Tax Court in Brief | Villanueva v. Comm’r | Net Operating Losses and Carry Forward

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Tax Court in Brief | Villanueva v. Comm’r | Net Operating Losses and Carry Forward

The Tax Court in Brief – March 28th – April 1st, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of March 28, 2022, through April 1, 2022

Villanueva v. Comm’r, T.C. Memo. 2022-27 | March 31, 2022 |Goeke, J. | Dkt. No. 19781-18

Short Summary: Villanueva reported a loss of $112,375 on Form 4797, Sales of Business Property, attached to his 2013 return, from the disposition of a condominium. He reported a date of loss as August 5, 2013, although a mortgage lender had foreclosed on the condo in May 2009 and Villanueva lost possession of the condominium on that date. The IRS disallowed the reported loss in full.

Primary Holdings: 

  • Villanueva sustained the loss in 2009 when the foreclosure occurred. Thus, the deduction, if allowable, would have been for 2009. Villanueva was not permitted to carry forward any portion of that loss to 2013 because he incorrectly reported the disposition of the condo and he did not include a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto. Accordingly, the IRS’s determination was proper.

Key Points of Law:

  • Taxpayers bear the burden of proving (and substantiating with adequate records) their entitlement to any deductions claimed. Rule 142(a); INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992); 26 U.S.C. § 6001.
  • Taxpayers are entitled to deduct losses sustained during the taxable year that were not compensated for by insurance or otherwise. 26 U.S.C. § 165(a). 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. Treas. Reg. § 1.165-1(d)(1). 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. Eisenberg v. Comm’r, 78 T.C. 336, 344 (1982).
  • In general, a taxpayer is entitled to deduct, as a net operating loss (NOL) for a taxable year, an amount equal to the sum of the NOL carryovers and carrybacks to that year. 26 U.S.C. § 172(a). NOL 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. Treas. Reg. § 1.165-1(d)(1). An NOL generally must be carried back 2 years and then carried forward 20 years. § 172(b)(1)(A).
  • 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. Rule 142(a); see Keith v. Comm’r, 115 T.C. 605, 621 (2000). The taxpayer must establish that the NOL was not absorbed in the years preceding the particular year for which the NOL deduction is sought. 26 U.S.C. § 172(b)(2), (c).
  • 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.” Treas. Reg. § 1.172-1(c).

Insights:  Deductions are a matter of legislative grace. Taxpayers are entitled to deduct losses sustained during the taxable year that were not compensated for by insurance or otherwise. Taxpayers must substantiate that the loss is attributable to a trade or business or in a profit-motive endeavor, and adequate documentation must be maintained to evidence the applicable loss. The Code and Treasury Regulations have mechanisms for carrying forward and reporting net operating losses. However, the taxpayer must be prepared to submit a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the loss deduction. See Treas. Reg. § 1.172-1(c).