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  5. 42 T.C.M. 1132 (1981)
 

TERRELL v. COMMISSIONER

Docket Nos. 14429-79, 14513-79.

42 T.C.M. 1132 (1981)

T.C. Memo. 1981-527

Price M. Terrell v. Commissioner. Price M. Terrell and Henri P. Terrell v. Commissioner.

United States Tax Court.

Filed September 21, 1981.

Attorney(s) appearing for the Case

Price M. Terrell, pro se, Los Angeles, Calif. Edgar Gonzalo Rios, for the respondent.

Memorandum Findings of Fact and Opinion FAY, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: ____________________________________________________________________________________ Addition to Tax Petitioner(s) Year Deficiency Sec. 6651(a)(1)1 ____________________________________________________________________________________ Price M. Terrell .............. 1971 $12,397.52 — and Henri P. Terrell Price M. Terrell .............. 1972 5,392.70 — Price M. Terrell .............. 1973 9,185.08 — Price M. Terrell .............. 1974 8,777.79 $465.70 Price M. Terrell .............. 1975 1,493.89 — ____________________________________________________________________________________
These cases have been consolidated for purposes of trial, briefing, and opinion. After certain concessions, the remaining issues are (1) whether petitioners are entitled to deductions claimed with respect to the operation of a horse breeding ranch, (2) whether petitioner Price M. Terrell is entitled to a deduction for a net operating loss carryover to 1975, (3) whether petitioner Price M. Terrell is liable for a section 6651(a)(1) addition to tax for 1974, and (4) if we conclude there is no deficiency in Federal income tax for 1971, whether petitioners are entitled to a refund of taxes withheld in 1971.2 Findings of Fact Some of the facts have been stipulated and are found accordingly. Petitioners, Price M. Terrell and Henri P. Terrell, resided in Los Angeles, Calif., at the time they filed their petitions in this case. Petitioners filed a joint return for 1971 and following their divorce, filed separate returns for the years 1972 through 1975. Price M. Terrell (petitioner) was a dentist practicing in Los Angeles, Calif., during the years in question. In January 1969, petitioner entered into an oral agreement with Lawrence G. Patterson (Patterson) for the purpose of purchasing an interest in a horse breeding ranch in Clay Center, Kan. The ranch was managed and operated by Patterson and his wife, Glenda C. Fountaine (Fountaine), doing business as the Laurdue Ranch. As promoters, Patterson and Fountaine sold investment interests in the Laurdue Ranch. Petitioner made the following investments in the Laurdue Ranch on the dates specified: Date Amount 7/17/70 ............. $1,000 8/10/71 ............. 2,935 8/10/71 ............. 2,000 6/30/72 ............. 3,000 ______ $8,935 Total Investment
Petitioner's participation involved nothing more than investing; he participated in no part of the management or the operation of the Laurdue Ranch. Petitioner stipulated as to having no knowledge with respect to incurring any personal liability relative to the Laurdue Ranch. The operators of Laurdue Ranch, Patterson and Fountaine, represented to investors that the ranch was a horse breeding venture and that substantial losses for tax purposes would be incurred in the operation of the ranch. Fountaine posed as an income tax expert and prepared the investors' returns.3 If she did not prepare an investor's complete return, Fountaine at least prepared Schedule F, Farm Income and Expenses, as it related to the operation of Laurdue Ranch. Fountaine prepared petitioner's Federal income tax returns for 1969 and 1970. Expecting Fountaine to likewise prepare his income tax returns for 1971, 1972, and 1973, petitioner turned over his personal and business records for those years to Fountaine. Fountaine, however, never filed such returns. Instead, those returns were filed late in 1975 after petitioner had obtained the assistance of a different tax adviser. Unlike the prior taxable years 1971 through 1973, petitioner did not turn over to Fountaine his business and personal records for the taxable year 1974. Petitioner had in his possession at all times his business and personal records for the taxable year 1974, except those relating to the Laurdue Ranch. The return for that year was filed in September 1975, over four months from the date it was due. Petitioners received no reports, income or expense statements, or any accounting data concerning the Laurdue Ranch and its operations. Petitioners introduced no records, bills, receipts, or documentation to substantiate any of the expenses of the Laurdue Ranch. In fact, petitioners based their claim for the expenses incurred in the years 1971 through 1974 on their 1969 and 1970 Federal income tax returns supplemented by an opinion of the San Diego Cattlemen's Association as to the cost of feeding and caring for the number of horses allegedly owned by the Laurdue Ranch with adjustments for increases in operating costs. Petitioners were never furnished a partnership tax return for the breeding venture and no such partnership return was filed with the Internal Revenue Service.4 Petitioners apparently did not know their percentage interest or share of the ranch. They "estimated" ownership of an 18 percent interest in the ranch. On Schedule F, Farm Income and Expenses, petitioners reported the following farm deductions, including expenses and depreciation on 15 brood mare horses, and the following farm income for the years specified: Taxable Farm Farm Year Deductions5 Income 1971 $38,999.55 0 1972 29,652.72 0 1973 42,000.60 0 1974 34,908.08 0
In his statutory notices of deficiency, respondent disallowed the farm deductions claimed in 1971 through 1974 in their entirety. As a result of disallowing the deductions for 1974, respondent denied petitioner a deduction for a net operating loss carryover to 1975. Respondent also asserted a section 6651(a)(1) addition to tax for 1974. Opinion The issues are (1) whether petitioners are entitled to deductions claimed for farm expenses allegedly incurred as a result of their investment in a horse breeding ranch, (2) whether petitioner Price M. Terrell is entitled to a deduction for a net operating loss carryover to 1975, (3) whether petitioner is liable for an addition to tax under section 6651(a)(1) for 1974, and (4) if petitioners are not liable for a deficiency in income tax for 1971, whether they are entitled to a refund for taxes withheld in that year. Respondent contends that the expenses allegedly incurred by the Laurdue Ranch and claimed by petitioners as deductions on Schedule F of their income tax returns should not be allowed as deductions. Respondent makes several arguments including (1) the expenses have not been substantiated, (2) petitioners have not established their distributive share of partnership loss under section 702, and (3) even if petitioners can establish their distributive share of partnership loss, petitioners have not shown that the adjusted basis of their interest in the partnership exceeds their distributive share of partnership losses under section 704(d). We agree with respondent for the reasons below. The burden of proof is on petitioners to overcome the presumption of correctness that attaches to respondent's determination. Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933); Rule 142(a).6 Petitioners' claims are based on conjecture and approximations. Petitioners provided no documentation for the alleged expenses incurred by the Laurdue Ranch. There are no accounting records, periodic reports, or any reliable evidence whatsoever to substantiate the expenses allegedly incurred. Petitioners attempt to support their claimed deductions for the years 1971 through 1974 with prior years' income tax returns and with the opinion of a third party. Based on figures from petitioners' income tax returns filed in 1969 and 1970, in addition to the opinion of the San Diego Cattlemen's Association as to the cost of maintaining the number of horses allegedly owned by the Laurdue Ranch, petitioners computed the amount of expenses incurred by the Laurdue Ranch for the years in issue, 1971 through 1974. We have been given no evidence to show specific items of expenses, to establish recipients of such claimed expenses, or to show that, if there were such expenditures, they were for deductible items. Petitioners have simply failed to meet their burden of proof.7 The fact that petitioners were unable to obtain evidence from the operators of Laurdue Ranch, Patterson and Fountaine, does not relieve them of their burden of proof. Burnet v. Houston, 283 U.S. 223 (1931). Petitioners argue that the claimed deductions represent their distributive share of partnership loss. Although the type of interest petitioner acquired is uncertain, we accept petitioners' claim that they own a partnership interest for purposes of this argument. Petitioners likewise have failed to meet their burden of proof in establishing a distributive share of partnership loss. There is no written agreement between petitioners and the operators of the ranch. Petitioners estimate their interest in the Laurdue Ranch to be 18 percent. Yet petitioners apparently know nothing about the number of participating investors or the amount of their investments. Petitioners' estimation is clearly insufficient. Respondent determined that petitioner is not entitled to a net operating loss deduction of $2,250 for 1975 based on a net operating loss carryover from 1974. Petitioner's income tax return for 1975 does not indicate which year the net operating loss was sustained. In his trial memorandum petitioner asserts the losses were incurred in the taxable years 1972 through 1975. At trial petitioner presented no evidence to establish the nature of the loss nor the year in which the loss was incurred. Petitioner has failed to meet his burden of proof to establish the existence of a net operating loss. Rule 142(a). We find for respondent and deny petitioner's deduction for a net operating loss carryover into 1975. Respondent determined that petitioner Price M. Terrell is liable for an addition to tax of $465.70 under section 6651(a)(1) for the late filing of his 1974 return. Petitioner had in his possession at all times his personal and business records for 1974 and could have filed a timely return. The fact that petitioner did not have records relative to the Laurdue Ranch does not establish "reasonable cause" for not filing timely. We sustain respondent's imposition of the addition to tax. Since we have determined petitioners are liable for a deficiency in income tax for 1971, petitioners are entitled to a credit of $9,189.76, the amount of taxes withheld in 1971, to be applied against such deficiency. See n. 2, supra. To reflect the foregoing and the parties' concessions, Decisions will be entered under Rule 155.

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