On March 31, 2022, the Tax Court issued a Memorandum Opinion in the case of Villanueva v. Commissioner (T.C. Memo. 2022-27). The primary issue presented in Villanueva v. Commissioner was whether the petitioner was entitled to a net operating loss deduction.
Held: Sorry, Edgardo, not today.
Background to Villanueva v. Commissioner
The IRS determined deficiencies against the petitioner for 2013 and 2014 of $61,832 and $90,408, respectively, and an IRC § 6662(a) accuracy-related penalty and an IRC § 6651(a)(1) addition to tax for failure to timely file a return for each year.
The petitioner had his 2013 tax return prepared by an enrolled agent, who also assisted petitioner with the audit of his 2013 and 2014 tax returns.
Strike one, Edgardo.
The petitioner reported a loss of $112,357 on Form 4797, Sales of Business Property, attached to his 2013 return, from the disposition of a condominium in Newport Beach, California (condo). On the Form 4797, the petitioner reported the date of loss as August 5, 2013. However, a mortgage lender had foreclosed on the condo in May 2009, and the petitioner lost possession of the condo on that date. During early 2009, the petitioner attempted to rent the condo using the services of rental companies to facilitate the rental and to collect payment. The IRS disallowed the $112,357 loss in full.
During the course of the audit, the petitioner’s return preparer prepared amended returns for 2009 through 2013. The 2009 amended return, though, was not filed. It reported the disposition of the condo for a loss of $87,283.
Strike two, Edgardo.
The NOL (or Lack Thereof) in Villanueva v. Commissioner
Taxpayers are entitled to deduct losses sustained during the taxable year that were not compensated for by insurance or otherwise.[1] Regulations under IRC § 165(a) provide that a loss is treated as sustained during the taxable year in which the loss occurs as evidenced by a closed and completed transaction and fixed by identifiable events occurring in such taxable year.[2]
A foreclosure sale normally constitutes a disposition of property from which the mortgagor may realize gain or loss for purposes of IRC § 1001(a).[3] A loss resulting from a foreclosure sale is typically sustained in the year in which the property is disposed of and the debt is discharged from the proceeds of the foreclosure sale.[4]
The petitioner concedes that he sustained the loss in 2009 when the foreclosure occurred. Accordingly, the deduction, if allowable, would have been for 2009, and the issue that the Tax Court was faced with resolving was whether the petitioner is entitled to carry forward any portion of that loss to 2013.
NOLs, Generally
In general, a taxpayer is entitled to deduct, as an NOL for a taxable year, an amount equal to the sum of the NOL carryovers and carrybacks to that year.[5] An NOL generally must be carried back 2 years and then carried forward 20 years.[6]
The taxpayer bears the burden of establishing both the existence of the NOL and the amount that may be carried forward to the year at issue.[7] As part of this proof, the taxpayer must establish that the NOL was not fully absorbed in the years preceding the particular year for which he seeks the NOL deduction.[8] A taxpayer claiming an NOL deduction must file with his return “a concise statement setting forth the amount of the [NOL] deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the [NOL] deduction.”[9]
The parties focused on the issue of whether the petitioner rented the condo and engaged in a trade or business or had a profit motive with respect to the condo rental.[10] However, the petitioner has not established that he is even entitled to an NOL deduction for 2013—regardless of whether he engaged in such a trade or business or had a profit motive.
The 2009 amended return was not filed, and the petitioner did not claim a loss for 2009 that can be carried forward. He incorrectly reported the disposition of the condo as occurring in 2013, and he did not claim an NOL deduction on his 2013 return.
The 2013 return reported what he now acknowledges were an incorrect sale price, adjusted basis, and loss amount from the disposition, and thus such information does not constitute a concise statement of material and relevant facts or a detailed schedule of how he computed the NOL. The record also indicates that petitioner’s loss on the disposition was less than the amount he now claims.
The documentation he provided to the Tax Court, including the 2009 and 2010 unfiled, amended returns, lacks sufficient information to establish that petitioner is entitled to an NOL deduction for 2013. Significant for resolution of this case, even if he had a loss on the foreclosure, petitioner has not established that the carryover amount was not absorbed before 2013.[11]
As such, the petitioner did not establish that he had a loss for 2009 that could be carried forward to 2013. He is not entitled to an NOL deduction for 2013. Accordingly, the Tax Court sustained the IRS’s determination that the petitioner is not entitled to the loss deduction of $112,357 claimed on his 2013 return.
…and Edgardo Villanueva strikes out looking.
Footnotes for Villanueva v. Commissioner
- IRC § 165(a). ↑
- Treas. Reg. § 1.165-1(d)(1). ↑
- See Helvering v. Hammel, 311 U.S. 504 (1941). ↑
- Eisenberg v. Commissioner, 78 T.C. 336, 344 (1982). ↑
- IRC § 172(a). ↑
- IRC § 172(b)(1)(A). ↑
- Tax Court Rule 142(a); see Keith v. Commissioner, 115 T.C. 605, 621 (2000). ↑
- IRC § 172(b)(2), (c); Deutsch v. Commissioner, T.C. Memo. 2012-318, *14. ↑
- Treas. Reg. § 1.172-1(c). ↑
- See Lender Mgmt., LLC v. Commissioner, T.C. Memo. 2017-246, *24. ↑
- See Evans v. Commissioner, T.C. Memo. 2016-7 (holding that the NOL deduction was not substantiated because the taxpayer failed to establish that a loss remained to be carried forward to the year at issue). ↑
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