                     T.C. Summary Opinion 2011-121



                        UNITED STATES TAX COURT



         ROBERT DAVID WUERTH & CYNTHIA WUERTH, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 28637-09S.            Filed October 13, 2011.



        Robert David Wuerth and Cynthia Wuerth, pro sese.

        Stewart Todd Hittinger, for respondent.



     COHEN, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

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

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

this opinion shall not be treated as precedent for any other

case.
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     Respondent determined deficiencies and penalties as follows:

                                           Penalty
                Year      Deficiency     Sec. 6662(a)

                2005        $8,601        $1,720.20
                2006         5,442         1,088.40

After concessions, the issues remaining for decision are:    (1)

Whether petitioners are entitled to deduct a casualty loss for

2005 relating to damage to their real property and (2) whether

petitioners are liable for penalties under section 6662 for 2005

and 2006.   All section references are to the Internal Revenue

Code (Code) in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

                            Background

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Indiana at the time the petition was

filed.

     Robert David Wuerth (petitioner) and Cynthia Wuerth

purchased a home in Newburgh, Indiana, in 1989.   The two-story

house has an attached three-car garage and is on a wooded lot of

approximately 1 acre.

     During the years in issue, petitioner taught graduate

courses in accounting at various online universities and was

licensed as a certified public accountant (C.P.A.).     Petitioner
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performed many of his duties as an adjunct instructor from a home

office in petitioners’ residence.

     DeVry University, one of petitioner’s employers, paid

petitioner’s earnings to Wuerth Asset Management, LLC (Wuerth

Management), a limited liability company petitioners formed in

2000 and classified as a partnership for Federal tax purposes.

Petitioners each owned 50 percent of Wuerth Management.    From the

time it was formed through the years in issue the ownership

structure of Wuerth Management did not change.

     On November 6, 2005, petitioners’ property, both lot and

improvements, suffered damage as a result of a tornado.

Petitioners filed a claim under their homeowners insurance policy

for the sustained damage.   The policy had a $500 deductible, and

petitioners received insurance reimbursements totaling $37,524.

Petitioners paid outside contractors $27,353 for cleanup and

repairs following the tornado.    Petitioner cleaned up part of the

property over the course of the next several years.

     Petitioners jointly filed their self-prepared Form 1040,

U.S. Individual Income Tax Return, for 2005.   On Form 4684,

Casualties and Thefts, included with their Form 1040, petitioners

claimed a casualty loss of $40,355 relating to their residence

and a casualty loss relating to a damaged vehicle.    Wuerth

Management also claimed a casualty loss deduction of $7,121 for

petitioners’ residence on the 2005 Form 1065, U.S. Return of
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Partnership Income, that petitioner prepared as he believed this

was necessary because he used a portion of the residence as a

home office.

     Petitioners’ 2005 Form 1040 indicates that they determined

the amount of the real property casualty loss using a fair market

value of $229,500 for the real property before the tornado and

$157,250 after the tornado, less $31,895 in insurance proceeds.

Petitioner calculated these values using his own research and

personal estimates of the financial damage caused by the storm.

     On the Wuerth Management Forms 1065 for 2005 and 2006,

numerous other deductions were claimed for purported business

expenses, including television service, travel, and meals and

entertainment.   These deductions reduced the income from Wuerth

Management that passed through to petitioners and was reported on

their 2005 and 2006 Forms 1040.

     In 2008, the Internal Revenue Service (IRS) examined

petitioners’ returns for 2005 and 2006.   During the course of the

examination, petitioner hired an appraiser to determine the value

of the Indiana real property both before and after the tornado.

The appraiser had not personally appraised the property before

the damage occurred and relied on the statements petitioner made

regarding its previous condition.   The appraiser ultimately

determined that the market value of the property before the

tornado was $250,000 and after the tornado was $117,000.    The
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appraisal report included numerous errors, including misstating

the calculations for the pre-tornado value of the real property

as totaling $220,000 and $240,000 at different points in the

report.

     The IRS sent petitioners a notice of deficiency on September

16, 2009.   In the notice, the IRS determined that petitioners

sustained the full amount of the loss claimed for their vehicle

and $16,363.90 of the loss claimed for the real property for

2005.   The IRS disallowed deductions that Wuerth Management

claimed for 2005 and 2006 that resulted in an increase to

petitioners’ income as reported on their 2005 and 2006 Forms

1040.

     Petitioners provided documentation as substantiation for

some of the claimed expenses, and respondent conceded that

petitioners were entitled to some deductions beyond what was

allowed in the notice.   During the trial, petitioners conceded

that they were not entitled to the remaining claimed deductions

for 2005 and 2006, with the exception of the casualty loss

deduction for their real property claimed for 2005.

                            Discussion

Casualty Loss Deduction Relating to Real Property for 2005

     The parties agree that petitioners sustained a casualty loss

in 2005 within the meaning of section 165(c)(3).   That section

provides that, in the case of an individual, the deduction under
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section 165(a) shall be limited to “losses of property not

connected with a trade or business or a transaction entered into

for profit, if such losses arise from fire, storm, shipwreck, or

other casualty”.    Sec. 165(c)(3).    Deductions for casualty losses

are limited to those not compensated for by insurance or

otherwise.    Sec. 165(a).    Respondent agrees that petitioners’

property suffered damage from a severe tornado and as a result

petitioners’ property lost value.      However, respondent disputes

petitioners’ assertion that they are entitled to a greater

deduction for 2005 for casualty loss than was allowed in the

notice of deficiency.

     The amount of a casualty loss deduction is generally

computed as the excess of the fair market value of the property

immediately before the casualty over the fair market value of the

property immediately after the casualty, limited by the adjusted

basis of the property.       Helvering v. Owens, 305 U.S. 468 (1939);

Millsap v. Commissioner, 46 T.C. 751 (1966), affd. 387 F.2d 420

(8th Cir. 1968); sec. 1.165-7(b)(1), Income Tax Regs.      These

respective values “shall generally be ascertained by competent

appraisal.”    Sec. 1.165-7(a)(2)(I), Income Tax Regs.

Alternatively, the amount of a casualty loss may be established

by reasonable repair costs paid to restore property to its

precasualty condition.    Sec. 1.165-7(a)(2)(ii), Income Tax Regs.

The cost of repairs alternative, however, must be calculated
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using the actual repair costs, not estimates.    Lamphere v.

Commissioner, 70 T.C. 391, 396 (1978).

     As a general rule, taxpayers have the burden of proving that

they are entitled to the deductions that they claim.    Rule

142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Under section 7491(a), the burden of proof shifts to

respondent if petitioners complied with requirements to

substantiate an item, maintained all required records, and

presented credible evidence as to a factual issue.    Petitioners

have not done so, and thus the burden has not shifted.

     For 2005 petitioners divided the real property casualty loss

deduction they claimed between their Form 1040 and the Form 1065

that was filed for Wuerth Management.    Petitioners have presented

no evidence and made no argument that any portion of their

Indiana real property was the property of a business entity.      We

agree with respondent that the property and the casualty loss

were personal.

     Essentially, petitioners present three methods of valuation

to justify their assertion that the casualty loss was greater

than the amount that the IRS allowed in the notice of deficiency.

First, petitioners argue that the costs of clearing fallen trees

from the property exceeded the allowed deduction.    Petitioner

testified that he received several estimates of approximately

$50,000 to clean up what he claims is only 20 percent of the
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property, with the remaining 80 percent already addressed by

petitioner himself.    If repair costs are to be used as an

alternative method of valuation, the taxpayer must substantiate

the actual costs, not merely provide estimates.    Farber v.

Commissioner, 57 T.C. 714, 719 (1972); sec. 1.165-7(a)(2)(ii),

Income Tax Regs.    The only actual uncompensated expenditure

petitioner claimed to have made was $8,950 to a landscaping

company to clear some fallen trees and debris in 2006.

Petitioners did not present any receipt into evidence to

substantiate this or any other expense relating to the cleanup of

their property.    The evidence presented is insufficient to

justify a casualty loss for 2005 higher than the deduction

allowed in the notice of deficiency.

     Second, petitioner argues that his estimate of the damages

used to derive the figure as reported on the tax returns is

accurate.   Although petitioner argues that he used a

“sophisticated” appraisal method, his description of how he

arrived at the values used is riddled with approximations that

are not substantiated by any evidence other than petitioner’s

flat assertions.

     Petitioner claims that he began with a fair market value for

the property before the tornado of $250,000.    He concluded that

the property lost 10 percent of its value because of a decrease

in the property’s aesthetic value because of the fallen trees,
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which he admits is simply a hypothesized value rather than a

justifiable calculation.   He also subtracted $79,000 for “lot

clearing costs” and $18,198 for “landscaping fix up costs” based

on the same estimates described above.    Finally, he subtracted

$28,125 for “profit on real estate to cover high inherent risk”,

in all totaling $150,823 in losses.    These self-serving estimates

did not use any recognized method of real property valuation, are

only conjecture, and do not justify petitioners’ casualty loss

deduction beyond that allowed by respondent.

     Petitioner also presented at trial photographs of the

property taken before the tornado and others taken after, which

show fallen trees and other damage.    These photos are

insufficient to show the extent of the damage or to determine the

monetary harm caused to the property by the casualty.

     Third, petitioners offer as evidence an appraisal completed

in November 2008.   This appraisal, however, merely serves as a

restatement of petitioners’ unsubstantiated estimates.      The

appraiser did not personally evaluate the property before the

tornado damage and relied heavily on petitioner’s statements to

justify the retrospective appraisal of the property.      The

appraiser also relied on the estimates petitioner obtained for

cleanup and excavation costs described above to determine the

value of the property immediately after the loss.    The

information petitioner provided to the appraiser is extremely
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favorable to petitioners’ position as to the amount of the

casualty loss and is not corroborated by any other evidence.    We

need not consider an expert’s opinion when that expert is merely

an advocate for one of the parties.    See Estate of Halas v.

Commissioner, 94 T.C. 570, 577 (1990).    Furthermore, the

appraisal report has numerous errors, including calculations

showing the pre-tornado value of the home as $220,000, $240,000,

and $250,000.   Such errors call into question the reliability of

the appraisal, and thus the report does not provide adequate

support for petitioners’ position.     See, e.g., Knight v.

Commissioner, 115 T.C. 506 (2000).

     Petitioner makes numerous accusations of improper behavior

by IRS agents and attempts to discredit the valuation the IRS

used during administrative appeals.    These arguments are

irrelevant.   We review the merits of the case de novo and do not

consider any record created during internal IRS appeals

procedures.   See Greenberg’s Express, Inc. v. Commissioner, 62

T.C. 324, 328 (1974).

     Petitioners have not proven that the amount of the casualty

loss sustained, after accounting for insurance proceeds, is

greater than the amount allowed in the notice of deficiency.    We

therefore sustain respondent’s determination as to the casualty

loss deduction relating to the real property for 2005.
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Section 6662(a) Penalty

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

accuracy-related penalty on any underpayment of Federal income

tax attributable to taxpayers’ negligence or disregard of rules

or regulations or substantial understatement of income tax.

Section 6662(c) defines negligence as including any failure to

make a reasonable attempt to comply with the provisions of the

Code and defines disregard as any careless, reckless, or

intentional disregard.    Disregard of rules or regulations is

careless if taxpayers do not exercise reasonable diligence to

determine the correctness of a return position that is contrary

to the rule or regulation.    Sec. 1.6662-3(b)(2), Income Tax Regs.

A substantial understatement of income tax exists if the

understatement exceeds the greater of 10 percent of the tax

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

6662(d)(1)(A).

     Under section 7491(c), the Commissioner bears the burden of

production with regard to penalties and must come forward with

sufficient evidence indicating that it is appropriate to impose

penalties.   See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

However, once the Commissioner has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalties are inappropriate because of

reasonable cause or substantial authority.    See Rule 142(a);
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Higbee v. Commissioner, supra at 446-447.    Considering the

inaccuracy of the items on the returns and the amounts of the

resulting underpayments of tax, respondent has satisfied the

burden of producing evidence that the penalties are appropriate.

     The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which taxpayers acted with reasonable cause and in good faith.

Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448.     The

decision as to whether taxpayers acted with reasonable cause and

in good faith is made on a case-by-case basis, taking into

account all of the pertinent facts and circumstances.     See sec.

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

     Petitioners did not provide any evidence that they relied on

professional advice.   See sec. 6662(d)(2)(B).    Petitioner admits

that the basis for the valuation of the property was his own

approach based on estimates and intuition rather than any

accepted methods of valuation or professional assistance.

Despite his background as an instructor in accounting and

licensed C.P.A., petitioner did not determine a reasonable value

for the damage to the property.    Furthermore, petitioner’s

testimony with respect to the now conceded personal expenses that

petitioners deducted as business expenses demonstrates a lack of

a reasonable attempt to comply with the law.     Petitioners are

therefore liable for the penalties imposed for 2005 and 2006.
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     We have considered the other arguments of the parties, and

they are either without merit or need not be addressed in view of

our resolution of the issues.    For the reasons explained above,


                                         Decision will be entered

                                   under Rule 155.
