                  T.C. Memo. 2010-55



                UNITED STATES TAX COURT



  ROBERT WEISBERG AND JULIE PETERSON, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21157-07.                Filed March 22, 2010.



     P owned shares in an S corporation and in 2000
personally guaranteed a line of credit to the
corporation. The S corporation incurred losses in
2003, and P deducted $199,141 of those losses on his
2003 income tax return. In March 2004 P personally
took out a loan and paid off the corporation’s line of
credit in the amount of $150,174. The IRS disallowed
the 2003 loss on the grounds that P had insufficient
basis in the S corporation and determined a tax
deficiency, a late-filing addition to tax, and an
accuracy-related penalty.

     Held: P’s guaranty of the S corporation’s line of
credit did not increase his basis in the S corporation
during the year in issue. Therefore P may not deduct
the loss in 2003.

     Held, further: P is liable for the late-filing
addition to tax under sec. 6651(a)(1), I.R.C., and the
accuracy-related penalty under sec. 6662(a), I.R.C.
                                - 2 -

     Robert Weisberg, pro se.

     Thomas M. Regan and Michael E. O’Brien, for petitioner Julie

Peterson.

     Lisa R. Woods, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     GUSTAFSON, Judge:   The Internal Revenue Service (IRS) issued

to petitioners Robert Weisberg and Julie Peterson a notice of

deficiency for taxable year 2003 pursuant to section 6212,1

showing the IRS’s determination of a deficiency in income tax of

$100,803, an addition to tax under section 6651(a)(1) for failure

to file timely, and an accuracy-related penalty under section

6662(a).2   Petitioners brought this case pursuant to

section 6213(a), asking this Court to redetermine the deficiency.


     1
      Unless otherwise indicated, all citations of sections refer
to the Internal Revenue Code of 1986 (the Code, 26 U.S.C.), as
amended, and all citations of Rules refer to the Tax Court Rules
of Practice and Procedure.
     2
      The notice of deficiency was not offered into evidence.
However, a copy of it was attached to the petition; and though
respondent’s answer alleged an omission of two pages
(Form 4089-B, Notice of Deficiency--Waiver), the omission is not
material, and respondent otherwise alleged the same document to
be the notice of deficiency. Consequently, the notice of
deficiency is judicially admitted, and “Judicial admissions
‘eliminate the need for evidence on the subject matter of the
admission,’ as admitted facts are no longer at issue.” Ferguson
v. Neighborhood Housing Servs. of Cleveland, Inc., 780 F.2d 549,
550-551 (6th Cir. 1986) (quoting Seven-Up Bottling Co. v. Seven-
Up Co., 420 F. Supp. 1246, 1251 (E.D. Mo. 1976), affd. 561 F.2d
1275 (8th Cir. 1977)).
                                   - 3 -

After concessions,3 the issues for decision are whether

Mr. Weisberg is entitled to deduct a loss of $199,141 from his

law firm Weisberg & Associates, Inc., and whether he is liable

for the late-filing addition to tax and the accuracy-related

penalty for tax year 2003.

                             FINDINGS OF FACT

     At the time they filed their petition, the petitioners

resided in Minnesota.      The following facts are based on

Mr. Weisberg’s testimony and the four exhibits that were offered

into evidence.

     In the year in issue, Mr. Weisberg was an attorney.           He was

a shareholder (apparently the 100-percent shareholder, though the

record is not clear) of Weisberg & Associates, an S corporation

through which he practiced law.

     In February 2000 (i.e., before the year in issue), Firstar

Bank issued a $200,000 line of credit to Weisberg Personal Injury

Lawyers, P.A., which we assume to be a predecessor to Weisberg &

Associates.      Mr. Weisberg personally guaranteed repayment of the

loan.       The proceeds of that line of credit were used for business

expenses of Weisberg & Associates.         Weisberg & Associates


        3
      The parties stipulated that Ms. Peterson is entitled to
relief from joint liability pursuant to section 6015(c).
Although there are three adjustments to income reflected on
item 7 of Form 5278, Statement--Income Tax Changes, attached to
the notice of deficiency, paragraph 4 of the petition puts at
issue only one of those three--i.e., the loss disallowance
addressed in this opinion.
                               - 4 -

incurred losses in 2003, of which Mr. Weisberg’s share was

$199,141.

     As of March 2004 Weisberg & Associates owed $150,174.21 on

the Firstar line of credit.   In that month Mr. Weisberg

personally borrowed $250,000 from Bremer Bank and used

$150,174.21 of the loan proceeds to pay off Weisberg &

Associates’ Firstar line of credit.

     In 2004 Mr. Weisberg received extensions of time to file the

petitioners’ Federal income tax return for the year 2003, and it

was due to be filed October 15, 2004.   An accounting firm

prepared the Federal income tax return, and it was filed on

November 29, 2004.   The return reported income from a variety of

sources but claimed from Weisberg & Associates a loss of

$199,141, which reduced the total taxable income that otherwise

would have been reported.   The return reported a total tax due of

$99,760.

     In its notice of deficiency issued in June 2007, the IRS

disallowed the Weisberg & Associates loss on the grounds that

“Your flow-through loss from your S Corporation is limited to

your basis.”   (Neither in the notice of deficiency nor in this

lawsuit did the IRS dispute the underlying deductions of

Weisberg & Associates that gave rise to the claimed loss.)    The

notice of deficiency determined a total corrected tax liability

of $200,563 and a consequent deficiency of $100,803.
                                 - 5 -

      In September 2007 Mr. Weisberg and Ms. Peterson timely filed

their petition disputing that deficiency.

                                OPINION

I.    Burden of Proof

      The IRS’s deficiency determinations are generally presumed

correct; and Mr. Weisberg, as a petitioner in this case, has the

burden of establishing that the determinations in the notice of

deficiency are erroneous.     See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).     Mr. Weisberg does not argue that the

burden of proof has shifted under section 7491(a), and the record

suggests no basis for such a shift.       With respect to additions to

tax and penalties, the Commissioner bears the burden of

production, and he must produce sufficient evidence showing that

it is appropriate to impose an addition to tax or penalty in a

particular case.   Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446 (2001).   Once the Commissioner meets this burden, the

taxpayer must come forward with persuasive evidence that the

Commissioner’s determination is incorrect.      Rule 142(a); Higbee

v. Commissioner, supra at 447.

II.   S Corporation Pass-Through Loss

      Subchapter S of the Code provides that a qualifying small

business corporation that makes the proper election (referred to

as an “S corporation”, sec. 1361(a)) is generally not subject to

income tax.   Sec. 1363(a).   Rather, its items of income,
                               - 6 -

deductions, credits, and losses pass through to its shareholders,

sec. 1366(a)(1), who then claim those items on their own income

tax returns.

     However, an S corporation shareholder may not claim a loss

deduction greater than his basis in the S corporation,

sec. 1366(d)(1), with “basis” in this context consisting

essentially of his investment in the corporation.   A taxpayer who

claims a loss from an S corporation must establish his basis in

the S corporation.   Bergman v. United States, 174 F.3d 928, 931-

933 (8th Cir. 1999); Parrish v. Commissioner, 168 F.3d 1098, 1102

(8th Cir. 1999), affg. T.C. Memo. 1997-474.

     The record contains no information concerning Mr. Weisberg’s

basis in Weisberg & Associates before 2000.   In that year he

personally guaranteed a line of credit for the firm.   Under

certain conditions, debt can contribute to a shareholder’s basis

in an S corporation, but those conditions are not satisfied here.

As we stated in Spencer v. Commissioner, 110 T.C. 62, 83-84

(1998), affd. without published opinion 194 F.3d 1324 (11th Cir.

1999):

          This court has held that mere shareholder
     guaranties of S corporation indebtedness generally fail
     to satisfy the requirements of section 1366(d)(1)(B)
     (i.e., economic outlay plus a direct indebtedness
     between the corporation and its shareholders). * * *
     No form of indirect borrowing, including a guaranty,
     gives rise to indebtedness from the corporation to the
     shareholders for such purpose until and unless the
     shareholders pay part or all of the obligation. * * *
     Prior to that crucial act, liability may exist, but not
                                - 7 -

     debt to the shareholder. * * * This Court also has
     held that the mere guaranty of a loan does not involve
     any economic outlay. * * * Until the guarantor pays
     the obligation, the guarantor does not have an actual
     investment. * * * [Citations omitted; emphasis added.]

Mr. Weisberg’s 2000 guaranty of the firm’s line of credit did

not, by itself, increase his basis in the S corporation.

Consequently, there is no evidence that in 2003 he had a basis in

any amount.

     In March 2004 Mr. Weisberg incurred his own personal loan

and used it to pay off the firm’s line of credit.    We may assume,

for argument’s sake, that by that act he did increase his basis

in the S corporation by $150,174.    However, the year in issue

here is 2003, and that act in March 2004 did not increase his

basis in 2003.   Consequently, Mr. Weisberg has not shown that he

is entitled to claim any portion of the loss in 2003.

(Section 1366(d)(2) and (3) provides the rules for carrying such

a loss over to later years, but Mr. Weisberg’s later years are

not at issue here.)

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

     Section 6651(a)(1) imposes an addition to tax “[i]n case of

failure * * * to file any return * * * on the date prescribed

therefor”.    The 2003 income tax return was due October 15, 2004

(on account of extensions that the IRS had granted), but the

return was not filed until more than a month later, on

November 29, 2004.    Respondent has thus shown that the late-
                                 - 8 -

filing addition to tax is properly imposed.     Mr. Weisberg has not

shown reasonable cause for not timely filing the 2003 return or

that the failure was not due to willful neglect.      Sec.

6651(a)(1).   He is therefore liable for the addition to tax under

section 6651(a)(1), and he has not alleged any error in the IRS’s

computation of that addition.

IV.   Section 6662(a) Penalty

      Section 6662(a) and (b)(2) imposes an “accuracy-related

penalty” of 20 percent of the portion of the underpayment of tax

attributable to any substantial understatement of income tax.    By

definition, an understatement of income tax is substantial if it

exceeds the greater of $5,000 or “10 percent of the tax required

to be shown on the return”.     Sec. 6662(d)(1)(A).

      Mr. Weisberg’s return reported a total tax due of $99,760;

the notice of deficiency (which we have upheld on the only point

in dispute) determined a liability (i.e., “the tax required to be

shown on the return”) of $200,563; and the resulting deficiency

in tax is $100,803.   Since 10 percent of the tax required to be

shown is $20,056, the underpayment is well in excess of that

amount, and respondent has thus carried his burden, under

section 7491(c), of producing evidence that Mr. Weisberg is

liable for a penalty equal to 20 percent of $100,803, i.e.,

$20,160.60.
                               - 9 -

     A taxpayer who is otherwise liable for the accuracy-related

penalty may avoid the liability if he successfully invokes one of

three other provisions:   Section 6662(d)(2)(B) provides that an

understatement may be reduced, first, where the taxpayer had

substantial authority for his treatment of any item giving rise

to the understatement or, second, where the relevant facts

affecting the item’s treatment are adequately disclosed and the

taxpayer had a reasonable basis for his treatment of that item.

Mr. Weisberg made no showing that would implicate these

provisions.

     The third provision available to a taxpayer who resists the

accuracy-related penalty is section 6664(c)(1), which provides

that, if the taxpayer shows that there was reasonable cause for a

portion of an underpayment and that he acted in good faith with

respect to such portion, no accuracy-related penalty shall be

imposed with respect to that portion.   Whether the taxpayer acted

with reasonable cause and in good faith depends on the pertinent

facts and circumstances, including the extent to which he relied

on the advice of a tax professional.    Sec. 1.6664-4(b)(1), Income

Tax Regs. (26 C.F.R.)   Mr. Weisberg’s 2003 tax return was

prepared by an accounting firm, which might indicate reliance on

the advice of a tax professional; but Mr. Weisberg gave no

testimony about the information he provided to that firm (in

particular, information about his basis in his S corporation) nor
                             - 10 -

about any advice he received or relied on.    Thus, Mr. Weisberg

made no showing of reasonable cause--neither on the grounds of

reliance on professional advice nor on any other grounds.

     To reflect the foregoing,



                                      Decision will be entered in

                                 favor of petitioner Julie Peterson,

                                 granting her relief from joint

                                 liability under section 6015(c),

                                 and will be entered in favor of

                                 respondent, sustaining the

                                 deficiency against petitioner

                                 Robert Weisberg.
