Barnes v. Commissioner of Internal Revenue Service , 712 F.3d 581 ( 2013 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 15, 2013 Decided April 5, 2013
No. 12-1284
MARC S. BARNES AND ANNE M. BARNES,
APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
On Appeal from the Decision
of the United States Tax Court
Mario Vincent Dispenza Jr. argued the cause for
appellants. On the briefs was Gerald W. Kelly Jr.
John A. Nolet, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
Richard Farber, Attorney.
Before: GARLAND, Chief Judge, ROGERS and TATEL,
Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: This case concerns Marc and Anne
Barnes’s joint income-tax return for fiscal year 2003. That
year was a busy one for the Barneses, who at the time owned
2
or were involved with several different restaurant, nightclub,
and event-promotion businesses. Relevant here, they held a
partial ownership stake in an S corporation called “Whitney
Restaurants,” and they also ran an unincorporated event-
promotion sole proprietorship.
The Barneses’ 2003 tax return reported the income and
withholdings for each of these businesses. The Internal
Revenue Service disagreed with the Barneses’ assessment of
their tax liability in two primary respects. The first concerns a
deduction the Barneses claimed for their $279,289 pro rata
share of Whitney’s 2003 losses. Taxpayers can deduct S-
corporation losses only when they have sufficient “basis”—
here, the amount of capital the taxpayer has contributed to the
corporation minus the taxpayer’s share of the corporation’s
previous losses—to absorb them. See 26 U.S.C. § 1366(d)(1).
Because the IRS determined that the Barneses’ remaining
basis in Whitney was just $153,282.93, they were entitled to
take a deduction for that amount only. Accordingly, the IRS
disallowed the deduction claimed for the remainder
($123,006) of the Barneses’ share of Whitney’s losses.
The second point of contention between the Barneses and
the IRS relates to the gross income of the Barneses’ event-
promotion sole proprietorship. Although the Barneses initially
reported its income as $168,997, they subsequently alleged
that they had overstated that amount by $30,000 because of a
bookkeeping error. The IRS rejected this claim, declining to
reduce the sole proprietorship’s income as the Barneses had
requested.
When all was said and done, the IRS determined that the
Barneses’ 2003 income taxes were deficient by $54,486.
Finding that this deficiency constituted a “substantial
understatement” of their income tax liability, see id.
3
§ 6662(d), the Service imposed a $10,897.20 accuracy-related
penalty.
The Barneses challenged the IRS’s deficiency finding, as
well as the penalty, in the United States Tax Court. Reviewing
the case on a fully stipulated record, the Tax Court upheld the
Commissioner’s determinations.
Appealing to this Court, see id. § 7482(a)(1) (“The
United States Courts of Appeals . . . shall have exclusive
jurisdiction to review the decisions of the Tax Court . . . in the
same manner and to the same extent as decisions of the
district courts . . . .”), the Barneses argue that the Tax Court
misunderstood relevant law when it affirmed the IRS’s
calculation of their remaining basis in Whitney. They also
challenge the factual basis for the Tax Court’s decisions
affirming the Service’s rejection of their over-reporting claim
and upholding its imposition of the penalty.
We review the Tax Court’s legal conclusions de novo and
its factual findings for clear error. See Jombo v.
Commissioner of Internal Revenue, 398 F.3d 661, 663 (D.C.
Cir. 2005). We would owe deference to the IRS’s
interpretation of the Internal Revenue Code under Chevron
U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), “if the Service
had reached the interpretation[s] asserted here in a notice-and-
comment rulemaking, a formal agency adjudication, or in
some other procedure meeting the prerequisites for Chevron
deference.” Landmark Legal Foundation v. IRS, 267 F.3d
1132, 1135–36 (D.C. Cir. 2001) (citing United States v. Mead
Corp., 533 U.S. 218, 229–34 (2001)). But because the IRS
makes no claim to have done anything of the sort in
evaluating the Barneses’ return, we give its interpretations
“no more than the weight derived from their ‘power to
persuade.’ ” Id. at 1136 (quoting Mead, 533 U.S. at 228, in
4
turn quoting Skidmore v. Swift & Co., 323 U.S. 124, 140
(1944)).
The first of the Barneses’ three challenges—their claim
that IRS and the Tax Court calculated their basis in Whitney
in reliance on an erroneous interpretation of the Internal
Revenue Code—turns on a single question: Is a taxpayer’s
basis in an S corporation reduced by the amount of any
suspended losses in the first year the basis is adequate to
absorb those losses, regardless of whether the taxpayer claims
a tax deduction for those losses in that year? The Barneses,
who in 1997 failed to claim a deduction for a suspended loss
even though they had adequate basis to absorb it, say “no: no
deduction claimed, no basis reduction.”
Unfortunately for the Barneses, the IRS and the Tax
Court correctly concluded that the Internal Revenue Code
says otherwise. Section 1367, which specifies the effects of
various losses on a shareholder’s basis, states that basis “shall
be decreased for any period,” 26 U.S.C. § 1367(a)(2)(B)
(cross-referencing id. § 1366(a)(1)(A)), by “the shareholder’s
pro rata share of the corporation’s . . . items of . . . loss.” Id.
§ 1366(a)(1)(A). Section 1366 provides that any S-
corporation losses a shareholder lacks sufficient basis to
absorb “shall be treated as incurred by the corporation in the
succeeding taxable year.” Id. § 1366(d)(2)(A) (cross-
referencing id. § 1366(d)(1)). Taken together, these two
provisions are clear: A shareholder’s basis is decreased “for
any period” by the amount of that shareholder’s pro rata share
of the corporation’s losses, and a shareholder incurs
previously unabsorbed losses in the first year the shareholder
has adequate basis to do so.
Nothing in any of these provisions suggests that a
shareholder’s basis is not reduced if the shareholder fails to
5
take a deduction for the corporation’s losses. Indeed, the fact
that the Code explicitly provides that a shareholder’s basis is
increased by corporate income “only to the extent such
amount is included in the shareholder’s gross income on his
return,” id. § 1367(b)(1), but provides no similar exception for
corporate losses, militates against the Barneses’ preferred
reading. See Russello v. United States, 464 U.S. 16, 23 (1983)
(“[W]here Congress includes particular language in one
section of a statute but omits it in another section of the same
Act, it is generally presumed that Congress acts intentionally
and purposely in the disparate inclusion or exclusion.”
(internal quotation marks omitted)). This difference makes
sense. Although Congress had every reason to prevent
taxpayers from reaping a double benefit by failing to report
income while still being credited with an increased basis, it
had no reason to permit them to indefinitely delay the
realization of losses.
True, this means that the Barneses paid more in taxes
than they owed. But so it goes. They could have avoided this
problem by claiming a deduction for the loss in 1997 or by
amending their 1997 return during the applicable limitations
period thereafter. Because they failed to do either, neither a
contorted reading of the applicable statutes nor the so-called
tax benefit rule—which the Barneses invoke but which is
simply inapplicable here, see Hillsboro National Bank v.
Commissioner of Internal Revenue, 460 U.S. 370, 377–86
(1983)—can turn back the clock.
The Barneses’ next claim relates to their alleged $30,000
over-reporting of the sole proprietorship’s income. In support
of their claim, they provided evidence showing that only
$30,000 of a certain $60,000 check was paid to the sole
proprietorship. As the Tax Court emphasized, however, they
provided no evidence that they actually reported the excess
6
$30,000 as part of the sole proprietorship’s income in the first
place. Given this, the Tax Court made no clear error when it
upheld the IRS’s determination not to reduce the sole
proprietorship’s income. On this issue, the Barneses also
argue that the IRS acted inconsistently by rejecting their claim
of over-reported income while accepting their claim of over-
reported expenses. But because they failed to make this
argument before the Tax Court, see Oral Arg. Rec. 12:33–
13:30 (conceding this point), we consider it forfeited. See
Marymount Hospital, Inc. v. Shalala, 19 F.3d 658, 663 (D.C.
Cir. 1994) (“[A]bsent ‘exceptional circumstances’ . . . ‘it is
not our practice to entertain issues first raised on appeal.’ ”
(quoting Roosevelt v. E.I. Du Pont de Nemours & Co., 958
F.2d 416, 419 & n.5 (D.C. Cir. 1992)); see also Valdez v.
Commissioner of Internal Revenue, 110 F.3d 72 (9th Cir.
1997) (applying this rule to appeals from Tax Court
decisions).
Finally, given our resolution of the two previous issues,
there is no dispute that the Barneses’ 2003 tax return
understated their taxes by an amount that qualifies as
“substantial.” See 26 U.S.C. § 6662(d)(1)(A). The Barneses
nonetheless argue that the IRS and the Tax Court should have
excused their understatement on “substantial authority” or
“reasonable cause and good faith” grounds. See id.
§§ 6662(d)(2)(B)(i), 6664(c)(1). But taxpayers bear the
burden of proof on this question, see Higbee v. Commissioner
of Internal Revenue, 116 T.C. 438, 447 (2001), and the Tax
Court committed no error when it determined that the
Barneses failed to submit the evidence necessary to carry that
burden.
For the foregoing reasons, we affirm.
So ordered.