and

section 179 expenses of $10,270. This deduction relates to two vehicles used by

AAPS. Respondent in his post-trial brief conceded these expenses in full. We

accordingly conclude that petitioners are entitled to a deduction of $10,270 for de-

preciation.

       E.       Insurance Expenses

       Petitioners reported on their 2008 amended Schedule C insurance expenses

of $9,420. Petitioners did not explain these expenses at trial or present evidence to

substantiate them. We accordingly conclude that they are not entitled to any de-

duction for insurance expenses.

       F.       Interest Expenses

       Petitioners reported on their 2008 amended Schedule C interest expenses of

$4,205. Petitioners conceded these expenses at trial, explaining that their tax pre-

parer had incorrectly reported their home mortgage interest as a business expense.

We accordingly conclude that they are not entitled to any Schedule C deduction

for interest.
                                       - 16 -

[*16] G.     Legal and Professional Services Expenses

      Petitioners reported on their 2008 amended Schedule C legal and profes-

sional service expenses of $500. Respondent in his post-trial brief conceded this

deduction in full. We accordingly conclude that petitioners are entitled to a de-

duction of $500 for legal and professional services.

      H.     Office Expenses

      Petitioners reported on their 2008 amended Schedule C office expenses of

$4,023. Respondent in his post-trial brief conceded this deduction in full. We ac-

cordingly conclude that petitioners are entitled to a deduction of $4,023 for office

expenses.

      I.     Rent or Lease Expenses

      Petitioners reported on their 2008 amended Schedule C expenses of $1,725

for renting or leasing business property. Petitioners did not explain these expenses

at trial or substantiate them. We accordingly conclude that they are not entitled to

any deduction for rent or leasing expenses.

      J.     Supplies Expenses

      Petitioners reported on their 2008 amended Schedule C expenses of $83,811

for supplies. They produced at trial no documentation substantiating these ex-

penses, nor did they explain what supplies AAPS required or where those supplies
                                        - 17 -

[*17] were purchased. Respondent nevertheless conceded in his post-trial brief

that petitioners were entitled to a deduction of $48,228 for supplies. We conclude

that they are entitled to a deduction in the amount respondent conceded.

      K.     Travel Expenses

      Petitioners reported on their 2008 amended Schedule C travel expenses of

$4,542. Petitioners did not explain these expenses at trial or present any documen-

tation substantiating them. We accordingly conclude that they are not entitled to

any deduction for travel expenses for 2008.

      L.     Utilities Expense

      Petitioners reported on their 2008 amended Schedule C utilities expense of

$3,055. Petitioners did not explain this expense at trial or present any documenta-

tion substantiating it. We accordingly conclude that they are not entitled to a de-

duction for utilities expense.

      M.     Other Expenses

      Petitioners reported on their 2008 amended Schedule C “other expenses” of

$25,846. These expenses were allegedly incurred for: (1) permits; (2) bank fees;

(3) telephone; (4) tools; and (5) vehicular equipment. Petitioners made no attempt

to substantiate these expenses at trial or on brief. (In any event, the telephone ex-

penses would appear to duplicate the advertising expenses reported elsewhere on
                                         - 18 -

[*18] petitioners’ return. See supra p. 13.) Respondent in his post-trial brief

conceded $3,580 of the claimed expenses--namely, $2,184 for permits, $1,170 for

tools, and $226 for bank fees. We conclude that petitioners are entitled to a

deduction for “other expenses” in the amounts respondent conceded.

      N.     Conclusion

      The expenses substantiated by petitioners or conceded by respondent total

$128,099. This amount is less than the $233,127 “floor” to which respondent, in

the stipulation of settled issues, agreed that petitioners for 2008 were entitled. We

accordingly expect that the Rule 155 computations will reflect Schedule C adjust-

ments to income and deductions, for COGS and business expenses, respectively,

in the total amount of $233,127 for 2008.7




      7
        In their post-trial brief petitioners argue that they substantiated $10,403
more in advertising expenses and $25,145 more in subcontractor expenses than
respondent conceded. According to petitioners, they should thus be entitled to
Schedule C deductions of $268,675, viz., the $233,127 “floor” allowed in the sti-
pulation of settled issues + $10,403 + $25,145. Petitioners are improperly trying
to have it both ways. The stipulation did not state what expenses petitioners had
substantiated. Rather, it left that issue for trial, providing that petitioners would be
afforded at least $233,127 of expenses for 2008, regardless of their proof at trial.
Although petitioners at trial substantiated more expenses in two expense categor-
ies than conceded by respondent, they struck out in most other expense categories.
Overall, the expenses they substantiated at trial were $105,028 less than respon-
dent has allowed. They should be grateful for his generosity.
                                         - 19 -

[*19] III.   Theft Loss Deduction

      Section 165(a) permits a deduction for losses sustained during the taxable

year and not compensated for by insurance or otherwise. In the case of an indivi-

dual, a loss is deductible under section 165(a) only if the loss: (1) is “incurred in a

trade or business”; (2) is incurred in a “transaction entered into for profit”; or

(3) “arise[s] from fire, storm, shipwreck, or other casualty, or from theft.” Sec.

165(c). “Theft” is broadly defined to include larceny, embezzlement, and robbery.

Sec. 1.165-8(d), Income Tax Regs.; see Bellis v. Commissioner, 61 T.C. 354, 357

(1973), aff’d, 540 F.2d 448 (9th Cir. 1976).

      In order to deduct a theft loss, the taxpayer must prove “the fair market val-

ue of the stolen property before the theft and the adjusted basis of the property.”

Sheridan v. Commissioner, T.C. Memo. 2015-25, 109 T.C.M. (CCH) 1130, 1131;

sec. 1.165-8(c), Income Tax Regs. (providing that the amount of a theft loss de-

duction “shall be determined consistently with the manner prescribed in § 1.165-7

for determining the amount of casualty loss”). To prove fair market value, the tax-

payer generally must supply a “competent appraisal” of the stolen property. Sec.

1.165-7(a)(2)(i), Income Tax Regs. The appraisal must “recognize the effects of

any general market decline affecting” the property, so that any deduction will be

“limited to the actual loss resulting from damage to the property.” Ibid. “Adjusted
                                         - 20 -

[*20] basis” is computed as if the taxpayer had sold or otherwise disposed of the

stolen property. See id. para. (b)(1)(ii).

      A theft loss is usually treated as sustained in the tax year “in which the tax-

payer discovers such loss.” Sec. 165(e); sec. 1.165-1(d)(3), Income Tax Regs.

But if there is a pending claim for reimbursement with respect to the loss, no por-

tion of the loss is treated as sustained “until it can be ascertained with reasonable

certainty whether or not such reimbursement will be received.” Sec. 1.165-

1(d)(2)(i), (3), Income Tax Regs. “Whether a reasonable prospect of recovery ex-

ists with respect to a claim for reimbursement of a loss is a question of fact.” Id.

para. (d)(2)(i). If a taxpayer contends that the year of loss “is fixed by his aban-

donment of the claim for reimbursement, he must be able to produce objective evi-

dence of his having abandoned the claim, such as the execution of a release.” Ibid.

      The parties agree that petitioners suffered a theft at the Fontana property

during 2010. They disagree, however, as to whether the theft entitles petitioners

to a deduction under section 165. For at least three reasons, we conclude that peti-

tioners are not so entitled.

      First, petitioners did not offer a “competent appraisal” of the stolen proper-

ty, see sec. 1.165-7(a)(2)(i), Income Tax Regs., and they otherwise failed to estab-

lish its fair market value. Petitioner testified that he determined the fair market
                                        - 21 -

[*21] values of the missing items by finding similar items on auction websites.

But petitioners’ failure to enter the auction listings into evidence prevents us from

evaluating how closely the auction prices match the values petitioners proffered.

See Manning v. Commissioner, T.C. Memo. 1980-159, 40 T.C.M. (CCH) 298,

299-300. Similarly, petitioners did not demonstrate that they were sufficiently

familiar with the fair market values of the missing items, such as the antique cars,

for us to rely on their estimates. See Tatham v. Commissioner, T.C. Memo. 1979-

205, 38 T.C.M. (CCH) 848, 850-851. Many of the values petitioners proffer--e.g.,

valuing three copper kitchen pots at $3,700--seem implausible on their face. See

Sykes v. Commissioner, T.C. Memo. 2010-84, 99 T.C.M. (CCH) 1351, 1353,

aff’d, 479 F. App’x 90 (9th Cir. 2012); Corby v. Commissioner, T.C. Memo.

1980-96, 40 T.C.M. (CCH) 21, 23.

      Second, petitioners presented no evidence (such as receipts) demonstrating

the missing items’ costs or adjusted bases. Many of the missing items constituted

equipment and supplies relating to AAPS’ pool-construction business. It would

appear, judging from petitioners’ returns for the years in issue, that they elected to

expense many of these items on prior year returns. With respect to such items,

they would have adjusted bases of zero. See sec. 179; sec. 1.179-1(f)(2), Income

Tax Regs. Petitioners presented no evidence on this point.
                                        - 22 -

[*22] Finally, we are not convinced that the recovery petitioners sought with re-

spect to their insurance claim was so unlikely that they could claim a deduction for

2010. They had a pending claim for reimbursement from Allstate throughout

2010, and they spent the next six years pursuing that claim. Petitioners have not

carried their burden of proving that they had no “reasonable prospect of recovery”

on this claim at year-end 2010. See sec. 1.165-1(d)(2)(i), Income Tax Regs. We

accordingly sustain respondent’s disallowance of the theft loss deduction.8

IV.   NOL Deductions

      A taxpayer may generally deduct, as an NOL for a taxable year, an amount

equal to the sum of the NOL carryovers and carrybacks to that year. Sec. 172(a).

A taxpayer claiming an NOL deduction must file with his return “a concise state-

ment setting forth the amount of the * * * [NOL] deduction claimed and all mater-

ial and pertinent facts relative thereto, including a detailed schedule showing the

computation of the * * * [NOL] deduction.” Sec. 1.172-1(c), Income Tax Regs.

Petitioners bear the burden of establishing both the existence of NOLs for prior or

subsequent years and the amount of the NOL that may properly be carried to the

      8
        Petitioners contend that, even if they had a reasonable prospect of recovery
on their insurance claim in 2010, they were nevertheless entitled to claim a deduc-
tion for the excess of the stolen items’ value over their policy limit. See sec.
1.165-1(d)(2)(ii), Income Tax Regs. Having found that petitioners failed to estab-
lish the items’ fair market values or bases, we reject this contention.
                                        - 23 -

[*23] year in issue. See Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621

(2000).

      Petitioners’ 2009 and 2010 amended returns claimed NOL deductions of

$113,393 and $18,128, respectively. Although petitioners did not attach to their

amended returns a statement describing the NOL deductions, they explained in

their post-trial brief that the NOL deductions originated from the theft loss that

petitioners had claimed for 2010. Because petitioners are not entitled to a theft

loss deduction, they are not entitled to corresponding NOL deductions.

      To reflect the foregoing,


                                                 Decision will be entered under

                                       Rule 155.
