Petitioners bear the burden of proving that the corporation actually
incurred losses for the years in issue. Our review of the record convinces us
that petitioners have failed to do so in this case.
There are several reasons for our conclusion. First, the record does
not contain Ard Rhei's income tax returns for the years in issue.14 Second,
Mr. Burke failed to offer sufficient documentation to substantiate that Ard
Rhei incurred the losses for which Mr. Burke claimed deductions. Aside from
the unconvincing testimony of Mr. Burke and his accountant, the record only
contains Ard Rhei's general ledger for 1985. This ledger, without more, is
insufficient to substantiate these losses. Finally, a disclosure statement in
each of the returns for the years in issue demonstrates the uncertainty
regarding these loss deductions. These disclosures state:
As per the direction of John J. Burke, amounts approximating the
results of Ard Rhei, Inc.'s (S-corporation, I.D.# 11-2734819)
operations have been included on the shareholders personal tax
return in order to more accurately reflect the income stated on
the Form 1040. The corporation's tax return has not been filed to
date. [Emphasis added.]
Because Mr. Burke has failed to substantiate that Ard Rhei incurred any losses
for the years in issue, we sustain respondent's determination.
Additions to Tax for Fraud
We must next consider whether Mr. Burke is liable for additions to tax
for fraud under section 6653(b) for the taxable years 1985, 1986, and 1987.
Respondent bears the burden of proof on this issue. Sec. 7454(a). For the
taxable year 1985, if any portion of an underpayment of tax required to be
shown on a return is due to fraud, there shall be added to the tax an amount
equal to 50 percent of the underpayment as well as an amount equal to 50
percent of the interest payable under section 6601 with respect to that
portion of the underpayment attributable to fraud. Sec. 6653(b)(1) and (2).
For the taxable years 1986 and 1987, the addition to tax is equal to 75
14Kenneth S. Silver, Mr. Burke's accountant, testified that he prepared
these returns only a few weeks before trial.
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